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 SEPTEMBERJune 30, 2022
OR
☐ 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 | ☐ | No | ☐ | |||||||||||||||||
Indicate by check mark whether the registrant is a shell corporation (defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
CLASS: | ||||||||||||||||||||
OUTSTANDING SHARES AT: | SHARES: | |||||||||||||||||||
Common Stock, par value $0.01 per share | August 11, 2023 | 3,253,210 | ||||||||||||||||||
PAGE NO. | ||||||||
Item 1. | ||||||||
Consolidated Balance Sheets at | ||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
Item 3. | ||||||||
Item 4. | ||||||||
PART II. | ||||||||
Item | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item | ||||||||
Item 6. | ||||||||
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
June 30, 2023 | December 31, 2022 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS: | ||||||||
Cash and Cash Equivalents | $ | 77,179,815 | $ | 28,502,364 | ||||
Certificates of Deposit with Other Banks | 1,100,045 | 1,100,045 | ||||||
Investments: | ||||||||
Available For Sale ("AFS") | 541,952,626 | 550,148,284 | ||||||
Held To Maturity ("HTM") Net of Allowance for Credit Losses of $0 (Fair Value of $170,589,274 and $161,463,573 at June 30, 2023 and December 31, 2022, Respectively) | 176,622,658 | 167,437,616 | ||||||
Total Investments | 718,575,284 | 717,585,900 | ||||||
Loans Receivable, Net: | ||||||||
Held For Sale | 1,219,997 | 913,258 | ||||||
Held For Investment (Net of Allowance for Credit Losses of $12,283,325 and $11,177,753 at June 30, 2023 and December 31, 2022, Respectively) | 588,444,632 | 549,003,912 | ||||||
Total Loans Receivable, Net | 589,664,629 | 549,917,170 | ||||||
Accrued Interest Receivable: | ||||||||
Loans | 1,464,926 | 1,462,039 | ||||||
Investments | 3,538,475 | 3,348,635 | ||||||
Total Accrued Interest Receivable | 5,003,401 | 4,810,674 | ||||||
Operating Lease Right-of-Use ("ROU") Assets | 1,633,474 | 1,860,997 | ||||||
Land Held for Sale | 1,096,614 | 1,096,614 | ||||||
Premises and Equipment, Net | 28,833,709 | 27,959,793 | ||||||
Federal Home Loan Bank ("FHLB") Stock, at Cost | 658,600 | 650,600 | ||||||
Other Real Estate Owned ("OREO") | 105,000 | 119,700 | ||||||
Bank Owned Life Insurance ("BOLI") | 27,624,535 | 27,318,098 | ||||||
Goodwill | 1,199,754 | 1,199,754 | ||||||
Other Assets | 19,565,343 | 19,244,454 | ||||||
Total Assets | $ | 1,472,240,203 | $ | 1,381,366,163 | ||||
LIABILITIES: | ||||||||
Deposit Accounts | $ | 1,179,473,071 | $ | 1,110,085,296 | ||||
Borrowings from Federal Reserve Bank ("FRB") | 69,200,000 | 44,080,000 | ||||||
Other Borrowings | 17,890,095 | 27,588,147 | ||||||
Junior Subordinated Debentures | 5,155,000 | 5,155,000 | ||||||
Subordinated Debentures | 26,500,000 | 26,500,000 | ||||||
Operating Lease Liabilities | 1,676,802 | 1,904,285 | ||||||
Other Liabilities | 9,036,474 | 5,819,807 | ||||||
Total Liabilities | $ | 1,308,931,442 | $ | 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 June 30, 2023 and December 31, 2022 | $ | 82,949,000 | $ | 82,949,000 | ||||
Common Stock, $0.01 Par Value; 5,000,000 Shares Authorized; 3,454,669 and 3,453,817 Shares Issued and 3,253,736 and 3,252,884 Shares Outstanding at June 30, 2023 and December 31, 2022, Respectively | 34,547 | 34,538 | ||||||
Additional Paid-In Capital ("APIC") | 18,250,501 | 18,230,187 | ||||||
Treasury Stock, at Cost (200,933 Shares) | (4,330,712 | ) | (4,330,712 | ) | ||||
Accumulated Other Comprehensive Loss ("AOCI") | (39,751,959 | ) | (40,778,646 | ) | ||||
Retained Earnings | 106,157,384 | 104,129,261 | ||||||
Total Shareholders' Equity | $ | 163,308,761 | $ | 160,233,628 | ||||
Total Liabilities and Shareholders' Equity | $ | 1,472,240,203 | $ | 1,381,366,163 | ||||
| September 30, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | (Audited) | ||||||||||
| ASSETS: | |||||||||||
| Cash and Cash Equivalents | $ | 20,068,111 | $ | 27,622,851 | |||||||
| Certificates of Deposit with Other Banks | 1,100,045 | 1,100,045 | |||||||||
| Investments: | |||||||||||
| Available For Sale ("AFS") | 591,550,461 | 682,849,058 | |||||||||
| Held To Maturity ("HTM") (Fair Value of $131,615,851 and $23,720,408 at September 30, 2022 and December 31, 2021, Respectively) | 137,968,847 | 23,506,768 | |||||||||
| Total Investments | 729,519,308 | 706,355,826 | |||||||||
| Loans Receivable, Net: | |||||||||||
| Held For Sale | 2,141,011 | 4,038,414 | |||||||||
| Held For Investment (Net of Allowance of $11,298,845 and $11,087,164 at September 30, 2022 and December 31, 2021, Respectively) | 520,953,262 | 495,458,395 | |||||||||
| Total Loans Receivable, Net | 523,094,273 | 499,496,809 | |||||||||
| Accrued Interest Receivable: | |||||||||||
| Loans | 1,112,227 | 1,333,155 | |||||||||
| Investments | 3,381,208 | 2,419,335 | |||||||||
| Total Accrued Interest Receivable | 4,493,435 | 3,752,490 | |||||||||
| Operating Lease Right-of-Use ("ROU") Assets | 1,974,088 | 2,252,424 | |||||||||
| Land Held for Sale | 1,096,614 | 1,529,691 | |||||||||
| Premises and Equipment, Net | 27,423,707 | 25,236,915 | |||||||||
| Federal Home Loan Bank ("FHLB") Stock, at Cost | 650,500 | 585,700 | |||||||||
| Other Real Estate Owned ("OREO") | 119,700 | 129,700 | |||||||||
| Bank Owned Life Insurance ("BOLI") | 27,167,099 | 26,709,897 | |||||||||
| Goodwill | 1,199,754 | 1,199,754 | |||||||||
| Other Assets | 20,074,279 | 5,241,410 | |||||||||
| Total Assets | $ | 1,357,980,913 | $ | 1,301,213,512 | |||||||
| LIABILITIES: | |||||||||||
| Deposit Accounts | $ | 1,118,816,745 | $ | 1,115,962,963 | |||||||
| Borrowings from Federal Reserve Bank ("FRB") | 1,000,000 | — | |||||||||
| Other Borrowings | 38,809,115 | 26,785,393 | |||||||||
| Junior Subordinated Debentures | 5,155,000 | 5,155,000 | |||||||||
| Subordinated Debentures | 29,000,000 | 30,000,000 | |||||||||
| Operating Lease Liabilities | 2,014,086 | 2,293,295 | |||||||||
| Other Liabilities | 6,590,080 | 5,494,336 | |||||||||
| Total Liabilities | $ | 1,201,385,026 | $ | 1,185,690,987 | |||||||
| SHAREHOLDERS’ EQUITY: | |||||||||||
| Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP, $1,000 Par Value; 82,949 and 0 Shares Authorized, Issued and Outstanding at September 30, 2022 and December 31, 2021, respectively | $ | 82,949,000 | $ | — | |||||||
| Common Stock, $0.01 Par Value; 5,000,000 Shares Authorized; 3,453,817 Shares Issued and 3,252,884 Shares Outstanding at September 30, 2022 and December 31, 2021 | 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") | (41,517,322) | 5,215,107 | |||||||||
| Retained Earnings | 101,230,196 | 96,373,405 | |||||||||
| Total Shareholders' Equity | $ | 156,595,887 | $ | 115,522,525 | |||||||
| Total Liabilities and Shareholders' Equity | $ | 1,357,980,913 | $ | 1,301,213,512 | |||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Interest Income: | ||||||||||||||||
Loans | $ | 8,071,689 | $ | 6,205,296 | $ | 15,481,852 | $ | 12,301,982 | ||||||||
Investments | 7,014,243 | 3,128,220 | 13,787,725 | 5,729,178 | ||||||||||||
Other | 467,123 | 54,047 | 501,555 | 56,263 | ||||||||||||
Total Interest Income | 15,553,055 | 9,387,563 | 29,771,132 | 18,087,423 | ||||||||||||
Interest Expense: | ||||||||||||||||
Deposits | 5,171,281 | 397,630 | 8,086,549 | 742,697 | ||||||||||||
FHLB Advances and Other Borrowed Money | 822,547 | 17,220 | 1,450,329 | 47,003 | ||||||||||||
Subordinated Debentures | 347,812 | 393,750 | 695,625 | 787,500 | ||||||||||||
Junior Subordinated Debentures | 87,134 | 35,213 | 170,740 | 61,252 | ||||||||||||
Total Interest Expense | 6,428,774 | 843,813 | 10,403,243 | 1,638,452 | ||||||||||||
Net Interest Income | 9,124,281 | 8,543,750 | 19,367,889 | 16,448,971 | ||||||||||||
Provision for Credit Losses | 221,000 | — | 221,000 | — | ||||||||||||
Net Interest Income After Provision for Credit Losses | 8,903,281 | 8,543,750 | 19,146,889 | 16,448,971 | ||||||||||||
Non-Interest Income: | ||||||||||||||||
Gain on Sale of Loans | 201,059 | 510,931 | 394,940 | 1,224,824 | ||||||||||||
Service Fees on Deposit Accounts | 301,264 | 271,887 | 570,877 | 529,378 | ||||||||||||
Commissions From Insurance Agency | 185,568 | 245,769 | 348,367 | 385,273 | ||||||||||||
Trust Income | 457,098 | 355,673 | 839,306 | 720,419 | ||||||||||||
BOLI Income | 156,233 | 148,962 | 306,437 | 306,203 | ||||||||||||
ATM and Check Card Fee Income | 749,814 | 704,133 | 1,551,836 | 1,421,400 | ||||||||||||
Grant Income | — | 170,699 | — | 170,699 | ||||||||||||
Other | 200,193 | 229,664 | 439,843 | 482,846 | ||||||||||||
Total Non-Interest Income | 2,251,229 | 2,637,718 | 4,451,606 | 5,241,042 | ||||||||||||
Non-Interest Expense: | ||||||||||||||||
Compensation and Employee Benefits | 5,024,089 | 4,904,606 | 10,264,885 | 9,961,226 | ||||||||||||
Occupancy | 772,722 | 694,650 | 1,579,156 | 1,407,436 | ||||||||||||
Advertising | 261,801 | 279,596 | 506,396 | 539,929 | ||||||||||||
Depreciation and Maintenance of Equipment | 598,388 | 585,216 | 1,186,347 | 1,138,537 | ||||||||||||
FDIC Insurance Premiums | 217,503 | 84,183 | 307,809 | 196,225 | ||||||||||||
Writedown of Land Held for Sale | — | 93,733 | — | 433,077 | ||||||||||||
Consulting | 142,396 | 169,231 | 355,731 | 333,981 | ||||||||||||
Debit Card Expenses | 352,287 | 326,344 | 688,933 | 610,133 | ||||||||||||
Data Processing | 315,844 | 278,687 | 628,077 | 513,078 | ||||||||||||
Other | 1,223,613 | 1,012,303 | 2,421,897 | 1,889,771 | ||||||||||||
Total Non-Interest Expense | 8,908,643 | 8,428,549 | 17,939,231 | 17,023,393 | ||||||||||||
Income Before Income Taxes | 2,245,867 | 2,752,919 | 5,659,264 | 4,666,620 | ||||||||||||
Provision for Income Taxes | 467,670 | 589,116 | 1,206,967 | 953,786 | ||||||||||||
Net Income | 1,778,197 | 2,163,803 | 4,452,297 | 3,712,834 | ||||||||||||
Net Income Per Common Share (Basic) | $ | 0.55 | $ | 0.67 | $ | 1.37 | $ | 1.14 | ||||||||
Cash Dividend Per Share on Common Stock | $ | 0.13 | $ | 0.40 | $ | 0.26 | $ | 0.52 | ||||||||
Weighted Average Shares Outstanding (Basic) | 3,253,736 | 3,252,884 | 3,253,736 | 3,252,884 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Interest Income: | |||||||||||||||||||||||
| Loans | $ | 6,306,312 | $ | 7,261,810 | $ | 18,608,294 | $ | 20,039,222 | |||||||||||||||
| Investments | 4,892,385 | 2,403,203 | 10,621,563 | 7,437,590 | |||||||||||||||||||
| Other | 94,436 | 3,401 | 150,699 | 6,450 | |||||||||||||||||||
| Total Interest Income | 11,293,133 | 9,668,414 | 29,380,556 | 27,483,262 | |||||||||||||||||||
| Interest Expense: | |||||||||||||||||||||||
| Deposits | 675,765 | 376,136 | 1,418,462 | 1,257,205 | |||||||||||||||||||
| FHLB Advances and Other Borrowed Money | 44,386 | 50,756 | 91,389 | 389,142 | |||||||||||||||||||
| Subordinated Debentures | 389,375 | 393,750 | 1,176,875 | 1,181,250 | |||||||||||||||||||
| Junior Subordinated Debentures | 49,842 | 23,955 | 111,094 | 72,974 | |||||||||||||||||||
| Total Interest Expense | 1,159,368 | 844,597 | 2,797,820 | 2,900,571 | |||||||||||||||||||
| Net Interest Income | 10,133,765 | 8,823,817 | 26,582,736 | 24,582,691 | |||||||||||||||||||
| Reversal of Provision for Loan Losses | — | (665,000) | — | (2,270,000) | |||||||||||||||||||
| Net Interest Income After Reversal of Provision for Loan Losses | 10,133,765 | 9,488,817 | 26,582,736 | 26,852,691 | |||||||||||||||||||
| Non-Interest Income: | |||||||||||||||||||||||
| Gain on Sale of Loans | 287,081 | 932,340 | 1,511,905 | 3,022,755 | |||||||||||||||||||
| Service Fees on Deposit Accounts | 279,909 | 251,440 | 809,287 | 702,548 | |||||||||||||||||||
| Commissions From Insurance Agency | 235,506 | 187,657 | 620,779 | 468,083 | |||||||||||||||||||
| Trust Income | 363,830 | 359,035 | 1,084,249 | 1,005,517 | |||||||||||||||||||
| BOLI Income | 150,999 | 155,000 | 457,202 | 485,000 | |||||||||||||||||||
| ATM and Check Card Fee Income | 687,773 | 615,568 | 2,109,173 | 1,811,216 | |||||||||||||||||||
| Grant Income | — | 1,826,265 | 170,699 | 1,826,265 | |||||||||||||||||||
| Other | 219,289 | 202,314 | 702,135 | 669,379 | |||||||||||||||||||
| Total Non-Interest Income | 2,224,387 | 4,529,619 | 7,465,429 | 9,990,763 | |||||||||||||||||||
| Non-Interest Expense: | |||||||||||||||||||||||
| Compensation and Employee Benefits | 5,019,920 | 4,757,937 | 14,981,146 | 14,145,363 | |||||||||||||||||||
| Occupancy | 703,310 | 641,555 | 2,110,746 | 1,922,369 | |||||||||||||||||||
| Advertising | 153,460 | 275,947 | 693,389 | 671,186 | |||||||||||||||||||
| Depreciation and Maintenance of Equipment | 751,739 | 781,217 | 2,278,890 | 2,354,958 | |||||||||||||||||||
| FDIC Insurance Premiums | 87,858 | 73,845 | 284,083 | 215,181 | |||||||||||||||||||
| Net Cost (Recovery) from Operation of OREO | 10,000 | 55,000 | 10,000 | (115,840) | |||||||||||||||||||
| Writedown of Land Held for Sale | — | — | 433,077 | — | |||||||||||||||||||
| Consulting | 179,318 | 182,684 | 513,299 | 512,998 | |||||||||||||||||||
| Debit Card Expenses | 307,092 | 284,434 | 917,225 | 859,357 | |||||||||||||||||||
| Telephone | 97,204 | 100,113 | 291,069 | 313,229 | |||||||||||||||||||
| Postage | 59,654 | 16,469 | 182,202 | 147,600 | |||||||||||||||||||
| General Insurance | 76,566 | 77,731 | 257,577 | 248,691 | |||||||||||||||||||
| Other | 831,564 | 801,964 | 2,348,375 | 1,829,544 | |||||||||||||||||||
| Total Non-Interest Expense | 8,277,685 | 8,048,896 | 25,301,078 | 23,104,636 | |||||||||||||||||||
| Income Before Income Taxes | 4,080,467 | 5,969,540 | 8,747,087 | 13,738,818 | |||||||||||||||||||
| Provision for Income Taxes | 854,664 | 1,327,070 | 1,808,450 | 2,993,414 | |||||||||||||||||||
| Net Income | 3,225,803 | 4,642,470 | 6,938,637 | 10,745,404 | |||||||||||||||||||
| Net Income Per Common Share (Basic) | $ | 0.99 | $ | 1.43 | $ | 2.13 | $ | 3.30 | |||||||||||||||
| Cash Dividend Per Share on Common Stock | $ | 0.12 | $ | 0.11 | $ | 0.64 | $ | 0.33 | |||||||||||||||
| Weighted Average Shares Outstanding (Basic) | 3,252,884 | 3,252,884 | 3,252,884 | 3,252,884 | |||||||||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) Three Months Ended June 30, 2023 2022 Net Income Other Comprehensive Loss: Unrealized Holding Losses on Securities AFS, Net of Tax Benefit of $(1,488,845) and $(4,338,998) at June 30, 2023 and 2022, Respectively Amortization of Unrealized Losses (Gains) on AFS Securities Transferred to HTM, Net of Tax Expense of $740 and $670 at June 30, 2023 and 2022, Respectively Other Comprehensive Loss, Net of Tax Comprehensive Loss Six Months Ended June 30, 2023 2022 Net Income Other Comprehensive Income (Loss): Unrealized Holding Gains (Losses) on Securities AFS, Net of Tax Expense (Benefit) of $318,841 and $(10,892,436) at June 30, 2023 and 2022, Respectively Amortization of Unrealized Losses (Gains) on AFS Securities Transferred to HTM, Net of Tax Expense of $1,621 and $619 at June 30, 2023 and 2022, Respectively Other Comprehensive Income (Loss), Net of Tax Comprehensive Income (Loss) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.Income (Unaudited) $ 1,778,197 $ 2,163,803 (4,553,333 ) (13,376,260 ) 2,219 2,011 (4,551,114 ) (13,374,249 ) $ (2,772,917 ) $ (11,210,446 ) $ 4,452,297 $ 3,712,834 1,021,823 (33,598,964 ) 4,864 1,857 1,026,687 (33,597,107 ) $ 5,478,984 $ (29,884,273 ) Three Months Ended September 30, 2022 2021 Net Income $ 3,225,803 $ 4,642,470 Other Comprehensive (Loss) Income: Unrealized Holding Losses on Securities AFS, Net of Taxes of $(4,263,005) and $(923,669) at September 30, 2022 and 2021, Respectively (13,137,592) (2,859,580) Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $757 and $437 at September 30, 2022 and 2021, Respectively 2,270 1,311 Other Comprehensive Loss, Net of Tax (13,135,322) (2,858,269) Comprehensive (Loss) Income $ (9,909,519) $ 1,784,201 Nine Months Ended September 30, 2022 2021 Net Income $ 6,938,637 $ 10,745,404 Other Comprehensive Loss: Unrealized Holding Losses on Securities AFS, Net of Taxes of $(15,155,441) and $(1,588,001) at September 30, 2022 and 2021, Respectively (46,736,556) (4,896,535) Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $1,376 and $72 at September 30, 2022 and 2021, Respectively 4,127 215 Other Comprehensive Loss, Net of Tax (46,732,429) (4,896,320) Comprehensive (Loss) Income $ (39,793,792) $ 5,849,084
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity (Unaudited) For the Three and Preferred Stock Common Stock APIC Treasury Stock AOCI (Loss) Retained Earnings Total Balance at December 31, 2021 Net Income Other Comprehensive Loss, Net of Tax Cash Dividends on Common Stock Balance at March 31, 2022 Net Income Other Comprehensive Loss, Net of Tax Preferred Stock issuance Cash Dividends on Common Stock Balance at June 30, 2022 Preferred Stock Common Stock APIC Treasury Stock AOCI (Loss) Retained Earnings Total Balance at December 31, 2022 Adoption of ASU 2016-13 Net Income Other Comprehensive Income, Net of Tax Employee Stock Purchase Plan Cash Dividends on Common Stock Balance at March 31, 2023 Net Income Other Comprehensive Loss, Net of Tax Employee Stock Purchase Plan Cash Dividends on Common Stock Balance at June 30, 2023 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense Discount Accretion and Premium Amortization, net Provision for Credit Losses Earnings on BOLI Gain on Sales of Loans Write Down of Land Held for Sale Write Down of OREO Amortization of Operating Lease ROU Assets Proceeds From Sale of Loans Held For Sale Origination of Loans Held For Sale Increase in Accrued Interest Receivable Other, Net Net Cash Provided By Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Investments AFS Proceeds from Paydowns and Maturities of Investments AFS Purchase of Investments HTM Proceeds from Paydowns and Maturities of Investments HTM Purchase of FHLB Stock Increase in Loans Receivable Purchase and Improvement of Premises and Equipment Net Cash Used By Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Deposit Accounts (Decrease) Increase in Other Borrowings, Net Proceeds from FRB Borrowings Repayment of FRB Borrowings Issuance of Preferred Stock Proceeds from Employee Stock Purchase Plan Dividends to Common Stock Shareholders Net Cash Provided By Financing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Period Cash and Cash Equivalents at End of Period SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid for Interest Cash Paid for Taxes Non-Cash Transactions: Other Comprehensive Income (Loss) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form NOTE 2 - PRINCIPLES OF CONSOLIDATION The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Security Federal Bank (the “Bank”) and the Bank’s wholly owned subsidiaries, Security Federal Investments, Inc. ("SFINV") 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 - 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, On January 1, 2023, the Company In addition, CECL made changes to the The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on AFS 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 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 $729,000 at June 30, 2023 and was excluded from the 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 Allowance for Credit Losses – Available for Sale Securities For AFS 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 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 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 AFS security is confirmed to be uncollectible or Accrued interest receivable on AFS debt securities totaled $2.8 million at June 30, 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 The accrual of interest is generally discontinued when a loan becomes 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 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 collateral. • Commercial - Owner occupied commercial mortgages consist of loans to purchase or re-finance owner occupied nonresidential properties. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. 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 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. Typically, 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. The primary risk associated with non-owner occupied commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are 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 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 declining collateral values. • Other - Consumer loans consist of loans to finance unsecured home improvements, student loans, automobiles and revolving lines of credit that can be secured or unsecured. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral. The Company calculates the allowance for credit losses on loans for each pool of loans using a remaining life loss methodology with a two quarter reasonable and supportable forecast period and an immediate reversion period. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses on loans to 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 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 date 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. The Company records an allowance for credit losses - unfunded commitments unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for unfunded commitments in the Company’s income 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 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 wouldn't be published until June 2023. The amendments are effective immediately for Other accounting standards that have been issued or proposed by the 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 Three Months Ended June 30, 2023 2022 Income Shares EPS Income Shares EPS Basic EPS Six Months Ended June 30, 2023 2022 Income Shares EPS Income Shares EPS Basic EPS 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 NOTE 6 - INVESTMENTS, AVAILABLE FOR SALE ("AFS") The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investments June 30, 2023 Amortized Gross Unrealized Gross Unrealized Fair Student Loan Pools Small Business Administration (“SBA”) Bonds Tax Exempt Municipal Bonds Taxable Municipal Bonds Mortgage-Backed Securities ("MBS") Total Available For Sale December 31, 2022 Amortized Gross Unrealized Gross Unrealized Fair Student Loan Pools SBA Bonds Tax Exempt Municipal Bonds Taxable Municipal Bonds MBS Total Available For Sale 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 MBS included in the tables above and below are issued or guaranteed by an agency of the United States government such as Ginnie Mae, or by Government Sponsored Entities ("GSEs"), including Fannie Mae and Freddie Mac. Ginnie Mae MBS are backed by the full faith and credit of the United States government, while those issued by GSEs are not. Also included in MBS in the tables above and below are private label The amortized cost and fair value of investments AFS at June 30, 2023 Investments AFS: Amortized Cost Fair Value One Year or Less After One – Five Years After Five – Ten Years More Than Ten Years MBS AFS Total AFS At There were no sales of investments AFS The following June 30, 2023 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Student Loan Pools SBA Bonds Tax Exempt Municipal Bonds Taxable Municipal Bonds MBS The following table shows the December 31, 2022 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Student Loan Pools SBA Bonds Tax Exempt Municipal Bonds Taxable Municipal Bonds MBS Securities classified as investments AFS are recorded at fair market value. At 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, Accrued interest receivable on AFS debt securities totaled $2.8 million at June 30, 2023 and was excluded from the NOTE 7 - INVESTMENTS, HELD TO MATURITY ("HTM") The Company’s investments HTM portfolio is recorded at amortized cost. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investments HTM at June 30, 2023 Amortized Gross Unrealized Gross Unrealized Fair US Treasury Bonds FHLB Bond Student Loan Pools SBA Bonds Taxable Municipal Bonds MBS Total Held To Maturity December 31, 2022 Amortized Gross Unrealized Gross Unrealized Fair US Treasury Bonds FHLB Bond Student Loan Pools SBA Bonds Taxable Municipal Bonds MBS Total HTM At The estimate of expected credit losses on investments HTM 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 CMO securities which are not explicitly or implicitly guaranteed by the U.S. government are evaluated utilizing underlying pool data such as historical loss rates, loan-to-value ratios and credit enhancement data. All mortgage-backed securities issued by government-sponsored corporations are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The state and local governments securities held by the Company are highly rated by major rating agencies. As a result of the analysis, there was no allowance for credit losses recorded for investments HTM as of June 30, 2023. As of June 30, 2023, there were no HTM debt securities that were classified as either nonaccrual or 90 days or more past due and still accruing. Accrued interest receivable on HTM debt securities totaled $729,000 at June 30, 2023 and was excluded from the estimate of credit losses. 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. June 30, 2023 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses US Treasury Bonds FHLB Bond Student Loan Pools Taxable Municipal Bonds MBS December 31, 2022 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses US Treasury Bonds FHLB Bond Student Loan Pools Taxable Municipal Bonds MBS At June 30, 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 $54.1 million, compared to an amortized cost and fair value of $25.3 million and $24.5 million at December 31, 2022 respectively. NOTE 8 - LOANS RECEIVABLE, NET Loans receivable, net, consisted of the following as of the dates indicated below: June 30, 2023 December 31, 2022 Real Estate Loans: Construction Residential Mortgage Commercial Commercial and Agricultural Loans Consumer Loans: Home Equity Lines of Credit (HELOC) Other Consumer Total Loans Held for Investment, Gross Less: Allowance for Credit Losses Deferred Loan Fees Total Loans Receivable, Net 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 The Term Loans by Year of Origination 2023 2022 2021 2020 2019 Prior Revolving Total Real Estate - Construction Pass Caution Special Mention Substandard Total Current period gross write-offs Real Estate - Mortgage Pass Caution Special Mention Substandard Total Current period gross write-offs Real Estate - Commercial Pass Caution Special Mention Substandard Total Current period gross write-offs Commercial and Agricultural Pass Caution Special Mention Substandard Total Current period gross write-offs Home Equity Lines of Credit Pass Caution Special Mention Substandard Total Current period gross write-offs Consumer loans Pass Caution Special Mention Substandard Total Current period gross write-offs Total Loans The table below December 31, 2022 Pass Caution Special Mention Substandard Total Loans Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total Past Due and The tables below present an age analysis of past due balances by loan category at June 30, 2023 30-59 Days 60-89 Days 90 Days or Total Past Total Loans Past Due Past Due More Past Due Due Current Receivable Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total December 31, 2022 30-59 Days 60-89 Days 90 Days or Total Past Total Loans Past Due Past Due More Past Due Due Current Receivable Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total At June 30, The following table shows CECL Incurred Loss June 30, 2023 December 31, 2022 with No Allowance with an Allowance Nonaccrual Loans Nonaccrual Loans Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total Nonaccrual Loans The Company did not recognize any interest income on nonaccrual loans during the six months ended June 30, The following table represents the accrued interest receivables written off by reversing interest income during the three and six months ended June 30, 2023: For the Three Months Ended Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total Loans For the Six Months Ended Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total Loans Allowance for The following Three Months Ended June 30, 2023 Real Estate Consumer Construction Residential Commercial Agricultural HELOC Other Total Beginning Balance Provision for credit losses Charge-Offs Recoveries Ending Balance Six Months Ended June 30, 2023 Real Estate Consumer Construction Residential Commercial Agricultural HELOC Other Total Beginning Balance Adjustment to allowance for adoption of ASU 2016-13 Provision for credit losses Charge-Offs Recoveries Ending Balance The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans: • Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. • Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage. • Home equity lines of credit are generally secured by second mortgages on residential real estate property. • Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral. The following table summarizes the amortized cost of collateral dependent loans: June 30, 2023 Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Total Loans Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the Incurred Loss methodology. The following table shows the activity in the allowance for loan losses by category for the three and Three Months Ended June 30, 2022 Real Estate Consumer Construction Residential Commercial Agricultural HELOC Other Total Beginning Balance Provision for Loan Losses Charge-Offs Recoveries Ending Balance Six Months Ended June 30, 2022 Real Estate Consumer Construction Residential Commercial Agricultural HELOC Other Total Beginning Balance Provision for Loan Losses Charge-Offs Recoveries Ending Balance Prior to 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 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 Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total The following tables present information related to impaired loans by loan category at December 31, 2022 Recorded Unpaid Principal Related Impaired Loans Investment Balance Allowance Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total Three Months Ended June 30, 2022 Average Recorded Interest Income Impaired Loans Investment Recognized Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total Six Months Ended June 30, 2022 Average Recorded Interest Income Impaired Loans Investment Recognized Construction Real Estate Residential Real Estate Commercial Real Estate Commercial and Agricultural Consumer HELOC Other Consumer Total Modifications to Borrowers Experiencing Financial Difficulty The allowance for credit losses incorporates an estimate of lifetime expected credit losses and Because the effect of most modifications made to 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 Upon the Company's determination that a modified The Company had twomodified The Company did not modify any loans to borrowers experiencing financial difficulty during the six months ended June 30, 2023 or 2022. As of June 30, 2023 and 2022, there were no loans Allowance for Credit Losses - Unfunded Commitments The Company maintains an allowance for credit losses - unfunded commitments for credit exposures such as unfunded balances for existing lines of credit and The following tables present the balance and activity in the Three Months Ended June 30, 2023 Allowance for Credit Losses - Unfunded Commitments Beginning Balance Provision for unfunded commitments Ending Balance Allowance for Credit Losses - Unfunded Commitments Beginning Balance Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13 Reversal of provision for unfunded commitments Ending Balance NOTE 9 - DEPOSITS Deposits outstanding Deposit Account Type June 30, 2023 December 31, 2022 Checking Money Market Savings Certificates of Deposit Total The Company had $5.0 million in Certificates of deposits that met or exceeded the FDIC insurance limit of The amounts and scheduled maturities of June 30, 2023 December 31, 2022 Within 1 Year After 1 Year, Within 2 Years After 2 Years, Within 3 Years After 3 Years, Within 4 Years After 4 Years, Within 5 Years Total Certificates of Deposit NOTE 10 - BORROWINGS The Company had $17.9 million and $27.6 million in other borrowings at 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 As of a result of the discontinuation of LIBOR, effective June 30, 2023, the Capital Securities transitioned from its floating rate of three month LIBOR plus 170 basis points to a replacement rate of three month Secured Overnight Financing Rate ("SOFR") as adjusted by the relevant spread adjustment of 0.26161. 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 The The 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 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 During the NOTE 12 - REGULATORY MATTERS The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. The Company is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than Based on its capital levels at 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" Amount Ratio Amount Ratio Amount Ratio June 30, 2023 (Dollars in Thousands) Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) Total Risk-Based Capital (To Risk Weighted Assets) Common Equity Tier 1 Capital (To Risk Weighted Assets) Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) December 31, 2022 Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) Total Risk-Based Capital (To Risk Weighted Assets) Common Equity Tier 1 Capital (To Risk Weighted Assets) Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional 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 Investments AFS are recorded at fair value on a recurring basis. At Mortgage Loans Held for Sale The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with the FHLMC or other investors are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company. The Company usually delivers a commitment to, and receives funding from, the investor within 30 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination Land Held for Sale Land held for sale is reported at the lower of the carrying amount or fair value less costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral less estimated selling costs. The Company records land held for sale as nonrecurring level 3. Collateral Dependent Loans The Company does not record loans held for investment at fair value on a Fair value is estimated using one of Those Other Real Estate Owned Fair value adjustments to OREO are recorded at the lower of the carrying amount of the loan or the 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 Assets measured at fair value on a recurring basis were as follows at June 30, 2023 December 31, 2022 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Student Loan Pools SBA Bonds Tax Exempt Municipal Bonds Taxable Municipal Bonds MBS Total There were no liabilities measured at fair value on a recurring basis at 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 June 30, 2023 Assets: Level 1 Level 2 Level 3 Total Mortgage Loans Held For Sale Collateral Dependent Loans (1) Other Real Estate Owned Land Held for Sale Total December 31, 2022 Assets: Level 1 Level 2 Level 3 Total Mortgage Loans Held For Sale Collateral Dependent Loans (1) Other Real Estate Owned Land Held for Sale Total (1) Reported net of specific reserves. There were no specific reserves at There were no liabilities measured at fair value on a nonrecurring basis at For Level 3 assets measured at fair value on a recurring or non-recurring basis at Range of Inputs Level 3 Assets Valuation Technique Significant Unobservable Inputs June 30, 2023 December 31, 2022 Land Held for Sale Appraised Value/Comparable Sales Discounts to appraised values for estimated holding or selling costs 10% 10% Collateral Dependent Loans Appraised Value Discounts to appraised values for estimated holding and/or selling costs or age of appraisal 8% - 13% 8% - 13% 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 Certificates of Deposit with Other Banks Investment Securities HTM Loans Receivable, Net 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, 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 Deposits FHLB Advances and Borrowings from the FRB Other Borrowed Money Subordinated Debentures Junior Subordinated Debentures The following tables provide a summary of the carrying value and estimated fair value of the Company’s financial instruments at June 30, 2023 Carrying Fair Value Amount Level 1 Level 2 Level 3 Financial Assets: Dollars in thousands Cash and Cash Equivalents Certificates of Deposits with Other Banks Investment Securities AFS Investment Securities HTM Loans Receivable, Net FHLB Stock Land Held for Sale Financial Liabilities: Deposits: Checking, Savings & Money Market Accounts Certificates of Deposits Borrowings from FRB Other Borrowed Money Subordinated Debentures Junior Subordinated Debentures December 31, 2022 Carrying Fair Value Amount Level 1 Level 2 Level 3 Financial Assets: Dollars in thousands Cash and Cash Equivalents Certificates of Deposits with Other Banks Investment Securities AFS Investment Securities HTM Loans Receivable, Net FHLB Stock Land Held for Sale Financial Liabilities: Deposits: Checking, Savings & Money Market Accounts Certificates of Deposits Borrowings from FRB Other Borrowed Money Subordinated Debentures Junior Subordinated Debentures At June 30, Because no active market exists for a significant portion of the 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. NOTE 14 Revenue Recognition In accordance with The Company only applies the Service Fees on Deposit Accounts The ATM and Check Card Fee Income Check card fee income represents fees earned when a debit card issued by the 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 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 The following table presents the Company's non-interest income for the Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Non-interest income: Gain on Sale of Loans (1) Service Fees on Deposit Accounts Commissions From Insurance Agency (1) Trust Income BOLI Income (1) ATM and Check Card Fee Income Grant Income Other (1) Total non-interest income (1)Not within the scope of ASC 606 NOTE The Company has operating leases on six of its At Remainder of 2023 2024 2025 2026 2027 Thereafter Total undiscounted lease payments Less: effect of discounting Present value of estimated lease payments (lease liability) NOTE 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 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. 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 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. 