SECURITY FEDERAL CORP - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

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

FOR THE TRANSITION PERIOD:


FROM:						TO:

COMMISSION FILE NUMBER: 000-16120

SECURITY FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)

South Carolina

57-0858504

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

238 Richland Avenue Northwest, Aiken, South Carolina 29801

(Address of principal executive office and Zip Code)

(803) 641-3000

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer

☐

Smaller reporting company

☒

Non-accelerated filer

☒

Emerging growth company

☐

Accelerated filer

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

YES

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

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

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

CLASS:

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

November 15, 2021

3,252,884



PART I.	FINANCIAL INFORMATION (UNAUDITED)	PAGE NO.
Item 1.	Financial Statements (unaudited):	3
	Consolidated Balance Sheets at September 30, 2021 and December 31, 2020	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	47

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	48
	Signatures	50

SCHEDULES OMITTED

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Part 1. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets


	September 30, 2021		December 31, 2020
	(Unaudited)		(Audited)
ASSETS:
Cash and Cash Equivalents	$	13,555,265	$	18,025,409
Certificates of Deposit with Other Banks	100,005		350,005
Investments and Mortgage-Backed Securities ("MBS"):
Available For Sale ("AFS")	627,833,669		589,324,401
Held To Maturity ("HTM") (Fair Value of $22,853,943 and $19,205,287 at September 30, 2021 and December 31, 2020, Respectively)	22,420,739		18,254,394
Total Investments and MBS	650,254,408		607,578,795
Loans Receivable, Net:
Held For Sale	3,589,131		5,693,400
Held For Investment (Net of Allowance of $11,172,237 and $12,842,896 at September 30, 2021 and December 31, 2020, Respectively)	497,011,394		473,473,972
Total Loans Receivable, Net	500,600,525		479,167,372
Accrued Interest Receivable:
Loans	1,274,106		1,252,023
Mortgage-Backed Securities	672,391		631,449
Investment Securities	1,691,322		1,614,077
Total Accrued Interest Receivable	3,637,819		3,497,549
Operating Lease Right-of-Use ("ROU") Assets	2,358,453		2,351,661
Premises and Equipment, Net	26,194,747		26,575,257
Federal Home Loan Bank ("FHLB") Stock, at Cost	962,600		2,354,000
Other Real Estate Owned ("OREO")	129,700		498,610
Bank Owned Life Insurance ("BOLI")	26,559,897		26,074,897
Goodwill	1,199,754		1,199,754
Other Assets	4,726,586		4,036,831
Total Assets	$	1,230,279,759	$	1,171,710,140
LIABILITIES:
Deposit Accounts	$	1,016,567,086	$	918,096,235
Advance Payments By Borrowers for Taxes and Insurance	447,136		206,110
Advances from FHLB	10,000,000		35,000,000
Borrowings from Federal Reserve Bank ("FRB")	15,375,000		48,700,000
Other Borrowings	26,607,702		13,117,030

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

Subordinated Debentures	30,000,000		30,000,000
Operating Lease Liabilities	2,395,857		2,380,269
Other Liabilities	7,050,600		7,149,750
Total Liabilities	$	1,113,598,381	$	1,059,804,394
SHAREHOLDERS’ EQUITY:

Common Stock, $0.01 Par Value; 5,000,000 Shares Authorized; 3,453,817 Shares Issued and 3,252,884 Shares Outstanding at September 30, 2021 and December 31, 2020	$	34,538	$	34,538
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 Income ("AOCI")	8,044,630		12,940,950
Retained Earnings	94,702,735		85,030,783
Total Shareholders' Equity	$	116,681,378	$	111,905,746
Total Liabilities and Shareholders' Equity	$	1,230,279,759	$	1,171,710,140

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest Income:
Loans	$	7,261,810	$	6,774,037	$	20,039,222	$	19,333,257
Mortgage-Backed Securities	1,302,757		1,475,881		4,018,985		4,728,662
Investment Securities	1,100,446		1,085,221		3,418,605		3,417,663
Other	3,401		3,639		6,450		52,970
Total Interest Income	9,668,414		9,338,778		27,483,262		27,532,552
Interest Expense:
NOW and Money Market Accounts	172,730		185,626		489,105		912,675
Savings Accounts	18,688		25,306		52,402		68,294
Certificate Accounts	184,718		575,602		715,698		2,360,497
FHLB Advances and Other Borrowed Money	50,756		224,250		389,142		700,590

Senior Convertible Debentures	—		—		—		81,796
Subordinated Debentures	393,750		393,750		1,181,250		1,181,250
Junior Subordinated Debentures	23,955		26,380		72,974		101,388
Total Interest Expense	844,597		1,430,914		2,900,571		5,406,490
Net Interest Income	8,823,817		7,907,864		24,582,691		22,126,062
Provision For Loan Losses	(665,000)		2,200,000		(2,270,000)		3,600,000
Net Interest Income After Provision For Loan Losses	9,488,817		5,707,864		26,852,691		18,526,062
Non-Interest Income:
Gain on Sale of MBS and Investment Securities	—		139,346		—		1,332,666
Gain on Sale of Loans	932,340		1,184,818		3,022,755		2,494,084
Service Fees on Deposit Accounts	251,440		222,085		702,548		695,561
Commissions From Insurance Agency	187,657		202,007		468,083		513,783
Trust Income	359,035		243,990		1,005,517		782,210
BOLI Income	155,000		138,250		485,000		408,250
ATM & Check Card Fee Income	615,568		499,176		1,811,216		1,416,946
Grant Income	1,826,265		171,310		1,826,265		316,814
Other	202,314		187,269		669,379		629,814
Total Non-Interest Income	4,529,619		2,988,251		9,990,763		8,590,128
Non-Interest Expense:
Compensation and Employee Benefits	4,757,937		4,743,327		14,145,363		13,654,330
Occupancy	641,555		669,258		1,922,369		1,864,202
Advertising	275,947		325,584		671,186		776,605
Depreciation and Maintenance of Equipment	781,217		689,118		2,354,958		2,126,683
FDIC Insurance Premiums	73,845		51,858		215,181		67,938
Net Cost (Recovery) from Operation of OREO	55,000		(22,049)		(115,840)		(27,329)

Consulting	182,684		190,379		512,998		563,246
Debit Card Expense	284,434		232,788		859,357		764,570
Telephone	100,113		135,645		313,229		372,631
Postage	16,469		94,306		147,600		249,512
General Insurance	77,731		62,318		248,691		226,983
Other	801,964		513,685		1,829,544		1,681,363
Total Non-Interest Expense	8,048,896		7,686,217		23,104,636		22,320,734
Income Before Income Taxes	5,969,540		1,009,898		13,738,818		4,795,456
Provision For Income Taxes	1,327,070		105,187		2,993,414		810,227
Net Income	4,642,470		904,711		10,745,404		3,985,229
Net Income Per Common Share (Basic)	$	1.43	$	0.28	$	3.30	$	1.25

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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended September 30,
	2021		2020
Net Income	$	4,642,470	$	904,711
Other Comprehensive (Loss) Income:

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



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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

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


	Common Stock		APIC		Treasury Stock		AOCI		Retained Earnings		Total
Balance at December 31, 2019	$	31,578	$	12,308,179	$	(4,330,712)	$	4,467,527	$	79,281,433	$	91,758,005
Net Income	—		—		—		—		1,064,187		1,064,187
Other Comprehensive Loss, Net of Tax	—		—		—		(2,159,363)		—		(2,159,363)
Employee Stock Purchases	4		12,964		—		—		—		12,968
Conversion of Senior Convertible Debentures, 295,600 shares of common stock	2,956		5,909,044		—		—		—		5,912,000
Cash Dividends on Common Stock	—		—		—		—		(325,408)		(325,408)
Balance at March 31, 2020	$	34,538	$	18,230,187	$	(4,330,712)	$	2,308,164	$	80,020,212	$	96,262,389
Net Income	—		—		—		—		2,016,331		2,016,331
Other Comprehensive Income, Net of Tax	—		—		—		9,119,097		—		9,119,097

