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 MARCH 31, ~~2022~~2023

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

FOR THE TRANSITION PERIOD:


FROM:						TO:

COMMISSION FILE NUMBER: 000-16120

SECURITY FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)

South 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)

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

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

Indicate by check mark whether the registrant has submitted electronically 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

May ~~16, 2022~~12, 2023

~~3,252,884~~3,253,210



PART I.	FINANCIAL INFORMATION (UNAUDITED)	PAGE NO.
Item 1.	Financial Statements (unaudited):	3
	Consolidated Balance Sheets at March 31, ~~2022~~2023 and December 31, ~~2021~~2022	3
	Consolidated Statements of Income for the Three Months Ended March 31, ~~2022~~2023 and ~~2021~~2022	4
	Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) for the Three Months Ended March 31, ~~2022~~2023 and ~~2021~~2022	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, ~~2022~~2023 and ~~2021~~2022	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2022~~2023 and ~~2021~~2022	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2934
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3843
Item 4.	Controls and Procedures	3843

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	3944
Item 1A.	Risk Factors	3944
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3944
Item 3.	Defaults Upon Senior Securities	3944
Item 4.	Mine Safety Disclosures	3944
Item 5.	Other Information	3944
Item 6.	Exhibits	3945
	Signatures	4146

SCHEDULES OMITTED

All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Part 1. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

March 31, 2022 December 31, 2021
(Unaudited) (Audited)
ASSETS:
Cash and Cash Equivalents $ 31,110,278 $ 27,622,851
Certificates of Deposit with Other Banks 1,100,045 1,100,045
Investments:
Available For Sale ("AFS") 668,057,963 682,849,058
Held To Maturity ("HTM") (Fair Value of $21,040,983 and $23,720,408 at March 31, 2022 and December 31, 2021, Respectively) 22,060,506 23,506,768
Total Investments 690,118,469 706,355,826
Loans Receivable, Net:
Held For Sale 3,585,384 4,038,414
Held For Investment (Net of Allowance of $11,128,963 and $11,087,164 at March 31, 2022 and December 31, 2021, Respectively) 500,774,033 495,458,395
Total Loans Receivable, Net 504,359,417 499,496,809
Accrued Interest Receivable:
Loans 1,342,058 1,333,155
Investments 2,513,419 2,419,335
Total Accrued Interest Receivable 3,855,477 3,752,490
Operating Lease Right-of-Use ("ROU") Assets 2,145,572 2,252,424
Land Held for Sale 1,190,347 1,529,691
Premises and Equipment, Net 25,968,849 25,236,915
Federal Home Loan Bank ("FHLB") Stock, at Cost 650,500 585,700
Other Real Estate Owned ("OREO") 129,700 129,700
Bank Owned Life Insurance ("BOLI") 26,867,138 26,709,897
Goodwill 1,199,754 1,199,754
Other Assets 11,093,868 5,241,410
Total Assets $ 1,299,789,414 $ 1,301,213,512
LIABILITIES:
Deposit Accounts $ 1,125,935,322 $ 1,115,962,963
Other Borrowings 34,251,923 26,785,393
Junior Subordinated Debentures 5,155,000 5,155,000
Subordinated Debentures 30,000,000 30,000,000
Operating Lease Liabilities 2,188,913 2,293,295
Other Liabilities 5,799,904 5,494,336
Total Liabilities $ 1,203,331,062 $ 1,185,690,987
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 March 31, 2022 and December 31, 2021 $ 34,538 $ 34,538
Additional Paid-In Capital ("APIC") 18,230,187 18,230,187
Treasury Stock, at Cost (200,933 Shares) (4,330,712) (4,330,712)
Accumulated Other Comprehensive (Loss) Income ("AOCI") (15,007,751) 5,215,107
Retained Earnings 97,532,090 96,373,405
Total Shareholders' Equity $ 96,458,352 $ 115,522,525
Total Liabilities and Shareholders' Equity $ 1,299,789,414 $ 1,301,213,512


	March 31, 2023		December 31, 2022
	(Unaudited)		(Audited)
ASSETS:
Cash and Cash Equivalents	$	24,719,440	$	28,502,364
Certificates of Deposit with Other Banks	1,100,045		1,100,045
Investments:
Available For Sale ("AFS")	541,070,073		550,148,284
Held To Maturity ("HTM") Net of Allowance for Credit Losses of $0 (Fair Value of $175,852,725 and $161,463,573 at March 31, 2023 and December 31, 2022, Respectively)	180,178,508		167,437,616
Total Investments	721,248,581		717,585,900
Loans Receivable, Net:
Held For Sale	240,841		913,258
Held For Investment (Net of Allowance for Credit Losses of $12,126,810 and $11,177,753 at March 31, 2023 and December 31, 2022, Respectively)	574,189,709		549,003,912
Total Loans Receivable, Net	574,430,550		549,917,170
Accrued Interest Receivable:
Loans	1,531,288		1,462,039
Investments	3,828,399		3,348,635
Total Accrued Interest Receivable	5,359,687		4,810,674
Operating Lease Right-of-Use ("ROU") Assets	1,747,944		1,860,997
Land Held for Sale	1,096,614		1,096,614
Premises and Equipment, Net	28,674,858		27,959,793
Federal Home Loan Bank ("FHLB") Stock, at Cost	658,600		650,600
Other Real Estate Owned ("OREO")	119,700		119,700
Bank Owned Life Insurance ("BOLI")	27,468,302		27,318,098
Goodwill	1,199,754		1,199,754
Other Assets	18,269,716		19,244,454
Total Assets	$	1,406,093,791	$	1,381,366,163
LIABILITIES:
Deposit Accounts	$	1,108,673,509	$	1,110,085,296

Borrowings from Federal Reserve Bank ("FRB")	61,375,000		44,080,000
Other Borrowings	27,817,803		27,588,147
Junior Subordinated Debentures	5,155,000		5,155,000
Subordinated Debentures	26,500,000		26,500,000
Operating Lease Liabilities	1,793,589		1,904,285
Other Liabilities	8,286,135		5,819,807
Total Liabilities	$	1,239,601,036	$	1,221,132,535
SHAREHOLDERS’ EQUITY:
Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP, $1,000 Par Value; 82,949 Shares Authorized, Issued and Outstanding at March 31, 2023 and December 31, 2022	$	82,949,000	$	82,949,000
Common Stock, $0.01 Par Value; 5,000,000 Shares Authorized; 3,454,143 and 3,453,817 Shares Issued and 3,253,210 and 3,252,884 Shares Outstanding at March 31, 2023 and December 31, 2022, Respectively	34,541		34,538
Additional Paid-In Capital ("APIC")	18,238,598		18,230,187
Treasury Stock, at Cost (200,933 Shares)	(4,330,712)		(4,330,712)
Accumulated Other Comprehensive Loss ("AOCI")	(35,200,845)		(40,778,646)
Retained Earnings	104,802,173		104,129,261
Total Shareholders' Equity	$	166,492,755	$	160,233,628
Total Liabilities and Shareholders' Equity	$	1,406,093,791	$	1,381,366,163

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)


		Three Months Ended March 31,					Three Months Ended March 31,
		2022		2021				2023		2022
Interest Income:	Interest Income:					Interest Income:
Loans	Loans	$	6,096,686	$	6,483,879	Loans		$	7,410,163	$	6,096,686
Investments	Investments	2,600,958		2,612,066		Investments		6,773,482		2,600,958
Other	Other	2,216		1,502		Other		34,432		2,216
Total Interest Income	Total Interest Income	8,699,860		9,097,447		Total Interest Income		14,218,077		8,699,860
Interest Expense:	Interest Expense:					Interest Expense:

Deposits	Deposits	345,067		470,067		Deposits		2,915,268		345,067
FHLB Advances and Other Borrowed Money	FHLB Advances and Other Borrowed Money	29,783		189,163		FHLB Advances and Other Borrowed Money		627,782		29,783
Subordinated Debentures	Subordinated Debentures	393,750		393,750		Subordinated Debentures		347,813		393,750
Junior Subordinated Debentures	Junior Subordinated Debentures	26,039		24,619		Junior Subordinated Debentures		83,606		26,039
Total Interest Expense	Total Interest Expense	794,639		1,077,599		Total Interest Expense		3,974,469		794,639
Net Interest Income	Net Interest Income	7,905,221		8,019,848		Net Interest Income		10,243,608		7,905,221
Reversal of Provision for Loan Losses		—		(870,000)
Net Interest Income After Provision for Loan Losses		7,905,221		8,889,848
Provision for Credit Losses						Provision for Credit Losses		—		—
Net Interest Income After Provision for Credit Losses						Net Interest Income After Provision for Credit Losses		10,243,608		7,905,221
Non-Interest Income:	Non-Interest Income:					Non-Interest Income:

Gain on Sale of Loans	Gain on Sale of Loans	713,893		1,071,481		Gain on Sale of Loans		193,881		713,893
Service Fees on Deposit Accounts	Service Fees on Deposit Accounts	257,491		231,934		Service Fees on Deposit Accounts		269,613		257,491
Commissions From Insurance Agency	Commissions From Insurance Agency	139,504		130,503		Commissions From Insurance Agency		162,799		139,504
Trust Income	Trust Income	364,746		309,139		Trust Income		382,208		364,746
BOLI Income	BOLI Income	157,241		165,000		BOLI Income		150,204		157,241
ATM and Check Card Fee Income	ATM and Check Card Fee Income	717,267		519,843		ATM and Check Card Fee Income		802,022		717,267

Other	Other	253,182		345,752		Other		239,650		253,182
Total Non-Interest Income	Total Non-Interest Income	2,603,324		2,773,652		Total Non-Interest Income		2,200,377		2,603,324
Non-Interest Expense:	Non-Interest Expense:					Non-Interest Expense:
Compensation and Employee Benefits	Compensation and Employee Benefits	5,056,620		4,869,246		Compensation and Employee Benefits		5,240,796		5,056,620
Occupancy	Occupancy	712,786		621,282		Occupancy		806,434		712,786
Advertising	Advertising	260,333		199,402		Advertising		244,595		260,333
Depreciation and Maintenance of Equipment	Depreciation and Maintenance of Equipment	720,661		802,847		Depreciation and Maintenance of Equipment		620,156		720,661
FDIC Insurance Premiums	FDIC Insurance Premiums	112,042		68,616		FDIC Insurance Premiums		90,306		112,042
Net Recovery from Operation of OREO		—		(103,667)

Writedown of Land Held for Sale	Writedown of Land Held for Sale	339,344		—		Writedown of Land Held for Sale		—		339,344

Consulting	Consulting	164,750		168,910		Consulting		213,335		164,750
Debit Card Expenses	Debit Card Expenses	283,789		258,663		Debit Card Expenses		336,646		283,789

Data Processing						Data Processing		280,036		67,052
Other	Other	944,519		724,385		Other		1,198,284		877,467
Total Non-Interest Expense	Total Non-Interest Expense	8,594,844		7,609,684		Total Non-Interest Expense		9,030,588		8,594,844
Income Before Income Taxes	Income Before Income Taxes	1,913,701		4,053,816		Income Before Income Taxes		3,413,397		1,913,701
Provision For Income Taxes		364,670		875,024
Provision for Income Taxes						Provision for Income Taxes		739,297		364,670
Net Income	Net Income	1,549,031		3,178,792		Net Income		2,674,100		1,549,031
Net Income Per Common Share (Basic)	Net Income Per Common Share (Basic)	$	0.48	$	0.98	Net Income Per Common Share (Basic)		$	0.82	$	0.48

Cash Dividend Per Share on Common Stock	Cash Dividend Per Share on Common Stock	$	0.12	$	0.11	Cash Dividend Per Share on Common Stock		$	0.13	$	0.12
Weighted Average Shares Outstanding (Basic)	Weighted Average Shares Outstanding (Basic)	3,252,884		3,252,884		Weighted Average Shares Outstanding (Basic)		3,253,112		3,252,884

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) (Unaudited)

Three Months Ended March 31,
2022 2021
Net Income $ 1,549,031 $ 3,178,792
Other Comprehensive Loss:
Unrealized Holding Losses on Securities AFS, Net of Taxes of $(6,553,438) and $(1,771,865) at March 31, 2022 and 2021, Respectively (20,222,704) (5,463,402)
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $(51) and $(678) at March 31, 2022 and 2021, Respectively (154) (2,034)
Other Comprehensive Loss, Net of Tax (20,222,858) (5,465,436)
Comprehensive Loss $ (18,673,827) $ (2,286,644)


	Three Months Ended March 31,
	2023		2022
Net Income	$	2,674,100	$	1,549,031
Other Comprehensive Income (Loss):

Unrealized Holding Gains (Losses) on Securities AFS, Net of Tax Expense (Benefit) of $1,807,684 and $(6,553,438) at March 31, 2023 and 2022, Respectively	5,575,156		(20,222,704)

Amortization of Unrealized Losses (Gains) on AFS Securities Transferred to HTM, Net of Tax Expense (Benefit) of $882 and $(51) at March 31, 2023 and 2022, Respectively	2,645		(154)
Other Comprehensive Income (Loss), Net of Tax	5,577,801		(20,222,858)
Comprehensive Income (Loss)	$	8,251,901	$	(18,673,827)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the Three Months Ended March 31, ~~2022~~2023 and ~~2021~~2022


		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

Common
Stock APIC Treasury Stock AOCI Retained Earnings Total
Balance at December 31, 2021 $ 34,538 $ 18,230,187 $ (4,330,712) $ 5,215,107 $ 96,373,405 $ 115,522,525
Net Income — — — — 1,549,031 1,549,031
Other Comprehensive Loss, Net of Tax — — — (20,222,858) — (20,222,858)
Cash Dividends on Common Stock — — — — (390,346) (390,346)
Balance at March 31, 2022 $ 34,538 $ 18,230,187 $ (4,330,712) $ (15,007,751) $ 97,532,090 $ 96,458,352


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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended
	March 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	2,674,100	$	1,549,031
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	518,033		491,565
Discount Accretion and Premium Amortization, net	1,160,223		1,975,822
Provision for Credit Losses	—		—
Earnings on BOLI	(150,204)		(157,241)

Gain on Sales of Loans	(193,881)		(713,893)




Write Down of Land Held for Sale	—		339,344
Amortization of Operating Lease ROU Assets	113,053		106,852
Proceeds From Sale of Loans Held For Sale	6,736,663		20,285,158
Origination of Loans Held For Sale	(5,870,365)		(19,118,235)
Increase in Accrued Interest Receivable	(549,013)		(102,987)
Other, Net	1,525,330		902,012
Net Cash Provided By Operating Activities	$	5,963,939	$	5,557,428
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investments AFS	$	(3,487,262)	$	(43,978,806)
Proceeds from Paydowns and Maturities of Investments AFS	18,739,220		30,072,755
Purchase of Investments HTM	(15,587,496)		—
Proceeds from Paydowns and Maturities of Investments HTM	2,895,475		1,391,444
Purchase of FHLB Stock	(8,000)		(64,800)
Increase in Loans Receivable	(26,764,068)		(5,315,638)
Purchase and Improvement of Premises and Equipment	(1,233,098)		(1,223,499)
Net Cash Used By Investing Activities	$	(25,445,229)	$	(19,118,544)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in Deposit Accounts	$	(1,411,787)	$	9,972,359