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 Certain matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risk and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors, including, but not limited to: • potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as supply chain disruptions; higher inflation and the impact of current and future monetary policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) in response thereto; • 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 credit losses and provision for 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 credit losses not being adequate to cover actual losses, and require us to materially increase our allowance for 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 transition away from London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks; • fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; • secondary market conditions for loans and our ability to originate loans for sale and sell loans in the secondary market; • results of examinations of the 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 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; • our ability to attract and retain deposits; • our ability to control operating costs and expenses; • our ability to implement our business strategies; • the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • difficulties in reducing risks associated with the loans on our balance sheet; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • 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; • 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 • other risks described elsewhere in this document and in the Company's other reports filed with or furnished to the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). Some of these forward-looking statements are discussed in the Company's Financial Condition at Assets - Increase (Decrease) June 30, 2023 December 31, 2022 $ % Cash and Cash Equivalents Certificates of Deposits with Other Banks Investments AFS Investments HTM Total Loans Receivable, Net Accrued Interest Receivable OREO Operating Lease ROU Assets Land Held for Sale Premises and Equipment, Net FHLB Stock BOLI Goodwill Other Assets Total Assets Cash and cash equivalents Investments HTM Total loans receivable, net, Premises and Equipment, net increased $874,000 or 3.1% to $28.8 million at June 30, 2023 from $28.0 million at December 31, Liabilities Deposit Accounts Results of Operations for the Quarters Ended Net income decreased Net Interest Income The following table compares detailed average balances, Quarter Ended June 30, 2023 2022 (Dollars in thousands) Average Balance Interest Yield/ Rate (1) Average Balance Interest Yield/ Rate (1) Interest-Earning Assets: Loans Receivable, Net Taxable Investments Non-taxable Investments Deposits with other Banks Total Interest-Earning Assets Interest-Bearing Liabilities: Checking, Savings & Money Market Accounts Certificates Accounts Total Interest-Bearing Deposits Other Borrowings (2) Junior Subordinated Debentures Subordinated Debentures Total Interest-Bearing Liabilities Net Interest Rate Spread Tax Equivalent Net Interest Income/Margin Less: tax equivalent adjustment Net Interest Income (1) Annualized (2) Includes FRB borrowings and repurchase agreements. Net interest income Interest Income Total tax-equivalent interest income increased $6.1 million or 65.0% to $15.6 million for the quarter ended Interest income on loans Interest Expense Total interest expense increased $5.6 million or 661.9% to $6.4 million for the quarter ended June 30, 2023 compared to $844,000 for the same quarter in 2022 due to an increase in market interest rates combined with a $74.7 million increase in the average balance of these Interest expense on deposits increased $4.8 million to Provision for The amount of the provision 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. Management also reviews and incorporates certain ratios such as percentage of classified loans, average historical In addition, management performs a quarterly analysis of the 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 is excluded from the estimate of credit losses. The estimate of expected credit losses on held to maturity debt securities is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Additionally, private label collateralized mortgage obligation ("CMO") securities which are not explicitly or implicitly guaranteed by the U.S. government are evaluated utilizing underlying pool data such as historical loss rates, loan-to-value ratios and credit enhancement data. All mortgage-backed held to maturity 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 For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to 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 are 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 security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the 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. Based on the foregoing, the Company recorded a $221,000 provision for credit losses under the CECL methodology during the quarter ended June 30, 2023 compared to no provision for loan Non-Interest Income Non-interest income decreased Non-Interest Expense Non-interest expense increased Quarter Ended June 30, Increase (Decrease) 2023 2022 $ % Compensation and Employee Benefits Occupancy Advertising Depreciation and Maintenance of Equipment FDIC Insurance Premiums Write down of Land Held for Sale Consulting Debit Card Expense Data Processing Other Total Non-Interest Expense The increase in non-interest expense was primarily due to increases in compensation and employee benefits, occupancy, FDIC insurance premiums, data processing expenses and Provision For Income Taxes The provision for income taxes decreased $121,000 or 20.6% to $468,000 for the quarter ended June 30, 2023 from $589,000 for the same period in 2022 due to lower net income before taxes in 2023. Pre-tax net income was $2.2 million for the quarter ended June 30, 2023 compared to $2.8 million for the second quarter of 2022. The Company’s combined federal and state effective income tax rate was 20.8% and 21.4% for the quarters ended June 30, 2023 and 2022, respectively. Net Income Net Interest Income The following table compares detailed average balances, Six Months Ended June 30, 2023 2022 (Dollars in thousands) Average Balance Interest Yield/ Rate (1) Average Balance Interest Yield/ Rate (1) Interest-Earning Assets: Loans Receivable, Net Taxable Investments Non-taxable Investments Deposits with other Banks Total Interest-Earning Assets Interest-Bearing Liabilities: Checking, Savings & Money Market Accounts Certificates Accounts Total Interest-Bearing Deposits Other Borrowings (2) Junior Subordinated Debentures Subordinated Debentures Total Interest-Bearing Liabilities Net Interest Rate Spread Tax Equivalent Net Interest Income/Margin Less: tax equivalent adjustment Net Interest Income (1) Annualized (2) Includes FRB borrowings and repurchase agreements. Interest Income Total tax-equivalent interest income increased $11.6 million or 63.9% to $29.8 million for the six months ended June 30, 2023 compared to $18.2 million for the same period in 2022. Interest income on loans increased $3.2 million or 25.8% to $15.5 million for the six months ended June 30, 2023 from $12.3 million for the first six months of 2022. The increase in loan interest income was the result of a $66.3 million increase in the average loan portfolio balance combined with a 55 basis point increase in the average yield on loans receivable AS ADJUSTABLE-RATE LOANS RESET AND NEW LOANS WERE ORIGINATED AT HIGHER MARKET INTEREST RATES. Interest income from taxable investments increased $8.4 million or 166.2% to $13.5 million during the six months ended June 30, 2023 from $5.1 million for the first six months of 2022, due to a $23.0 million increase in the average balance of taxable investments combined with a 237 basis point increase in the average yield to 3.87%, REFLECTING HIGHER MARKET INTEREST RATES. Tax equivalent interest income from non-taxable investments decreased $397,000 to $384,000 during the six months ended June 30, 2023 due to a decrease in the average balance of non-taxable investments. Interest income from deposits with other banks increased Interest Expense Total interest expense increased $8.8 million or 534.9% to $10.4 million for the six months ended June 30, 2023 compared to $1.6 million for the same period in 2022 due to an increase in market interest rates combined with a $39.9 million increase in the average balance of these Interest expense on deposits increased $7.3 million to $8.1 million for the six months ended June 30, 2023 from $743,000 for the first six months of 2022, due to Provision for Credit Losses The Company recorded a $221,000 provision for credit losses for the six months ended Management also reviews and incorporates certain ratios such as percentage of classified loans, average historical 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 Based on the foregoing, the Company recorded $221,000 and $0 in provisions for credit losses for the Non-Interest Income Non-interest income decreased $789,000 or 15.1% to $4.5 million for the six months ended June 30, 2023 compared to $5.2 million for the six months ended June 30, 2022. The decrease NineSix Months Ended SeptemberJune 30, 20222023 and 20212022 $ — $ 34,538 $ 18,230,187 $ (4,330,712 ) $ 5,215,107 $ 96,373,405 $ 115,522,525 — — — — — 1,549,031 1,549,031 — — — — (20,222,858 ) — (20,222,858 ) — — — — — (390,346 ) (390,346 ) $ — $ 34,538 $ 18,230,187 $ (4,330,712 ) $ (15,007,751 ) $ 97,532,090 $ 96,458,352 — — — — — 2,163,803 2,163,803 — — — — (13,374,249 ) — (13,374,249 ) 82,949,000 — — — — — 82,949,000 — — — — — (1,301,154 ) (1,301,154 ) $ 82,949,000 $ 34,538 $ 18,230,187 $ (4,330,712 ) $ (28,382,000 ) $ 98,394,739 $ 166,895,752 $ 82,949,000 $ 34,538 $ 18,230,187 $ (4,330,712 ) $ (40,778,646 ) $ 104,129,261 $ 160,233,628 — — — — — (1,578,271 ) (1,578,271 ) — — — — — 2,674,100 2,674,100 — — — — 5,577,801 — 5,577,801 — 3 8,411 — — — 8,414 — — — — — (422,917 ) (422,917 ) $ 82,949,000 $ 34,541 $ 18,238,598 $ (4,330,712 ) $ (35,200,845 ) $ 104,802,173 $ 166,492,755 — — — — — 1,778,197 1,778,197 — — — — (4,551,114 ) — (4,551,114 ) — 6 11,903 — — — 11,909 — — — — — (422,986 ) (422,986 ) $ 82,949,000 $ 34,547 $ 18,250,501 $ (4,330,712 ) $ (39,751,959 ) $ 106,157,384 $ 163,308,761 Preferred Stock Common
StockAPIC Treasury Stock AOCI 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 Net Income — — — — — 3,178,792 3,178,792 Other Comprehensive Loss, Net of Tax — — — — (5,465,436) — (5,465,436) Cash Dividends on Common Stock — — — — — (357,817) (357,817) Balance at March 31, 2021 $ — $ 34,538 $ 18,230,187 $ (4,330,712) $ 7,475,514 $ 87,851,758 $ 109,261,285 Net Income — — — — — 2,924,142 2,924,142 Other Comprehensive Income, Net of Tax — — — — 3,427,385 — 3,427,385 Cash Dividends on Common Stock — — — — — (357,818) (357,818) Balance at June 30, 2021 $ — $ 34,538 $ 18,230,187 $ (4,330,712) $ 10,902,899 $ 90,418,082 $ 115,254,994 Net Income — — — — — 4,642,470 4,642,470 Other Comprehensive Loss, Net of Tax — — — — (2,858,269) — (2,858,269) Cash Dividends on Common Stock — — — — — (357,817) (357,817) Balance at September 30, 2021 $ — $ 34,538 $ 18,230,187 $ (4,330,712) $ 8,044,630 $ 94,702,735 $ 116,681,378 Preferred Stock Common
StockAPIC Treasury Stock AOCI (Loss) 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 Net Income — — — — — 2,163,803 2,163,803 Other Comprehensive Loss, Net of Tax — — — — (13,374,249) — (13,374,249) Preferred Stock issuance 82,949,000 — — — — — 82,949,000 Cash Dividends on Common Stock — — — — — (1,301,154) (1,301,154) Balance at June 30, 2022 $ 82,949,000 $ 34,538 $ 18,230,187 $ (4,330,712) $ (28,382,000) $ 98,394,739 $ 166,895,752 Net Income — — — — — 3,225,803 3,225,803 Other Comprehensive Loss, Net of Tax — — — — (13,135,322) — (13,135,322) Cash Dividends on Common Stock — — — — — (390,346) (390,346) Balance at September 30, 2022 $ 82,949,000 $ 34,538 $ 18,230,187 $ (4,330,712) $ (41,517,322) $ 101,230,196 $ 156,595,887 $ 4,452,297 $ 3,712,834 1,074,843 974,969 2,249,971 3,860,615 221,000 — (306,437 ) (306,203 ) (394,940 ) (1,224,824 ) — 433,077 14,700 — 227,523 214,520 13,689,002 38,267,947 (13,600,801 ) (33,594,750 ) (192,727 ) (153,344 ) 2,354,318 (198,921 ) $ 9,788,749 $ 11,985,920 $ (27,119,351 ) $ (59,674,541 ) 34,376,696 59,699,068 (16,936,251 ) (84,220,113 ) 7,780,215 2,622,788 (8,000 ) (64,800 ) (41,239,991 ) (6,930,842 ) (1,948,759 ) (2,703,463 ) $ (45,095,441 ) $ (91,271,903 ) $ 69,387,775 $ 33,718,714 (9,698,052 ) 15,559,633 346,055,000 145,665,000 (320,935,000 ) (145,665,000 ) — 82,949,000 20,323 — (845,903 ) (1,691,500 ) $ 83,984,143 $ 130,535,847 48,677,451 51,249,864 28,502,364 27,622,851 $ 77,179,815 $ 78,872,715 $ 9,242,225 $ 1,502,472 1,584,315 384,000 1,026,687 (33,597,107 ) Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 6,938,637 $ 10,745,404 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense 1,460,975 1,471,810 Discount Accretion and Premium Amortization, net 5,314,299 5,016,096 Reversal of Provision for Loan Losses — (2,270,000) Earnings on BOLI (457,202) (485,000) Gain on Sales of Loans (1,511,905) (3,022,755) Gain on Sales of OREO — (105,422) Write Down on OREO 10,000 20,000 Write Down of Land Held for Sale 433,077 — Amortization of Operating Lease ROU Assets 278,336 247,947 Proceeds From Sale of Loans Held For Sale 47,464,791 91,709,578 Origination of Loans Held For Sale (44,055,483) (86,582,554) Increase in Accrued Interest Receivable (740,945) (140,270) Other, Net 1,143,235 801,185 Net Cash Provided By Operating Activities $ 16,277,815 $ 17,406,019 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Investments AFS $ (59,674,541) $ (122,070,342) Proceeds from Paydowns and Maturities of Investments AFS 83,769,857 72,169,959 Purchase of Investments HTM (118,798,583) (8,261,528) Proceeds from Paydowns and Maturities of Investments HTM 4,333,488 3,985,667 Proceeds from Redemption of Certificates of Deposits with Other Banks — 250,000 Purchase of FHLB Stock (64,800) (1,900) Redemption of FHLB Stock — 1,393,300 Increase in Loans Receivable (25,494,867) (21,267,422) Proceeds From Sale of OREO — 454,332 Purchase and Improvement of Premises and Equipment (3,647,767) (1,091,300) Net Cash Used By Investing Activities $ (119,577,213) $ (74,439,234) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Deposit Accounts $ 2,853,782 $ 98,470,851 Repayment of FHLB Advances — (25,000,000) Increase in Other Borrowings, Net 12,023,722 13,490,672 Proceeds from FRB Borrowings 202,980,000 232,140,000 Repayment of FRB Borrowings (201,980,000) (265,465,000) Issuance of Preferred Stock 82,949,000 — Repurchase of Subordinated Debenture (1,000,000) — Dividends to Common Stock Shareholders (2,081,846) (1,073,452) Net Cash Provided By Financing Activities $ 95,744,658 $ 52,563,071 Net Decrease in Cash and Cash Equivalents (7,554,740) (4,470,144) Cash and Cash Equivalents at Beginning of Period 27,622,851 18,025,409 Cash and Cash Equivalents at End of Period $ 20,068,111 $ 13,555,265 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid for Interest $ 2,417,879 $ 2,569,016 Cash Paid for Income Taxes 1,099,000 2,995,442 Non-Cash Transactions: Other Comprehensive Loss (46,732,429) (4,896,320) Initial Recognition of Operating Lease ROU Asset — 254,739 Initial Recognition of Operating Lease Liability — 254,739 10-Q10-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”) 20212022 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K10-K for the year ended December 31, 20212022 (“2021 10-K”202210-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the ninethree and six months ended SeptemberJune 30, 20222023 are not necessarily indicative of the results that may be expected for the year ending December 31, 20222023 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., and Security Federal Insurance, Inc. (“SFINS”), and Security Financial Services Corporation (“SFSC”). SFINV was formed to hold investment securities and allow for better management of the securities portfolio. SFINS is an insurance agency offering auto, business, health and home insurance. Effective April 30, 2022, Collier Jennings Financial Corporation, a wholly owned subsidiary of SFINS, and its subsidiaries, Security Federal Auto Insurance, The Auto Insurance Store Inc., and Security Federal Premium Pay Plans Inc. and its wholly owned premium finance subsidiary were dissolved. Security Federal Premium Pay Plans Inc.’s ownership interests in four other premium finance subsidiaries were disposed of at an immaterial gain. Additionally, effective April 30, 2022, previously inactive SFSC was dissolved. All significant intercompany transactions and balances have been eliminated in consolidation.CRITICALSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES20212022 included in our 20212022 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.Thebelievesadopted 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.related allowance and all recoveries are creditedaccounting for AFS 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 AFS debt securities if management does not intend to sell and general economic conditions. Management evaluates the carrying value of the loans periodically and the allowancedoes not believe that it is adjusted accordingly.While management usesbest information availablemodified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $784,000, which is presented as a reduction to make evaluations, futurenet loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $1.2 million, which is recorded within "Other Liabilities." The adoption of CECL had an insignificant impact on the Company's held to maturity and AFS securities portfolios. The Company recorded a net decrease to retained earnings of $1.6 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments maynoted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be necessaryreported in accordance with previously applicable accounting standards (“Incurred Loss”).economic conditions differ substantiallythe Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.assumptions used in making these evaluations. estimate of credit losses.loancredit losses is subjectwas recorded on held to periodic evaluations by our bank regulatory agencies, includingmaturity securities at June 30, 2023.Board of Governors ofCompany has the Federal Reserve System ("Federal Reserve"),intent to sell the FDIC and the South Carolina Board of Financial Institutions, which may require adjustments to be made to the allowance based upon the information that is available at the time of their examination.The Company values impaired loans at the loan’s fair value ifsecurity or it is probablemore likely than not that the Company will be unablerequired to collect all amounts due accordingsell the security, the security is written down to fair value and the entire loss is recorded in earnings.terms ofsecurity. If the loan agreement atassessment indicates that a credit loss exists, the present value of expected cash flows expected to be collected are compared to the market priceamortized cost basis of the loan, if available,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.the valuewhen either of the underlying collateral. Expected cash flowscriteria regarding intent or requirement to sell is met. At June 30, 2023, there was no allowance for credit loss related to the AFS portfolio.requiredreported 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.discountedpast due when a scheduled payment has not been received 30 days after the contractual due date.loan’s effective interest rate. Whenborrower will be unable to service 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.interest and then to principal. Oncedetermine the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off.assumptionsits own internal data to measure historical credit loss experience within the loan pools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss rates over the calculated remaining life of loans by pool.estimatesinclude adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in determiningunderlying collateral, external factors and economic conditions not already captured.taxes payable or refundablestatements. The allowance for credit losses - unfunded commitments is estimated by loan segment at each balance sheet date under CECL 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 credit losses - unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.year, deferred income tax liabilitiesloan balance to arrive at the quantitative baseline portion of the allowance. The difference between the allowance previously determined and assetsthe current allowance was not material to the Company’s financial statements.events recognized differently inall entities and are applied prospectively. The Company does not expect these amendments to have a material effect on its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. The Company exercises considerable judgment in evaluatingstatements.amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimatesFASB or other standards-setting authorities are reevaluated onnot expected to have a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reportedmaterial impact on the Company’s consolidated financial statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code,position, results of operations or assessments made by the Internal Revenue Service.cash flows.SeptemberJune 30, 20222023 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 and nine months ended September 30, 2022 and 2021.periods indicated. $ 1,778,197 3,253,736 $ 0.55 $ 2,163,803 3,252,884 $ 0.67 $ 4,452,297 3,253,736 $ 1.37 $ 3,712,834 3,252,884 $ 1.14 Three Months Ended September 30, 2022 2021 Income Shares EPS Income Shares EPS Basic EPS $ 3,225,803 3,252,884 $ 0.99 $ 4,642,470 3,252,884 $ 1.43 Nine Months Ended September 30, 2022 2021 Income Shares EPS Income Shares EPS Basic EPS $ 6,938,637 3,252,884 $ 2.13 $ 10,745,404 3,252,884 $ 3.30 SeptemberJune 30, 2022 2023 and 2021,2022, the Company had no options outstanding and there was no activity during both the three and ninesix months ended