1,000 1,000 82,949 82,949 82,949 82,949 82,949 82,949 0.01 0.01 5,000,000 5,000,000 3,456,136 3,228,777 3,453,817 3,252,884 227,359 200,933 1,600 14,900 0 1 2,800 2,000 1 0 67 6 0 0 0 2 2 0 0 0 1,214 355 859 1.2 5.0 501,000 false false false false Not within the scope of ASC 606

 thunderdome:item
 utr: Y

 UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 FORM 10-K

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

 For the fiscal year ended December 31, 2023

 OR

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

 For the transition period _________ to _________

 Commission File Number: 000-16120

 SECURITY FEDERAL CORPORATION

 (Exact name of registrant as specified in its charter)

 South Carolina

 57-0858504

 (State or other jurisdiction of incorporation or organization)

 (I.R.S. Employer Identification No.)

 238 Richland Avenue Northwest, Aiken, South Carolina

 29801

 (Address of principal executive offices)

 (Zip Code)

 ( 803) 641-3000

 (Registrants telephone number, including area code)

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

 Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share

 (Title of Class)

 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

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

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

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

 Large accelerated filer

 Accelerated filer

 Non-accelerated filer

 Smaller reporting company

 Emerging growth company

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

 Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).

 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 As of March 21, 2024, there were issued and outstandin g 3,229,325 shares of the registrant's Common Stock, which is traded on the OTC Pink Open Market under the symbol "SFDL." The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked price of such stock as of June 30, 2023, was $ 44,257,125. (The exclusion from such amount o f the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

 DOCUMENTS INCORPORATED BY REFERENCE

 Portions of the Regi strant's Proxy Statement for the 2024 Annual Meeting of Stockholders (the "2024 Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

 PART I.

 Item 1.

 Business

 Item 1A.

 Risk Factors

 Item 1B.

 Unresolved Staff Comments

 Item 1C.

 Cybersecurity

 Item 2.

 Properties

 Item 3.

 Legal Proceedings

 Item 4.

 Mine Safety Disclosures

 PART II.

 Item 5.

 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Item 6.

 Reserved

 Item 7.

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

 Item 7A.

 Quantitative and Qualitative Disclosures About Market Risk

 Item 8.

 Financial Statements and Supplementary Data

 Item 9.

 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 Item 9A.

 Controls and Procedures

 Item 9B.

 Other Information

 Item 9C.

 Disclosure Regarding Jurisdictions the Prevent Inspections

 PART III.

 Item 10.

 Directors, Executive Officers and Corporate Governance

 Item 11.

 Executive Compensation

 Item 12.

 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 Item 13.

 Certain Relationships and Related Transactions, and Director Independence

 Item 14.

 Principal Accountant Fees and Services

 Item 15.

 Exhibits and Financial Statement Schedules

 Item 16.

 Form 10-K Summary

 Signatures

 SCHEDULES OMITTED

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

 Forward-Looking Statements

 This Form 10-K, including information incorporated by reference herein, contains, and future filings by Security Federal Corporation ("Company") on 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 and operations or financial condition, 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's expectations and may, therefore, involve risk and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors, including, but not limited to:

 •

 potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets; including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth;

 •

 changes in the interest rate environment, including the recent past increases in the Board of Governors of the Federal Reserve System (the "Federal Reserve") benchmark rate and duration at which such elevated interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;

 •

 the impact of continuing elevated inflation and the current and future monetary policies of the Federal Reserve in response thereto;

 •

 the effects of any federal government shutdown;

 •

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

 •

 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;

 •

 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 sell loans in the secondary market;

 •

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

 •

 legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax laws, and in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

 •

 our ability to attract and retain deposits;

 •

 our ability to control operating costs and expenses;

 •

 our ability to implement our business strategies;

 •

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

 •

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

 •

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

 •

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

 •

 our ability to attract and retain key members of our senior management team;

 •

 costs and effects of litigation, including settlements and judgments;

 i

 •

 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; and

 •

 other risks described elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2023 ("2023 Form 10-K") and in the Company's other reports filed with or furnished to the Securities and Exchange Commission (the "SEC").

 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 2024 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.

 As used throughout this report, the terms "we," "our," or "us" refer to Security Federal Corporation and our consolidated subsidiary, Security Federal Bank.

 Available Information

 The Company provides a link on its investor information page at www.securityfederalbank.com to the SEC website ( www.sec.gov) for purposes of providing copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the SEC. Other than an investor's own internet access charges, these filings are available free of charge at the SEC's website at www.sec.gov. The information contained on the Company's website is not included as part of, or incorporated by reference into, this 2023 Form 10-K.

 ii

 Item 1. Business

 Security Federal Corporation

 Security Federal Corporation (the "Company") was incorporated under the laws of the State of Delaware in July 1987 for the purpose of becoming the savings and loan holding company for Security Federal Bank ("Security Federal" or the "Bank") upon the Bank's conversion from mutual to stock form (the "Conversion"). Effective August 17, 1998, the Company changed its state of incorporation from Delaware to South Carolina. On December 28, 2011, the Company reorganized into a bank holding company in connection with the Bank's conversion from a federally chartered stock savings bank to a South Carolina chartered commercial bank. As a result of the reorganization, the Federal Reserve became the Company's primary federal regulator.