Increase in Other Borrowings, Net	229,656		7,466,530
Proceeds from FRB Borrowings	324,005,000		109,025,000
Repayment of FRB Borrowings	(306,710,000)		(109,025,000)

Proceeds from Employee Stock Purchase Plan	8,414		—

Dividends to Common Stock Shareholders	(422,917)		(390,346)
Net Cash Provided By Financing Activities	$	15,698,366	$	17,048,543
Net (Decrease) Increase in Cash and Cash Equivalents	(3,782,924)		3,487,427
Cash and Cash Equivalents at Beginning of Period	28,502,364		27,622,851
Cash and Cash Equivalents at End of Period	$	24,719,440	$	31,110,278
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest	$	3,644,472	$	402,484


Non-Cash Transactions:

Other Comprehensive Income (Loss)	5,577,801		(20,222,858)

Three Months Ended
March 31,
2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,549,031 $ 3,178,792
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense 491,565 491,501
Discount Accretion and Premium Amortization, net 1,975,822 1,493,219
Reversal of Provision for Loan Losses — (870,000)
Earnings on BOLI (157,241) (165,000)
Gain on Sales of Loans (713,893) (1,071,481)
Gain on Sales of OREO — (105,422)
Write Down of Land Held for Sale 339,344 —
Amortization of Operating Lease ROU Assets 106,852 91,044
Proceeds From Sale of Loans Held For Sale 20,285,158 31,523,356
Origination of Loans Held For Sale (19,118,235) (31,230,874)
Increase in Accrued Interest Receivable:
Loans (8,903) (253,807)
Investments (94,084) (29,988)
Other, Net 902,012 (181,777)
Net Cash Provided By Operating Activities $ 5,557,428 $ 2,869,563
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investments AFS $ (43,978,806) $ (9,885,592)
Proceeds from Paydowns and Maturities of Investments AFS 30,072,755 21,735,920
Proceeds from Paydowns and Maturities of Investments HTM 1,391,444 926,540
Proceeds from Redemption of Certificates of Deposits with Other Banks — 250,000
Purchase of FHLB Stock (64,800) —
Redemption of FHLB Stock — 455,800
Increase in Loans Receivable (5,315,638) (25,435,148)
Proceeds From Sale of OREO — 454,332
Purchase and Improvement of Premises and Equipment (1,223,499) (320,100)
Net Cash Used By Investing Activities $ (19,118,544) $ (11,818,248)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts $ 9,972,359 $ 51,705,946
Increase in Other Borrowings, Net 7,466,530 7,379,944
Proceeds from FRB Borrowings 109,025,000 90,900,000
Repayment of FRB Borrowings (109,025,000) (139,600,000)
Dividends to Common Stock Shareholders (390,346) (357,817)
Net Cash Provided By Financing Activities $ 17,048,543 $ 10,028,073
Net Increase in Cash and Cash Equivalents 3,487,427 1,079,388
Cash and Cash Equivalents at Beginning of Period 27,622,851 18,025,409
Cash and Cash Equivalents at End of Period $ 31,110,278 $ 19,104,797
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: ��
Cash Paid for Interest $ 402,484 $ 701,955
Non-Cash Transactions:
Other Comprehensive Loss (20,222,858) (5,465,436)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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”) ~~2021~~2022 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (“~~2021~~2022 10-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the three months ended March 31, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022~~2023 or any other period. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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 ~~Insurance, Inc. (“SFINS”), Security Federal~~ Investments, Inc. ("SFINV") and Security ~~Financial Services Corporation~~Federal Insurance, Inc. (“~~SFSC”~~SFINS”). SFINS is an insurance agency offering auto, business, health and home insurance. SFINS has a wholly owned subsidiary, Collier Jennings Financial Corporation, which has as subsidiaries Security Federal Auto Insurance, The Auto Insurance Store Inc., and Security Federal Premium Pay Plans Inc. Security Federal Premium Pay Plans Inc. has one wholly owned premium finance subsidiary and also has an ownership interest in four other premium finance subsidiaries. SFINV was formed to hold investment securities and allow for better management of the securities portfolio. ~~SFSC~~SFINS is ~~currently inactive.~~an insurance agency offering auto, business, and home insurance. 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.

NOTE 3 - ~~CRITICAL~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the audited consolidated financial statements at December 31, ~~2021~~2022 included in our ~~2021~~2022 Annual Report to Shareholders. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, and, as such, have a greater possibility of producing results that could be materially different than originally reported. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

~~The~~Accounting Standards Adopted in 2023

On January 1, 2023, the Company ~~believes~~adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Accounting Standards Codification (“ASC”) 326. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of the consolidated financial statements. The impact of an unexpected and sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings. The Company provides for loan losses using the allowance method. Accordingly, all loan losses are chargedcredit losses.

In addition, CECL made changes to the ~~related allowance and all recoveries are credited~~accounting for available for sale debt securities. One such change is to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to operations based on various factors, which, in management’s judgment, deserve current recognition in estimating possible losses. Such factors considered by management include the fair value of the underlying collateral, stated guarantees by the borrower (if applicable), the borrower’s ability to repay from other economic resources, growth and composition of the loan portfolio, the relationship of the allowance for loanrequire credit losses to ~~the outstanding loans, loss experience, delinquency trends,~~be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and ~~general economic conditions. Management evaluates the carrying value of the loans periodically and the allowance~~does not believe that it is ~~adjusted accordingly.~~more likely than not, they will be required to sell.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~While management uses~~The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the ~~best information available to make evaluations, future adjustments may be necessary if economic conditions differ substantially from~~modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the ~~assumptions used~~adoption of CECL included an increase in ~~making these evaluations. The~~the allowance for credit losses on loans of $784,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan ~~losses~~commitments of $1.2 million, which is ~~subject~~recorded within "Other Liabilities." The adoption of CECL had an insignificant impact on the Company's held to ~~periodic evaluations by our bank regulatory agencies, including~~maturity and available for sale securities portfolios. The Company recorded a net decrease to retained earnings of $1.6 million as of January 1, 2023 for the ~~Board~~cumulative effect of ~~Governors~~adopting CECL, which reflects the transition adjustments noted above, net of the ~~Federal Reserve System ("Federal Reserve"), the FDIC and the South Carolina Board of Financial Institutions, which may require adjustments~~applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be ~~made to the allowance based upon the information that is available at the time of their examination.~~reported in accordance with previously applicable accounting standards (“Incurred Loss”).

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

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

Allowance for Credit Losses – Held to Maturity Securities

Management measures expected credit losses on held to maturity debt securities on a collective basis by major security type. Accrued interest receivable on held to maturity debt securities totaled $941,000 at March 31, 2023 and was excluded from the ~~loan’s fair value if~~estimate of credit losses.

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

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

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

Allowance for Credit Losses – Available for Sale Securities

For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is ~~probable~~more likely than not that the Company will be ~~unable~~required to ~~collect all amounts due according~~sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

Loans

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

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

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

Allowance for Credit Losses - Loans

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

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

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

Real Estate

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

•Residential Mortgage - Residential mortgages consist of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the ~~underlying collateral. Expected~~collateral

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

•Commercial - Owner occupied commercial mortgages consist of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings, other commercial facilities, and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. Non-owner occupied commercial mortgages consist of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash ~~flows~~flow to service the debt. While these loans and leases are ~~required~~collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

Commercial and Agricultural - Commercial business loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be ~~discounted at~~unable to service the loan’s effective interest rate. When the ultimate 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 underdebt consistent with the contractual terms of the loan ~~agreement~~or lease.

Consumer loans

•Home equity - Home equity loans consist of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to ~~interest~~declining collateral values. This risk is elevated for loans secured by junior lines as a substantial decline in value could render the junior lien position effectively unsecured.

•Other - Consumer loans consist of loans to finance unsecured home improvements, student loans, automobiles and ~~then to principal. Once~~revolving lines of credit that can be secured or unsecured. The value of the ~~recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to~~underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the ~~extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off.~~collateral.

The Company ~~uses assumptions~~calculates the allowance for credit losses for each pool using a remaining life loss methodology with a two quarter reasonable and ~~estimates in determining income taxes payable or refundable~~supportable forecast period and an immediate reversion period. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses to determine the ~~current year, deferred income tax liabilities and assets~~allowance 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.credit losses. The Company ~~exercises considerable judgment in evaluating~~uses its own internal data to measure historical credit loss experience within the ~~amount and timing~~pools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss rates over the calculated remaining life 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 submittedloans 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.pool.

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

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

Allowance for Credit Losses – Unfunded Commitments

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

Recent Accounting Pronouncements

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

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

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.

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 March 31, ~~2022~~2023 or ~~2021;~~2022; 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 months ended March 31, 2022 and 2021.~~periods indicated.

Three Months Ended March 31,
2022 2021
Income Shares EPS Income Shares EPS
Basic EPS $ 1,549,031 3,252,884 $ 0.48 $ 3,178,792 3,252,884 $ 0.98


	Three Months Ended March 31,
	2023					2022
	Income		Shares	EPS		Income		Shares	EPS
Basic EPS	$	2,674,100	3,253,112	$	0.82	$	1,549,031	3,252,884	$	0.48

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 March 31, ~~2022~~2023 and ~~2021,~~2022, the Company had no options outstanding and there was no activity during ~~both~~ the three months ended March 31, ~~2022~~2023 and ~~2021.~~2022. At those dates, there were 50,000 options available for grants.

912

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 6 - INVESTMENTS, AVAILABLE FOR SALE ("AFS")

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


		March 31, 2022									March 31, 2023
		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	$	69,643,896	$	148,642	772,585		$	69,019,953	Student Loan Pools	$	57,131,715	$	6,090	$	1,303,979	$	55,833,826
Small Business Administration (“SBA”) Bonds	Small Business Administration (“SBA”) Bonds	129,481,761		705,783		2,154,061		128,033,483		Small Business Administration (“SBA”) Bonds	94,018,900		508,204		2,831,043		91,696,061
Tax Exempt Municipal Bonds	Tax Exempt Municipal Bonds	44,717,399		1,665,090		641,833		45,740,656		Tax Exempt Municipal Bonds	21,550,469		593,719		1,224,676		20,919,512
Taxable Municipal Bonds	Taxable Municipal Bonds	65,817,454		14,366		5,377,145		60,454,675		Taxable Municipal Bonds	64,729,848		—		11,794,778		52,935,070
Mortgage-Backed Securities		378,237,842		617,656		14,046,302		364,809,196

Mortgage-Backed Securities ("MBS")										Mortgage-Backed Securities ("MBS")	350,265,323		39,438		30,619,157		319,685,604
Total Available For Sale	Total Available For Sale	$	687,898,352	$	3,151,537	$	22,991,926	$	668,057,963	Total Available For Sale	$	587,696,255	$	1,147,451	$	47,773,633	$	541,070,073

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

											December 31, 2022
											Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Student Loan Pools	Student Loan Pools	$	71,949,517	$	317,722	$	255,678	$	72,011,561	Student Loan Pools	$	60,854,658	$	11,647	$	1,709,323	$	59,156,982
SBA Bonds	SBA Bonds	139,854,620		1,018,231		1,079,774		139,793,077		SBA Bonds	102,292,600		584,290		3,246,923		99,629,967
Tax Exempt Municipal Bonds	Tax Exempt Municipal Bonds	44,757,755		5,226,600		—		49,984,355		Tax Exempt Municipal Bonds	22,536,806		405,341		1,631,819		21,310,328
Taxable Municipal Bonds	Taxable Municipal Bonds	65,834,301		734,237		599,387		65,969,151		Taxable Municipal Bonds	65,249,883		—		14,480,144		50,769,739
Mortgage-Backed Securities		353,517,112		5,294,398		3,720,596		355,090,914
MBS										MBS	353,223,361		29,861		33,971,954		319,281,268
Total Available For Sale	Total Available For Sale	$	675,913,305	$	12,591,188	$	5,655,435	$	682,849,058	Total Available For Sale	$	604,157,308	$	1,031,139	$	55,040,163	$	550,148,284

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 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.

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 March 31, ~~2022,~~2023, the ~~Bank~~Company held ~~AFS private label CMO mortgage-backed securities with~~ an amortized cost and fair value of ~~$62.5~~$61.3 million and ~~$60.3~~$54.8 million in private label CMO securities, compared to an amortized cost and fair value of ~~$41.8~~$60.1 million and ~~$41.7~~$53.8 million at December 31, ~~2021,~~2022, respectively. There was no allowance for credit losses recorded on investments AFS as of March 31, 2023.

The amortized cost and fair value of investments AFS at March 31, ~~2022~~2023 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties. Since ~~mortgage-backed 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.


		March 31, 2022					March 31, 2023
Investment Securities AFS:		Amortized Cost		Fair Value
Investments AFS:						Investments AFS:	Amortized Cost		Fair Value
One Year or Less	One Year or Less	$	534,371	$	539,925	One Year or Less	$	17,789	$	17,640
After One – Five Years	After One – Five Years	6,267,665		6,218,626		After One – Five Years	4,587,262		4,529,933
After Five – Ten Years	After Five – Ten Years	85,826,597		84,508,438		After Five – Ten Years	74,277,652		70,811,848
More Than Ten Years	More Than Ten Years	217,031,877		211,981,778		More Than Ten Years	158,548,229		146,025,048
Mortgage-Backed Securities AFS		378,237,842		364,809,196
MBS AFS						MBS AFS	350,265,323		319,685,604
Total AFS	Total AFS	$	687,898,352	$	668,057,963	Total AFS	$	587,696,255	$	541,070,073

1013

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At March 31, ~~2022,~~2023, the amortized cost and fair value of investments AFS pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were ~~$330.4~~$374.3 million and ~~$326.1~~$348.3 million, ~~respectively,~~ compared to an amortized cost and fair value of ~~$335.6~~$318.0 million and ~~$342.6~~$297.0 million ~~respectively,~~ at December 31, ~~2021.~~2022, respectively.

There were no sales of investments AFS ~~securities~~ during the three months ended March 31, ~~2022~~2023 and ~~2021;~~2022; and therefore, no proceeds from sales, gross gains or gross losses were recorded during those periods.

The following ~~tables show~~table shows the gross unrealized losses and estimated fair value of available sale securities for which an allowance for credit losses has not been recorded aggregated by ~~investment~~ category and length of time that ~~the individual available for sale~~ securities ~~were~~have been in a continuous unrealized loss position at ~~the dates indicated.~~March 31, 2023.


