UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD:


FROM:						TO:

COMMISSION FILE NUMBER: 000-16120

SECURITY FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)

South Carolina

57-0858504

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

238 Richland Avenue Northwest, Aiken, South Carolina 29801

(Address of principal executive office and Zip Code)

(803) 641-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Smaller reporting company

☒

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.

YES

Indicate by check mark whether the registrant is a shell corporation (defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act: None

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

CLASS:

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

November ~~15, 2021~~14, 2022

3,252,884



PART I.	FINANCIAL INFORMATION (UNAUDITED)	PAGE NO.
Item 1.	Financial Statements (unaudited):	3
	Consolidated Balance Sheets at September 30, ~~2021~~2022 and December 31, ~~2020~~2021	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	4
	Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	7
	Notes to Consolidated Financial Statements	98
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4744
Item 4.	Controls and Procedures	4744

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	4845
Item 1A.	Risk Factors	4845
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4845
Item 3.	Defaults Upon Senior Securities	4845
Item 4.	Mine Safety Disclosures	4845
Item 5.	Other Information	4845
Item 6.	Exhibits	4846
	Signatures	5047

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, 2021		December 31, 2020			September 30, 2022		December 31, 2021
		(Unaudited)		(Audited)			(Unaudited)		(Audited)
ASSETS:	ASSETS:					ASSETS:
Cash and Cash Equivalents	Cash and Cash Equivalents	$	13,555,265	$	18,025,409	Cash and Cash Equivalents	$	20,068,111	$	27,622,851
Certificates of Deposit with Other Banks	Certificates of Deposit with Other Banks	100,005		350,005		Certificates of Deposit with Other Banks	1,100,045		1,100,045
Investments and Mortgage-Backed Securities ("MBS"):
Investments:						Investments:
Available For Sale ("AFS")	Available For Sale ("AFS")	627,833,669		589,324,401		Available For Sale ("AFS")	591,550,461		682,849,058
Held To Maturity ("HTM") (Fair Value of $22,853,943 and $19,205,287 at September 30, 2021 and December 31, 2020, Respectively)		22,420,739		18,254,394
Total Investments and MBS		650,254,408		607,578,795
Held To Maturity ("HTM") (Fair Value of $131,615,851 and $23,720,408 at September 30, 2022 and December 31, 2021, Respectively)						Held To Maturity ("HTM") (Fair Value of $131,615,851 and $23,720,408 at September 30, 2022 and December 31, 2021, Respectively)	137,968,847		23,506,768
Total Investments						Total Investments	729,519,308		706,355,826
Loans Receivable, Net:	Loans Receivable, Net:					Loans Receivable, Net:
Held For Sale	Held For Sale	3,589,131		5,693,400		Held For Sale	2,141,011		4,038,414
Held For Investment (Net of Allowance of $11,172,237 and $12,842,896 at September 30, 2021 and December 31, 2020, Respectively)		497,011,394		473,473,972
Held For Investment (Net of Allowance of $11,298,845 and $11,087,164 at September 30, 2022 and December 31, 2021, Respectively)						Held For Investment (Net of Allowance of $11,298,845 and $11,087,164 at September 30, 2022 and December 31, 2021, Respectively)	520,953,262		495,458,395
Total Loans Receivable, Net	Total Loans Receivable, Net	500,600,525		479,167,372		Total Loans Receivable, Net	523,094,273		499,496,809
Accrued Interest Receivable:	Accrued Interest Receivable:					Accrued Interest Receivable:
Loans	Loans	1,274,106		1,252,023		Loans	1,112,227		1,333,155
Mortgage-Backed Securities		672,391		631,449
Investment Securities		1,691,322		1,614,077
Investments						Investments	3,381,208		2,419,335
Total Accrued Interest Receivable	Total Accrued Interest Receivable	3,637,819		3,497,549		Total Accrued Interest Receivable	4,493,435		3,752,490
Operating Lease Right-of-Use ("ROU") Assets	Operating Lease Right-of-Use ("ROU") Assets	2,358,453		2,351,661		Operating Lease Right-of-Use ("ROU") Assets	1,974,088		2,252,424
Land Held for Sale						Land Held for Sale	1,096,614		1,529,691
Premises and Equipment, Net	Premises and Equipment, Net	26,194,747		26,575,257		Premises and Equipment, Net	27,423,707		25,236,915
Federal Home Loan Bank ("FHLB") Stock, at Cost	Federal Home Loan Bank ("FHLB") Stock, at Cost	962,600		2,354,000		Federal Home Loan Bank ("FHLB") Stock, at Cost	650,500		585,700
Other Real Estate Owned ("OREO")	Other Real Estate Owned ("OREO")	129,700		498,610		Other Real Estate Owned ("OREO")	119,700		129,700
Bank Owned Life Insurance ("BOLI")	Bank Owned Life Insurance ("BOLI")	26,559,897		26,074,897		Bank Owned Life Insurance ("BOLI")	27,167,099		26,709,897
Goodwill	Goodwill	1,199,754		1,199,754		Goodwill	1,199,754		1,199,754
Other Assets	Other Assets	4,726,586		4,036,831		Other Assets	20,074,279		5,241,410
Total Assets	Total Assets	$	1,230,279,759	$	1,171,710,140	Total Assets	$	1,357,980,913	$	1,301,213,512
LIABILITIES:	LIABILITIES:					LIABILITIES:
Deposit Accounts	Deposit Accounts	$	1,016,567,086	$	918,096,235	Deposit Accounts	$	1,118,816,745	$	1,115,962,963
Advance Payments By Borrowers for Taxes and Insurance		447,136		206,110
Advances from FHLB		10,000,000		35,000,000

Borrowings from Federal Reserve Bank ("FRB")	Borrowings from Federal Reserve Bank ("FRB")	15,375,000		48,700,000		Borrowings from Federal Reserve Bank ("FRB")	1,000,000		—
Other Borrowings	Other Borrowings	26,607,702		13,117,030		Other Borrowings	38,809,115		26,785,393

Junior Subordinated Debentures	Junior Subordinated Debentures	5,155,000		5,155,000		Junior Subordinated Debentures	5,155,000		5,155,000

Subordinated Debentures	Subordinated Debentures	30,000,000		30,000,000		Subordinated Debentures	29,000,000		30,000,000
Operating Lease Liabilities	Operating Lease Liabilities	2,395,857		2,380,269		Operating Lease Liabilities	2,014,086		2,293,295
Other Liabilities	Other Liabilities	7,050,600		7,149,750		Other Liabilities	6,590,080		5,494,336
Total Liabilities	Total Liabilities	$	1,113,598,381	$	1,059,804,394	Total Liabilities	$	1,201,385,026	$	1,185,690,987
SHAREHOLDERS’ EQUITY:	SHAREHOLDERS’ EQUITY:					SHAREHOLDERS’ EQUITY:

Common Stock, $0.01 Par Value; 5,000,000 Shares Authorized; 3,453,817 Shares Issued and 3,252,884 Shares Outstanding at September 30, 2021 and December 31, 2020		$	34,538	$	34,538
Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP, $1,000 Par Value; 82,949 and 0 Shares Authorized, Issued and Outstanding at September 30, 2022 and December 31, 2021, respectively						Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP, $1,000 Par Value; 82,949 and 0 Shares Authorized, Issued and Outstanding at September 30, 2022 and December 31, 2021, respectively	$	82,949,000	$	—
Common Stock, $0.01 Par Value; 5,000,000 Shares Authorized; 3,453,817 Shares Issued and 3,252,884 Shares Outstanding at September 30, 2022 and December 31, 2021						Common Stock, $0.01 Par Value; 5,000,000 Shares Authorized; 3,453,817 Shares Issued and 3,252,884 Shares Outstanding at September 30, 2022 and December 31, 2021	34,538		34,538
Additional Paid-In Capital ("APIC")	Additional Paid-In Capital ("APIC")	18,230,187		18,230,187		Additional Paid-In Capital ("APIC")	18,230,187		18,230,187
Treasury Stock, at Cost (200,933 Shares)	Treasury Stock, at Cost (200,933 Shares)	(4,330,712)		(4,330,712)		Treasury Stock, at Cost (200,933 Shares)	(4,330,712)		(4,330,712)

Accumulated Other Comprehensive Income ("AOCI")		8,044,630		12,940,950
Accumulated Other Comprehensive (Loss) Income ("AOCI")						Accumulated Other Comprehensive (Loss) Income ("AOCI")	(41,517,322)		5,215,107
Retained Earnings	Retained Earnings	94,702,735		85,030,783		Retained Earnings	101,230,196		96,373,405
Total Shareholders' Equity	Total Shareholders' Equity	$	116,681,378	$	111,905,746	Total Shareholders' Equity	$	156,595,887	$	115,522,525
Total Liabilities and Shareholders' Equity	Total Liabilities and Shareholders' Equity	$	1,230,279,759	$	1,171,710,140	Total Liabilities and Shareholders' Equity	$	1,357,980,913	$	1,301,213,512

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,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Interest Income:	Interest Income:									Interest Income:
Loans	Loans	$	7,261,810	$	6,774,037	$	20,039,222	$	19,333,257	Loans	$	6,306,312	$	7,261,810	$	18,608,294	$	20,039,222
Mortgage-Backed Securities		1,302,757		1,475,881		4,018,985		4,728,662
Investment Securities		1,100,446		1,085,221		3,418,605		3,417,663
Investments										Investments	4,892,385		2,403,203		10,621,563		7,437,590
Other	Other	3,401		3,639		6,450		52,970		Other	94,436		3,401		150,699		6,450
Total Interest Income	Total Interest Income	9,668,414		9,338,778		27,483,262		27,532,552		Total Interest Income	11,293,133		9,668,414		29,380,556		27,483,262
Interest Expense:	Interest Expense:									Interest Expense:
NOW and Money Market Accounts		172,730		185,626		489,105		912,675
Savings Accounts		18,688		25,306		52,402		68,294
Certificate Accounts		184,718		575,602		715,698		2,360,497

Deposits										Deposits	675,765		376,136		1,418,462		1,257,205
FHLB Advances and Other Borrowed Money	FHLB Advances and Other Borrowed Money	50,756		224,250		389,142		700,590		FHLB Advances and Other Borrowed Money	44,386		50,756		91,389		389,142

Senior Convertible Debentures		—		—		—		81,796
Subordinated Debentures	Subordinated Debentures	393,750		393,750		1,181,250		1,181,250		Subordinated Debentures	389,375		393,750		1,176,875		1,181,250
Junior Subordinated Debentures	Junior Subordinated Debentures	23,955		26,380		72,974		101,388		Junior Subordinated Debentures	49,842		23,955		111,094		72,974
Total Interest Expense	Total Interest Expense	844,597		1,430,914		2,900,571		5,406,490		Total Interest Expense	1,159,368		844,597		2,797,820		2,900,571
Net Interest Income	Net Interest Income	8,823,817		7,907,864		24,582,691		22,126,062		Net Interest Income	10,133,765		8,823,817		26,582,736		24,582,691
Provision For Loan Losses		(665,000)		2,200,000		(2,270,000)		3,600,000
Net Interest Income After Provision For Loan Losses		9,488,817		5,707,864		26,852,691		18,526,062
Reversal of Provision for Loan Losses										Reversal of Provision for Loan Losses	—		(665,000)		—		(2,270,000)
Net Interest Income After Reversal of Provision for Loan Losses										Net Interest Income After Reversal of Provision for Loan Losses	10,133,765		9,488,817		26,582,736		26,852,691
Non-Interest Income:	Non-Interest Income:									Non-Interest Income:
Gain on Sale of MBS and Investment Securities		—		139,346		—		1,332,666

Gain on Sale of Loans	Gain on Sale of Loans	932,340		1,184,818		3,022,755		2,494,084		Gain on Sale of Loans	287,081		932,340		1,511,905		3,022,755
Service Fees on Deposit Accounts	Service Fees on Deposit Accounts	251,440		222,085		702,548		695,561		Service Fees on Deposit Accounts	279,909		251,440		809,287		702,548
Commissions From Insurance Agency	Commissions From Insurance Agency	187,657		202,007		468,083		513,783		Commissions From Insurance Agency	235,506		187,657		620,779		468,083
Trust Income	Trust Income	359,035		243,990		1,005,517		782,210		Trust Income	363,830		359,035		1,084,249		1,005,517
BOLI Income	BOLI Income	155,000		138,250		485,000		408,250		BOLI Income	150,999		155,000		457,202		485,000
ATM & Check Card Fee Income		615,568		499,176		1,811,216		1,416,946
ATM and Check Card Fee Income										ATM and Check Card Fee Income	687,773		615,568		2,109,173		1,811,216
Grant Income	Grant Income	1,826,265		171,310		1,826,265		316,814		Grant Income	—		1,826,265		170,699		1,826,265
Other	Other	202,314		187,269		669,379		629,814		Other	219,289		202,314		702,135		669,379
Total Non-Interest Income	Total Non-Interest Income	4,529,619		2,988,251		9,990,763		8,590,128		Total Non-Interest Income	2,224,387		4,529,619		7,465,429		9,990,763
Non-Interest Expense:	Non-Interest Expense:									Non-Interest Expense:
Compensation and Employee Benefits	Compensation and Employee Benefits	4,757,937		4,743,327		14,145,363		13,654,330		Compensation and Employee Benefits	5,019,920		4,757,937		14,981,146		14,145,363
Occupancy	Occupancy	641,555		669,258		1,922,369		1,864,202		Occupancy	703,310		641,555		2,110,746		1,922,369
Advertising	Advertising	275,947		325,584		671,186		776,605		Advertising	153,460		275,947		693,389		671,186
Depreciation and Maintenance of Equipment	Depreciation and Maintenance of Equipment	781,217		689,118		2,354,958		2,126,683		Depreciation and Maintenance of Equipment	751,739		781,217		2,278,890		2,354,958
FDIC Insurance Premiums	FDIC Insurance Premiums	73,845		51,858		215,181		67,938		FDIC Insurance Premiums	87,858		73,845		284,083		215,181
Net Cost (Recovery) from Operation of OREO	Net Cost (Recovery) from Operation of OREO	55,000		(22,049)		(115,840)		(27,329)		Net Cost (Recovery) from Operation of OREO	10,000		55,000		10,000		(115,840)
Writedown of Land Held for Sale										Writedown of Land Held for Sale	—		—		433,077		—

Consulting	Consulting	182,684		190,379		512,998		563,246		Consulting	179,318		182,684		513,299		512,998
Debit Card Expense		284,434		232,788		859,357		764,570
Debit Card Expenses										Debit Card Expenses	307,092		284,434		917,225		859,357
Telephone	Telephone	100,113		135,645		313,229		372,631		Telephone	97,204		100,113		291,069		313,229
Postage	Postage	16,469		94,306		147,600		249,512		Postage	59,654		16,469		182,202		147,600
General Insurance	General Insurance	77,731		62,318		248,691		226,983		General Insurance	76,566		77,731		257,577		248,691
Other	Other	801,964		513,685		1,829,544		1,681,363		Other	831,564		801,964		2,348,375		1,829,544
Total Non-Interest Expense	Total Non-Interest Expense	8,048,896		7,686,217		23,104,636		22,320,734		Total Non-Interest Expense	8,277,685		8,048,896		25,301,078		23,104,636
Income Before Income Taxes	Income Before Income Taxes	5,969,540		1,009,898		13,738,818		4,795,456		Income Before Income Taxes	4,080,467		5,969,540		8,747,087		13,738,818
Provision For Income Taxes		1,327,070		105,187		2,993,414		810,227
Provision for Income Taxes										Provision for Income Taxes	854,664		1,327,070		1,808,450		2,993,414
Net Income	Net Income	4,642,470		904,711		10,745,404		3,985,229		Net Income	3,225,803		4,642,470		6,938,637		10,745,404
Net Income Per Common Share (Basic)	Net Income Per Common Share (Basic)	$	1.43	$	0.28	$	3.30	$	1.25	Net Income Per Common Share (Basic)	$	0.99	$	1.43	$	2.13	$	3.30

Cash Dividend Per Share on Common Stock	Cash Dividend Per Share on Common Stock	$	0.11	$	0.10	$	0.33	$	0.30	Cash Dividend Per Share on Common Stock	$	0.12	$	0.11	$	0.64	$	0.33
Weighted Average Shares Outstanding (Basic)	Weighted Average Shares Outstanding (Basic)	3,252,884		3,252,884		3,252,884		3,199,603		Weighted Average Shares Outstanding (Basic)	3,252,884		3,252,884		3,252,884		3,252,884

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

Three Months Ended September 30,
2021 2020
Net Income $ 4,642,470 $ 904,711
Other Comprehensive (Loss) Income:
Unrealized Holding (Losses) Gains on Securities AFS, Net of Taxes of $(923,669) and $495,301 at September 30, 2021 and 2020, Respectively (2,859,580) 1,508,962
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $34,837 at September 30, 2020 — (104,509)
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $437 and $(1,878) at September 30, 2021 and 2020, Respectively 1,311 (5,635)
Other Comprehensive (Loss) Income, Net of Tax (2,858,269) 1,398,818
Comprehensive Income $ 1,784,201 $ 2,303,529


	Three Months Ended September 30,
	2022		2021
Net Income	$	3,225,803	$	4,642,470
Other Comprehensive (Loss) Income:

Unrealized Holding Losses on Securities AFS, Net of Taxes of $(4,263,005) and $(923,669) at September 30, 2022 and 2021, Respectively	(13,137,592)		(2,859,580)

Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $757 and $437 at September 30, 2022 and 2021, Respectively	2,270		1,311
Other Comprehensive Loss, Net of Tax	(13,135,322)		(2,858,269)
Comprehensive (Loss) Income	$	(9,909,519)	$	1,784,201

Nine Months Ended September 30,
2021 2020
Net Income $ 10,745,404 $ 3,985,229
Other Comprehensive (Loss) Income:
Unrealized Holding (Losses) Gains on Securities AFS, Net of Taxes of $(1,588,002) and $3,051,380 at September 30, 2021 and 2020, Respectively (4,896,535) 9,375,250
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $333,167 at September 30, 2020 — (999,499)
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $72 and $(5,733) at September 30, 2021 and 2020, Respectively 215 (17,199)
Other Comprehensive (Loss) Income, Net of Tax (4,896,320) 8,358,552
Comprehensive Income $ 5,849,084 $ 12,343,781



	Nine Months Ended September 30,
	2022		2021
Net Income	$	6,938,637	$	10,745,404
Other Comprehensive Loss:
Unrealized Holding Losses on Securities AFS, Net of Taxes of $(15,155,441) and $(1,588,001) at September 30, 2022 and 2021, Respectively	(46,736,556)		(4,896,535)

Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $1,376 and $72 at September 30, 2022 and 2021, Respectively	4,127		215
Other Comprehensive Loss, Net of Tax	(46,732,429)		(4,896,320)
Comprehensive (Loss) Income	$	(39,793,792)	$	5,849,084

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021


		Common Stock		APIC		Treasury Stock		AOCI		Retained Earnings		Total			Preferred Stock		Common Stock		APIC		Treasury Stock		AOCI		Retained Earnings		Total
Balance at December 31, 2019		$	31,578	$	12,308,179	$	(4,330,712)	$	4,467,527	$	79,281,433	$	91,758,005
Balance at December 31, 2020														Balance at December 31, 2020	$	—	$	34,538	$	18,230,187	$	(4,330,712)	$	12,940,950	$	85,030,783	$	111,905,746
Net Income	Net Income	—		—		—		—		1,064,187		1,064,187		Net Income	—		—		—		—		—		3,178,792		3,178,792
Other Comprehensive Loss, Net of Tax	Other Comprehensive Loss, Net of Tax	—		—		—		(2,159,363)		—		(2,159,363)		Other Comprehensive Loss, Net of Tax	—		—		—		—		(5,465,436)		—		(5,465,436)
Employee Stock Purchases		4		12,964		—		—		—		12,968
Conversion of Senior Convertible Debentures, 295,600 shares of common stock		2,956		5,909,044		—		—		—		5,912,000
Cash Dividends on Common Stock	Cash Dividends on Common Stock	—		—		—		—		(325,408)		(325,408)		Cash Dividends on Common Stock	—		—		—		—		—		(357,817)		(357,817)
Balance at March 31, 2020		$	34,538	$	18,230,187	$	(4,330,712)	$	2,308,164	$	80,020,212	$	96,262,389
Balance at March 31, 2021														Balance at March 31, 2021	$	—	$	34,538	$	18,230,187	$	(4,330,712)	$	7,475,514	$	87,851,758	$	109,261,285
Net Income	Net Income	—		—		—		—		2,016,331		2,016,331		Net Income	—		—		—		—		—		2,924,142		2,924,142
Other Comprehensive Income, Net of Tax	Other Comprehensive Income, Net of Tax	—		—		—		9,119,097		—		9,119,097		Other Comprehensive Income, Net of Tax	—		—		—		—		3,427,385		—		3,427,385

Cash Dividends on Common Stock	Cash Dividends on Common Stock	—		—		—		—		(325,289)		(325,289)		Cash Dividends on Common Stock	—		—		—		—		—		(357,818)		(357,818)
Balance at June 30, 2020		$	34,538	$	18,230,187	$	(4,330,712)	$	11,427,261	$	81,711,254	$	107,072,528
Balance at June 30, 2021														Balance at June 30, 2021	$	—	$	34,538	$	18,230,187	$	(4,330,712)	$	10,902,899	$	90,418,082	$	115,254,994
Net Income	Net Income	—		—		—		—		904,711		904,711		Net Income	—		—		—		—		—		4,642,470		4,642,470
Other Comprehensive Income, Net of Tax		—		—		—		1,398,818		—		1,398,818