Cash Dividends on Common Stock	—		—		—		—		(325,289)		(325,289)
Balance at June 30, 2020	$	34,538	$	18,230,187	$	(4,330,712)	$	11,427,261	$	81,711,254	$	107,072,528
Net Income	—		—		—		—		904,711		904,711
Other Comprehensive Income, Net of Tax	—		—		—		1,398,818		—		1,398,818

Cash Dividends on Common Stock	—		—		—		—		(325,269)		(325,269)
Balance at September 30, 2020	$	34,538	$	18,230,187	$	(4,330,712)	$	12,826,079	$	82,290,696	$	109,050,788


	Common Stock		APIC		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 Income, 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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended
	September 30,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	10,745,404	$	3,985,229
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	1,471,810		1,401,863

Discount Accretion and Premium Amortization, net	5,016,096		3,246,360
Provision for Loan Losses	(2,270,000)		3,600,000
Earnings on BOLI	(485,000)		(408,250)

Gain on Sales of Loans	(3,022,755)		(2,494,084)

Gain on Sales of Investment Securities and MBS	—		(1,332,666)

Gain on Sales of OREO	(105,422)		(46,354)
Write Down on OREO	20,000		—
Amortization of Operating Lease ROU Assets	247,947		276,664
Amortization of Deferred Loan Costs, net	3,643,268		805,925
Proceeds From Sale of Loans Held For Sale	91,709,578		79,231,518
Origination of Loans Held For Sale	(86,582,554)		(80,242,011)
(Increase) Decrease in Accrued Interest Receivable:
Loans	(22,083)		(614,618)
MBS	(40,942)		(30,775)
Investment Securities	(77,245)		251,762
Increase in Advance Payments By Borrowers	241,026		353,843
Other, Net	560,159		(648,115)
Net Cash Provided By Operating Activities	$	21,049,287	$	7,336,291
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of MBS AFS	$	(85,337,142)	$	(68,855,028)
Proceeds from Paydowns, Maturities and Sales of MBS AFS	42,244,294		35,555,734

Purchase of MBS Held To Maturity ("HTM")	(8,261,528)		—
Proceeds from Payments and Maturities of MBS HTM	3,985,667		3,246,065
Purchase of Investment Securities AFS	(36,733,200)		(79,072,088)
Proceeds from Paydowns, Maturities and Sales of Investment Securities AFS	29,925,665		31,547,522



Proceeds from Redemption of Certificates of Deposits with Other Banks	250,000		—
Purchase of FHLB Stock	(1,900)		(6,759,500)
Redemption of FHLB Stock	1,393,300		6,942,000
Purchase of BOLI	—		(4,000,000)

Increase in Loans Receivable	(24,910,690)		(75,932,370)
Proceeds From Sale of OREO	454,332		578,994
Purchase and Improvement of Premises and Equipment	(1,091,300)		(882,197)

Net Cash Used By Investing Activities	$	(78,082,502)	$	(157,630,868)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts	$	98,470,851	$	133,384,506
Proceeds from FHLB Advances	—		226,285,000
Repayment of FHLB Advances	(25,000,000)		(229,423,000)
Increase in Other Borrowings, Net	13,490,672		8,188,288
Redemption of Senior Convertible Debentures	—		(132,000)
Proceeds from FRB Borrowings	232,140,000		85,950,000
Repayment of FRB Borrowings	(265,465,000)		(69,925,000)
Proceeds from Employee Stock Purchases	—		12,968
Dividends to Common Stock Shareholders	(1,073,452)		(975,966)
Net Cash Provided By Financing Activities	$	52,563,071	$	153,364,796
Net (Decrease) Increase in Cash and Cash Equivalents	(4,470,144)		3,070,219
Cash and Cash Equivalents at Beginning of Period	18,025,409		12,536,311
Cash and Cash Equivalents at End of Period	$	13,555,265	$	15,606,530

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)


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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and accounting principles generally accepted in the United States of America ("GAAP"); therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows. Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited consolidated financial statements appearing in Security Federal Corporation’s (the “Company”) 2020 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 10-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other period. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2. Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Security Federal Bank (the “Bank”) and the Bank’s wholly owned subsidiaries, Security Federal Insurance, Inc. (“SFINS”), Security Federal Investments, Inc. ("SFINV") and Security Financial Services Corporation (“SFSC”). SFINS is an insurance agency offering auto, business, health and home insurance. SFINS has a wholly owned subsidiary, Collier Jennings Financial Corporation, which has as subsidiaries Security Federal Auto Insurance, The Auto Insurance Store Inc., and Security Federal Premium Pay Plans Inc. Security Federal Premium Pay Plans Inc. has one wholly owned premium finance subsidiary and also has an ownership interest in four other premium finance subsidiaries. SFINV was formed to hold investment securities and allow for better management of the securities portfolio. SFSC is currently inactive. All significant intercompany transactions and balances have been eliminated in consolidation.

The Company has a wholly owned subsidiary, Security Federal Statutory Trust (the “Trust”), which issued and sold fixed and floating rate capital securities of the Trust. However, under current accounting guidance, the Trust is not consolidated in the Company’s financial statements. The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage loans and other loans to individuals and small businesses for various personal and commercial purposes.

3. Critical Accounting Policies

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

3. Critical Accounting Policies, Continued

While management uses the best information available to make evaluations, future adjustments may be necessary if economic conditions differ substantially from the assumptions used in making these evaluations. The allowance for loan losses is subject to periodic evaluations by our bank regulatory agencies, including the Board of Governors of the Federal Reserve System ("Federal Reserve"), the FDIC and the South Carolina Board of Financial Institutions, which may require adjustments to be made to the allowance based upon the information that is available at the time of their examination.

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

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

4. Earnings Per Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued. The dilutive effect of options outstanding under the Company’s stock option plan is reflected in diluted EPS by application of the treasury stock method. There were no stock options outstanding at September 30, 2021 or 2020; 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 three and nine months ended September 30, 2021 and 2020.


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


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

5. Stock-Based Compensation

Certain officers and directors of the Company participate in incentive and non-qualified stock option plans. Options are granted at exercise prices not less than the fair value of the Company’s common stock on the date of the grant. At September 30, 2021 and 2020, the Company had no options outstanding and there was no activity during both the nine months ended September 30, 2021 and 2020. At those dates, there were 50,000 options available for grants.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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


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



Student Loan Pools	$	70,206,668	$	518,071	143,568		$	70,581,171
Small Business Administration (“SBA”) Bonds	139,129,553		1,148,197		952,400		139,325,350
Tax Exempt Municipal Bonds	44,797,517		5,009,076		36,273		49,770,320
Taxable Municipal Bonds	53,962,317		1,028,467		450,104		54,540,680
Mortgage-Backed Securities	309,035,345		6,900,422		2,319,619		313,616,148

Total Available For Sale	$	617,131,400	$	14,604,233	$	3,901,964	$	627,833,669

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



Student Loan Pools	$	61,244,212	$	220,239	$	382,986	$	61,081,465
SBA Bonds	153,565,023		797,456		1,057,454		153,305,025
Tax Exempt Municipal Bonds	42,793,179		6,023,263		—		48,816,442
Taxable Municipal Bonds	46,680,301		1,743,322		75,168		48,348,455
Mortgage-Backed Securities	267,854,880		10,672,412		754,278		277,773,014
Total Available For Sale	$	572,137,595	$	19,456,692	$	2,269,886	$	589,324,401

Student Loan Pools are typically 97% guaranteed by the United States government while SBA bonds are 100% backed by the full faith and credit of the United States government. The majority of the mortgage-backed securities included in the tables above and below are issued or guaranteed by an agency of the United States government such as Ginnie Mae, or by Government Sponsered Entities ("GSEs"), including Fannie Mae and Freddie Mac. Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the United States government, while those issued by GSEs are not.