		March 31, 2022													March 31, 2023
		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	$	42,904,279	$	638,738	$	8,522,110	$	133,847	$	51,426,389	$	772,585	Student Loan Pools	$	6,532,605	$	96,105	$	44,272,894	$	1,207,874	$	50,805,499	$	1,303,979
SBA Bonds	SBA Bonds	27,636,662		1,048,385		44,662,286		1,105,676		72,298,948		2,154,061		SBA Bonds	3,627,220		18,733		44,567,268		2,812,310		48,194,488		2,831,043
Tax Exempt Municipal Bonds	Tax Exempt Municipal Bonds	11,333,397		641,833		—		—		11,333,397		641,833		Tax Exempt Municipal Bonds	519,710		9,017		12,819,506		1,215,659		13,339,216		1,224,676
Taxable Municipal Bonds	Taxable Municipal Bonds	52,021,448		4,295,099		7,019,116		1,082,046		59,040,564		5,377,145		Taxable Municipal Bonds	—		—		52,935,070		11,794,778		52,935,070		11,794,778
Mortgage-Backed Securities		274,461,548		11,257,378		33,080,871		2,788,924		307,542,419		14,046,302
MBS														MBS	19,109,549		801,062		298,058,704		29,818,095		317,168,253		30,619,157
		$	408,357,334	$	17,881,433	$	93,284,383	$	5,110,493	$	501,641,717	$	22,991,926		$	29,789,084	$	924,917	$	452,653,442	$	46,848,716	$	482,442,526	$	47,773,633

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


	December 31, 2022
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses



Student Loan Pools	$	24,768,260	$	637,963	$	30,684,124	$	1,071,360	$	55,452,384	$	1,709,323
SBA Bonds	8,403,975		120,766		45,969,373		3,126,157		54,373,348		3,246,923
Tax Exempt Municipal Bonds	8,050,944		718,645		4,929,289		913,174		12,980,233		1,631,819
Taxable Municipal Bonds	14,427,796		3,196,761		36,341,943		11,283,383		50,769,739		14,480,144
MBS	146,016,464		11,132,554		170,578,059		22,839,400		316,594,523		33,971,954

	$	201,667,439	$	15,806,689	$	288,502,788	$	39,233,474	$	490,170,227	$	55,040,163

Securities classified as ~~available for sale~~investments AFS are recorded at fair market value. At March 31, ~~2022~~2023 and December 31, ~~2021, 347~~2022, 411 and ~~199~~416 individual investments AFS ~~securities~~ were in a loss position, including 92339 and 83211 securities that were in a loss position for greater than 12 months, respectively. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. The decrease in unrealized losses within the AFS portfolio during the three months ended March 31, 2023 resulted in a $1.4 million decrease in net deferred taxes, which is included in "Other Assets" on the Consolidated Balance Sheets at March 31, 2023.

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

~~Additional deterioration in market and economic conditions related to the novel coronavirus of 2019 (“COVID-19”) pandemic may, however, have~~ an ~~adverse impact on~~allowance for 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~~deemed necessary.

Accrued interest receivable on available for sale debt securities totaled $2.9 million at the balance sheet date of the reporting period for which the assessment is made, or the Company may recognize a portion in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment. There was no OTTI recognized during the three months ended March 31, ~~2022~~2023 and was excluded from the ~~year ended December 31, 2021.~~estimate of credit losses.

1114

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The Company’s investments HTM portfolio is recorded at amortized cost. ~~At March 31, 2022 and December 31, 2021, the Company's entire HTM portfolio was comprised of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities.~~ The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of ~~held to maturity securities~~investments HTM at ~~those dates~~the date indicated were as follows:

March 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Mortgage-Backed Securities (1)
$ 22,060,506 $ 174,809 $ 1,194,332 $ 21,040,983
Total Held To Maturity $ 22,060,506 $ 174,809 $ 1,194,332 $ 21,040,983
December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Mortgage-Backed Securities (1)
$ 23,506,768 $ 577,005 $ 363,365 $ 23,720,408
Total Held To Maturity $ 23,506,768 $ 577,005 $ 363,365 $ 23,720,408

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

~~The Comp~~any has not invested in any private label mortgage-backed securities classified as HTM. At March 31, 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 $8.7 million, respectively, compared to 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 HTM securities have been in a continuous unrealized loss position at the dates indicated below.~~

March 31, 2022
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)
$ 12,853,559 $ 865,430 $ 2,732,371 $ 328,902 $ 15,585,930 $ 1,194,332
$ 12,853,559 $ 865,430 $ 2,732,371 $ 328,902 $ 15,585,930 $ 1,194,332

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

December 31, 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)
$ 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

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


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
US Treasury Bonds	$	34,600,540	$	—	$	486,165	$	34,114,375
FHLB Bond	1,000,000		—		4,852		995,148
Student Loan Pools	18,494,187		100,836		67,488		18,527,535
SBA Bonds	15,448,896		716,125		—		16,165,021
Taxable Municipal Bonds	954,460		—		42,860		911,600
MBS	109,680,425		47,045		4,588,424		105,139,046
Total Held To Maturity	$	180,178,508	$	864,006	$	5,189,789	$	175,852,725

	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
US Treasury Bonds	$	34,511,849	$	—	$	682,198	$	33,829,651
FHLB Bond	1,000,000		—		1,360		998,640
Student Loan Pools	16,387,997		88,489		59,090		16,417,396
SBA Bonds	3,521,293		162,235		—		3,683,528
Taxable Municipal Bonds	951,864		—		60,134		891,730
MBS	111,064,613		29,194		5,451,179		105,642,628
Total HTM	$	167,437,616	$	279,918	$	6,253,961	$	161,463,573

At March 31, ~~2022~~2023 and December 31, ~~2021, 11~~2022, 49 and ~~six~~54 individual investments HTM ~~securities~~ were in a loss position, including ~~two~~13 and six securities that were in a loss position for greater than 12 months, ~~at both periods.~~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.~~issuer. The Company has the ability and intent to hold these securities to maturity.

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

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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


	March 31, 2023
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US Treasury Bonds	$	34,114,375	$	486,165	$	—	$	—	$	34,114,375	$	486,165
FHLB Bond	995,148		4,852		—		—		995,148		4,852
Student Loan Pools	4,790,881		67,488		—		—		4,790,881		67,488
Taxable Municipal Bonds	911,600		42,860		—		—		911,600		42,860
MBS	72,819,297		2,070,120		13,895,073		2,518,304		86,714,370		4,588,424
	$	113,631,301	$	2,671,485	$	13,895,073	$	2,518,304	$	127,526,374	$	5,189,789

	December 31, 2022
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US Treasury Bonds	$	33,829,651	$	682,198	$	—	$	—	$	33,829,651	$	682,198
FHLB Bond	998,640		1,360		—		—		998,640		1,360
Student Loan Pools	6,520,050		59,090		—		—		6,520,050		59,090
Taxable Municipal Bonds	891,730		60,134		—		—		891,730		60,134
MBS	88,351,096		3,145,166		9,334,438		2,306,013		97,685,534		5,451,179
	$	130,591,167	$	3,947,948	$	9,334,438	$	2,306,013	$	139,925,605	$	6,253,961

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 8 - LOANS RECEIVABLE, NET

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

March 31, 2022 December 31, 2021
Real Estate Loans:
Construction $ 101,702,355 $ 100,162,260
Residential Mortgage 84,799,618 84,965,542
Commercial 241,048,027 227,751,664
Commercial and Agricultural Loans 33,854,099 44,689,391
Consumer Loans:
HELOC 29,409,219 28,611,516
Other Consumer 21,936,673 21,449,809
Total Loans Held For Investment, Gross 512,749,991 507,630,182
Less:
Allowance For Loan Losses 11,128,963 11,087,164
Deferred Loan Fees 846,995 1,084,623
11,975,958 12,171,787
Total Loans Receivable, Net $ 500,774,033 $ 495,458,395

During the first quarter of 2022, the Bank continued its participation in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), by processing applications for PPP loan forgiveness. PPP loans are included in Commercial and Agricultural loans in the tables above and below and had a total balance of $3.5 million at March 31, 2022 compared to $9.8 million at December 31, 2021. The balance of unamortized net deferred fees on PPP loans was $179,000 at March 31, 2022 compared to $441,000 at December 31, 2021.


	March 31, 2023		December 31, 2022
Real Estate Loans:
Construction	$	108,716,018	$	112,793,694
Residential Mortgage	131,958,557		110,056,973
Commercial	255,314,563		252,154,475
Commercial and Agricultural Loans	34,864,923		30,647,975
Consumer Loans:
Home Equity Lines of Credit (HELOC)	32,017,283		31,736,676
Other Consumer	24,185,686		23,598,110
Total Loans Held for Investment, Gross	587,057,030		560,987,903
Less:
Allowance for Credit Losses	12,126,810		11,177,753
Deferred Loan Fees	740,511		806,238
	12,867,321		11,983,991
Total Loans Receivable, Net	$	574,189,709	$	549,003,912

The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, caution, special mention, and substandard. These indicators are used to rate the credit quality of loans for the purposes of determining the Company’s allowance for ~~loan~~credit 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~~credit 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 March 31, 2022 and December 31, 2021.~~

March 31, 2022
Pass
Caution Special Mention
Substandard
Total Loans
Construction Real Estate $ 76,989,251 $ 20,082,910 $ 4,265,573 $ 364,621 $ 101,702,355
Residential Real Estate 65,002,986 15,907,480 1,240,739 2,648,413 84,799,618
Commercial Real Estate 191,571,418 43,636,618 3,077,070 2,762,921 241,048,027
Commercial and Agricultural 28,733,158 4,796,087 37,254 287,600 33,854,099
Consumer HELOC 23,884,209 4,447,603 570,673 506,734 29,409,219
Other Consumer 15,372,103 6,352,561 77,086 134,923 21,936,673
Total $ 401,553,125 $ 95,223,259 $ 9,268,395 $ 6,705,212 $ 512,749,991

1317

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
The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of March 31, 2023.


		Term Loans by Year of Origination
	Dollars in Thousands	2023		2022		2021		2020		2019		Prior		Revolving		Total
Real Estate - Construction
	Pass	$	3,095	$	19,223	$	9,564	$	2,232	$	760	$	40,313	$	4,999	$	80,186
	Caution	286		6,875		2,497		288		431		15,645		—		26,022
	Special Mention	—		30		39		—		—		1,426		—		1,495
	Substandard	—		—		—		140		—		873		—		1,013
Total		3,381		26,128		12,100		2,660		1,191		58,257		4,999		108,716
Current period gross write-offs		—		—		—		—		—		—		—		—
Real Estate - Mortgage
	Pass	6,970		24,756		11,602		15,090		4,297		27,695		10,441		100,851
	Caution	2,754		8,559		5,016		1,609		1,606		5,501		8		25,053
	Special Mention	1,338		159		914		362		—		250		—		3,023
	Substandard	—		—		206		244		52		2,530		—		3,032
Total		11,062		33,474		17,738		17,305		5,955		35,976		10,449		131,959
Current period gross write-offs		—		—		—		—		—		—		—		—
Real Estate - Commercial
	Pass	4,380		39,104		43,477		14,467		21,036		77,045		2,112		201,621
	Caution	1,363		3,945		3,346		6,302		7,214		20,659		100		42,929
	Special Mention	—		844		464		792		243		3,426		—		5,769
	Substandard	—		72		61		—		—		4,863		—		4,996
Total		5,743		43,965		47,348		21,561		28,493		105,993		2,212		255,315
Current period gross write-offs		—		—		—		—		—		—		—		—
Commercial and Agricultural
	Pass	2,010		8,074		8,882		808		598		3,325		3,918		27,613
	Caution	2,122		1,703		1,693		86		25		519		544		6,692
	Special Mention	16		52		90		20		1		105		—		284
	Substandard	—		24		47		14		15		76		100		276
Total		4,148		9,853		10,712		928		639		4,025		4,562		34,865
Current period gross write-offs		—		—		16		—		—		—		—		16
Home Equity Lines of Credit
	Pass	—		—		—		—		—		—		26,274		26,274
	Caution	—		—		—		—		—		—		4,658		4,658
	Special Mention	—		—		—		—		—		—		501		501
	Substandard	—		—		—		—		—		—		584		584
Total		—		—		—		—		—		—		32,017		32,017
Current period gross write-offs		—		—		—		—		—		—		—		—
Consumer loans
	Pass	2,190		5,626		2,623		1,221		357		335		4,576		16,928
	Caution	1,080		2,957		1,355		764		332		89		269		6,846
	Special Mention	—		142		22		—		—		—		6		170
	Substandard	—		59		84		53		31		10		5		242
Total		3,270		8,784		4,084		2,038		720		434		4,856		24,186
Current period gross write-offs		—		10		—		—		—		—		25		35
Total Loans		$	27,604	$	122,204	$	91,982	$	44,492	$	36,998	$	204,685	$	59,095	$	587,058

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below summarizes the balance within each risk category by loan type, excluding loans held for sale, at December 31, 2022.



December 31, 2022	Pass		Caution		Special Mention		Substandard		Total Loans
Construction Real Estate	$	91,564,058	$	18,837,894	$	2,013,824	$	377,918	$	112,793,694
Residential Real Estate	84,028,037		22,372,649		887,874		2,768,413		110,056,973
Commercial Real Estate	196,063,300		47,821,422		3,270,916		4,998,837		252,154,475
Commercial and Agricultural	25,383,994		4,593,283		371,071		299,627		30,647,975
Consumer HELOC	25,693,252		5,018,419		401,550		623,455		31,736,676
Other Consumer	16,515,206		6,725,317		178,638		178,949		23,598,110
Total	$	439,247,847	$	105,368,984	$	7,123,873	$	9,247,199	$	560,987,903

Past Due and ~~Non-accrual~~Nonaccrual Loans

The tables below present an age analysis of past due balances by loan category at ~~March 31, 2022 and December 31, 2021:~~the dates indicated.


