sfdl-20211231

Exhibit 13

Annual Report to Stockholders

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Selected Consolidated Financial and Other Data

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Selected Consolidated Financial and Other Data

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Selected Consolidated Financial and Other Data

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Selected Consolidated Financial and Other Data

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Selected Consolidated Financial and Other Data

The following table provides selected consolidated financial and operating data of Security Federal Corporation at the dates and for the periods indicated. In conjunction with the data provided in the following tables and in order to more fully understand our historical consolidated financial and operating data, you should also read our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the accompanying notes included in this report.


	Years Ended December 31,
	2021		2020		2019		2018		2017
Balance Sheet Data at End of Period	(Dollars in Thousands, Except Per Share Data)
Total Assets	$	1,301,214	$	1,171,710	$	963,228	$	912,614	$	868,813
Cash and Cash Equivalents	27,623		18,025		12,536		12,706		10,320
Certificates of Deposit with Other Banks	1,100		350		950		1,200		1,950
Investment and Mortgage-Backed Securities	706,356		607,579		433,892		409,894		412,055
Total Loans Receivable, Net (1)	499,497		479,167		452,859		430,054		390,493
Deposits	1,115,963		918,096		771,407		767,497		702,107
Advances From Federal Home Loan Bank	—		35,000		38,138		34,030		51,680
Total Shareholders' Equity	115,523		111,906		91,758		80,518		77,923

Income Data
Total Interest Income	$	37,117	$	37,096	$	36,934	$	33,072	$	29,787
Total Interest Expense	3,824		6,581		8,311		5,449		4,175
Net Interest Income	33,293		30,515		28,623		27,623		25,612
Provision For Loan Losses	(2,404)		3,600		375		925		300
Net Interest Income After Provision For Loan Losses	35,697		26,915		28,248		26,698		25,312
Non-Interest Income	12,633		11,421		9,097		7,669		7,344
Non-Interest Expense	32,047		29,708		27,871		25,590		24,302
Income Taxes (2)	3,509		1,577		1,680		1,570		2,435
Net Income	12,774		7,051		7,794		7,207		5,919

Per Common Share Data
Net Income Per Common Share (Basic)	$	3.93	$	2.19	$	2.64	$	2.44	$	2.01
Cash Dividends	$	0.44	$	0.40	$	0.40	$	0.36	$	0.36

(1) INCLUDES LOANS HELD FOR SALE

(2) FOR THE YEAR ENDED DECEMBER 31, 2017, INCLUDES $606,000 FOR THE DEFERRED TAX ASSET WRITEDOWN DUE TO THE COMPREHENSIVE TAX LEGISLATION ENACTED ON DECEMBER 22, 2017, COMMONLY REFERRED TO AS THE TAX CUTS AND JOBS ACT.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Selected Consolidated Financial and Other Data


	Years Ended December 31,
	2021		2020		2019		2018		2017
Other Data

Average Interest Rate Spread	2.87	%	2.91	%	3.10	%	3.27	%	3.27	%

Net Interest Margin (Net Interest Income / Average Earning Assets)	2.97	%	3.04	%	3.26	%	3.38	%	3.34	%
Average Interest-Earning Assets to Average Interest-Bearing Liabilities	128.62	%	120.99	%	116.83	%	116.01	%	113.80	%
Common Equity to Total Assets	8.88	%	9.55	%	9.53	%	8.82	%	8.97	%
Non-Performing Assets to Total Assets (3)	0.22	%	0.31	%	0.43	%	0.85	%	0.79	%
Return on Assets	1.04	%	0.63	%	0.80	%	0.81	%	0.69	%
Return on Common Equity	11.20	%	6.81	%	8.90	%	9.30	%	7.87	%
Average Common Equity to Average Assets Ratio	9.27	%	9.32	%	9.05	%	8.69	%	8.77	%
Dividend Payout Ratio on Common Shares(4)	11.20	%	18.46	%	14.41	%	14.76	%	17.92	%
Number of Full-Service Offices	17		17		17		16		15

(3) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND OTHER REAL ESTATE OWNED ("OREO")

(4) RATIO OF DIVIDENDS PAID ON COMMON SHARES TO NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

General

The following discussion and analysis is presented to provide the reader with an understanding of the financial condition and the results of operations of Security Federal Corporation and its subsidiaries. The investment and other activities of the parent company, Security Federal Corporation (the “Company”), have had no significant impact on the results of operations for the periods presented in the Consolidated Financial Statements included herein. Because we conduct all of our material business operations through Security Federal Bank (the "Bank"), a wholly owned subsidiary of the Company, the following discussion of financial results are primarily indicative of the activities of the Bank. The Bank was founded in 1922 as a mutual building and loan association. In 1987, the Bank converted to a federally chartered stock savings bank. On December 28, 2011, the Bank completed a charter conversion from a federally chartered stock savings bank to a South Carolina chartered commercial bank. In connection with this transaction, the Company reorganized from a savings and loan holding company into a bank holding company.

The Bank also has three 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 (“Collier Jennings”), which has three wholly owned 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.

In addition to the Bank, the Company has another wholly owned subsidiary, Security Federal Statutory Trust (the “Trust”), which issued and sold fixed and floating rate capital securities of the Trust. Under current accounting guidance, however, the Trust is not consolidated in the Company’s financial statements. Unless the context indicates otherwise, references to the Company shall include the Bank and its subsidiaries.

The principal business of the Bank is accepting deposits from the general public and originating consumer and commercial business loans as well as mortgage loans that enable borrowers to purchase or refinance one-to-four family residential real estate. The Bank also originates construction loans on single-family residences, multi-family dwellings, and commercial real estate, as well as loans for the acquisition, development and construction of residential subdivisions, and commercial projects. The Bank also provides trust services and it offers property, casualty and health insurance products through its subsidiary, Security Federal Insurance Inc.

The Bank's net income depends primarily on its interest rate spread which is the difference between the average yield earned on its loan and investment portfolios and the average rate paid on its deposits and borrowings. When the rate earned on interest-earning assets equals or exceeds the rate paid on interest-bearing liabilities, this positive interest rate spread will generate net interest income. The Bank’s interest spread is influenced by interest rates, deposit flows, and loan demands. Levels of non-interest income and operating expense are also significant factors in earnings.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Forward-Looking Statements

This document, including information contained therein or incorporated by reference, contents, and future filings by the Company on Form 10-K, Form 10-Q, and Form 8-K, and future oral and written statements by the Company and its management may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risk and uncertainties.

Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors, including, but not limited to:

•potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the ongoing novel coronavirus of 2019 (“COVID-19”) and any governmental or societal responses thereto;

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for 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 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;

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

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

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

•costs and effects of litigation, including settlements and judgments;

•our ability to manage loan delinquency rates;

•increased competitive pressures among financial services companies;

•changes in consumer spending, borrowing and savings habits;

•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

•our ability to pay dividends on our common stock;

•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 Financial Accounting Standards Board ("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 Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 (“CAA 2021”); and

•the other risks described elsewhere in this document.

Some of these and other factors are discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 under Item 1A, “Risk Factors.” Such developments could have an adverse impact on our financial position and our results of operations.

Any of the forward-looking statements that 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 2022 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company’s consolidated financial condition and consolidated results of operations, liquidity and stock price performance.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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 the Federal Reserve maintaining a low interest rate environment throughout 2021. 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 through the end of the 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.

Paycheck Protection Program ("PPP") Participation

The CARES Act, signed into law on March 27, 2020, authorized the U.S. Small Business Administration (“SBA”) to temporarily guarantee loans under Paycheck Protection Program, or PPP. The goal of the PPP was to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Bank was automatically authorized to originate PPP loans upon commencement of the program in April 2020. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower's PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA if the borrower meets the PPP conditions. Through the PPP, the Bank provided over $75 million in funding during the year ended December 31, 2020. The Bank began the process of working with customers through the SBA forgiveness process in the fourth quarter of 2020.

The CAA, 2021 renewed and extended the PPP until March 31, 2021 by authorizing an additional $284.5 billion for the program. As a result, in January 2021, the Bank began accepting and processing loan applications under this second PPP. 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 the PPP loan is either two or five years from the date of loan origination. Through the second round PPP, the Bank provided over $52 million in funding during the year ended December 31, 2021.

As a result of PPP loan repayments, the Bank recognized deferred PPP loan fees of $4.7 million during 2021 and $1.2 million during 2020, which increased net income in the periods recognized. At December 31, 2021 and 2020, the Bank had $9.8 million and $47.1 million in PPP loans remaining, respectively. The balance of unamortized net deferred fees on PPP loans was $441,000 at December 31, 2021 compared to $1.4 million at December 31, 2020.

Loan Modifications

According to the CARES Act, the CAA, 2021 and related regulatory guidance, banks are not required to designate as troubled debt restructurings (“TDRs”) the modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current, as defined under the CARES Act and related bank agency guidance prior to any relief through January 1, 2022.

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. As of December 31, 2021, all loans on deferral due to COVID-19 had resumed regular principal and interest payments.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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 the Company’s Consolidated Financial Statements. The significant accounting policies of the Company are described in Note 1 of the Notes to the Consolidated Financial Statements included herein.

Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers these accounting policies to be critical accounting policies. The judgments, estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments, estimates and assumptions made by management, actual results could differ from these judgments, estimates and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments, estimates and assumptions used in preparation of the Consolidated Financial Statements. The impact of an unexpected 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 loan portfolio monthly and adjusts the allowance accordingly. Additional analysis was completed on the allowance for loan losses during 2020 and 2021 based on the significance of loan modifications in accordance with the CARES Act and regulatory guidance, loan risk rating downgrades as well as additional risk factors related to COVID-19. 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 bank regulatory agencies that may require adjustments to the allowance based upon the information that is available at the time of their examination. For a further discussion of the Company’s estimation process and methodology related to the allowance for loan losses, see the discussion under the section entitled “Financial Condition” and “Comparison of the Years Ended December 31, 2021 and 2020-Provision for Loan Losses” included herein.

The Company values an impaired loan at the loan’s fair value if it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Impaired loans are measured 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 collectability of an impaired loan’s principal is in doubt, wholly or partially, all payments received are applied to principal. Once the recorded principal balance has been reduced to zero, any additional payments received are applied to interest income to the extent that any interest has been foregone. Any additional payments received are recorded as recoveries of any amounts previously charged off. When the repayment of the loan is not in doubt, payments are applied under the contractual terms of the loan agreement first to interest and then to principal.

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 the Company 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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Asset and Liability Management

The objective of the Bank’s program of asset and liability management is to limit the Bank’s vulnerability to material and prolonged increases or decreases in interest rates, or "interest rate risk." As a financial institution, interest rate risk is the Company’s most significant market risk. The earnings and economic value of our shareholders’ equity varies in relation to changes in interest rates and the corresponding impact on the market values of our assets and liabilities. The Bank has an Asset Liability Management Committee (“ALCO”) who monitors the Bank’s asset liability strategy.

The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or re-pricing opportunities of interest-earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of interest-earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO meets regularly to review interest rate risk and liquidity in relation to present and potential market conditions and evaluate funding and balance sheet management strategies to ensure the level of risk is consistent with our asset/liability objectives.

Simulation is the principal tool used by the Bank in its ongoing effort to measure interest rate risk. Simulation involves the use of a financial modeling system that provides reports showing the current and future impact of changes in interest rates, strategies and tactics. The Bank uses two dynamic methods; net interest income (“NII”) simulation and economic value of equity (“EVE”) analysis. The NII simulation models the impact that changes in interest rates will have on our earnings while EVE models the impact those changes will have on the net present value of our asset and liability portfolios. These models take into account our contractual agreements with regard to investments, loans, deposits, and borrowings but also include assumptions surrounding market and customer behavior under different rate scenarios. The assumptions we use are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets and liabilities under the various interest rate scenarios. We use market data to determine prepayments and maturities of loans, investments and borrowings and use our own assumptions on deposit decay rates except for time deposits. Time deposits are modeled to reprice to market rates upon their stated maturities. We also assume that non-maturity deposits can be maintained with rate adjustments not directly proportionate to the change in market interest rates, based upon our historical deposit rates. We have demonstrated in the past that the tiering structure of our deposit accounts during changing rate environments results in relatively lower volatility and less than market rate changes in our interest expense for deposits. These assumptions are based upon our analysis of our customer base, competitive factors, and historical experience. While these models are dependent on the accuracy of the assumptions that underlie the process, we believe that such modeling provides a better illustration of our sensitivity to interest rate risk than does a traditional static gap analysis. These tools provide our ALCO with the capability to estimate and manage the amount of earnings at risk in future periods and in selected interest rate risk environments. In response to the COVID-19 pandemic the Federal Reserve reduced the targeted federal funds rate 150 basis points to a range of 0.00% to 0.25%. Given that the targeted Fed Funds rate at December 31, 2021 was a range of 0.00% to 0.25%, a 200 or 300 basis point reduction in rates is not reported in the tables below.

NII Simulation- The Bank’s primary focus is on NII simulation. Using NII simulation, the Bank measures earnings exposure over both a twelve and twenty-four month period under multiple instantaneous rate shock scenarios. The Bank’s policy provides the maximum acceptable negative impact on net interest income and return on assets over each time horizon associated with each respective change in interest rates. Our ALCO monitors compliance with these policy limits and reports them to the Board of Directors quarterly.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

The following table indicates the NII simulation scenarios modeled and the applicable policy parameters.


Change in Market Rates	Maximum Allowable Change in NII Over		Maximum Allowable Change in ROA Over
(in Basis Points)	12 Months	24 Months	12 Months	24 Months
400	(20)%	(20)%	(40)%	(40)%
300	(15)%	(15)%	(30)%	(30)%
200	(10)%	(10)%	(20)%	(20)%
100	(7.5)%	(7.5)%	(10)%	(10)%
—	—%	—%	—%	—%
(100)	(7.5)%	(7.5)%	(10)%	(10)%

EVE simulation- The EVE analysis serves as an indicator of the extent to which the present value of our capital could change, given potential changes in interest rates. The difference represented by the present value of assets minus the present value of liabilities is defined as the economic value of equity. This measure assumes a static balance sheet and does not incorporate any growth assumptions, but does assume loan prepayments and certain other cash flows occur. It provides a measure of rate risk extending beyond the twelve or twenty - four month time horizon contained in the NII simulation analyses.

While an instantaneous and severe shift in interest rates is used in this analysis to provide an estimate of exposure under an extremely adverse scenario, a gradual shift in interest rates would have a much more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon, i.e., the next fiscal year. Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, change in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.

The following table indicates the EVE simulation scenarios modeled and the applicable policy parameters.


Change in Market Rates (In Basis Points)						Maximum Change in Economic Value of Equity
400						(40)%
300						(30)%
200						(20)%
100						(10)%
—						—%
(100)						(10)%

In evaluating the Bank's exposure to interest rate risk, certain shortcomings inherent in the method of analysis described above are considered. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. For example, loan repayment rates and withdrawals of deposits will likely differ substantially from the assumptions used in the simulation models in the event of significant changes in interest rates due to the option of borrowers to prepay their loans and the ability of depositors to withdraw funds prior to maturity. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Financial Condition - Assets

Total assets increased $129.5 million or 11.1% to $1.3 billion at December 31, 2021 from $1.2 billion at December 31, 2020. This increase was primarily due to increases in both investments and mortgage-backed securities ("MBS") available for sale ("AFS") and held to maturity ("HTM") and net loans receivable.