Other Comprehensive Loss, Net of Tax														Other Comprehensive Loss, Net of Tax	—		—		—		—		(2,858,269)		—		(2,858,269)
Cash Dividends on Common Stock	Cash Dividends on Common Stock	—		—		—		—		(325,269)		(325,269)		Cash Dividends on Common Stock	—		—		—		—		—		(357,817)		(357,817)
Balance at September 30, 2020		$	34,538	$	18,230,187	$	(4,330,712)	$	12,826,079	$	82,290,696	$	109,050,788
Balance at September 30, 2021														Balance at September 30, 2021	$	—	$	34,538	$	18,230,187	$	(4,330,712)	$	8,044,630	$	94,702,735	$	116,681,378


		Common Stock		APIC		Treasury Stock		AOCI		Retained Earnings		Total			Preferred Stock		Common Stock		APIC		Treasury Stock		AOCI (Loss)		Retained Earnings		Total
Balance at December 31, 2020		$	34,538	$	18,230,187	$	(4,330,712)	$	12,940,950	$	85,030,783	$	111,905,746
Balance at December 31, 2021														Balance at December 31, 2021	$	—	$	34,538	$	18,230,187	$	(4,330,712)	$	5,215,107	$	96,373,405	$	115,522,525
Net Income	Net Income	—		—		—		—		3,178,792		3,178,792		Net Income	—		—		—		—		—		1,549,031		1,549,031
Other Comprehensive Loss, Net of Tax	Other Comprehensive Loss, Net of Tax	—		—		—		(5,465,436)		—		(5,465,436)		Other Comprehensive Loss, Net of Tax	—		—		—		—		(20,222,858)		—		(20,222,858)

Cash Dividends on Common Stock	Cash Dividends on Common Stock	—		—		—		—		(357,817)		(357,817)		Cash Dividends on Common Stock	—		—		—		—		—		(390,346)		(390,346)
Balance at March 31, 2021		$	34,538	$	18,230,187	$	(4,330,712)	$	7,475,514	$	87,851,758	$	109,261,285
Balance at March 31, 2022														Balance at March 31, 2022	$	—	$	34,538	$	18,230,187	$	(4,330,712)	$	(15,007,751)	$	97,532,090	$	96,458,352
Net Income	Net Income	—		—		—		—		2,924,142		2,924,142		Net Income	—		—		—		—		—		2,163,803		2,163,803
Other Comprehensive Income, Net of Tax		—		—		—		3,427,385		—		3,427,385
Other Comprehensive Loss, Net of Tax														Other Comprehensive Loss, Net of Tax	—		—		—		—		(13,374,249)		—		(13,374,249)
Preferred Stock issuance														Preferred Stock issuance	82,949,000		—		—		—		—		—		82,949,000
Cash Dividends on Common Stock	Cash Dividends on Common Stock	—		—		—		—		(357,818)		(357,818)		Cash Dividends on Common Stock	—		—		—		—		—		(1,301,154)		(1,301,154)
Balance at June 30, 2021		$	34,538	$	18,230,187	$	(4,330,712)	$	10,902,899	$	90,418,082	$	115,254,994
Balance at June 30, 2022														Balance at June 30, 2022	$	82,949,000	$	34,538	$	18,230,187	$	(4,330,712)	$	(28,382,000)	$	98,394,739	$	166,895,752
Net Income	Net Income	—		—		—		—		4,642,470		4,642,470		Net Income	—		—		—		—		—		3,225,803		3,225,803
Other Comprehensive Income, Net of Tax		—		—		—		(2,858,269)		—		(2,858,269)
Other Comprehensive Loss, Net of Tax														Other Comprehensive Loss, Net of Tax	—		—		—		—		(13,135,322)		—		(13,135,322)
Cash Dividends on Common Stock	Cash Dividends on Common Stock	—		—		—		—		(357,817)		(357,817)		Cash Dividends on Common Stock	—		—		—		—		—		(390,346)		(390,346)
Balance at September 30, 2021		$	34,538	$	18,230,187	$	(4,330,712)	$	8,044,630	$	94,702,735	$	116,681,378
Balance at September 30, 2022														Balance at September 30, 2022	$	82,949,000	$	34,538	$	18,230,187	$	(4,330,712)	$	(41,517,322)	$	101,230,196	$	156,595,887

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended
	September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	6,938,637	$	10,745,404
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	1,460,975		1,471,810
Discount Accretion and Premium Amortization, net	5,314,299		5,016,096
Reversal of Provision for Loan Losses	—		(2,270,000)
Earnings on BOLI	(457,202)		(485,000)

Gain on Sales of Loans	(1,511,905)		(3,022,755)


Gain on Sales of OREO	—		(105,422)
Write Down on OREO	10,000		20,000
Write Down of Land Held for Sale	433,077		—
Amortization of Operating Lease ROU Assets	278,336		247,947
Proceeds From Sale of Loans Held For Sale	47,464,791		91,709,578
Origination of Loans Held For Sale	(44,055,483)		(86,582,554)
Increase in Accrued Interest Receivable	(740,945)		(140,270)


Other, Net	1,143,235		801,185
Net Cash Provided By Operating Activities	$	16,277,815	$	17,406,019
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investments AFS	$	(59,674,541)	$	(122,070,342)
Proceeds from Paydowns and Maturities of Investments AFS	83,769,857		72,169,959
Purchase of Investments HTM	(118,798,583)		(8,261,528)
Proceeds from Paydowns and Maturities of Investments HTM	4,333,488		3,985,667

Proceeds from Redemption of Certificates of Deposits with Other Banks	—		250,000
Purchase of FHLB Stock	(64,800)		(1,900)
Redemption of FHLB Stock	—		1,393,300


Increase in Loans Receivable	(25,494,867)		(21,267,422)
Proceeds From Sale of OREO	—		454,332
Purchase and Improvement of Premises and Equipment	(3,647,767)		(1,091,300)

Net Cash Used By Investing Activities	$	(119,577,213)	$	(74,439,234)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts	$	2,853,782	$	98,470,851

Repayment of FHLB Advances	—		(25,000,000)
Increase in Other Borrowings, Net	12,023,722		13,490,672
Proceeds from FRB Borrowings	202,980,000		232,140,000
Repayment of FRB Borrowings	(201,980,000)		(265,465,000)
Issuance of Preferred Stock	82,949,000		—

Repurchase of Subordinated Debenture	(1,000,000)		—
Dividends to Common Stock Shareholders	(2,081,846)		(1,073,452)
Net Cash Provided By Financing Activities	$	95,744,658	$	52,563,071
Net Decrease in Cash and Cash Equivalents	(7,554,740)		(4,470,144)
Cash and Cash Equivalents at Beginning of Period	27,622,851		18,025,409
Cash and Cash Equivalents at End of Period	$	20,068,111	$	13,555,265
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest	$	2,417,879	$	2,569,016
Cash Paid for Income Taxes	1,099,000		2,995,442
Non-Cash Transactions:

Other Comprehensive Loss	(46,732,429)		(4,896,320)
Initial Recognition of Operating Lease ROU Asset	—		254,739
Initial Recognition of Operating Lease Liability	—		254,739

Nine Months Ended
September 30,
2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,745,404 $ 3,985,229
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense 1,471,810 1,401,863
Discount Accretion and Premium Amortization, net 5,016,096 3,246,360
Provision for Loan Losses (2,270,000) 3,600,000
Earnings on BOLI (485,000) (408,250)
Gain on Sales of Loans (3,022,755) (2,494,084)
Gain on Sales of Investment Securities and MBS — (1,332,666)
Gain on Sales of OREO (105,422) (46,354)
Write Down on OREO 20,000 —
Amortization of Operating Lease ROU Assets 247,947 276,664
Amortization of Deferred Loan Costs, net 3,643,268 805,925
Proceeds From Sale of Loans Held For Sale 91,709,578 79,231,518
Origination of Loans Held For Sale (86,582,554) (80,242,011)
(Increase) Decrease in Accrued Interest Receivable:
Loans (22,083) (614,618)
MBS (40,942) (30,775)
Investment Securities (77,245) 251,762
Increase in Advance Payments By Borrowers 241,026 353,843
Other, Net 560,159 (648,115)
Net Cash Provided By Operating Activities $ 21,049,287 $ 7,336,291
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of MBS AFS $ (85,337,142) $ (68,855,028)
Proceeds from Paydowns, Maturities and Sales of MBS AFS 42,244,294 35,555,734
Purchase of MBS Held To Maturity ("HTM") (8,261,528) —
Proceeds from Payments and Maturities of MBS HTM 3,985,667 3,246,065
Purchase of Investment Securities AFS (36,733,200) (79,072,088)
Proceeds from Paydowns, Maturities and Sales of Investment Securities AFS 29,925,665 31,547,522
Proceeds from Redemption of Certificates of Deposits with Other Banks 250,000 —
Purchase of FHLB Stock (1,900) (6,759,500)
Redemption of FHLB Stock 1,393,300 6,942,000
Purchase of BOLI — (4,000,000)
Increase in Loans Receivable (24,910,690) (75,932,370)
Proceeds From Sale of OREO 454,332 578,994
Purchase and Improvement of Premises and Equipment (1,091,300) (882,197)
Net Cash Used By Investing Activities $ (78,082,502) $ (157,630,868)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts $ 98,470,851 $ 133,384,506
Proceeds from FHLB Advances — 226,285,000
Repayment of FHLB Advances (25,000,000) (229,423,000)
Increase in Other Borrowings, Net 13,490,672 8,188,288
Redemption of Senior Convertible Debentures — (132,000)
Proceeds from FRB Borrowings 232,140,000 85,950,000
Repayment of FRB Borrowings (265,465,000) (69,925,000)
Proceeds from Employee Stock Purchases — 12,968
Dividends to Common Stock Shareholders (1,073,452) (975,966)
Net Cash Provided By Financing Activities $ 52,563,071 $ 153,364,796
Net (Decrease) Increase in Cash and Cash Equivalents (4,470,144) 3,070,219
Cash and Cash Equivalents at Beginning of Period 18,025,409 12,536,311
Cash and Cash Equivalents at End of Period $ 13,555,265 $ 15,606,530

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Consolidated Statements of Cash Flows (Unaudited)~~

Nine Months Ended
September 30,
2021 2020
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 2,569,016 $ 5,231,953
Cash Paid for Income Taxes 2,995,442 864,401
Non-Cash Transactions:
Transfers From Loans Receivable to OREO — 19,600
Conversion of Senior Convertible Debentures — 5,912,000
Other Comprehensive (Loss) Income (4,896,320) 8,358,552
Initial Recognition of Operating Lease ROU Asset 254,739 —
Initial Recognition of Operating Lease Liability 254,739 —

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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 ("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”) ~~2020~~2021 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (“~~2020~~2021 10-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the nine months ended September 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021~~2022 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"), Security Federal Insurance, Inc. (“SFINS”), ~~Security Federal Investments, Inc. ("SFINV")~~ and Security Financial Services Corporation (“SFSC”). SFINV was formed to hold investment securities and allow for better management of the securities portfolio. SFINS is an insurance agency offering auto, business, health and home insurance. ~~SFINS has~~Effective April 30, 2022, Collier Jennings Financial Corporation, a wholly owned subsidiary ~~Collier Jennings Financial Corporation, which has as~~of SFINS, and its subsidiaries, Security Federal Auto Insurance, The Auto Insurance Store Inc., and Security Federal Premium Pay Plans Inc. and its wholly owned premium finance subsidiary were dissolved. Security Federal Premium Pay Plans Inc. ~~has one wholly owned premium finance subsidiary and also has an~~’s ownership ~~interest~~interests in four other premium finance ~~subsidiaries. SFINV~~subsidiaries were disposed of at an immaterial gain. Additionally, effective April 30, 2022, previously inactive SFSC was ~~formed to hold investment securities and allow for better management of the securities portfolio. SFSC is currently inactive.~~dissolved. 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 - CRITICAL ACCOUNTING POLICIES

The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the audited consolidated financial statements at December 31, ~~2020~~2021 included in our ~~2020~~2021 Annual Report to Shareholders. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, and, as such, have a greater possibility of producing results that could be materially different than originally reported. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of the consolidated financial statements. The impact of an unexpected and sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings. The Company provides for loan losses using the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to operations based on various factors, which, in management’s judgment, deserve current recognition in estimating possible losses. Such factors considered by management include the fair value of the underlying collateral, stated guarantees by the borrower (if applicable), the borrower’s ability to repay from other economic resources, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to the outstanding loans, loss experience, delinquency trends, and general economic conditions. Management evaluates the carrying value of the loans periodically and the allowance is adjusted accordingly.

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, which may require adjustments to be made to the allowance based upon the information that is available at the time of their examination.

The Company values impaired loans at the loan’s fair value if it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, the market price of the loan, if available, or the value of the underlying collateral. Expected cash flows are required to be discounted at the loan’s effective interest rate. When the ultimate ~~collectibility~~collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest and then to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off.

The Company uses assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. The Company exercises considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the consolidated financial statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service.

~~4. Earnings Per Share~~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. There were no stock options outstanding at September 30, ~~2021~~2022 or ~~2020;~~2021; and therefore, no dilutive options were included in the calculation of diluted EPS for those periods. The following tables include a summary of the Company's basic EPS for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.


		Three Months Ended September 30,											Three Months Ended September 30,
		2021					2020						2022					2021
		Income		Shares	EPS		Income		Shares	EPS			Income		Shares	EPS		Income		Shares	EPS
Basic EPS	Basic EPS	$	4,642,470	3,252,884	$	1.43	$	904,711	3,252,884	$	0.28	Basic EPS	$	3,225,803	3,252,884	$	0.99	$	4,642,470	3,252,884	$	1.43

													Nine Months Ended September 30,
		Nine Months Ended September 30,											2022					2021
		2021					2020						Income		Shares	EPS		Income		Shares	EPS
		Income		Shares	EPS		Income		Shares	EPS
Basic EPS	Basic EPS	$	10,745,404	3,252,884	$	3.30	$	3,985,229	3,199,603	$	1.25	Basic EPS	$	6,938,637	3,252,884	$	2.13	$	10,745,404	3,252,884	$	3.30

~~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. At September 30, ~~2021~~2022 and ~~2020,~~2021, the Company had no options outstanding and there was no activity during both the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021. At those dates, there were 50,000 options available for grants.

109

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~6. Investment and Mortgage-Backed Securities, Available For Sale~~NOTE 6 - INVESTMENTS, AVAILABLE FOR SALE ("AFS")

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of ~~investment and mortgage-backed securities~~investments available for sale at the dates indicated were as follows:


		September 30, 2021									September 30, 2022
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Student Loan Pools	Student Loan Pools	$	70,206,668	$	518,071	143,568		$	70,581,171	Student Loan Pools	$	64,581,912	$	33,352	$	1,393,915	$	63,221,349
Small Business Administration (“SBA”) Bonds	Small Business Administration (“SBA”) Bonds	139,129,553		1,148,197		952,400		139,325,350		Small Business Administration (“SBA”) Bonds	109,893,553		732,050		3,169,244		107,456,359
Tax Exempt Municipal Bonds	Tax Exempt Municipal Bonds	44,797,517		5,009,076		36,273		49,770,320		Tax Exempt Municipal Bonds	44,440,177		186,711		2,914,934		41,711,954
Taxable Municipal Bonds	Taxable Municipal Bonds	53,962,317		1,028,467		450,104		54,540,680		Taxable Municipal Bonds	65,767,015		—		14,346,937		51,420,078
Mortgage-Backed Securities		309,035,345		6,900,422		2,319,619		313,616,148
Mortgage-Backed Securities ("MBS")										Mortgage-Backed Securities ("MBS")	361,824,048		63,849		34,147,176		327,740,721

Total Available For Sale	Total Available For Sale	$	617,131,400	$	14,604,233	$	3,901,964	$	627,833,669	Total Available For Sale	$	646,506,705	$	1,015,962	$	55,972,206	$	591,550,461

		December 31, 2020
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

											December 31, 2021
											Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Student Loan Pools	Student Loan Pools	$	61,244,212	$	220,239	$	382,986	$	61,081,465	Student Loan Pools	$	71,949,517	$	317,722	$	255,678	$	72,011,561
SBA Bonds	SBA Bonds	153,565,023		797,456		1,057,454		153,305,025		SBA Bonds	139,854,620		1,018,231		1,079,774		139,793,077
Tax Exempt Municipal Bonds	Tax Exempt Municipal Bonds	42,793,179		6,023,263		—		48,816,442		Tax Exempt Municipal Bonds	44,757,755		5,226,600		—		49,984,355
Taxable Municipal Bonds	Taxable Municipal Bonds	46,680,301		1,743,322		75,168		48,348,455		Taxable Municipal Bonds	65,834,301		734,237		599,387		65,969,151
Mortgage-Backed Securities		267,854,880		10,672,412		754,278		277,773,014
MBS										MBS	353,517,112		5,294,398		3,720,596		355,090,914
Total Available For Sale	Total Available For Sale	$	572,137,595	$	19,456,692	$	2,269,886	$	589,324,401	Total Available For Sale	$	675,913,305	$	12,591,188	$	5,655,435	$	682,849,058

Student Loan Pools are typically 97% guaranteed by the United States government while SBA bonds are 100% backed by the full faith and credit of the United States government. The majority of the ~~mortgage-backed securities~~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 ~~Sponsered~~Sponsored Entities ("GSEs"), including Fannie Mae and Freddie Mac. Ginnie Mae ~~mortgage-backed securities~~MBS are backed by the full faith and credit of the United States government, while those issued by GSEs are not.

At September 30, 2021, AFS Ginnie Mae mortgage-backed securities had an amortized cost and fair value of $133.8 million and $133.9 million, respectively, compared to an amortized cost and fair value of $91.7 million and $93.4 million, respectively, at December 31, 2020.

Also included in ~~mortgage-backed securities~~MBS 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, ~~2021~~2022, the ~~Bank~~Company held AFS private label CMO ~~mortgage-backed securities~~MBS with an amortized cost and fair value of ~~$31.4~~$62.3 million and ~~$31.6~~$56.4 million, compared to an amortized cost and fair value of ~~$37.0~~$41.8 million and ~~$37.7~~$41.7 million at December 31, ~~2020,~~2021, respectively.

~~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 sale~~investments AFS at September 30, ~~2021~~2022 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~~MBS 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, 2021					September 30, 2022
Investment Securities:		Amortized Cost		Fair Value
Investment Securities AFS:						Investment Securities AFS:	Amortized Cost		Fair Value
One Year or Less	One Year or Less	$	74,883	$	70,483	One Year or Less	$	539,253	$	537,497
After One – Five Years	After One – Five Years	7,092,198		7,092,980		After One – Five Years	5,898,094		5,834,644
After Five – Ten Years	After Five – Ten Years	82,618,930		83,552,707		After Five – Ten Years	82,128,559		78,136,356
More Than Ten Years	More Than Ten Years	218,310,044		223,501,351		More Than Ten Years	196,116,751		179,301,243
Mortgage-Backed Securities		309,035,345		313,616,148
Total Available For Sale		$	617,131,400	$	627,833,669
MBS AFS						MBS AFS	361,824,048		327,740,721
Total AFS						Total AFS	$	646,506,705	$	591,550,461

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At September 30, ~~2021~~2022, the amortized cost and fair value of ~~investment and mortgage-backed securities available for sale~~investments AFS pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were ~~$299.5~~$329.8 million and $309.0 million, respectively, compared to an amortized cost and fair value of ~~$263.3~~$335.6 million and ~~$274.4~~$342.6 million, respectively, at December 31, ~~2020.~~2021.

There were no sales of ~~available for sale~~AFS securities during the nine months ended September 30, ~~2021. The Bank received $4.6 million~~2022 and ~~$25.0 million in gross~~2021; and therefore, no proceeds from sales, ~~of available for sale securities during the three and nine months ended September 30, 2020, respectively. As a result, the Company recognized~~ gross gains ~~of $139,000 and $1.3 million during the three and nine months ended September 30, 2020, respectively, and no~~or gross losses were recorded during ~~the three and nine months ended September 30, 2020.~~those periods.

The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that the individual ~~available for sale~~AFS securities were in a continuous unrealized loss position at the dates indicated.