		March 31, 2022													March 31, 2023
		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable			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	$	317,228	$	—	$	—	$	317,228	$	101,385,127	$	101,702,355	Construction Real Estate	$	2,848,456	$	421,916	$	205,057	$	3,475,429	$	105,240,589	$	108,716,018
Residential Real Estate	Residential Real Estate	1,296,880		115,013		239,896		1,651,789		83,147,829		84,799,618		Residential Real Estate	1,076,722		103,930		266,093		1,446,745		130,511,812		131,958,557
Commercial Real Estate	Commercial Real Estate	1,607,614		—		367,906		1,975,520		239,072,507		241,048,027		Commercial Real Estate	649,004		95,678		349,906		1,094,588		254,219,975		255,314,563
Commercial and Agricultural	Commercial and Agricultural	171,271		—		39,883		211,154		33,642,945		33,854,099		Commercial and Agricultural	24,811		5,538		45,349		75,698		34,789,225		34,864,923
Consumer HELOC	Consumer HELOC	96,370		54,283		19,912		170,565		29,238,654		29,409,219		Consumer HELOC	285,415		47,683		76,325		409,423		31,607,860		32,017,283
Other Consumer	Other Consumer	166,499		53,778		15,486		235,763		21,700,910		21,936,673		Other Consumer	183,626		58,143		27,530		269,299		23,916,387		24,185,686
Total	Total	$	3,655,862	$	223,074	$	683,083	$	4,562,019	$	508,187,972	$	512,749,991	Total	$	5,068,034	$	732,888	$	970,260	$	6,771,182	$	580,285,848	$	587,057,030


		December 31, 2021													December 31, 2022
		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable			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	Construction Real Estate	$	—	$	—	$	100,472	$	100,472	$	112,693,222	$	112,793,694
Residential Real Estate	Residential Real Estate	296,556		543,716		205,713		1,045,985		83,919,557		84,965,542		Residential Real Estate	1,557,114		—		471,430		2,028,544		108,028,429		110,056,973
Commercial Real Estate	Commercial Real Estate	195,271		—		372,405		567,676		227,183,988		227,751,664		Commercial Real Estate	2,670,997		89,342		354,406		3,114,745		249,039,730		252,154,475
Commercial and Agricultural	Commercial and Agricultural	79,381		133,610		—		212,991		44,476,400		44,689,391		Commercial and Agricultural	5,683		2,113		55,468		63,264		30,584,711		30,647,975
Consumer HELOC	Consumer HELOC	51,430		—		44,382		95,812		28,515,704		28,611,516		Consumer HELOC	199,414		—		74,159		273,573		31,463,103		31,736,676
Other Consumer	Other Consumer	93,560		3,648		8,797		106,005		21,343,804		21,449,809		Other Consumer	271,774		78,566		17,321		367,661		23,230,449		23,598,110
Total	Total	$	720,489	$	795,490	$	631,297	$	2,147,276	$	505,482,906	$	507,630,182	Total	$	4,704,982	$	170,021	$	1,073,256	$	5,948,259	$	555,039,644	$	560,987,903

At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, 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.

1419

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table shows non-accrual loans by category at the dates indicated.


	CECL						Incurred Loss
	March 31, 2023						December 31, 2022
	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Nonaccrual Loans
Construction Real Estate	$	217,970	$	—	$	217,970	$	114,630
Residential Real Estate	1,505,185		—		1,505,185		1,544,762
Commercial Real Estate	4,220,087		—		4,220,087		4,281,975
Commercial and Agricultural	101,142		—		101,142		112,652
Consumer HELOC	188,266		—		188,266		188,540
Other Consumer	35,549		—		35,549		28,671
Total Nonaccrual Loans	$	6,268,199	$	—	$	6,268,199	$	6,271,230

The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, ~~2022 compared to December~~2023.

The following table represents the accrued interest receivables written off by reversing interest income during the three months ended March 31, ~~2021:~~2023:

Non-accrual Loans: March 31, 2022 December 31, 2021
Construction Real Estate $ 19,799 $ 21,434
Residential Real Estate 1,560,113 1,389,498
Commercial Real Estate 1,036,496 1,057,496
Commercial and Agricultural 75,095 64,479
Consumer HELOC 115,766 141,683
Other Consumer 14,265 8,797
Total Non-accrual Loans $ 2,821,534 $ 2,683,387


	For the Three Months Ended March 31, 2023
Construction Real Estate	$	2,882
Residential Real Estate	1,031
Commercial Real Estate	—
Commercial and Agricultural	1,103
Consumer HELOC	—
Other Consumer	143
Total Loans	$	5,159

Allowance for ~~Loan~~Credit Losses

The following ~~tables show~~table shows the activity in the allowance for ~~loan~~credit losses by category for the three months ended March 31, ~~2022 and 2021:~~2023 under the CECL methodology:

Three Months Ended March 31, 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
Provision for Loan Losses (73,215) (44,818) 81,527 (22,242) 35,182 23,566 —
Charge-Offs — — — — — (31,871) (31,871)
Recoveries 8,602 9,711 18,981 23,333 2,709 10,334 73,670
Ending Balance $ 2,336,583 $ 1,628,316 $ 4,932,948 $ 1,242,919 $ 555,403 $ 432,794 $ 11,128,963
Three Months Ended March 31, 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
Recovery of Loan Losses (161,817) (320,905) (272,740) (28,303) (55,793) (30,442) (870,000)
Charge-Offs — — — (6,699) — (38,277) (44,976)
Recoveries — 70 8,640 948 — 9,295 18,953
Ending Balance $ 2,325,093 $ 1,943,579 $ 5,489,541 $ 1,078,898 $ 601,563 $ 508,199 $ 11,946,873


	Three Months Ended March 31, 2023
	Real Estate								Consumer
	Construction		Residential		Commercial		Commercial and Agricultural		HELOC		Other		Total
Beginning Balance	$	2,323,397	$	2,124,835	$	4,804,282	$	874,092	$	598,807	$	452,340	$	11,177,753
Adjustment to allowance for adoption of ASU 2016-13	263,737		461,879		(340,492)		112,452		107,548		179,070		784,194
Provision for credit losses	(245,136)		477,263		(204,984)		154,789		(56,733)		39,801		165,000
Charge-Offs	—		—		—		(15,880)		—		(34,940)		(50,820)
Recoveries	3,960		8,400		5,016		5,300		21,904		6,103		50,683
Ending Balance	$	2,345,958	$	3,072,377	$	4,263,822	$	1,130,753	$	671,526	$	642,374	$	12,126,810

1520

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

•Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and ~~Loans Receivable Evaluated for Impairment~~other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.

•Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.

•Home equity lines of credit are generally secured by second mortgages on residential real estate property.

•Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

The ~~tables below summarize~~following table details the ~~impaired loan balances evaluated individually and collectively for impairment within the allowance for loan losses and loans receivable balances at March 31, 2022 and December 31, 2021.~~

Allowance For Loan Losses Loans Receivable
March 31, 2022 Individually Evaluated For Impairment Collectively Evaluated For Impairment

Total
Individually Evaluated For Impairment Collectively Evaluated For Impairment Total
Construction Real Estate $ — $ 2,336,583 $ 2,336,583 $ 17,889 $ 101,684,466 $ 101,702,355
Residential Real Estate — 1,628,316 1,628,316 1,225,909 83,573,709 84,799,618
Commercial Real Estate — 4,932,948 4,932,948 1,029,627 240,018,400 241,048,027
Commercial and Agricultural — 1,242,919 1,242,919 31,446 33,822,653 33,854,099
Consumer HELOC — 555,403 555,403 95,854 29,313,365 29,409,219
Other Consumer — 432,794 432,794 — 21,936,673 21,936,673
Total $ — $ 11,128,963 $ 11,128,963 $ 2,400,725 $ 510,349,266 $ 512,749,991
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
amortized cost of collateral dependent loans:





	March 31, 2023
Construction Real Estate	$	217,970
Residential Real Estate			1,062,365
Commercial Real Estate			4,220,087
Commercial and Agricultural			31,446
Consumer HELOC


			47,683

Total Loans	$	5,579,551

~~Loans~~Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for ~~which~~loan losses under the Incurred Loss methodology. The following table shows the activity in the allowance for loan losses by category for the three months ended March 31, 2022:


	Three Months Ended March 31, 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
Provision for Loan Losses	(73,215)		(44,818)		81,527		(22,242)		35,182		23,566		—
Charge-Offs	—		—		—		—		—		(31,871)		(31,871)
Recoveries	8,602		9,711		18,981		23,333		2,709		10,334		73,670
Ending Balance	$	2,336,583	$	1,628,316	$	4,932,948	$	1,242,919	$	555,403	$	432,794	$	11,128,963

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

collateral.

1621

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The table below summarizes the impaired loan balances evaluated individually and collectively for impairment within the allowance for loan losses and loans receivable balances at December 31, 2022:


	Allowance For Loan Losses						Loans Receivable
December 31, 2022	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total		Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Construction Real Estate	$	—	$	2,323,397	$	2,323,397	$	114,630	$	112,679,064	$	112,793,694
Residential Real Estate	—		2,124,835		2,124,835		1,089,308		108,967,665		110,056,973
Commercial Real Estate	—		4,804,282		4,804,282		4,281,702		247,872,773		252,154,475
Commercial and Agricultural	—		874,092		874,092		31,446		30,616,529		30,647,975
Consumer HELOC	—		598,807		598,807		48,792		31,687,884		31,736,676
Other Consumer	—		452,340		452,340		—		23,598,110		23,598,110
Total	$	—	$	11,177,753	$	11,177,753	$	5,565,878	$	555,422,025	$	560,987,903

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


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

Construction Real Estate	Construction Real Estate	$	17,889	$	17,889	$	—	$	19,133	$	19,133	$	—	Construction Real Estate	$	114,630	$	114,630	$	—
Residential Real Estate	Residential Real Estate	1,225,909		1,762,909		—		1,128,452		1,646,952		—		Residential Real Estate	1,089,308		1,626,308		—
Commercial Real Estate	Commercial Real Estate	1,029,627		1,029,627		—		1,046,974		1,046,974		—		Commercial Real Estate	4,281,702		4,281,702		—
Commercial and Agricultural	Commercial and Agricultural	31,446		926,446		—		31,446		926,446		—		Commercial and Agricultural	31,446		926,446		—
Consumer HELOC	Consumer HELOC	95,854		95,854		—		97,302		97,302		—		Consumer HELOC	48,792		48,792		—
Other Consumer	Other Consumer	—		—		—		—		—		—		Other Consumer	—		—		—
Total	Total	$	2,400,725	$	3,832,725	$	—	$	2,323,307	$	3,736,807	$	—	Total	$	5,565,878	$	6,997,878	$	—

Three Months Ended March 31,
2022 2021
Impaired Loans Average Recorded Investment Interest Income
Recognized Average Recorded
Investment Interest Income
Recognized
Construction Real Estate $ 18,511 $ — $ 39,303 $ —
Residential Real Estate 1,239,308 — 1,272,179 —
Commercial Real Estate 1,038,300 — 1,084,620 1,856
Commercial and Agricultural 31,446 — 53,046 —
Consumer HELOC 96,578 — 157,813 —
Other Consumer — — 1,787 —
Total $ 2,424,143 $ — $ 2,608,748 $ 1,856


					Three Months Ended March 31, 2022

Impaired Loans	Average Recorded Investment
Interest Income Recognized















Construction Real Estate	$	18,511	$	—
Residential Real Estate	1,239,308		—
Commercial Real Estate	1,038,300		—
Commercial and Agricultural	31,446		—
Consumer HELOC	96,578		—
Other Consumer	—		—
Total	$	2,424,143	$	—

~~Troubled Debt Restructurings~~

Modifications to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and ~~Loan Modifications~~

Inis recorded on each asset upon asset origination or acquisition. The starting point for the ~~course~~estimate of ~~resolving delinquent loans,~~ the ~~Bank may choose~~allowance for credit losses is historical loss information, which includes losses from modifications of receivables to ~~restructure the contractual terms~~borrowers experiencing financial difficulty. An assessment of ~~certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to~~whether a borrower ~~that it would not otherwise consider (FASB ASC Topic 310-40). The concessions granted~~is experiencing financial difficulty is made on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Bank grants such concessions to reassess the borrower’s financial status and develop a plan for repayment.

At the date of modification, TDRs are initially classified as nonaccrual TDRs. 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 Bank had three TDRs with a combined balance of $680,000 included in impaired loans at March 31, 2022 compared to three TDRs with a combined balance of $694,000 at December 31, 2021. There were no loans restructured as TDRs during the three months ended March 31, 2022 or the three months ended March 31, 2021 and no TDRs in default at that dates.The Bank considers any loan 30 days or more past due to be in default. At March 31, 2022 and December 31, 2021, the Bank 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.

modification.

1722

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

~~Our policy with respect~~

Because the effect of most modifications made to ~~accrual~~borrowers experiencing financial difficulty is already included in the allowance for credit losses because of ~~interest on loans restructured as~~the measurement methodologies used to estimate the allowance, 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 priorchange to the ~~restructuring but shows capacity~~allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to ~~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,~~be uncollectible; therefore, that portion of the loan is ~~placed on nonaccrual status.~~

~~The Bank will continue~~written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment 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 Bank's policy with respect to nonperforming loans requires the borrower to become current and then make a minimum of 6 consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status.

allowance for credit losses.

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

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

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

The Company did not modify any loans to borrowers experiencing financial difficulty during the three months ended March 31, 2023 or 2022.

As of March 31, 2023 and 2022, there were no loans modified with borrowers experiencing financial difficulty for which there was a payment default within 12 months of the restructuring date. The Company considers any loan 30 days or more past due to be in default.

Allowance for Credit Losses - Unfunded Commitments

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

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended March 31, 2023.


	Total Allowance for Credit Losses - Unfunded Commitments















Balance, December 31, 2022	$	—
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13	1,213,614
(Reversal of) provision for unfunded commitments	(165,000)

Balance, March 31, 2023	$	1,048,614

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 9 - DEPOSITS

Deposits outstanding ~~as of March 31, 2022 and December 31, 2021~~at the dates indicated are summarized below by account ~~type.~~type as follows:

Deposit Account Type March 31, 2022 December 31, 2021
Checking $ 497,262,504 $ 495,467,035
Money Market 374,957,870 366,065,262
Savings 101,386,737 97,068,740
Certificates of Deposit 152,328,211 157,361,926
Total $ 1,125,935,322 $ 1,115,962,963


Deposit Account Type	March 31, 2023		December 31, 2022
Checking	$	474,947,532	$	510,983,509
Money Market	348,562,043		348,833,623
Savings	102,392,660		108,237,098
Certificates of Deposit	182,771,274		142,031,066
Total	$	1,108,673,509	$	1,110,085,296

The Bank had $5.0 million in ~~other~~ brokered deposits, which are included in checking and money market deposits above, at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. In addition, the Bank had ~~$10.0~~$6.0 million and $6.0 million in brokered time deposits, ~~at March 31, 2022 and December 31, 2021. At March 31, 2022 and December 31, 2021, the Bank had $67,000~~ and $68,000 ~~respectively,~~and $98,000, in overdrafts that were reclassified to ~~loans.~~loans at March 31, 2023 and December 31, 2022, respectively.

~~Certificate~~Certificates of deposits that met or exceeded the FDIC insurance limit of $250,000 were ~~$27.9~~$49.1 million and ~~$39.4~~$30.3 million at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

All deposits that met or exceeded the FDIC insurance limit totaled $310.2 million and $350.1 million at March 31, 2023 and December 31, 2022, respectively.