Cash and cash equivalents increased $9.6 million or 53.2% to $27.6 million at December 31, 2021 compared to $18.0 million at December 31, 2020. Total investments and MBS increased $98.8 million or 16.3% to $706.4 million at December 31, 2021 from $607.6 million at December 31, 2020 as purchases of investment and MBS AFS exceeded maturities, sales and principal paydowns during the year. The Bank purchased 84 investment and MBS for a total purchase price of $217.6 million during the year ended December 31, 2021 compared to purchases of 125 investment and MBS for a total purchase price of $256.6 million during the prior year, most of which were for our investment and MBS AFS portfolio. There were no sales of investment and MBS AFS during 2021 compared to sales of $25.0 million during 2020.

Loans receivable, net, including loans held for sale, increased $20.3 million or 4.2% to $499.5 million at December 31, 2021 from $479.2 million at December 31, 2020 primarily due to increases in both commercial real estate and commercial business loans. 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. During the year ended December 31, 2021, the Bank originated $367.7 million in new and renewed consumer and commercial loans. The Bank's portfolio of consumer and commercial loans had a combined balance of $451.7 million at December 31, 2021 and $430.3 million at December 31, 2020. Consumer and commercial loans combined were 88.3% and 85.6% of total loans at December 31, 2021 and 2020, respectively. Consumer loans increased $3.9 million or 7.1% to $59.3 million at December 31, 2021 from $55.3 million at December 31, 2020. Commercial business loans (excluding PPP loans) increased $9.6 million or 48.6% to $29.3 million at December 31, 2021 from $19.7 million at December 31, 2020 while commercial real estate loans increased $54.1 million or 18.1% to $353.4 million at December 31, 2021 from $299.3 million at December 31, 2020.

Residential real estate loans held for investment decreased $10.7 million or 16.1% to $56.0 million at December 31, 2021 from $66.7 million at December 31, 2020. During the year ended December 31, 2021, the Bank originated $37.8 million in adjustable rate residential real estate loans (“ARMs”) for investment purposes. Loans held for sale, comprised of fixed rate residential loans, decreased $1.7 million or 29.1% to $4.0 million at December 31, 2021 from $5.7 million at December 31, 2020.

At December 31, 2021, the Bank’s residential real estate loans held for investment included $9.7 million in longer term fixed rate residential mortgage loans. Typically, long term, newly originated fixed rate residential real estate loans are not retained in the portfolio but are sold immediately in contrast to ARMs, which are generally retained in the portfolio. The Bank sells all its fixed rate residential loans on a service-released basis. Fixed rate residential loans sold to institutional investors, on a service-released basis totaled $112.9 million during the year ended December 31, 2021, $111.1 million during the year ended December 31, 2020 and $61.9 million during the year ended December 31, 2019. At December 31, 2021, the Bank held $67.7 million or 83.2% of its residential real estate loans held for investment in ARMs and $13.7 million, or 16.8%, in fixed rate residential loans. The Bank's remaining loan portfolio included $88.6 million of adjustable rate and $363.0 million of fixed rate consumer, commercial business (including $9.8 million in PPP loans) and commercial real estate loans, or 16.6% and 68.1% of total loans, respectively, at December 31, 2021.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Financial Condition - Non-Performing Assets

The Bank’s non-performing assets, which consist of non-accrual loans and OREO, decreased $811,000 or 22.4% to $2.8 million at December 31, 2021 from $3.6 million at December 31, 2020. Non-performing assets represented 0.2% and 0.3% of total assets at December 31, 2021 and 2020, respectively. The Bank did not designate loans with payment deferrals granted due to the COVID-19 pandemic as delinquent in accordance with provisions of the CARES Act, the CAA, 2021 and related regulatory guidance. The table below summarizes our non-performing assets for those periods.


	At December 31, 2021				At December 31, 2020				$		%
	Amount			Percent (1)	Amount			Percent (1)	Change		Change
Loans 90 Days or More Past Due or Non-Accrual Loans:
Residential Real Estate	$	1,332,106		0.3%	$	1,682,240		0.4%	$	(350,134)	(20.8)	%
Commercial Business	64,479			—	100,408			—	(35,929)		(35.8)
Commercial Real Estate	1,136,322			0.2	939,946			0.2	196,376		20.9
Consumer	150,480			—	402,878			0.1	(252,398)		(62.6)
Total Non-Performing Loans	2,683,387			0.5%	3,125,472			0.7%	(442,085)		(14.1)	%

Other Non-Performing Assets:
OREO	129,700			—%	498,610			0.1%	(368,910)		(74.0)	%

Total Non-Performing Assets	$	2,813,087		0.5%	$	3,624,082		0.8%	$	(810,995)	(22.4)	%
Total Non-Performing Assets as a Percentage of Total Assets	0.2		%		0.3		%

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

The largest decrease in non-performing loans was in the non-performing residential real estate loan category, which decreased $350,000 or 20.8% to $1.3 million at December 31, 2021 from $1.7 million at December 31, 2020. Non-performing residential real estate loans at December 31, 2021 consisted of 11 loans to 11 borrowers with an average loan balance of $121,000, the largest of which was $274,000, compared to 14 loans to 14 borrowers with an average loan balance of $120,000, the largest of which was $301,000, at December 31, 2020.

Non-performing consumer loans decreased $252,000 or 62.6% to $150,000 at December 31, 2021 from $403,000 at December 31, 2020. Non-performing consumer loans at December 31, 2021 consisted of seven loans to seven borrowers with an average loan balance of $22,000, the largest of which was $55,000, compared to 16 loans to 16 borrowers with an average loan balance of $25,000, the largest of which was $74,000, at December 31, 2020.

Non-performing commercial real estate loans increased $196,000 or 20.9% to $1.1 million at December 31, 2021 from $940,000 at December 31, 2020. The balance in non-performing commercial real estate loans consisted of eight loans to six borrowers with an average loan balance of $151,000 at December 31, 2021 compared to eight loans to seven borrowers with an average loan balance of $117,000 at December 31, 2020.

In addition, potential problem loans, which are loans rated substandard or special mention and not included in nonperforming loans or TDRs, totaled approximately $19.6 million, or 3.9% of gross loans at December 31, 2021, compared to $24.0 million, or 4.9% of gross loans at December 31, 2020. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower's ability to comply with present repayment terms.

Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the underlying collateral. In the event an acceptable arrangement cannot be reached, we may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

The balance of loans classified as TDRs increased $379,000 or 120.5% during the year ended December 31, 2021. The Bank had three TDRs totaling $694,000 at December 31, 2021 compared to three TDRs totaling $315,000 at December 31, 2020. The three TDRs at December 31, 2021 were commercial real estate loans to separate borrowers and secured by first mortgages on single family residences. The largest TDR had a balance of $403,000 at December 31, 2021. In comparison, the three TDRs at December 31, 2020 included two commercial real estate loans to two separate borrowers, the largest of which had a balance of $288,000 and one unsecured consumer loan with a balance of $2,000. At both December 31, 2021 and 2020, all TDRs were non-accruing.

All TDRs are reviewed for impairment loss and included in impaired loans until paid off. TDR loans can be classified as either accrual or non-accrual. TDR loans are classified as non-performing loans unless they have been performing in accordance with their modified terms for a period of at least six months in which case they are placed on accrual status. At December 31, 2021, the Bank had $2.3 million of impaired loans, including $694,000 in TDRs, compared to $2.2 million impaired loans, including $315,000 in TDRs, at December 31, 2020.

OREO decreased $369,000 or 74.0% to $130,000 at December 31, 2021 from $499,000 at December 31, 2020. At December 31, 2021, the balance of OREO consisted of five acres of commercial land in Aiken, South Carolina.

The Bank reviews its loan portfolio and allowance for loan losses on a monthly basis. When determining the appropriate allowance for loan losses during the years ended December 31, 2021 and 2020, management took into consideration the impact of the COVID-19 pandemic on such additional factors as the national and state unemployment rates and related trends, national and state unemployment benefit claim levels and related trends, the amount of and timing of financial assistance provided by the government, consumer spending levels and trends, industries significantly impacted by the COVID-19 pandemic, a review of the Bank's largest commercial loan relationships, and the Bank's COVID-19 loan modification program.

Management decreased historical loss factors and qualitative factors for all loan categories at December 31, 2021, 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 December 31, 2021. The decrease in the factors resulted in a significant decrease in the allowance for loan losses during the current year through the reversal of provision for loan losses recorded during the year ended December 31, 2020. For further discussion, see “Comparison of the Years Ended December 31, 2021 and 2020-Provision for Loan Losses” included herein.

Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate. Future additions to the Bank's allowance for loan losses are dependent on, among other things, the performance of the Bank's loan portfolio, the economy, changes in real estate values, and interest rates. There can be no assurance that additions to the allowance will not be required in future periods. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. Uncertainties relating to our allowance for loan losses are heightened as a result of the risks surrounding the COVID-19 pandemic. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations. Management continually monitors its loan portfolio for the impact of local economic changes. The ratio of the allowance for loan losses to total loans was 2.19% and 2.64% at December 31, 2021 and 2020, respectively. The Bank closely monitors its past due loans and loans subjected to a COVID-19 loan modification.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Financial Condition - Liabilities and Shareholders Equity

Total deposits increased $197.9 million or 21.6% to $1.12 billion at December 31, 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 COVID-19 pandemic. The majority of the Bank’s deposits are originated within the Bank’s immediate market area. The Bank had brokered time deposits of $10.0 million and $16.0 million at December 31, 2021 and 2020, respectively. The Bank uses brokered time deposits to manage interest rate risk because they are accessible in bulk at rates typically only slightly higher than those in our market areas. A portion of these brokered time deposits give the Bank a call option that allows the Bank the choice to redeem them early should rates change. In addition, the Bank had $5.0 million in other brokered deposits at December 31, 2021. Total deposits at December 31, 2021, excluding brokered deposits, increased $198.9 million or 22.0% to $1.1 billion from $902.1 million at December 31, 2020. Brokered deposits were 1.3% of total deposits at December 31, 2021 and 1.7% of total deposits at December 31, 2020.

The Bank had no outstanding FHLB advances or borrowings from the "discount window" of the Federal Reserve Bank of Atlanta ("FRB") at December 31, 2021 compared to FHLB advances and FRB borrowings of $35.0 million and $48.7 million, respectively, 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%, where it remained at December 31, 2021.

Other borrowings increased $13.7 million or 104.2% to $26.8 million at December 31, 2021 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 December 31, 2021 and 2020. The Bank had pledged as collateral for these repurchase agreements investment and MBS with amortized costs and fair values of $45.3 million and $45.2 million, respectively, at December 31, 2021 and $26.6 million and $26.8 million, respectively, at December 31, 2020.

In September 2006, Security Federal Statutory Trust issued and sold 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 Sheet 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 1.90% at December 31, 2021. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part.

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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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 senior debentures and for general corporate purposes. For additional information, refer to Note 14 of the Notes to Consolidated Financial Statements included herein.

Total shareholders' equity increased $3.6 million or 3.2% to $115.5 million at December 31, 2021 from $111.9 million at December 31, 2020. The increase was attributable to net income of $12.8 million, which was partially offset by $1.4 million in dividends paid to common shareholders combined with a $7.7 million decrease in accumulated other comprehensive income, net of tax, related to the unrecognized loss in value of investment and MBS during the year ended December 31, 2021. Book value per common share was $35.51 at December 31, 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

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table also distinguishes between the changes related to higher or lower outstanding balances and the changes related to the volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in rate (multiplied by prior year volume); (2) changes in volume (multiplied by prior year rate); and (3) net change (the sum of the prior columns). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change attributable to volume and the change attributable to rate. Changes in income are calculated on a tax equivalent basis using the effective tax rate for the period.


	Years Ended December 31,
	2021 vs. 2020						2020 vs. 2019
	(Decrease) Increase Due to Change in						(Decrease) Increase Due to Change in
(Dollars in Thousands)	Volume		Rate		Net		Volume		Rate		Net
Interest-Earning Assets:
Loans: (1)
Residential Mortgage	$	(690)	$	(166)	$	(856)	$	(50)	$	(150)	$	(200)
Other Loans	688		1,090		1,778		3,824		(2,019)		1,805
Total Loans	(2)		924		922		3,774		(2,169)		1,605
Mortgage-Backed Securities	1,311		(2,110)		(799)		529		(1,047)		(518)
Taxable Investment Securities	865		(838)		27		874		(1,982)		(1,108)
Non-taxable Investment Securities (2)	283		(327)		(44)		(186)		390		204
Deposits in Other Banks	(38)		(31)		(69)		10		(29)		(19)
Total Interest-Earning Assets	$	2,419	$	(2,382)	$	37	$	5,001	$	(4,837)	$	164
Interest-Bearing Liabilities:
Deposits:
Certificate Accounts	$	(474)	$	(1,414)	$	(1,888)	$	(607)	$	(935)	$	(1,542)
NOW Accounts	54		(117)		(63)		57		88		145
Money Market Accounts	130		(462)		(332)		139		(1,269)		(1,130)
Savings Accounts	25		(37)		(12)		20		(10)		10
Total Deposits	(265)		(2,030)		(2,295)		(391)		(2,126)		(2,517)
Borrowings	(125)		(337)		(462)		940		(152)		788
Total Interest-Bearing Liabilities	(390)		(2,367)		(2,757)		549		(2,278)		(1,729)
Effect on Net Tax Equivalent Interest Income (2)	$	2,809	$	(15)	$	2,794	$	4,452	$	(2,559)	$	1,893

(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN AVERAGE LOANS OUTSTANDING.

(2)THE TAX-EQUIVALENT INTEREST INCOME ADJUSTMENT RELATES TO THE TAX EXEMPT MUNICIPAL BONDS

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Average Balances, Interest Income and Expenses, and Average Yields and Rates

The following table sets forth information related to our average balance sheet, average yields on interest earning assets, and average costs of interest earning liabilities at December 31, 2021, 2020 and 2019. The average balances were derived from the daily balances throughout the periods indicated. The average yields or costs were calculated by dividing the income or expense by the average balance of the corresponding assets or liabilities. Nonaccrual loans are included in earning assets in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status.