SeptemberJune 30, 2022 2023 and 2021.2022. At those dates, there were 50,000 options available for grants.912available for saleAFS at the dates indicated were as follows: September 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Student Loan Pools $ 64,581,912 $ 33,352 $ 1,393,915 $ 63,221,349 Small Business Administration (“SBA”) Bonds 109,893,553 732,050 3,169,244 107,456,359 Tax Exempt Municipal Bonds 44,440,177 186,711 2,914,934 41,711,954 Taxable Municipal Bonds 65,767,015 — 14,346,937 51,420,078 Mortgage-Backed Securities ("MBS") 361,824,048 63,849 34,147,176 327,740,721 Total Available For Sale $ 646,506,705 $ 1,015,962 $ 55,972,206 $ 591,550,461 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Student Loan Pools $ 71,949,517 $ 317,722 $ 255,678 $ 72,011,561 SBA Bonds 139,854,620 1,018,231 1,079,774 139,793,077 Tax Exempt Municipal Bonds 44,757,755 5,226,600 — 49,984,355 Taxable Municipal Bonds 65,834,301 734,237 599,387 65,969,151 MBS 353,517,112 5,294,398 3,720,596 355,090,914 Total Available For Sale $ 675,913,305 $ 12,591,188 $ 5,655,435 $ 682,849,058 Cost Gains Losses Value $ 55,012,254 $ 24,574 $ 1,152,504 $ 53,884,324 86,796,430 456,505 3,092,775 84,160,160 21,565,323 389,470 1,293,005 20,661,788 64,709,727 — 12,620,947 52,088,780 366,537,252 20,821 35,400,499 331,157,574 $ 594,620,986 $ 891,370 $ 53,559,730 $ 541,952,626 Cost Gains Losses Value $ 60,854,658 $ 11,647 $ 1,709,323 $ 59,156,982 102,292,600 584,290 3,246,923 99,629,967 22,536,806 405,341 1,631,819 21,310,328 65,249,883 — 14,480,144 50,769,739 353,223,361 29,861 33,971,954 319,281,268 $ 604,157,308 $ 1,031,139 $ 55,040,163 $ 550,148,284 collateralized mortgage obligation ("CMO")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 SeptemberJune 30, 2022,2023, the Company held AFS private label CMO MBS with an amortized cost and fair value of $62.3$79.0 million and $56.4$72.0 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.SeptemberJune 30, 20222023 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 MBS are not due at a single maturity date, they are disclosed separately, rather than allocated over the maturity groupings set forth in the table below.September 30, 2022 Investment Securities AFS: Amortized Cost Fair Value One Year or Less $ 539,253 $ 537,497 After One – Five Years 5,898,094 5,834,644 After Five – Ten Years 82,128,559 78,136,356 More Than Ten Years 196,116,751 179,301,243 MBS AFS 361,824,048 327,740,721 Total AFS $ 646,506,705 $ 591,550,461 $ 15,149 $ 15,048 4,941,009 4,923,354 74,445,408 70,014,896 148,682,168 135,841,754 366,537,252 331,157,574 $ 594,620,986 $ 541,952,626 1013SeptemberJune 30, 2022,2023, the amortized cost and fair value of investments AFS pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $329.8$362.8 million and $309.0$332.5 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. securities during the ninesix months ended SeptemberJune 30, 2022 2023 and 2021;2022; and therefore, no proceeds from sales, gross gains or gross losses were recorded during those periods.tables showtable shows the gross unrealized losses and estimated fair value of AFS securities for which an allowance for credit losses has not been recorded aggregated by investment category and length of time that the individual AFS securities werehave been in a continuous unrealized loss position at June 30, 2023. $ 2,219,356 $ 9,373 $ 46,923,563 $ 1,143,131 $ 49,142,919 $ 1,152,504 4,287,109 12,009 41,374,318 3,080,766 45,661,427 3,092,775 510,280 23,629 12,712,000 1,269,376 13,222,280 1,293,005 — — 52,088,780 12,620,947 52,088,780 12,620,947 38,697,258 1,140,729 290,776,832 34,259,770 329,474,090 35,400,499 $ 45,714,003 $ 1,185,740 $ 443,875,493 $ 52,373,990 $ 489,589,496 $ 53,559,730 dates indicated. September 30, 2022 Less than 12 Months 12 Months or More Total Fair
ValueUnrealized
LossesFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesStudent Loan Pools $ 37,822,551 $ 718,181 $ 23,576,616 $ 675,734 $ 61,399,167 $ 1,393,915 SBA Bonds 13,370,130 906,319 40,092,297 2,262,925 53,462,427 3,169,244 Tax Exempt Municipal Bonds 33,440,787 2,914,934 — — 33,440,787 2,914,934 Taxable Municipal Bonds 40,292,536 10,429,037 11,127,542 3,917,900 51,420,078 14,346,937 MBS 214,230,551 18,654,810 107,126,659 15,492,366 321,357,210 34,147,176 $ 339,156,555 $ 33,623,281 $ 181,923,114 $ 22,348,925 $ 521,079,669 $ 55,972,206 December 31, 2021 Less than 12 Months 12 Months or More Total Fair
ValueUnrealized
LossesFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesStudent Loan Pools $ 36,816,929 $ 216,012 $ 8,826,508 $ 39,666 $ 45,643,437 $ 255,678 SBA Bonds 15,916,497 359,541 48,791,470 720,233 64,707,967 1,079,774 Taxable Municipal Bonds 28,032,194 413,490 4,342,641 185,897 32,374,835 599,387 MBS 160,097,766 2,865,948 22,951,882 854,648 183,049,648 3,720,596 $ 240,863,386 $ 3,854,991 $ 84,912,501 $ 1,800,444 $ 325,775,887 $ 5,655,435 $ 24,768,260 $ 637,963 $ 30,684,124 $ 1,071,360 $ 55,452,384 $ 1,709,323 8,403,975 120,766 45,969,373 3,126,157 54,373,348 3,246,923 8,050,944 718,645 4,929,289 913,174 12,980,233 1,631,819 14,427,796 3,196,761 36,341,943 11,283,383 50,769,739 14,480,144 146,016,464 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 SeptemberJune 30, 20222023 and December 31, 2021, 4432022, 427 and 199416 individual investments AFS securities were in a loss position, including 140356 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 increase in unrealized losses within the AFS portfolio during the nine months ended September 30, 2022 resulted in a $14.9 million increase in net deferred taxes, which is included in "Other Assets" on the Consolidated Balance Sheets at September 30, 2022.theseunrealized 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”).A further decline in national and local economic conditions, as a result of the effects of inflation, a inflation, a potential recession or slowed economic growth, and any governmental or societal responses to the novel coronavirus of 2019 (“COVID-19”) pandemic, among other factors, may, however, have an adverse impact onallowance 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 todeemed necessary.difference between the investment’s cost and its fair value at the balance sheet dateestimate of the reporting period for which the assessment is made, or the Company may recognize a portion in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment. There was no OTTI recognized during the nine months ended September 30, 2022 and the year ended December 31, 2021.1114September 30, 2022 and December 31, 2021the date indicated were as follows:September 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value US Treasury Bonds $ 34,422,185 $ — $ 657,961 $ 33,764,224 SBA Bonds 3,653,646 176,069 — 3,829,715 Taxable Municipal Bonds 949,306 — 51,976 897,330 MBS 98,943,710 1,860 5,820,988 93,124,582 Total Held To Maturity $ 137,968,847 $ 177,929 $ 6,530,925 $ 131,615,851 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value MBS $ 23,506,768 $ 577,005 $ 363,365 $ 23,720,408 Total Held To Maturity $ 23,506,768 $ 577,005 $ 363,365 $ 23,720,408 Cost Gains Losses Value $ 34,691,658 $ — $ 709,002 $ 33,982,656 1,000,000 — 11,448 988,552 17,975,057 69,938 81,883 17,963,112 13,148,556 604,114 — 13,752,670 957,062 — 55,302 901,760 108,850,325 507 5,850,308 103,000,524 $ 176,622,658 $ 674,559 $ 6,707,943 $ 170,589,274 Cost Gains Losses Value $ 34,511,849 $ — $ 682,198 $ 33,829,651 1,000,000 — 1,360 998,640 16,387,997 88,489 59,090 16,417,396 3,521,293 162,235 — 3,683,528 951,864 — 60,134 891,730 111,064,613 29,194 5,451,179 105,642,628 $ 167,437,616 $ 279,918 $ 6,253,961 $ 161,463,573 SeptemberJune 30, 2022, the amortized cost2023 and fair value ofDecember 31, 2022, 62 and 54 individual investments HTM that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $8.6 million and $8.0 million, respectively, compared to 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. September 30, 2022 Less than 12 Months 12 Months or More Total Fair
ValueUnrealized
LossesFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesUS Treasury Bonds $ 33,764,224 $ 657,961 $ — $ — $ 33,764,224 $ 657,961 Taxable Municipal Bonds 897,330 51,976 — — 897,330 51,976 MBS 83,477,755 3,668,395 8,330,880 2,152,593 91,808,635 5,820,988 $ 118,139,309 $ 4,378,332 $ 8,330,880 $ 2,152,593 $ 126,470,189 $ 6,530,925 December 31, 2021 Less than 12 Months 12 Months or More Total Fair
ValueUnrealized
LossesFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesMBS $ 9,969,587 $ 206,472 $ 3,442,229 $ 156,893 $ 13,411,816 $ 363,365 $ 9,969,587 $ 206,472 $ 3,442,229 $ 156,893 $ 13,411,816 $ 363,365 At September 30, 2022 and December 31, 2021, 50 and six individual HTM securities were in a loss position, including five19 and two6 securities that were in a loss position for greater than 12 months, respectively. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value was attributable to changes in market interest rates and was not in the credit quality of the issuer and therefore, the loss was not considered other-than-temporary.issuer. The Company has the ability and intent to hold these securities to maturity.1215 $ 33,982,656 $ 709,002 $ — $ — $ 33,982,656 $ 709,002 988,552 11,448 — — 988,552 11,448 9,128,369 81,883 — — 9,128,369 81,883 901,760 55,302 — — 901,760 55,302 74,800,709 2,268,240 28,177,551 3,582,068 102,978,260 5,850,308 $ 119,802,046 $ 3,125,875 $ 28,177,551 $ 3,582,068 $ 147,979,597 $ 6,707,943 $ 33,829,651 $ 682,198 $ — $ — $ 33,829,651 $ 682,198 998,640 1,360 — — 998,640 1,360 6,520,050 59,090 — — 6,520,050 59,090 891,730 60,134 — — 891,730 60,134 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 September 30, 2022 December 31, 2021 Real Estate Loans: Construction $ 104,250,955 $ 100,162,260 Residential Mortgage 97,404,583 84,965,542 Commercial 246,797,162 227,751,664 Commercial and Agricultural Loans 31,501,202 44,689,391 Consumer Loans: Home Equity Lines of Credit (HELOC) 29,954,251 28,611,516 Other Consumer 23,095,584 21,449,809 Total Loans Held For Investment, Gross 533,003,737 507,630,182 Less: Allowance For Loan Losses 11,298,845 11,087,164 Deferred Loan Fees 751,630 1,084,623 12,050,475 12,171,787 Total Loans Receivable, Net $ 520,953,262 $ 495,458,395 During the first nine months of 2022, the Company 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 $55,000 at September 30, 2022 compared to $9.8 million at December 31, 2021. The balance of unamortized net deferred fees on PPP loans was $8,000 at September 30, 2022 compared to $441,000 at December 31, 2021. $ 104,251,639 $ 112,793,694 145,685,427 110,056,973 259,912,832 252,154,475 34,264,896 30,647,975 32,367,179 31,736,676 24,841,816 23,598,110 601,323,789 560,987,903 12,283,325 11,177,753 595,832 806,238 12,879,157 11,983,991 $ 588,444,632 $ 549,003,912 loancredit losses. Pass loans are loans that are performing and are deemed adequately protected by the net worth of the borrower or the underlying collateral value. These loans are considered to have the least amount of risk in terms of determining the allowance for loancredit losses. Loans that are graded as substandard are considered to have the most risk. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 90 days or more past due are automatically classified in this category. The caution and special mention categories fall in between the pass and substandard grades and consist of loans that do not currently expose the Company to sufficient risk to warrant adverse classification but possess weaknesses.tablesfollowing table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of June 30, 2023. $ 10,417,314 $ 33,771,809 $ 18,509,413 $ 5,202,965 $ 740,273 $ 1,593,668 $ 4,998,369 $ 75,233,811 2,405,514 17,764,334 1,552,647 3,464,157 424,094 485,558 — 26,096,304 — 29,769 — — 1,278,716 459,724 — 1,768,209 — — 251,769 139,799 643,260 118,487 — 1,153,315 12,822,828 51,565,912 20,313,829 8,806,921 3,086,343 2,657,437 4,998,369 104,251,639 — — 1,270 — — — — 1,270 14,138,634 30,646,464 11,486,272 14,394,653 4,187,015 24,570,986 10,121,616 109,545,640 7,112,242 8,822,433 5,453,105 1,733,323 1,637,317 4,980,282 15,940 29,754,642 1,560,414 158,883 905,331 311,988 — 248,084 — 3,184,700 — — 625,439 - 50,342 2,524,664 — 3,200,445 22,811,290 39,627,780 18,470,147 16,439,964 5,874,674 32,324,016 10,137,556 145,685,427 — — — — — — — — 7,539,285 46,985,388 51,586,533 13,254,437 24,446,966 55,660,664 2,320,461 201,793,734 7,819,570 5,013,012 4,382,223 6,596,059 7,131,281 16,734,598 — 47,676,743 212,500 840,401 461,021 464,443 236,435 3,276,765 99,811 5,591,376 — 71,406 59,604 — — 4,719,969 — 4,850,979 15,571,355 52,910,207 56,489,381 20,314,939 31,814,682 80,391,996 2,420,272 259,912,832 — — — — — — — — 2,333,570 8,662,633 8,755,005 754,806 554,676 738,092 3,941,547 25,740,329 3,330,166 1,610,930 1,830,633 75,513 22,353 139,119 728,104 7,736,818 294,217 36,424 122,193 15,321 — 100,055 — 568,210 — 22,108 15,998 10,716 12,903 70,914 86,900 219,539 5,957,953 10,332,095 10,723,829 856,356 589,932 1,048,180 4,756,551 34,264,896 — — 15,880 — — — — 15,880 — — — — — — 26,752,709 26,752,709 — — — — — — 4,512,811 4,512,811 — — — — — — 450,225 450,225 — — — — — — 651,434 651,434 — — — — — — 32,367,179 32,367,179 — — — — — — 1,488 1,488 4,468,903 4,923,483 2,195,606 1,043,745 292,347 255,949 4,540,877 17,720,910 1,549,087 2,614,321 1,217,032 648,313 283,610 77,027 279,655 6,669,045 59,110 135,813 — — — — 6,285 201,208 — 35,355 109,256 55,737 28,165 7,321 14,819 250,653 6,077,100 7,708,972 3,521,894 1,747,795 604,122 340,297 4,841,636 24,841,816 — 18,658 1,633 — — — 50,629 70,920 $ 63,240,526 $ 162,144,966 $ 109,519,080 $ 48,165,975 $ 41,969,753 $ 116,761,926 $ 59,521,563 $ 601,323,789 summarizesummarizes the balance within each risk category by loan type, excluding loans held for sale, at September 30, 2022 and December 31, 2021.September 30, 2022
Pass
CautionSpecial Mention
Substandard
Total LoansConstruction Real Estate $ 85,290,332 $ 17,068,984 $ 1,541,750 $ 349,889 $ 104,250,955 Residential Real Estate 76,008,204 18,055,116 735,332 2,605,931 97,404,583 Commercial Real Estate 193,971,553 46,929,938 3,606,034 2,289,637 246,797,162 Commercial and Agricultural 26,859,082 4,094,485 331,731 215,904 31,501,202 Consumer HELOC 23,960,565 4,997,785 402,060 593,841 29,954,251 Other Consumer 16,163,946 6,649,604 171,910 110,124 23,095,584 Total $ 422,253,682 $ 97,795,912 $ 6,788,817 $ 6,165,326 $ 533,003,737 13SECURITY FEDERAL CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2021 Special Mention 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 $ 91,564,058 $ 18,837,894 $ 2,013,824 $ 377,918 $ 112,793,694 84,028,037 22,372,649 887,874 2,768,413 110,056,973 196,063,300 47,821,422 3,270,916 4,998,837 252,154,475 25,383,994 4,593,283 371,071 299,627 30,647,975 25,693,252 5,018,419 401,550 623,455 31,736,676 16,515,206 6,725,317 178,638 178,949 23,598,110 $ 439,247,847 $ 105,368,984 $ 7,123,873 $ 9,247,199 $ 560,987,903 Non-accrualNonaccrual LoansSeptemberthe dates indicated. $ 1,058,046 $ — $ 93,307 $ 1,151,353 $ 103,100,286 $ 104,251,639 464,531 1,107,561 266,093 1,838,185 143,847,242 145,685,427 1,056,783 20,376 416,813 1,493,972 258,418,860 259,912,832 265,959 — 9,923 275,882 33,989,014 34,264,896 182,090 30,293 78,064 290,447 32,076,732 32,367,179 344,835 64,678 55,778 465,291 24,376,525 24,841,816 $ 3,372,244 $ 1,222,908 $ 919,978 $ 5,515,130 $ 595,808,659 $ 601,323,789 $ — $ — $ 100,472 $ 100,472 $ 112,693,222 $ 112,793,694 1,557,114 — 471,430 2,028,544 108,028,429 110,056,973 2,670,997 89,342 354,406 3,114,745 249,039,730 252,154,475 5,683 2,113 55,468 63,264 30,584,711 30,647,975 199,414 — 74,159 273,573 31,463,103 31,736,676 271,774 78,566 17,321 367,661 23,230,449 23,598,110 $ 4,704,982 $ 170,021 $ 1,073,256 $ 5,948,259 $ 555,039,644 $ 560,987,903 20222023 and December 31, 2021:September 30, 2022 90 Days or
More Past DueConstruction Real Estate $ 108,112 $ 547,795 $ 100,472 $ 756,379 $ 103,494,576 $ 104,250,955 Residential Real Estate 128,333 319,082 449,007 896,422 96,508,161 97,404,583 Commercial Real Estate 713,162 64,531 358,906 1,136,599 245,660,563 246,797,162 Commercial and Agricultural 131,687 33,835 16,775 182,297 31,318,905 31,501,202 Consumer HELOC 350,385 17,439 19,420 387,244 29,567,007 29,954,251 Other Consumer 215,030 50,427 17,456 282,913 22,812,671 23,095,584 Total $ 1,646,709 $ 1,033,109 $ 962,036 $ 3,641,854 $ 529,361,883 $ 533,003,737 December 31, 2021 90 Days or More Past Due Construction Real Estate $ 4,291 $ 114,516 $ — $ 118,807 $ 100,043,453 $ 100,162,260 Residential Real Estate 296,556 543,716 205,713 1,045,985 83,919,557 84,965,542 Commercial Real Estate 195,271 — 372,405 567,676 227,183,988 227,751,664 Commercial and Agricultural 79,381 133,610 — 212,991 44,476,400 44,689,391 Consumer HELOC 51,430 — 44,382 95,812 28,515,704 28,611,516 Other Consumer 93,560 3,648 8,797 106,005 21,343,804 21,449,809 Total $ 720,489 $ 795,490 $ 631,297 $ 2,147,276 $ 505,482,906 $ 507,630,182 At September 30, 2022 and December 31, 2021,, the Company did not have any loans that were 90 days or more past due and still accruing interest. The Company's strategy is to work with its borrowers to reach acceptable payment plans while protecting its interests in the existing collateral. In the event an acceptable arrangement cannot be reached, the Company may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.1419non-accrualnonaccrual loans by category at Septemberthe dates indicated. Nonaccrual Loans Nonaccrual Loans Total $ 244,776 $ — $ 244,776 $ 114,630 1,327,575 — 1,327,575 1,544,762 4,373,266 — 4,373,266 4,281,975 63,020 — 63,020 112,652 467,365 — 467,365 188,540 79,923 — 79,923 28,671 $ 6,555,925 $ — $ 6,555,925 $ 6,271,230 2022 compared to December 31, 2021:Non-accrual Loans: September 30, 2022 December 31, 2021 Construction Real Estate $ 115,874 $ 21,434 Residential Real Estate 1,529,370 1,389,498 Commercial Real Estate 741,081 1,057,496 Commercial and Agricultural 75,740 64,479 Consumer HELOC 112,784 141,683 Other Consumer 24,049 8,797 Total Non-accrual Loans $ 2,598,898 $ 2,683,387 June 30, 2023 $ — 5,783 1,461 — 66 768 $ 8,078 June 30, 2023 $ 2,882 6,814 1,461 1,103 66 911 $ 13,237 LoanCredit Lossestables showtable shows the activity in the allowance for credit losses on loans by category for the three and six months ended June 30, 2023 under the CECL methodology: Commercial and $ 2,345,958 $ 3,072,377 $ 4,263,822 $ 1,130,753 $ 671,526 $ 642,374 $ 12,126,810 (149,018 ) 182,914 158,167 (35,144 ) (20,087 ) 24,168 161,000 (1,270 ) — — — (1,488 ) (35,980 ) (38,738 ) 5,180 5,600 5,017 6,461 4,327 7,668 34,253 $ 2,200,850 $ 3,260,891 $ 4,427,006 $ 1,102,070 $ 654,278 $ 638,230 $ 12,283,325 Commercial and $ 2,323,397 $ 2,124,835 $ 4,804,282 $ 874,092 $ 598,807 $ 452,340 $ 11,177,753 263,737 461,879 (340,492 ) 112,452 107,548 179,070 784,194 (394,154 ) 660,177 (46,817 ) 119,645 (76,820 ) 63,969 326,000 (1,270 ) — — (15,880 ) (1,488 ) (70,920 ) (89,558 ) 9,140 14,000 10,033 11,761 26,231 13,771 84,936 $ 2,200,850 $ 3,260,891 $ 4,427,006 $ 1,102,070 $ 654,278 $ 638,230 $ 12,283,325 • Construction real estate loans are typically secured by commercial and residential lots. • Commercial and agricultural business loans are primarily secured by business equipment, furniture and fixtures, inventory and receivables. $ 104,977 1,037,750 4,116,125 31,446 346,744 $ 5,637,042 ninesix months ended SeptemberJune 30, 2022 and 2021: Three Months Ended September 30, 2022 Real Estate Consumer Construction Residential Commercial Commercial and Agricultural HELOC Other Beginning Balance $ 2,104,386 $ 1,870,696 $ 4,736,314 $ 1,403,818 $ 606,847 $ 475,893 $ 11,197,954 (Reversal of) Provision for Loan Losses 99,612 (17,503) 44,664 (117,519) (37,681) 28,427 — Charge-Offs — — — — — (54,192) (54,192) Recoveries 15,460 9,678 77,479 1,281 38,190 12,995 155,083 Ending Balance $ 2,219,458 $ 1,862,871 $ 4,858,457 $ 1,287,580 $ 607,356 $ 463,123 $ 11,298,845 Three Months Ended September 30, 2021 Real Estate Consumer Construction Residential Commercial Commercial and Agricultural HELOC Other Total Beginning Balance $ 2,129,101 $ 1,768,461 $ 4,956,531 $ 1,528,501 $ 566,579 $ 474,587 $ 11,423,760 (Reversal of) Provision for Loan Losses 33,090 (21,578) (196,852) (403,030) (58,843) (17,787) (665,000) Charge-Offs (21,460) — — (800) — (23,702) (45,962) Recoveries 192,459 15,749 240,585 323 10,323 — 459,439 Ending Balance $ 2,333,190 $ 1,762,632 $ 5,000,264 $ 1,124,994 $ 518,059 $ 433,098 $ 11,172,237 Commercial and $ 2,336,583 $ 1,628,316 $ 4,932,948 $ 1,242,919 $ 555,403 $ 432,794 $ 11,128,963 (239,158 ) 224,160 (227,132 ) 159,404 46,567 36,159 — — — — — — (11,821 ) (11,821 ) 6,961 18,220 30,498 1,495 4,877 18,761 80,812 $ 2,104,386 $ 1,870,696 $ 4,736,314 $ 1,403,818 $ 606,847 $ 475,893 $ 11,197,954 1521 Nine Months Ended September 30, 2022 Real Estate Consumer Construction Residential Commercial Commercial and Agricultural HELOC Other Beginning Balance $ 2,401,196 $ 1,663,423 $ 4,832,440 $ 1,241,828 $ 517,512 $ 430,765 $ 11,087,164 (Reversal of) Provision for Loan Losses (212,761) 161,839 (100,941) 19,643 44,068 88,152 — Charge-Offs — — — — — (97,884) (97,884) Recoveries 31,023 37,609 126,958 26,109 45,776 42,090 309,565 Ending Balance $ 2,219,458 $ 1,862,871 $ 4,858,457 $ 1,287,580 $ 607,356 $ 463,123 $ 11,298,845 Nine Months Ended September 30, 2021 Real Estate Consumer Construction Residential Commercial Commercial and Agricultural HELOC Other Total Beginning Balance $ 2,486,910 $ 2,264,414 $ 5,753,641 $ 1,112,952 $ 657,356 $ 567,623 $ 12,842,896 (Reversal of) Provision for Loan Losses (324,719) (541,877) (1,149,539) 17,562 (149,620) (121,807) (2,270,000) Charge-Offs (21,460) — — (7,499) — (81,394) (110,353) Recoveries 192,459 40,095 396,162 1,979 10,323 68,676 709,694 Ending Balance $ 2,333,190 $ 1,762,632 $ 5,000,264 $ 1,124,994 $ 518,059 $ 433,098 $ 11,172,237 16SECURITY FEDERAL CORPORATION AND SUBSIDIARIESNotes Commercial and $ 2,401,196 $ 1,663,423 $ 4,832,440 $ 1,241,828 $ 517,512 $ 430,765 $ 11,087,164 (312,373 ) 179,342 (145,605 ) 137,162 81,749 59,725 — — — — — — (43,692 ) (43,692 ) 15,563 27,931 49,479 24,828 7,586 29,095 154,482 $ 2,104,386 $ 1,870,696 $ 4,736,314 $ 1,403,818 $ 606,847 $ 475,893 $ 11,197,954 Consolidated Financial StatementsAllowance for Loan Lossesthe adoption of ASU 2016-13, loans were considered impaired when, based on current information and Loans Receivable Evaluated for Impairmentsummarizeinclude all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral.September 30, 2022 and December 31, 2021.2022: $ — $ 2,323,397 $ 2,323,397 $ 114,630 $ 112,679,064 $ 112,793,694 — 2,124,835 2,124,835 1,089,308 108,967,665 110,056,973 — 4,804,282 4,804,282 4,281,702 247,872,773 252,154,475 — 874,092 874,092 31,446 30,616,529 30,647,975 — 598,807 598,807 48,792 31,687,884 31,736,676 — 452,340 452,340 — 23,598,110 23,598,110 $ — $ 11,177,753 $ 11,177,753 $ 5,565,878 $ 555,422,025 $ 560,987,903 Allowance For Loan Losses Loans Receivable September 30, 2022 Individually Evaluated For Impairment Collectively Evaluated For Impairment Individually Evaluated For Impairment Collectively Evaluated For Impairment Total Construction Real Estate $ — $ 2,219,458 $ 2,219,458 $ 115,874 $ 104,135,081 $ 104,250,955 Residential Real Estate — 1,862,871 1,862,871 1,112,281 96,292,302 97,404,583 Commercial Real Estate — 4,858,457 4,858,457 737,672 246,059,490 246,797,162 Commercial and Agricultural — 1,287,580 1,287,580 31,446 31,469,756 31,501,202 Consumer HELOC — 607,356 607,356 49,905 29,904,346 29,954,251 Other Consumer — 463,123 463,123 — 23,095,584 23,095,584 Total $ — $ 11,298,845 $ 11,298,845 $ 2,047,178 $ 530,956,559 $ 533,003,737 Allowance For Loan Losses Loans Receivable December 31, 2021 Individually Evaluated For Impairment Collectively Evaluated For Impairment Total Individually Evaluated For Impairment Collectively Evaluated For Impairment Total Construction Real Estate $ — $ 2,401,196 $ 2,401,196 $ 19,133 $ 100,143,127 $ 100,162,260 Residential Real Estate — 1,663,423 1,663,423 1,128,452 83,837,090 84,965,542 Commercial Real Estate — 4,832,440 4,832,440 1,046,974 226,704,690 227,751,664 Commercial and Agricultural — 1,241,828 1,241,828 31,446 44,657,945 44,689,391 Consumer HELOC — 517,512 517,512 97,302 28,514,214 28,611,516 Other Consumer — 430,765 430,765 — 21,449,809 21,449,809 Total $ — $ 11,087,164 $ 11,087,164 $ 2,323,307 $ 505,306,875 $ 507,630,182 Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Non-accrual commercial loans under $200,000 and non-accrual consumer loans under $100,000 are considered immaterial and are excluded from the impairment review. Once a loan is identified as individually impaired, management measures the impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costsNotes 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.Consolidated Financial StatementsSeptember 30, 2022 and December 31, 20212022 and for the three and ninesix months ended SeptemberJune 30, 2022 and 2021.September 30, 2022 December 31, 2021 Impaired Loans Recorded
InvestmentUnpaid
Principal
BalanceRelated
AllowanceRecorded
InvestmentUnpaid
Principal
Balance
Related
AllowanceConstruction Real Estate $ 115,874 $ 115,874 $ — $ 19,133 $ 19,133 $ — Residential Real Estate 1,112,281 1,649,281 — 1,128,452 1,646,952 — Commercial Real Estate 737,672 737,672 — 1,046,974 1,046,974 — Commercial and Agricultural 31,446 926,446 — 31,446 926,446 — Consumer HELOC 49,905 49,905 — 97,302 97,302 — Other Consumer — — — — — — Total $ 2,047,178 $ 3,479,178 $ — $ 2,323,307 $ 3,736,807 $ — $ 114,630 $ 114,630 $ — 1,089,308 1,626,308 — 4,281,702 4,281,702 — 31,446 926,446 — 48,792 48,792 — — — — $ 5,565,878 $ 6,997,878 $ — $ 117,739 $ — 1,142,322 — 756,649 — 31,446 — 52,914 — — — $ 2,101,070 $ — $ 118,503 $ — 1,153,767 — 762,720 — 31,446 — 53,463 — — — $ 2,119,899 $ — 1723Three Months Ended September 30, 2022 2021 Impaired Loans Average Recorded Investment Interest Income
RecognizedAverage Recorded
InvestmentInterest Income
RecognizedConstruction Real Estate $ 116,495 $ — $ 27,396 $ — Residential Real Estate 1,121,686 — 1,224,991 496 Commercial Real Estate 743,998 — 1,068,681 6,887 Commercial and Agricultural 31,446 — 46,246 — Consumer HELOC 50,725 — 152,775 — Total $ 2,064,350 $ — $ 2,520,089 $ 7,383 Nine Months Ended September 30, 2022 2021 Impaired Loans Average Recorded
InvestmentInterest Income
RecognizedAverage Recorded
InvestmentInterest Income
RecognizedConstruction Real Estate $ 117,881 $ — $ 33,530 $ — Residential Real Estate 1,144,363 — 1,317,557 3,149 Commercial Real Estate 756,394 — 1,086,104 11,914 Commercial and Agricultural 31,446 — 50,326 — Consumer HELOC 52,643 — 156,049 — Total $ 2,102,727 $ — $ 2,643,566 $ 15,063 Troubled Debt RestructuringsLoan ModificationsInis recorded on each asset upon asset origination or acquisition. The starting point for the courseestimate of resolving delinquent loans, the Company may chooseallowance for credit losses is historical loss information, which includes losses from modifications of receivables to restructure the contractual termsborrowers experiencing financial difficulty. An assessment of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession towhether a borrower that it would not otherwise consider (FASB ASC Topic 310-40). The concessions grantedis 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 Company grants such concessions to reassess the borrower’s financial status and develop a plan for repayment. At the date of modification, TDRs are initially classified as nonaccrual TDRs. They are returneda modification.accruing status when thereborrowers experiencing financial difficulty is economic substancealready included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the restructuring, thereallowance for credit losses is documented credit evaluationgenerally 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 borrower'sasset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.condition,difficulty, another concession, such as principal forgiveness, may be granted. As such multiple types of modifications may have been made on the remaining balancesame loan within the current reporting period each much be reported. The combination is reasonably assuredat least two of repayment in accordance with itsthe following: a term extension, principal forgiveness, and interest rate reduction.terms,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 borrower has demonstrated sustained repayment performance in accordance withallowance for credit losses is adjusted by the same amount.terms for a reasonable period of time (generally a minimum of six months).The Company had three TDRsloans with a combined balance of $394,000 included in impaired loans$367,000 at SeptemberJune 30, 20222023, compared to three TDRstwo modified loans with a combined balance of $694,000$385,000 at December 31, 2021. There2022.restructured as TDRs duringmodified with borrowers experiencing financial difficulty for which there was a payment default within 12 months of the nine months ended September 30, 2022 or the nine months ended September 30, 2021 and no TDRs were in default at those dates.restructuring date. The Company considers any loan 30 days or more past due to be in default. At September 30, 2022 December 31, 2021, the Company had no commitments to extend additionalfuture credit, as well as both standby and commercial letters of credit when there is a contractual obligation to borrowers whose loan terms have been modifiedextend credit and when this extension of credit is not unconditionally cancellable (i.e., commitment cannot be canceled at any time). The allowance for credit losses - unfunded commitments is adjusted through the provision for (reversal of) credit losses. 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 a TDR. All TDRs are also classified as impairedcomputing the allowance for credit losses on loans, and are includeddiscussed in this Note 8. The allowance for credit losses - unfunded commitments of $1.1 million and $0 at June 30, 2023 and December 31, 2022, respectively, is separately classified on the balance sheet within "Other Liabilities."loans individually evaluatedallowance for impairment.Our policy with respect to accrual of interest on loans restructured as a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance undercredit losses - unfunded loan commitments for the previous loan termsthree and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is probable. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.The Company will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. The Bank's policy with respect $ 1,048,614 60,000 $ 1,108,614 Six Months Ended June 30, 2023 $ — 1,213,614 (105,000 ) $ 1,108,614 1824to nonperforming loans requires the borrower to become current and then make a minimum of six 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.as of September 30, 2022 and December 31, 2021at the dates indicated are summarized below by account type.Deposit Account Type September 30, 2022 December 31, 2021 Checking $ 500,639,875 $ 495,467,035 Money Market 373,055,947 366,065,262 Savings 108,996,328 97,068,740 Certificates of Deposit 136,124,595 157,361,926 Total $ 1,118,816,745 $ 1,115,962,963 $ 477,850,717 $ 510,983,509 375,053,531 348,833,623 97,460,230 108,237,098 229,108,593 142,031,066 $ 1,179,473,071 $ 1,110,085,296 other brokered deposits, which are included in checking and money market deposits in the above table, at Septemberboth June 30, 20222023 and December 31, 2021. In addition, the2022. The Company had $6.0$12.5 million and $10.0$6.0 million in brokered time deposits, which are included in certificates of deposit in the above table, at June 30, 2023and $75,000December 31, 2022, respectively. In addition, $81,000 and $68,000,$98,000, in overdrafts that were reclassified to loans at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.$250,000$250,000 were $28.2$56.2 million and $39.4$30.3 million at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.all certificates of deposit at September 30, 2022 and December 31, 2021 are shown below.the dates indicated were as follows: $ 179,484,148 $ 97,163,169 43,167,443 31,550,543 2,550,664 6,465,582 3,906,338 3,177,916 — 3,673,856 $ 229,108,593 $ 142,031,066 September 30, 2022 December 31, 2021 Within 1 Year $ 101,104,486 $ 118,119,148 After 1 Year, Within 2 Years 20,604,464 26,189,318 After 2 Years, Within 3 Years 7,447,047 7,148,260 After 3 Years, Within 4 Years 3,189,396 2,815,491 After 4 Years, Within 5 Years 3,779,202 3,089,709 Total Certificates of Deposit $ 136,124,595 $ 157,361,926 $38.8$69.2 million in outstanding borrowings under the Board of Governors of the Federal Reserve System (“Federal Reserve”) Bank Term Funding Program (“BTFP”) with a weighted average borrowing rate of 4.42% at June 30, 2023 compared to $44.1 million in borrowings from the FRB discount window with a weighted average borrowing rate of 4.50% at December 31, 2022. During the first quarter of 2023, the Company elected to participate in the BTFP, allowing the Company to refinance its existing borrowings from the FRB 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. Depository institutions may borrow from the FRB discount window for periods as long as 90 days, and borrowings are prepayable and renewable by the borrower on a daily basis. At June 30, 2023, the Company had pledged as collateral for these borrowings investment securities with an amortized cost and fair value of $163.4 million and $26.8$149.7 million, compared to an amortized cost and fair value of $72.6 million and $69.2 million, respectively, at December 31, 2022, respectively.SeptemberJune 30, 20222023 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 0.35%1.49% at SeptemberJune 30, 20222023 compared to 0.15%0.75% at December 31, 2021.2022. Collateral pledged by the Company for these repurchase agreements consisted of investments with a combined amortized cost and fair value of $53.5$45.8 million and $50.9$42.7 million at SeptemberJune 30, 20222023 and $45.3$52.3 million and $45.2$49.8 million at December 31, 2021,2022, respectively.The Company had $1.0 million in outstanding borrowings from the "discount window" of the Federal Reserve Bank of Atlanta at September 30, 2022 compared toThere were no outstanding borrowingsFHLB advances at June 30, 2023 and December 31, 2021. Depository institutions may borrow from2022. FHLB advances are secured by a blanket collateral agreement with the discount window for periods as long as 90 days,FHLB by pledging the Company’s portfolio of residential first mortgage loans and borrowings are prepayable and renewable by the borrower on a daily basis. At September 30, 2022 and December 31, 2021, the borrowing rate was 3.25% and 0.25%, respectively. At September 30, 2022, the investment securities. The Company had's pledged as collateral for these borrowings investment and mortgage-backed securities withFHLB advances had an amortized cost and fair value of $73.3$58.7 million and $70.4$51.3 million respectively, compared to an amortized costat June 30, 2023, and fair value of $79.2$70.1 million and $82.6$61.1 million respectively, at December 31, 2021.2022, respectively.19254.99%7.25% at SeptemberJune 30, 20222023 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.“10-Year“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“15-Year Notes”, and together with the 10-Year10-Year Notes, the “Notes”).10-Year10-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-monththree-month LIBOR rate plus 369 basis points.15-Year15-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-Year15-Year Notes shall reset semi-annually to an interest rate equal to the then-current three-monththree-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, 2020.10-Year10-Year Notes, and November 22, 2029, with respect to the 15-Year15-Year Notes. The Company may redeem the 10-Year10-Year Notes and the 15-Year15-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.Convertible Debenturesconvertible senior debentures and for general corporate purposes.quarteryear ended September 30,December 31, 2022 the Company repurchased $1.0 million in principal of the 10-Year10-Year Notes and $2.5 million in principal of the 15-Year Notes, leaving an aggregate remaining principal balance of $16.5 million.2026$3.0$3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations.SeptemberJune 30, 2022,2023, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at SeptemberJune 30, 2022,2023, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status. Actual For Capital Adequacy To Be "Well-Capitalized" Amount Ratio Amount Ratio Amount Ratio September 30, 2022 Dollars in Thousands Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)$ 138,263 17.9% $ 46,448 6.0% $ 61,930 8.0% Total Risk-Based Capital
(To Risk Weighted Assets)147,960 19.1% 61,930 8.0% 77,413 10.0% Common Equity Tier 1 Capital (To Risk Weighted Assets) 138,263 17.9% 34,836 4.5% 50,318 6.5% Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)138,263 10.3% 53,607 4.0% 67,009 5.0% December 31, 2021 Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)$ 123,783 17.4% $ 42,701 6.0% $ 56,934 8.0% Total Risk-Based Capital
(To Risk Weighted Assets)132,706 18.6% 56,934 8.0% 71,168 10.0% Common Equity Tier 1 Capital (To Risk Weighted Assets) 123,783 17.4% 32,025 4.5% 46,259 6.5% Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)123,783 9.9% 50,169 4.0% 62,711 5.0% $ 144,043 17.7 % $ 48,774 6.0 % $ 65,032 8.0 % 154,244 19.0 % 65,032 8.0 % 81,291 10.0 % 144,043 17.7 % 36,581 4.5 % 52,839 6.5 % 144,043 10.1 % 56,851 4.0 % 71,063 5.0 % $ 141,452 17.8 % $ 47,714 6.0 % $ 63,619 8.0 % 151,408 19.0 % 63,619 8.0 % 79,523 10.0 % 141,452 17.8 % 35,785 4.5 % 51,690 6.5 % 141,452 10.4 % 54,372 4.0 % 67,965 5.0 % CET1Common Equity Tier 1 capital greater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.bonuses. At SeptemberJune 30, 2022,2023, the Bank’s conservation buffer wawas 11.0%s 11.1%.2127Level 1 -Investment securities available for saleSeptemberJune 30, 2022,2023, the Company’s investment portfolio was comprised of student loan pools, government and agency bonds, MBS issued by government agencies or GSEs, private label CMO MBSsecurities 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 2.22SECURITY FEDERAL CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial StatementsImpairedLoans that are considered impaired are recordednonrecurringrecurring basis. Once a loanHowever, 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 measuredcalculated 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.several methods, includingthe 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.impairedcollateral dependent loans not requiring a specific charge against thean allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investmentinvestments in the loan. Loans which are deemed to be impaired are primarily valuedsuch loans. At June 30, 2023, all collateral dependent loans were evaluated based on a nonrecurring basis at the fair value of the underlying real estate collateral. SuchLoans where an allowance is established based on the fair values are obtained using independent appraisals, whichvalue of collateral require classification in the fair value hierarchy. The Company considers to berecords collateral dependent loans as nonrecurring Level 3 inputs.loancredit 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.September 30, 2022 and December 31, 2021:the dates indicated: $ — $ 53,884,324 $ — $ — $ 59,156,982 $ — — 84,160,160 — — 99,629,967 — — 20,661,788 — — 21,310,328 — — 52,088,780 — — 50,769,739 — — 331,157,574 — — 319,281,268 — $ — $ 541,952,626 $ — $ — $ 550,148,284 $ — September 30, 2022 December 31, 2021 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Student Loan Pools $ — $ 63,221,349 $ — $ — $ 72,011,561 $ — SBA Bonds — 107,456,359 — — 139,793,077 — Tax Exempt Municipal Bonds — 41,711,954 — — 49,984,355 — Taxable Municipal Bonds — 51,420,078 — — 65,969,151 — MBS — 327,740,721 — — 355,090,914 — Total $ — $ 591,550,461 $ — $ — $ 682,849,058 $ — SeptemberJune 30, 20222023 or December 31, 2021.September 30, 2022 and December 31, 2021,the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall. September 30, 2022 Assets: Level 1 Level 2 Level 3 Total Mortgage Loans Held For Sale $ — $ 2,141,011 $ — $ 2,141,011 — — 2,047,178 2,047,178 Other Real Estate Owned — — 119,700 119,700 Land Held for Sale — — 1,096,614 1,096,614 Total $ — $ 2,141,011 $ 3,263,492 $ 5,404,503 23SECURITY FEDERAL CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2021 Assets: Level 1 Level 2 Level 3 Total Mortgage Loans Held For Sale $ — $ 4,038,414 $ — $ 4,038,414 — — 2,323,307 2,323,307 Other Real Estate Owned — — 129,700 129,700 Land Held for Sale — — 1,529,691 1,529,691 Total $ — $ 4,038,414 $ 3,982,698 $ 8,021,112 (1) $ — $ 1,219,997 $ — $ 1,219,997 — — 5,637,042 5,637,042 — — 105,000 105,000 — — 1,096,614 1,096,614 $ — $ 1,219,997 $ 6,838,656 $ 8,058,653 $ — $ 913,258 $ — $ 913,258 — — 5,565,878 5,565,878 — — 119,700 119,700 — — 1,096,614 1,096,614 $ — $ 913,258 $ 6,782,192 $ 7,695,450 September June 30, 20222023 and December 31, 2021.SeptemberJune 30, 20222023 or December 31, 2021.September 30, 2022 and December 31, 2021,the dates indicated, the significant unobservable inputs used in the fair value measurements were as follows:Range of Inputs Level 3 Assets Valuation Technique Significant Unobservable Inputs September 30, 2022 December 31, 2021 Land Held for Sale Appraised Value/Comparable Sales Discounts to appraised values for estimated holding or selling costs 10% 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% 8% - 13% Other Real Estate Owned Appraised Value/Comparable Sales Discounts to appraised values for estimated holding or selling costs 30% 30% residential real estate,HELOCs and other consumer and all other loans. The results are then adjusted to account for credit risk as described above.24SECURITY FEDERAL CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial StatementsSeptemberJune 30, 20222023 or December 31, 2021.September 30, 2022 and December 31, 2021the dates indicated presented in accordance with the applicable accounting guidance.September 30, 2022 Carrying Fair Value Amount Total Level 1 Level 2 Level 3 Financial Assets: Dollars in thousands Cash and Cash Equivalents $ 20,068 $ 20,068 $ 20,068 $ — $ — Certificates of Deposits with Other Banks 1,100 1,100 — 1,100 — Investment Securities, Available for Sale 591,550 591,550 — 591,550 — Investment Securities, Held to Maturity 137,969 131,616 — 131,616 — Loans Receivable, Net 520,953 501,910 — — 501,910 Loans Held for Sale 2,141 2,141 — — 2,141 FHLB Stock 651 651 651 — — Land Held for Sale 1,097 1,097 — — 1,097 Financial Liabilities: Deposits: Checking, Savings & Money Market Accounts $ 982,692 $ 982,692 $ 982,692 $ — $ — Certificates of Deposits 136,125 132,569 — 132,569 — Borrowings from FRB 1,000 1,000 1,000 — — Other Borrowed Money 38,809 38,809 38,809 — — Subordinated Debentures 29,000 27,049 — 27,049 — Junior Subordinated Debentures 5,155 5,155 — 5,155 — $ 77,180 $ 77,180 $ — $ — 1,100 — 1,100 — 541,953 — 541,953 — 176,623 — 170,589 — 588,445 — — 567,659 659 659 — — 1,097 — — 1,097 $ 950,364 $ 950,364 $ — $ — 229,109 — 226,115 — 69,200 68,716 — — 17,890 17,890 — — 26,500 — 22,741 — 5,155 — 5,155 — 2531December 31, 2021 Carrying Fair Value Amount Total Level 1 Level 2 Level 3 Financial Assets: Dollars in thousands Cash and Cash Equivalents $ 27,623 $ 27,623 $ 27,623 $ — $ — Certificates of Deposits with Other Banks 1,100 1,100 — 1,100 — Investment Securities, Available for Sale 682,849 682,849 — 682,849 — Investment Securities, Held to Maturity 23,507 23,720 — 23,720 — Loans Receivable, Net 495,458 503,986 — — 503,986 Loans Held for Sale 4,038 4,038 — — 4,038 FHLB Stock 586 586 586 — — Land Held for Sale 1,530 1,530 — — 1,530 Financial Liabilities: Deposits: Checking, Savings & Money Market Accounts $ 958,601 $ 958,601 $ 958,601 $ — $ — Certificates of Deposits 157,362 157,201 — 157,201 — Other Borrowed Money 26,785 26,785 26,785 — — Subordinated Debentures 30,000 30,154 — 30,154 — Junior Subordinated Debentures 5,155 5,155 — 5,155 — At September $ 28,502 $ 28,502 $ — $ — 1,100 — 1,100 — 550,148 — 550,148 — 167,438 — 161,464 — 549,004 — — 528,174 651 651 — — 1,097 — — 1,097 $ 968,054 $ 968,054 $ — $ — 142,031 — 138,382 — 44,080 44,071 — — 27,588 27,588 — — 26,500 — 24,435 — 5,155 — 5,155 — 2022,2023, the BankCompany had $173.0$176.1 million in off-balanceoff-balance sheet financial commitments. These commitments are to originate loans and unused consumer lines of credit and credit card lines. Because these obligations are based on current market rates, if funded, the original principalprincipal amount is considered to be a reasonable estimate of fair value. Fair value estimates are made on a specific date, based on relevant market data and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the Bank’sCompany’s entire holdings of a particular financial instrument.Bank’sCompany’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 BankCompany 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.26SECURITY FEDERAL CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements - ACCOUNTING AND REPORTING CHANGESThe 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, which is commonly referred to as the current expected credit loss methodology. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted. The Company is in the process of identifying required changes to the loan loss estimation models and processes and evaluating the impact of this new guidance. 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 (e.g., loans, debt securities, derivatives, borrowings) that reference the London Interbank Offered Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The guidance permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. In January 2021, updated guidance was issued to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this guidance to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this guidance have differing effective dates, beginning with an interim period including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect adoption of this guidance to have a material impact on its consolidated financial statements.In March 2022, the FASB issued amendments which are intended to improve the decision usefulness of information provided to investors about certain loan re-financings, restructurings, and write-offs. The amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted. 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 15 - NON-INTEREST INCOMETopic 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 transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.five-stepfive-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.27SECURITY FEDERAL CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial StatementsBankCompany 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.BankCompany is used. The BankCompany 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.BankCompany 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,Company, there were no changes in the accounting for trust income. atthe delivery of control over the property to the buyer at the time of each real estate closing.three and nine months ended September 30, 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.Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Non-interest income: $ 287,081 $ 932,340 $ 1,511,905 $ 3,022,755 Service Fees on Deposit Accounts 279,909 251,440 809,287 702,548 235,506 187,657 620,779 468,083 Trust Income 363,830 359,035 1,084,249 1,005,517 150,999 155,000 457,202 485,000 ATM and Check Card Fee Income 687,773 615,568 2,109,173 1,811,216 — 1,826,265 170,699 1,826,265 219,289 202,314 702,135 669,379 Total non-interest income $ 2,224,387 $ 4,529,619 $ 7,465,429 $ 9,990,763 $ 201,059 $ 510,931 $ 394,940 $ 1,224,824 301,264 271,887 570,877 529,378 185,568 245,769 348,367 385,273 457,098 355,673 839,306 720,419 156,233 148,962 306,437 306,203 749,814 704,133 1,551,836 1,421,400 — 170,699 — 170,699 200,193 229,664 439,843 482,846 $ 2,251,229 $ 2,637,718 $ 4,451,606 $ 5,241,042 28331615 - LEASES Effective January 1, 2019 the Company adopted ASC 842 “Leases.” Currently, thebranches that are accounted for under this standard. 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 nine monthssix months ended SeptemberJune 30, 2022,2023, the Company made cash payments in the amount of $380,000$258,000 for operating leases. The lease expense recognized during this period was $384,000$256,000 and was recorded in occupancy expense within the Consolidated Statements of Income. The lease liability had a net decrease of $279,000.$227,000. At June 30, 2023, the Company had ROU assets of $1.6 million and a lease liability of $1.7 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 June 30, 2023, the remaining weighted average lease term is 4.33was 3.62 years and the weighted average discount rate used is was 3.2%.SeptemberJune 30, 2022, maturities2023, maturities of operating lease liabilities for future periods were as follows: $ 260,296 522,147 474,815 363,428 147,842 10,371 1,778,899 (102,097 ) $ 1,676,802 Remainder of 2022 $ 126,564 2023 518,138 2024 522,147 2025 474,815 2026 363,428 Thereafter 155,996 Total undiscounted lease payments 2,161,088 Less: effect of discounting (147,002) Present value of estimated lease payments (lease liability) $ 2,014,086 1716 - PREFERRED STOCKCOVID-19COVID-19 pandemic by providing direct and indirect capital investments in low- and moderate-income community financial institutions.1817 - SUBSEQUENT EVENTSNonrecognizedNon-recognized 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.2934“Safe Harbor”“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995•potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal responses to the novel coronavirus disease 2019 (“COVID-19”) pandemic, including the possibility of new COVID-19 variants;•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be affected by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our allowance for loan losses;•changes in 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;•the future of the 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 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 other governmental initiatives affecting the financial services industry;•our ability to attract and retain deposits;•our ability to control operating costs and expenses;•our ability to implement our business strategies;•the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;•difficulties in reducing risks associated with the loans on our balance sheet;•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;•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;• • the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; 30•our ability to retain key members of our senior management team;•costs and effects of litigation, including settlements and judgments;•our ability to manage loan delinquency rates;•increased competitive pressures among financial services companies;•changes in consumer spending, borrowing and savings habits;•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;•our ability to pay dividends on our common stock;•the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;•inability of key third-party providers to perform their obligations to us;•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and•other risks described elsewhere in this document and in the Company's other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 10-K”).20212022 Form 10-K as well as other risk factors under Item 1A, “Risk Factors.” Such developments could have an adverse impact on our consolidated financial position and results of operations. Any of the forward-looking statements that we make in this quarterly report on Form 10-Q and in other public reports and statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risksfactors could cause our actual results for 20222023 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-19The 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 September 30, 2022, all Bank branches were open with normal hours. 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.31SeptemberJune 30, 20222023 and December 31, 2021$56.8$90.9 million to $1.4$1.5 billion at SeptemberJune 30, 20222023 from $1.3$1.4 billion at December 31, 2021.2022. This increase was primarily due to increases in cash and cash equivalents, investments held to maturity ("HTM") and cash and cash equivalents,loans receivable, net, which were partially offset by a declinedecrease in investments available for sale ("AFS"). Changes in total assets are shown below.Increase (Decrease) (Dollars in thousands) September 30, 2022 December 31, 2021 $ % Cash and Cash Equivalents $ 20,068 $ 27,623 $ (7,555) (27.4) % Certificates of Deposits with Other Banks 1,100 1,100 — — Investments AFS 591,550 682,849 (91,299) (13.4) Investments HTM 137,969 23,507 114,462 486.9 Loans Receivable, Net 523,094 499,497 23,597 4.7 Accrued Interest Receivable 4,493 3,752 741 19.7 OREO 120 130 (10) (7.7) Operating Lease ROU Assets 1,974 2,252 (278) (12.3) Land Held for Sale 1,097 1,530 (433) (28.3) Premises and Equipment, Net 27,424 25,237 2,187 8.7 FHLB Stock 651 586 65 11.1 BOLI 27,167 26,710 457 1.7 Goodwill 1,200 1,200 — — Other Assets 20,074 5,241 14,833 283.0 Total Assets $ 1,357,981 $ 1,301,214 $ 56,767 4.4% $ 77,179,815 $ 28,502,364 $ 48,677,451 170.8 % 1,100,045 1,100,045 — — 541,952,626 550,148,284 (8,195,658 ) (1.5 ) 176,622,658 167,437,616 9,185,042 5.5 589,664,629 549,917,170 39,747,459 7.2 5,003,401 4,810,674 192,727 4.0 105,000 119,700 (14,700 ) (12.3 ) 1,633,474 1,860,997 (227,523 ) (12.2 ) 1,096,614 1,096,614 — — 28,833,709 27,959,793 873,916 3.1 658,600 650,600 8,000 1.2 27,624,535 27,318,098 306,437 1.1 1,199,754 1,199,754 — — 19,565,343 19,244,454 320,889 1.7 $ 1,472,240,203 $ 1,381,366,163 $ 90,874,040 6.6 % decreased $7.6increased $48.7 million or 27.4%170.8% to $20.1$77.2 million at SeptemberJune 30, 20222023 compared to $27.6$28.5 million at December 31, 2021,2022, as a result of increased deposits and borrowings during the purchase of investmentssix months ended June 30, 2023.and funding of loans. Investments AFS decreased $91.3increased $9.2 million or 13.4% to $591.6$176.6 million at SeptemberJune 30, 20222023 from $682.8$167.4 million at December 31, 20212022 as a result of purchases exceeding paydowns and maturities during the six months ended June 30, 2023. Investments AFS decreased $8.2 million or 1.5% to $542.0 million at June 30, 2023 from $550.1 million at December 31, 2022 as maturities and principal paydowns of investments AFS exceeded purchases during the ninesix months ended SeptemberJune 30, 2022. Additionally, investments2023. Investments AFS experiencedexperienced a $46.7$1.0 million decreaseincrease in fair valuevalue during the ninesix months ended SeptemberJune 30, 2022. Investments HTM increased $114.5 million to $138.0 million at September 30, 2022 from $23.5 million at December 31, 2021. The increase is primarily the result of the Company's investment of Emergency Capital Investment Program (“ECIP”) proceeds. For additional details on the ECIP, see “Note 17 - Preferred Stock” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.Loans2023.includingwhich includes loans held for sale, increased $23.6$39.7 million or 4.7%7.2% to $523.1$589.7 million at SeptemberJune 30, 20222023 from $499.5$549.9 million at December 31, 2021,2022, primarily due to an increase in residential mortgage, commercial real estate, commercial real estate and construction real estateagricultural loans originated during the period. LoanAll held for investment loan balances in all loan categories increased during the ninesix months ended SeptemberJune 30, 20222023 with the exception of the commercial and agricultural loan category,construction loans, which decreased $13.2$8.5 million or 29.5%7.6% to $31.5$104.3 million at SeptemberJune 30, 20222023 from $44.7$112.8 million at December 31, 2021.2022. Commercial real estate loans increased $19.0$7.8 million or 8.4%3.1% to $246.8$259.9 million at SeptemberJune 30, 20222023 from $227.8$252.2 million at December 31, 2021.2022. Residential mortgage loans increased $12.4$35.6 million or 14.6%32.4% to $97.4$145.7 million at SeptemberJune 30, 20222023 from $85.0$110.1 million at December 31, 2021. Construction real estate loans increased $4.1 million or 4.1% to $104.3 million at September 30, 2022 from $100.2 million at December 31, 2021.$1.3 million$631,000 or 4.7%2.0% to $30.0$32.4 million at SeptemberJune 30, 20222023 from $28.6$31.7 million at December 31, 2021.2022. Other consumer loans increased $1.6$1.2 million or 7.7%5.3% to $23.1$24.8 million at SeptemberJune 30, 20222023 from $21.4$23.6 million at December 31, 2021.2022. Loans held for sale decreased $1.9 millionincreased $307,000 or 47.0%33.6% to $2.1$1.2 million at SeptemberJune 30, 20222023 from $4.0$913,000 at December 31, 2022.2021.Land held for sale decreased $433,000 during 2022 due to as a write down in the value of the land based on a recent appraisal. Other assets increased $14.8 million or 283.0% to $20.1 million at September 30, 2022 from $5.2 million at December 31, 2021. The increase was primarily the result of a $14.9 million increase in net deferred taxes,our newest branch which was relatedopened this year as well as improvements to increased unrealized losses in the investment portfolio at September 30, 2022.32$2.9$69.4 million or 0.3%6.3% to $1.12$1.18 billion at SeptemberJune 30, 20222023 from $1.12 billion at December 31, 2021. This growth was2022 primarily due to increases in checkinghigher cost certificates of deposit and savingsmoney market accounts, partially offset by a declinedecreases in higher cost certificates of deposits.checking and savings accounts. The majority of the Bank’s deposits are originated within the Bank’s immediate market area. The Bank had $6.0$12.5 million and $10.0$6.0 million in brokered time deposits at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively. The Bank uses brokered time deposits to manage interest rate risk because they are accessible in bulk at rates typically only slightly higher than those in our market areas. A portion of these brokered time deposits give the Bank a call option that allows the Bank the choice to redeem them early should rates change. In addition, the Bank had $5.0 million in other brokered deposits at both SeptemberJune 30, 20222023 and December 31, 2021.2022. At June 30, 2023, the Bank had one deposit relationship totaling approximately 5.2% of outstanding deposits. At December 31, 2022, the Bank had no deposit relationships greater than 5% of outstanding deposits. At June 30, 2023, approximately $326.6 million of our $1.18 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.Shareholders’ EquityShareholders’ equity increased $41.1The Bank had $69.2 million or 35.6%in borrowings from the Federal Reserve Bank of Atlanta (“FRB”) at June 30, 2023, compared to $156.6$44.1 million at September 30, 2022 from $115.5 million at December 31, 2021. The increase was primarily attributable to a $82.9 million issuance of2022. During the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (the “Preferred Stock”) during the secondfirst quarter of 2022 and year2023, the Bank elected to date net income of $6.9 million.participate in the Federal Reserve's Bank Term Funding Program (“BTFP”), allowing the Bank to refinance its existing FRB borrowings. The increase was partially offset by a $46.7 million decrease in accumulated other comprehensive (loss) income, net of tax, combined with $2.1Bank also had $17.9 million in dividends paidother borrowings at June 30, 2023, compared to common shareholders during the nine months ended September 30, 2022. The decrease in net accumulated other comprehensive income, net$27.6 million and December 31, 2022, which consisted of tax, was related to the unrecognized loss in fair value of investments AFS during the nine months ended September 30, 2022reflecting the increase in market interest rates during the year.short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. For additional details on the issuance of the Preferred Stock pursuant to the ECIP,information, see “Note 17 - Preferred Stock”10 – Borrowings” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.33SeptemberJune 30, 20222023 and 2021$1.4$386,000, or 17.8%, to $1.8 million or 30.5%, to $3.2 million or $0.99$0.55 per basic common share for the quarter ended SeptemberJune 30, 20222023 compared to $4.6$2.2 million or $1.43$0.67 per basic common share for the quarter ended SeptemberJune 30, 2021.2022. The decrease in net income was primarily due to no grant income received during the third quarterresult of 2022 compared to a $1.8 million grant receivedincreases in the third quarter of 2021provision for credit losses and non-interest expense combined with the $665,000 reversal of provision for loan losses in the quarter ended September 30, 2021 compared to no provision or reversal for loan losses for the quarter ended September 30, 2022. In addition,lower non-interest expense increased $229,000,income, partially offsetting a $1.3 millionoffset by an increase in net interest income for the quarter ended September 30, 2022 compared to the same quarter in 2021.Net Interest IncomeNet interest income increased $1.3 million, or 14.8%, to $10.1 million during the quarter ended September 30, 2022, compared to $8.8 million for the same quarter in 2021. During the quarter ended September 30, 2022, average interest-earning assets increased $194.0 million or 17.2% to $1.3 billion from $1.1 billion for the same quarter in 2021, while average interest-bearing liabilities increased $47.5 million or 5.5% to $914.1 million for the quarter ended September 30, 2022 from $866.6 million for the comparable quarter in 2021. The Company's net interest margin was 3.09% for the quarter ended September 30, 2022 compared to 3.16% for the comparable quarter in 2021. The Company's net interest spread on a tax equivalent basis was 2.93% for the quarter ended September 30, 2022 compared to 3.07% for the quarter ended September 30, 2021.Loan yields in 2021 were impacted favorably as a result of recognitionincreased market interest rates and, to a lesser extent, higher average balances of unamortized deferred fee income on PPPinvestments and loans forgiven and repaid by the SBA. Loan yields in 2022 were impacted favorably as a result of the rising interest rate environment.receivable, net. Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”FMOC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve”) has increased the target range for the federal funds rate by 300500 basis points, including 15025 basis points during the thirdsecond quarter of 2022,2023, to a range of 3.00%5.00% to 3.25%5.25% as of SeptemberJune 30, 2022. In November 2022,2023. Subsequent to June 30, 2023, the FOMC increasedraised the target range for the federal funds rate another 75by an additional 25 basis pointspoints. As it continues to seek to control inflation without creating a range of 3.75% to 4.00%. We believe our net interest margin during the current year will continue to increase to reflect the lagging benefit of variable rate interest-earnings assets beginning to reprice higher and ifrecession, the FOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent Federal Reserve communications and interest rate forecasts.associatedaverage yields on interest-earning assets, average costs of interest-bearing liabilities and the resulting changes in interest income and expense for the three months ended SeptemberJune 30, 20222023 and 2021.2022. 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.Quarter Ended September 30, Change in Average Balance Increase (Decrease) in Interest Income 2022 2021 (Dollars in thousands) Average Balance Interest Income Average Balance Interest Income Loans Receivable, Net $ 521,143 $ 6,306 4.84 % $ 505,191 $ 7,262 5.75 % $ 15,952 $ (956) Taxable Investments 741,358 4,550 2.45 570,578 2,191 1.54 170,780 2,359 44,685 417 3.73 43,814 281 2.56 871 136 Deposits with other Banks 13,569 94 2.78 7,148 3 0.19 6,421 91 Total Interest-Earning Assets $ 1,320,755 $ 11,367 3.44 % $ 1,126,731 $ 9,737 3.46 % $ 194,024 $ 1,630 (1) Annualized(2)Tax 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 SeptemberJune 30, 20222023 and 2021. The tax equivalent adjustment relates to the tax exempt municipal bonds and was approximately $74,000 and $68,000 for the quarters ended September 30, 2022 and 2021, respectively.. $ 596,375 $ 8,072 5.41 % $ 517,732 $ 6,205 4.79 % 693,506 6,858 3.96 685,032 2,855 1.67 20,767 187 3.61 44,702 333 2.98 37,426 467 4.99 36,014 54 0.60 $ 1,348,074 $ 15,584 4.62 % $ 1,283,480 $ 9,447 2.94 % $ 671,595 $ 4,549 2.71 % $ 706,739 $ 251 0.14 % 209,350 622 1.19 151,820 147 0.39 880,945 5,171 2.35 858,559 398 0.16 91,626 823 3.59 35,780 17 0.19 5,155 87 6.76 5,155 35 2.73 26,500 348 5.25 30,000 394 5.25 $ 1,004,226 $ 6,429 2.56 % $ 929,494 $ 844 0.36 % 2.06 % 2.58 % $ 9,155 2.72 % $ 8,603 2.60 % 31 60 $ 9,124 $ 8,543 34Total tax equivalent interestonincreased $581,000 or 6.8% to $9.1 million during the quarter ended June 30, 2023, compared to $8.5 million for the same quarter in 2022. During the quarter ended June 30, 2023, average interest-earning assets increased $1.6$64.6 million or 5.0% to $11.4$1.35 billion from $1.28 billion for the same quarter in 2022, while average interest-bearing liabilities increased $74.7 million or 8.0% to $1.0 billion for the quarter ended June 30, 2023 from $929.5 million for the comparable quarter in 2022. The Company's net interest margin was 2.72% for the quarter ended June 30, 2023 compared to 2.60% for the comparable quarter in 2022. The Company's net interest spread on a tax equivalent basis was 2.06% for the quarter ended June 30, 2023 compared to 2.58% for the quarter ended June 30, 2022.SeptemberJune 30, 20222023 compared to $9.7$9.4 million for the same period in 2021.decreased $956,000increased $1.9 million or 13.2%30.1% to $6.3$8.1 million for the quarter ended SeptemberJune 30, 20222023 from $7.3$6.2 million for the thirdsecond quarter of 2021.2022. The decreaseincrease in loan interest income was the result of a 91$78.6 million increase in the average loan portfolio balance combined with a 62 basis point decreaseincrease in the average yield on loans receivable primarily due to a decrease in deferredAS ADJUSTABLE-RATE LOAns reset and new loans were originated at higher market interest income on PPP loans recognized during the period. This decrease was partially offset by a $16.0 million increase in the average loan portfolio balance.$2.4$4.0 million or 140.2% to $4.5$6.9 million during the quarter ended SeptemberJune 30, 2023 from $2.9 million for the second quarter of 2022, due to a $170.8$8.5 million increase in the average balance of these assetstaxable investments combined with a 91229 basis point increase in the average yield.yield to 3.96%, reflecting higher market interest rates. Tax equivalent interest income from non-taxable investments increased $136,000decreased $146,000 to $417,000$187,000 during the quarter ended SeptemberJune 30, 20222023 due to an increasea $23.9 million decrease in the average yield onbalance of non-taxable investments.$91,000$413,000 during the quarter ended SeptemberJune 30, 20222023 to $467,000, due to a $6.4$1.4 million increase in the average balance of these assets combined with a significant increase in the average yield earned on these assets. Theassets due to increased market interest rates.assets was primarily relatedliabilities.the $82.9 million in cash received during the second quarter of 2022 from the sale of the Preferred Stock mentioned above.Interest ExpenseThe following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended September 30, 2022 and 2021.Quarter Ended September 30, Change in Average Balance Increase (Decrease) in Interest Expense 2022 2021 (Dollars in thousands) Average Balance Interest Expense Average Balance Interest Expense Checking, Savings & Money Market Accounts $ 700,322 $ 540 0.31 % $ 627,678 $ 191 0.12 % $ 72,644 $ 349 Certificates Accounts 139,841 136 0.39 165,084 185 0.45 (25,243) (49) 39,099 44 0.45 38,676 51 0.52 423 (6) Junior Subordinated Debentures 5,155 50 3.87 5,155 24 1.86 — 26 Subordinated Debentures 29,652 389 5.25 30,000 394 5.25 (348) (5) Total Interest-Bearing Liabilities $ 914,069 $ 1,159 0.51 % $ 866,593 $ 845 0.39 % $ 47,476 $ 315 (1) Annualized(2) Includes FHLB Advances, FRB Borrowings and Repurchase AgreementsTotal interest expense increased $315,000 or 37.3% to $1.2$5.2 million for the quarter ended SeptemberJune 30, 2022 compared to $845,0002023 from $398,000 for the samesecond quarter in 2021of 2022, due to an increase of 12219 basis points in the average cost combined with a $22.4 million increase in the average balance of interest-bearing deposit accounts. Interest expense on FRB and other borrowings increased $805,000 during the quarter due to a $55.8 million increase in the average balance of these liabilities combined with an increase of 340 basis points in the average cost of interest bearing liabilities combined with a $47.5 million or 5.5% increase in the average balance of these liabilities.Interest expense on deposits increased $300,000 to $676,000 for the quarter ended September 30, 2022 due to a $47.4 million increase in the average balance of interest bearing deposit accounts combined with a 13 basis point increase in the average cost of interest-bearing deposits during the third quarter of 2022 when compared to the same quarter in 2021. Interest expense on certificate accounts decreased $49,000 due to a decrease of $25.2 million in the average balance combined with a six basis point decrease in the average cost of certificate deposits during the third quarter of 2022, as management elected to utilize liquidity gained from lower cost deposits to reduce its balances of higher cost certificates of deposit in a managed reduction of these funds. Interest expense on all other interest-bearing deposits increased $349,000 during the quarter due to a $72.6 million increase in the average balance combined with a 19 basis point increase in the average cost. Interest expense on the junior subordinated debentures increased due to increased floating interest rates reflecting higher market interest rates.35SECURITY FEDERAL CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of OperationsLoanCredit Losses is determined by management’s on-going monthly analysis of the loan portfolio and the adequacy of the allowance for loan losses.credit losses for loans and unfunded commitments is determined by management’s on-going monthly analysis. The Company has policies and procedures in place for evaluating and monitoring the overall credit quality of the loan portfolio and for timely identification of potential problem loans including internal and external loan reviews. The adequacy of the allowance for loancredit losses is reviewed monthly by the Asset Classification Committee and quarterly by the Board of Directors. Management’s review of the adequacy of the allowance includes three main components.Currently, management appliesThe Company calculates the allowance for credit losses for each loan pool using a ten yearremaining life loss methodology with a two quarter reasonable and supportable forecast period and an immediate reversion period. Management believes that the Company’s historical loss ratioexperience provides the best basis for its assessment of expected credit losses to eachdetermine the allowance for credit losses on loans. The Company uses its own internal data to measure historical credit loss experience within the loan category to estimatepools with similar risk characteristics over an economic cycle. The Company then forecasts the inherentcalculated historical loss in these pooled loans.problem creditsindividually evaluated collateral dependent loans identified through the Company’s internal monitoring system. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for impairment and recorded in accordance with accounting guidance. For each loan deemed impaired, management calculates a specific reservedetermining the allowance for credit losses. Under CECL, for collateral dependent loans, the amount in whichCompany has adopted the recorded investment inpractical expedient to measure the loan exceedsallowance for credit losses based on the fair value. This estimatevalue of collateral. The allowance for credit losses on loans is calculated on an individual loan basis based on a thorough analysisthe shortfall between the fair value of the most probable source of repayment,loan's collateral, which is typicallyadjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral underlyingexceeds the loan.loancredit losses by loan category, delinquency percentages, and the assignment of percentage targets of reserves in each loan category when evaluating the allowance. Once the analysis is completed, the three components are combined and compared to the allowance amount. Based on this, charges are made to the provision as needed. Because the SBA guarantees 100%PPP loans madeCompany's investment securities classified as available for sale and held to eligible borrowers, these loans domaturity. correspondinglong history of no credit losses. The state and local governments securities held by the Company are highly rated by major rating agencies.loss.The table below showslosses under the Incurred Loss methodology during the quarter ended June 30, 2022. For additional information of the changes in the allowance for loancredit losses, see “Note 3 – Summary of Significant Accounting Policies", "Note 6 - Investments, Available for Sale", "Note 7 - Investments, Held to Maturity, and “Note 8 - Loans Receivable" of the quarters ended September 30, 2022 and 2021.Quarter Ended September 30, (Dollars in thousands) 2022 2021 Beginning Balance $ 11,198 $ 11,424 (Reversal of) Provision for Loan Losses — (665) Charge-offs (54) (46) Recoveries 155 459 Net Recoveries $ 101 $ 413 Ending Allowance for Loan Losses Balance $ 11,299 $ 11,172 At Period End: 9/30/2022 9/30/2021 Impaired Loans $ 2,047 $ 2,484 $ 532,252 $ 508,184 Total Loans Receivable, Net $ 523,094 $ 500,601 Allowance For Loan Losses as a % of Impaired Loans 551.9 % 449.8 % 2.1 % 2.2 % (1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES The Company had net recoveriesNotes to Consolidated Financial Statements included in Part I. Item 1 of $101,000 for the quarter ended September 30, 2022 compared to net recoveries of $413,000 for the third quarter of 2021. There was no provision for loan losses for the quarter ended September 30, 2022 compared to a negative provision of $665,000 for the third quarter of 2021 following significantly higher loan loss provisions during 2020 in response to the ongoing COVID-19 pandemic. The reversal of loan loss provisions during the three months ended September 30, 2021 was the result of a reduction in historical loss and qualitative adjustment factors related to improvement in the economic and business conditions at both the national and regional levels as of September 30, 2021. Non-performing assets improved to $2.8 million, or 0.21% of total assets, at September 30, 2022 from $3.1 million, or 0.25% of total assets, at September 30, 2021.36Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral. In the event an acceptable arrangement cannot be reached, we may need to acquire these properties through foreclosure or other means and subsequently sell, develop or liquidate them. Management believes the allowance for loan losses is adequate based on its best estimates of the probable losses inherent in the loan portfolio, although there can be no guarantee these estimates will not be proven incorrect in the future. In addition, bank regulatory agencies may require additional provisions to the allowance for loan losses based on their judgments and estimates as part of their examination process. Because the allowance for loan losses is an estimate, there is no guarantee that actual loan losses will not exceed the allowance for loan losses, or that additional increases in the allowance for loan losses will not be required in the future. A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowed economic growth and any governmental or societal responses to the COVID-19 pandemic among 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.$2.3 million,$386,000 or 50.9%,14.7% to $2.2$2.3 million for the quarter ended SeptemberJune 30, 20222023 compared to $4.5$2.6 million for the quarter ended SeptemberJune 30, 2021.2022. The decrease was primarily due to a $645,000$310,000 decrease in gain on sale of loans reflecting the decline in originations of loans held for sale following recent market interest rate increases combined with a $1.8 million decrease inincreases. In addition, there was no grant income. These decreases were partially offset by increases in all other non-interest income line items with the exception of BOLI income, which decreased $4,000recorded during the quarter ended SeptemberJune 30, 2022 when2023 compared to $171,000 for the quarter ended SeptemberJune 30, 2021.2022. For additionaladditional 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.$229,000$480,000 or 2.8%5.7% to $8.3$8.9 million for the quarter ended SeptemberJune 30, 20222023 compared to $8.0$8.4 million for the quarter ended SeptemberJune 30, 2021.2022. The following table summarizes the changes in non-interest expense:Quarter Ended September 30, Increase (Decrease) 2022 2021 $ % Compensation and Employee Benefits $ 5,019,920 $ 4,757,937 $ 261,983 5.5 % Occupancy 703,310 641,555 61,755 9.6 Advertising 153,460 275,947 (122,487) (44.4) Depreciation and Maintenance of Equipment 751,739 781,217 (29,478) (3.8) FDIC Insurance Premiums 87,858 73,845 14,013 19.0 Net Cost of Operation of OREO 10,000 55,000 (45,000) (81.8) Consulting 179,318 182,684 (3,366) (1.8) Debit Card Expense 307,092 284,434 22,658 8.0 Telephone 97,204 100,113 (2,909) (2.9) Postage 59,654 16,469 43,185 262.2 General Insurance 76,566 77,731 (1,165) (1.5) Other 831,564 801,964 29,600 3.7 Total Non-Interest Expense $ 8,277,685 $ 8,048,896 $ 228,789 2.8 % $ 5,024,089 $ 4,904,606 $ 119,483 2.4 % 772,722 694,650 78,072 11.2 % 261,801 279,596 (17,795 ) (6.4 )% 598,388 585,216 13,172 2.3 % 217,503 84,183 133,320 158.4 % — 93,733 (93,733 ) (100.0 )% 142,396 169,231 (26,835 ) (15.9 )% 352,287 326,344 25,943 7.9 % 315,844 278,687 37,157 13.3 % 1,223,613 1,012,303 211,310 20.9 % $ 8,908,643 $ 8,428,549 $ 480,094 5.7 % occupancy expenseother non-interest expenses during the thirdsecond quarter of 2022,2023, which were partially offset by a decrease in advertising expense.$262,000$119,000 or 5.5%2.4% to $5.0 million for the quarter ended SeptemberJune 30, 20222023 when compared to the quarter ended SeptemberJune 30, 20212022 due to general annual cost of living increases, and an increase in the number of full time equivalent employees as a result of our newest branch added during the first quarter of 2022in 2023 and the overall growth of the Company. Occupancy expense and other non-interest expenseexpenses also increased during the thirdsecond quarter of 20222023 due to increased operations and the addition of our newest branch located in Columbia, South Carolina.37Provision For Income TaxesThe provision for income taxes decreased $472,000 or 35.6% to $855,000 for the quarter ended September 30, 2022 from $1.3 million for the same period in 2021 due to lower net income before taxes in 2022. Pre-tax net income was $4.1 million for the quarter ended September 30, 2022 compared to $6.0 million for the third quarter of 2021. The Company’s combined federal and state effective income tax rate was 20.9% and 22.2% for the quarters ended September 30, 2022 and 2021, respectively.38SECURITY FEDERAL CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of OperationsNineSix Months Ended SeptemberJune 30, 20222023 and 2021decreased $3.8increased $739,000, or 19.9%, to $4.5 million or 35.4% to $6.9 million or $2.13$1.37 per basic common share for the ninesix months ended SeptemberJune 30, 20222023 compared to $10.7$3.7 million or $3.30$1.14 per commonbasic common share for the ninesix months ended SeptemberJune 30, 2021.2022. The decreaseincrease in net income was primarily due to the reversal of $2.3 million in loan loss reserves during the nine months ended September 30, 2021 compared to no provision or reversal for loan losses recorded during the nine months ended September 30, 2022. A decrease in non-interest income andan increase in non-interest expenses also contributednet interest income as a result of increased market interest rates and, to lower net income during the nine months ended September 30, 2022 when compared to the same period last year.Net interest income increased $2.0 million or 8.1% to $26.6 million for the nine months ended September 30, 2022 compared to $24.6 million for the same period last year. During the nine months ended September 30, 2022, average interest earning assets increased $164.5 million or 14.8% to $1.3 billion from $1.1 billion for the nine months ended September 30, 2021. Average interest-bearing liabilities also increased by $58.0 million or 6.7% to $927.7 million for the nine months ended September 30, 2022 from $869.7 million for the same period in 2021. The Company's net interest margin fell 18 basis points to 2.79% for the nine months ended September 30, 2022 compared to 2.97% for the nine months ended September 30, 2021. The net interest spread on a tax equivalent basis fell 20 basis points to 2.68% for the nine months ended September 30, 2022 from 2.88% for the comparable period in 2021.Interest Incomeassociatedaverage yields on interest-earning assets, average costs of interest-bearing liabilities and the resulting changes in interest income and expense for the ninesix months ended SeptemberJune 30, 20222023 and 2021:Nine Months Ended September 30, Change in Average Balance Increase (Decrease) in Interest Income 2022 2021 (Dollars in Thousands) Average Balance Interest Income Average Balance Interest Income Loans Receivable, Net $ 518,436 $ 18,608 4.79 % $ 508,693 $ 20,039 5.25 % $ 9,743 $ (1,431) Taxable Investments 696,283 9,720 1.86 556,001 6,409 1.54 140,282 3,310 44,633 1,086 3.25 44,014 1,230 3.73 619 (144) Deposits with other Banks 18,545 151 1.08 4,672 6 0.18 13,873 144 Total Interest-Earning Assets $ 1,277,897 $ 29,565 3.08 % $ 1,113,380 $ 27,684 3.32 % $ 164,517 $ 1,879 (1) Annualized(2)Tax2022. 