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

Also included in mortgage-backed securities in the tables above and below are private label collateralized mortgage obligation ("CMO") securities, which are issued by non-governmental real estate mortgage investment conduits and are not backed by the full faith and credit of the United States government. At September 30, 2021 the Bank held AFS private label CMO mortgage-backed securities with an amortized cost and fair value of $31.4 million and $31.6 million, compared to an amortized cost and fair value of $37.0 million and $37.7 million at December 31, 2020, respectively.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The amortized cost and fair value of investment and mortgage-backed securities available for sale at September 30, 2021 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties. Since mortgage-backed securities are not due at a single maturity date, they are disclosed separately, rather than allocated over the maturity groupings set forth in the table below.


	September 30, 2021
Investment Securities:	Amortized Cost		Fair Value
One Year or Less	$	74,883	$	70,483
After One – Five Years	7,092,198		7,092,980
After Five – Ten Years	82,618,930		83,552,707
More Than Ten Years	218,310,044		223,501,351
Mortgage-Backed Securities	309,035,345		313,616,148
Total Available For Sale	$	617,131,400	$	627,833,669

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

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

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


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



Student Loan Pools	$	19,683,284	$	101,836	$	8,974,486	$	41,732	$	28,657,770	$	143,568
SBA Bonds	28,694,170		637,312		38,137,753		315,088		66,831,923		952,400
Tax Exempt Municipal Bonds	4,740,849		36,273		—		—		4,740,849		36,273
Taxable Municipal Bonds	15,994,162		285,575		3,344,600		164,529		19,338,762		450,104
Mortgage-Backed Securities	112,346,749		1,955,565		9,280,082		364,054		121,626,831		2,319,619
	$	181,459,214	$	3,016,561	$	59,736,921	$	885,403	$	241,196,135	$	3,901,964


	December 31, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses



Student Loan Pools	$	7,196,541	$	46,207	$	29,460,703	$	336,779	$	36,657,244	$	382,986
SBA Bonds	39,843,800		653,518		43,907,816		403,936		83,751,616		1,057,454

Taxable Municipal Bond	7,092,538		75,168		—		—		7,092,538		75,168
Mortgage-Backed Securities	51,941,025		655,213		9,542,092		99,065		61,483,117		754,278

	$	106,073,904	$	1,430,106	$	82,910,611	$	839,780	$	188,984,515	$	2,269,886

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Securities classified as available for sale are recorded at fair market value. At September 30, 2021 and December 31, 2020, 22.7% and 37.0% of the unrealized losses, representing 71 and 88 individual securities, respectively, consisted of securities in a continuous loss position for 12 months or more. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”).

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

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

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



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



Mortgage-Backed Securities (1)	$	22,420,739	$	729,574	$	296,370	$	22,853,943
Total Held To Maturity	$	22,420,739	$	729,574	$	296,370	$	22,853,943


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


Mortgage-Backed Securities (1)	$	18,254,394	$	984,015	$	33,122	$	19,205,287
Total Held To Maturity	$	18,254,394	$	984,015	$	33,122	$	19,205,287

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

At September 30, 2021, the Bank held an amortized cost and fair value of $5.9 million and $6.4 million, respectively, in GNMA mortgage-backed securities classified as held to maturity, which are included in the table above, compared to an amortized cost and fair value of $8.1 million and $8.7 million, respectively, at December 31, 2020. The Company has not invested in any private label mortgage-backed securities classified as held to maturity. At September 30, 2021, the amortized cost and fair value of mortgage-backed securities held to maturity that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $9.2 million and $9.9 million, respectively, compared to an amortized cost and fair value of $13.4 million and $14.3 million, respectively, at December 31, 2020.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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


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


Mortgage-Backed Securities (1)	$	11,574,820	$	296,370	$	—	$	—	$	11,574,820	$	296,370
	$	11,574,820	$	296,370	$	—	$	—	$	11,574,820	$	296,370

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


	December 31, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses




Mortgage-Backed Securities (1)	$	3,692,780	$	32,583	$	787,503	$	539	$	4,480,283	$	33,122
	$	3,692,780	$	32,583	$	787,503	$	539	$	4,480,283	$	33,122

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

The Company’s held to maturity portfolio is recorded at amortized cost. At September 30, 2021 there were no securities in a continuous loss position for 12 months or more compared to one security at December 31, 2020, which represented 1.6% of the unrealized losses at December 31, 2020. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value was attributable to changes in market interest rates and was not in the credit quality of the issuer and therefore, the loss was not considered other-than-temporary. The Company has the ability and intent to hold this security to maturity.

8. Loans Receivable, Net

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


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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. Loans Receivable, Net, Continued

During the year ended December 31, 2020, the Bank participated in the initial SBA Paycheck Protection Program (“PPP”), a guaranteed unsecured loan program enacted under the Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”) signed into law on March 27, 2020 to provide near-term relief to help small businesses impacted by COVID-19 sustain operations. PPP loans are fully guaranteed by the SBA. Loan originations under the initial PPP ended in August 2020. The Consolidated Appropriations Act, 2021 (“CAA 2021”) enacted on December 27, 2020, renewed and extended the PPP until May 31, 2021. As a result, in January 2021, the Bank began accepting and processing loan applications under this second PPP.

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

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

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



September 30, 2021	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	64,787,568	$	9,994,908	$	154,960	$	2,479,482	$	77,416,918
Consumer	43,080,359		10,938,180		855,278		720,940		55,594,757
Commercial Business	23,554,952		4,217,359		78,758		209,786		28,060,855
Commercial Real Estate	255,654,434		61,703,703		16,339,585		3,737,652		337,435,374
PPP	32,119,284		—		—		—		32,119,284
Total	$	419,196,597	$	86,854,150	$	17,428,581	$	7,147,860	$	530,627,188



December 31, 2020	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	65,437,564	$	9,675,300	$	799,446	$	2,994,849	$	78,907,159
Consumer	42,926,887		10,525,814		891,107		991,617		55,335,425
Commercial Business	15,315,677		3,851,517		309,100		228,568		19,704,862
Commercial Real Estate	221,696,863		56,642,660		16,349,302		4,610,822		299,299,647
PPP	47,105,618		—		—		—		47,105,618
Total	$	392,482,609	$	80,695,291	$	18,348,955	$	8,825,856	$	500,352,711

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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


	September 30, 2021
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
Residential Real Estate	$	—	$	130,958	$	106,166	$	237,124	$	77,179,794	$	77,416,918
Consumer	320,412		88,653		58,917		467,982		55,126,775		55,594,757
Commercial Business	18,318		9,656		—		27,974		28,032,881		28,060,855
Commercial Real Estate	1,348,006		—		378,966		1,726,972		335,708,402		337,435,374
PPP	—		—		—		—		32,119,284		32,119,284
Total	$	1,686,736	$	229,267	$	544,049	$	2,460,052	$	528,167,136	$	530,627,188


	December 31, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
Residential Real Estate	$	—	$	152,634	$	160,152	$	312,786	$	78,594,373	$	78,907,159
Consumer	292,498		30,610		91,870		414,978		54,920,447		55,335,425
Commercial Business	49,554		—		7,152		56,706		19,648,156		19,704,862
Commercial Real Estate	735,456		346,850		550,409		1,632,715		297,666,932		299,299,647
PPP	—		—		—		—		47,105,618		47,105,618
Total	$	1,077,508	$	530,094	$	809,583	$	2,417,185	$	497,935,526	$	500,352,711

At September 30, 2021 and December 31, 2020, 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.