	For the Year Ended December 31,
	2021						2020
(Dollars in thousands)	Average Balance		Interest		Yield/Rate		Average Balance		Interest		Yield/Rate
Interest-Earning Assets:
Residential Mortgage	$	64,016	$	3,058	4.78	%	$	78,353	$	3,914	5.00	%
Other Loans	449,971		24,138		5.36	%	437,034		22,360		5.12	%
Total Loans (1)	513,987		27,196		5.29	%	515,387		26,274		5.10	%
Mortgage-Backed Securities	304,234		5,341		1.76	%	243,841		6,140		2.52	%
Taxable Investment Securities	287,153		3,881		1.35	%	229,340		3,855		1.68	%
Non-taxable Investments (2)	23,351		955		4.09	%	17,490		999		5.71	%
Deposits in Other Banks	1,639		14		0.87	%	4,535		83		1.83	%
Total Interest-Earning Assets	$	1,130,364	$	37,387	3.31	%	$	1,010,593	$	37,351	3.70	%
Interest-Bearing Liabilities:
Certificate Accounts	$	172,995	$	879	0.51	%	$	216,619	$	2,767	1.28	%
NOW Accounts	204,869		219		0.11	%	166,115		282		0.17	%
Money Market Accounts	325,349		461		0.14	%	274,124		793		0.29	%
Savings Accounts	85,880		72		0.08	%	63,374		84		0.13	%
Total Interest-Bearing Deposits	789,093		1,631		0.21	%	720,232		3,926		0.55	%
Other Borrowings	23,608		38		0.15	%	18,125		55		0.30	%

Junior Subordinated Debt	5,155		97		1.88	%	5,155		127		2.46	%
Senior Convertible Debt	—		—		—	%	1,123		82		7.30	%
Subordinated Debt	30,000		1,575		5.25	%	30,000		1,575		5.25	%
FHLB Advances & FRB Borrowings	30,985		483		1.56	%	60,600		817		1.35	%
Total Interest-Bearing Liabilities	$	878,841	$	3,824	0.44	%	$	835,235	$	6,582	0.79	%
Net Interest Rate Spread					2.87	%					2.91	%
Tax Equivalent Net Interest Income/Margin (2)			$	33,563	2.97	%			$	30,769	3.04	%
Less: tax equivalent adjustment (2)			270						254
Net Interest Income			$	33,293					$	30,515

(1) INTEREST INCOME FROM OTHER LOANS INCLUDED IN THE TABLES ABOVE AND BELOW INCLUDES DEFERRED PPP LOAN FEES OF $4.7 MILLION AND $1.2 MILLION RECOGNIZED DURING THE YEARS ENDED DECEMBER 31, 2021 AND 2020, RESPECTIVELY.

(2)TAX EQUIVALENT BASIS RECOGNIZES THE INCOME TAX SAVINGS WHEN COMPARING TAXABLE AND TAX-EXEMPT ASSETS AND WAS CALCULATED USING THE EFFECTIVE TAX RATE IN PLACE FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019. THE TAX-EQUIVALENT INTEREST INCOME ADJUSTMENT RELATES TO THE TAX EXEMPT MUNICIPAL BONDS INCLUDED IN OUR INVESTMENT PORTFOLIO DURING THE PERIODS INDICATED.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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


	For the Year Ended December 31,
	2020						2019
(Dollars in thousands)	Average Balance		Interest		Yield/Rate		Average Balance		Interest		Yield/Rate
Interest-Earning Assets:
Residential Mortgage Loans	$	78,353	$	3,914	5.00	%	$	79,334	$	4,114	5.19	%
Other Loans	437,034		22,360		5.12	%	364,527		20,555		5.64	%
Total Loans (1)	515,387		26,274		5.10	%	443,861		24,669		5.56	%
Mortgage-Backed Securities	243,841		6,140		2.52	%	224,860		6,658		2.96	%
Taxable Investment Securities	229,340		3,855		1.68	%	190,760		4,962		2.60	%
Non-taxable Investments (2)	17,490		999		5.71	%	22,732		795		3.50	%
Deposits in Other Banks	4,535		83		1.83	%	4,087		103		2.52	%
Total Interest-Earning Assets	$	1,010,593	$	37,351	3.70	%	$	886,300	$	37,187	4.20	%
Interest-Bearing Liabilities:
Certificate Accounts	$	216,619	$	2,767	1.28	%	$	256,194	$	4,309	1.68	%
NOW Accounts	166,115		282		0.17	%	122,453		137		0.11	%
Money Market Accounts	274,124		793		0.29	%	254,723		1,923		0.75	%
Savings Accounts	63,374		84		0.13	%	50,635		74		0.15	%
Total Interest-Bearing Deposits	720,232		3,926		0.55	%	684,005		6,443		0.94	%
Other Borrowings	18,125		55		0.30	%	14,182		70		0.49	%
Note Payable	—		—		—	%	675		36		5.33	%
Junior Subordinated Debt	5,155		127		2.46	%	5,155		216		4.19	%
Senior Convertible Debt	1,123		82		7.30	%	6,045		483		7.99	%
Subordinated Debt	30,000		1,575		5.25	%	2,630		171		6.50	%
FHLB Advances & FRB Borrowings	60,600		817		1.35	%	45,900		892		1.94	%
Total Interest-Bearing Liabilities	$	835,235	$	6,582	0.79	%	$	758,592	$	8,311	1.10	%
Net Interest Rate Spread					2.91	%					3.10	%
Tax Equivalent Net Interest Income/Margin (2)			$	30,769	3.04	%			$	28,876	3.26	%
Less: tax equivalent adjustment (2)			254						253
Net Interest Income			$	30,515					$	28,623

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Comparison of the Years Ended December 31, 2021 and 2020

Net Income

Net income increased $5.7 million or 81.2% to $12.8 million or $3.93 per common share for the year ended December 31, 2021, compared to $7.1 million or $2.19 per common share for the year ended December 31, 2020. The increase in net income during 2021 was primarily the result of higher net interest income and non-interest income, specifically grant income, combined with the reversal of provision of loan losses during 2021 following significantly higher loan loss provisions during 2020 in response to the ongoing COVID-19 pandemic.

Net Interest Income

Net interest income increased $2.8 million or 9.1% to $33.3 million for the year ended December 31, 2021, compared to $30.5 million in 2020. The increase in net interest income was primarily due to higher interest income from loans and lower interest expense. The net interest margin on a tax equivalent basis decreased 22 basis points to 3.04% for the year ended December 31, 2021 from 3.26% for the year ended December 31, 2020. Loan yields in 2021 were impacted favorably as a result of recognition of unamortized deferred fee income on PPP loans forgiven and repaid by the SBA.

Total average interest-earning assets increased $119.8 million or 11.9% to $1.13 billion for the year ended December 31, 2021 from $1.01 billion for the year ended December 31, 2020 with a 39 basis point decrease in the average yield earned on these assets. Average interest-bearing liabilities increased $43.6 million or 5.2% to $878.8 million for the year ended December 31, 2021 from $835.2 million for the year ended December 31, 2020 with a decrease of 33 basis points in the average cost. The interest rate spread on a tax equivalent basis decreased four basis points to 2.87% for the year ended December 31, 2021 from 2.91% in 2020.

Total interest income increased $21,000 or 0.1% to $37.1 million for the year ended December 31, 2021, compared to $37.1 million for the year ended December 31, 2020 as a result of increased interest income from loans which was nearly offset by lower interest income from investments and other interest earning assets. Interest income from loans increased $922,000 or 3.5% to $27.2 million for the year ended December 31, 2021 compared to $26.3 million for the year ended December 31, 2020. The increase was attributable to an increase of 19 basis points in the average yield earned on the Bank's loan portfolio during 2021, which was partially offset by a $1.4 million decrease in average total loans outstanding during the year ended December 31, 2021. The Bank recognized $4.7 million and $1.2 million in deferred loan fees on PPP loans during the years ended December 31, 2021 and 2020, respectively.

Total tax equivalent interest income on investment securities, mortgage-backed securities, and other investments decreased $886,000, or 8.0%, due to a decrease of 59 basis points in the average yield earned on these assets, which was partially offset by a $121.2 million, or 24.5%, increase in the aggregate average balance of these interest earning assets during 2021.

Total interest expense decreased $2.8 million or 41.9% to $3.8 million for the year ended December 31, 2021, compared to $6.6 million for the year ended December 31, 2020 due to a 35 basis point decline in the average cost of interest bearing liabilities, which was partially offset by a $43.6 million or 5.2% increase in the average balance of these liabilities. The largest decrease was in interest expense on deposits, which decreased $2.3 million or 58.5% to $1.6 million in 2021 compared to $3.9 million in 2020. Average interest bearing deposits increased $68.9 million or 9.6% to $789.1 million during the year ended December 31, 2021 compared to $720.2 million during 2020, while the average cost of those deposits decreased 34 basis points to 0.21% during 2021 from 0.55% in 2020.

Interest expense on FHLB advances and all other borrowings decreased $463,000 or 17.4% to $2.2 million during the year ended December 31, 2021 from $2.7 million during the prior year. The decrease was attributable to a $25.3 million, or 22.0% decrease in the average balance of these liabilities, which was partially offset by an increase of 24 basis points in the average cost to 2.44% in 2021 from 2.20% during 2020.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Provision for Loan Losses

The Company recorded a negative provision for loan losses of $2.4 million for the year ended December 31, 2021 compared to provision expense of $3.6 million for the year ended December 31, 2020. The reversal of loan loss provisions during 2021 was the result of a reduction in historical loss and qualitative adjustment factors related to improvement in the economic and business conditions at both the national and regional levels as of December 31, 2021. Non-performing assets decreased $811,000, or 22.4%, to $2.8 million at December 31, 2021 from $3.6 million at December 31, 2020. Non-performing assets represented 0.22% and 0.31% of total assets at December 31, 2021 and 2020, respectively.

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 established policies and procedures for evaluating and monitoring the credit quality of the loan portfolio and for the 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 portfolio based on historical trends and the risk inherent in each category. The historical loss periods used to calculate these ratios can range from one to ten years depending on which period is deemed a more relevant indicator of future losses. Currently, management applies a ten-year historical loss ratio to each loan category to estimate the inherent loss in these pooled loans.

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, including but not limited to classified loans, non-accrual loans and TDRs. These loans are evaluated for impairment and recorded in accordance with accounting guidance. All TDRs and substantially all non-accrual loans are individually evaluated for impairment. In accordance with our policy, non-accrual commercial loans with a balance less than $200,000 and non-accrual consumer loans with a balance less than $100,000 are deemed immaterial and therefore excluded from the individual impairment review. 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.

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.

Management believes the allowance for loan losses at December 31, 2021 is adequate based on its best estimates of the losses inherent in the loan portfolio, although there can be no guarantee as to these estimates. 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 can be no guarantee that actual loan losses will not exceed the allowance for loan losses, or that additional increases in the allowance for loan losses will not be required in the future. A further decline in national and local economic conditions, as a result of the 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 $1.2 million or 10.6% to $12.6 million for the year ended December 31, 2021 from $11.4 million for the year ended December 31, 2020. The increase in non-interest income was primarily attributable to increases in grant income, ATM and check card fee income, trust income and gain on sale of mortgage loans. These increases in non-interest income were partially offset by a decrease of $1.3 million in net gain on sale of investments due to no investments sold during 2021 compared to 16 AFS investment securities sold for a total gain of $1.3 million in 2020.

The Bank received $1.8 million and $520,000 in grant income during the years ended December 31, 2021 and 2020, respectively. The Bank was awarded a $1.8 million grant during the third quarter of 2021 by the Community Development Financial Institutions (CDFI) Fund Rapid Response Program (RRP) created 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, which satisfied the performance obligation of the grant. A portion of the grant income received in 2020 was awarded by the Bank Enterprise Award (BEA) Program in recognition of the Bank’s investments in distressed communities and its continued commitment to community development.

Gain on sale of loans increased $328,000 or 9.3% to $3.8 million for the year ended December 31, 2021 compared to $3.5 million in 2020 as the dollar volume of loans sold to investors increased. The Company sold 486 loans to investors with a total balance of $112.9 million in 2021 compared to 514 loans to investors with a total balance of $111.1 million during 2020.

Income from BOLI increased $62,000 or 10.8% to $635,000 during the year ended December 31, 2021 from $573,000 during the year ended December 31, 2020. All BOLI income recognized in 2021 and 2020 was related to an increase in the cash surrender value of the BOLI policies.

Trust income increased $301,000 or 26.4% to $1.4 million during the year ended December 31, 2021 due to an increase in assets under management. ATM and check card fee income increased $787,000 or 46.8% to $2.5 million for the year ended December 31, 2021 compared to $1.7 million in 2020 reflecting higher transaction volume.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Non-Interest Expense

Non-interest expense increased $2.3 million or 7.9% to $32.0 million during the year ended December 31, 2021 compared to $29.7 million during 2020. The increase in non-interest expense was primarily due to increases in compensation and employee benefits expense and consulting expense.

Compensation and employee benefits increased $1.2 million or 6.5% to $19.2 million during the year ended December 31, 2021 from $18.0 million for the year ended December 31, 2020 due to general annual cost of living increases, an increase in commissions and incentives on mortgage loan production, and an increase in the number of full time equivalent employees as a result of our growth and expansion into the Augusta, Georgia market.

Consulting expense increased $433,000 or 56.4% to $1.2 million for the year ended December 31, 2021 as a result of a one time expense of $605,000 for IT related consulting expenses incurred in 2021.

Depreciation and maintenance of equipment increased $260,000 or 9.1% to $3.1 million for the year ended December 31, 2021 compared to $2.9 million in 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 in 2022.

FDIC insurance premiums increased $156,000 primarily due to the use of remaining FDIC small bank credits by the Bank during 2020.

The net gain on OREO sales exceeded write-downs and other costs, resulting in a net recovery of $116,000 from the operation of OREO properties during the year ended December 31, 2021. For the year ended December 31, 2020, the Company incurred a net cost of $2,000 from the operation of OREO. The net gain on OREO sales was $105,000 during 2021 compared to $46,000 in 2020. The Company wrote down $20,000 in the value of OREO properties during 2021 compared to $15,000 in 2020.

Debit card expense increased $135,000 to $1.2 million for the year ended December 31, 2021 primarily 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 $189,000 or 5.8% to $3.4 million for the year ended December 31, 2021 compared to $3.2 million during 2020 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 had reopened and resumed normal business hours.

Provision for Income Taxes

The provision for income taxes increased $1.9 million or 122.5% to $3.5 million during the year ended December 31, 2021 compared to $1.6 million for the year ended December 31, 2020 due to higher pre-tax income in 2021 combined with purchased state tax credits in 2020. The Company's combined federal and state effective tax rate was 21.6% for 2021 compared to 18.3% for 2020.

Comparison of the Years Ended December 31, 2020 and 2019

A comparison of our operating results for the 2020 and 2019 fiscal years may be found under the heading “Comparison of Operating Results for the Years Ended December 31, 2020 and 2019” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Net cost of operation of OREO includes all expenses associated with OREO properties, including write-downs in value and

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Regulatory Capital

The following table reconciles the Bank's shareholders' equity to its various regulatory capital positions.


	December 31,
	2021		2020
	(In Thousands)
Bank’s Shareholders’ Equity (1)	$	124,983	$	110,873
Reduction for Goodwill	1,200		1,200
Tangible Capital	123,783		109,673
Core Capital	123,783		109,673
Supplemental Capital	8,923		7,428
Total Risk-Based Capital	$	132,706	$	117,101

(1)EXCLUDES UNREALIZED (LOSSES) GAINS ON INVESTMENT SECURITIES OF $5.2 MILLION and $12.9 MILLION AT DECEMBER 31, 2021 AND 2020, RESPECTIVELY.

The Bank is subject to minimum capital requirements imposed by the FDIC. Based on capital levels at December 31, 2021, the Bank was considered to be well capitalized. At December 31, 2021, the Bank exceeded all regulatory capital requirements with Tier 1 leverage-based capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 (CET1) capital ratios of 9.9%, 17.4%, 18.6%, and 17.4%, respectively.

CET1 consists of Tier 1 capital less all capital components that are not considered common equity. In addition to the FDIC’s minimum capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. At December 31, 2021, the Bank’s capital conservation buffer was 10.6%.

For additional information regarding the Bank's and Company's regulatory capital compliance, see the discussion included in Note 16 of the Notes to Consolidated Financial Statements included herein.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Liquidity and Capital Resources

Liquidity refers to the ability to generate sufficient cash flows to fund current loan demand, repay maturing borrowings, fund maturing deposit withdrawals, and meet operating expenses. 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 need for funds varies among periods depending on funding needs as well as the rate of amortization and prepayment on loans. The use of FHLB and other advances and borrowings varies depending on loan demand, deposit inflows, and the use of investment leverage strategies to increase net interest income.