The amounts and scheduled maturities of all certificates of deposit at the dates indicated were as ~~follows at March 31, 2022 and December 31, 2021:~~follows:


		March, 31 2022		December 31, 2021			March 31, 2023		December 31, 2022
Within 1 Year	Within 1 Year	$	113,847,310	$	118,119,148	Within 1 Year	$	133,984,928	$	97,163,169
After 1 Year, Within 2 Years	After 1 Year, Within 2 Years	25,348,765		26,189,318		After 1 Year, Within 2 Years	36,761,162		31,550,543
After 2 Years, Within 3 Years	After 2 Years, Within 3 Years	7,911,044		7,148,260		After 2 Years, Within 3 Years	6,189,086		6,465,582
After 3 Years, Within 4 Years	After 3 Years, Within 4 Years	2,696,274		2,815,491		After 3 Years, Within 4 Years	2,680,079		3,177,916
After 4 Years, Within 5 Years	After 4 Years, Within 5 Years	2,524,818		3,089,709		After 4 Years, Within 5 Years	3,156,019		3,673,856

Total Certificates of Deposits		$	152,328,211	$	157,361,926
Total Certificates of Deposit						Total Certificates of Deposit	$	182,771,274	$	142,031,066

NOTE 10 - BORROWINGS

The ~~Bank~~Company had ~~$34.3~~$27.8 million and ~~$26.8~~$27.6 million in other borrowings at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. The interest rate paid on the repurchase agreements was ~~0.15%~~1.39% at ~~both~~ March 31, ~~2022 and~~2023 compared to 0.75% at December 31, ~~2021.~~2022. Collateral pledged by the ~~Bank~~Company for these repurchase agreements consisted of investments with a combined amortized cost and fair value of ~~$48.0~~$53.0 million and ~~$47.2~~$50.3 million at March 31, ~~2022~~2023 and ~~$45.3~~$52.3 million and ~~$45.2~~$49.8 million at December 31, ~~2021,~~2022, respectively.

During the first quarter of 2023, the Bank elected to participate in the Federal Reserve Bank Term Funding Program (“BTFP”), allowing the Bank to refinance its existing borrowings from Federal Reserve Discount Window in order to receive a lower fixed rate. Advances made under the BTFP are for up to one year and will be extended at the one year overnight index swap ("OIS") rate as of the day the advance is made plus 10 basis points. The interest rate will be fixed for the term of the advance on the day the advance is made. To determine the rate, the BTFP will use the fixed OIS rate based on the effective federal funds rate for a one-year maturity.

The Company had $61.4 million in outstanding borrowings under the BTFP with a weighted average borrowing rate of 4.39% at March 31, 2023 compared to $44.1 million in borrowings from the discount window of the Federal Reserve Bank of Atlanta at with a weighted average borrowing rate of 4.50% at December 31, 2022. Depository institutions may borrow from the discount window for periods as long as 90 days, and borrowings are prepayable and renewable by the borrower on a daily basis. At March 31, 2023, the Company had pledged as collateral for these borrowings investment securities with an amortized cost and fair value of $169.5 million and $157.3 million, compared to an amortized cost and fair value of $72.6 million and $69.2 million, respectively, at December 31, 2022, respectively.

There were no outstanding FHLB advances at March 31, 2023 and December 31, 2022. FHLB advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank’s portfolio of residential first mortgage loans and investment securities. The Bank's pledged collateral for FHLB advances had an amortized cost and fair value of $60.8 million and $53.4 million at March 31, 2023, and $70.1 million and $61.1 million at December 31, 2022, respectively.

1824

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 ~~2.53%~~6.57% at March 31, ~~2022~~2023 compared to ~~1.90%~~6.47% at December 31, ~~2021.~~2022. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has had the right to redeem the Capital Securities in whole or in ~~part.~~part since September 15, 2011.

As of a result of the discontinuation of LIBOR, effective June 30, 2023, the Capital Securities will transition from its floating rate of three month LIBOR plus 170 basis points to a replacement rate which is expected to be the floating rate of three month Secured Overnight Financing Rate ("SOFR") as adjusted by the relevant spread adjustment of 0.26161 plus 170 basis points.

Subordinated Debentures

In November 2019, the Company sold and issued to certain institutional investors $17.5 million in aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2029 (the “10-Year Notes”) and $12.5 million in aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2034 (the “15-Year Notes”, and together with the 10-Year Notes, the “Notes”).

The 10-Year Notes have a stated maturity of November 22, 2029, and bear interest at a fixed rate of 5.25% per year, from and including November 22, 2019 but excluding November 22, 2024. From and including November 22, 2024 to but excluding the maturity date or early redemption date, the interest rate shall reset semi-annually to an interest rate equal to the then-current three-month LIBOR rate plus 369 basis points.

The 15-Year Notes have a stated maturity of November 22, 2034, and bear interest at a fixed rate of 5.25% per year, from and including November 22, 2019 but excluding November 22, 2029. From and including November 22, 2029 to but excluding the maturity date or early redemption date, the interest rate for the 15-Year Notes shall reset semi-annually to an interest rate equal to the then-current three-month LIBOR rate plus 357 basis points. The Notes are payable semi-annually in arrears on June 1 and December 1 of each year commencing June 1, 2020.

Both the 10-Year and 15-Note Year subordinated notes include remedies in the event that LIBOR is discontinued. The Company is currently determining an appropriate benchmark replacement for LIBOR. The Company expects the replacement benchmark to be materially consistent with the three-month LIBOR.

The Notes are not subject to redemption at the option of the holder and may be redeemed by the Company only under certain limited circumstances prior to November 22, 2024, with respect to 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 Notes have been structured to qualify as Tier 2 capital for the Company under applicable regulatory guidelines. The Company used the net proceeds from the sale of the Notes to fund the redemption of the ~~Convertible Debentures~~convertible senior debentures and for general corporate ~~purposes.~~purposes to support future growth.

During the year ended December 31, 2022 the Company repurchased $1.0 million in principal of the 10-Year Notes and $2.5 million in principal of the 15-Year Notes, leaving an aggregate remaining principal balance of $16.5 million and $10.0 million, respectively.

1925

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 12 - REGULATORY MATTERS

The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

The Company is a bank holding company registered with the Board of Governors of the Federal ~~Reserve.~~Reserve System (the "Federal Reserve"). Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $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.

Based on its capital levels at March 31, ~~2022,~~2023, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at March 31, ~~2022,~~2023, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.

The 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
March 31, 2022		Dollars in Thousands
March 31, 2023											March 31, 2023	(Dollars in Thousands)

Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	125,668	18.1%	$	41,742	6.0%	$	55,656	8.0%	Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	142,406	17.9%	$	47,863	6.0%	$	63,817	8.0%
Total Risk-Based Capital (To Risk Weighted Assets)	Total Risk-Based Capital (To Risk Weighted Assets)	134,394		19.3%	55,656		8.0%	69,571		10.0%	Total Risk-Based Capital (To Risk Weighted Assets)	152,417		19.1%	63,817		8.0%	79,772		10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	Common Equity Tier 1 Capital (To Risk Weighted Assets)	125,668		18.1%	31,307		4.5%	45,221		6.5%	Common Equity Tier 1 Capital (To Risk Weighted Assets)	142,406		17.9%	35,897		4.5%	51,852		6.5%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	125,668		9.7%	51,952		4.0%	64,940		5.0%	Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	142,406		10.4%	54,811		4.0%	68,513		5.0%
December 31, 2021
December 31, 2022											December 31, 2022

Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	123,783	17.4%	$	42,701	6.0%	$	56,934	8.0%	Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	141,452	17.8%	$	47,714	6.0%	$	63,619	8.0%
Total Risk-Based Capital (To Risk Weighted Assets)	Total Risk-Based Capital (To Risk Weighted Assets)	132,706		18.6%	56,934		8.0%	71,168		10.0%	Total Risk-Based Capital (To Risk Weighted Assets)	151,408		19.0%	63,619		8.0%	79,523		10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	Common Equity Tier 1 Capital (To Risk Weighted Assets)	123,783		17.4%	32,025		4.5%	46,259		6.5%	Common Equity Tier 1 Capital (To Risk Weighted Assets)	141,452		17.8%	35,785		4.5%	51,690		6.5%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	123,783		9.9%	50,169		4.0%	62,711		5.0%	Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	141,452		10.4%	54,372		4.0%	67,965		5.0%

In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional ~~CET1~~Common Equity Tier 1 capital greater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At March 31, ~~2022,~~2023, the Bank’s conservation buffer was ~~11.3%~~11.1%.

2026

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 AFS

~~Investment securities available for sale~~Investments AFS are recorded at fair value on a recurring basis. At March 31, ~~2022,~~2023, 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 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.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

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

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

~~Impaired~~Collateral Dependent Loans

~~Loans that are considered impaired are recorded~~The Company does not record loans held for investment at fair value on a ~~nonrecurring~~recurring basis. ~~Once a loan~~However, from time to time, the Company designates individually evaluated loans with higher risk as collateral dependent loans and an allowance for credit losses is ~~considered impaired,~~established as necessary. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is ~~measured~~calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for estimated costs to sell, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

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

Those ~~impaired~~collateral dependent loans not requiring ~~a specific charge against the~~an allowance represent loans for which the fair value of the expected repayments or collateral ~~meet or~~ exceed the recorded ~~investment~~investments in ~~the loan. Loans which are deemed to be impaired are primarily valued~~such loans. At March 31, 2023, all collateral dependent loans were evaluated based on ~~a nonrecurring basis at~~ the fair value of the ~~underlying real estate~~ collateral. ~~Such~~Loans where an allowance is established based on the fair ~~values are obtained using independent appraisals, which~~value of collateral require classification in the fair value hierarchy. The Company ~~considers to be~~records collateral dependent loans as nonrecurring Level ~~3 inputs.~~3.

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 acquisition are charged to the allowance for ~~loan~~credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of 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 ~~March 31, 2022 and December 31, 2021:~~the dates indicated:


		March 31, 2022						December 31, 2021							March 31, 2023						December 31, 2022
		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	$	—	$	69,019,953	$	—	$	—	$	72,011,561	$	—	Student Loan Pools	$	—	$	55,833,826	$	—	$	—	$	59,156,982	$	—
SBA Bonds	SBA Bonds	—		128,033,483		—		—		139,793,077		—		SBA Bonds	—		91,696,061		—		—		99,629,967		—
Tax Exempt Municipal Bonds	Tax Exempt Municipal Bonds	—		45,740,656		—		—		49,984,355		—		Tax Exempt Municipal Bonds	—		20,919,512		—		—		21,310,328		—
Taxable Municipal Bonds	Taxable Municipal Bonds	—		60,454,675		—		—		65,969,151		—		Taxable Municipal Bonds	—		52,935,070		—		—		50,769,739		—
Mortgage-Backed Securities		—		364,809,196		—		—		355,090,914		—
MBS														MBS	—		319,685,604		—		—		319,281,268		—

Total	Total	$	—	$	668,057,963	$	—	$	—	$	682,849,058	$	—	Total	$	—	$	541,070,073	$	—	$	—	$	550,148,284	$	—

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

2228

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

There were no liabilities measured at fair value on a recurring basis at March 31, 2023 or December 31, 2022.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The tables below present assets measured at fair value on a nonrecurring basis at ~~March 31, 2022 and December 31, 2021,~~the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall.


		March 31, 2022									March 31, 2023
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	$	—	$	3,585,384	$	—	$	3,585,384	Mortgage Loans Held For Sale	$	—	$	240,841	$	—	$	240,841
Collateral Dependent Impaired Loans (1)		—		—		2,400,725		2,400,725
Collateral Dependent Loans (1)										Collateral Dependent Loans (1)	—		—		5,579,551		5,579,551
Other Real Estate Owned	Other Real Estate Owned	—		—		129,700		129,700		Other Real Estate Owned	—		—		119,700		119,700
Land Held for Sale	Land Held for Sale	—		—		1,190,347		1,190,347		Land Held for Sale	—		—		1,096,614		1,096,614
Total	Total	$	—	$	3,585,384	$	3,720,772	$	7,306,156	Total	$	—	$	240,841	$	6,795,865	$	7,036,706


		December 31, 2021									December 31, 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	$	—	$	4,038,414	$	—	$	4,038,414	Mortgage Loans Held For Sale	$	—	$	913,258	$	—	$	913,258
Collateral Dependent Impaired Loans (1)		—		—		2,323,307		2,323,307
Collateral Dependent Loans (1)										Collateral Dependent Loans (1)	—		—		5,565,878		5,565,878
Other Real Estate Owned	Other Real Estate Owned	—		—		129,700		129,700		Other Real Estate Owned	—		—		119,700		119,700
Land Held for Sale	Land Held for Sale	—		—		1,529,691		1,529,691		Land Held for Sale	—		—		1,096,614		1,096,614
Total	Total	$	—	$	4,038,414	$	3,982,698	$	8,021,112	Total	$	—	$	913,258	$	6,782,192	$	7,695,450

(1) Reported net of specific reserves. There were no specific reserves at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

There were no liabilities measured at fair value on a nonrecurring basis at March 31, ~~2022~~2023 or December 31, ~~2021.~~2022.

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

Valuation

Significant

March 31, 2022

December 31, 2021

Range of Inputs

Level 3 Assets

Technique

Unobservable Inputs

Range of Inputs

Level 3 Assets

Valuation Technique

Significant Unobservable Inputs

March 31, 2023

December 31, 2022

Land Held for Sale

Appraised Value/Comparable Sales

Discounts to appraised values for estimated holding or selling costs

10%

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%

Collateral Dependent Loans

Appraised Value

Discounts to appraised values 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

30%

Other Real Estate Owned

Appraised Value/Comparable Sales

Discounts to appraised values for estimated holding or selling costs

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.

2329

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: construction, residential mortgage, commercial real estate, other commercial, HELOCs and other consumer loans. The results are then adjusted to account for credit risk as described above.

A further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates 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.

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 ~~or FRB borrowings~~ as of March 31, ~~2022~~2023 or December 31, ~~2021.~~2022.

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 ~~March 31, 2022 and December 31, 2021~~the dates indicated presented in accordance with the applicable accounting guidance.