		September 30, 2021													September 30, 2022
		Less than 12 Months				12 Months or More				Total					Less than 12 Months				12 Months or More				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Student Loan Pools	Student Loan Pools	$	19,683,284	$	101,836	$	8,974,486	$	41,732	$	28,657,770	$	143,568	Student Loan Pools	$	37,822,551	$	718,181	$	23,576,616	$	675,734	$	61,399,167	$	1,393,915
SBA Bonds	SBA Bonds	28,694,170		637,312		38,137,753		315,088		66,831,923		952,400		SBA Bonds	13,370,130		906,319		40,092,297		2,262,925		53,462,427		3,169,244
Tax Exempt Municipal Bonds	Tax Exempt Municipal Bonds	4,740,849		36,273		—		—		4,740,849		36,273		Tax Exempt Municipal Bonds	33,440,787		2,914,934		—		—		33,440,787		2,914,934
Taxable Municipal Bonds	Taxable Municipal Bonds	15,994,162		285,575		3,344,600		164,529		19,338,762		450,104		Taxable Municipal Bonds	40,292,536		10,429,037		11,127,542		3,917,900		51,420,078		14,346,937
Mortgage-Backed Securities		112,346,749		1,955,565		9,280,082		364,054		121,626,831		2,319,619
MBS														MBS	214,230,551		18,654,810		107,126,659		15,492,366		321,357,210		34,147,176
		$	181,459,214	$	3,016,561	$	59,736,921	$	885,403	$	241,196,135	$	3,901,964		$	339,156,555	$	33,623,281	$	181,923,114	$	22,348,925	$	521,079,669	$	55,972,206

December 31, 2020
Less than 12 Months 12 Months or More Total
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
Student Loan Pools $ 7,196,541 $ 46,207 $ 29,460,703 $ 336,779 $ 36,657,244 $ 382,986
SBA Bonds 39,843,800 653,518 43,907,816 403,936 83,751,616 1,057,454
Taxable Municipal Bond 7,092,538 75,168 — — 7,092,538 75,168
Mortgage-Backed Securities 51,941,025 655,213 9,542,092 99,065 61,483,117 754,278
$ 106,073,904 $ 1,430,106 $ 82,910,611 $ 839,780 $ 188,984,515 $ 2,269,886

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

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


	December 31, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses



Student Loan Pools	$	36,816,929	$	216,012	$	8,826,508	$	39,666	$	45,643,437	$	255,678
SBA Bonds	15,916,497		359,541		48,791,470		720,233		64,707,967		1,079,774

Taxable Municipal Bonds	28,032,194		413,490		4,342,641		185,897		32,374,835		599,387
MBS	160,097,766		2,865,948		22,951,882		854,648		183,049,648		3,720,596

	$	240,863,386	$	3,854,991	$	84,912,501	$	1,800,444	$	325,775,887	$	5,655,435

Securities classified as ~~available for sale~~AFS are recorded at fair market value. At September 30, ~~2021~~2022 and December 31, ~~2020, 22.7%~~2021, 443 and ~~37.0% of the unrealized losses, representing 71 and 88~~199 individual AFS securities ~~respectively, consisted of securities~~were in a ~~continuous~~loss position, including 140 and 83 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 increase in unrealized losses within the AFS portfolio during the nine months ended September 30, 2022 resulted in a $14.9 million increase in net deferred taxes, which is included in "Other Assets" on the Consolidated Balance Sheets at September 30, 2022.

The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”).

~~Additional deterioration~~A further decline in ~~market~~national and local economic conditions, ~~related~~as a result of the effects of inflation, a inflation, a potential recession or slowed economic growth, and any governmental or societal responses to the novel coronavirus of 2019 (“COVID-19”) pandemic, among other factors, may, however, have an adverse impact on credit quality in the future and result in OTTI charges. Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, an impairment loss is recognized in earnings equal to the difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or the Company may recognize a portion in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment. There was no OTTI recognized during the nine months ended September 30, ~~2021~~2022 and the year ended December 31, ~~2020.~~

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

At September 30, 2021 and December 31, 2020, the Company's entire held to maturity portfolio was comprised of mortgage-backed securities. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of held to maturity securities at those dates were as follows:

September 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Mortgage-Backed Securities (1)
$ 22,420,739 $ 729,574 $ 296,370 $ 22,853,943
Total Held To Maturity $ 22,420,739 $ 729,574 $ 296,370 $ 22,853,943
December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Mortgage-Backed Securities (1)
$ 18,254,394 $ 984,015 $ 33,122 $ 19,205,287
Total Held To Maturity $ 18,254,394 $ 984,015 $ 33,122 $ 19,205,287

~~(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA~~

At September 30, 2021, the Bank held an amortized cost and fair value of $5.9 million and $6.4 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 $8.1 million and $8.7 million, respectively, at December 31, 2020. The Company has not invested in any private label mortgage-backed securities classified as held to maturity. At September 30, 2021, 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 $9.2 million and $9.9 million, respectively, compared to an amortized cost and fair value of $13.4 million and $14.3 million, respectively, at December 31, 2020.

2021.

1311

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~7. Investment~~NOTE 7 - INVESTMENTS, HELD TO MATURITY ("HTM")

The Company’s HTM portfolio is recorded at amortized cost. The amortized cost, gross unrealized gains, gross unrealized losses, and ~~Mortgage-Backed Securities, Held~~fair values of investments HTM at September 30, 2022 and December 31, 2021 were as follows:



September 30, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
US Treasury Bonds	$	34,422,185	$	—	$	657,961	$	33,764,224
SBA Bonds	3,653,646		176,069		—		3,829,715
Taxable Municipal Bonds	949,306		—		51,976		897,330
MBS	98,943,710		1,860		5,820,988		93,124,582
Total Held To Maturity	$	137,968,847	$	177,929	$	6,530,925	$	131,615,851


December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value


MBS	$	23,506,768	$	577,005	$	363,365	$	23,720,408
Total Held To Maturity	$	23,506,768	$	577,005	$	363,365	$	23,720,408

At September 30, 2022, the amortized cost and fair value of investments HTM that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $8.6 million and $8.0 million, respectively, compared to ~~Maturity, Continued~~an amortized cost and fair value of $9.0 million and $9.5 million, respectively, at December 31, 2021.

The following tables show gross unrealized losses, fair value, and length of time that individual ~~held to maturity~~HTM securities have been in a continuous unrealized loss position at the dates indicated below.

September 30, 2021
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)
$ 11,574,820 $ 296,370 $ — $ — $ 11,574,820 $ 296,370
$ 11,574,820 $ 296,370 $ — $ — $ 11,574,820 $ 296,370

~~(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA~~

December 31, 2020
Less than 12 Months 12 Months or More Total
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
Mortgage-Backed Securities (1)
$ 3,692,780 $ 32,583 $ 787,503 $ 539 $ 4,480,283 $ 33,122
$ 3,692,780 $ 32,583 $ 787,503 $ 539 $ 4,480,283 $ 33,122

~~(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA~~


	September 30, 2022
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US Treasury Bonds	$	33,764,224	$	657,961	$	—	$	—	$	33,764,224	$	657,961
Taxable Municipal Bonds	897,330		51,976		—		—		897,330		51,976
MBS	83,477,755		3,668,395		8,330,880		2,152,593		91,808,635		5,820,988
	$	118,139,309	$	4,378,332	$	8,330,880	$	2,152,593	$	126,470,189	$	6,530,925

~~The Company’s held to maturity portfolio is recorded at amortized cost.~~


	December 31, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses




MBS	$	9,969,587	$	206,472	$	3,442,229	$	156,893	$	13,411,816	$	363,365
	$	9,969,587	$	206,472	$	3,442,229	$	156,893	$	13,411,816	$	363,365

At September 30, 2022 and December 31, 2021, ~~there~~50 and six individual HTM securities were ~~no securities~~ in a ~~continuous~~loss position, including five and two securities that were in a loss position for greater than 12 months, ~~or more compared to one security at December 31, 2020, which represented 1.6% of the unrealized losses at December 31, 2020.~~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 and therefore, the loss was not considered other-than-temporary. The Company has the ability and intent to hold ~~this security~~these securities to maturity.

~~8. Loans Receivable, Net~~

~~Loans receivable, net, consisted of the following as of the dates indicated below:~~

September 30, 2021 December 31, 2020
Residential Real Estate Loans $ 77,416,918 $ 78,907,159
Consumer Loans 55,594,757 55,335,425
Commercial Business Loans 28,060,855 19,704,862
Commercial Real Estate Loans 337,435,374 299,299,647
Paycheck Protection Program ("PPP") Loans 32,119,284 47,105,618
Total Loans Held For Investment 530,627,188 500,352,711
Loans Held For Sale 3,589,131 5,693,400
Total Loans Receivable, Gross 534,216,319 506,046,111
Less:
Allowance For Loan Losses 11,172,237 12,842,896
Loans in Process 20,013,219 12,197,417
Deferred Loan Fees 2,430,338 1,838,426
33,615,794 26,878,739
Total Loans Receivable, Net $ 500,600,525 $ 479,167,372

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. NOTE 8 - LOANS RECEIVABLE, NET

Loans ~~Receivable, Net, Continued~~receivable, net, consisted of the following as of the dates indicated below:


	September 30, 2022		December 31, 2021
Real Estate Loans:
Construction	$	104,250,955	$	100,162,260
Residential Mortgage	97,404,583		84,965,542
Commercial	246,797,162		227,751,664
Commercial and Agricultural Loans	31,501,202		44,689,391
Consumer Loans:
Home Equity Lines of Credit (HELOC)	29,954,251		28,611,516
Other Consumer	23,095,584		21,449,809
Total Loans Held For Investment, Gross	533,003,737		507,630,182
Less:
Allowance For Loan Losses	11,298,845		11,087,164
Deferred Loan Fees	751,630		1,084,623
	12,050,475		12,171,787
Total Loans Receivable, Net	$	520,953,262	$	495,458,395

During the ~~year ended December 31, 2020,~~first nine months of 2022, the ~~Bank participated~~Company continued its participation in the ~~initial SBA~~U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), ~~a guaranteed unsecured~~by processing applications for PPP loan program enacted under the Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”) signed into law on March 27, 2020 to provide near-term relief to help small businesses impacted by COVID-19 sustain operations.forgiveness. PPP loans are ~~fully guaranteed by~~included in Commercial and Agricultural loans in the ~~SBA. Loan originations under the initial PPP ended in August 2020. The Consolidated Appropriations Act, 2021 (“CAA 2021”) enacted on December 27, 2020, renewed~~tables above and ~~extended the PPP until May 31, 2021. As~~below and had a ~~result, in January 2021, the Bank began accepting and processing loan applications under this second PPP.~~

Astotal balance of $55,000 at September 30, ~~2021, the Bank had originated nearly 2,800 PPP loans~~2022 compared to new and existing customers, totaling approximately $127.6 million. The Bank earns 1% interest on PPP loans as well as a fee from the SBA to cover processing costs, which is amortized over the life of the loan. The maturity date of a PPP loan is either two or five years from the date of loan origination. As of September 30, 2021, we have recognized $4.5$9.8 million ~~in PPP loans fees, including $3.3 million recognized in the nine months ended September 30,~~at December 31, 2021. The balance of unamortized net deferred fees on PPP loans was ~~$1.8 million~~$8,000 at September 30, ~~2021~~2022 compared to ~~$1.4 million~~$441,000 at December 31, 2020. The Bank expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations in accordance with the CARES Act. Because the SBA guarantees 100% of the PPP loans made to eligible borrowers, and the entire principal amount of these loans, including any accrued interest, is eligible to be forgiven and repaid by the SBA, PPP loans are excluded from our allowance for loan losses calculation. There were 696 PPP loans tot~~aling $32.1 million in our loan portfolio at September 30,~~ 2021.

The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, caution, special mention, and substandard. These indicators are used to rate the credit quality of loans for the purposes of determining the Company’s allowance for loan losses. Pass loans are loans that are performing and are deemed adequately protected by the net worth of the borrower or the underlying collateral value. These loans are considered to have the least amount of risk in terms of determining the allowance for loan losses. Loans that are graded as substandard are considered to have the most risk. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 90 days or more past due are automatically classified in this category. The caution and special mention categories fall in between the pass and substandard grades and consist of loans that do not currently expose the Company to sufficient risk to warrant adverse classification but possess weaknesses.

The tables below summarize the balance within each risk category by loan type, excluding loans held for sale, at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

September 30, 2021

Pass

Caution
Special Mention

Substandard

Total Loans
Residential Real Estate $ 64,787,568 $ 9,994,908 $ 154,960 $ 2,479,482 $ 77,416,918
Consumer 43,080,359 10,938,180 855,278 720,940 55,594,757
Commercial Business 23,554,952 4,217,359 78,758 209,786 28,060,855
Commercial Real Estate 255,654,434 61,703,703 16,339,585 3,737,652 337,435,374
PPP 32,119,284 — — — 32,119,284
Total $ 419,196,597 $ 86,854,150 $ 17,428,581 $ 7,147,860 $ 530,627,188

December 31, 2020

Pass

Caution
Special Mention

Substandard

Total Loans
Residential Real Estate $ 65,437,564 $ 9,675,300 $ 799,446 $ 2,994,849 $ 78,907,159
Consumer 42,926,887 10,525,814 891,107 991,617 55,335,425
Commercial Business 15,315,677 3,851,517 309,100 228,568 19,704,862
Commercial Real Estate 221,696,863 56,642,660 16,349,302 4,610,822 299,299,647
PPP 47,105,618 — — — 47,105,618
Total $ 392,482,609 $ 80,695,291 $ 18,348,955 $ 8,825,856 $ 500,352,711



September 30, 2022	Pass		Caution		Special Mention		Substandard		Total Loans
Construction Real Estate	$	85,290,332	$	17,068,984	$	1,541,750	$	349,889	$	104,250,955
Residential Real Estate	76,008,204		18,055,116		735,332		2,605,931		97,404,583
Commercial Real Estate	193,971,553		46,929,938		3,606,034		2,289,637		246,797,162
Commercial and Agricultural	26,859,082		4,094,485		331,731		215,904		31,501,202
Consumer HELOC	23,960,565		4,997,785		402,060		593,841		29,954,251
Other Consumer	16,163,946		6,649,604		171,910		110,124		23,095,584
Total	$	422,253,682	$	97,795,912	$	6,788,817	$	6,165,326	$	533,003,737

1513

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



December 31, 2021	Pass		Caution		Special Mention		Substandard		Total Loans
Construction Real Estate	$	67,205,984	$	25,867,339	$	6,566,302	$	522,635	$	100,162,260
Residential Real Estate	65,650,970		14,506,787		2,061,598		2,746,187		84,965,542
Commercial Real Estate	185,117,439		34,263,196		5,669,666		2,701,363		227,751,664
Commercial and Agricultural	40,017,641		4,296,962		54,380		320,408		44,689,391
Consumer HELOC	23,416,585		3,987,734		624,055		583,142		28,611,516
Other Consumer	15,059,609		6,244,382		85,673		60,145		21,449,809
Total	$	396,468,228	$	89,166,400	$	15,061,674	$	6,933,880	$	507,630,182

8.Past Due and Non-accrual Loans ~~Receivable, Net, Continued~~

The tables below present an age analysis of past due balances by loan category at September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


		September 30, 2021													September 30, 2022
		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable			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														Construction Real Estate	$	108,112	$	547,795	$	100,472	$	756,379	$	103,494,576	$	104,250,955
Residential Real Estate	Residential Real Estate	$	—	$	130,958	$	106,166	$	237,124	$	77,179,794	$	77,416,918	Residential Real Estate	128,333		319,082		449,007		896,422		96,508,161		97,404,583
Consumer		320,412		88,653		58,917		467,982		55,126,775		55,594,757
Commercial Business		18,318		9,656		—		27,974		28,032,881		28,060,855
Commercial Real Estate	Commercial Real Estate	1,348,006		—		378,966		1,726,972		335,708,402		337,435,374		Commercial Real Estate	713,162		64,531		358,906		1,136,599		245,660,563		246,797,162
PPP		—		—		—		—		32,119,284		32,119,284
Commercial and Agricultural														Commercial and Agricultural	131,687		33,835		16,775		182,297		31,318,905		31,501,202
Consumer HELOC														Consumer HELOC	350,385		17,439		19,420		387,244		29,567,007		29,954,251
Other Consumer														Other Consumer	215,030		50,427		17,456		282,913		22,812,671		23,095,584
Total	Total	$	1,686,736	$	229,267	$	544,049	$	2,460,052	$	528,167,136	$	530,627,188	Total	$	1,646,709	$	1,033,109	$	962,036	$	3,641,854	$	529,361,883	$	533,003,737


		December 31, 2020													December 31, 2021
		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable			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														Construction Real Estate	$	4,291	$	114,516	$	—	$	118,807	$	100,043,453	$	100,162,260
Residential Real Estate	Residential Real Estate	$	—	$	152,634	$	160,152	$	312,786	$	78,594,373	$	78,907,159	Residential Real Estate	296,556		543,716		205,713		1,045,985		83,919,557		84,965,542
Consumer		292,498		30,610		91,870		414,978		54,920,447		55,335,425
Commercial Business		49,554		—		7,152		56,706		19,648,156		19,704,862
Commercial Real Estate	Commercial Real Estate	735,456		346,850		550,409		1,632,715		297,666,932		299,299,647		Commercial Real Estate	195,271		—		372,405		567,676		227,183,988		227,751,664
PPP		—		—		—		—		47,105,618		47,105,618
Commercial and Agricultural														Commercial and Agricultural	79,381		133,610		—		212,991		44,476,400		44,689,391
Consumer HELOC														Consumer HELOC	51,430		—		44,382		95,812		28,515,704		28,611,516
Other Consumer														Other Consumer	93,560		3,648		8,797		106,005		21,343,804		21,449,809
Total	Total	$	1,077,508	$	530,094	$	809,583	$	2,417,185	$	497,935,526	$	500,352,711	Total	$	720,489	$	795,490	$	631,297	$	2,147,276	$	505,482,906	$	507,630,182

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company did not have any loans that were 90 days or more past due and still accruing interest. The Company's strategy is to work with its borrowers to reach acceptable payment plans while protecting its interests in the existing collateral. In the event an acceptable arrangement cannot be reached, the Company may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table shows non-accrual loans by category at September 30, ~~2021~~2022 compared to December 31, ~~2020:~~2021:


		September 30, 2021				December 31, 2020				(Decrease) Increase
		Amount		Percent (1)		Amount		Percent (1)		$		%
Non-accrual Loans:	Non-accrual Loans:												Non-accrual Loans:	September 30, 2022		December 31, 2021
Construction Real Estate													Construction Real Estate	$	115,874	$	21,434
Residential Real Estate	Residential Real Estate	$	1,506,923	0.3	%	$	1,682,240	0.4	%	$	(175,317)	(10.4)%	Residential Real Estate	1,529,370		1,389,498
Consumer		210,833		0.1		402,878		0.1		(192,045)		(47.7)
Commercial Business		70,031		—		100,408		—		(30,377)		(30.3)
Commercial Real Estate	Commercial Real Estate	1,145,783		0.2		939,946		0.2		205,837		21.9	Commercial Real Estate	741,081		1,057,496
Commercial and Agricultural													Commercial and Agricultural	75,740		64,479
Consumer HELOC													Consumer HELOC	112,784		141,683
Other Consumer													Other Consumer	24,049		8,797
Total Non-accrual Loans	Total Non-accrual Loans	$	2,933,570	0.6	%	$	3,125,472	0.7	%	$	(191,902)	(6.1)%	Total Non-accrual Loans	$	2,598,898	$	2,683,387

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

Allowance for Loan Losses

The following tables show the activity in the allowance for loan losses by category for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30, 2022
	Real Estate								Consumer
	Construction		Residential		Commercial		Commercial and Agricultural		HELOC		Other		Total
Beginning Balance	$	2,104,386	$	1,870,696	$	4,736,314	$	1,403,818	$	606,847	$	475,893	$	11,197,954
(Reversal of) Provision for Loan Losses	99,612		(17,503)		44,664		(117,519)		(37,681)		28,427		—
Charge-Offs	—		—		—		—		—		(54,192)		(54,192)
Recoveries	15,460		9,678		77,479		1,281		38,190		12,995		155,083
Ending Balance	$	2,219,458	$	1,862,871	$	4,858,457	$	1,287,580	$	607,356	$	463,123	$	11,298,845

	Three Months Ended September 30, 2021
	Real Estate								Consumer
	Construction		Residential		Commercial		Commercial and Agricultural		HELOC		Other		Total
Beginning Balance	$	2,129,101	$	1,768,461	$	4,956,531	$	1,528,501	$	566,579	$	474,587	$	11,423,760
(Reversal of) Provision for Loan Losses	33,090		(21,578)		(196,852)		(403,030)		(58,843)		(17,787)		(665,000)
Charge-Offs	(21,460)		—		—		(800)		—		(23,702)		(45,962)
Recoveries	192,459		15,749		240,585		323		10,323		—		459,439
Ending Balance	$	2,333,190	$	1,762,632	$	5,000,264	$	1,124,994	$	518,059	$	433,098	$	11,172,237

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	Nine Months Ended September 30, 2022
	Real Estate								Consumer
	Construction		Residential		Commercial		Commercial and Agricultural		HELOC		Other		Total
Beginning Balance	$	2,401,196	$	1,663,423	$	4,832,440	$	1,241,828	$	517,512	$	430,765	$	11,087,164
(Reversal of) Provision for Loan Losses	(212,761)		161,839		(100,941)		19,643		44,068		88,152		—
Charge-Offs	—		—		—		—		—		(97,884)		(97,884)
Recoveries	31,023		37,609		126,958		26,109		45,776		42,090		309,565
Ending Balance	$	2,219,458	$	1,862,871	$	4,858,457	$	1,287,580	$	607,356	$	463,123	$	11,298,845

	Nine Months Ended September 30, 2021
	Real Estate								Consumer
	Construction		Residential		Commercial		Commercial and Agricultural		HELOC		Other		Total
Beginning Balance	$	2,486,910	$	2,264,414	$	5,753,641	$	1,112,952	$	657,356	$	567,623	$	12,842,896
(Reversal of) Provision for Loan Losses	(324,719)		(541,877)		(1,149,539)		17,562		(149,620)		(121,807)		(2,270,000)
Charge-Offs	(21,460)		—		—		(7,499)		—		(81,394)		(110,353)
Recoveries	192,459		40,095		396,162		1,979		10,323		68,676		709,694
Ending Balance	$	2,333,190	$	1,762,632	$	5,000,264	$	1,124,994	$	518,059	$	433,098	$	11,172,237

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8.Allowance for Loan Losses and Loans Receivable ~~Net, Continued~~

Evaluated for Impairment

The ~~following~~ tables ~~show~~below summarize the ~~activity in the allowance for~~impaired loan ~~losses by category for the three and nine months ended September 30, 2021 and 2020:~~