The principal use of the Bank's funds is the origination of mortgages and other loans and the purchase of investments and mortgage-backed securities. Originations of new loans and renewals of previously funded loans on loans held for investment were $438.4 million during the year ended December 31, 2021 compared to $395.8 million during the year ended December 31, 2020. Purchases of investment and mortgage-backed securities totaled $217.6 million during 2021 compared to $256.6 million during 2020. Other uses of the Bank's funds during the year ended December 31, 2021 included paying down FHLB investments and FRB borrowings and dividend payments to shareholders.

In the normal course of business, the Company makes off-balance sheet arrangements, including credit commitments to its customers to meet their financial needs. These arrangements involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated statement of financial condition. The Bank makes personal, commercial, and real estate lines of credit available to customers and does issue standby letters of credit.

Commitments to extend credit to customers are subject to the Bank’s normal credit policies and are essentially the same as those involved in extending loans to customers. Unused lines of credit on home equity loans, credit cards, and commercial loans amounted to $163.8 million at December 31, 2021. Home equity loans are made on a floating rate basis with final maturities of 15 to 20 years. The Bank issues fixed rate credit cards, currently at 9.99%, and variable rate rewards credit cards with a floating rate equal to prime plus 9.99%. Credit cards are renewed every three years. The Bank had undisbursed loans-in-process of $21.4 million at December 31, 2021, which will be disbursed over an average of 90 days, and are included in the total unused commitments above. These commitments to originate loans and future advances of lines of credit are expected to be funded from loan amortizations and prepayments, deposit inflows, maturing investments, and short-term borrowing capacity. See Note 19 of the Notes to the Consolidated Financial Statements included herein for additional information regarding our commitments and off-balance sheet arrangements.

We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. At December 31, 2021 the Bank was on schedule to open two new branches during 2022. Based on our current capital allocation objectives, we project expending approximately $2.9 million of cash for capital investment in property, plant and equipment related to our newest two branches and approximately $2.6 million for renovations on two existing branches during 2022.

For the year ending December 31, 2022, we project that fixed commitments will include $497,000 of operating lease payments. See Note 5 of the Notes to the Consolidated Financial Statements included herein for additional information regarding our operating leases.

The Bank’s liquidity has been positively impacted by increases in deposit levels. During the years ended December 31, 2021, 2020 and 2019, deposits increased by $197.9 million, $146.7 million and $3.9 million, respectively. As a result, our liquid assets in the form of cash and cash equivalents, certificates of deposit at other banks and investment securities increased to $735.1 million at December 31, 2021 from $626.0 million at December 31, 2020. Management believes that future liquidity can be met through the Bank's deposit base, which had a balance of $1.12 billion at December 31, 2021, and from MBS and investment securities sales and maturities. The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the years ended December 31, 2021, 2020 and 2019, the Bank sold $118.4 million, $112.9 million and $61.5 million in loans, respectively and received principal payments on loans of $415.1 million, $361.9 million and $282.7 million, respectively.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

At December 31, 2021, the Bank had $90.6 million outstanding in certificates of deposit of $100,000 or more, referred to as “Jumbo Certificates,” compared to $106.8 million at December 31, 2020. Brokered certificates of deposit totaled $10.0 million at December 31, 2021 compared to $16.0 million at December 31, 2020. Total certificates of deposit scheduled to mature in one year or less totaled $118.1 million at December 31, 2021 compared to $128.8 million at December 31, 2020.

Certificate of deposits that met or exceeded the FDIC insurance limit of $250,000 totaled $39.4 million and $49.6 million at December 31, 2021 and 2020, respectively. The following table summarizes the maturity schedule of certificates of deposit with a balance of $250,000 or more at December 31, 2021:



	(In Thousands)
Within 3 Months	$	4,198
After 3 Months, Within 6 Months	10,506
After 6 Months, Within 12 Months	12,323
After 12 Months	12,423
	$	39,450

Management’s policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with the Bank. In addition, at December 31, 2021 the Bank had $369.0 million in unused borrowing capacity at the FHLB.

Historically the Bank’s cash flow from operating activities has been relatively stable. The cash flows from investing activities vary with sales of investments and with the need to invest excess funds or utilize leverage strategies with the purchase of mortgage-backed and investment securities. The cash flows from financing activities vary depending on the need for FHLB advances and other borrowings. The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.

Security Federal Corporation is a separate legal entity from Security Federal Bank and must provide for its own liquidity and pay its own operating expenses. Sources of capital and liquidity for Security Federal Corporation include distributions from Security Federal Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Security Federal Bank to pay dividends. At December 31, 2021, Security Federal Corporation (on an unconsolidated basis) had liquid assets of $20.2 million. The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.12 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of $0.12 per share, our average total dividend paid each quarter would be approximately $390,346 based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares).

Report of Independent Registered Public Accounting Firm (PCAOB ID 149)

To the Shareholders and the Board of Directors of Security Federal Corporation:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Security Federal Corporation and its Subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses

As described in Note 4 to the Company’s financial statements, the Company has a gross loan portfolio of approximately $507.6 million and related allowance for loan losses of approximately $11.1 million as of December 31, 2021. As described by the Company in Note 1, the evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a regular basis and is based upon the Company’s review of 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.

We identified the Company’s estimate of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors for collectively evaluated loans. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included the following:

•We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.

•We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered.

•We performed analytical procedures to evaluate the directional consistency of changes that occurred in the qualitative factors for collectively evaluated loans.

•We validated the mathematical accuracy of the calculation.

We have served as the Company's auditor since 1998.

/s/ Elliott Davis, LLC

Columbia, South Carolina

March 29, 2022

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	December 31,
	2021		2020
Assets:
Cash and Cash Equivalents	$	27,622,851	$	18,025,409
Certificates of Deposit with Other Banks	1,100,045		350,005
Investment and Mortgage-Backed Securities ("MBS"):
Available For Sale ("AFS")	682,849,058		589,324,401
Held To Maturity ("HTM") (Fair Value of $23,720,408 and $19,205,287 at December 31, 2021 and December 31, 2020, Respectively)	23,506,768		18,254,394
Total Investments and MBS	706,355,826		607,578,795
Loans Receivable, Net:
Held For Sale	4,038,414		5,693,400
Held For Investment (Net of Allowance of $11,087,164 and $12,842,896 at December 31, 2021 and December 31, 2020, Respectively)	495,458,395		473,473,972
Total Loans Receivable, Net	499,496,809		479,167,372
Accrued Interest Receivable:
Loans	1,333,155		1,252,023
Mortgage-Backed Securities	721,619		631,449
Investment Securities	1,697,716		1,614,077
Total Accrued Interest Receivable	3,752,490		3,497,549
Operating Lease Right-of-Use Assets	2,252,424		2,351,661
Land Held for Sale	1,529,691		—
Premises and Equipment, Net	25,236,915		26,575,257
Federal Home Loan Bank ("FHLB") Stock, at Cost	585,700		2,354,000
Other Real Estate Owned ("OREO")	129,700		498,610
Bank Owned Life Insurance ("BOLI")	26,709,897		26,074,897
Goodwill	1,199,754		1,199,754
Other Assets	5,241,410		4,036,831
Total Assets	$	1,301,213,512	$	1,171,710,140
Liabilities:
Deposit Accounts	$	1,115,962,963	$	918,096,235
Advance Payments by Borrowers for Taxes and Insurance	168,510		206,110
Advances from FHLB	—		35,000,000
Borrowings from Federal Reserve Bank ("FRB")	—		48,700,000
Other Borrowings	26,785,393		13,117,030
Junior Subordinated Debentures	5,155,000		5,155,000
Subordinated Debentures	30,000,000		30,000,000
Operating Lease Liabilities	2,293,295		2,380,269
Other Liabilities	5,325,826		7,149,750
Total Liabilities	1,185,690,987		1,059,804,394
Commitments (Notes 5 and 19)
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 December 31, 2021 and 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")	5,215,107		12,940,950
Retained Earnings	96,373,405		85,030,783
Total Shareholders' Equity	115,522,525		111,905,746
Total Liabilities and Shareholders' Equity	$	1,301,213,512	$	1,171,710,140

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



	Years Ended December 31,
	2021		2020		2019
Interest Income:
Loans	$	27,195,915	$	26,273,429	$	24,669,073
Mortgage-Backed Securities	5,340,744		6,139,753		6,657,925
Investment Securities	4,566,149		4,599,762		5,504,563
Other	14,251		83,381		102,550
Total Interest Income	37,117,059		37,096,325		36,934,111
Interest Expense:
NOW and Money Market Accounts	680,212		1,075,378		2,060,844
Statement Savings Accounts	71,865		83,757		73,961
Certificate Accounts	878,961		2,766,917		4,308,596
FHLB Advances and Other Borrowings	520,949		871,844		961,947
Note Payable	—		—		35,515
Senior Convertible Debentures	—		81,796		483,520
Subordinated Debentures	1,575,000		1,575,000		170,625
Junior Subordinated Debentures	97,109		127,000		216,492
Total Interest Expense	3,824,096		6,581,692		8,311,500
Net Interest Income	33,292,963		30,514,633		28,622,611
(Reversal of) Provision for Loan Losses	(2,404,117)		3,600,000		375,000
Net Interest Income after Provision for Loan Losses	35,697,080		26,914,633		28,247,611
Non-Interest Income:
Gain on Sale of Investment Securities	—		1,332,666		819,053
Gain on Sale of Loans	3,836,411		3,508,397		1,728,741
Service Fees on Deposit Accounts	956,978		941,440		1,069,470
Commissions From Insurance Agency	610,097		643,414		674,991
Trust Income	1,438,727		1,138,007		1,061,200
BOLI Income	635,000		573,250		678,609
ATM and Check Card Fee Income	2,470,171		1,683,059		1,449,416
Grant Income	1,826,265		519,712		478,049
Other	859,602		1,081,188		1,137,614
Total Non-Interest Income	12,633,251		11,421,133		9,097,143
Non-Interest Expense:
Compensation and Employee Benefits	19,159,831		17,991,666		16,838,702
Occupancy	2,622,113		2,574,549		2,354,347
Advertising	1,120,097		1,053,658		796,213
Depreciation and Maintenance of Equipment	3,137,300		2,876,832		2,601,104
FDIC Insurance Premiums	291,039		134,859		84,022
Net (Recovery) Expense from Operation of OREO	(115,867)		2,033		(65,772)
Consulting	1,201,605		768,210		377,911
Debit Card Expenses	1,197,926		1,061,917		912,507
Other	3,433,005		3,244,481		3,971,683
Total Non-Interest Expense	32,047,049		29,708,205		27,870,717
Income Before Income Taxes	16,283,282		8,627,561		9,474,037
Provision For Income Taxes	3,509,391		1,576,957		1,679,550
Net Income	12,773,891		7,050,604		7,794,487

Net Income Per Common Share (Basic)	$	3.93	$	2.19	$	2.64
Net Income Per Common Share (Diluted)	$	3.93	$	2.19	$	2.50
Cash Dividend Per Share On Common Stock	$	0.44	$	0.40	$	0.40
Weighted Average Shares Outstanding (Basic)	3,252,884		3,212,996		2,955,737
Weighted Average Shares Outstanding (Diluted)	3,252,884		3,212,996		3,257,937

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Years Ended December 31,
	2021		2020		2019
Net Income	$	12,773,891	$	7,050,604	$	7,794,487
Other Comprehensive (Loss) Income
Unrealized Gains (Losses) on Securities:
Unrealized Holding (Losses) Gains on Securities Available For Sale, Net of Taxes of $(2,525,307); $3,075,693 and $1,675,405 at December 31, 2021, 2020 and 2019, Respectively	(7,725,746)		9,494,218		5,133,884
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $333,167 and $204,763 at December 31, 2020 and 2019, Respectively	—		(999,499)		(614,290)
Amortization of Unrealized Gains on Available For Sale Securities Transferred to Held To Maturity, Net of Taxes of $(32); $(7,099) and $(8,053) at December 31, 2021, 2020 and 2019, Respectively	(97)		(21,296)		(24,158)
Other Comprehensive (Loss) Income	(7,725,843)		8,473,423		4,495,436
Comprehensive Income	$	5,048,048	$	15,524,027	$	12,289,923

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


	Common Stock			Treasury Stock
	Shares	Amount		Shares	Amount		APIC		AOCI (Loss)		Retained Earnings		Total
December 31, 2018	3,154,829	$	31,548	200,933	$	(4,330,712)	$	12,235,341	$	(27,909)	$	72,610,165	$	80,518,433
Net Income	—	—		—	—		—		—		7,794,487		7,794,487
Other Comprehensive Income, Net of Tax	—	—		—	—		—		4,495,436		—		4,495,436
Employee Stock Purchases	1,958	20		—	—		52,848		—		—		52,868
Redemption of Convertible Debentures	1,000	10		—	—		19,990		—		—		20,000
Cash Dividends on Common Stock	—	—		—	—		—		—		(1,123,219)		(1,123,219)
December 31, 2019	3,157,787	$	31,578	200,933	$	(4,330,712)	$	12,308,179	$	4,467,527	$	79,281,433	$	91,758,005
Net Income	—	—		—	—		—		—		7,050,604		7,050,604
Other Comprehensive Income, Net of Tax	—	—		—	—		—		8,473,423		—		8,473,423
Employee Stock Purchases	430	4		—	—		12,964		—		—		12,968
Conversion of Convertible Debentures	295,600	2,956		—	—		5,909,044		—		—		5,912,000
Cash Dividends on Common Stock	—	—		—	—		—		—		(1,301,254)		(1,301,254)
December 31, 2020	3,453,817	$	34,538	200,933	$	(4,330,712)	$	18,230,187	$	12,940,950	$	85,030,783	$	111,905,746
Net Income	—	—		—	—		—		—		12,773,891		12,773,891
Other Comprehensive Loss, Net of Tax	—	—		—	—		—		(7,725,843)		—		(7,725,843)
Cash Dividends on Common Stock	—	—		—	—		—		—		(1,431,269)		(1,431,269)
December 31, 2021	3,453,817	$	34,538	200,933	$	(4,330,712)	$	18,230,187	$	5,215,107	$	96,373,405	$	115,522,525

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Years Ended December 31,
	2021		2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	12,773,891	$	7,050,604		$	7,794,487
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Depreciation Expense	1,957,583		1,888,280			1,589,671

Discount Accretion and Premium Amortization, Net	6,801,729		4,462,996			5,290,316
Provisions for Loan Losses	(2,404,117)		3,600,000			375,000
Earnings on BOLI	(635,000)		(573,250)			(540,000)
Income Recognized From BOLI Death Benefit	—		—			(138,609)
Gain on Sales of Loans	(3,836,411)		(3,508,397)			(1,728,741)
(Gain) Loss on Sales of Mortgage-Backed Securities ("MBS")	—		(625,923)			139,390
Gain on Sales of Investment Securities	—		(706,743)			(958,443)

Gain on Sales of OREO	(105,422)		(46,354)			(184,864)
Write Down on OREO	20,000		15,000			22,000