March 31, 2022 Carrying Fair Value
Amount Total Level 1 Level 2 Level 3
Financial Assets: Dollars in thousands
Cash and Cash Equivalents $ 31,110 $ 31,110 $ 31,110 $ — $ —
Certificates of Deposits with Other Banks 1,100 1,100 — 1,100 —
Investment Securities, Available for Sale 668,058 668,058 — 668,058 —
Investment Securities, Held to Maturity 22,061 21,041 — 21,041 —
Loans Receivable, Net 500,774 500,700 — — 500,700
Loans Held for Sale 3,585 3,585 — — 3,585
FHLB Stock 651 651 651 — —
Land Held for Sale 1,190 1,190 — — 1,190
Financial Liabilities:
Deposits:
Checking, Savings & Money Market Accounts $ 973,607 $ 973,607 $ 973,607 $ — $ —
Certificates of Deposits 152,328 150,839 — 150,839 —
Other Borrowed Money 34,252 34,252 34,252 — —
Subordinated Debentures 30,000 29,144 — 29,144 —
Junior Subordinated Debentures 5,155 5,155 — 5,155 —


March 31, 2023	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
Financial Assets:	Dollars in thousands
Cash and Cash Equivalents	$	24,719	$	24,719	$	—	$	—
Certificates of Deposits with Other Banks	1,100		—		1,100		—
Investment Securities AFS	541,070		—		541,070		—
Investment Securities HTM	180,179		—		175,853		—
Loans Receivable, Net	574,190		—		—		557,843
FHLB Stock	659		659		—		—
Land Held for Sale	1,097		—		—		1,097
Financial Liabilities:
Deposits:
Checking, Savings & Money Market Accounts	$	925,902	$	925,902	$	—	$	—
Certificates of Deposits	182,771		—		179,810		—
Borrowings from FRB	61,375		61,191		—		—
Other Borrowed Money	27,818		27,818		—		—
Subordinated Debentures	26,500		—		24,135		—
Junior Subordinated Debentures	5,155		—		5,155		—

2430

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements


December 31, 2021		Carrying		Fair Value
December 31, 2022												December 31, 2022	Carrying		Fair Value
		Amount		Total		Level 1		Level 2		Level 3			Amount		Level 1		Level 2		Level 3
Financial Assets:	Financial Assets:	Dollars in thousands										Financial Assets:	Dollars in thousands
Cash and Cash Equivalents	Cash and Cash Equivalents	$	27,623	$	27,623	$	27,623	$	—	$	—	Cash and Cash Equivalents	$	28,502	$	28,502	$	—	$	—
Certificates of Deposits with Other Banks	Certificates of Deposits with Other Banks	1,100		1,100		—		1,100		—		Certificates of Deposits with Other Banks	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		—
Investment Securities AFS												Investment Securities AFS	550,148		—		550,148		—
Investment Securities HTM												Investment Securities HTM	167,438		—		161,464		—
Loans Receivable, Net	Loans Receivable, Net	495,458		503,986		—		—		503,986		Loans Receivable, Net	549,917		—		—		528,174
Loans Held for Sale		4,038		4,038		—		—		4,038
FHLB Stock	FHLB Stock	586		586		586		—		—		FHLB Stock	651		651		—		—
Land Held for Sale	Land Held for Sale	1,530		1,530		—		—		1,530		Land Held for Sale	1,097		—		—		1,097
Financial Liabilities:	Financial Liabilities:											Financial Liabilities:
Deposits:	Deposits:											Deposits:
Checking, Savings & Money Market Accounts	Checking, Savings & Money Market Accounts	$	958,601	$	958,601	$	958,601	$	—	$	—	Checking, Savings & Money Market Accounts	$	968,054	$	968,054	$	—	$	—
Certificates of Deposits	Certificates of Deposits	157,362		157,201		—		157,201		—		Certificates of Deposits	142,031		—		138,382		—
Borrowings from FRB												Borrowings from FRB	44,080		44,071		—		—
Other Borrowed Money	Other Borrowed Money	26,785		26,785		26,785		—		—		Other Borrowed Money	27,588		27,588		—		—
Subordinated Debentures	Subordinated Debentures	30,000		30,154		—		30,154		—		Subordinated Debentures	26,500		—		24,435		—
Junior Subordinated Debentures	Junior Subordinated Debentures	5,155		5,155		—		5,155		—		Junior Subordinated Debentures	5,155		—		5,155		—

AtAt March 31, ~~2022,~~2023, the Bank had ~~$154.0~~$165.0 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 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~~

~~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. 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. Until our evaluation is complete the impact of the 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 March 2020, the FASB issued guidance that applies to contracts, hedging relationships and other transactions 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 March~~2022 the FASB issued guidance for loans modified as a TDR by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases. This ASU will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology.

NOTE 1514 - NON-INTEREST INCOME

Revenue Recognition

In accordance with ~~Topic 606,~~ASU 2014-09, Revenue from Contracts with Customers (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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

Service Fees on Deposit 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.

The following table presents the Company's non-interest income for the ~~three months ended March 31, 2022 and 2021.~~periods indicated. 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 March 31,
2022 2021
Non-interest income:
Gain on Sale of Loans (1)
$ 713,893 $ 1,071,481
Service Fees on Deposit Accounts 257,491 231,934
Commissions From Insurance Agency (1)
139,504 130,503
Trust Income 364,746 309,139
BOLI Income (1)
157,241 165,000
ATM and Check Card Fee Income 717,267 519,843
Other (1)
253,182 345,752
Total non-interest income $ 2,603,324 $ 2,773,652
(1) Not within the scope of ASC 606

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	Three Months Ended March 31,
	2023		2022
Non-interest income:

Gain on Sale of Loans (1)	$	193,881	$	713,893
Service Fees on Deposit Accounts	269,613		257,491
Commissions From Insurance Agency (1)	162,799		139,504
Trust Income	382,208		364,746
BOLI Income (1)	150,204		157,241
ATM and Check Card Fee Income	802,022		717,267

Other (1)	239,650		253,182
Total non-interest income	$	2,200,377	$	2,603,324
(1) Not within the scope of ASC 606

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1615 - LEASES

~~Effective January 1, 2019 the Company adopted ASC 842 “Leases.” Currently, the~~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.branches. During the three months ended March 31, ~~2022,~~2023, the Company made cash payments in the amount of ~~$125,000~~$128,000 for operating leases. The lease expense recognized during this period was ~~$123,000~~$128,000 and was recorded in occupancy expense within the Consolidated Statements of Income. The lease liability had a net decrease of ~~$104,000.~~$111,000. At March 31, 2023, the Bank had ROU assets of $1.7 million and a lease liability of $1.8 million recorded on its consolidated balance sheet compared to ROU assets of $1.9 million and a lease liability of $1.9 million at December 31, 2022. The lease agreements have maturity dates ranging from 2023 through 2028, some of which include options for multiple five or ten year extensions. At March 31, 2023, the remaining weighted average lease term ~~is 4.86~~was 3.86 years and the weighted average discount rate used iswas 3.2%.

~~Maturities~~At March 31, 2023, maturities of operating lease liabilities ~~at March 31, 2022~~ for future periods ~~are~~were as follows:

Remainder of 2022 $ 373,648
2023 508,954
2024 510,362
2025 460,339
2026 355,507
Thereafter 167,146
Total undiscounted lease payments 2,375,956
Less: effect of discounting 187,478
Present value of estimated lease payments (lease liability) $ 2,188,478



Remainder of 2023	$	389,688
2024	522,147
2025	474,815
2026	363,428
2027	149,301
Thereafter	10,371
Total undiscounted lease payments	1,909,750
Less: effect of discounting	(116,161)
Present value of estimated lease payments (lease liability)	$	1,793,589

NOTE 16 - PREFERRED STOCK

On May 24, 2022, the 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 17 - SUBSEQUENT EVENTS

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

2834

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

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

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

Certain matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risk and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors, including, but not limited to:

•potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, ~~generally, resulting~~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 ~~the ongoing novel coronavirus~~acts of ~~2019 (“COVID-19”)~~war including Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses ~~thereto;~~to new variants of the novel coronavirus disease 2019 (“COVID-19”);

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for ~~loan~~credit losses and provision for ~~loan~~credit 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~~credit losses not being adequate to cover actual losses, and require us to materially increase our allowance for ~~loan~~credit losses;

•changes in general economic conditions, either nationally or in our market areas;

•changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

•unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;

•the ~~future of the~~transition away from London Interbank Offered Rate ("LIBOR")~~, and the 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~~credit 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 changes in banking, securities and tax law, and in regulatory policies and principles, or the interpretation of regulatory capital or other ~~rules, and including changes as a result of COVID-19;~~rules;

•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;

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

•difficulties in reducing risks associated with the loans on our balance sheet;

•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

•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;

•our ability to retain key members of our senior management team;

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

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

•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; and

•~~the~~ other risks described elsewhere in this document and in the Company's other ~~filings~~reports filed with or furnished to the Securities and Exchange Commission, including ~~our~~its Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (“~~2021~~2022 Form 10-K”).

Some of these forward-looking statements are discussed in the Company's ~~2021~~2022 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~~factors could cause our actual results for ~~2022~~2023 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~~

The Company maintains its commitment to supporting its community and clients during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its clients. As of March 31, 2022, all Bank branches were open with normal hours and substantially all employees had returned to their normal working environments. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

3036

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Financial Condition at March 31, ~~2022~~2023 and December 31, ~~2021~~2022

Assets

- Total assets ~~decreased $1.4~~increased $24.7 million to ~~$1.3~~$1.4 billion at March 31, ~~2022~~2023 from ~~$1.3~~$1.4 billion at December 31, ~~2021.~~2022. This increase was primarily due to increases in investments held to maturity ("HTM") and loans receivable, net, which were partially offset by decreases in cash and cash equivalents and investments available for sale ("AFS"). Changes in total assets are shown below.


						Increase (Decrease)									Increase (Decrease)
(Dollars in thousands)		March 31, 2022		12/31/2021		$		%
											March 31, 2023		December 31, 2022		$		%
Cash and Cash Equivalents	Cash and Cash Equivalents	$	31,110	$	27,623	$	3,487	12.6	%	Cash and Cash Equivalents	$	24,719,440	$	28,502,364	$	(3,782,924)	(13.3)	%
Certificates of Deposits with Other Banks	Certificates of Deposits with Other Banks	1,100		1,100		—		—		Certificates of Deposits with Other Banks	1,100,045		1,100,045		—		—
Investments AFS	Investments AFS	668,058		682,849		(14,791)		(2.2)		Investments AFS	541,070,073		550,148,284		(9,078,211)		(1.7)
Investments HTM	Investments HTM	22,061		23,507		(1,446)		(6.2)		Investments HTM	180,178,508		167,437,616		12,740,892		7.6
Loans Receivable, Net		504,359		499,497		4,862		1.0
Total Loans Receivable, Net										Total Loans Receivable, Net	574,430,550		549,917,170		24,513,380		4.5
Accrued Interest Receivable	Accrued Interest Receivable	3,855		3,752		103		2.7		Accrued Interest Receivable	5,359,687		4,810,674		549,013		11.4
OREO	OREO	130		130		—		—		OREO	119,700		119,700		—		—
Operating Lease ROU Assets	Operating Lease ROU Assets	2,146		2,252		(106)		(4.7)		Operating Lease ROU Assets	1,747,944		1,860,997		(113,053)		(6.1)
Land Held for Sale	Land Held for Sale	1,190		1,530		(340)		(22.2)		Land Held for Sale	1,096,614		1,096,614		—		—
Premises and Equipment, Net	Premises and Equipment, Net	25,969		25,237		732		2.9		Premises and Equipment, Net	28,674,858		27,959,793		715,065		2.6
FHLB Stock	FHLB Stock	651		586		65		11.1		FHLB Stock	658,600		650,600		8,000		1.2
BOLI	BOLI	26,867		26,710		157		0.6		BOLI	27,468,302		27,318,098		150,204		0.5
Goodwill	Goodwill	1,200		1,200		—		—		Goodwill	1,199,754		1,199,754		—		—
Other Assets	Other Assets	11,094		5,241		5,853		111.7		Other Assets	18,269,716		19,244,454		(974,738)		(5.1)

Total Assets										Total Assets	$	1,406,093,791	$	1,381,366,163	$	24,727,628	1.8%

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

Investments AFS decreased ~~$14.8~~$9.1 million or ~~2.2%~~1.7% to ~~$668.1~~$541.1 million at March 31, ~~2022~~2023 from ~~$682.8~~$550.1 million at December 31, ~~2021~~2022 as maturities and principal paydowns of investments AFS exceeded purchases during the three months ended March 31, ~~2022.~~2023. Additionally, investments AFS experienced a ~~$20.2~~$5.6 million ~~decrease~~increase in fair value during the three months ended March 31, ~~2022.~~2023.

Loans receivable, net, including loans held for sale, increased ~~$4.9~~$24.5 million or ~~1.0%~~4.5% to ~~$504.4~~$574.4 million at March 31, ~~2022~~2023 from ~~$499.5~~$549.9 million at December 31, ~~2021,~~2022, primarily due to residential mortgage, commercial real estate, commercial and agricultural loans originated during the period. ~~Loan~~All held for investment loan balances ~~in the commercial real estate, construction real estate and consumer HELOC categories all~~ increased during the first quarter ~~ended~~of 2023 with the exception of construction loans, which decreased $4.1 million or 3.6% to $108.7 million at March 31, ~~2022 while residential mortgage loans, commercial and agricultural loans, and other consumer loans all decreased since the prior year end.~~2023 from $112.8 million at December 31, 2022. Commercial real estate loans increased ~~$13.3~~$3.2 million or ~~5.8%~~1.3% to ~~$241.0~~$255.3 million at March 31, ~~2022~~2023 from ~~$227.8~~$252.2 million at December 31, ~~2021. Construction real estate~~2022. Residential mortgage loans increased ~~$1.5~~$21.9 million or ~~1.5%~~19.9% to ~~$101.7~~$132.0 million at March 31, ~~2022~~2023 from ~~$100.2~~$110.1 million at December 31, ~~2021.~~2022. Consumer HELOC ~~grew $0.8 million~~increased $281,000 or ~~2.8%~~0.9% to ~~$29.4~~$32.0 million at March 31, ~~2022~~2023 from ~~$28.6~~$31.7 million at December 31, ~~2021. Commercial and agricultural~~2022. Other consumer loans ~~decreased $10.8 million~~increased $588,000 or ~~24.2%~~2.5% to ~~$33.9~~$24.2 million at March 31, ~~2022~~2023 from ~~$44.7~~$23.6 million at December 31, 2021. Residential mortgage loans decreased $166,000 or 0.2% to $84.8 million at March 31, 2022 from $85.0 million at December 31, 2021. Other consumer loans decreased $2.3 million or 10.6% to $19.2 million at March 31, 2022 from $21.5 million at December 31, 2021.2022. Loans held for sale, decreased ~~$453,000~~$672,000 or ~~11.2%~~73.6% to ~~$3.6~~$241,000 at March 31, 2023 from $913,000 at December 31, 2022.