Three Months Ended September 30, 2021
Residential
Real Estate

Consumer
Commercial
Business Commercial
Real Estate

Total
Beginning Balance $ 1,097,992 $ 1,165,357 $ 1,559,281 $ 7,601,130 $ 11,423,760
Provision for Loan Losses (74,147) (16,176) (419,263) (155,414) (665,000)
Charge-Offs — (45,962) — — (45,962)
Recoveries 8,600 11,545 323 438,971 459,439
Ending Balance $ 1,032,445 $ 1,114,764 $ 1,140,341 $ 7,884,687 $ 11,172,237

Nine Months Ended September 30, 2021
Residential
Real Estate

Consumer
Commercial
Business Commercial
Real Estate

Total
Beginning Balance $ 1,528,948 $ 1,298,655 $ 1,165,033 $ 8,850,260 $ 12,842,896
Provision for Loan Losses (529,449) (160,458) (19,972) (1,560,121) (2,270,000)
Charge-Offs — (103,654) (6,699) — (110,353)
Recoveries 32,946 80,221 1,979 594,548 709,694
Ending Balance $ 1,032,445 $ 1,114,764 $ 1,140,341 $ 7,884,687 $ 11,172,237
Three Months Ended September 30, 2020
Residential
Real Estate
Consumer Commercial
Business Commercial
Real Estate
Total
Beginning Balance $ 1,532,804 $ 1,317,734 $ 639,731 $ 7,186,002 $ 10,676,271
Provision for Loan Losses 55,487 (223) 442,730 1,702,006 2,200,000
Charge-Offs — (45,851) — (19,453) (65,304)
Recoveries 600 13,430 — 20,665 34,695
Ending Balance $ 1,588,891 $ 1,285,090 $ 1,082,461 $ 8,889,220 $ 12,845,662

Nine Months Ended September 30, 2020
Residential
Real Estate
Consumer Commercial
Business Commercial
Real Estate
Total
Beginning Balance $ 1,390,594 $ 1,210,849 $ 544,764 $ 6,079,367 $ 9,225,574
Provision for Loan Losses 196,497 168,447 572,745 2,662,311 3,600,000
Charge-Offs — (148,844) (35,048) (19,453) (203,345)
Recoveries 1,800 54,638 — 166,995 223,433
Ending Balance $ 1,588,891 $ 1,285,090 $ 1,082,461 $ 8,889,220 $ 12,845,662

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~8. Loans Receivable, Net, Continued~~

~~The following tables present information related to impaired loans~~balances evaluated individually and collectively for impairment inwithin the allowance for loan losses ~~at the dates indicated.~~

Allowance For Loan Losses
September 30, 2021 Individually Evaluated For Impairment Collectively Evaluated For Impairment

Total
Residential Real Estate $ — $ 1,032,445 $ 1,032,445
Consumer — 1,114,764 1,114,764
Commercial Business — 1,140,341 1,140,341
Commercial Real Estate — 7,884,687 7,884,687
Total $ — $ 11,172,237 $ 11,172,237

Allowance For Loan Losses
December 31, 2020 Individually Evaluated For Impairment Collectively Evaluated For Impairment
Total
Residential Real Estate $ — $ 1,528,948 $ 1,528,948
Consumer — 1,298,655 1,298,655
Commercial Business — 1,165,033 1,165,033
Commercial Real Estate — 8,850,260 8,850,260
Total $ — $ 12,842,896 $ 12,842,896

~~The following tables present information related to impaired loans evaluated individually~~ and ~~collectively for impairment in~~ loans receivable balances at ~~the dates indicated:~~September 30, 2022 and December 31, 2021.

Loans Receivable
September 30, 2021 Individually Evaluated For Impairment Collectively Evaluated For Impairment

Total
Residential Real Estate $ 1,210,901 $ 76,206,017 $ 77,416,918
Consumer 151,915 55,442,842 55,594,757
Commercial Business 35,446 28,025,409 28,060,855
Commercial Real Estate 1,085,504 336,349,870 337,435,374
PPP — 32,119,284 32,119,284
Total $ 2,483,766 $ 528,143,422 $ 530,627,188

Loans Receivable
December 31, 2020 Individually Evaluated For Impairment Collectively Evaluated For Impairment
Total
Residential Real Estate $ 1,284,303 $ 77,622,856 $ 78,907,159
Consumer 161,869 55,173,556 55,335,425
Commercial Business 53,047 19,651,815 19,704,862
Commercial Real Estate 720,111 298,579,536 299,299,647
PPP — 47,105,618 47,105,618
Total $ 2,219,330 $ 498,133,381 $ 500,352,711


	Allowance For Loan Losses						Loans Receivable
September 30, 2022	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total		Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Construction Real Estate	$	—	$	2,219,458	$	2,219,458	$	115,874	$	104,135,081	$	104,250,955
Residential Real Estate	—		1,862,871		1,862,871		1,112,281		96,292,302		97,404,583
Commercial Real Estate	—		4,858,457		4,858,457		737,672		246,059,490		246,797,162
Commercial and Agricultural	—		1,287,580		1,287,580		31,446		31,469,756		31,501,202
Consumer HELOC	—		607,356		607,356		49,905		29,904,346		29,954,251
Other Consumer	—		463,123		463,123		—		23,095,584		23,095,584
Total	$	—	$	11,298,845	$	11,298,845	$	2,047,178	$	530,956,559	$	533,003,737

	Allowance For Loan Losses						Loans Receivable
December 31, 2021	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total		Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Construction Real Estate	$	—	$	2,401,196	$	2,401,196	$	19,133	$	100,143,127	$	100,162,260
Residential Real Estate	—		1,663,423		1,663,423		1,128,452		83,837,090		84,965,542
Commercial Real Estate	—		4,832,440		4,832,440		1,046,974		226,704,690		227,751,664
Commercial and Agricultural	—		1,241,828		1,241,828		31,446		44,657,945		44,689,391
Consumer HELOC	—		517,512		517,512		97,302		28,514,214		28,611,516
Other Consumer	—		430,765		430,765		—		21,449,809		21,449,809
Total	$	—	$	11,087,164	$	11,087,164	$	2,323,307	$	505,306,875	$	507,630,182

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. Non-accrual commercial loans under $200,000 and non-accrual consumer loans under $100,000 are considered immaterial and are excluded from the impairment review. 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.

The following tables present information related to impaired loans by loan category at September 30, 2022 and December 31, 2021 and for the three and nine months ended September 30, 2022 and 2021.


	September 30, 2022						December 31, 2021
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance















Construction Real Estate	$	115,874	$	115,874	$	—	$	19,133	$	19,133	$	—
Residential Real Estate	1,112,281		1,649,281		—		1,128,452		1,646,952		—
Commercial Real Estate	737,672		737,672		—		1,046,974		1,046,974		—
Commercial and Agricultural	31,446		926,446		—		31,446		926,446		—
Consumer HELOC	49,905		49,905		—		97,302		97,302		—
Other Consumer	—		—		—		—		—		—
Total	$	2,047,178	$	3,479,178	$	—	$	2,323,307	$	3,736,807	$	—

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	Three Months Ended September 30,
	2022				2021
Impaired Loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized















Construction Real Estate	$	116,495	$	—	$	27,396	$	—
Residential Real Estate	1,121,686		—		1,224,991		496
Commercial Real Estate	743,998		—		1,068,681		6,887
Commercial and Agricultural	31,446		—		46,246		—
Consumer HELOC	50,725		—		152,775		—

Total	$	2,064,350	$	—	$	2,520,089	$	7,383

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 $2.5 million and $2.6 million for the three and nine months ended September 30, 2021, respectively, compared to $3.3 million and $3.7 million for the three and nine months ended September 30, 2020, respectively.



	Nine Months Ended September 30,
	2022				2021
Impaired Loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized















Construction Real Estate	$	117,881	$	—	$	33,530	$	—
Residential Real Estate	1,144,363		—		1,317,557		3,149
Commercial Real Estate	756,394		—		1,086,104		11,914
Commercial and Agricultural	31,446		—		50,326		—
Consumer HELOC	52,643		—		156,049		—

Total	$	2,102,727	$	—	$	2,643,566	$	15,063

~~The following tables present information related to impaired loans by loan category at September 30, 2021~~Troubled Debt Restructurings and ~~December 31, 2020 and for the nine months ended September 30, 2021 and 2020. There was no allowance recorded related to any impaired loans at September 30, 2021 and December 31, 2020.~~

September 30, 2021 December 31, 2020
Impaired Loans Recorded
Investment Unpaid
Principal
Balance Related
Allowance Recorded
Investment Unpaid
Principal
Balance
Related
Allowance
Residential Real Estate $ 1,210,901 $ 1,210,901 $ — $ 1,284,303 $ 1,284,303 $ —
Consumer 151,915 160,215 — 161,869 170,169 —
Commercial Business 35,446 930,446 — 53,047 948,046 —
Commercial Real Estate 1,085,504 1,230,924 — 720,111 865,531 —
Total $ 2,483,766 $ 3,532,486 $ — $ 2,219,330 $ 3,268,049 $ —

Three Months Ended September 30,
2021 2020
Impaired Loans Average Recorded Investment Interest Income
Recognized Average Recorded
Investment Interest Income
Recognized
With No Related Allowance Recorded:
Residential Real Estate $ 1,224,991 $ 496 $ 1,792,912 $ —
Consumer 152,775 — 174,276 —
Commercial Business 46,246 — 54,846 —
Commercial Real Estate 1,096,077 6,887 1,294,957 7,788
Total $ 2,520,089 $ 7,383 $ 3,316,991 $ 7,788

Nine Months Ended September 30,
2021 2020
Impaired Loans Average Recorded
Investment Interest Income
Recognized Average Recorded
Investment Interest Income
Recognized
With No Related Allowance Recorded:
Residential Real Estate 1,317,557 3,149 1,817,715 13,030
Consumer 156,049 — 178,296 —
Commercial Business 50,326 — 60,262 —
Commercial Real Estate 1,119,634 11,914 1,656,438 41,580
Total $ 2,643,566 $ 15,063 $ 3,712,711 $ 54,610

Loan Modifications

In the course of resolving delinquent loans, the Company may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider ~~(Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”)~~(FASB ASC Topic 310-40). The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Company grants such concessions to reassess the borrower’s financial status and develop a plan for repayment.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

At the date of modification, TDRs are initially classified as nonaccrual TDRs. ~~TDR loans~~They 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).

The Company had three TDRs with a combined balance of $394,000 included in impaired loans at September 30, ~~2021 and December 31, 2020 had~~2022 compared to three TDRs with a combined balance of ~~$707,000 and $315,000, respectively, and~~$694,000 at December 31, 2021. There were no loans restructured as TDRs during the ~~Company had no commitments at these dates to lend additional funds on these loans. There was one new TDR modified during~~nine months ended September 30, 2022 or the nine months ended September 30, 2021 and no TDRs were in default at ~~that date. There were no new TDRs modified during the nine months ended September 30, 2020 and no TDRs in default at that date.~~those dates. The ~~Bank~~Company considers any loan 30 days or more past due to be in default. At September 30, 2022 and December 31, 2021, the Company had no commitments to extend additional credit to borrowers whose loan terms have been modified in a TDR. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment.

Our policy with respect to accrual of interest on loans restructured as a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is probable. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.

The Company will continue to 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. The ~~Company's~~Bank's policy with respect

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

to nonperforming loans requires the borrower to become current and then make a minimum of 6six consecutive payments in accordance with the ~~modified~~ loan terms before that loan can be placed back on accrual status. Further, the borrower must ~~demonstrate the~~show capacity to continue ~~making payments on~~performing into the ~~loan~~future prior to restoration of accrual status.

NOTE 9 - DEPOSITS

Deposits outstanding as of September 30, 2022 and December 31, 2021 are summarized below by account type.


Deposit Account Type	September 30, 2022		December 31, 2021
Checking	$	500,639,875		$	495,467,035
Money Market	373,055,947			366,065,262
Savings	108,996,328			97,068,740
Certificates of Deposit	136,124,595			157,361,926
Total	$	1,118,816,745		$	1,115,962,963

The ~~CARES Act amended GAAP~~Company had $5.0 million in other brokered deposits, which are included in checking and money market deposits above, at September 30, 2022 and December 31, 2021. In addition, the Company had $6.0 million and $10.0 million in brokered time deposits, and $75,000 and $68,000, in overdrafts that were reclassified to loans at September 30, 2022 and December 31, 2021, respectively.

Certificates of deposits that met or exceeded the FDIC insurance limit of $250,000 were $28.2 million and $39.4 million at September 30, 2022 and December 31, 2021, respectively.

The amounts and scheduled maturities of all certificates of deposit at September 30, 2022 and December 31, 2021 are shown below.


	September 30, 2022		December 31, 2021
Within 1 Year	$	101,104,486	$	118,119,148
After 1 Year, Within 2 Years	20,604,464		26,189,318
After 2 Years, Within 3 Years	7,447,047		7,148,260
After 3 Years, Within 4 Years	3,189,396		2,815,491
After 4 Years, Within 5 Years	3,779,202		3,089,709

Total Certificates of Deposit	$	136,124,595	$	157,361,926

NOTE 10 - BORROWINGS

The Company had $38.8 million and $26.8 million in other borrowings at September 30, 2022 and December 31, 2021, 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 0.35% at September 30, 2022 compared to 0.15% at December 31, 2021. Collateral pledged by the Company for these repurchase agreements consisted of investments with a combined amortized cost and fair value of $53.5 million and $50.9 million at September 30, 2022 and $45.3 million and $45.2 million at December 31, 2021, respectively.

The Company had $1.0 million in outstanding borrowings from the "discount window" of the Federal Reserve Bank of Atlanta at September 30, 2022 compared to no outstanding borrowings at December 31, 2021. 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 September 30, 2022 and December 31, 2021, the borrowing rate was 3.25% and 0.25%, respectively. At September 30, 2022, the Company had pledged as collateral for these borrowings investment and mortgage-backed securities with an amortized cost and fair value of $73.3 million and $70.4 million, respectively, compared to an amortized cost and fair value of $79.2 million and $82.6 million, respectively, at December 31, 2021.

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 4.99% at September 30, 2022 compared to 1.90% at December 31, 2021. 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 the right to redeem the Capital Securities in whole or in part.

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.

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 the ~~modification of loans~~10-Year Notes, and November 22, 2029, with respect to ~~borrowers affected by~~ the ~~COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under~~15-Year Notes. The Company may redeem the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be 1) related to COVID-19; 2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and 3) executed between March 1, 2020,10-Year Notes and the ~~earlier of a) 60 days~~15-Year Notes at its option, in whole at any time, or in part from time to time, after ~~the date of termination~~November 22, 2024 and November 22, 2029, respectively. The Notes are unsecured, subordinated obligations of the ~~national emergency by~~Company and rank junior in right to payment to the ~~President or b) December 31, 2020.~~Company’s current and future senior indebtedness, and each Note is equal in right to payment with respect to the other Notes. The ~~CAA, 2021 provides additional COVID-19 emergency response and relief, including extending relief offered under~~Company used the ~~CARES Act related to TDRs as a result of COVID-19 through January 1, 2022 or 60 days after~~net proceeds from the ~~end~~sale of the ~~national emergency declared by~~Notes to fund the ~~President, whichever is earlier.~~redemption of the Convertible Debentures and for general corporate purposes.

~~On April 7, 2020,~~During the federal banking regulators issued a revised interagency statement on loan modifications and the reporting for financial institutions working with customers affected by the COVID-19 pandemic ("Interagency Statement"). The Interagency Statement confirmed that COVID-19 related short-term loan modifications (e.g., payment deferrals of six months or less) provided to borrowers that were current (less than 30 days past due) at the time the relief was granted are not TDR loans. Borrowers that do not meet the criteria in the CARES Act or the Interagency Statement are assessed for TDR loan classification in accordance with the Company’s accounting policies. All loans modified due to COVID-19 are separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. Loan modifications in accordance with the CARES Act and related banking agency regulatory guidance are still subject to an evaluation in regards to determining whether or not a loan is deemed to be impaired. As ofquarter ended September 30, ~~2021, there were no loans still on deferral. At December 31, 2020, there were eight loans on deferral with a combined~~2022 the Company repurchased $1.0 million in principal of the 10-Year Notes, leaving an aggregate remaining principal balance of ~~$3.0~~$16.5 million.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to 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 Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations. If Security Federal Corporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, it would have exceeded all regulatory capital requirements with Common Equity Tier 1 ("CET1") capital, Tier 1 leverage-based capital, Tier 1 risk-based capital and total risk-based capital ratios of 16.6%, 9.0%, 16.6% and 22.5%, respectively, at September 30, 2021.

Based on its capital levels at September 30, ~~2021,~~2022, 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, ~~2021,~~2022, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.

The tables below provide the Bank’s regulatory capital requirements and actual results at the dates indicated.


		Actual			For Capital Adequacy			To Be "Well-Capitalized"				Actual			For Capital Adequacy			To Be "Well-Capitalized"
		Amount		Ratio	Amount		Ratio	Amount		Ratio		Amount		Ratio	Amount		Ratio	Amount		Ratio
September 30, 2021		Dollars in Thousands
September 30, 2022											September 30, 2022	Dollars in Thousands

Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	121,421	18.8%	$	38,751	6.0%	$	51,669	8.0%	Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	138,263	17.9%	$	46,448	6.0%	$	61,930	8.0%
Total Risk-Based Capital (To Risk Weighted Assets)	Total Risk-Based Capital (To Risk Weighted Assets)	129,532		20.1%	51,669		8.0%	64,586		10.0%	Total Risk-Based Capital (To Risk Weighted Assets)	147,960		19.1%	61,930		8.0%	77,413		10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	Common Equity Tier 1 Capital (To Risk Weighted Assets)	121,421		18.8%	29,064		4.5%	41,981		6.5%	Common Equity Tier 1 Capital (To Risk Weighted Assets)	138,263		17.9%	34,836		4.5%	50,318		6.5%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	121,421		10.2%	47,625		4.0%	59,531		5.0%	Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	138,263		10.3%	53,607		4.0%	67,009		5.0%
December 31, 2020
December 31, 2021											December 31, 2021

Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	109,673	18.6%	$	35,330	6.0%	$	47,107	8.0%	Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	123,783	17.4%	$	42,701	6.0%	$	56,934	8.0%
Total Risk-Based Capital (To Risk Weighted Assets)	Total Risk-Based Capital (To Risk Weighted Assets)	117,101		19.9%	47,107		8.0%	58,884		10.0%	Total Risk-Based Capital (To Risk Weighted Assets)	132,706		18.6%	56,934		8.0%	71,168		10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	Common Equity Tier 1 Capital (To Risk Weighted Assets)	109,673		18.6%	26,498		4.5%	38,275		6.5%	Common Equity Tier 1 Capital (To Risk Weighted Assets)	123,783		17.4%	32,025		4.5%	46,259		6.5%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	109,673		9.8%	44,957		4.0%	56,197		5.0%	Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	123,783		9.9%	50,169		4.0%	62,711		5.0%

In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional CET1 capital greater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At September 30, ~~2021~~2022, the Bank’s conservation buffer ~~was 12.1%~~was 11.1%.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~10. Carrying Amounts and Fair Value of Financial Instruments~~NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS

GAAP requires the Company to disclose fair value of financial instruments measured at amortized cost on the balance sheet and to measure that fair value using an exit price notion, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

Accounting guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). 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 Sale~~AFS

Investment securities available for sale are recorded at fair value on a recurring basis. At September 30, ~~2021,~~2022, the Company’s investment portfolio was comprised of student loan pools, government and agency bonds, ~~mortgage-backed securities~~MBS issued by government agencies or GSEs, private label CMO ~~mortgage-backed securities~~MBS and municipal securities. Fair value measurement is based upon prices obtained from third party pricing services that use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As a result, these securities are classified as Level 2.

Mortgage Loans Held for Sale

The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with the FHLMC or other investors, are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company. The Company usually delivers a commitment to, and receives funding from, the investor within 30 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Land Held for Sale

~~10. Carrying Amounts and~~Land held for sale is reported at the lower of the carrying amount or fair value less costs to sell. Fair ~~Value~~value is based upon independent market prices, appraised values of ~~Financial Instruments, Continued~~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.

Impaired Loans

~~The Company does not record loans held for investment~~Loans that are considered impaired are recorded at fair value on a ~~recurring~~nonrecurring basis. ~~However, from time to time,~~Once a loan is considered impaired, and an allowance for loan losses is established as necessary. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as impaired, management measures the impairment by determining the fair value ~~of the collateral for the loan.~~

~~Fair value~~ is ~~estimated~~measured using one of ~~the following methods:~~several methods, including fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of the Company’s primary market area, management would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired. However, as a second example, on a nonperforming commercial real estate loan where management is familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, management may perform an internal analysis whereby the previous appraisal value would be reviewed and adjusted for current conditions including recent sales of similar properties in the area and any other relevant economic trends. These valuations are reviewed at a minimum on a quarterly basis.

Those impaired loans not requiring ana specific charge against the allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded ~~investments~~investment in ~~such loans. At September 30, 2021, our~~the loan. Loans which are deemed to be impaired ~~loans were generally evaluated based~~are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. ~~Impaired loans where an allowance is established~~Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.