Accretion of Deferred Fees on Loans	(5,121,770)		(1,799,236)			(202,684)
Proceeds From Sale of Loans Held For Sale ("HFS")	118,371,483		112,914,762			61,466,054
Origination of Loans Held For Sale	(112,880,086)		(111,109,159)			(61,945,934)
(Increase) Decrease in Accrued Interest Receivable:
Loans	(81,132)		(40,197)			45,857
MBS	(90,170)		(80,235)			40,635
Investment Securities	(83,639)		21,420			242,347
Decrease in Advance Payments By Borrowers	(37,600)		(1,472)			(50,923)
Amortization of Operating Lease Right-of-Use ("ROU") Assets	381,623		367,015		—	371,836
Other, Net	(872,656)		(2,470,309)			233,478
Net Cash Provided By Operating Activities	14,158,306		9,358,802			11,860,873
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of MBS Available For Sale ("AFS")	(144,986,541)		(117,864,801)			(106,828,636)
Proceeds from Payments and Maturities of MBS AFS	56,572,630		32,888,318			32,283,649
Proceeds from Sale of MBS AFS	—		13,884,602			61,306,939
Purchase of MBS Held To Maturity ("HTM")	(10,455,826)		(3,726,280)			—
Proceeds from Payments and Maturities of MBS HTM	5,055,590		4,525,687			3,165,575
Purchase of Investment Securities AFS	(62,190,739)		(135,015,731)			(83,980,247)
Proceeds from Payments and Maturities of Investment Securities AFS	40,175,076		28,579,348			35,243,895
Proceeds from Sale of Investment Securities AFS	—		11,148,752			35,174,873

Proceeds from Payments and Maturities of Investment Securities HTM	—		—			1,000,000

(Investment in) Redemption of Certificates of Deposits with Other Banks	(750,040)		600,000			250,005
Purchase of FHLB Stock	(1,900)		(7,239,800)			(11,907,800)
Redemption of FHLB Stock	1,770,200		7,422,300			11,575,300
Purchase of BOLI	—		(4,000,000)			—
Proceeds from BOLI Death Benefit	—		—			414,855
Net Increase in Loans Receivable	(14,458,536)		(26,775,117)			(21,601,713)
Proceeds from Sale of OREO	454,332		578,994			1,040,366
Purchase and Improvement of Premises and Equipment	(2,148,932)		(1,243,654)			(4,634,847)
Net Cash Used By Investing Activities	(130,964,686)		(196,237,382)			(47,497,786)

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Years Ended December 31,
	2021		2020		2019
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts	197,866,728		146,688,753		3,910,775
Proceeds from FHLB Advances	—		237,585,000		342,223,000
Repayment of FHLB Advances	(35,000,000)		(240,723,000)		(338,115,000)
Repayment of Note Payable, Net	—		—		(2,362,500)
Proceeds from Other Borrowings, Net	13,668,363		1,537,211		881,390

Proceeds from Issuance of Subordinated Debentures	—		—		30,000,000
Redemption of Senior Convertible Debentures	—		(132,000)		—
Proceeds from FRB Borrowings	274,265,000		259,600,000		—
Repayment of FRB Borrowings	(322,965,000)		(210,900,000)		—
Proceeds from Employee Stock Purchases	—		12,968		52,868
Dividends to Common Stock Shareholders	(1,431,269)		(1,301,254)		(1,123,219)
Net Cash Provided By Financing Activities	126,403,822		192,367,678		35,467,314
Net Increase (Decrease) in Cash and Cash Equivalents	9,597,442		5,489,098		(169,599)
Cash and Cash Equivalents at Beginning of Year	18,025,409		12,536,311		12,705,910
Cash and Cash Equivalents at End of Year	$	27,622,851	$	18,025,409	$	12,536,311
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest	$	3,895,061	$	6,834,112	$	7,882,527
Income Taxes	$	4,226,442	$	1,475,401	$	1,764,541
Supplemental Schedule of Non Cash Transactions:
Transfers from Loans Receivable to OREO	$	—	$	368,510	$	832,800
Transfers From Premises and Equipment, Net to Land HFS	$	1,529,691	$	—	$	—
Increase (Decrease) in Unrealized Gains on Securities AFS, Net of Taxes	$	(7,725,843)	$	8,473,423	$	4,495,436
Initial Recognition of Lease ROU Assets	$	282,386	$	—	$	3,090,512
Initial Recognition of Lease Liability	$	282,386	$	—	$	3,090,512
Redemption of Convertible Debentures	$	—	$	—	$	20,000
Conversion of Senior Convertible Debentures	$	—	$	5,912,000	$	—

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

The following is a description of the more significant accounting and reporting policies used in the preparation and presentation of the accompanying consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation.

Basis of Consolidation and Nature of Operations

The accompanying consolidated financial statements include the accounts of Security Federal Corporation (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”). Security Federal Corporation 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 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. 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.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing balances in other banks, and federal funds sold. Cash equivalents have original maturities of three months or less.

Investment and Mortgage-Backed Securities

Investment securities, including mortgage-backed securities, are classified in one of three categories: HTM, AFS, or trading. Management determines the appropriate classification of debt securities at the time of purchase. Investment securities are classified as HTM when the Company has the positive intent and ability to hold the securities to maturity. These securities are recorded at cost and adjusted for amortization of premiums and accretion of discounts over a level yield basis. Callable debt securities held at a premium are amortized until the earliest call date. Prepayment assumptions on mortgage-backed securities are anticipated.

Management classifies investment securities that are not considered to be HTM as AFS. This type of investment is stated at fair value with unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity (“accumulated other comprehensive income (loss)”). Gains and losses from sales of investment and mortgage-backed securities AFS are determined using the specific identification method. The Company had no investment securities classified as trading.

Loans Receivable Held for Investment

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest is recognized over the term of the loan based on the outstanding loan balance. Fees charged for originating loans, if any, are deferred and offset by the deferral of certain direct expenses associated with loans originated. The net deferred fees are recognized as yield adjustments by applying the interest method.

Allowance for Loan Losses

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

The Company regularly re-evaluates its practices in determining the allowance for loan losses. During the year ended December 31, 2020, the Company increased its look-back period to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. For the year ended December 31, 2020, the Company increased its look-back period to 10 years to continue to include losses incurred by the Company beginning with the first quarter of 2011. The Company continued to use a look-back period of 10 years for the year ended December 31, 2021.

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

The Company 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 less estimated selling costs. In accordance with our policy, non-accrual commercial loans with a balance less than $200,000 and non-accrual consumer loans with a balance less than $100,000 are deemed immaterial and therefore excluded from the individual impairment review. Expected cash flows are required to be discounted at the loan’s effective interest rate. When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied 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 did not designate loans with payment deferrals granted due to the novel coronavirus of 2019 (“COVID-19’) pandemic as delinquent or impaired in accordance with provisions of The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) and the Consolidated Appropriations Act, 2021 (the “CAA, 2021”) and related regulatory guidance. Additional analysis was also completed on the allowance for loan losses during 2021 and 2020 based on the significance of loan modifications in accordance with the CARES Act and regulatory guidance and loan risk rating downgrades as well as additional risk factors related to COVID-19.

Loans Receivable 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 institutional 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 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.

Other Real Estate Owned

Other real estate owned represents real estate and other assets acquired through foreclosure or repossession and are initially recorded at the estimated fair value less costs to sell. Subsequent improvements are capitalized. Costs of holding real estate, such as property taxes, insurance, general maintenance and interest expense, are expensed as a period cost. Fair values are reviewed regularly and allowances for possible losses are established when the carrying value of the asset owned exceeds the fair value less estimated costs to sell. Fair values are generally determined by reference to an outside appraisal.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Premises and Equipment

Premises and equipment are carried at cost, net of accumulated depreciation. Depreciation of premises and equipment is amortized on a straight-line method over the estimated useful life of the related asset. Estimated lives are 7 to 40 years for buildings and improvements and generally 3 to 10 years for furniture, fixtures and equipment. Maintenance and repairs are charged to current expense. The cost of major renewals and improvements are capitalized.

Land Held for Sale

During the year ended December 31, 2021, the Company transferred three parcels of land with a combined book balance of $1.5 million from premises and equipment to land held for sale. Land held for sale is reported at the lower of the carrying amount and fair value less costs to sell.

Goodwill

The Company's goodwill is a result of the excess of the cost over the fair value of net assets resulting from the acquisition of Collier Jennings Financial Corporation in July 2006. Goodwill is reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

Income Taxes

Income tax expense or benefit is recognized for the net change in the deferred tax liability or asset during the year. That amount together with income taxes currently payable is the total amount of income tax expense or benefit for the year. Deferred taxes are provided for by the differences in financial reporting bases for assets and liabilities compared with their tax bases. Generally, a current tax liability or asset is established for taxes presently payable or refundable and a deferred tax liability or asset is established for future tax items. A valuation allowance, if applicable, is established for deferred tax assets that may not be realized. Deferred income taxes are provided for in differences between the provision for loan losses for financial statement purposes and those allowed for income tax purposes.

The Company adopted accounting guidance which prescribes a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosures. There have been no gross amounts of unrecognized tax benefits or interest or penalties related to uncertain tax positions since adoption. There are no unrecognized tax benefits that would, if recognized, affect the effective tax rate. There are no positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months. Years prior to December 31, 2018 are closed for federal, state and local income tax matters.

Loan Fees and Costs Associated with Originating Loans

Loan fees received, net of direct incremental costs of originating loans, are deferred and amortized over the contractual life of the related loan. The net fees are recognized as yield adjustments by applying the interest method. Prepayments are not anticipated.

Interest Income

Interest on loans is accrued and credited to income monthly based on the principal balance outstanding and the contractual rate on the loan. The Company places loans on non-accrual status when they become greater than 90 days delinquent or when, in the opinion of management, full collection of principal or interest is unlikely. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received first to principal and then to interest income. The loans are returned to an accrual status when full collection of principal and interest appears likely.

Advertising Expense

Advertising and public relations costs are generally expensed as incurred. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent. Advertising and public relations costs of $1.1 million, $1.1 million, and $796,000 were included in the Company’s results of operations for the years ended December 31, 2021, 2020 and 2019, respectively.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Stock-Based Compensation

The Company accounts for compensation costs under its stock option plans using the fair value method. This method requires the measurement of the cost of employee services received in exchange for an award of equity instruments based upon the fair value of the award on the grant date. The cost of the award is recognized in the income statement over the vesting period of the award.

Net Income Per Common 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 as of December 31, 2021, 2020 and 2019; and therefore, no dilutive options in the calculation of diluted EPS for those periods. Diluted EPS also assumes the Senior Convertible Debentures were converted into 302,200 shares of common stock at the beginning of the year ended December 31, 2019. The related interest expense recorded during the period, net of tax, is added back to the EPS numerator while the underlying shares are added to the denominator.

The following tables show the effect of dilutive options on the Company’s net income per common share.


	Year Ended December 31, 2021					Year Ended December 31, 2020
	Income		Shares	EPS		Income		Shares	EPS
Basic EPS	$	12,773,891	3,252,884	$	3.93	$	7,050,604	3,212,996	$	2.19


	Year Ended December 31, 2019
		Income		Shares	Per Share
Basic EPS		$	7,794,487	2,955,737	$	2.64
Effect of Dilutive Securities:

Senior Convertible Debentures		362,640		302,200	(0.14)

Diluted EPS		$	8,157,127	3,257,937	$	2.50

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes include:

• Determination of the allowance for loan losses and provision for credit losses

• Valuation of real estate acquired in conjunction with foreclosures or in satisfaction of loans

• Income taxes, including tax provisions and realization of deferred tax assets

• Fair value of assets and liabilities

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Operating Segments

Accounting standards require that information be reported about a company’s operating segments using a “management approach.” Reportable segments are identified in these standards as those revenue producing components for which separate financial information is produced internally and which are subject to evaluation by the chief operating decision maker. While the chief operating decision maker monitors the revenue streams of the various products and services, operations are managed, and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.

Recently Issued or Adopted Accounting Standards

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 May 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 ASU 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 ASU 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

Risks and Uncertainties

In the normal course of its business, the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default on the Company’s loan portfolio that results from borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable, the valuation of real estate held by the Company, and the valuation of loans held for sale and securities available for sale. The Company is subject to the regulations of various government agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the bank regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances, and operating restrictions, resulting from the regulators’ judgments based on information available to them at the time of their examination.

Reclassifications

Certain amounts in prior years’ consolidated financial statements have been reclassified to conform to current period classifications.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 2 - 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 ("MBS") available for sale ("AFS") at the dates indicated are as follows:


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



Student Loan Pools	$	71,949,517	$	317,722	$	255,678	$	72,011,561
Small Business Administration (“SBA”) Bonds	139,854,620		1,018,231		1,079,774		139,793,077
Tax Exempt Municipal Bonds	44,757,755		5,226,600		—		49,984,355
Taxable Municipal Bonds	65,834,301		734,237		599,387		65,969,151
MBS	353,517,112		5,294,398		3,720,596		355,090,914
	$	675,913,305	$	12,591,188	$	5,655,435	$	682,849,058
	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
MBS	267,854,880		10,672,412		754,278		277,773,014

	$	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. Included in the tables above and below in MBS are Government National Mortgage Association ("GNMA") MBS, which are also backed by the full faith and credit of the United States government. At December 31, 2021, the Bank held an amortized cost and fair value of $167.8 million and $167.0 million, respectively, in GNMA MBS compared to an amortized cost and fair value of $91.7 million and $93.4 million, respectively, at December 31, 2020. Also included in MBS in the tables above and below are private label collateralized mortgage obligation ("CMO") securities, which are issued by non-governmental real estate mortgage investment conduits and are not backed by the full faith and credit of the United States government. At December 31, 2021 the Bank held an amortized cost and fair value of $41.8 million and $41.7 million, respectively, in private label CMO MBS, compared to an amortized cost and fair value of $37.0 million and $37.7 million, respectively, at December 31, 2020.

The amortized cost and fair value of investment and MBS AFS at December 31, 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 MBS are not due at a single maturity date, they are disclosed separately, rather than allocated over the maturity groupings below.


	Amortized Cost		Fair Value
Due in less than one year	$	80,651	$	76,617
Due in one year to five years	7,891,953		7,878,402
Due in five to ten years	91,419,245		92,355,997
Due in ten years or more	223,004,344		227,447,128
MBS	353,517,112		355,090,914
	$	675,913,305	$	682,849,058

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The amortized cost and fair value of investment and MBS AFS pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $335.6 million and $342.6 million, respectively, at December 31, 2021 and $263.3 million and $274.4 million, respectively, at December 31, 2020.

There were no sales of AFS securities during the year ended December 31, 2021. The Bank received $25.0 million and $96.5 million in gross proceeds from sales of AFS securities during the years ended December 31, 2020 and 2019, respectively. As a result, the Bank recognized gross gains of $1.3 million and $1.5 million, respectively, and gross losses of $0 and $636,000, respectively, during the years ended December 31, 2020 and 2019.

Securities classified as AFS are recorded at fair market value. The tables below summarize gross unrealized losses and the related fair value, aggregated by investment category and length of time that individual AFS securities have been in a continuous unrealized loss position for the periods indicated.


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



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

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

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


	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 Bonds	7,092,538		75,168		—		—		7,092,538		75,168
MBS	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

At December 31, 2021 and 2020, there were 199 and 145 individual AFS securities in a loss position, including 83 and 88 securities that were in a loss position for greater than 12 months. 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”).