Other assets decreased $975,000 or 5.1% to $18.3 million at March 31, ~~2022~~2023 from ~~$4.0~~$19.2 million at December 31, ~~2021.~~

Land held for sale decreased $340,000 during the first quarter of 2022 due to a write down in the value of the land. Other assets increased $5.9 million or 111.7% to $11.1 million at March 31, 2022 from $5.2 million at December 31, 2021.2022. The ~~increase~~decrease was primarily the result of a ~~$6.2~~$1.4 million ~~increase~~decrease in net deferred taxes, which was related to ~~increased~~decreased unrealized losses in the investment portfolio at March 31, 2023.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Liabilities

Deposit Accounts

Total deposits decreased $1.4 million or 0.1% to $1.11 billion at March 31, 2023 from December 31, 2022 due to decreases in checking and savings accounts, partially offset by an increase 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 in brokered time deposits at both March 31, 2023 and December 31, 2022. 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 $5.0 million in other brokered deposits at both March 31, 2023 and December 31, 2022. At March 31, 2023, approximately $310.2 million of our $1.11 billion deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. For additional details of deposits, see “Note 9 – Deposits” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Borrowings

The Bank had $61.4 million in borrowings from the Federal Reserve Bank of Atlanta (“FRB”) at March 31, 2023, compared to $44.1 million at December 31, 2022. During the first quarter of 2023, the Bank elected to participate in the Federal Reserve Bank Term Funding Program (“BTFP”) program, allowing the Bank to refinance its existing FRB borrowings. The Bank also had $27.8 million in other borrowings at March 31, 2023, compared to $27.6 million and December 31, 2022, which consisted of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. For additional information, see “Note 10 – Borrowings” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

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

Shareholders’ Equity

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

Net Income

Net income increased $1.1 million, or 72.6%, to $2.7 million or $0.82 per basic common share for the quarter ended March 31, 2023 compared to $1.5 million or $0.48 per basic common share for the quarter ended March 31, 2022. The increase in net ~~deferred taxes~~income was ~~offset partially~~primarily due to an increase in net interest income as a result of increased market interest rates and, to a lesser extent, higher average balances of investments and loans receivable, net. Since March 2022, in response to inflation, the Federal Open Market Committee (“FMOC”) of the Federal Reserve has increased the target range for the federal funds rate by 475 basis points, including 50 basis points during the first quarter of 2023, to a ~~$332,000~~range of 4.75% to 5.00% as of March 31, 2023. As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are may be implemented during calendar 2023.

Net Interest Income

The following table compares detailed average balances, average yields on interest-earning assets, average costs of interest-bearing liabilities and the resulting changes in interest income ~~taxes~~and expense for the three months ended March 31, 2023 and 2022. The average balances were derived from the daily balances throughout the periods indicated. The average yields or costs were calculated by dividing the income or expense by the average balance of the corresponding assets or liabilities. Nonaccrual loans are included in earning assets in the following table. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. Interest income from non-taxable investments is calculated on a tax equivalent basis, which recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using the effective tax rate for the quarters ended March 31, 2023 and 2022.


	Quarter Ended March 31,
	2023						2022
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate (1)		Average Balance		Interest		Yield/ Rate (1)
Interest-Earning Assets:
Loans Receivable, Net	$	570,125	$	7,410	5.20	%	$	516,382	$	6,097	4.72	%
Taxable Investments	698,974		6,610		3.78		681,785		2,426		1.42
Non-taxable Investments	21,087		197		3.74		24,151		226		3.74
Deposits with other Banks	3,585		34		3.84		2,404		2		0.37
Total Interest-Earning Assets	$	1,293,771	$	14,251	4.41	%	$	1,224,722	$	8,751	2.86	%
Interest-Bearing Liabilities:
Checking, Savings & Money Market Accounts	$	672,122	$	2,293	1.36	%	$	695,774	$	223	0.13	%
Certificates Accounts	163,806		622		1.52		160,215		122		0.34
Total Interest-Bearing Deposits	835,928		2,915		1.39		855,989		345		0.16
Other Borrowings (2)	77,501		627		3.24		49,356		30		0.24
Junior Subordinated Debentures	5,155		84		6.49		5,155		26		2.02
Subordinated Debentures	26,500		348		5.25		30,000		394		5.25
Total Interest-Bearing Liabilities	$	945,084	$	3,974	1.68	%	$	940,500	$	795	0.34	%
Net Interest Rate Spread					2.73	%					2.52	%
Tax Equivalent Net Interest Income/Margin			$	10,277	3.18	%			$	7,956	2.60	%
Less: tax equivalent adjustment			34						51
Net Interest Income			$	10,243					$	7,905

(1) Annualized

(2) Includes Federal Reserve borrowings and repurchase agreements.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Net interest income increased $2.3 million or 29.6% to $10.2 million during the quarter ended March 31, 2023, compared to $7.9 million for the same quarter in 2022. During the quarter ended March 31, 2023, average interest-earning assets increased $69.0 million or 5.6% to $1.3 billion from $1.2 billion for the same quarter in 2022, while average interest-bearing liabilities increased $4.6 million or 0.5% to $945.1 million for the quarter ended March 31, 2023 from $940.5 million for the comparable quarter in 2022. The Company's net interest margin was 3.18% for the quarter ended March 31, 2023 compared to 2.60% for the comparable quarter in 2022. The Company's net interest spread on a tax equivalent basis was 2.73% for the quarter ended March 31, 2023 compared to 2.52% for the quarter ended March 31, 2022.

Interest Income

Total tax-equivalent interest income increased $5.5 million or 62.8% to $14.3 million for the quarter ended March 31, 2023 compared to $8.8 million for the same period in 2022.

Interest income on loans increased $1.3 million or 21.5% to $7.4 million for the quarter ended March 31, 2023 from $6.1 million for the first quarter of 2022. The increase in loan interest income was the result of a $53.7 million increase in the average loan portfolio balance combined with a 48 basis point increase in the average yield on loans receivable.

Interest income from taxable investments increased $4.2 million or 172.5% to $6.6 million during the quarter ended March 31, 2023 from $2.4 million for the first quarter of 2022, due to a $17.2 million increase in the average balance of taxable investments combined with a 236 basis point increase in the average yield to 3.78%. Tax equivalent interest income from non-taxable investments decreased $29,000 to $197,000 during the quarter ended March 31, 2023 due to a decrease in the average balance of non-taxable investments.

Interest income from deposits with other banks increased $32,000 during the quarter ended March 31, 2023 to $34,000, due to a $1.2 million increase in the average balance of these assets combined with a significant increase in the average yield earned on these assets due to increased market interest rates.

~~Shareholders’ Equity~~Interest Expense

Shareholders’ equity decreased $19.1 million or 16.5% to $96.5 million at March 31, 2022 from $115.5 million at December 31, 2021. The decrease was primarily attributable to a $20.2 million decrease in accumulated other comprehensive income, net of tax, combined with $390,000 in dividends paid to common shareholders during the three months ended March 31, 2022, which was partially offset by net income of $1.5 million. The decrease in net accumulated other comprehensive income was related to the unrecognized loss in value of investments AFS during the three months ended March 31, 2022.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

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

As previously disclosed, the Company has determined to apply for an investment from the United States Department of Treasury (“Treasury”) under the Emergency Capital Investment Program (“ECIP”). The Treasury had informed the Company that it is eligible to receive an ECIP investment in an amount up to $82,949,000 in the form of in non-dilutive Tier 1 senior perpetual preferred capital. In connection with the ECIP investment from the Treasury, the Company would be required to fulfill certain conditions established by the Treasury and would be subject to certain restrictions. Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage minority depository institutions and low- and moderate-income community financial institutions such as the Bank to augment their efforts to support small businesses and consumers in their communities.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

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

~~Results of Operations for the Quarters Ended March 31, 2022 and 2021~~

~~Net Income~~

~~Net income decreased $1.6 million or 51.3% to $1.5 million or $0.48 per basic common share for the quarter ended March 31, 2022 compared to~~Total interest expense increased $3.2 million or ~~$0.98 per basic common share for the quarter ended March 31, 2021. The decrease in net income was primarily due~~399.9% to the $870,000 reversal of provision for loan losses in the quarter ended March 31, 2021 following significantly higher loan loss provisions during 2020 in response to the ongoing COVID-19 pandemic. In addition, non-interest expense increased $985,000 for the quarter ended March 31, 2022 compared to the same quarter in 2021.

~~Net Interest Income~~

Net interest income decreased $115,000 or 1.4% to $7.9 million during the quarter ended March 31, 2022, compared to $8.0 million for the same quarter in 2021. During the quarter ended March 31, 2022, average interest-earning assets increased $131.2 million or 12.0% to $1.2 billion from $1.1 billion for the same quarter in 2021, while average interest-bearing liabilities increased $71.6 million or 8.2% to $940.5$4.0 million for the quarter ended March 31, ~~2022 from $868.9 million for the comparable quarter in 2021. The Company's net interest margin was 2.60% for the quarter ended March 31, 2022~~2023 compared to 2.96% for the comparable quarter in 2021. The Company's net interest spread on a tax equivalent basis was 2.52% for the quarter ended March 31, 2022 compared to 2.85% for the quarter ended March 31, 2021. Loan 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.

~~Interest Income~~

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended March 31, 2022 and 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 March 31, Change in Average Balance Increase (Decrease) in Interest Income
2022 2021
(Dollars in thousands) Average Balance
Yield(1)
Average Balance
Yield(1)
Loans Receivable, Net $ 516,382 4.72 % $ 504,393 5.14 % $ 11,989 $ (387)
Taxable Investments 681,785 1.42 565,053 1.73 116,732 (21)
Non-taxable Investments (2)
24,151 3.74 21,952 4.20 2,199 (5)
Overnight Time and Certificates of Deposit 2,404 0.37 2,113 0.28 291 1
Total Interest-Earning Assets $ 1,224,722 2.86 % $ 1,093,511 3.35 % $ 131,211 $ (412)

~~(1)~~ ~~Annualized~~

~~(2)~~Tax equivalent basis recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using the effective tax rate for the quarters ended March 31, 2022 and 2021. The tax equivalent adjustment relates to the tax exempt municipal bonds and was $50,739 and $65,781 for the quarters ended March 31, 2022 and 2021, respectively.

Average interest-earning assets increased $131.2 million, or 12.0%, to $1.2 billion for the quarter ended March 31, 2022 despite a 49 basis point decline in the average yield on interest-earning assets and a $412,000 decrease in total tax equivalent interest income to $10.6 million for the quarter ended March 31, 2022 compared to $10.7 million$795,000 for the same ~~period~~quarter in ~~2021.~~

Total interest income on loans decreased $387,000 or 6.0% to $6.1 million for the quarter ended March 31, 2022 from $6.5 million for the first quarter of 2021. The decrease in interest income from loans was the result of a 42 basis point decrease in the average yield on loans receivable, primarily due to a decrease in deferred interest income on the Paycheck Protection Program (“PPP”) loans recognized during the period ($262,000 recognized in the quarter ended March 31, 2022 compared to $994,000 in the first quarter of 2021). This decrease was partially offset by a $12.0 million increase in the average loan portfolio balance.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

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

~~Interest income from taxable investments decreased $21,000 to $2.4 million during the quarter ended March 31,~~ 2022 due to an increase in market interest rates combined with a ~~31 basis point decrease in the average yield, which was partially offset by a $116.7~~$4.6 million increase in the average balance of these ~~assets. Tax equivalent interest income from non-taxable investment securities decreased $5,000~~liabilities.

Interest expense on deposits increased $2.6 million to ~~$226,000 during the quarter ended March 31, 2022 due to a decrease of 46 basis points in the average yield on non-taxable investment securities, partially offset by a $2.2~~$2.9 million ~~increase in the average balance of these assets.~~

~~Interest Expense~~

~~The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended March 31, 2022 and 2021.~~

Quarter Ended March 31, Change in Average Balance Increase (Decrease) in Interest Expense
2022 2021
(Dollars in thousands) Average Balance
Cost(1)
Average Balance
Cost(1)
Checking Accounts $ 228,451 0.11 % $ 190,608 0.11 % $ 37,843 $ 11
Savings and Money Market Accounts 467,323 0.16 375,022 0.16 92,301 29
Certificate Accounts 160,215 0.34 185,493 0.65 (25,278) (165)
Other Borrowings (2)
49,356 0.24 82,641 0.92 (33,285) (159)
Junior Subordinated Debentures 5,155 2.02 5,155 1.91 — 1
Subordinated Debentures 30,000 5.25 30,000 5.25 — —
Total Interest-Bearing Liabilities $ 940,500 0.34 % $ 868,919 0.50 % $ 71,581 $ (283)

~~(1)~~ ~~Annualized~~

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

~~Total interest expense decreased $283,000 or 26.3% to $795,000~~ for the quarter ended March 31, 2022 compared to $1.1 million for the same quarter in 2021 due to a decline of 16 basis points in the average cost of interest bearing liabilities, which was partially offset by a $71.6 million or 8.2% increase in the average balance of these liabilities.

Despite a $104.9 million increase in the average balance of deposit accounts, the average cost of interest-bearing deposits decreased nine basis points, resulting in a $125,000 decrease in interest expense on deposit accounts during the first quarter of 2022 when compared to the same quarter in 2021. Interest expense on certificate accounts decreased $165,000 due to a decrease of $25.3 million in the average balance combined with a 31 basis point decrease in the average cost of certificate deposits during the first quarter of 2022, as management elected to utilize liquidity gained2023 from ~~lower cost deposits to reduce its balances of higher cost certificates of deposit in a managed reduction of these funds. Interest expense on other borrowings decreased $159,000~~$345,000 for the first quarter of 2022, due to an increase of 123 basis points in the average cost, partially offset by a ~~$33.3~~$20.1 million decrease in the average balance of interest-bearing deposit accounts. Interest expense on FRB and other borrowings increased $598,000 during the quarter due to a $28.1 million increase in the balance of these ~~interest-bearing~~ liabilities combined with ~~a decrease~~an increase of 68300 basis points in the average ~~cost.~~cost of these liabilities. Interest expense on the junior subordinated debentures increased due to increased floating interest rates reflecting higher market interest rates.

Provision for ~~Loan~~Credit 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~~credit 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~~credit 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~~The Company calculates the allowance for credit losses for each pool using a ~~ten year~~remaining life loss methodology with a two quarter reasonable and supportable forecast period and an immediate reversion period. Management believes that the Company’s historical loss ~~ratio~~experience provides the best basis for its assessment of expected credit losses to ~~each loan category~~determine the allowance for credit losses. The Company uses its own internal data to ~~estimate~~measure historical credit loss experience within the ~~inherent~~pools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss ~~in these pooled loans.~~

rates over the calculated remaining life of loans by pool. The second component of management’s monthly analysis is the specific review and evaluation of significant ~~problem credits~~individually evaluated collateral dependent loans identified through the Company’s internal monitoring system. These loans ~~are evaluated for impairment~~do not share common risk characteristics and ~~recorded in~~

3440

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

~~accordance with accounting guidance. For each loan deemed impaired, management calculates a specific reserve~~are not included within the collectively evaluated loans for determining the ~~amount in which~~allowance for credit losses. Under CECL, for collateral dependent loans, the ~~recorded investment in~~Company has adopted the ~~loan exceeds~~practical expedient to measure the allowance for credit losses based on the fair ~~value. This estimate~~value of collateral. The allowance for credit losses is calculated on an individual loan basis based on ~~a thorough analysis~~the shortfall between the fair value of the ~~most probable source of repayment,~~loan's collateral, which is ~~typically~~adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral ~~underlying~~exceeds the ~~loan.~~

amortized cost, no allowance is required. The third component is an analysis of changes in qualitative factors that may affect the portfolio, including but not limited to: relevant economic trends that could impact borrowers’ ability to repay, industry trends, changes in the volume and composition of the portfolio, credit concentrations, or lending policies and the experience and ability of the staff and Board of Directors.