Other Real Estate Owned

Fair value adjustments to OREO are recorded at the lower of carrying amount of the loan or fair value of the collateral less selling costs. Any write-downs based on the asset’s fair value at the date of ~~collateral require classification in~~acquisition are charged to the ~~fair value hierarchy. The Company records impaired loans as nonrecurring Level 3. At September 30, 2021 and December 31, 2020,~~allowance for loan losses. After foreclosure, management periodically performs valuations such that the ~~recorded investment in impaired loans was $2.5 million and $2.2 million, respectively.~~

~~Foreclosed Assets~~

~~Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are~~real estate is carried at the lower of ~~carrying value~~its new cost basis or fair ~~value. Fair~~ value, ~~is based upon independent market prices, appraised values~~net 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.

Assets measured at fair value on a recurring basis were as follows at September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


		September 30, 2021						December 31, 2020							September 30, 2022						December 31, 2021
		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3			Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

Student Loan Pools	Student Loan Pools	$	—	$	70,581,171	$	—	$	—	$	61,081,465	$	—	Student Loan Pools	$	—	$	63,221,349	$	—	$	—	$	72,011,561	$	—
SBA Bonds	SBA Bonds	—		139,325,350		—		—		153,305,025		—		SBA Bonds	—		107,456,359		—		—		139,793,077		—
Tax Exempt Municipal Bonds	Tax Exempt Municipal Bonds	—		49,770,320		—		—		48,816,442		—		Tax Exempt Municipal Bonds	—		41,711,954		—		—		49,984,355		—
Taxable Municipal Bonds	Taxable Municipal Bonds	—		54,540,680		—		—		48,348,455		—		Taxable Municipal Bonds	—		51,420,078		—		—		65,969,151		—
Mortgage-Backed Securities		—		313,616,148		—		—		277,773,014		—
MBS														MBS	—		327,740,721		—		—		355,090,914		—

Total	Total	$	—	$	627,833,669	$	—	$	—	$	589,324,401	$	—	Total	$	—	$	591,550,461	$	—	$	—	$	682,849,058	$	—

There were no liabilities measured at fair value on a recurring basis at September 30, ~~2021~~2022 or December 31, ~~2020.~~

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~10. Carrying Amounts and Fair Value of Financial Instruments, Continued~~2021.

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, ~~2021~~2022 and December 31, ~~2020,~~2021, aggregated by the level in the fair value hierarchy within which those measurements fall.


		September 30, 2021									September 30, 2022
Assets:	Assets:	Level 1		Level 2		Level 3		Total		Assets:	Level 1		Level 2		Level 3		Total
Mortgage Loans Held For Sale	Mortgage Loans Held For Sale	$	—	3,589,131		$	—	$	3,589,131	Mortgage Loans Held For Sale	$	—	$	2,141,011	$	—	$	2,141,011
Collateral Dependent Impaired Loans (1)	Collateral Dependent Impaired Loans (1)	—		—		2,483,766		2,483,766		Collateral Dependent Impaired Loans (1)	—		—		2,047,178		2,047,178
Foreclosed Assets		—		—		129,700		129,700
Other Real Estate Owned										Other Real Estate Owned	—		—		119,700		119,700
Land Held for Sale										Land Held for Sale	—		—		1,096,614		1,096,614
Total	Total	$	—	$	3,589,131	$	2,613,466	$	6,202,597	Total	$	—	$	2,141,011	$	3,263,492	$	5,404,503

December 31, 2020
Assets: Level 1 Level 2 Level 3 Total
Mortgage Loans Held For Sale $ — 5,693,400 $ — $ 5,693,400
Collateral Dependent Impaired Loans (1)
— — 2,216,948 2,216,948
Foreclosed Assets — — 498,610 498,610
Total $ — $ 5,693,400 $ 2,715,558 $ 8,408,958

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	December 31, 2021
Assets:	Level 1		Level 2		Level 3		Total
Mortgage Loans Held For Sale	$	—	$	4,038,414	$	—	$	4,038,414
Collateral Dependent Impaired Loans (1)	—		—		2,323,307		2,323,307
Other Real Estate Owned	—		—		129,700		129,700
Land Held for Sale	—		—		1,529,691		1,529,691
Total	$	—	$	4,038,414	$	3,982,698	$	8,021,112

(1) Reported net of specific reserves. There were no specific reserves at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

There were no liabilities measured at fair value on a nonrecurring basis at September 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

For Level 3 assets ~~and liabilities~~ measured at fair value on a recurring or non-recurring basis at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the significant unobservable inputs used in the fair value measurements were as follows:

~~Valuation~~

~~Significant~~

~~9/30/2021~~

~~12/31/2020~~

~~Level 3 Assets~~

~~Technique~~

~~Unobservable Inputs~~

~~Range of Inputs~~

~~Collateral Dependent Impaired Loans~~

~~Appraised Value/ Discounted Cash Flows~~

~~Discounts to appraised values or cash flows for estimated holding and/or selling costs or age of appraisal~~

~~—% - 14%~~

~~Foreclosed Assets~~

~~Appraised Value/Comparable Sales~~

~~Discounts to appraised values for estimated holding or selling costs~~

~~30%~~

~~11% - 72%~~

Range of Inputs

Level 3 Assets

Valuation Technique

Significant Unobservable Inputs

September 30, 2022

December 31, 2021

Land Held for Sale

Appraised Value/Comparable Sales

Discounts to appraised values for estimated holding or selling costs

10%

Collateral Dependent Impaired Loans

Appraised Value/ Discounted Cash Flows

Discounts to appraised values or cash flows for estimated holding and/or selling costs or age of appraisal

8% - 13%

Other Real Estate Owned

Appraised Value/Comparable Sales

Discounts to appraised values for estimated holding or selling costs

36%

30%

For assets and liabilities not presented on the balance sheet at fair value, the following methods are used to determine fair value:

Cash and Cash 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—Fair value is based on market prices for similar assets.

Investment Securities ~~Held to Maturity~~HTM—~~Securities~~Investment securities held to maturity are valued at quoted market prices or dealer quotes.

Loans Receivable, Net—The fair value of loans is estimated using 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. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: commercial real estate, other commercial, residential real estate, consumer and all other loans. The results are then adjusted to account for credit risk as described above.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

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

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 that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.

FHLB Stock—The fair value approximates the carrying value.

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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

FHLB Advances and Borrowings from the FRB—Fair value is estimated using discounted cash flows with current market rates for borrowings with similar terms. The Company had no outstanding FHLB advances as of September 30, 2022 or December 31, 2021.

Other Borrowed Money—The carrying value of these short term borrowings approximates fair value.

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—The carrying value of junior subordinated debentures approximates fair value.

The following tables provide a summary of the carrying value and estimated fair value of the Company’s financial instruments at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 presented in accordance with the applicable accounting guidance.

September 30, 2021 Carrying Fair Value
Amount Total Level 1 Level 2 Level 3
Financial Assets: Dollars in thousands
Cash and Cash Equivalents $ 13,555 $ 13,555 $ 13,555 $ — $ —
Certificates of Deposits with Other Banks 100 100 — 100 —
Investment and Mortgage-Backed Securities 650,254 650,688 — 650,688 —
Loans Receivable, Net 500,601 500,748 — — 500,748
FHLB Stock 963 963 963 — —
Financial Liabilities:
Deposits:
Checking, Savings & Money Market Accounts $ 861,081 $ 861,081 $ 861,081 $ — $ —
Certificate Accounts 155,486 155,831 — 155,831 —
Advances from FHLB 10,000 10,068 — 10,068 —
Borrowings from FRB 15,375 15,480 — 15,480 —
Other Borrowed Money 26,608 26,608 26,608 — —
Subordinated Debentures 30,000 30,000 — 30,000 —
Junior Subordinated Debentures 5,155 5,155 — 5,155 —


September 30, 2022	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:	Dollars in thousands
Cash and Cash Equivalents	$	20,068	$	20,068	$	20,068	$	—	$	—
Certificates of Deposits with Other Banks	1,100		1,100		—		1,100		—
Investment Securities, Available for Sale	591,550		591,550		—		591,550		—
Investment Securities, Held to Maturity	137,969		131,616		—		131,616		—
Loans Receivable, Net	520,953		501,910		—		—		501,910
Loans Held for Sale	2,141		2,141		—		—		2,141
FHLB Stock	651		651		651		—		—
Land Held for Sale	1,097		1,097		—		—		1,097
Financial Liabilities:
Deposits:
Checking, Savings & Money Market Accounts	$	982,692	$	982,692	$	982,692	$	—	$	—
Certificates of Deposits	136,125		132,569		—		132,569		—
Borrowings from FRB	1,000		1,000		1,000		—		—
Other Borrowed Money	38,809		38,809		38,809		—		—
Subordinated Debentures	29,000		27,049		—		27,049		—
Junior Subordinated Debentures	5,155		5,155		—		5,155		—

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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


December 31, 2021	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:	Dollars in thousands
Cash and Cash Equivalents	$	27,623	$	27,623	$	27,623	$	—	$	—
Certificates of Deposits with Other Banks	1,100		1,100		—		1,100		—
Investment Securities, Available for Sale	682,849		682,849		—		682,849		—
Investment Securities, Held to Maturity	23,507		23,720		—		23,720		—
Loans Receivable, Net	495,458		503,986		—		—		503,986
Loans Held for Sale	4,038		4,038		—		—		4,038
FHLB Stock	586		586		586		—		—
Land Held for Sale	1,530		1,530		—		—		1,530
Financial Liabilities:
Deposits:
Checking, Savings & Money Market Accounts	$	958,601	$	958,601	$	958,601	$	—	$	—
Certificates of Deposits	157,362		157,201		—		157,201		—
Other Borrowed Money	26,785		26,785		26,785		—		—
Subordinated Debentures	30,000		30,154		—		30,154		—
Junior Subordinated Debentures	5,155		5,155		—		5,155		—

December 31, 2020 Carrying Fair Value
Amount Total Level 1 Level 2 Level 3
Financial Assets: Dollars in thousands
Cash and Cash Equivalents $ 18,025 $ 18,025 $ 18,025 $ — $ —
Certificates of Deposits with Other Banks 350 350 — 350 —
Investment and Mortgage-Backed Securities 607,579 608,530 — 608,530 —
Loans Receivable, Net 479,167 481,450 — — 481,450
FHLB Stock 2,354 2,354 2,354 — —
Financial Liabilities:
Deposits:
Checking, Savings & Money Market Accounts $ 737,571 $ 737,571 $ 737,571 $ — $ —
Certificate Accounts 180,525 181,487 — 181,487 —
Advances from FHLB 35,000 35,200 — 35,200 —
Borrowings from FRB 48,700 48,978 48,978
Other Borrowed Money 13,117 13,117 13,117 — —
Subordinated Debentures 30,000 30,000 — 30,000 —
Junior Subordinated Debentures 5,155 5,155 — 5,155 —

Att September 30, ~~2021,~~2022, the Bank had ~~$175.5~~$173.0 million in 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 ~~principal~~principal 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.

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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~11. Accounting and Reporting Changes~~NOTE 14 - ACCOUNTING AND REPORTING CHANGES

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

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.~~model, which is commonly referred to as the current expected credit loss methodology. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted. 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~~Until our evaluation is complete the ~~magnitude~~impact of the ~~increase~~change will be unknown.

In April 2019, the FASB issued guidance to provide entities that have certain financial instruments measured at amortized cost that have credit losses, to irrevocably elect the fair value option in Subtopic 825-10, upon adoption of the June 2016 guidance related to accounting for credit losses and modifying the impairment model for certain debt securities. The fair value option applies to available-for-sale debt securities. This guidance should be applied at adoption on a modified-retrospective basis as a cumulative-effect adjustment to the opening balance of retained earnings in the statement of financial condition. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In December 2019, the FASB issued guidance simplifying the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendments also improve consistent application or and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance became effective for reporting periods beginning after December 15, 2020. The adoption of these amendments did not have a material effect on the Company's consolidated financial statements.

In March 2020, the FASB issued guidance that applies to contracts, hedging relationships and other transactions (e.g., loans, debt securities, derivatives, borrowings) that reference the London Interbank Offered Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The guidance permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. In January 2021, updated guidance was issued to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this guidance to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this guidance have differing effective dates, beginning with an interim period including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect adoption of this guidance to have a material impact on its consolidated financial statements.

In ~~October 2020,~~March 2022, the FASB issued ~~guidance~~amendments which ~~clarifies that~~are intended to improve the ~~Company should reevaluate whether a callable debt security is within the scope~~decision usefulness of ~~paragraph 310-20-35-33 for each reporting period. This guidance became~~information provided to investors about certain loan re-financings, restructurings, and write-offs. The amendments are effective for ~~reporting periods~~fiscal years beginning after December 15, ~~2020.~~2022 including interim periods within those fiscal years. Early adoption is permitted. The ~~adoption of this guidance did~~Company does not expect these amendments to have a material ~~impact~~effect on ~~the Company's consolidated~~its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting authorities are not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~12. Non-Interest Income~~NOTE 15 - NON-INTEREST INCOME

Revenue Recognition

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the 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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Service Fees on Deposit ~~Fees~~Accounts

The Bank earns fees from its deposit customers for account maintenance, transaction-based and overdraft 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.

ATM and Check Card Fee Income

Check card fee income represents fees earned when a debit card issued by the Bank 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 the 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 trust income.

Gains/Losses on OREO Sales

Gains/losses on the sale of OREO are included in non-interest expense and are generally recognized when the performance obligation is complete. This is typically at delivery of control over the property to the buyer at the time of each real estate closing.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~12. Non-Interest Income, Continued~~

The following table presents the Company's non-interest income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021. All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income, with the exception of gains on the sale of OREO, which are included in non-interest expense when applicable.

Quarter Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Non-interest income:
Gain on sale of MBS & investment securities, net (1)
— 139,346 — 1,332,666
Gain on sale of loans, net (1)
932,340 1,184,818 3,022,755 2,494,084
Service fees on deposit accounts $ 251,440 $ 222,085 $ 702,548 $ 695,561
Commissions from insurance agency (1)
187,657 202,007 468,083 513,783
Trust income 359,035 243,990 1,005,517 782,210
BOLI income (1)
155,000 138,250 485,000 408,250
ATM & check card fee income 615,568 499,176 1,811,216 1,416,946
Grant income (1)
1,826,265 171,310 1,826,265 316,814
Other non-interest income (1)
202,314 187,269 669,379 629,814
Total non-interest income $ 4,529,619 $ 2,988,251 $ 9,990,763 $ 8,590,128
(1) Not within the scope of ASC 606


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Non-interest income:

Gain on Sale of Loans (1)	$	287,081	$	932,340	$	1,511,905	$	3,022,755
Service Fees on Deposit Accounts	279,909		251,440		809,287		702,548
Commissions From Insurance Agency (1)	235,506		187,657		620,779		468,083
Trust Income	363,830		359,035		1,084,249		1,005,517
BOLI Income (1)	150,999		155,000		457,202		485,000
ATM and Check Card Fee Income	687,773		615,568		2,109,173		1,811,216
Grant Income (1)	—		1,826,265		170,699		1,826,265
Other (1)	219,289		202,314		702,135		669,379
Total non-interest income	$	2,224,387	$	4,529,619	$	7,465,429	$	9,990,763
(1) Not within the scope of ASC 606

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~13. Leases~~

NOTE 16 - LEASES

Effective January 1, 2019 the Company adopted ASC 842 “Leases.” Currently, the Company has operating leases on six of its branches that are accounted for under this standard. ~~As a result of this standard, the Company recognized a right-of-use asset of $3.1 million effective January 1, 2019.~~ The Company entered into one of the six leases mentioned above on September 30, 2021 and recognized a right-of-use asset of $255,000 on that date. During the nine months ended September 30, ~~2021,~~2022, the Company made cash payments in the amount of ~~$325,000~~$380,000 for operating leases. The lease expense recognized during this period was ~~$350,000~~$384,000 and the lease liability had a net ~~increase~~decrease of ~~$16,000 due to the newly added lease.~~$279,000. The weighted average lease term is ~~5.63~~4.33 years and the weighted average discount rate used is 3.2%.

At September 30, 2022, maturities of operating lease liabilities for future periods were as follows:



Remainder of 2022	$	126,564
2023	518,138
2024	522,147
2025	474,815
2026	363,428
Thereafter	155,996
Total undiscounted lease payments	2,161,088
Less: effect of discounting	(147,002)
Present value of estimated lease payments (lease liability)	$	2,014,086

~~14. Subsequent Events~~NOTE 17 - PREFERRED STOCK

On May 24, 2022, the Company entered into a Letter Agreement (“Agreement”) with the U.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 moderate-income community financial institutions and minority depository institutions to provide 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 economic effect of the COVID-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 Agreement. After the tenth anniversary of the investment date, the dividend rate will be fixed based on the average annual amount of lending 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 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.

NOTE 18 - 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 requiring accrual or disclosure.

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

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 ~~effect~~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 oil prices and supply chain disruptions, and any governmental or societal responses to the novel coronavirus ofdisease 2019 (“COVID-19”) pandemic, including on the ~~Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the~~possibility of new COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;variants;

•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 loan losses and provision for loan 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 loan losses not being adequate to cover actual losses, and require us to materially increase our allowance for loan 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;

•~~uncertainty regarding~~ the future of the London Interbank Offered Rate ("LIBOR"), and the ~~potential~~ transition away from 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 the Bank by the Federal 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 loan 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 Reform~~changes in banking, securities and ~~Consumer Protection Act; changes~~tax law, and in regulatory policies and principles, or the interpretation of regulatory capital ~~requirements~~ or other rules, ~~including as a result of Basel III;~~and other governmental initiatives affecting the financial services industry;

•our ability to attract and retain deposits;

•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;

•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;

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing;

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

•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;

•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 ~~services, including as a result of the CARES Act, the CAA 2021 and recent COVID-19 vaccination efforts;~~services; and

•~~the~~ other risks described elsewhere in this document and in the Company's other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (“~~2020~~2021 10-K”).

Some of these forward-looking statements are discussed in the Company's ~~2020~~2021 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 risks could cause our actual results for ~~2021~~2022 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.

Response to COVID-19

~~In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization.~~

The ~~spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility~~Company maintains its commitment to supporting its community and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders to close businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary, and some permanent, closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that the Federal Reserve may maintain a low interest rate environment for the foreseeable future. Although financial markets have rebounded from significant declines that occurred earlier in the pandemic and U.S. and global economic conditions have shown signs of improvement since the beginning of the pandemic, many of the effects that arose or became more pronounced after the onset ofclients during the COVID-19 pandemic ~~persisted this year. These changes have had~~ and ~~are likely~~remains focused on keeping its employees safe and the Bank running effectively to serve its clients. As of September 30, 2022, all Bank branches were open with normal hours. The Bank will continue to ~~have a significant adverse effect on the markets~~monitor branch access and occupancy levels in ~~which we conduct our business~~relation to cases and ~~the demand for our products~~close contact scenarios and ~~services.~~

follow governmental restrictions and public health authority guidelines.

~~In response to the current global situation surrounding the COVID-19 pandemic, the Bank has offered a variety of relief options designed to support our customers and the communities we serve.~~

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

~~Paycheck Protection Program ("PPP") Participation~~

During the nine months ended September 30, 2021, the Bank received $67.8 million in PPP loan repayments compared to $28.2 million during 2020. As a result of these repayments, the Bank recognized $4.5 million in deferred PPP loan fees which increased net interest income, $3.3 million of which was recognized during the nine months ended September 30, 2021.

At September 30, 2021, the Bank had $32.1 million in PPP loans remaining compared to $47.1 million at December 31, 2020. We expect that the great majority of our PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The balance of unamortized net deferred fees on PPP loans was $1.8 million at September 30, 2021 compared to $1.4 million at December 31, 2020.

~~Loan Modifications~~

Since March 31, 2020, the Bank approved modifications related to the COVID-19 pandemic on over 340 customer loans with a combined balance, net of deferred fees, of $114.9 million. The majority of these modifications were for commercial real estate loans. The primary method of relief was to allow the borrower a three to six month payment deferral.~~All of these deferrals have resumed regular principal and interest payments as of September 30, 2021.~~

~~Branch Operations and Additional Client Support~~

The impact of COVID-19 is rapidly evolving and its future social and economic effects are uncertain at this time. The actual impact will depend on many factors beyond our Company’s control; however, the Company is taking every step to protect the health and safety of its employees and customers. Many of our non-branch personnel are working remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. The Families First Coronavirus Response Act, which requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19, also provides additional flexibility to our employees to help navigate their individual challenges.

3231

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition at September 30, ~~2021~~2022 and December 31, ~~2020~~2021

Assets -

Total assets increased ~~$58.6~~$56.8 million ~~or 5.0%~~ to ~~$1.23~~$1.4 billion at September 30, ~~2021~~2022 from ~~$1.17~~$1.3 billion at December 31, ~~2020.~~2021. This increase was primarily due to increases in investments held to maturity ("HTM") and cash and cash equivalents, which were partially offset by a decline investments available for sale ("AFS"). Changes in total assets are shown below.