Factors considered in the Company's review of its investment securities portfolio 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, then an impairment loss is recognized in earnings equal to the entire 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 of the impairment 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 years ended December 31, 2021, 2020 and 2019.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 3 - MORTGAGE-BACKED SECURITIES, HELD TO MATURITY

At December 31, 2021, the Company's entire held to maturity ("HTM") portfolio was comprised of MBS. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of held to maturity securities at December 31, 2021 and 2020 were as follows:


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


MBS (1)	$	23,506,768	$	577,005	$	363,365	$	23,720,408
Total HTM	$	23,506,768	$	577,005	$	363,365	$	23,720,408

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


MBS (1)	$	18,254,394	$	984,015	$	33,122	$	19,205,287
Total HTM	$	18,254,394	$	984,015	$	33,122	$	19,205,287

(1) COMPRISED OF GSES OR GNMA MBS

The Company’s HTM portfolio is recorded at amortized cost. The Company has the ability and intent to hold these securities to maturity. At December 31, 2021, the Bank held an amortized cost and fair value of $5.3 million and $5.7 million, respectively, in GNMA MBS classified as HTM 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 MBS classified as HTM.

At December 31, 2021, the amortized cost and fair value of MBS HTM that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $9.0 million and $9.5 million, respectively, compared to an amortized cost and fair value of $13.4 million and $14.3 million, respectively, at December 31, 2020. The following tables show gross unrealized losses, fair value and length of time that individual HTM securities were in a continuous unrealized loss position at December 31, 2021 and 2020.


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


MBS (1)	$	9,969,587	$	206,472	$	3,442,229	$	156,893	$	13,411,816	$	363,365
	$	9,969,587	$	206,472	$	3,442,229	$	156,893	$	13,411,816	$	363,365

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


MBS (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 GSES OR GNMA MBS

At December 31, 2021 and 2020, six and three individual HTM securities were in a loss position, including two and one securities that were in a loss position for greater than 12 months.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE, NET

Loans receivable, net, at December 31, 2021 and 2020 are summarized below.


	December 31,
	2021				2020
	Balance		% of Total Gross Loans		Balance		% of Total Gross Loans
Residential Real Estate Loans	$	55,977,999	10.9	%	$	66,709,742	13.5	%
Consumer Loans	59,256,394		11.6	%	55,335,425		11.2	%
Commercial Business Loans	29,287,265		5.7	%	19,704,862		4.0	%
Commercial Real Estate Loans	353,356,712		69.1	%	299,299,647		60.6	%
Paycheck Protection Program ("PPP") Loans	9,751,812		1.9	%	47,105,618		9.5	%
Total Loans Held For Investment	507,630,182		99.2	%	488,155,294		98.8	%
Loans Held For Sale	4,038,414		0.8	%	5,693,400		1.2	%
Total Loans Receivable, Gross	$	511,668,596	100.0	%	$	493,848,694	100.0	%
Less:
Allowance For Loan Losses	11,087,164				12,842,896
Deferred Loan Fees	1,084,623				1,838,426
	12,171,787				14,681,322
Total Loans Receivable, Net	$	499,496,809			$	479,167,372

During the year ended December 31, 2020, the Bank participated in the SBA Paycheck Protection Program (“PPP”), a guaranteed unsecured loan program enacted under the CARES Act to provide near-term relief to help small businesses impacted by COVID-19 sustain operations. The CAA, 2021 renewed and extended the PPP until March 31, 2021. As a result, in January 2021, the Bank began accepting and processing loan applications under this second PPP program. 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 the PPP loan is either two or five years from the date of loan origination. PPP loans totaled $9.8 million at December 31, 2021 compared to $47.1 million at December 31, 2020. The balance of unamortized net deferred fees on PPP loans was $441,000 at December 31, 2021 compared to $1.4 million December 31, 2020.

Credit Quality Indicators

The Bank categorizes loans into risk categories based on relevant information regarding the borrowers' ability to payoff their loan in accordance with its terms. This information includes; but is not limited to, current financial and credit documentation, payment history, public information and current economic trends, among other factors. Risk ratings are used to rate the credit quality of loans for the purposes of determining the Bank’s allowance for loan losses. The following definitions are used for credit quality risk ratings:

Pass - 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.

Caution - loans that do not currently expose the Bank to sufficient risk to warrant adverse classification but possess weaknesses.

Special Mention - loans that do not currently expose the Bank to sufficient risk to warrant adverse classification but possess more weaknesses than Caution loans.

Substandard - 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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following tables summarize the loan grades used by the Bank to measure the credit quality of gross loans receivable, excluding those held for sale, by loan segment at December 31, 2021 and 2020.


December 31, 2021	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	42,220,385	$	11,501,275	$	153,505	$	2,102,834	$	55,977,999
Consumer	46,895,253		10,775,951		832,463		752,727		59,256,394
Commercial Business	24,191,552		4,720,925		54,380		320,408		29,287,265
Commercial Real Estate	273,409,226		62,168,249		14,021,326		3,757,911		353,356,712
PPP	9,751,812		—		—		—		9,751,812
Total	$	396,468,228	$	89,166,400	$	15,061,674	$	6,933,880	$	507,630,182


December 31, 2020	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	53,240,147	$	9,675,300	$	799,446	$	2,994,849	$	66,709,742
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	$	380,285,192	$	80,695,291	$	18,348,955	$	8,825,856	$	488,155,294

Past Due and Non-accrual Loans

The following tables present an age analysis of past due balances by category at December 31, 2021 and 2020.


	December 31, 2021
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
Residential Real Estate	$	—	$	241,680	$	205,713	$	447,393	$	55,530,606	$	55,977,999
Consumer	273,764		65,788		53,178		392,730		58,863,664		59,256,394
Commercial Business	79,381		133,610		—		212,991		29,074,274		29,287,265
Commercial Real Estate	367,344		354,412		372,406		1,094,162		352,262,550		353,356,712
PPP	—		—		—		—		9,751,812		9,751,812
Total	$	720,489	$	795,490	$	631,297	$	2,147,276	$	505,482,906	$	507,630,182


	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	$	66,396,956	$	66,709,742
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	$	438,632,491	$	488,155,294

At December 31, 2021 and 2020, the Bank did not have any loans that were 90 days or more past due and still accruing interest. 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 have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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


	December 31, 2021				December 31, 2020				Increase (Decrease)
	Amount		Percent (1)		Amount		Percent (1)		$		%
Non-accrual Loans:
Residential Real Estate	$	1,332,106	0.3	%	$	1,682,240	0.4	%	$	(350,134)	(20.8)	%
Consumer	150,480		—		402,878		0.1		(252,398)		(62.6)
Commercial Business	64,479		—		100,408		—		(35,929)		(35.8)
Commercial Real Estate	1,136,322		0.2		939,946		0.2		196,376		20.9
Total Non-accrual Loans	$	2,683,387	0.5	%	$	3,125,472	0.7	%	$	(442,085)	(14.1)	%

(1) PERCENT OF GROSS LOANS RECEIVABLE HELD FOR INVESTMENT, NET OF DEFERRED FEES

Allowance for Loan Losses

The tables below show the allowance for loan losses by loan category for the years ended December 31, 2021, 2020 and 2019.


	For the Year Ended December 31, 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	(597,159)		(201,384)		106,569		(1,712,143)		(2,404,117)
Charge-Offs	—		(129,923)		(6,699)		—		(136,622)
Recoveries	41,496		107,003		2,711		633,797		785,007
Ending Balance	$	973,285	$	1,074,351	$	1,267,614	$	7,771,914	$	11,087,164


	For the Year Ended December 31, 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	136,063		251,948		655,317		2,556,672		3,600,000
Charge-Offs	(9)		(226,760)		(35,048)		(19,453)		(281,270)
Recoveries	2,300		62,618		—		233,674		298,592
Ending Balance	$	1,528,948	$	1,298,655	$	1,165,033	$	8,850,260	$	12,842,896


	For the Year Ended December 31, 2019
	Residential Real Estate		Consumer		Commercial Business		Commercial Real Estate		Total
Beginning Balance	$	1,191,443	$	1,203,593	$	923,600	$	5,853,081	$	9,171,717
Provision	227,624		324,394		(392,817)		215,799		375,000
Charge-Offs	(34,599)		(432,003)		(1,132)		(517,583)		(985,317)
Recoveries	6,126		114,865		15,113		528,070		664,174
Ending Balance	$	1,390,594	$	1,210,849	$	544,764	$	6,079,367	$	9,225,574

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Allowance for Loan Losses and Loans Receivable Evaluated for Impairment

The following tables summarize the impaired loans evaluated individually and collectively for impairment within the allowance for loan losses and loans receivable balances at December 31, 2021 and 2020.


	Allowance For Loan Losses						Loans Receivable
December 31, 2021	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total		Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	973,285	$	973,285	$	1,128,452	$	54,849,547	$	55,977,999
Consumer	—		1,074,351		1,074,351		97,302		59,159,092		59,256,394
Commercial Business	—		1,267,614		1,267,614		31,446		29,255,819		29,287,265
Commercial Real Estate	—		7,771,914		7,771,914		1,066,107		352,290,605		353,356,712
PPP	—		—		—		—		9,751,812		9,751,812
Total	$	—	$	11,087,164	$	11,087,164	$	2,323,307	$	505,306,875	$	507,630,182

December 31, 2020
Residential Real Estate	$	—	$	1,528,948	$	1,528,948	$	1,284,303	$	65,425,439	$	66,709,742
Consumer	—		1,298,655		1,298,655		161,869		55,173,556		55,335,425
Commercial Business	—		1,165,033		1,165,033		53,047		19,651,815		19,704,862
Commercial Real Estate	—		8,850,260		8,850,260		720,111		298,579,536		299,299,647
PPP	—		—		—		—		47,105,618		47,105,618
Total	$	—	$	12,842,896	$	12,842,896	$	2,219,330	$	485,935,964	$	488,155,294

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and, if it is over 24 months old, will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of total impaired loans was $2.6 million for year ended December 31, 2021 compared to $3.9 million for the year ended December 31, 2020. In accordance with our policy, non-accrual commercial loans with a balance less than $200,000 and non-accrual consumer loans with a balance less than $100,000 are deemed immaterial and therefore excluded from the individual impairment review.

The following tables present information related to impaired loans by loan category as of and for the years ended December 31, 2021, 2020 and 2019.


	December 31, 2021
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	1,128,452	$	1,128,452	$	—	$	1,275,540	$	4,139
Consumer	97,302		105,602		—		142,602		—
Commercial Business	31,446		926,446		—		46,093		—
Commercial Real Estate	1,066,107		1,211,527		—		1,108,041		18,060










Total	$	2,323,307	$	3,372,027	$	—	$	2,572,276	$	22,199

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	December 31, 2020
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	1,284,303	$	1,284,303	$	—	$	1,877,590	$	24,597
Consumer	161,869		170,169		—		210,722		1,591
Commercial Business	53,047		948,046		—		58,597		—
Commercial Real Estate	720,111		865,531		—		1,717,842		56,737










Total	$	2,219,330	$	3,268,049	$	—	$	3,864,751	$	82,925


	December 31, 2019
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	1,086,433	$	1,086,433	$	—	$	1,322,609	$	—
Consumer	184,402		192,702		—		1,106,795		—
Commercial Business	64,406		959,406		—		71,422		—
Commercial Real Estate	1,894,642		2,066,862		—		3,893,786		54,372










Total	$	3,229,883	$	4,305,403	$	—	$	6,394,612	$	54,372

Troubled Debt Restructurings and Loan Modifications

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

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

The Bank had three TDRs with a total balance of $694,000 included in impaired loans at December 31, 2021 compared to three TDRs totaling $315,000 at December 31, 2020. There was one commercial real estate loan restructured as a TDR during 2021 with a balance of $412,000 at the time of restructure and immediately thereafter. During the year ended December 31, 2020, there was one commercial real estate loan restructured as a TDR, which had a balance of $290,000 at the time of restructure and immediately thereafter. There were no loans restructured as TDRs during 2019. At December 31, 2021 and 2020, there were no TDRs in default. The Bank considers any loan 30 days or more past due to be in default. At December 31, 2021 and 2020, the Bank had no commitments to extend additional credit to borrowers whose loan terms have been modified in a TDR. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment.

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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The CARES Act, signed into law on March 27, 2020, provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term 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. generally up to 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, as amended by the CAA, 2021, a loan modification must be (1) related to the COVID-19 pandemic; (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) January 1, 2022. As of December 31, 2021, there were no loans still on deferral or modified due to COVID-19. Loan modifications made in accordance with the CARES Act were still subject to an impairment evaluation.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 5 - PREMISES AND EQUIPMENT, NET AND LEASES

Premises and equipment, net, are summarized as follows:


	December 31,
	2021		2020
Land	$	6,178,733	$	7,708,424
Buildings and Improvements	25,910,745		25,601,331
Furniture and Equipment	12,942,820		13,821,901
Construction in Progress	2,296,927		1,007,552
Total Premises and Equipment	47,329,225		48,139,208
Less: Accumulated Depreciation	(22,092,310)		(21,563,951)
Total Premises and Equipment, Net	$	25,236,915	$	26,575,257

During the year ended December 31, 2021, the Company transferred three parcels of land with a combined book balance of $1.5 million from Land to Land Held for Sale.

Construction in progress of $2.3 million at December 31, 2021 primarily included building and construction costs associated with our two newest branches, scheduled for opening in 2022. At December 31, 2021 the estimated additional costs to complete and equip the branches was approximately $2.9 million. Depreciation expense on premises and equipment was $2.0 million, $1.9 million and $1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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 both a right-of-use (ROU) asset and lease liability 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 year ended December 31, 2021, the Company made cash payments in the amount of $442,000 for operating leases. The lease expense recognized during this period was $455,000 and the lease liability had a net reduction of $87,000 due to the newly added lease. At December 31, 2021, the Company had ROU assets of $2.3 million and a lease liability of $2.3 million recorded on its consolidated balance sheet. The remaining weighted average lease term is five years and the weighted average discount rate used is 3.2%.

At December 31, 2021, future undiscounted lease payments for operating leases with initial terms of one year or more were as follows:


Year ended December 31,
2022	497,126
2023	508,957
2024	510,365
2025	460,343
2026	353,239
Thereafter	156,600
Total undiscounted lease payments	2,486,630
Less: effect of discounting	193,335
Present value of estimated lease payments (lease liability)	$	2,293,295

Total rental expense was $477,000, $461,000, and $460,000 for the years ended December 31, 2021, 2020 and 2019, respectively. Six lease agreements with monthly expenses of $4,600, $7,750, $900, $7,900, $9,950, and $10,600 have multiple renewal options totaling 25, 30, 10, 15, 45, and 20 years, respectively.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 6 - GOODWILL

Goodwill was recorded in connection with the Company's acquisition of Collier Jennings Financial Corporation in July 2006. The goodwill balance of $1.2 million remained unchanged at both December 31, 2021 and 2020. In accordance with accounting guidance, the Company evaluates its goodwill on an annual basis. The evaluations were performed as of December 31, 2021 and December 31, 2020 for the years ended December 31, 2021 and 2020, respectively. At the time of the evaluations the Company determined that no impairment existed. Therefore, there was no write-down of goodwill for the years ended December 31, 2021 and 2020.