Management also reviews and incorporates certain ratios such as percentage of classified loans, average historical ~~loan~~credit 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~~

Based on the ~~SBA guarantees 100%~~foregoing, no provision for credit losses was recorded for the three months ended March 31, 2022 and 2023.For additional details 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~~credit losses, ~~for~~see “Note 8 - Loans Receivable" of the ~~quarters ended March 31, 2022 and 2021.~~Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Quarter Ended March 31,
(Dollars in thousands) 2022 2021
Beginning Balance $ 11,087 $ 12,843
Provision for Loan Losses 0 (870)
Charge-offs (32) (45)
Recoveries 74 19
Net Recoveries (Charge-offs) $ 42 $ (26)
Ending Allowance for Loan Losses Balance $ 11,129 $ 11,947
At Period End: 3/31/2022 3/31/2021
Impaired Loans $ 2,401 $ 2,589
Gross Loans Receivable, Held For Investment (1)
$ 511,903 $ 511,726
Total Loans Receivable, Net $ 504,359 $ 506,252
Allowance For Loan Losses as a % of Impaired Loans 463.6 % 461.5 %
Allowance For Loan Losses as a % of Gross Loans Receivable (1)
2.2 % 2.3 %
(1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES

~~The Company had net recoveries of $42,000~~Non-Interest Income

Non-interest income decreased $403,000 or 15.5% to $2.2 million for the quarter ended March 31, ~~2022~~2023 compared to net charge-offs of $26,000 for the first quarter of 2021. We did not record any provisions for loan losses during the quarter ended March 31, 2022 compared to a negative provision of $870,000 for the first quarter of 2021. The reversal of loan loss provisions during the three months ended March 31, 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 March 31, 2021. Non-performing assets increased $131,000, or 4.7%, to $2.9 million at March 31, 2022 from $2.8 million at December 31, 2021. Non-performing assets represented 0.2% of total assets at both March 31, 2022 and December 31, 2021.

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 decline in national and local economic conditions, as a result of the COVID-19 pandemic or 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.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

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

~~Non-Interest Income~~

~~Non-interest income decreased $170,000 or 6.1%~~ to $2.6 million for the quarter ended March 31, ~~2022 compared~~2022. The decrease was primarily due to ~~$2.8 million~~a $520,000 decrease in gain on sale of loans reflecting the decline in originations of loans held for sale following recent market interest rate increases. In addition, BOLI income and other non-interest income decreased $7,000 and $14,000, respectively, during the quarter ended March 31, ~~2021.~~2023 when compared to the quarter ended March 31, 2022. These decreases were partially offset by increases in all other non-interest income line items with the largest increase occurring in ATM and check card fee income, which increased $85,000 or 11.8% to $802,000 during the quarter ended March 31, 2023 when compared to the quarter ended March 31, 2022, due to a new interchange service provider that pays the Bank more fees per transaction. For additional details of the changes in non-interest income, see “Note 1514 - 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 ~~$985,000~~$436,000 or ~~12.9%~~5.1% to $9.0 million for the quarter ended March 31, 2023 compared to $8.6 million for the quarter ended March 31, ~~2022 compared to $7.6 million for the quarter ended March 31, 2021.~~2022. The following table summarizes the changes in non-interest expense:


		Quarter Ended March 31,				Increase (Decrease)					Quarter Ended March 31,				Increase (Decrease)
		2022		2021		$		%			2023		2022		$		%
Compensation and Employee Benefits	Compensation and Employee Benefits	$	5,056,620	$	4,869,246	$	187,374	3.8	%	Compensation and Employee Benefits	$	5,240,796	$	5,056,620	$	184,176	3.6	%
Occupancy	Occupancy	712,786		621,282		91,504		14.7		Occupancy	806,434		712,786		93,648		13.1
Advertising	Advertising	260,333		199,402		60,931		30.6		Advertising	244,595		260,333		(15,738)		(6.0)
Depreciation and Maintenance of Equipment	Depreciation and Maintenance of Equipment	720,661		802,847		(82,186)		(10.2)		Depreciation and Maintenance of Equipment	620,156		720,661		(100,505)		(13.9)
FDIC Insurance Premiums	FDIC Insurance Premiums	112,042		68,616		43,426		63.3		FDIC Insurance Premiums	90,306		112,042		(21,736)		(19.4)
Net Cost (Recovery) of Operation of OREO		—		(103,667)		103,667		(100.0)

Write down of Land Held for Sale	Write down of Land Held for Sale	339,344		—		339,344		100.0		Write down of Land Held for Sale	—		339,344		(339,344)		(100.0)

Consulting	Consulting	164,750		168,910		(4,160)		(2.5)		Consulting	213,335		164,750		48,585		29.5
Debit Card Expense	Debit Card Expense	283,789		258,663		25,126		9.7		Debit Card Expense	336,646		283,789		52,857		18.6

Data Processing										Data Processing	280,036		67,052		212,984		317.6
Other	Other	944,519		724,385		220,134		30.4		Other	1,198,284		877,467		320,817		36.6
Total Non-Interest Expense	Total Non-Interest Expense	$	8,594,844	$	7,609,684	$	985,160	12.9	%	Total Non-Interest Expense	$	9,030,588	$	8,594,844	$	435,744	5.1	%

The increase in non-interest expense was primarily due to increases in compensation and employee benefits, ~~expense,~~ occupancy expense ~~write down of land held for sale~~ and other non-interest expenses during the first quarter of ~~2022 combined with~~2023, which were partially offset by a ~~net recovery on operation~~decrease in depreciation and maintenance of ~~OREO during the first quarter~~equipment and a writedown of ~~2021.~~land held for sale.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Compensation and employee benefits increased ~~$187,000~~$184,000 or ~~3.8%~~3.6% to ~~$5.1~~$5.2 million for the quarter ended March 31, ~~2022~~2023 when compared to the quarter ended March 31, ~~2021~~2022 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~~in 2023 and the ~~first quarter of 2022 and~~ overall growth of the Company. Occupancy expense and other non-interest expense also increased during the first quarter of ~~2022~~2023 due to increased operations and the addition of our newest branch located in ~~Columbia, South Carolina.~~

~~The net gain on OREO sales exceeded write-downs and other costs, resulting in a net recovery of $104,000 from the operation~~

~~of OREO properties, which decreased non-interest expense during the quarter March 31, 2021.~~

Other non-interest expense increased $220,000 or 30.4% to $945,000 for the quarter ended March 31, 2022 compared to $724,000 during the first quarter of 2021 due to increased operations and the opening of our newest branch in 2022. Branches were closed for the majority of 2020 and the first quarter of 2021 as a result of the COVID-19 pandemic.Augusta, Georgia.

Provision For Income Taxes

The provision for income taxes ~~decreased $510,000~~increased $375,000 or ~~58.3%~~102.7% to ~~$365,000~~$739,000 for the quarter ended March 31, ~~2022~~2023 from ~~$875,000~~$365,000 for the same period in ~~2021~~2022 due to ~~lower~~higher net income before taxes in ~~2022.~~2023. Pre-tax net income was ~~$1.9~~$3.7 million for the quarter ended March 31, ~~2022~~2023 compared to ~~$4.1~~$1.9 million for the first quarter of ~~2021.~~2022. The Company’s combined federal and state effective income tax rate was ~~19.1%~~21.7% and ~~21.6%~~19.1% for the quarters ended March 31, 2023 and 2022, ~~and 2021,~~ respectively.

3642

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~~We actively ~~analyzes~~analyze and ~~manages the Bank’s~~manage 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 securities repayments, including interest payments, maturities and sales of loans and investment securities, advances from the ~~FHLB,~~FRB, and cash flow generated from operations. The sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage repayments are greatly influenced by the level of interest rates, economic conditions, and competition. Management believes that the Company’s current liquidity position and its forecasted operating results are sufficient to fund all of its existing commitments. The Bank had ~~$154.0~~$165.1 million in unused commitments to extend credit and standby letters of credit at March 31, ~~2022~~2023. .

During the three months ended March 31, ~~2022,~~2023, loan disbursements exceeded loan repayments resulting in a ~~$4.9~~$24.5 million or ~~1.0%~~4.5% increase in total net loans receivable. Also during the three months ended March 31, ~~2022,~~2023, deposits ~~increased $10.0~~decreased $1.4 million or ~~0.9%~~0.1%. The Bank had no outstanding ~~FLHB~~FHLB advances at March 31, ~~2022,~~2023 with ~~$390.2~~$395.1 million in additional borrowing capacity at the FHLB at that date. The Bank ~~also~~ had no$61.4 million of outstanding borrowings from the ~~discount window facility at the FRB~~Federal Reserve BTFP at March 31, ~~2022,~~2023, which was collateralized by investments ~~AFS~~ with a fair market value of ~~$77.6 million. At March 31, 2022, the Bank had no outstanding borrowings~~$157.3 million 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 March 31, ~~2022.~~2023. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

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

Security Federal is a separate legal entity from the Bank and must provide for its own liquidity. At March 31, ~~2022, the Company, on an unconsolidated basis,~~2023, Security Federal had liquid assets of ~~$20~~$89.9 million. In addition to its operating expenses, ~~the Company~~Security Federal is responsible for paying any dividends declared, if any, to its shareholders, funds paid for ~~Company~~Security Federal stock repurchases, and payments on trust-preferred securities and subordinated debentures held at the Company level. ~~The Company has the ability to receive~~Security Federal's main source of funds are dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is ~~$0.12~~$0.13 per share ~~as approved by our Board of Directors,~~ which we believe is a 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 our cash to our shareholders. Assuming continued payment during ~~2022~~2023 at this rate of ~~$0.12~~$0.13 per share, our average total dividend paid each quarter would be approximately ~~$390,000~~$423,000 based on the number of outstanding shares at March 31, ~~2022.~~2023.

At March 31, ~~2022,~~2023, the Bank exceeded all regulatory capital requirements with Common Equity Tier 1 Capital (CET1), Tier 1 leverage-based capital, Tier 1 risk-based capital, and total risk-based capital ratios of ~~18.06%~~17.85%, ~~9.68%~~10.39%, ~~18.06%~~17.85%, and ~~19.32%~~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 March 31, ~~2022~~2023 the Bank’s conservation buffer ~~was 11.3%~~was 11.1%. ~~For~~For additional details, see “Note 12 - Regulatory Matters” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

3743

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 ~~2021~~2022 Form 10-K.

For the three months ended March 31, ~~2022,~~2023, the Bank's interest rate spread, defined as the average yield on ~~interest bearing~~interest-earning assets less the average rate paid on ~~interest bearing~~interest-bearing liabilities, was ~~2.52%~~2.73%.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that at March 31, ~~2022~~2023 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Control over Financial Reporting: There have been no significant changes in our internal controls over financial reporting during the quarter ended March 31, ~~2022~~2023 that have materially affected or are reasonably likely to affect our internal controls over financial ~~reporting.~~reporting

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

3844

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 ~~2021~~2022 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)
~~10.1~~4.2			~~1993 Salary Continuation Agreements (4)~~ Form of Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (3)
~~10.2~~			~~Amendment One to 1993 Salary Continuation Agreements (5)~~
~~10.3~~10.1			Form of 2006 Salary Continuation Agreement ~~(6)~~(5)
~~10.4~~10.2			Form of Security Federal Split Dollar Agreement (56))
~~10.5~~10.3			2018 Employee Stock Purchase Plan (76)
~~10.6~~10.4			~~Form~~Letter Agreement, Dated May 24, 2022 between Security Federal Corporation andthe U.S. Department of ~~Compensation Modification Agreement (8)~~Treasury,with respect to the issuance of Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (3)
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
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 March 31, ~~2022,~~2023, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive ~~Loss;~~Income (Loss); (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements
104			Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)

_______________________

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

(2) 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.

~~SECURITY FEDERAL CORPORATION AND SUBSIDIARIES~~

~~(3)~~(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) Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference.~~

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

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

4046

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:

May ~~16, 2022~~12, 2023

By:

/s/J. Chris Verenes

J. Chris Verenes

Chief Executive Officer

Duly Authorized Representative

Date:

May ~~16, 2022~~12, 2023

By:

/s/Darrell Rains

Darrell Rains

Chief Financial Officer

Duly Authorized Representative

4147


Non-accrual Loans:	March 31, 2022		December 31, 2021
Construction Real Estate	$	19,799	$	21,434
Residential Real Estate	1,560,113		1,389,498
Commercial Real Estate	1,036,496		1,057,496
Commercial and Agricultural	75,095		64,479
Consumer HELOC	115,766		141,683
Other Consumer	14,265		8,797
Total Non-accrual Loans	$	2,821,534	$	2,683,387



Remainder of 2022	$	373,648
2023	508,954
2024	510,362
2025	460,339
2026	355,507
Thereafter	167,146
Total undiscounted lease payments	2,375,956
Less: effect of discounting	187,478
Present value of estimated lease payments (lease liability)	$	2,188,478


	Quarter Ended March 31,								Change in Average Balance		Increase (Decrease) in Interest Income
	2022				2021
(Dollars in thousands)	Average Balance		Yield(1)		Average Balance		Yield(1)
Loans Receivable, Net	$	516,382	4.72	%	$	504,393	5.14	%	$	11,989	$	(387)
Taxable Investments	681,785		1.42		565,053		1.73		116,732		(21)
Non-taxable Investments (2)	24,151		3.74		21,952		4.20		2,199		(5)
Overnight Time and Certificates of Deposit	2,404		0.37		2,113		0.28		291		1
Total Interest-Earning Assets	$	1,224,722	2.86	%	$	1,093,511	3.35	%	$	131,211	$	(412)


	Quarter Ended March 31,								Change in Average Balance		Increase (Decrease) in Interest Expense
	2022				2021
(Dollars in thousands)	Average Balance		Cost(1)		Average Balance		Cost(1)
Checking Accounts	$	228,451	0.11	%	$	190,608	0.11	%	$	37,843	$	11
Savings and Money Market Accounts	467,323		0.16		375,022		0.16		92,301		29
Certificate Accounts	160,215		0.34		185,493		0.65		(25,278)		(165)
Other Borrowings (2)	49,356		0.24		82,641		0.92		(33,285)		(159)
Junior Subordinated Debentures	5,155		2.02		5,155		1.91		—		1
Subordinated Debentures	30,000		5.25		30,000		5.25		—		—
Total Interest-Bearing Liabilities	$	940,500	0.34	%	$	868,919	0.50	%	$	71,581	$	(283)