						Increase (Decrease)									Increase (Decrease)
(Dollars in thousands)	(Dollars in thousands)	9/30/2021		12/31/2020		$		%		(Dollars in thousands)	September 30, 2022		December 31, 2021		$		%
Cash and Cash Equivalents	Cash and Cash Equivalents	$	13,555	$	18,025	$	(4,470)	(24.8)	%	Cash and Cash Equivalents	$	20,068	$	27,623	$	(7,555)	(27.4)	%

Investments and MBS – AFS		627,834		589,324		38,510		6.5
Investments and MBS – HTM		22,421		18,254		4,167		22.8
Certificates of Deposits with Other Banks										Certificates of Deposits with Other Banks	1,100		1,100		—		—
Investments AFS										Investments AFS	591,550		682,849		(91,299)		(13.4)
Investments HTM										Investments HTM	137,969		23,507		114,462		486.9
Loans Receivable, Net	Loans Receivable, Net	500,601		479,167		21,434		4.5		Loans Receivable, Net	523,094		499,497		23,597		4.7
Accrued Interest Receivable										Accrued Interest Receivable	4,493		3,752		741		19.7
OREO	OREO	130		499		(369)		(73.9)		OREO	120		130		(10)		(7.7)
Operating Lease ROU Assets	Operating Lease ROU Assets	2,358		2,352		6		0.3		Operating Lease ROU Assets	1,974		2,252		(278)		(12.3)
Land Held for Sale										Land Held for Sale	1,097		1,530		(433)		(28.3)
Premises and Equipment, Net	Premises and Equipment, Net	26,195		26,575		(380)		(1.4)		Premises and Equipment, Net	27,424		25,237		2,187		8.7
FHLB Stock	FHLB Stock	963		2,354		(1,391)		(59.1)		FHLB Stock	651		586		65		11.1
BOLI	BOLI	26,560		26,075		485		1.9		BOLI	27,167		26,710		457		1.7
Goodwill	Goodwill	1,200		1,200		—		—		Goodwill	1,200		1,200		—		—
Other Assets	Other Assets	4,727		4,037		690		17.1		Other Assets	20,074		5,241		14,833		283.0

Total Assets										Total Assets	$	1,357,981	$	1,301,214	$	56,767	4.4%

Cash and cash equivalents decreased ~~$4.5~~$7.6 million or ~~24.8%~~27.4% to ~~$13.6~~$20.1 million at September 30, ~~2021 from $18.0~~2022 compared to $27.6 million at December 31, ~~2020 primarily due to~~2021, as a ~~decrease in~~result of the ~~Federal Reserve Outgoing Cash Letter account, which fluctuates daily. Investment~~purchase of investments HTM and ~~mortgage-backed securities~~funding of loans. Investments AFS ~~increased $38.5~~decreased $91.3 million or ~~6.5%~~13.4% to ~~$627.8~~$591.6 million at September 30, ~~2021~~2022 from ~~$589.3~~$682.8 million at December 31, ~~2020~~2021 as ~~purchases of new investments and mortgage-backed securities AFS exceeded~~ maturities and principal paydowns of investments AFS exceeded purchases during the nine months ended September 30, ~~2021. Investment and mortgage-backed securities~~2022. Additionally, investments AFS experienced a $46.7 million decrease in fair value during the nine months ended September 30, 2022. Investments HTM increased ~~$4.2~~$114.5 million ~~or 22.8%~~ to ~~$22.4~~$138.0 million at September 30, ~~2021~~2022 from ~~$18.3~~$23.5 million at December 31, ~~2020 as a~~2021. The increase is primarily the result of ~~purchases during 2021.~~the Company's investment of Emergency Capital Investment Program (“ECIP”) proceeds. For additional details on the ECIP, see “Note 17 - Preferred Stock” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Loans receivable, net, including loans held for sale, increased ~~$21.4~~$23.6 million or ~~4.5%~~4.7% to ~~$500.6~~$523.1 million at September 30, ~~2021~~2022 from ~~$479.2~~$499.5 million at December 31, ~~2020,~~2021, primarily due to residential real estate, commercial ~~business~~real estate and construction real estate loans originated during the period. Loan balances in ~~the commercial business, commercial real estate and consumer~~all loan categories ~~all~~ increased while residential real estate, loans held for sale and PPP loan balances all decreased since the prior year end. Commercial business loans increased $8.4 million or 42.4% to $28.1 million at September 30, 2021 from $19.7 million at December 31, 2020. Commercial real estate loans increased $38.1 million or 12.7% to $337.4 million at September 30, 2021 from $299.3 million at December 31, 2020. Consumer loans grew $259,000 or 0.5% to $55.6 million at September 30, 2021 from $55.3 million at December 31, 2020. Residential real estate loans decreased $1.5 million or 1.9% to $77.4 million at September 30, 2021 from $78.9 million at December 31, 2020. Loans held for sale, decreased $2.1 million or 37.0% to $3.6 million at September 30, 2021 from $5.7 million at December 31, 2020. PPP loans decreased $15.0 million or 31.8% to $32.1 million at September 30, 2021 from $47.1 million at December 31, 2020.

OREO decreased $369,000 or 73.9% to $130,000 at September 30, 2021 from $499,000 at December 31, 2020 due to a write-down of $20,000 combined with the sale of two OREO properties, with a combined book value of $349,000, during the nine months ended September 30, ~~2021. At September 30, 2021, OREO consisted~~2022 with the exception of ~~one~~the commercial ~~land property located in Aiken, South Carolina.~~

~~FHLB stock~~and agricultural loan category, which decreased ~~$1.4~~$13.2 million or ~~59.1%~~29.5% to ~~$1.0~~$31.5 million at September 30, ~~2021~~2022 from ~~$2.4~~$44.7 million at December 31, ~~2020 as a result of a decrease in advances~~2021. Commercial real estate loans increased $19.0 million or 8.4% to $246.8 million at September 30, 2022 from ~~the FHLB of Atlanta. The Bank, as a member of the FHLB of Atlanta, is required~~$227.8 million at December 31, 2021. Residential mortgage loans increased $12.4 million or 14.6% to ~~acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal~~$97.4 million at September 30, 2022 from $85.0 million at December 31, 2021. Construction real estate loans increased $4.1 million or 4.1% to ~~a membership component, which is 0.09% of total assets, plus a transaction component, which is 4.25% of outstanding advances (borrowings)~~$104.3 million at September 30, 2022 from ~~the FHLB of Atlanta. As the Bank's total advances have~~$100.2 million at December 31, 2021.Consumer HELOC increased $1.3 million or 4.7% to $30.0 million at September 30, 2022 from $28.6 million at December 31, 2021. Other consumer loans increased $1.6 million or 7.7% to $23.1 million at September 30, 2022 from $21.4 million at December 31, 2021. Loans held for sale, decreased ~~so has its required investment in FHLB stock~~.$1.9 million or 47.0% to $2.1 million at September 30, 2022 from $4.0 million at December 31, 2021.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Management's Discussion and Analysis~~Land held for sale decreased $433,000 during 2022 due to a write down in the value of ~~Financial Condition and Results of Operations~~

~~Liabilities~~

~~Deposit Accounts~~

~~Total deposits~~the land based on a recent appraisal. Other assets increased ~~$98.5~~$14.8 million or ~~10.7%~~283.0% to ~~$1.0 billion~~$20.1 million at September 30, ~~2021~~2022 from ~~$918.1~~$5.2 million at December 31, ~~2020. This growth~~2021. The increase was primarily due to proceeds from PPP loans and government stimulus checks deposited directly into customer accounts, organic growth in customer relationships and reduced withdrawals from deposit accounts due to a change in spending habits as athe result of ~~the ongoing COVID-19 pandemic. The $123.5~~a $14.9 million increase in ~~demand accounts~~net deferred taxes, which was ~~partially offset by a $25.0 million decrease~~related to increased unrealized losses in ~~certificate accounts during~~ the ~~first nine months of 2021. The balance, weighted average rates and increases and decreases in deposit accounts~~investment portfolio at September 30, ~~2021 and December 31, 2020 are shown below.~~

9/30/2021 12/31/2020 Increase (Decrease)
(Dollars in thousands) Balance Weighted Rate Balance Weighted Rate $ %
Demand Accounts:
Checking $ 425,791 0.04 % $ 372,070 0.05 % $ 53,721 14.4 %
Money Market 344,323 0.16 291,068 0.16 53,255 18.3
Savings 90,967 0.14 74,433 0.14 16,534 22.2
Total $ 861,081 0.10 % $ 737,571 0.10 % $ 123,510 16.7 %
Certificate Accounts
0.00 – 0.99% $ 136,038 $ 122,712 $ 13,326 10.9 %
1.00 – 1.99% 13,919 46,620 (32,701) (70.1)
2.00 – 2.99% 5,529 11,193 (5,664) (50.6)
Total $ 155,486 0.43 % $ 180,525 0.77 % $ (25,039) (13.9) %
Total Deposits $ 1,016,567 0.15 % $ 918,096 0.23 % $ 98,471 10.7 %

Included in certificate accounts were $10.0 million and $16.0 million in brokered deposits at September 30, 2021 and December 31, 2020, with a weighted average interest rate of 0.26% and 0.37%, respectively.

~~Advances From FHLB~~

~~FHLB advances are summarized by contractual year of maturity and weighted average interest rate in the table below:~~

(Dollars in thousands) 9/30/2021 12/31/2020 Decrease
Year Due: Balance Rate Balance Rate $ %
2021 $ — — % $ 25,000 1.98 % $ (25,000) (100.0)%
2023 10,000 1.45 10,000 1.46 — —
Total Advances $ 10,000 1.45 % $ 35,000 1.83 % $ (25,000) (71.4)%

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 $97.0 million and $97.6 million, at September 30, 2021 and $104.7 million and $106.2 million at December 31, 2020, respectively.

There were no callable FHLB advances at September 30, 2021. Callable advances are callable at the option of the FHLB. If an advance is called, 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.2022.

3432

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

~~Borrowings From the Federal Reserve Bank~~Liabilities

Deposit Accounts

Total deposits increased $2.9 million or 0.3% to $1.12 billion at September 30, 2022 from $1.12 billion at December 31, 2021. This growth was primarily due to increases in checking and savings accounts partially offset by a decline in higher cost certificates of deposits. The majority of the Bank’s deposits are originated within the Bank’s immediate market area. The Bank had $6.0 million and $10.0 million in brokered time deposits at September 30, 2022 and December 31, 2021, respectively. 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 Bank a call option that allows the Bank the choice to redeem them early should rates change. In addition, the Bank had $15.4 million in borrowings from the "discount window" of the Federal Reserve Bank of Atlanta compared to $48.7 million at December 31, 2020. 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. Effective March 16, 2020 the borrowing rate was set at the top of the targeted Federal Funds Rate, or 0.25%. At September 30, 2021, the collateral pledged by the Bank for these borrowings consisted of investment and mortgage-backed securities with an amortized cost and fair value of $80.9 million and $84.7 million, respectively.

~~Other Borrowings (Repurchase Agreements)~~

~~The Bank had $26.6~~$5.0 million in other borrowings at September 30, 2021, an increase of $13.5 million or 102.8% from $13.1 million at December 31, 2020. 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 0.15%brokered deposits at both September 30, ~~2021~~2022 and December 31, ~~2020.~~

~~Collateral pledged by the Bank for these repurchase agreements consisted~~2021. For additional details of investment and mortgage-backed securities with amortized costs and fair values of $38.1 million and $38.1 million at September 30, 2021 and $26.6 million and $26.8 million at December 31, 2020, respectively.

~~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 1.82% at September 30, 2021 compared to 1.92% at December 31, 2020. 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 the right to redeem the Capital Securities in whole or in part.

~~Subordinated Debentures~~

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 the 10-Year Notes, and November 22, 2029, with respect to the 15-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 time, after November 22, 2024 and November 22, 2029, respectively. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness, and each Note is equal in right to payment with respect to the other Notes. The Company used the net proceeds from the saledeposits, see “Note 9 – Deposits” of the Notes to ~~fund the redemption~~Consolidated Financial Statements included in Part I. Item 1 of ~~the Convertible Debentures and for general corporate purposes.~~

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

this report.

Shareholders’ Equity

Shareholders’ equity increased ~~$4.8~~$41.1 million or ~~4.3%~~35.6% to ~~$116.7~~$156.6 million at September 30, ~~2021~~2022 from ~~$111.9~~$115.5 million at December 31, ~~2020.~~2021. The increase was primarily attributable to a $82.9 million issuance of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (the “Preferred Stock”) during the second quarter of 2022 and year to date net income of ~~$10.7 million, which~~$6.9 million. The increase was partially offset by a ~~$4.9~~$46.7 million decrease in accumulated other comprehensive (loss) income, net of tax, ~~and $1.1~~combined with $2.1 million in dividends paid to common shareholders during the nine months ended September 30, ~~2021.~~2022. The decrease in net accumulated other comprehensive income, net of tax, was related to the unrecognized loss in fair value of ~~investment and mortgage-backed securities~~investments AFS during the nine months ended September 30, ~~2021. Book value per common share was $35.87 at September 30, 2021 compared~~2022reflecting the increase in market interest rates during the year. For additional details on the issuance of the Preferred Stock pursuant to ~~$34.40 at December 31, 2020.~~the ECIP, see “Note 17 - Preferred Stock” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

3633

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the ~~Three Month Periods~~Quarters Ended September 30, ~~2021~~2022 and ~~2020~~2021

Net Income

Net income ~~increased $3.7~~decreased $1.4 million, or ~~413.1%~~30.5%, to $3.2 million or $0.99 per basic common share for the quarter ended September 30, 2022 compared to $4.6 million or $1.43 per basic common share for the quarter ended September 30, 2021. The decrease in net income was primarily due to no grant income received during the third quarter of 2022 compared to a $1.8 million grant received in the third quarter of 2021 combined with the $665,000 reversal of provision for loan losses in the quarter ended September 30, 2021 compared to ~~$905,000~~no provision or ~~$0.28 per basic common share~~reversal for loan losses for the quarter ended September 30, ~~2020. The~~2022. In addition, non-interest expense increased $229,000, partially offsetting a $1.3 million increase in net interest income ~~was primarily~~for the ~~result of decreases~~quarter ended September 30, 2022 compared to the same quarter in ~~interest expense and the provision for loan losses combined with an increase in non-interest income during the third quarter of~~ 2021.

Net Interest Income

Net interest income increased ~~$916,000~~$1.3 million, or ~~11.6%~~14.8%, to ~~$8.8~~$10.1 million during the quarter ended September 30, ~~2021,~~2022, compared to ~~$7.9~~$8.8 million for the same ~~period~~quarter in ~~2020.~~2021. During the quarter ended September 30, ~~2021,~~2022, average interest-earning assets increased ~~$89.0~~$194.0 million or ~~8.6%~~17.2% to ~~$1.1~~$1.3 billion from ~~$1.0~~$1.1 billion for the same ~~period~~quarter in ~~2020,~~2021, while average interest-bearing liabilities increased ~~$30.8~~$47.5 million or ~~3.7%~~5.5% to ~~$866.6~~$914.1 million for the quarter ended September 30, ~~2021~~2022 from ~~$835.8~~$866.6 million for the comparable ~~period~~quarter in ~~2020.~~2021. The Company's net interest margin was ~~3.17%~~3.09% for the quarter ended September 30, ~~2021~~2022 compared to ~~3.09%~~3.16% for the comparable ~~period~~quarter in ~~2020.~~2021. The Company's net interest spread on a tax equivalent basis was ~~3.08%~~2.93% for the quarter ended September 30, ~~2021~~2022 compared to ~~2.96%~~3.07% for the quarter ended September 30, ~~2020.~~2021.

InLoan yields in 2021 were impacted favorably as a result of recognition of unamortized deferred fee income on PPP loans forgiven and repaid by the SBA. Loan yields in 2022 were impacted favorably as a result of the rising interest rate environment. Since March 2022, in response to ~~COVID-19,~~inflation, the Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve ~~reduced~~System (“Federal Reserve”) has increased the ~~targeted Federal Funds Rate~~target range for the federal funds rate by 300 basis points, including 150 basis points during ~~March 2020~~the third quarter of 2022, to a range of ~~0.00%~~3.00% to ~~0.25%, where it remains at~~3.25% as of September 30, ~~2021. The effect of changes in~~2022. In November 2022, the ~~targeted Federal Funds Rate on~~FOMC increased the ~~cost of funding liabilities typically lags~~target range for the ~~effect on the yield earned on interest-earning assets because rates on many deposit accounts are based on local competition and not tied~~federal funds rate another 75 basis points to a ~~specific market-based index. Interest-earning assets adjust earlier because they are tied~~range of 3.75% to a specific market-based index. Because the length of the COVID-19 pandemic and the effects of the extraordinary measures being put in place to address its economic consequences are unknown, until the pandemic subsides, the Company expects its net interest income and4.00%. We believe our net interest margin during the current year will ~~be adversely affected~~continue to increase to reflect the lagging benefit of variable rate interest-earnings assets beginning to reprice higher and if the FOMC continues to raise the targeted federal funds rate in ~~2021~~an effort to curb inflation, which appears likely based on recent Federal Reserve communications and ~~possibly longer.~~interest rate forecasts.

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, ~~2021~~2022 and ~~2020:~~2021. 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 earning assets in the following table. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status.


		Quarter Ended September 30,								Change in Average Balance		Increase (Decrease) in Interest Income			Quarter Ended September 30,												Change in Average Balance		Increase (Decrease) in Interest Income
		2021				2020									2022						2021
(Dollars in thousands)	(Dollars in thousands)	Average Balance		Yield(1)		Average Balance		Yield(1)						(Dollars in thousands)	Average Balance		Interest Income		Yield(1)		Average Balance		Interest Income		Yield(1)
Loans Receivable, Net	Loans Receivable, Net	$	505,191	5.75	%	$	544,499	4.98	%	$	(39,308)	$	488	Loans Receivable, Net	$	521,143	$	6,306	4.84	%	$	505,191	$	7,262	5.75	%	$	15,952	$	(956)
Mortgage-Backed Securities		302,614		1.72		239,772		2.46		62,842		(173)
Investment Securities(2)		311,933		1.50		245,715		1.87		66,218		22
Overnight Time and Certificates of Deposit		1,531		0.89		2,327		0.63		(796)		—
Taxable Investments														Taxable Investments	741,358		4,550		2.45		570,578		2,191		1.54		170,780		2,359
Non-taxable Investments (2)														Non-taxable Investments (2)	44,685		417		3.73		43,814		281		2.56		871		136
Deposits with other Banks														Deposits with other Banks	13,569		94		2.78		7,148		3		0.19		6,421		91
Total Interest-Earning Assets	Total Interest-Earning Assets	$	1,121,269	3.47	%	$	1,032,313	3.64	%	$	88,956	$	337	Total Interest-Earning Assets	$	1,320,755	$	11,367	3.44	%	$	1,126,731	$	9,737	3.46	%	$	194,024	$	1,630

(1) Annualized

(2) Tax equivalent basis recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using anthe effective tax rate ~~of 21%~~ for the quarters ended September 30, ~~2021~~2022 and ~~2020.~~2021. The tax equivalent adjustment relates to the tax exempt municipal bonds and was ~~$68,478~~approximately $74,000 and ~~$61,425~~$68,000 for the quarters ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Average interest-earning assets increased $89.0 million, or 8.6%, and total tax equivalent interest income increased $337,000, or 3.6%, to $9.7 million for the quarter ended September 30, 2021 compared to the same period in 2020 despite a 17 basis point decline in the average yield on interest-earning assets.

Total interest income on loans increased $488,000 or 7.2% to $7.3 million for the quarter ended September 30, 2021 from $6.8 million for the third quarter of 2020. The increase in interest income from loans was the result of a 77 basis point increase in the average yield on loans receivable, which was primarily driven by the recognition of $1.5 million in fee income related to PPP loans during the quarter ended September 30, 2021. This increase was partially offset by a $39.3 million or 7.2% decrease in the average loan portfolio balance.

3734

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Total tax equivalent interest income on average interest-earning assets increased $1.6 million to $11.4 million for the quarter ended September 30, 2022 compared to $9.7 million for the same period in 2021.

Interest income on loans decreased $956,000 or 13.2% to $6.3 million for the quarter ended September 30, 2022 from $7.3 million for the third quarter of 2021. The decrease in loan interest income was the result of a 91 basis point decrease in the average yield on loans receivable, primarily due to a decrease in deferred interest income on PPP loans recognized during the period. This decrease was partially offset by a $16.0 million increase in the average loan portfolio balance.

Interest income from ~~MBS decreased $173,000 or 11.7%~~taxable investments increased $2.4 million to ~~$1.3~~$4.5 million during the quarter ended September 30, ~~2021~~2022 due to a ~~74 basis point decrease in the average yield, which was partially offset by a $62.8~~$170.8 million increase in the average balance of these ~~assets.~~assets combined with a 91 basis point increase in the average yield. Tax equivalent interest income from ~~investment securities decreased $22,000 or 1.9%~~non-taxable investments increased $136,000 to ~~$1.2 million~~$417,000 during the quarter ended September 30, ~~2021~~2022 due to ~~a decrease of 37 basis points~~an increase in the average yield on ~~investment securities, partially offset by~~non-taxable investments.

Interest income from deposits with other banks increased $91,000 during the quarter ended September 30, 2022 due to a ~~$66.2~~$6.4 million ~~or 26.9%~~ increase in the average balance of these assets combined with a significant increase in the ~~investment securities portfolio.~~average yield earned on these assets. The increase in the average balance of these assets was primarily related to the $82.9 million in cash received during the second quarter of 2022 from the sale of the Preferred Stock mentioned above.

Interest Expense

The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended September 30, ~~2021~~2022 and ~~2020.~~2021.