NOTE 7 - FHLB STOCK

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 was 0.05% and 0.09% of total Bank assets at December 31, 2021 and 2020, respectively, plus a transaction component equal to 3.75% and 4.25% of outstanding advances (borrowings) from the FHLB of Atlanta at December 31, 2021 and 2020, respectively. The Bank is in compliance with this requirement with an investment in FHLB of Atlanta stock of $586,000 and $2.4 million at December 31, 2021 and 2020, respectively. No readily available market exists for this stock and it has no quoted fair value. However, because redemption of this stock has historically been at par, it is carried at cost.

NOTE 8 - OTHER REAL ESTATE OWNED

The Bank owned $130,000 and $499,000 in OREO at December 31, 2021 and 2020, respectively. Transactions in OREO for the years ended December 31, 2021, 2020 and 2019 are summarized below.



	2021		2020		2019
Balance, beginning of year	$	498,610	$	677,740	$	722,442
Additions	—		368,510		832,800
Sales	(348,910)		(532,640)		(855,502)
Write-downs	(20,000)		(15,000)		(22,000)
Balance, end of year	$	129,700	$	498,610	$	677,740

The Bank sold two OREO properties during the year ended December 31, 2021 for gross proceeds of $454,000, which resulted in a related gain on sale of OREO in the amount of $105,000. At December 31, 2021, there were two mortgage loans collateralized by residential real estate property with a combined balance of $140,000 in the process of foreclosure; however, both loans were subsequently paid off prior to being foreclosed. At December 31, 2020, there was one property with a balance of $13,000 in the process of foreclosure.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 9 - DEPOSITS

Deposits outstanding at December 31, 2021 and 2020 are summarized below by account type.


Deposit Account Type	December 31, 2021		December 31, 2020
Checking	$	495,467,035		$	372,070,032
Money Market	366,065,262			291,067,575
Savings	97,068,740			74,433,571
Total	$	958,601,037		$	737,571,178
Certificates:
0.00 – 0.99%	$	140,254,173		$	122,711,943
1.00 – 1.99%	12,292,837			46,619,682
2.00 – 2.99%	4,814,916			11,193,432

Total	$	157,361,926		$	180,525,057
Total Deposits	$	1,115,962,963		$	918,096,235

The Bank had $5.0 million in other brokered deposits, which are included in checking and money market deposits above, at December 31, 2021. In addition, the Bank had $10.0 million and $16.0 million in brokered time deposits at December 31, 2021 and 2020, respectively, with a weighted average interest rate of 0.26% and 0.37%, respectively, which are included in certificates of deposit above. One of the brokered deposits, with a balance of $4.0 million at December 31, 2021 will mature within one year. At December 31, 2021 and 2020, the Bank had $68,000 and $78,000, respectively, in overdrafts that were reclassified to loans.

The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $90.6 million and $106.8 million at December 31, 2021 and 2020, respectively. Certificate of deposits that met or exceeded the FDIC insurance limit of $250,000 were $39.4 million and $49.6 million at December 31, 2021 and 2020, respectively.

The amounts and scheduled maturities of all certificates of deposit were as follows at December 31, 2021 and 2020:


	December 31,
	2021		2020
Within 1 Year	$	118,119,148	$	128,758,122
After 1 Year, Within 2 Years	26,189,318		27,550,051
After 2 Years, Within 3 Years	7,148,260		10,555,458
After 3 Years, Within 4 Years	2,815,491		10,847,730
After 4 Years, Within 5 Years	3,089,709		2,813,696

Total Certificates of Deposits	$	157,361,926	$	180,525,057

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 10 - FHLB ADVANCES, FRB BORROWINGS AND OTHER BORROWINGS

There were no outstanding FHLB advances at December 31, 2021 compared to $35.0 million at December 31, 2020. FHLB advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank’s portfolio of residential first mortgage loans and investment securities. The Bank's pledged collateral for FHLB advances had an amortized cost and fair value of $94.3 million and $94.3 million, respectively, at December 31, 2021 and $104.7 million and $106.2 million, respectively, at December 31, 2020.

FHLB advances are subject to prepayment penalties. During the year ended December 31, 2021, the Bank prepaid one FHLB advance, which resulted in a prepayment fee of approximately $90,000, which is included in FHLB interest expense. The Bank did not prepay any FHLB advances during the years ended December 31, 2020 and 2019. 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. The Bank did not have any callable FHLB advances at December 31, 2021. At December 31, 2021 and 2020, the Bank had $369.0 million and $304.3 million in additional borrowing capacity, respectively, at the FHLB.

The Bank had no outstanding borrowings from the "discount window" of the Federal Reserve Bank of Atlanta at December 31, 2021 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. At both December 31, 2021 and 2020, the borrowing rate was 0.25%. At December 31, 2021, the Bank had pledged as collateral for these borrowings investment and mortgage-backed securities with an amortized cost and fair value of $79.2 million and $82.6 million, respectively, compared to an amortized cost and fair value of $57.0 million and $60.3 million, respectively, at December 31, 2020.

The Bank had $26.8 million and $13.1 million in other borrowings at December 31, 2021 and 2020, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. At both December 31, 2021 and 2020, the interest rate paid on the repurchase agreements was 0.15%. The maximum amount outstanding at any one month end during the year ended December 31, 2021 was $36.5 million compared to $21.0 million during the year ended December 31, 2020. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $45.3 million and $45.2 million, respectively, at December 31, 2021 and $26.6 million and $26.8 million, respectively, at December 31, 2020.

NOTE 11 - NOTE PAYABLE

On October 31, 2016, the Company repurchased all 22,000 shares of its Series B Preferred Stock from the United States Department of the Treasury ("Treasury") for a total payment amount of $21.4 million. In connection with this repurchase, the Company obtained a $14.0 million unsecured term loan from another financial institution. The loan accrued and paid interest on a quarterly basis at a floating rate, which was calculated as the previous quarter end Wall Street Journal Prime index minus 30 basis points. The remaining balance of this loan was repaid prior to its maturity date of October 1, 2019.

NOTE 12 - JUNIOR SUBORDINATED DEBENTURES

On September 21, 2006, Security Federal Statutory Trust (the “Trust”), a wholly-owned subsidiary of the Company, issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”), which are reported on the consolidated balance sheet as junior subordinated debentures, generating proceeds of $5.2 million. The Trust loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The Capital Securities accrue and pay distributions quarterly at a floating rate of three month LIBOR plus 170 basis points which was a rate per annum equal to 1.90% and 1.92% at December 31, 2021 and 2020, respectively. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of December 15, 2036. The Company has no current intention to exercise its right to defer payments of interest on the Capital Securities. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has had the right to redeem the Capital Securities in whole or in part since September 15, 2011.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 13 - SENIOR CONVERTIBLE DEBENTURES

In December 2009, the Company issued $6.1 million of 8.0% Senior Convertible Debentures with a maturity date of December 1, 2029. The debentures were convertible into the Company’s common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity.

In January 2020, the Company announced its intention to redeem all of the Senior Convertible Debentures on March 2, 2020. Subsequent to the announcement, $5.9 million of Senior Convertible Debentures were converted into 295,600 common shares by holders of the debt. The Company redeemed the remaining $132,000 of outstanding debentures for cash on March 2, 2020.

NOTE 14 - SUBORDINATED DEBENTURES

On November 22, 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 Notes have been structured to qualify as Tier 2 capital for the Company under applicable regulatory guidelines. The Company used the net proceeds from the sale of the Notes to fund the redemption of the convertible senior debentures and for general corporate purposes to support future growth.

NOTE 15 - INCOME TAXES

Income tax expense was comprised of the following for the dates indicated below:


	Years Ended December 31,
	2021		2020		2019
Current:
Federal	$	2,664,305	$	1,663,883	$	1,437,595
State	629,809		295,074		145,412
Total Current Tax Expense	3,294,114		1,958,957		1,583,007
Deferred:
Federal	211,703		(361,167)		105,960
State	3,574		(20,833)		(9,417)
Total Deferred Tax Expense (Benefit)	215,277		(382,000)		96,543
Total Income Tax Expense	$	3,509,391	$	1,576,957	$	1,679,550

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company's income taxes differ from those computed at the statutory federal income tax rate, as follows:


	Years Ended December 31,
	2021		2020		2019
Tax at Statutory Income Tax Rate	$	3,419,489	$	1,811,788	$	1,989,548
State Tax and Other	450,957		81,936		100,820
Tax Exempt Interest	(284,935)		(250,044)		(291,768)
Life Insurance	(133,350)		(120,383)		(142,508)
Valuation Allowance	57,230		53,660		23,458

Total Income Tax Expense	$	3,509,391	$	1,576,957	$	1,679,550

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2021 and 2020 are presented below. Net deferred tax assets or liabilities were included in other assets or other liabilities at December 31, 2021 and 2020.


	December 31,
	2021		2020
Deferred Tax Assets:
Deferred Compensation	$	761,937	$	670,582
Provision for Loan Losses	2,408,028		2,781,850
Other Real Estate Owned	7,579		3,248
Net Fees Deferred for Financial Reporting	78,527		74,743
Net Operating Losses	467,649		410,419
PPP Loan Fees	95,586		—
Other	52,806		105,993
Total Gross Deferred Tax Assets	3,872,112		4,046,835
Less: Valuation Allowance	(467,649)		(410,419)
Net Deferred Tax Assets	3,404,463		3,636,416
Deferred Tax Liabilities:
FHLB Stock Basis Over Tax Basis	72,195		72,196
Depreciation	913,635		1,040,831
Prepaid Expenses	154,463		43,943

Unrealized Gain on Securities Available for Sale	1,683,166		4,037,110
Total Gross Deferred Tax Liability	2,823,459		5,194,080
Net Deferred Tax (Liability) Asset	$	581,004	$	(1,557,664)

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. As of December 31, 2021, management has determined that it is more likely than not that the total deferred tax asset will be realized except for the deferred tax asset associated with state net operating loss carryforwards, and, accordingly, has established a valuation allowance only for this item. The change in the valuation allowance was approximately $57,000. The Company had state net operating losses attributable to the non-bank entities of $11.8 million and $10.4 million for the years ended December 31, 2021 and 2020, respectively.

Retained earnings at December 31, 2021 included tax bad debt reserves of $2.1 million, for which no provision for federal income tax has been made. If, in the future, these amounts are used for any purpose other than to absorb bad debt losses, including dividends, stock redemptions, or distributions in liquidation, or the Company ceases to be qualified as a bank holding company, they may be subject to federal income tax at the prevailing corporate tax rate. At December 31, 2021, the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company's policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense. Tax returns for 2018 and subsequent years are subject to examination by taxing authorities.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 16 - REGULATORY MATTERS

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

The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System ("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, at December 31, 2021, 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 15.3%, 8.7%, 15.3% and 20.8%, respectively.

Based on its capital levels at December 31, 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 December 31, 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 December 31, 2021 and 2020.


	Actual				For Capital Adequacy				To Be Well Capitalized
(Dollars in Thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2021







Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	123,783	17.4	%	$	42,701	6.0	%	$	56,934	8.0	%
Total Risk-Based Capital (To Risk Weighted Assets)	132,706		18.6	%	56,934		8.0	%	71,168		10.0	%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	123,783		17.4	%	32,025		4.5	%	46,259		6.5	%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	123,783		9.9	%	50,169		4.0	%	62,711		5.0	%
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 December 31, 2021 the Bank’s conservation buffer was 10.6%.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 17 - EMPLOYEE BENEFIT PLANS

The Company participates in a multiple employer defined contribution employee benefit plan covering substantially all employees with six months or more of service. The Company matches a portion of the employees’ contributions and the plan has a discretionary profit sharing provision. Total employer contributions were $328,000, $320,000 and $273,000 for the years ended December 31, 2021, 2020 and 2019, respectively, which are included within Compensation and Employee Benefits within the Company's Consolidated Statements of Income.

The Company has an Employee Stock Purchase Plan (“ESPP”). The ESPP allows employees of the Company to purchase stock quarterly through a payroll deduction at a discount calculated as 15% of the market value with a floor equal to the Company’s book value. The ESPP, which was approved by stockholders in April 2018, became effective July 1, 2018. Participation in the ESPP is voluntary. Employees are limited to investing $25,000 or 5% of their annual salary, whichever is lower, during the year. There were no employee stock purchases during the year ended December 31, 2021.

In 2014, the Company implemented an Incentive Compensation Plan (the "Plan"). Incentive awards are based on the financial and operating performance of the Company as well as other participant specific objectives. The Plan allows employees of the Company to earn up to 7.5 days of their annual salary for successfully completing specific goals established by the participants and their respective supervisors plus an additional 2.5 days of their annual salary if the Company meets an annual predetermined net operating income amount determined by the Board of Directors.

The Company also implemented an Incentive Compensation Plan for executive level officers (the "Executive Plan"). Under this plan, incentive awards are based on contributions to performance as measured by critical operating and financial ratios, and other participant specific objectives. The Company has to meet the annual predetermined net operating income amount determined by the Board of Directors for any incentive awards to be paid under the Executive Plan. If the Company does not meet the required net income amount, no incentives are paid regardless of the executive's performance on individual objectives or entity wide objectives.

In 2016, the Company implemented a Quarterly Branch Incentive Compensation Plan (the "Branch Incentive Plan"), and all branch employees were moved from the Plan to the Branch Incentive Plan. This plan is for retail branch employees only and pays incentive on a quarterly basis based on specific performance goals established for each branch location.

Participation in all three plans is voluntary. During the years ended December 31, 2021, 2020 and 2019, the Company incurred expenses of $597,000, $302,000 and $100,000, respectively, related to these incentive plans, which are included in Compensation and Employee Benefits within the Company's Consolidated Statements of Income.

Certain officers of the Company participate in a supplemental retirement plan. These benefits are not qualified under the Internal Revenue Code and they are not funded. During the years ended December 31, 2021, 2020 and 2019, the Company incurred expenses of $551,000, $488,000, and $496,000, respectively, for this plan, which are included in Compensation and Employee Benefits within the Company's Consolidated Statements of Income.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 18 - BANK OWNED LIFE INSURANCE

BOLI provides key person life insurance on certain officers of the Company. The cash value of the life insurance policies are recorded as a separate line item in the accompanying balance sheets at $26.7 million and $26.1 million at December 31, 2021 and 2020, respectively. The earnings portion of the insurance policies grows tax deferred and helps offset the cost of the Company’s benefits programs. The Company recorded earnings of $635,000, $573,000 and $540,000 for the growth in the cash value of life insurance during the years ended December 31, 2021, 2020 and 2019, respectively. In addition to the earnings above, the Company received $139,000 in death benefits during the year ended December 31, 2019. There were no death benefits received during the years ended December 31, 2021 and 2020.

NOTE 19 - COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company.

In conjunction with its lending activities, the Bank enters into various commitments to extend credit. The Bank also issues letters of credit. Loan commitments (unfunded loans and unused lines of credit) and letters of credit are issued to accommodate the financing needs of the Bank's customers. Loan commitments are agreements by the Bank to lend at a future date, so long as there are no violations of any conditions established in the agreement. Letters of credit commit the Bank to make payments on behalf of customers when certain specified events occur.

Financial instruments where the contract amount represents the Bank's credit risk include commitments under pre-approved but unused lines of credit of $163.8 million and $141.9 million and letters of credit of $3.0 million and $1.7 million at December 31, 2021 and 2020, respectively.

These loan and letter of credit commitments are subject to the same credit policies and reviews as loans on the balance sheet. Collateral, both the amount and nature, is obtained based upon management's assessment of the credit risk. Since many of the extensions of credit are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements.