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


	September 30, 2021				December 31, 2020				(Decrease) Increase
	Amount		Percent (1)		Amount		Percent (1)		$		%
Non-accrual Loans:
Residential Real Estate	$	1,506,923	0.3	%	$	1,682,240	0.4	%	$	(175,317)	(10.4)%
Consumer	210,833		0.1		402,878		0.1		(192,045)		(47.7)
Commercial Business	70,031		—		100,408		—		(30,377)		(30.3)
Commercial Real Estate	1,145,783		0.2		939,946		0.2		205,837		21.9
Total Non-accrual Loans	$	2,933,570	0.6	%	$	3,125,472	0.7	%	$	(191,902)	(6.1)%

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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


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



	Nine Months Ended September 30, 2021
	Residential Real Estate		Consumer		Commercial Business		Commercial Real Estate		Total
Beginning Balance	$	1,528,948	$	1,298,655	$	1,165,033	$	8,850,260	$	12,842,896
Provision for Loan Losses	(529,449)		(160,458)		(19,972)		(1,560,121)		(2,270,000)
Charge-Offs	—		(103,654)		(6,699)		—		(110,353)
Recoveries	32,946		80,221		1,979		594,548		709,694
Ending Balance	$	1,032,445	$	1,114,764	$	1,140,341	$	7,884,687	$	11,172,237



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



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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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


	Allowance For Loan Losses
September 30, 2021	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,032,445	$	1,032,445
Consumer	—		1,114,764		1,114,764
Commercial Business	—		1,140,341		1,140,341
Commercial Real Estate	—		7,884,687		7,884,687
Total	$	—	$	11,172,237	$	11,172,237


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

The following tables present information related to impaired loans evaluated individually and collectively for impairment in loans receivable at the dates indicated:


	Loans Receivable
September 30, 2021	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	1,210,901	$	76,206,017	$	77,416,918
Consumer	151,915		55,442,842		55,594,757
Commercial Business	35,446		28,025,409		28,060,855
Commercial Real Estate	1,085,504		336,349,870		337,435,374
PPP	—		32,119,284		32,119,284
Total	$	2,483,766	$	528,143,422	$	530,627,188


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

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Non-accrual commercial loans under $200,000 and non-accrual consumer loans under $100,000 are considered immaterial and are excluded from the impairment review. Once a loan is identified as individually impaired, management measures the impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Typically, the Company reviews the most recent appraisal and, if it is over 24 months old, will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $2.5 million and $2.6 million for the three and nine months ended September 30, 2021, respectively, compared to $3.3 million and $3.7 million for the three and nine months ended September 30, 2020, respectively.

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


	September 30, 2021						December 31, 2020
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance

Residential Real Estate	$	1,210,901	$	1,210,901	$	—	$	1,284,303	$	1,284,303	$	—
Consumer	151,915		160,215		—		161,869		170,169		—
Commercial Business	35,446		930,446		—		53,047		948,046		—
Commercial Real Estate	1,085,504		1,230,924		—		720,111		865,531		—










Total	$	2,483,766	$	3,532,486	$	—	$	2,219,330	$	3,268,049	$	—


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










Total	$	2,520,089	$	7,383	$	3,316,991	$	7,788



	Nine Months Ended September 30,
	2021				2020
Impaired Loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:










Residential Real Estate	1,317,557		3,149		1,817,715		13,030
Consumer	156,049		—		178,296		—
Commercial Business	50,326		—		60,262		—
Commercial Real Estate	1,119,634		11,914		1,656,438		41,580
Total	$	2,643,566	$	15,063	$	3,712,711	$	54,610

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At the date of modification, TDRs are initially classified as nonaccrual TDRs. TDR loans are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).

TDRs included in impaired loans at September 30, 2021 and December 31, 2020 had a combined balance of $707,000 and $315,000, respectively, and the Company had no commitments at these dates to lend additional funds on these loans. There was one new TDR modified during the nine months ended September 30, 2021 and no TDRs in default at that date. There were no new TDRs modified during the nine months ended September 30, 2020 and no TDRs in default at that date. The Bank considers any loan 30 days or more past due to be in default.

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

We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. The Company's policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the modified loan terms before that loan can be placed back on accrual status. Further, the borrower must demonstrate the capacity to continue making payments on the loan prior to restoration of accrual status.

The CARES Act amended GAAP with respect to the modification of loans to borrowers affected by the COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be 1) related to COVID-19; 2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and 3) executed between March 1, 2020, and the earlier of a) 60 days after the date of termination of the national emergency by the President or b) December 31, 2020. The CAA, 2021 provides additional COVID-19 emergency response and relief, including extending relief offered under the CARES Act related to TDRs as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

9. Regulatory Matters

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

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

Based on its capital levels at September 30, 2021, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at September 30, 2021, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.

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


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






Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	121,421	18.8%	$	38,751	6.0%	$	51,669	8.0%
Total Risk-Based Capital (To Risk Weighted Assets)	129,532		20.1%	51,669		8.0%	64,586		10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	121,421		18.8%	29,064		4.5%	41,981		6.5%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	121,421		10.2%	47,625		4.0%	59,531		5.0%
December 31, 2020






Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	109,673	18.6%	$	35,330	6.0%	$	47,107	8.0%
Total Risk-Based Capital (To Risk Weighted Assets)	117,101		19.9%	47,107		8.0%	58,884		10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	109,673		18.6%	26,498		4.5%	38,275		6.5%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	109,673		9.8%	44,957		4.0%	56,197		5.0%

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

10. Carrying Amounts and Fair Value of Financial Instruments

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

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


Level 1 -			Quoted Market Price in Active Markets Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds.
Level 2 -			Significant Other Observable Inputs Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts.
Level 3 -			Significant Unobservable Inputs Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available for Sale

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

Mortgage Loans Held for Sale

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Impaired Loans

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

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

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2021, our impaired loans were generally evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impaired loans as nonrecurring Level 3. At September 30, 2021 and December 31, 2020, the recorded investment in impaired loans was $2.5 million and $2.2 million, respectively.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Foreclosed assets are recorded as nonrecurring Level 3.

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


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




Student Loan Pools	$	—	$	70,581,171	$	—	$	—	$	61,081,465	$	—
SBA Bonds	—		139,325,350		—		—		153,305,025		—
Tax Exempt Municipal Bonds	—		49,770,320		—		—		48,816,442		—
Taxable Municipal Bonds	—		54,540,680		—		—		48,348,455		—
Mortgage-Backed Securities	—		313,616,148		—		—		277,773,014		—

Total	$	—	$	627,833,669	$	—	$	—	$	589,324,401	$	—

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The tables below present assets measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020, aggregated by the level in the fair value hierarchy within which those measurements fall.


	September 30, 2021
Assets:	Level 1		Level 2		Level 3		Total
Mortgage Loans Held For Sale	$	—	3,589,131		$	—	$	3,589,131
Collateral Dependent Impaired Loans (1)	—		—		2,483,766		2,483,766
Foreclosed Assets	—		—		129,700		129,700
Total	$	—	$	3,589,131	$	2,613,466	$	6,202,597


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

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

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

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

Valuation

Significant

9/30/2021

12/31/2020

Level 3 Assets

Technique

Unobservable Inputs

Range of Inputs

Collateral Dependent Impaired Loans

Appraised Value/ Discounted Cash Flows

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

—% - 14%

Foreclosed Assets

Appraised Value/Comparable Sales

Discounts to appraised values for estimated holding or selling costs

30%

11% - 72%

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

Cash and Cash Equivalents—The carrying amount of these financial instruments approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.

Certificates of Deposit with Other Banks—Fair value is based on market prices for similar assets.

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

Loans Receivable, Net—The fair value of loans is estimated using an exit price notion. The exit price notion uses a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument and also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. The credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: commercial real estate, other commercial, residential real estate, consumer and all other loans. The results are then adjusted to account for credit risk as described above.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

A further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.

FHLB Stock—The fair value approximates the carrying value.

Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

FHLB Advances and Borrowings from the FRB—Fair value is estimated using discounted cash flows with current market rates for borrowings with similar terms.

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

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

Junior Subordinated Debentures—The carrying value of junior subordinated debentures approximates fair value.

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


September 30, 2021	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:	Dollars in thousands
Cash and Cash Equivalents	$	13,555	$	13,555	$	13,555	$	—	$	—
Certificates of Deposits with Other Banks	100		100		—		100		—
Investment and Mortgage-Backed Securities	650,254		650,688		—		650,688		—
Loans Receivable, Net	500,601		500,748		—		—		500,748
FHLB Stock	963		963		963		—		—

Financial Liabilities:
Deposits:
Checking, Savings & Money Market Accounts	$	861,081	$	861,081	$	861,081	$	—	$	—
Certificate Accounts	155,486		155,831		—		155,831		—
Advances from FHLB	10,000		10,068		—		10,068		—
Borrowings from FRB	15,375		15,480		—		15,480		—
Other Borrowed Money	26,608		26,608		26,608		—		—
Subordinated Debentures	30,000		30,000		—		30,000		—
Junior Subordinated Debentures	5,155		5,155		—		5,155		—

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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


December 31, 2020	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:	Dollars in thousands
Cash and Cash Equivalents	$	18,025	$	18,025	$	18,025	$	—	$	—
Certificates of Deposits with Other Banks	350		350		—		350		—
Investment and Mortgage-Backed Securities	607,579		608,530		—		608,530		—
Loans Receivable, Net	479,167		481,450		—		—		481,450
FHLB Stock	2,354		2,354		2,354		—		—

Financial Liabilities:
Deposits:
Checking, Savings & Money Market Accounts	$	737,571	$	737,571	$	737,571	$	—	$	—
Certificate Accounts	180,525		181,487		—		181,487		—
Advances from FHLB	35,000		35,200		—		35,200		—
Borrowings from FRB	48,700		48,978				48,978
Other Borrowed Money	13,117		13,117		13,117		—		—
Subordinated Debentures	30,000		30,000		—		30,000		—
Junior Subordinated Debentures	5,155		5,155		—		5,155		—

At September 30, 2021, the Bank had $175.5 million in off-balance sheet financial commitments. These commitments are to originate loans and unused consumer lines of credit and credit card lines. Because these obligations are based on current market rates, if funded, the original principal amount is considered to be a reasonable estimate of fair value. Fair value estimates are made on a specific date, based on relevant market data and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the Bank’s entire holdings of a particular financial instrument.

Because no active market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value would also significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has significant assets and liabilities that are not considered financial assets or liabilities including deposit franchise values, loan servicing portfolios, deferred tax liabilities, and premises and equipment.

In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The Company has used management’s best estimate of fair value on the above assumptions. Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair value presented.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

11. Accounting and Reporting Changes

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

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The guidance significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted. The Company is in the process of identifying required changes to the loan loss estimation models and processes and evaluating the impact of this new guidance. Once adopted, we expect our allowance for loan losses to increase, however, until our evaluation is complete the magnitude of the increase will be unknown.

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

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

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

In October 2020, the FASB issued guidance which clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. This guidance became effective for reporting periods beginning after December 15, 2020. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12. Non-Interest Income

Revenue Recognition

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

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

Deposit Fees

The Bank earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

Check Card Fee Income

Check card fee income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Mastercard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the card. Certain expenses directly associated with the debit card are recorded on a net basis with the fee income.

Trust Income

Trust income includes monthly advisory fees that are based on assets under management and certain transaction fees that are assessed and earned monthly, concurrently with the investment management services provided to the customer. The Bank does not charge performance based fees for its trust services and does not currently have any institutional clients, hedge funds or mutual funds. Although trust income is included within the scope of ASC 606, based on the fees charged by the Bank, there were no changes in the accounting for trust income.

Gains/Losses on OREO Sales

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12. Non-Interest Income, Continued

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


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

13. Leases

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

14. Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

Management has reviewed all events occurring through the date the consolidated financial statements were available to be issued and determined that there were no subsequent events requiring accrual or disclosure.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

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

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

•the effect of the novel coronavirus of 2019 (“COVID-19”) pandemic, including on the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be affected by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our allowance for loan losses;

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

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

•uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest rate benchmarks;

•fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;

•secondary market conditions for loans and our ability to originate loans for sale and sell loans in the secondary market;

•results of examinations of the Company by the Board of Governors of the Federal Reserve System ("Federal Reserve") and the Bank by the Federal Deposit Insurance Corporation ("FDIC") and the South Carolina State Board of Financial Institutions, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;

•legislative or regulatory changes that adversely affect our business, including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in regulatory policies and principles, or the interpretation of regulatory capital requirements or other rules, including as a result of Basel III;

•our ability to attract and retain deposits;

•our ability to control operating costs and expenses;

•our ability to implement our business strategies;

•the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

•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;

•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;

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including as a result of the CARES Act, the CAA 2021 and recent COVID-19 vaccination efforts; and

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

Some of these forward-looking statements are discussed in the Company's 2020 Form 10-K as well as other risk factors under Item 1A, “Risk Factors.” Such developments could have an adverse impact on our consolidated financial position and results of operations. Any of the forward-looking statements that we make in this quarterly report on Form 10-Q and in other public reports and statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results for 2021 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company’s consolidated financial condition, consolidated results of operations, liquidity and stock price performance.

Response to COVID-19

In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders to close businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary, and some permanent, closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that the Federal Reserve may maintain a low interest rate environment for the foreseeable future. Although financial markets have rebounded from significant declines that occurred earlier in the pandemic and U.S. and global economic conditions have shown signs of improvement since the beginning of the pandemic, many of the effects that arose or became more pronounced after the onset of the COVID-19 pandemic persisted this year. These changes have had and are likely to continue to have a significant adverse effect on the markets in which we conduct our business and the demand for our products and services.

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Paycheck Protection Program ("PPP") Participation

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

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

Loan Modifications

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

Branch Operations and Additional Client Support

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

Assets

Total assets increased $58.6 million or 5.0% to $1.23 billion at September 30, 2021 from $1.17 billion at December 31, 2020. Changes in total assets are shown below.


					Increase (Decrease)
(Dollars in thousands)	9/30/2021		12/31/2020		$		%
Cash and Cash Equivalents	$	13,555	$	18,025	$	(4,470)	(24.8)	%

Investments and MBS – AFS	627,834		589,324		38,510		6.5
Investments and MBS – HTM	22,421		18,254		4,167		22.8
Loans Receivable, Net	500,601		479,167		21,434		4.5
OREO	130		499		(369)		(73.9)
Operating Lease ROU Assets	2,358		2,352		6		0.3
Premises and Equipment, Net	26,195		26,575		(380)		(1.4)
FHLB Stock	963		2,354		(1,391)		(59.1)
BOLI	26,560		26,075		485		1.9
Goodwill	1,200		1,200		—		—
Other Assets	4,727		4,037		690		17.1

Cash and cash equivalents decreased $4.5 million or 24.8% to $13.6 million at September 30, 2021 from $18.0 million at December 31, 2020 primarily due to a decrease in the Federal Reserve Outgoing Cash Letter account, which fluctuates daily. Investment and mortgage-backed securities AFS increased $38.5 million or 6.5% to $627.8 million at September 30, 2021 from $589.3 million at December 31, 2020 as purchases of new investments and mortgage-backed securities AFS exceeded maturities and principal paydowns during the nine months ended September 30, 2021. Investment and mortgage-backed securities HTM increased $4.2 million or 22.8% to $22.4 million at September 30, 2021 from $18.3 million at December 31, 2020 as a result of purchases during 2021.