		Quarter Ended September 30,								Change in Average Balance		Increase (Decrease) in Interest Expense			Quarter Ended September 30,												Change in Average Balance		Increase (Decrease) in Interest Expense
		2021				2020									2022						2021
(Dollars in thousands)	(Dollars in thousands)	Average Balance		Cost(1)		Average Balance		Cost(1)						(Dollars in thousands)	Average Balance		Interest Expense		Cost(1)		Average Balance		Interest Expense		Cost(1)
Now and Money Market Accounts		$	539,561	0.13	%	$	447,997	0.17	%	$	91,564	$	(13)
Savings Accounts		88,117		0.08		67,940		0.15		20,177		(7)
Certificate Accounts		165,084		0.45		218,636		1.05		(53,552)		(391)
FHLB Advances and Other Borrowings (2)		38,676		0.52		66,098		1.36		(27,422)		(173)
Checking, Savings & Money Market Accounts														Checking, Savings & Money Market Accounts	$	700,322	$	540	0.31	%	$	627,678	$	191	0.12	%	$	72,644	$	349
Certificates Accounts														Certificates Accounts	139,841		136		0.39		165,084		185		0.45		(25,243)		(49)
FHLB Advances & Other Borrowed Money (2)														FHLB Advances & Other Borrowed Money (2)	39,099		44		0.45		38,676		51		0.52		423		(6)
Junior Subordinated Debentures	Junior Subordinated Debentures	5,155		1.86		5,155		2.05		—		(2)		Junior Subordinated Debentures	5,155		50		3.87		5,155		24		1.86		—		26
Subordinated Debentures	Subordinated Debentures	30,000		5.25		30,000		5.25		—		—		Subordinated Debentures	29,652		389		5.25		30,000		394		5.25		(348)		(5)
Total Interest-Bearing Liabilities	Total Interest-Bearing Liabilities	$	866,593	0.39	%	$	835,826	0.68	%	$	30,767	$	(586)	Total Interest-Bearing Liabilities	$	914,069	$	1,159	0.51	%	$	866,593	$	845	0.39	%	$	47,476	$	315

(1) Annualized

(2) Includes FHLB Advances, FRB Borrowings and Repurchase Agreements

Total interest expense ~~decreased $586,000~~increased $315,000 or ~~41.0%~~37.3% to ~~$845,000~~$1.2 million for the quarter ended September 30, ~~2021~~2022 compared to ~~$1.4 million~~$845,000 for the same ~~period~~quarter in ~~2020~~2021 due to ~~a decline~~an increase of 2912 basis points in the average cost of interest bearing liabilities ~~which was partially offset by~~combined with a ~~$30.8~~$47.5 million or ~~3.7%~~5.5% increase in the average balance of these liabilities.

~~The largest decrease in interest~~Interest expense ~~was related~~on deposits increased $300,000 to ~~deposits. Despite~~$676,000 for the quarter ended September 30, 2022 due to a ~~$58.2~~$47.4 million increase in the average balance of interest bearing deposit accounts combined with a 13 basis point increase in the average cost of interest-bearing deposits ~~decreased 24 basis points, resulting in a $410,000 decrease in interest expense~~ during the third quarter of ~~2021~~2022 when compared to the same quarter in ~~2020.~~2021. Interest expense on certificate accounts ~~had the largest decrease in interest expense~~decreased $49,000 due to a decrease of ~~$53.6~~$25.2 million in the average balance combined with a 60six basis point decrease in the average cost of certificate deposits during the third quarter of ~~2021,~~2022, as management elected to utilize liquidity gained from lower cost deposits to reduce its balances of higher cost certificates of deposit in a managed reduction of these funds. Interest expense on ~~FHLB advances, FRB borrowings and repurchase agreements decreased $173,000 for~~all other interest-bearing deposits increased $349,000 during the ~~third~~ quarter ~~of 2021~~ due to a ~~$27.4~~$72.6 million ~~decrease~~increase in the average balance ~~of these interest-bearing liabilities,~~ combined with a ~~decrease of 82~~19 basis ~~points~~point increase in the average cost. Interest expense on the junior subordinated debentures increased due to increased floating interest rates reflecting higher market interest rates.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Provision for Loan 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 loan 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 loan 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 applies a ten year historical loss ratio to each loan category to estimate the inherent loss in these pooled loans.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

The second component of management’s monthly analysis is the specific review and evaluation of significant problem credits identified through the Company’s internal monitoring system. These loans are evaluated for impairment 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.

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 loan 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. Because the SBA guarantees 100% of the PPP loans made to eligible borrowers, these loans do not have a corresponding allowance for loan loss.

The table below shows the changes in the allowance for loan losses for the quarters ended September 30, ~~2021~~2022 and ~~2020.~~2021.


		Quarter Ended September 30,							Quarter Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2021			2020			(Dollars in thousands)	2022			2021
Beginning Balance	Beginning Balance	$	11,424		$	10,676		Beginning Balance	$	11,198		$	11,424
Provision for Loan Losses		(665)			2,200
(Reversal of) Provision for Loan Losses								(Reversal of) Provision for Loan Losses	—			(665)
Charge-offs	Charge-offs	(46)			(65)			Charge-offs	(54)			(46)
Recoveries	Recoveries	459			35			Recoveries	155			459
Net Recoveries (Charge-offs)		$	413		$	(30)
Ending Balance		$	11,172		$	12,846
Net Recoveries								Net Recoveries	$	101		$	413
Ending Allowance for Loan Losses Balance								Ending Allowance for Loan Losses Balance	$	11,299		$	11,172

At Period End:	At Period End:	9/30/2021			9/30/2020			At Period End:	9/30/2022			9/30/2021

Impaired Loans	Impaired Loans	$	2,484		$	3,217		Impaired Loans	$	2,047		$	2,484
Gross Loans Receivable, Held For Investment (1)	Gross Loans Receivable, Held For Investment (1)	$	508,184		$	533,221		Gross Loans Receivable, Held For Investment (1)	$	532,252		$	508,184
Total Loans Receivable, Net	Total Loans Receivable, Net	$	500,601		$	527,870		Total Loans Receivable, Net	$	523,094		$	500,601
Allowance For Loan Losses as a % of Impaired Loans	Allowance For Loan Losses as a % of Impaired Loans	449.8		%	399.3		%	Allowance For Loan Losses as a % of Impaired Loans	551.9		%	449.8		%
Allowance For Loan Losses as a % of Gross Loans Receivable (1)	Allowance For Loan Losses as a % of Gross Loans Receivable (1)	2.2		%	2.4		%	Allowance For Loan Losses as a % of Gross Loans Receivable (1)	2.1		%	2.2		%
(1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.
(1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES								(1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES

The Company had net recoveries of ~~$413,000, or 0.33% of gross loans on an annualized basis,~~$101,000 for the quarter ended September 30, ~~2021~~2022 compared to net ~~charge-offs~~recoveries of ~~$30,000, or 0.01% of gross loans on an annualized basis,~~$413,000 for the third quarter of ~~2020. We had a negative~~2021. There was no provision for loan losses ~~of $665,000~~ for the quarter ended September 30, ~~2021,~~2022 compared to ~~provision expense of $2.2 million for the third quarter of 2020. The~~a negative provision ~~for loan losses~~of $665,000 for the third quarter of 2021 ~~resulted primarily from~~following significantly higher loan loss provisions during 2020 in response to the ~~net recoveries and~~ongoing COVID-19 pandemic. The reversal of loan loss provisions during the three months ended September 30, 2021 was the result of a reduction in historical loss and qualitative adjustment factors related to improvement in the economic and business conditions at both the national and regional levels as of September 30, 2021. Non-performing assets improved to $2.8 million, or 0.21% of total assets, at September 30, 2022 from $3.1 million, or 0.25% of total assets, at September 30, 2021.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

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. Management believes the allowance for loan losses is adequate based on its best estimates of the probable losses inherent in the loan portfolio, although there can be no guarantee these estimates will not be proven incorrect in the future. In addition, bank regulatory agencies may require additional provisions to the allowance for loan losses based on their judgments and estimates as part of their examination process. Because the allowance for loan losses is an estimate, there is no guarantee that actual loan losses will not exceed the allowance for loan losses, or that additional increases in the allowance for loan losses will not be required in the future. A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowed economic growth and any governmental or societal responses to the COVID-19 pandemic oramong other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

Non-Interest Income

Non-interest income decreased $2.3 million, or 50.9%, to $2.2 million for the quarter ended September 30, 2022 compared to $4.5 million for the quarter ended September 30, 2021. The decrease was primarily due to a $645,000 decrease in gain on sale of loans reflecting the decline in originations of loans held for sale following recent market interest rate increases combined with a $1.8 million decrease in grant income. These decreases were partially offset by increases in all other non-interest income line items with the exception of BOLI income, which decreased $4,000 during the quarter ended September 30, 2022 when compared to the quarter ended September 30, 2021. For additional details of the changes in non-interest income, see “Note 15 - 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 $229,000 or 2.8% to $8.3 million for the quarter ended September 30, 2022 compared to $8.0 million for the quarter ended September 30, 2021. The following table summarizes the changes in non-interest expense:


	Quarter Ended September 30,				Increase (Decrease)
	2022		2021		$		%
Compensation and Employee Benefits	$	5,019,920	$	4,757,937	$	261,983	5.5	%
Occupancy	703,310		641,555		61,755		9.6
Advertising	153,460		275,947		(122,487)		(44.4)
Depreciation and Maintenance of Equipment	751,739		781,217		(29,478)		(3.8)
FDIC Insurance Premiums	87,858		73,845		14,013		19.0
Net Cost of Operation of OREO	10,000		55,000		(45,000)		(81.8)


Consulting	179,318		182,684		(3,366)		(1.8)
Debit Card Expense	307,092		284,434		22,658		8.0
Telephone	97,204		100,113		(2,909)		(2.9)
Postage	59,654		16,469		43,185		262.2
General Insurance	76,566		77,731		(1,165)		(1.5)
Other	831,564		801,964		29,600		3.7
Total Non-Interest Expense	$	8,277,685	$	8,048,896	$	228,789	2.8	%

The increase in non-interest expense was primarily due to increases in compensation and employee benefits and occupancy expense during the third quarter of 2022, which were partially offset by a decrease in advertising expense.

Compensation and employee benefits increased $262,000 or 5.5% to $5.0 million for the quarter ended September 30, 2022 when compared to the quarter ended September 30, 2021 due to general annual cost of living increases and an increase in the number of full time equivalent employees as a result of our newest branch added during the first quarter of 2022 and the overall growth of the Company. Occupancy expense and other non-interest expense also increased during the third quarter of 2022 due to increased operations and the addition of our newest branch located in Columbia, South Carolina.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

~~Non-Interest Income~~

Non-interest income increased to $4.5 million for the three months ended September 30, 2021 from $3.0 million for the same period in 2020. The table below summarizes the changes in non-interest income.

Quarter Ended September 30, Increase (Decrease)
2021 2020 $ %
Gain on Sale of MBS & Investment Securities $ — $ 139,346 $ (139,346) (100.0) %
Gain on Sale of Loans 932,340 1,184,818 (252,478) (21.3)
Service Fees on Deposit Accounts 251,440 222,085 29,355 13.2
Commissions From Insurance Agency 187,657 202,007 (14,350) (7.1)
BOLI Income 155,000 138,250 16,750 12.1
Trust Income 359,035 243,990 115,045 47.2
ATM & Check Card Fee Income 615,568 499,176 116,392 23.3
Grant Income 1,826,265 171,310 1,654,955 966.1
Other 202,314 187,269 15,045 8.0
Total Non-Interest Income $ 4,529,619 $ 2,988,251 $ 1,541,368 51.6 %

The $1.5 million increase in non-interest income was primarily attributable to a $1.8 million grant received during the quarter ended September 30, 2021. The grant was awarded by the Community Development Financial Institutions (CDFI) Rapid Response Program (RRP) in order to provide certified CDFIs with resources to help counter the economic impact of COVID-19 in distressed and underserved communities. The grant proceeds were used to fund qualified loans within the Bank’s target market areas. The increase in grant income was partially offset by decreases in gain on sale of MBS and investment securities and gain on sale of loans during the quarter ended September 30, 2021. ~~net gain on $139,000 Gain on sale of loans $252,000~~

~~Non-Interest Expense~~

Non-interest expense increased $363,000 or 4.7% to $8.0 million for the quarter ended September 30, 2021 compared to $7.7 million for the quarter ended September 30, 2020. The following table summarizes the changes in non-interest expense:

Quarter Ended September 30, Increase (Decrease)
2021 2020 $ %
Compensation and Employee Benefits $ 4,757,937 $ 4,743,327 $ 14,610 0.3 %
Occupancy 641,555 669,258 (27,703) (4.1)
Advertising 275,947 325,584 (49,637) (15.2)
Depreciation and Maintenance of Equipment 781,217 689,118 92,099 13.4
FDIC Insurance Premiums 73,845 51,858 21,987 42.4
Net Cost (Recovery) of Operation of OREO 55,000 (22,049) 77,049 (349.4)
Consulting 182,684 190,379 (7,695) (4.0)
Debit Card Expense 284,434 232,788 51,646 22.2
Telephone 100,113 135,645 (35,532) (26.2)
Postage 16,469 94,306 (77,837) (82.5)
General Insurance 77,731 62,318 15,413 24.7
Other 801,964 513,685 288,279 56.1
Total Non-Interest Expense $ 8,048,896 $ 7,686,217 $ 362,679 4.7 %

Depreciation and maintenance of equipment increased $92,000 or 13.4% to $781,000 for the quarter ended September 30, 2021 compared to $689,000 for the quarter ended September 30, 2020 due to additional capital expenses related to our new e-branch as well as our newest branch in the metro Augusta, Georgia area, which is scheduled to open early next year.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

The Company had a net cost of $55,000 from the operation of OREO properties during the quarter ended September 30, 2021 compared to a net recovery of $22,000 during the quarter ended September 30, 2020. This line item includes all income and expenses associated with OREO, including gain or loss on sales and write-downs in value during each period. FDIC insurance premiums increased to normalized levels due to the use of remaining FDIC small bank credits by the Bank during 2020.

Provision For Income Taxes

The provision for income taxes ~~increased $1.2~~decreased $472,000 or 35.6% to $855,000 for the quarter ended September 30, 2022 from $1.3 million ~~or 1,161.6%~~for the same period in 2021 due to ~~$1.3~~lower net income before taxes in 2022. Pre-tax net income was $4.1 million for the quarter ended September 30, ~~2021 from $105,000 for the same period in 2020 due~~2022 compared to ~~higher net income before taxes in 2021 and purchased state tax credits, which reduced income taxes in 2020. Pre-tax net income was~~ $6.0 million for the ~~quarter ended September 30, 2021 compared to $1.0 million for the second~~third quarter of ~~2020.~~2021. The Company’s combined federal and state effective income tax rate was ~~22.2%~~20.9% and ~~10.4%~~22.2% for the quarters ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

4138

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021

Net Income

Net income ~~increased $6.8~~decreased $3.8 million or ~~169.6%~~35.4% to $6.9 million or $2.13 per common share for the nine months ended September 30, 2022 compared to $10.7 million or $3.30 per common share for the nine months ended September 30, 2021. The decrease in net income was primarily due to the reversal of $2.3 million in loan loss reserves during the nine months ended September 30, 2021 compared to ~~the same nine month period in 2020. The increase in earnings was primarily the result of decreases in interest expense and the~~no provision or reversal for loan losses ~~combined with an~~recorded during the nine months ended September 30, 2022. A decrease in non-interest income and increase in non-interest expenses also contributed to lower net income during the ~~first~~ nine months ~~of 2021~~ended September 30, 2022 when compared to the same period last year.

Net Interest Income

Net interest income increased ~~$2.5~~$2.0 million or ~~11.1%~~8.1% to ~~$24.6~~$26.6 million for the nine months ended September 30, ~~2021~~2022 compared to ~~$22.1~~$24.6 million for the same period last year. During the nine months ended September 30, ~~2021,~~2022, average interest earning assets increased ~~$117.6~~$164.5 million or ~~11.8%~~14.8% to $1.3 billion from $1.1 billion ~~from $992.7~~for the nine months ended September 30, 2021. Average interest-bearing liabilities also increased by $58.0 million or 6.7% to $927.7 million for the nine months ended September 30, ~~2020. Average interest-bearing liabilities also increased by $41.8~~2022 from $869.7 million ~~or 5.0%~~for the same period in 2021. The Company's net interest margin fell 18 basis points to ~~$869.7 million~~2.79% for the nine months ended September 30, ~~2021 from $827.9 million for the same period in 2020. The Company's net interest margin fell two basis points~~2022 compared to ~~2.98%~~2.97% for the nine months ended September 30, ~~2021 compared to 3.00% for the nine months ended September 30, 2020.~~2021. The net interest spread on a tax equivalent basis ~~grew three~~fell 20 basis points to ~~2.88%~~2.68% for the nine months ended September 30, ~~2021~~2022 from ~~2.85%~~2.88% for the comparable period in ~~2020.~~2021.

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, ~~2021~~2022 and ~~2020:~~2021:

Nine Months Ended September 30, Change in Average Balance Increase (Decrease) in Interest Income
2021 2020
(Dollars in Thousands) Average Balance
Yield(1)
Average Balance
Yield(1)
Loans Receivable, Net $ 508,693 5.25 % $ 511,611 5.04 % $ (2,918) $ 706
Mortgage-Backed Securities 290,381 1.85 239,693 2.63 50,688 (710)
Investment Securities(2)
309,634 1.56 235,905 2.04 73,729 12
Overnight Time & Certificates of Deposit 1,572 0.55 5,504 1.28 (3,932) (47)
Total Interest-Earning Assets $ 1,110,280 3.32 % $ 992,713 3.72 % $ 117,567 $ (39)



	Nine Months Ended September 30,												Change in Average Balance		Increase (Decrease) in Interest Income
	2022						2021
(Dollars in Thousands)	Average Balance		Interest Income		Yield(1)		Average Balance		Interest Income		Yield(1)
Loans Receivable, Net	$	518,436	$	18,608	4.79	%	$	508,693	$	20,039	5.25	%	$	9,743	$	(1,431)
Taxable Investments	696,283		9,720		1.86		556,001		6,409		1.54		140,282		3,310
Non-taxable Investments(2)	44,633		1,086		3.25		44,014		1,230		3.73		619		(144)
Deposits with other Banks	18,545		151		1.08		4,672		6		0.18		13,873		144
Total Interest-Earning Assets	$	1,277,897	$	29,565	3.08	%	$	1,113,380	$	27,684	3.32	%	$	164,517	$	1,879

(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 21% for the nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021. The tax equivalent adjustment relates to the tax exempt municipal bonds and was ~~$201,978~~approximately $184,000 and ~~$190,996~~$202,000 for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Total tax equivalent interest income ~~decreased $39,000~~increased $1.9 million to $29.6 million during the nine months ended September 30, 2022 compared to $27.7 million during the nine months ended September 30, 2021, ~~compared to the first nine months of 2020,~~primarily due to ~~decreases~~an increase in interest income from ~~MBS, investment securities and other interest-earning assets,~~taxable investments, which ~~were~~was partially offset by ~~an increase~~a decrease in interest income from loans. Total interest income on loans ~~increased $706,000~~decreased $1.4 million or ~~3.7%~~7.1% to ~~$20.0~~$18.6 million during the nine months ended September 30, ~~2021~~2022 from ~~$19.3~~$20.0 million for the same period in ~~2020.~~2021. The ~~increase~~decrease was a result of a 2146 basis point ~~increase~~decrease in the average yield on loans receivable, which was primarily driven by the recognition of $3.3 million in fee income related to PPP loans during the nine months ended September 30, 2021. The ~~increase~~decrease was partially offset by a ~~$2.9~~$9.7 million or ~~0.6% decrease~~1.9% increase in the average loan balance.

Interest income from ~~MBS decreased $710,000~~taxable investment securities increased $3.3 million or ~~15.0%~~51.6% to ~~$4.0~~$9.7 million for the nine months ended September 30, ~~2021~~2022 from ~~$4.7~~$6.4 million for the same period in ~~2020.~~2021. The ~~decrease~~increase wasthe result of a ~~78 basis point decline in the average MBS portfolio yield, which was partially offset by a $50.7~~$140.3 million ~~or 21.1%~~ increase in the average balance of ~~mortgage-backed~~taxable investments, primarily HTM, combined with an increase of 32 basis points in the average yield earned on taxable investment securities. Tax equivalent interest income from non-taxable investment securities ~~increased $12,000~~decreased $144,000 or ~~0.3%~~11.7% to ~~$3.6~~$1.1 million for the nine months ended September 30, ~~2021~~2022 when compared to the ~~same~~ nine ~~month period in 2020.~~

months ended September 30, 2021.

4239

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Interest income from deposits with other banks increased $144,000 for the nine months ended September 30, 2022 due to a $13.9 million increase in the average balance of these assets, primarily due to the cash received for the sale of the Company's Preferred Stock, combined with an increase of 90 basis points in the average yield.