Included in the loan commitments noted above were unused credit card loan commitments of $8.0 million and $7.2 million and undisbursed loans in process of $21.4 million and $12.2 million at December 31, 2021 and 2020, respectively. The Bank also had $3.3 million in outstanding commitments on mortgage loans approved but not yet closed at December 31, 2021 compared to $2.1 million at December 31, 2020. These commitments, which are funded subject to certain limitations, extend over varying periods of time with the majority being funded within 45 days.

At December 31, 2021 and 2020, the Bank had outstanding commitments to sell approximately $4.0 million and $5.7 million of loans, respectively, which encompassed the Bank’s held for sale loans. The Bank also has commitments to sell mortgage loans not yet closed, on a best efforts basis. Best efforts means the Bank suffers no penalty if they are unable to deliver the loans to the potential buyers. The fair value of the Bank’s commitment to originate mortgage loans at committed interest rates and to sell such loans to permanent investors is insignificant.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 20 - RELATED PARTY TRANSACTIONS

Certain directors, executive officers and companies with which they are affiliated are customers of, and have banking transactions with, the Bank in the ordinary course of business. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable arms-length transactions. A summary of loan transactions with directors, including their affiliates, and executive officers follows:


	Years Ended December 31,
	2021		2020		2019
Balance, Beginning of Period	$	398,802	$	431,516	$	32,961
New Loans	—		—		417,590
Less Loan Payments	(16,414)		(32,714)		(19,035)
Balance, End of Period	$	382,388	$	398,802	$	431,516

Loans to all employees, officers, and directors of the Company constituted approximately 2.1% and 4.4% of the Company’s total shareholders' equity at December 31, 2021 and 2020, respectively. Deposits from executive officers and directors of the Company and the Bank and their related interests were approximately $18.3 million and $18.1 million at December 31, 2021 and 2020 and have substantially the same terms, including interest rates, as those prevailing at the time with other non-related depositors.

The Company leased office space from a related party during the years ended December 31, 2021, 2020 and 2019. The lease is with a company in which the related party, who is a director of the Company, has an ownership interest. The Company incurred rent expense of $89,800, $88,100 and $87,600 for the years ended December 31, 2021, 2020 and 2019, respectively, related to this lease. Management is of the opinion that the transactions with respect to office rent were made on terms that are comparable to those which would be made with unaffiliated persons.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 21 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS

The following is condensed financial information of Security Federal Corporation (Parent Company only). The primary asset is its investment in the Bank subsidiary and the principal source of income for the Company is equity in undistributed earnings from the Bank.

Condensed Balance Sheet Data


	December 31,
	2021		2020
Assets:
Cash	$	20,177,399	$	22,884,872

Investment in Security Federal Statutory Trust	155,000		155,000
Investment in Security Federal Bank	130,197,635		123,813,848
Accounts Receivable and Other Assets	282,005		341,569
Total Assets	$	150,812,039	$	147,195,289
Liabilities and Shareholders’ Equity:
Accounts Payable and Other Liabilities	$	134,514	$	134,543
Long-term Debt	35,155,000		35,155,000

Shareholders’ Equity	115,522,525		111,905,746
Total Liabilities and Shareholders’ Equity	$	150,812,039	$	147,195,289

Condensed Statements of Income Data


	Years Ended December 31,
	2021		2020		2019
Income:
Equity in Earnings of Security Federal Bank	$	14,109,630	$	8,393,140	$	2,092,130
Dividend Income from Security Federal Bank	—		—		6,400,000

Miscellaneous Income	46,026		148,877		62,390
Total Income	14,155,656		8,542,017		8,554,520
Expenses:
Interest Expense	1,672,109		1,783,796		906,152
Other Expenses	64,725		64,494		39,331
Total Expenses	1,736,834		1,848,290		945,483
Income Before Income Taxes	12,418,822		6,693,727		7,609,037
Income Tax Benefit	(355,069)		(356,877)		(185,450)
Net Income	$	12,773,891	$	7,050,604	$	7,794,487

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Condensed Statements of Cash Flow Data


	Years Ended December 31,
	2021		2020		2019
Operating Activities:
Net Income	$	12,773,891	$	7,050,604	$	7,794,487
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Equity in Earnings of Security Federal Bank	(14,109,630)		(8,393,140)		(2,092,130)
Decrease (Increase) in Accounts Receivable and Other Assets	59,564		45,320		(372,398)
(Decrease) Increase in Accounts Payable	(29)		(83,370)		169,218
Net Cash (Used) Provided By Operating Activities	(1,276,204)		(1,380,586)		5,499,177
Investing Activities:
Capital Pushdown to Security Federal Bank	—		—		(10,000,000)
Net Cash Used in Investing Activities	—		—		(10,000,000)
Financing Activities:
Redemption of Convertible Debentures	—		(132,000)		—
Employee Stock Plan Purchases	—		12,968		52,868
Proceeds from Subordinated Debentures	—		—		30,000,000
Repayment of Note Payable	—		—		(2,362,500)
Dividends Paid to Shareholders-Common Stock	(1,431,269)		(1,301,254)		(1,123,219)
Net Cash (Used) Provided By Financing Activities	(1,431,269)		(1,420,286)		26,567,149
Net (Decrease) Increase in Cash	(2,707,473)		(2,800,872)		22,066,326
Cash at Beginning of Period	22,884,872		25,685,744		3,619,418
Cash at End of Period	$	20,177,399	$	22,884,872	$	25,685,744

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 22 - 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

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

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

Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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

Investment Securities AFS

Investment securities AFS are recorded at fair value on a recurring basis. At December 31, 2021, the Company’s investment portfolio was comprised of student loan pools, government and agency bonds, mortgage-backed securities issued by government sponsored 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 such, these securities are classified as Level 2.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Mortgage Loans Held for Sale

Land Held for Sale

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

Impaired 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 individually impaired, management measures impairment.

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 December 31, 2021, most of the total impaired loans were 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. As of December 31, 2021 and 2020, the recorded investment in impaired loans was $2.3 million and $2.2 million, respectively. The average recorded investment in impaired loans was $2.6 million and $3.9 million for the years ended December 31, 2021 and 2020, respectively.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, they 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 less estimated selling costs. The Company records all foreclosed assets as nonrecurring level 3.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The tables below present the balances of assets measured at fair value on a recurring basis at December 31, 2021 and 2020:


	December 31, 2021						December 31, 2020
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Student Loan Pools	$	—	$	72,011,561	$	—	$	—	$	61,081,465	$	—
SBA Bonds	—		139,793,077		—		—		153,305,025		—
Tax Exempt Municipal Bonds	—		49,984,355		—		—		48,816,442		—
Taxable Municipal Bonds	—		65,969,151		—		—		48,348,455		—
Mortgage-Backed Securities	—		355,090,914		—		—		277,773,014		—
Total	$	—	$	682,849,058	$	—	$	—	$	589,324,401	$	—

There were no liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020.

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 table below presents assets measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020, aggregated by the level in the fair value hierarchy within which those measurements fall. There were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020.


	December 31, 2021
Assets	Level 1		Level 2		Level 3		Total
Mortgage Loans Held For Sale	$	—	$	4,038,414	$	—	$	4,038,414
Land Held For Sale	—		—		1,529,691		$	1,529,691
Collateral Dependent Impaired Loans (1)	—		—		2,323,307		2,323,307
Foreclosed Assets	—		—		129,700		129,700
Total	$	—	$	—	$	3,982,698	$	3,982,698

	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	$	—	$	—	$	2,715,558	$	2,715,558

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

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

Valuation

Significant

2021

2020

Level 3 Assets

Technique

Unobservable Inputs

Range

Land Held for Sale

Appraised Value/Comparable Sales

Discounts to appraised values for estimated holding or selling costs

10%

n/a

Collateral Dependent Impaired Loans

Appraised Value

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

8% - 13%

8% - 14%

Foreclosed Assets

Appraised Value/Comparable Sales

Discounts to appraised values for estimated holding or selling costs

30%

11% - 72%

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 deposits 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 are 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. 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.

Note Payable—The carrying value of the note payable approximates fair value.

Senior Convertible 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.

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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following tables summarize the carrying value and estimated fair value of the Company’s financial instruments as of December 31, 2021 and 2020 presented in accordance with the applicable accounting guidance.


	December 31, 2021
	Carrying		Fair Value
(In Thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and Cash Equivalents	$	27,623	$	27,623	$	27,623	$	—	$	—
Certificates of Deposits with Other Banks	1,100		1,100		—		1,100		—
Investment and Mortgage-Backed Securities	706,356		706,569		—		706,569		—
Loans Receivable, Net	499,497		508,024		—		—		508,024
FHLB Stock	586		586		586		—		—
Land Held for Sale	1,530		1,530		—		—		1,530
Financial Liabilities:
Deposits:
Checking, Savings and Money Market Accounts	$	958,601	$	958,601	$	958,601	$	—	$	—
Certificate Accounts	157,362		157,201		—		157,201		—


Other Borrowed Money	26,785		26,785		26,785		—		—
Subordinated Debentures	30,000		30,154		—		30,154		—
Junior Subordinated Debentures	5,155		5,155		—		5,155		—


	December 31, 2020
	Carrying		Fair Value
(In Thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
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 and 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		30,753		—		30,753		—
Junior Subordinated Debentures	5,155		5,155		—		5,155		—

At December 31, 2021, the Bank had $166.8 million of 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 is considered to be a reasonable estimate of fair value.

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)

Unaudited condensed financial data by quarter for the years ended December 31, 2021 and 2020 is as follows (dollars, except per share data, in thousands):


	Quarter ended
	3/31/2021		6/30/2021		9/30/2021		12/31/2021
Interest Income	$	9,098	$	8,717	$	9,668	$	9,634
Interest Expense	1,078		978		845		924
Net Interest Income	8,020		7,739		8,823		8,710
Provision for Loan Losses	(870)		(735)		(665)		(134)
Net Interest Income After Provision for Loan Losses	8,890		8,474		9,488		8,844
Non-interest Income	2,774		2,687		4,530		2,642
Non-interest Expense	7,610		7,446		8,049		8,942
Income Before Income Tax	4,054		3,715		5,969		2,544
Provision for Income Taxes	875		791		1,327		516
Net Income	$	3,179	$	2,924	$	4,642	$	2,028
Basic Net Income Per Common Share	$	0.98	$	0.90	$	1.43	$	0.62

Basic Weighted Average Shares Outstanding	3,252,884		3,252,884		3,252,884		3,252,884


	Quarter ended
	3/31/2020		6/30/2020		9/30/2020		12/31/2020
Interest Income	$	9,095	$	9,098	$	9,339	$	9,564
Interest Expense	2,219		1,756		1,431		1,175
Net Interest Income	6,876		7,342		7,908		8,389
Provision For Loan Losses	700		700		2,200		—
Net Interest Income After Provision for Loan Losses	6,176		6,642		5,708		8,389
Non-interest Income	2,796		2,806		2,988		2,831
Non-interest Expense	7,644		6,991		7,686		7,388
Income Before Income Tax	1,328		2,457		1,010		3,832
Provision for Income Taxes	264		441		105		767
Net Income	$	1,064	$	2,016	$	905	$	3,065
Basic Net Income Per Common Share	$	0.34	$	0.62	$	0.28	$	0.94

Basic Weighted Average Shares Outstanding	3,092,455		3,252,884		3,252,884		3,252,884

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 24 - NON-INTEREST INCOME

The Company adopted the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 and all subsequent ASUs that modified Topic 606. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606. The following table presents the Company's non-interest income for the years ended December 31, 2021, 2020 and 2019. 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.


	Year Ended December 31,
	2021		2020		2019
Non-interest income:
Gain on sale of investment securities, net (1)	$	—	$	1,332,666	$	819,053
Gain on sale of loans, net (1)	3,836,411		3,508,397		1,728,741
Service fees on deposit accounts	956,978		941,440		1,069,470
Commissions from insurance agency (1)	610,097		643,414		674,991
Trust income	1,438,727		1,138,007		1,061,200
BOLI income (1)	635,000		573,250		678,609
ATM and check card fee income	2,470,171		1,683,059		1,449,416
Grant income (1)	1,826,265		519,712		478,049
Other non-interest income (1)	859,602		1,081,188		1,137,614
Total non-interest income	$	12,633,251	$	11,421,133	$	9,097,143
(1) Not within the scope of ASC 606

The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. The following is a discussion of key revenues within the scope of the new revenue guidance.

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.

Service Fees on Deposit Accounts

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, the Company does not anticipate any changes in the accounting for trust income at this time.

ATM and Check Card Fee Income

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

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.

NOTE 25 - 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 financial statements were available to be issued and determined there were no subsequent events requiring accrual or disclosure.

SHAREHOLDERS INFORMATION

ANNUAL MEETING

The annual meeting of shareholders will be held at 11:00 a.m. on Thursday, April 28, 2022 by virtual meeting.

STOCK LISTING

The Company’s stock is traded on the Pink Open Market under the symbol “SFDL.” The stock began trading in October 2003.

PRICE RANGE OF COMMON STOCK

The table below shows the range of high and low bid prices. These prices represent actual transactions and do not include retail markups, markdowns or commissions.


	High	Low
Year Ended December 31, 2021
03/31/2021	$34.52	$25.31
06/30/2021	$36.49	$31.56
09/30/2021	$34.63	$30.98
12/31/2021	$32.96	$30.98

Year Ended December 31, 2020
03/31/2020	$34.48	$24.70
06/30/2020	$27.67	$23.27
09/30/2020	$24.80	$22.42
12/31/2020	$30.00	$21.54

As of December 31, 2021, the Company had approximately 277 shareholders of record, not including shares held in street name, and 3,252,884 outstanding shares of common stock.

DIVIDENDS

The first quarterly dividend on the stock was paid to shareholders on March 15, 1991. Dividends will be paid upon the determination of the Board of Directors that such payment is consistent with the long-term interest of the Company. The factors affecting this determination include the Company’s current and projected earnings, operating results, financial condition, regulatory restrictions, future growth plans, and other relevant factors. The Company paid $0.08 per share cash dividends each quarter since the first quarter of fiscal 2009 through the last quarter in 2016. During 2017 and 2018, the Company paid $0.09 per share. During 2019 and 2020, the Company paid $0.10 per share. During 2021, the Company paid $0.11 per share. In 2022, the Company expects to pay $0.12 per share cash dividends each quarter.

The ability of the Company to pay dividends depends primarily on the ability of the Bank to pay dividends to the Company. The Bank may not declare or pay a cash dividend on its stock or repurchase shares of its stock if the offset thereof would be to cause its regulatory capital to be reduced below the amount required to meet applicable regulatory capital requirements. South Carolina banking regulations restrict the amount of dividends that the Bank can pay to the Company, and may require prior approval before declaration and payment of any excess dividend. Unlike the Bank, there is no regulatory restriction on the payment of dividends by the Company; however, it is subject to the requirements of South Carolina law. South Carolina law generally prohibits the Company from paying dividends if, after giving effect to a proposed dividend: (1) the Company would be unable to pay its debts as they become due in the normal course of business, or (2) the Company’s total assets would be less than its total liabilities plus the sum that would be needed to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend. The Federal Reserve also has the authority to prohibit the Company from paying a dividend on its common stock.

CODE OF ETHICS

A copy of the Company’s Code of Ethics may be obtained at the Company’s Internet website at www.securityfederalbank.com.