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

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

FHLB stock decreased $1.4 million or 59.1% to $1.0 million at September 30, 2021 from $2.4 million at December 31, 2020 as a result of a decrease in advances from the FHLB of Atlanta. The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to a membership component, which is 0.09% of total assets, plus a transaction component, which is 4.25% of outstanding advances (borrowings) from the FHLB of Atlanta. As the Bank's total advances have decreased, so has its required investment in FHLB stock.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Liabilities

Deposit Accounts

Total deposits increased $98.5 million or 10.7% to $1.0 billion at September 30, 2021 from $918.1 million at December 31, 2020. This growth was primarily due to proceeds from PPP loans and government stimulus checks deposited directly into customer accounts, organic growth in customer relationships and reduced withdrawals from deposit accounts due to a change in spending habits as a result of the ongoing COVID-19 pandemic. The $123.5 million increase in demand accounts was partially offset by a $25.0 million decrease in certificate accounts during the first nine months of 2021. The balance, weighted average rates and increases and decreases in deposit accounts at September 30, 2021 and December 31, 2020 are shown below.


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



Total	$	155,486	0.43	%	$	180,525	0.77	%	$	(25,039)	(13.9)	%
Total Deposits	$	1,016,567	0.15	%	$	918,096	0.23	%	$	98,471	10.7	%

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

Advances From FHLB

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


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

Total Advances	$	10,000	1.45	%	$	35,000	1.83	%	$	(25,000)	(71.4)%

Advances are secured by a blanket collateral agreement with the FHLB pledging the Bank’s portfolio of residential first mortgage loans and investment securities with an amortized cost and fair value of $97.0 million and $97.6 million, at September 30, 2021 and $104.7 million and $106.2 million at December 31, 2020, respectively.

There were no callable FHLB advances at September 30, 2021. Callable advances are callable at the option of the FHLB. If an advance is called, the Bank has the option to pay off the advance without penalty, re-borrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Borrowings From the Federal Reserve Bank

At September 30, 2021, the Bank had $15.4 million in borrowings from the "discount window" of the Federal Reserve Bank of Atlanta compared to $48.7 million at December 31, 2020. Depository institutions may borrow from the discount window for periods as long as 90 days, and borrowings are prepayable and renewable by the borrower on a daily basis. Effective March 16, 2020 the borrowing rate was set at the top of the targeted Federal Funds Rate, or 0.25%. At September 30, 2021, the collateral pledged by the Bank for these borrowings consisted of investment and mortgage-backed securities with an amortized cost and fair value of $80.9 million and $84.7 million, respectively.

Other Borrowings (Repurchase Agreements)

The Bank had $26.6 million in other borrowings at September 30, 2021, an increase of $13.5 million or 102.8% from $13.1 million at December 31, 2020. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. The interest rate paid on the repurchase agreements was 0.15% at both September 30, 2021 and December 31, 2020.

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

Junior Subordinated Debentures

In September 2006, Security Federal Statutory Trust (the "Trust"), issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures. The Capital Securities accrue and pay distributions at a floating rate of three month LIBOR plus 170 basis points annually which was equal to 1.82% at September 30, 2021 compared to 1.92% at December 31, 2020. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part.

Subordinated Debentures

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

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

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

The Notes are not subject to redemption at the option of the holder and may be redeemed by the Company only under certain limited circumstances prior to November 22, 2024, with respect to the 10-Year Notes, and November 22, 2029, with respect to the 15-Year Notes. The Company may redeem the 10-Year Notes and the 15-Year Notes at its option, in whole at any time, or in part from time to time, after November 22, 2024 and November 22, 2029, respectively. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness, and each Note is equal in right to payment with respect to the other Notes. The Company used the net proceeds from the sale of the Notes to fund the redemption of the Convertible Debentures and for general corporate purposes.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Shareholders’ Equity

Shareholders’ equity increased $4.8 million or 4.3% to $116.7 million at September 30, 2021 from $111.9 million at December 31, 2020. The increase was primarily attributable to net income of $10.7 million, which was partially offset by a $4.9 million decrease in accumulated other comprehensive income, net of tax and $1.1 million in dividends paid to common shareholders during the nine months ended September 30, 2021. The decrease in net accumulated other comprehensive income was related to the unrecognized loss in value of investment and mortgage-backed securities during the nine months ended September 30, 2021. Book value per common share was $35.87 at September 30, 2021 compared to $34.40 at December 31, 2020.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

Net Income

Net income increased $3.7 million or 413.1% to $4.6 million or $1.43 per basic common share for the quarter ended September 30, 2021 compared to $905,000 or $0.28 per basic common share for the quarter ended September 30, 2020. The increase in net income was primarily the result of decreases in interest expense and the provision for loan losses combined with an increase in non-interest income during the third quarter of 2021.

Net Interest Income

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

In response to COVID-19, the Federal Reserve reduced the targeted Federal Funds Rate by 150 basis points during March 2020 to a range of 0.00% to 0.25%, where it remains at September 30, 2021. The effect of changes in the targeted Federal Funds Rate on the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets because rates on many deposit accounts are based on local competition and not tied to a specific market-based index. Interest-earning assets adjust earlier because they are tied to a specific market-based index. Because the length of the COVID-19 pandemic and the effects of the extraordinary measures being put in place to address its economic consequences are unknown, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2021 and possibly longer.

Interest Income

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended September 30, 2021 and 2020:


	Quarter Ended September 30,								Change in Average Balance		Increase (Decrease) in Interest Income
	2021				2020
(Dollars in thousands)	Average Balance		Yield(1)		Average Balance		Yield(1)
Loans Receivable, Net	$	505,191	5.75	%	$	544,499	4.98	%	$	(39,308)	$	488
Mortgage-Backed Securities	302,614		1.72		239,772		2.46		62,842		(173)
Investment Securities(2)	311,933		1.50		245,715		1.87		66,218		22
Overnight Time and Certificates of Deposit	1,531		0.89		2,327		0.63		(796)		—
Total Interest-Earning Assets	$	1,121,269	3.47	%	$	1,032,313	3.64	%	$	88,956	$	337

(1) Annualized

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

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Interest income from MBS decreased $173,000 or 11.7% to $1.3 million during the quarter ended September 30, 2021 due to a 74 basis point decrease in the average yield, which was partially offset by a $62.8 million increase in the average balance of these assets. Tax equivalent interest income from investment securities decreased $22,000 or 1.9% to $1.2 million during the quarter ended September 30, 2021 due to a decrease of 37 basis points in the average yield on investment securities, partially offset by a $66.2 million or 26.9% increase in the average balance of the investment securities portfolio.

Interest Expense

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


	Quarter Ended September 30,								Change in Average Balance		Increase (Decrease) in Interest Expense
	2021				2020
(Dollars in thousands)	Average Balance		Cost(1)		Average Balance		Cost(1)
Now and Money Market Accounts	$	539,561	0.13	%	$	447,997	0.17	%	$	91,564	$	(13)
Savings Accounts	88,117		0.08		67,940		0.15		20,177		(7)
Certificate Accounts	165,084		0.45		218,636		1.05		(53,552)		(391)
FHLB Advances and Other Borrowings (2)	38,676		0.52		66,098		1.36		(27,422)		(173)
Junior Subordinated Debentures	5,155		1.86		5,155		2.05		—		(2)
Subordinated Debentures	30,000		5.25		30,000		5.25		—		—
Total Interest-Bearing Liabilities	$	866,593	0.39	%	$	835,826	0.68	%	$	30,767	$	(586)

(1) Annualized

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

Total interest expense decreased $586,000 or 41.0% to $845,000 for the quarter ended September 30, 2021 compared to $1.4 million for the same period in 2020 due to a decline of 29 basis points in the average cost of interest bearing liabilities, which was partially offset by a $30.8 million or 3.7% increase in the average balance of these liabilities.