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 anthe effective tax rate of 21% for the ninesix months ended SeptemberJune 30, 20222023 and 2021. The tax equivalent adjustment relates to the tax exempt municipal bonds and was approximately $184,000 and $202,000 for the nine months ended September 30, 2022 and 2021, respectively.Total tax equivalent interest income increased $1.9 million to $29.6 million during the nine months ended September 30, 2022 compared to $27.7 million during the nine months ended September 30, 2021, primarily due to an increase in interest income from taxable investments, which was partially offset by a decrease in interest income from loans. Total interest income on loans decreased $1.4 million or 7.1% to $18.6 million during the nine months ended September 30, 2022 from $20.0 million for the same period in 2021. The decrease was a result of a 46 basis point decrease in the average yield on loans receivable, which was primarily driven by the recognition of $3.3 million in fee income related to PPP loans during the nine months ended September 30, 2021. The decrease was partially offset by a $9.7 million or 1.9% increase in the average loan balance.Interest income from taxable investment securities increased $3.3 million or 51.6% to $9.7 million for the nine months ended September 30, 2022 from $6.4 million for the same period in 2021. The increase was the result of a $140.3 million increase in the average balance of taxable investments, primarily HTM, combined with an increase of 32 basis points in the average yield earned on taxable investment securities. Tax equivalent interest income from non-taxable investment securities decreased $144,000 or 11.7% to $1.1 million for the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021. $ 583,323 $ 15,482 5.31 % $ 517,061 $ 12,302 4.76 % 696,225 13,467 3.87 673,236 5,059 1.50 20,926 384 3.68 44,705 781 3.49 20,599 502 4.87 20,919 56 0.54 $ 1,321,073 $ 29,835 4.52 % $ 1,255,921 $ 18,198 2.90 % $ 671,857 $ 6,055 1.80 % $ 701,395 $ 474 0.14 % 186,704 2,031 2.18 155,886 269 0.35 858,561 8,086 1.88 857,281 743 0.16 84,603 1,450 3.43 42,530 47 0.22 5,155 171 6.62 5,155 61 2.38 26,500 696 5.25 30,000 787 5.25 $ 974,819 $ 10,403 2.13 % $ 934,966 $ 1,638 0.35 % 2.39 % 2.55 % $ 19,432 2.94 % $ 16,560 2.60 % 64 111 $ 19,368 $ 16,449 39$144,000 for$445,000 during the ninesix months ended SeptemberJune 30, 20222023 to $502,000 due to a $13.9significant increase in the average yield earned on these assets due to increased market interest rates.assets, primarilyliabilities. the cash received for the sale of the Company's Preferred Stock, combined with an increase of 90 basis points in the average yield.Interest ExpenseThe following table compares detailed average balances, cost of funds on an annualized basis, and the resulting changes in interest expense for the nine months ended September 30, 2022 and 2021:Nine Months Ended September 30, Change in Average Balance Change in Interest Expense 2022 2021 (Dollars in Thousands) Average Balance Interest Expense Cost of Funds Average Balance Interest Expense Cost of Funds Checking, Savings & Money Market Accounts $ 700,580 $ 998 0.19 % $ 598,496 $ 542 0.12 % $ 102,084 $ 456 Certificates Accounts 150,670 420 0.37 176,589 716 0.54 (25,919) (296) 41,374 91 0.29 59,429 389 0.87 (18,055) (298) Junior Subordinated Debentures 5,155 111 2.87 5,155 73 1.89 — 38 Subordinated Debentures 29,883 1,177 5.25 30,000 1,181 5.25 (117) (4) Total Interest-Bearing Liabilities $ 927,662 $ 2,797 0.40 % $ 869,669 $ 2,901 0.44 % $ 57,993 $ (104) (1) Includes FHLB Advances, FRB Borrowings and Repurchase AgreementsInterest expense decreased $104,000 or 3.5% to $2.8 million during the nine months ended September 30, 2022 compared to $2.9 million for the same period in 2021. The decrease in total interest expense was attributable to a decrease of four172 basis points in the average cost combined with a $1.3 million increase in the average balance of interest-bearing liabilities, which was partially offset bydeposit accounts. Interest expense on FRB and other borrowings increased $1.4 million during the six months ended June 30, 2023 due to a $58.0$42.1 million or 6.7% increase in the average balance of these liabilities.Interest expense on deposits increased $161,000 to $1.4 million for the nine months ended September 30, 2022 due to a $76.2 million increase in the average balance of interest bearing deposit accounts. Interest expense on certificate accounts decreased $296,000 due to a $25.9 million decrease in the average balanceliabilities combined with a 17 basis point decrease in the average costan increase of certificate deposits during the first nine months of 2022, as management elected to utilize liquidity gained from lower cost deposits to reduce its balances of higher cost certificates of deposit in a managed reduction of these funds. Interest expense on all other interest-bearing deposits increased $457,000 during the nine months ended September 30, 2022 due to a $102.1 million increase in the average balance combined with a seven basis point increase in the average cost.Interest expense on FHLB advances and other borrowed money decreased $298,000 or 76.5% to $91,000 from $389,000 due to a $18.1 million or 30.4% decrease in the average balance combined with a decline of 58321 basis points in the average cost of these liabilities duringliabilities. Interest expense on the ninejunior subordinated debentures increased due to increased floating interest rates reflecting higher market interest rates.SeptemberJune 30, 2022 when compared to the same period last year.Provision for Loan LossesThere was2023 and no provision for loancredit losses recorded duringof the ninesix months ended SeptemberJune 30, 2022 compared to a reversal of provision expense of $2.3 million for2022. The Company adopted the same period in 2021.CECL methodology effective January 1, 2023. The negative provision during 2021 resulted from a reduction in qualitativetransition adjustment factors due to the improvement in the economic and business conditions at both the national and regional levels as of September 30, 2021 following significantly higher loan loss provisions during 2020 in response to the potential and unknown economic impact of the ongoing COVID-19 pandemic. For additional details related to the provision for loan losses and changesadoption of CECL included an increase in the allowance for credit losses on loans of $784,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $1.2 million, which is recorded within "Other Liabilities." The adoption of CECL had an insignificant impact on the Company's HTM and AFS securities portfolios. Results for reporting periods beginning after January 1, 2023 are presented under the CECL methodology while prior period amounts continue to be reported under the Incurred Loss methodology. For additional information on the provision and the allowance for credit losses, see "Note“Note 3 – Summary of Significant Accounting Policies" and “Note 8 - Loans Receivable, Net”Receivable" of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.40Non-Interest IncomeNon-interest income decreased $2.5 millionThe 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. The Company calculates the allowance for credit losses for each pool using a remaining life loss methodology with a two quarter reasonable and supportable forecast period and an immediate reversion period. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses to determine the allowance for credit losses. The Company uses its own internal data to measure historical credit loss experience within the pools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss rates over the calculated remaining life of loans by pool. The second component of management’s monthly analysis is the specific review and evaluation of significant individually evaluated collateral dependent loans identified through the Company’s internal monitoring system. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The third component is an analysis of changes in qualitative factors that may affect the portfolio, including but not limited to: relevant economic trends that could impact borrowers’ ability to repay, industry trends, changes in the volume and composition of the portfolio, credit concentrations, or 25.3%lending policies and the experience and ability of the staff and Board of Directors.$7.5 millionthe allowance amount. Based on this, charges are made to the provision as needed.ninesix months ended SeptemberJune 30, 2023 and 2022 compared to $10.0 million for the nine months ended September 30, 2021. The following table summarizes, respectively. For additional details of the changes in the componentsallowance for credit losses, see “Note 8 - Loans Receivable" of non-interest income:Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ % Gain on Sale of Loans $ 1,511,905 $ 3,022,755 $ (1,510,850) (50.0) % Service Fees on Deposit Accounts 809,287 702,548 106,739 15.2 Commissions From Insurance Agency 620,779 468,083 152,696 32.6 Trust Income 1,084,249 1,005,517 78,732 7.8 BOLI Income 457,202 485,000 (27,798) (5.7) ATM & Check Card Fee Income 2,109,173 1,811,216 297,957 16.5 Grant Income 170,699 1,826,265 (1,655,566) 100.0 Other 702,135 669,379 32,756 4.9 Total Non-Interest Income $ 7,465,429 $ 9,990,763 $ (2,525,334) (25.3) % in non-interest income was primarily attributabledue to a decreases$830,000 decrease in gain on sale of loans andreflecting the decline in originations of loans held for sale following recent market interest rate increases. In addition, there was no grant income which wasrecorded during the six months ended June 30, 2023 compared to $171,000 for the six months ended June 30, 2022. These decreases were partially offset by increases in every other non-interesttrust income line item with the exception of BOLIand ATM and check card fee income. ATM and check card fee income which decreased $28,000 during the nine months ended September 30, 2022. Gain on sale of loans decreased $1.5 millionincreased $130,000 or 50.0%9.2% to $1.5 million for the nine months ended September 30, 2022 compared to $3.0$1.6 million during the same period in 2021 as the dollar volume of loans sold decreased. Commissions from insurance subsidiary increased $153,000 to $621,000 during the ninesix months ended SeptemberJune 30, 2023 when compared to the six months ended June 30, 2022, due to an increase ina new interchange service provider that pays the numberBank more fees per transaction. For additional details of insurance policies sold. ATM & Check Card Fee income increased $298,000 primarily due to an increase in debit card usage.Non-Interest ExpenseFor the nine months ended September 30, 2022, non-interest expense increased $2.2 million or 9.5% to $25.3 million compared to $23.1 million for the same period in 2021. The table below summarizes the changes in non-interest income, see “Note 14 - Non-Interest Income” of the componentsNotes to Consolidated Financial Statements included in Part I. Item 1 of non-interest expense.Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ % Compensation and Employee Benefits $ 14,981,146 $ 14,145,363 $ 835,783 5.9 % Occupancy 2,110,746 1,922,369 188,377 9.8 Advertising 693,389 671,186 22,203 3.3 Depreciation and Maintenance of Equipment 2,278,890 2,354,958 (76,068) (3.2) FDIC Insurance Premiums 284,083 215,181 68,902 32.0 Net Cost (Recovery) of Operation of OREO 10,000 (115,840) 125,840 (108.6) Change in Value of Land HFS 433,077 — 433,077 100.0 Consulting 513,299 512,998 301 0.1 Debit Card Expense 917,225 859,357 57,868 6.7 Telephone 291,069 313,229 (22,160) (7.1) Postage 182,202 147,600 34,602 23.4 General Insurance 257,577 248,691 8,886 3.6 Other 2,348,375 1,829,544 518,831 28.4 Total Non-Interest Expense $ 25,301,078 $ 23,104,636 $ 2,196,442 9.5 %
Non-Interest Expense
Non-interest expense increased $916,000 or 5.4% to $17.9 million for the six months ended June 30, 2023 compared to $17.0 million for the six months ended June 30, 2022. The following table summarizes the changes in non-interest expense:
Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Compensation and Employee Benefits | $ | 10,264,885 | $ | 9,961,226 | $ | 303,659 | 3.0 | % | ||||||||
Occupancy | 1,579,156 | 1,407,436 | 171,720 | 12.2 | % | |||||||||||
Advertising | 506,396 | 539,929 | (33,533 | ) | (6.2 | )% | ||||||||||
Depreciation and Maintenance of Equipment | 1,186,347 | 1,138,537 | 47,810 | 4.2 | % | |||||||||||
FDIC Insurance Premiums | 307,809 | 196,225 | 111,584 | 56.9 | % | |||||||||||
Write down of Land Held for Sale | — | 433,077 | (433,077 | ) | (100.0 | )% | ||||||||||
Consulting | 355,731 | 333,981 | 21,750 | 6.5 | % | |||||||||||
Debit Card Expense | 688,933 | 610,133 | 78,800 | 12.9 | % | |||||||||||
Data Processing | 628,077 | 513,078 | 114,999 | 22.4 | % | |||||||||||
Other | 2,421,897 | 1,889,771 | 532,126 | 28.2 | % | |||||||||||
Total Non-Interest Expense | $ | 17,939,231 | $ | 17,023,393 | $ | 915,838 | 5.4 | % | ||||||||
Compensation and employee benefits expenses increased $836,000$304,000 or 5.9%3.0% to $15.0$10.3 million for the ninesix months ended SeptemberJune 30, 20222023 when compared to $14.1 million during the same period last year primarilysix months ended June 30, 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 the first quarter of 2022in 2023 and the overall growth of the Company. Occupancy expense and advertisingother non-interest expenses also increased during the first six months of 2023due to increased operations and the addition of our newest branch located in Columbia, South Carolina.
FDIC insurance premiums increased $112,000 or 56.9% to $308,000 for the ninesix months ended SeptemberJune 30, 20222023, compared to a net recovery of $116,000 during the nine months ended September 30, 2021. This line item includes all income and expenses associated with OREO, including gain or loss on sales and write-downssame period in value during each period.
The provision for income taxes decreasedincreased $253,000 or 26.5% to $1.2 million or 39.6% to $1.8 million for the ninesix months ended SeptemberJune 30, 20222023 from $3.0 million$954,000 for the same period in 2021 primarily2022 due to higher pre-taxnet income in 2021. Income before taxes in 2023. Pre-tax net income was $8.7 million and $13.7$5.7 million for the ninesix months ended SeptemberJune 30, 2023 compared to $4.7 million for the first six months of 2022 and 2021, respectively.. The Company’s combined federal and state effective income tax rate was 20.7%21.3% and 20.4% for the ninesix months ended SeptemberJune 30, 2023 and 2022 compared to 21.8% for the same period in 2021., respectively.
We actively analyzesanalyze and manages the Bank’smanage liquidity with the objective of maintaining an adequate level of liquidity and to ensure the availability of sufficient cash flows to support loan growth, fund deposit withdrawals, fund operations, and satisfy other financial commitments. See the “Consolidated Statements of Cash Flows” contained in Item 1 – Financial Statements, herein.
The Bank's primary sources of funds include deposits, scheduled loan and investment securities repayments, including interest payments, maturities and sales of loans and investment securities, advances from the FHLB and FRB, and cash flow generated from operations. The sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage repayments are greatly influenced by the level of interest rates, economic conditions, and competition. Management believes that the Company’s current liquidity position and its forecasted operating results are sufficient to fund all of its existing commitments.commitments. The Bank had $173.0$176.1 million in unused commitments to extend credit and standby letters of credit at SeptemberJune 30, 2022.2023.
The Bank's liquid assets in the Company sold $89.4form of cash and cash equivalents, certificates of deposits with other banks and investment AFS totaled $618.7 million at June 30, 2023. Certificates of Preferred Stockdeposit that are scheduled to mature in less than one year from June 30, 2023 totaled $179.5 million. Historically, the U.S. DepartmentBank has been able to retain a significant amount of Treasury pursuant to the ECIP.
At SeptemberJune 30, 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 17.86%17.7%, 10.32%10.1%, 17.86%17.7%, and 19.11%19.0%, 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 SeptemberJune 30, 20222023 the Bank’s conservation buffer was 11.1%was 11.0%. ForFor additional details, see “Note 12 - Regulatory Matters” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
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’sFor the ninesix months ended SeptemberJune 30, 2022,2023, the Bank's interest rate spread, defined as the average yield on interest bearinginterest-earning assets less the average rate paid on interest bearinginterest-bearing liabilities, was 2.68%2.38%.
(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 June 30, 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 June 30, 2023 that have materially affected or are reasonably likely to affect our internal controls over financial 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.
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.
There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's 20212022 Form 10-K.
None
None
Not applicable
None
3.1 | |||||
3.2 | |||||
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 | ||||
4.2 | Form of Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (3) | ||||
10.1 | |||||
| (5) | |||||
10.2 | (5) | ||||
10.3 | (6) | ||||
10.4 | |||||
31.1 | |||||
31.2 | |||||
32 | |||||
101 | The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended | ||||
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.
(4) Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.
(5) Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference.
(6) Filed on March 2, 2000,28, 2018, as an exhibit to the Company's RegistrationProxy Statement on Form S-8dated March 20, 2018 and incorporated herein by reference
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: | August 11, 2023 | By: | /s/J. Chris Verenes | ||||||||||||||
| J. Chris Verenes | |||||||||||||||||
| Chief Executive Officer | |||||||||||||||||
| Duly Authorized Representative |
Date: | August 11, 2023 | By: | ||||||||||||||||
/s/Darrell Rains | ||||||||||||||||||
| Darrell Rains | ||||||||||||||||||
| Chief Financial Officer | ||||||||||||||||||
| Duly Authorized Representative | ||||||||||||||||||