Interest Expense

The following table compares detailed average balances, cost of funds on an annualized basis, and the resulting changes in interest expense for the nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:


		Nine Months Ended September 30,								Change in Average Balance		Decrease in Interest Expense			Nine Months Ended September 30,												Change in Average Balance		Change in Interest Expense
		2021				2020									2022						2021
(Dollars in Thousands)	(Dollars in Thousands)	Average Balance		Cost of Funds (1)		Average Balance		Cost of Funds (1)						(Dollars in Thousands)	Average Balance		Interest Expense		Cost of Funds		Average Balance		Interest Expense		Cost of Funds
Now and Money Market Accounts		$	515,157	0.13	%	$	428,663	0.28	%	$	86,494	$	(424)
Statement Savings Accounts		83,339		0.08		60,131		0.15		23,208		(16)
Checking, Savings & Money Market Accounts														Checking, Savings & Money Market Accounts	$	700,580	$	998	0.19	%	$	598,496	$	542	0.12	%	$	102,084	$	456
Certificates Accounts	Certificates Accounts	176,589		0.54		223,450		1.41		(46,861)		(1,645)		Certificates Accounts	150,670		420		0.37		176,589		716		0.54		(25,919)		(296)
FHLB Advances and Other Borrowed Money		59,429		0.87		78,980		1.18		(19,551)		(311)
FHLB Advances & Other Borrowed Money (1)														FHLB Advances & Other Borrowed Money (1)	41,374		91		0.29		59,429		389		0.87		(18,055)		(298)
Junior Subordinated Debentures	Junior Subordinated Debentures	5,155		1.89		5,155		2.62		—		(28)		Junior Subordinated Debentures	5,155		111		2.87		5,155		73		1.89		—		38
Subordinated Debentures	Subordinated Debentures	30,000		5.25		30,000		—		—		—		Subordinated Debentures	29,883		1,177		5.25		30,000		1,181		5.25		(117)		(4)
Senior Convertible Debentures		—		—		1,500		7.27		(1,500)		(82)
Total Interest-Bearing Liabilities	Total Interest-Bearing Liabilities	$	869,669	0.44	%	$	827,879	0.87	%	$	41,790	$	(2,506)	Total Interest-Bearing Liabilities	$	927,662	$	2,797	0.40	%	$	869,669	$	2,901	0.44	%	$	57,993	$	(104)

(1) ~~Annualized~~Includes FHLB Advances, FRB Borrowings and Repurchase Agreements

Interest expense decreased ~~$2.5 million~~$104,000 or ~~46.4%~~3.5% to ~~$2.9~~$2.8 million during the nine months ended September 30, ~~2021~~2022 compared to ~~$5.4~~$2.9 million for the same period in ~~2020.~~2021. The decrease in total interest expense was attributable to a decrease of 43four basis points in the average cost of interest-bearing liabilities, which was partially offset by a ~~$41.8~~$58.0 million or ~~5.0%~~6.7% increase in the average balance of these liabilities.

Interest expense on deposits increased $161,000 to $1.4 million for the nine months ended September 30, 2022 due to a $76.2 million increase in the average balance of interest bearing deposit accounts. Interest expense on certificate accounts decreased $296,000 due to a $25.9 million decrease in the average balance combined with a 17 basis point decrease in the average cost of certificate deposits during the first nine months of 2022, as management elected to utilize liquidity gained from lower cost deposits to reduce its balances of higher cost certificates of deposit in a managed reduction of these funds. Interest expense on all other interest-bearing deposits increased $457,000 during the nine months ended September 30, 2022 due to a $102.1 million increase in the average balance combined with a seven basis point increase in the average cost.

Interest expense on FHLB advances and other ~~borrowings~~borrowed money decreased ~~$311,000~~$298,000 or ~~44.5%~~76.5% to ~~$389,000 during the nine months ended September 30, 2021~~$91,000 from ~~$701,000 during the same period in 2020~~$389,000 due to a ~~$19.6~~$18.1 million or ~~24.8%~~30.4% decrease in the average balance combined with a decline of 3158 basis points in the average cost of these liabilities during the nine months ended September 30, ~~2021~~2022 when compared to the same period last year.

Provision for Loan Losses

There was ~~$2.3 million in negative~~no provision for loan losses recorded during the nine months ended September 30, ~~2021~~2022 compared to a reversal of provision expense of ~~$3.6~~$2.3 million for the same period in ~~2020 reflecting~~2021. The negative provision during 2021 resulted from a ~~decline~~reduction in ~~the probable loan losses~~qualitative adjustment factors due to the ~~COVID-19 pandemic as~~improvement in the economic and business conditions at both the national and regional levels ~~continued to improve~~ as of September 30, ~~2021. The table below summarizes~~2021 following significantly higher loan loss provisions during 2020 in response to the potential and unknown economic impact of the ongoing COVID-19 pandemic. For additional details related to the provision for loan losses and changes in the allowance for loan losses, ~~for~~see "Note 8 - Loans Receivable, Net” of the ~~nine months ended September 30, 2021 and 2020.~~Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Nine Months Ended September 30,
(Dollars in Thousands) 2021 2020
Beginning Balance $ 12,843 $ 9,226
Provision for Loan Losses (2,270) 3,600
Charge-offs (110) (203)
Recoveries 709 223
Net Recoveries $ 599 $ 20
Ending Balance $ 11,172 $ 12,846

4340

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Non-Interest Income

Non-interest income ~~increased $1.4~~decreased $2.5 million or ~~16.3%~~25.3% to $7.5 million for the nine months ended September 30, 2022, compared to $10.0 million for the nine months ended September 30, ~~2021, compared to $8.6 million for the nine months ended September 30, 2020.~~2021. The following table summarizes the changes in the components of non-interest income:


		Nine Months Ended September 30,				Increase (Decrease)					Nine Months Ended September 30,				Increase (Decrease)
		2021		2020		$		%			2022		2021		$		%
Gain on Sale of MBS & Investment Securities		$	—	$	1,332,666	$	(1,332,666)	(100.0)	%

Gain on Sale of Loans	Gain on Sale of Loans	3,022,755		2,494,084		528,671		21.2		Gain on Sale of Loans	$	1,511,905	$	3,022,755	$	(1,510,850)	(50.0)	%
Service Fees on Deposit Accounts	Service Fees on Deposit Accounts	702,548		695,561		6,987		1.0		Service Fees on Deposit Accounts	809,287		702,548		106,739		15.2
BOLI Income		485,000		408,250		76,750		18.8
Commissions From Insurance Agency	Commissions From Insurance Agency	468,083		513,783		(45,700)		(8.9)		Commissions From Insurance Agency	620,779		468,083		152,696		32.6
Trust Income	Trust Income	1,005,517		782,210		223,307		28.5		Trust Income	1,084,249		1,005,517		78,732		7.8
BOLI Income										BOLI Income	457,202		485,000		(27,798)		(5.7)
ATM & Check Card Fee Income	ATM & Check Card Fee Income	1,811,216		1,416,946		394,270		27.8		ATM & Check Card Fee Income	2,109,173		1,811,216		297,957		16.5
Grant Income	Grant Income	1,826,265		316,814		1,509,451		476.4		Grant Income	170,699		1,826,265		(1,655,566)		100.0
Other	Other	669,379		629,814		39,565		6.3		Other	702,135		669,379		32,756		4.9
Total Non-Interest Income	Total Non-Interest Income	$	9,990,763	$	8,590,128	$	1,400,635	16.3	%	Total Non-Interest Income	$	7,465,429	$	9,990,763	$	(2,525,334)	(25.3)	%

The ~~increase~~decrease in non-interest income was primarily attributable to ~~increases~~a decreases in gain on sale of loans ~~trust income, ATM & check card fee income~~ and grant income, ~~reduced~~which was partially offset by increases in every other non-interest income line item with the ~~absence~~exception of ~~gain on sale of MBS & investment securities~~BOLI income, which decreased $28,000 during the nine months ended September 30, ~~2021.~~2022. Gain on sale of loans ~~increased $529,000~~decreased $1.5 million or ~~21.2%~~50.0% to ~~$3.0~~$1.5 million for the nine months ended September 30, ~~2021~~2022 compared to ~~$2.5~~$3.0 million during the same period in ~~2020~~2021 as the dollar volume of loans sold ~~increased.~~decreased. Commissions from insurance subsidiary increased $153,000 to $621,000 during the nine months ended September 30, 2022 due to an increase in the number of insurance policies sold. ATM & Check Card Fee income increased ~~$394,000~~$298,000 primarily due to an increase in debit card usage. ~~Grant income increased as a result of the $1.8 million CDFI RRP award received during 2021. The grant proceeds were used by the Bank to fund qualified loans in the target market areas we serve.~~

Non-Interest Expense

For the nine months ended September 30, ~~2021,~~2022, non-interest expense increased ~~$784,000~~$2.2 million or ~~3.5%~~9.5% to ~~$23.1~~$25.3 million compared to ~~$22.3~~$23.1 million for the same period in ~~2020.~~2021. The table below summarizes the changes in the components of non-interest expense.


		Nine Months Ended September 30,				Increase (Decrease)					Nine Months Ended September 30,				Increase (Decrease)
		2021		2020		$		%			2022		2021		$		%
Compensation and Employee Benefits	Compensation and Employee Benefits	$	14,145,363	$	13,654,330	$	491,033	3.6	%	Compensation and Employee Benefits	$	14,981,146	$	14,145,363	$	835,783	5.9	%
Occupancy	Occupancy	1,922,369		1,864,202		58,167		3.1		Occupancy	2,110,746		1,922,369		188,377		9.8
Advertising	Advertising	671,186		776,605		(105,419)		(13.6)		Advertising	693,389		671,186		22,203		3.3
Depreciation and Maintenance of Equipment	Depreciation and Maintenance of Equipment	2,354,958		2,126,683		228,275		10.7		Depreciation and Maintenance of Equipment	2,278,890		2,354,958		(76,068)		(3.2)
FDIC Insurance Premiums	FDIC Insurance Premiums	215,181		67,938		147,243		216.7		FDIC Insurance Premiums	284,083		215,181		68,902		32.0
Net Recovery of Operation of OREO		(115,840)		(27,329)		(88,511)		323.9
Net Cost (Recovery) of Operation of OREO										Net Cost (Recovery) of Operation of OREO	10,000		(115,840)		125,840		(108.6)
Change in Value of Land HFS										Change in Value of Land HFS	433,077		—		433,077		100.0

Consulting	Consulting	512,998		563,246		(50,248)		(8.9)		Consulting	513,299		512,998		301		0.1
Debit Card Expense	Debit Card Expense	859,357		764,570		94,787		12.4		Debit Card Expense	917,225		859,357		57,868		6.7
Telephone	Telephone	313,229		372,631		(59,402)		(15.9)		Telephone	291,069		313,229		(22,160)		(7.1)
Postage	Postage	147,600		249,512		(101,912)		(40.8)		Postage	182,202		147,600		34,602		23.4
General Insurance	General Insurance	248,691		226,983		21,708		9.6		General Insurance	257,577		248,691		8,886		3.6
Other	Other	1,829,544		1,681,363		148,181		8.8		Other	2,348,375		1,829,544		518,831		28.4
Total Non-Interest Expense	Total Non-Interest Expense	$	23,104,636	$	22,320,734	$	783,902	3.5	%	Total Non-Interest Expense	$	25,301,078	$	23,104,636	$	2,196,442	9.5	%

Compensation and employee benefits expenses increased $491,000 or 3.6% to $14.1 million for the nine months ended September 30, 2021 compared to $13.7 million during the same period last year primarily due to general annual cost of living increases.

4441

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

~~Depreciation~~Compensation and ~~maintenance of equipment~~employee benefits expenses increased ~~$228,000~~$836,000 or ~~10.7%~~5.9% to $15.0 million for the nine months ended September 30, 2022 compared to $14.1 million during the same period last year primarily due to ~~additional capital expenses related to our new e-branch~~annual cost of living increases and an increase in the number of full time equivalent employees as ~~well as~~a result of our newest branch inadded during the ~~metro Augusta, Georgia area, which is scheduled to open next year.~~

~~FDIC insurance premiums~~first quarter of 2022 and the overall growth of the Company. Occupancy expense and advertising also increased ~~$147,000 primarily~~ due to the ~~use~~addition of ~~remaining FDIC small bank credits by the Bank during 2020.~~our newest branch located in Columbia, South Carolina.

The Company had ~~a net recovery of $116,000 from the operation of~~$10,000 in write-down expenses on OREO properties during the nine months ended September 30, ~~2021~~2022 compared to a net recovery of ~~$27,000~~$116,000 during the nine months ended September 30, ~~2020.~~2021. This line item includes all income and expenses associated with OREO, including gain or loss on sales and write-downs in value during each period.

~~Debit card~~

Land held for sale decreased $433,000 during 2022 due to a write down in the value of the land based on a recent appraisal. Other non-interest expense increased ~~$95,000~~$519,000 or 28.4% to ~~$859,000~~$2.3 million for the nine months ended September 30, ~~2021 due~~2022 compared to ~~the replacement of all customer debit cards in 2021 because of the inclusion of a new chip within the cards.~~

~~Other non-interest expense increased~~$1.8 million during the nine months ended September 30, 2021 due to increased operations ~~as branches re-opened during 2021 after being closed for~~and the ~~majority~~opening of ~~2020 as a result of the COVID-19 pandemic. As of May 2021, all branches have reopened and resumed normal business hours.~~our newest branch in 2022.

Provision For Income Taxes

The provision for income taxes ~~increased $2.2~~decreased $1.2 million or ~~269.5%~~39.6% to ~~$3.0~~$1.8 million for the nine months ended September 30, ~~2021~~2022 from ~~$810,000~~$3.0 million for the same period in ~~2020~~2021 primarily due to higher pre-tax income in ~~2021 and purchased state tax credits in 2020.~~2021. Income before taxes was ~~$13.7~~$8.7 million and ~~$4.8~~$13.7 million for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The Company’s combined federal and state effective income tax rate was ~~21.8%~~20.7% for the nine months ended September 30, ~~2021~~2022 compared to ~~16.9%~~21.8% for the same period in ~~2020.~~2021.

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 Company actively analyzes and manages the Bank’s 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 include deposits, scheduled loan and investment ~~and mortgage-backed~~ securities repayments, including interest payments, maturities and sales of loans and investment ~~and mortgage-backed~~ securities, advances from the FHLB and 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.~~commitments. The Bank had $173.0 million in unused commitments to extend credit and standby letters of credit at September 30, 2022.

During the nine months ended September 30, ~~2021~~2022, loan disbursements exceeded loan repayments resulting in a ~~$21.4~~$23.6 million or ~~4.5%~~4.7% increase in total net loans receivable. Also during the nine months ended September 30, ~~2021,~~2022, deposits increased ~~$98.5~~$2.9 million or ~~10.7% and FHLB advances decreased $25.0 million.~~0.3%. The Bank had ~~$349.9~~no outstanding FHLB advances at September 30, 2022 with $401.7 million in additional borrowing capacity at the FHLB at ~~the end of the period.~~that date. The Bank ~~also has secured an $80.9~~had $1.0 million of outstanding borrowings from the discount window facility at the FRB at September 30, 2022, which was collateralized by ~~investment securities~~investments AFS with a fair market value of ~~$84.7 million. At September 30, 2021, the Bank had $15.4~~$70.4 million ~~in outstanding borrowings~~ at ~~the FRB.~~that date. The Bank also had a ~~$5.0~~$50.0 million unused Fed Funds facility with Pacific Coast Bankers Bank at September 30, ~~2021.~~2022. 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. As discussed above, on May 24, 2022, the Company sold $89.4 million of Preferred Stock to the U.S. Department of Treasury pursuant to the ECIP.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. At September 30, ~~2021,~~2022, the Company, on an unconsolidated basis, had liquid assets of $94.5 million. In addition to its operating expenses, the Company is responsible for paying any dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, and payments on trust-preferred securities and subordinated debentures held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, ~~had $114.3 million~~although there are regulatory restrictions on the ability of ~~certificates of deposit maturing within one year. Based on previous experience,~~ the Bank ~~anticipates~~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 $0.12 per share, as approved by our Board of Directors, which we believe is a ~~significant~~dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of ~~these certificates will~~our cash to our shareholders. Assuming continued payment during 2022 at this rate of $0.12 per share, our average total dividend paid each quarter would be ~~renewed~~approximately $390,000 based on ~~maturity.~~the number of outstanding shares at September 30, 2022.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

At September 30, ~~2021,~~2022, 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 ~~18.8%~~17.86%, ~~10.2%~~10.32%, ~~18.8%~~17.86%, and ~~20.1%~~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-based capital and Tier 1 leverage capital ratios of 6.5%, 10.0%, 8.0% and 5.0%, respectively. In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional CET1 capital greater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At September 30, ~~2021~~2022 the Bank’s conservation buffer ~~was 12.1%~~was 11.1%. ~~For~~For additional details, see ~~“Footnote –~~“Note 12 - Regulatory Matters” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

~~Off-Balance Sheet Commitments~~

The Company is a party to financial instruments with off-balance sheet risk in 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 excess of the amount recognized in the balance sheet. The Company’s maximum exposure to credit loss in the event 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, 2021.~~

(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 $ 1,776 $ 3,383 $ 57,660 $ 62,819 $ 110,292 $ 173,111
Standby Letters of Credit 98 132 1,657 1,887 544 2,431
Total $ 1,874 $ 3,515 $ 59,317 $ 64,706 $ 110,836 $ 175,542

4643

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’s profitability 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 ~~2020~~2021 Form 10-K.

For the nine months ended September 30, ~~2021,~~2022, the Bank's interest rate spread, defined as the average yield on interest bearing assets less the average rate paid on interest bearing liabilities was ~~2.88%~~2.68%.

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, ~~2021~~2022 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, ~~2021~~2022 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.

4744

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 Factors previously disclosed in Item 1A of the Company's ~~2020~~2021 Form 10-K.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Item 6 Exhibits


3.1			Articles of Incorporation, as amended (1)
3.2			Amended and Restated Bylaws (2)
3.3			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)
4.2			Form of Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (3)
10.1			1993 Salary Continuation Agreements ~~(4)~~(5)
10.2			Amendment One to 1993 Salary Continuation Agreements ~~(5)~~(6)
10.3			Form of 2006 Salary Continuation Agreement ~~(6)~~(7)
10.4			Form of Security Federal Split Dollar Agreement ((76))
10.5			~~1999~~2018 Employee Stock ~~Option~~Purchase Plan (7)8)
10.6			~~2002 Stock Option Plan (~~Form of Compensation Modification Agreement (9)8)
10.7			~~2006 Stock Option Plan (~~Letter Agreement, Dated May 24, 2022 between Security Federal Corporation and9)
~~10.8~~			~~2008 Equity Incentive Plan (1~~0)
~~10.9~~			~~Forms~~the U.S. Department of ~~incentive stock option agreement and non-qualified stock option agreement pursuant~~Treasury,with respect to the ~~2006~~issuance of Senior Non-Cumulative Perpetual Preferred Stock, ~~Option Plan (~~Series ECIP9) (3)
~~10.10~~			~~2018 Employee Stock Purchase Plan (1~~1)
~~10.11~~			~~Incentive Compensation Plan (4)~~
31.1			Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2			Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~


32			Certification of 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, ~~2021,~~2022, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive ~~Income;~~Loss; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements

~~______________________~~_______________________

(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.

~~(4)~~(5) Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference.

~~(5)~~(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.

~~(6)~~(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.

~~(7)~~(8) Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference

~~(8)~~(9) Filed on January 3, 2003, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.

~~(9) 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.~~

~~(10) Filed on November 12, 2008, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.~~

~~(11) Filed on March 28, 2018, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.~~

4946

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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 ~~15, 2021~~14, 2022

By:

/s/J. Chris Verenes

J. Chris Verenes

Chief Executive Officer

Duly Authorized Representative

Date:

November ~~15, 2021~~14, 2022

By:

/s/Darrell Rains

Darrell Rains

Chief Financial Officer

Duly Authorized Representative

5047


	September 30, 2021		December 31, 2020
Residential Real Estate Loans	$	77,416,918	$	78,907,159
Consumer Loans	55,594,757		55,335,425
Commercial Business Loans	28,060,855		19,704,862
Commercial Real Estate Loans	337,435,374		299,299,647
Paycheck Protection Program ("PPP") Loans	32,119,284		47,105,618
Total Loans Held For Investment	530,627,188		500,352,711
Loans Held For Sale	3,589,131		5,693,400
Total Loans Receivable, Gross	534,216,319		506,046,111
Less:
Allowance For Loan Losses	11,172,237		12,842,896
Loans in Process	20,013,219		12,197,417
Deferred Loan Fees	2,430,338		1,838,426
	33,615,794		26,878,739
Total Loans Receivable, Net	$	500,600,525	$	479,167,372


	Three Months Ended September 30, 2021
	Residential Real Estate		Consumer		Commercial Business		Commercial Real Estate		Total
Beginning Balance	$	1,097,992	$	1,165,357	$	1,559,281	$	7,601,130	$	11,423,760
Provision for Loan Losses	(74,147)		(16,176)		(419,263)		(155,414)		(665,000)
Charge-Offs	—		(45,962)		—		—		(45,962)
Recoveries	8,600		11,545		323		438,971		459,439
Ending Balance	$	1,032,445	$	1,114,764	$	1,140,341	$	7,884,687	$	11,172,237



	Three Months Ended September 30, 2020
	Residential Real Estate		Consumer		Commercial Business		Commercial Real Estate		Total
Beginning Balance	$	1,532,804	$	1,317,734	$	639,731	$	7,186,002	$	10,676,271
Provision for Loan Losses	55,487		(223)		442,730		1,702,006		2,200,000
Charge-Offs	—		(45,851)		—		(19,453)		(65,304)
Recoveries	600		13,430		—		20,665		34,695
Ending Balance	$	1,588,891	$	1,285,090	$	1,082,461	$	8,889,220	$	12,845,662



	Nine Months Ended September 30, 2020
	Residential Real Estate		Consumer		Commercial Business		Commercial Real Estate		Total
Beginning Balance	$	1,390,594	$	1,210,849	$	544,764	$	6,079,367	$	9,225,574
Provision for Loan Losses	196,497		168,447		572,745		2,662,311		3,600,000
Charge-Offs	—		(148,844)		(35,048)		(19,453)		(203,345)
Recoveries	1,800		54,638		—		166,995		223,433
Ending Balance	$	1,588,891	$	1,285,090	$	1,082,461	$	8,889,220	$	12,845,662


(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	$	1,776	$	3,383	$	57,660	$	62,819	$	110,292	$	173,111
Standby Letters of Credit	98		132		1,657		1,887		544		2,431
Total	$	1,874	$	3,515	$	59,317	$	64,706	$	110,836	$	175,542