The largest decrease in interest expense was related to deposits. Despite a $58.2 million increase in the average balance of deposit accounts, the average cost of interest-bearing deposits decreased 24 basis points, resulting in a $410,000 decrease in interest expense during the third quarter of 2021 when compared to the same quarter in 2020. Interest expense on certificate accounts had the largest decrease in interest expense due to a decrease of $53.6 million in the average balance combined with a 60 basis point decrease in the average cost of certificate deposits during the third quarter of 2021, as management elected to utilize liquidity gained from lower cost deposits to reduce its balances of higher cost certificates of deposit in a managed reduction of these funds. Interest expense on FHLB advances, FRB borrowings and repurchase agreements decreased $173,000 for the third quarter of 2021 due to a $27.4 million decrease in the average balance of these interest-bearing liabilities, combined with a decrease of 82 basis points in the average cost.

Provision for Loan Losses

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

The first component is an analysis of loss potential in various homogeneous segments of the loan portfolio based on historical trends and the risk inherent in each loan category. Currently, management applies a ten year historical loss ratio to each loan category to estimate the inherent loss in these pooled loans.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

The second component of management’s monthly analysis is the specific review and evaluation of significant problem credits identified through the Company’s internal monitoring system. These loans are evaluated for impairment and recorded in accordance with accounting guidance. For each loan deemed impaired, management calculates a specific reserve for the amount in which the recorded investment in the loan exceeds the fair value. This estimate is based on a thorough analysis of the most probable source of repayment, which is typically liquidation of the collateral underlying the loan.

The third component is an analysis of changes in qualitative factors that may affect the portfolio, including but not limited to: relevant economic trends that could impact borrowers’ ability to repay, industry trends, changes in the volume and composition of the portfolio, credit concentrations, or lending policies and the experience and ability of the staff and Board of Directors.

Management also reviews and incorporates certain ratios such as percentage of classified loans, average historical loan losses by loan category, delinquency percentages, and the assignment of percentage targets of reserves in each loan category when evaluating the allowance. Once the analysis is completed, the three components are combined and compared to the allowance amount. Based on this, charges are made to the provision as needed. Because the SBA guarantees 100% of the PPP loans made to eligible borrowers, these loans do not have a corresponding allowance for loan loss.

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


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

At Period End:	9/30/2021			9/30/2020
Impaired Loans	$	2,484		$	3,217
Gross Loans Receivable, Held For Investment (1)	$	508,184		$	533,221
Total Loans Receivable, Net	$	500,601		$	527,870
Allowance For Loan Losses as a % of Impaired Loans	449.8		%	399.3		%
Allowance For Loan Losses as a % of Gross Loans Receivable (1)	2.2		%	2.4		%
(1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.

The Company had net recoveries of $413,000, or 0.33% of gross loans on an annualized basis, for the quarter ended September 30, 2021 compared to net charge-offs of $30,000, or 0.01% of gross loans on an annualized basis, for the third quarter of 2020. We had a negative provision for loan losses of $665,000 for the quarter ended September 30, 2021, compared to provision expense of $2.2 million for the third quarter of 2020. The negative provision for loan losses for the third quarter of 2021 resulted primarily from the net recoveries and a reduction in qualitative adjustment factors related to improvement in the economic and business conditions at both the national and regional levels as of September 30, 2021.

Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral. In the event an acceptable arrangement cannot be reached, we may need to acquire these properties through foreclosure or other means and subsequently sell, develop or liquidate them. Management believes the allowance for loan losses is adequate based on its best estimates of the probable losses inherent in the loan portfolio, although there can be no guarantee these estimates will not be proven incorrect in the future. In addition, bank regulatory agencies may require additional provisions to the allowance for loan losses based on their judgments and estimates as part of their examination process. Because the allowance for loan losses is an estimate, there is no guarantee that actual loan losses will not exceed the allowance for loan losses, or that additional increases in the allowance for loan losses will not be required in the future. A decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Non-Interest Income

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


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

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

Non-Interest Expense

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


	Quarter Ended September 30,				Increase (Decrease)
	2021		2020		$		%
Compensation and Employee Benefits	$	4,757,937	$	4,743,327	$	14,610	0.3	%
Occupancy	641,555		669,258		(27,703)		(4.1)
Advertising	275,947		325,584		(49,637)		(15.2)
Depreciation and Maintenance of Equipment	781,217		689,118		92,099		13.4
FDIC Insurance Premiums	73,845		51,858		21,987		42.4
Net Cost (Recovery) of Operation of OREO	55,000		(22,049)		77,049		(349.4)

Consulting	182,684		190,379		(7,695)		(4.0)
Debit Card Expense	284,434		232,788		51,646		22.2
Telephone	100,113		135,645		(35,532)		(26.2)
Postage	16,469		94,306		(77,837)		(82.5)
General Insurance	77,731		62,318		15,413		24.7
Other	801,964		513,685		288,279		56.1
Total Non-Interest Expense	$	8,048,896	$	7,686,217	$	362,679	4.7	%

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

Provision For Income Taxes

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

Net Income

Net income increased $6.8 million or 169.6% to $10.7 million for the nine months ended September 30, 2021 compared to the same nine month period in 2020. The increase in earnings was primarily the result of decreases in interest expense and the provision for loan losses combined with an increase in non-interest income during the first nine months of 2021 when compared to the same period last year.

Net Interest Income

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

Interest Income

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the nine months ended September 30, 2021 and 2020:



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

(1) Annualized

(2) Tax equivalent basis recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using an effective tax rate of 21% for the nine months ended September 30, 2021 and 2020. The tax equivalent adjustment relates to the tax exempt municipal bonds and was $201,978 and $190,996 for the nine months ended September 30, 2021 and 2020, respectively.

Total tax equivalent interest income decreased $39,000 to $27.7 million during the nine months ended September 30, 2021 compared to the first nine months of 2020, due to decreases in interest income from MBS, investment securities and other interest-earning assets, which were partially offset by an increase in interest income from loans. Total interest income on loans increased $706,000 or 3.7% to $20.0 million during the nine months ended September 30, 2021 from $19.3 million for the same period in 2020. The increase was a result of a 21 basis point increase in the average yield on loans receivable, which was primarily driven by the recognition of $3.3 million in fee income related to PPP loans during the nine months ended September 30, 2021. The increase was partially offset by a $2.9 million or 0.6% decrease in the average loan balance.

Interest income from MBS decreased $710,000 or 15.0% to $4.0 million for the nine months ended September 30, 2021 from $4.7 million for the same period in 2020. The decrease was the result of a 78 basis point decline in the average MBS portfolio yield, which was partially offset by a $50.7 million or 21.1% increase in the average balance of mortgage-backed securities. Tax equivalent interest income from investment securities increased $12,000 or 0.3% to $3.6 million for the nine months ended September 30, 2021 when compared to the same nine month period in 2020.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Interest Expense

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



	Nine Months Ended September 30,								Change in Average Balance		Decrease in Interest Expense
	2021				2020
(Dollars in Thousands)	Average Balance		Cost of Funds (1)		Average Balance		Cost of Funds (1)
Now and Money Market Accounts	$	515,157	0.13	%	$	428,663	0.28	%	$	86,494	$	(424)
Statement Savings Accounts	83,339		0.08		60,131		0.15		23,208		(16)
Certificates Accounts	176,589		0.54		223,450		1.41		(46,861)		(1,645)
FHLB Advances and Other Borrowed Money	59,429		0.87		78,980		1.18		(19,551)		(311)
Junior Subordinated Debentures	5,155		1.89		5,155		2.62		—		(28)
Subordinated Debentures	30,000		5.25		30,000		—		—		—
Senior Convertible Debentures	—		—		1,500		7.27		(1,500)		(82)
Total Interest-Bearing Liabilities	$	869,669	0.44	%	$	827,879	0.87	%	$	41,790	$	(2,506)

(1) Annualized

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

Interest expense on FHLB advances and other borrowings decreased $311,000 or 44.5% to $389,000 during the nine months ended September 30, 2021 from $701,000 during the same period in 2020 due to a $19.6 million or 24.8% decrease in the average balance combined with a decline of 31 basis points in the average cost of these liabilities during the nine months ended September 30, 2021 when compared to the same period last year.

Provision for Loan Losses

There was $2.3 million in negative provision for loan losses recorded during the nine months ended September 30, 2021 compared to provision expense of $3.6 million for the same period in 2020 reflecting a decline in the probable loan losses due to the COVID-19 pandemic as the economic and business conditions at both the national and regional levels continued to improve as of September 30, 2021. The table below summarizes the changes in the allowance for loan losses for the nine months ended September 30, 2021 and 2020.


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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Non-Interest Income

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


	Nine Months Ended September 30,				Increase (Decrease)
	2021		2020		$		%
Gain on Sale of MBS & Investment Securities	$	—	$	1,332,666	$	(1,332,666)	(100.0)	%
Gain on Sale of Loans	3,022,755		2,494,084		528,671		21.2
Service Fees on Deposit Accounts	702,548		695,561		6,987		1.0
BOLI Income	485,000		408,250		76,750		18.8
Commissions From Insurance Agency	468,083		513,783		(45,700)		(8.9)
Trust Income	1,005,517		782,210		223,307		28.5
ATM & Check Card Fee Income	1,811,216		1,416,946		394,270		27.8
Grant Income	1,826,265		316,814		1,509,451		476.4
Other	669,379		629,814		39,565		6.3
Total Non-Interest Income	$	9,990,763	$	8,590,128	$	1,400,635	16.3	%

The increase in non-interest income was primarily attributable to increases in gain on sale of loans, trust income, ATM & check card fee income and grant income reduced by the absence of gain on sale of MBS & investment securities during the nine months ended September 30, 2021. Gain on sale of loans increased $529,000 or 21.2% to $3.0 million for the nine months ended September 30, 2021 compared to $2.5 million during the same period in 2020 as the dollar volume of loans sold increased. ATM & Check Card Fee income increased $394,000 primarily due to an increase in debit card usage. Grant income increased as a result of the $1.8 million CDFI RRP award received during 2021. The grant proceeds were used by the Bank to fund qualified loans in the target market areas we serve.

Non-Interest Expense

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


	Nine Months Ended September 30,				Increase (Decrease)
	2021		2020		$		%
Compensation and Employee Benefits	$	14,145,363	$	13,654,330	$	491,033	3.6	%
Occupancy	1,922,369		1,864,202		58,167		3.1
Advertising	671,186		776,605		(105,419)		(13.6)
Depreciation and Maintenance of Equipment	2,354,958		2,126,683		228,275		10.7
FDIC Insurance Premiums	215,181		67,938		147,243		216.7
Net Recovery of Operation of OREO	(115,840)		(27,329)		(88,511)		323.9

Consulting	512,998		563,246		(50,248)		(8.9)
Debit Card Expense	859,357		764,570		94,787		12.4
Telephone	313,229		372,631		(59,402)		(15.9)
Postage	147,600		249,512		(101,912)		(40.8)
General Insurance	248,691		226,983		21,708		9.6
Other	1,829,544		1,681,363		148,181		8.8
Total Non-Interest Expense	$	23,104,636	$	22,320,734	$	783,902	3.5	%

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Depreciation and maintenance of equipment increased $228,000 or 10.7% primarily due to additional capital expenses related to our new e-branch as well as our newest branch in the metro Augusta, Georgia area, which is scheduled to open next year.

FDIC insurance premiums increased $147,000 primarily due to the use of remaining FDIC small bank credits by the Bank during 2020.

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

Debit card expense increased $95,000 to $859,000 for the nine months ended September 30, 2021 due to the replacement of all customer debit cards in 2021 because of the inclusion of a new chip within the cards.

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

Provision For Income Taxes

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

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

Liquidity

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

The Bank's primary sources of funds include deposits, scheduled loan and investment and mortgage-backed securities repayments, including interest payments, maturities and sales of loans and investment and mortgage-backed securities, advances from the FHLB, and 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.

During the nine months ended September 30, 2021 loan disbursements exceeded loan repayments resulting in a $21.4 million or 4.5% increase in total net loans receivable. Also during the nine months ended September 30, 2021, deposits increased $98.5 million or 10.7% and FHLB advances decreased $25.0 million. The Bank had $349.9 million in additional borrowing capacity at the FHLB at the end of the period. The Bank also has secured an $80.9 million discount window facility at the FRB, collateralized by investment securities with a fair market value of $84.7 million. At September 30, 2021, the Bank had $15.4 million in outstanding borrowings at the FRB. The Bank also had a $5.0 million unused Fed Funds facility with Pacific Coast Bankers Bank at September 30, 2021. At September 30, 2021, the Bank had $114.3 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipates a significant portion of these certificates will be renewed on maturity.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

At September 30, 2021, the Bank exceeded all regulatory capital requirements with Common Equity Tier 1 Capital (CET1), Tier 1 leverage-based capital, Tier 1 risk-based capital, and total risk-based capital ratios of 18.8%, 10.2%, 18.8%, and 20.1%, respectively. To be categorized as “well capitalized” under the prompt corrective action provisions the Bank must maintain minimum CET1, total risk based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios of 6.5%, 10.0%, 8.0% and 5.0%, respectively. In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional CET1 capital greater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At September 30, 2021 the Bank’s conservation buffer was 12.1%. For additional details, see “Footnote – Regulatory Matters” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Off-Balance Sheet Commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Collateral is not required to support commitments.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2021.


(Dollars in thousands)	One Month or Less		After One Through Three Months		After Three Through Twelve Months		Total Within One Year		Greater Than One Year		Total
Unused Lines of Credit	$	1,776	$	3,383	$	57,660	$	62,819	$	110,292	$	173,111
Standby Letters of Credit	98		132		1,657		1,887		544		2,431
Total	$	1,874	$	3,515	$	59,317	$	64,706	$	110,836	$	175,542

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The Company’s profitability is affected by fluctuations in the market interest rate. Management’s goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. There were no material changes in information concerning market risk from the information provided in the Company’s 2020 Form 10-K.

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

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that at September 30, 2021 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. There have been no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2021 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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Part II: Other Information

Item 1 Legal Proceedings

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

Item 1A Risk Factors

There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's 2020 Form 10-K.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

Item 6 Exhibits


3.1			Articles of Incorporation, as amended (1)
3.2			Amended and Restated Bylaws (2)
4.1			Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (3)
10.1			1993 Salary Continuation Agreements (4)
10.2			Amendment One to 1993 Salary Continuation Agreements (5)
10.3			Form of 2006 Salary Continuation Agreement (6)
10.4			Form of Security Federal Split Dollar Agreement (6)
10.5			1999 Stock Option Plan (7)
10.6			2002 Stock Option Plan (8)
10.7			2006 Stock Option Plan (9)
10.8			2008 Equity Incentive Plan (10)
10.9			Forms of incentive stock option agreement and non-qualified stock option agreement pursuant to the 2006 Stock Option Plan (9)
10.10			2018 Employee Stock Purchase Plan (11)
10.11			Incentive Compensation Plan (4)
31.1			Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2			Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES


32			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101			The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements

______________________

(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 August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.

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

(5) Filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 and incorporated herein by reference.

(6) Filed on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K dated May 18, 2006 and incorporated herein by reference.

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

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

(9) Filed on August 22, 2006, as an exhibit to the Company's Registration Statement on Form S-8 (Registration Statement No. 333-136813) and incorporated herein by reference.

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SECURITY FEDERAL CORPORATION

Date:

November 15, 2021

By:

/s/J. Chris Verenes

J. Chris Verenes

Chief Executive Officer

Duly Authorized Representative

Date:

November 15, 2021

By:

/s/Darrell Rains

Darrell Rains

Chief Financial Officer

Duly Authorized Representative