 As a South Carolina corporation, the Company is authorized to engage in any activity permitted by South Carolina General Corporation Law. The Company is a one bank holding company. Through the bank holding company structure, it is possible to expand the size and scope of the financial services offered beyond those currently offered by the Bank. The holding company structure also provides the Company with greater flexibility than the Bank would have to diversify its business activities, through existing or newly formed subsidiaries, or through acquisitions or mergers of financial institutions as well as other companies. There are no current arrangements, understandings or agreements regarding any such acquisition. Future activities of the Company will be funded through the continuing operations of Security Federal and through borrowings from third parties. Activities of the Company may also be funded through sales of additional securities or income generated by other activities of the Company. At this time, there are no plans regarding sales of additional securities or other activities.

 At December 31, 2023, the Company, on a consolidated basis with the Bank, had assets of $1.5 billion, loans receivable, net of $621.6 million, deposits of $1.2 billion and shareholders' equity of $172.4 million. The executive office of the Company is located at 238 Richland Avenue Northwest, Aiken, South Carolina 29801, and its telephone number is (803) 641-3000.

 Security Federal Bank

 Security Federal is a South Carolina chartered commercial bank headquartered in Aiken, South Carolina. Security Federal, with 19 branch offices in Aiken, Lexington, Richland and Saluda counties in South Carolina and Columbia and Richmond counties in Georgia, was originally chartered under the name Aiken Building and Loan Association on March 27, 1922. It received its federal charter and changed its name to Security Federal Savings and Loan Association of Aiken on March 7, 1962, and later changed its name to Security Federal Savings Bank of South Carolina, on November 11, 1986. Effective April 8, 1996, the Bank changed its name to Security Federal Bank. The Bank converted from the mutual to the stock form of organization on October 30, 1987. As mentioned above, effective December 28, 2011, Security Federal converted from a federally chartered stock savings bank to a South Carolina chartered commercial bank. As a result of the conversion to a South Carolina commercial bank, the Bank is regulated by the State Board and the FDIC. Security Federal has two active wholly owned subsidiaries: Security Federal Investments, Inc. ("SFINV") and Security Federal Insurance, Inc. ("SFINS"). SFINV was formed to hold investment securities and allow for better management of the securities portfolio. SFINS is an insurance agency offering auto, business, and home insurance.

 In 2010, the Bank and the Company applied for and became a Certified Community Development Financial Institution ("CDFI"). The designation enables the Bank to be eligible for certain grants from United States Treasury ("Treasury"). The Treasury administers CDFIs and the Bank and Company must re-certify as a CDFI every year. Re-certification currently depends on the Bank making a percentage of its loans by dollar and number of loans in its Target Market, which consists primarily of low to moderate income census tracts in the Bank's market area. The criteria to remain a CDFI can change from year to year.

 On May 24, 2022, the Company entered into a Letter Agreement ("Agreement") with the Treasury under the Emergency Capital Investment Program ("ECIP"). Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage CDFIs and minority depository institutions to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially low-income and underserved communities, by providing direct and indirect capital investments in CDFIs. Pursuant to the Agreement, the Company agreed to issue and sell 82,949 shares of Preferred Stock for an aggregate purchase price of $82.9 million in cash. This ECIP investment is treated as tier 1 capital. The Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted, not higher than 2%, based on the lending growth criteria listed in the Agreement. After the tenth anniversary of the investment date, the dividend rate will be fixed based on the average annual amount of lending in years 2 through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15. The Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies' regulatory capital regulations.

 The principal business of Security Federal is accepting deposits from the general public and originating commercial real estate loans, commercial and agricultural business (non-real estate) loans, consumer loans, as well as mortgage loans to buy or refinance one-to-four family residential real estate. The Bank also originates construction loans on single-family residences, multi-family dwellings and projects, and commercial real estate, as well as loans for the acquisition, development and construction of residential subdivisions and commercial projects. Security Federal's income is derived primarily from interest and fees earned in connection with its lending activities, and its principal expenses are interest paid on savings deposits and borrowings and operating expenses. In addition, the Bank operates Security Federal Trust and Investments, a division of the Bank that offers trust, financial planning and financial management services.

 Lending Activities

 Security Federal's principal lending activities include originating loans on commercial real estate and one-to-four family residential real estate. The Bank originates fixed rate residential real estate loans for sale in the secondary market and adjustable rate mortgage ("ARM") loans to be held in its portfolio. The Bank also originates construction loans on single family residences, multi-family dwellings and commercial real estate, and loans for the acquisition, development and construction of residential subdivisions and commercial projects. To a lesser extent, the Bank originates consumer loans and commercial and agricultural business loans.

 The loan-to-value ratio, maturity and other provisions of loans made by the Bank reflect its policy of making the maximum loan permissible consistent with applicable regulations, established lending policies and market conditions. The Bank requires title insurance (or acceptable legal opinions on smaller loans secured by real estate), fire insurance, and flood insurance where applicable, on loans secured by improved real estate.

 Loan Portfolio Composition

 Loans receivable, net, including loans held for sale, increased to $622.5 million at December 31, 2023 from $549.9 million at December 31, 2022 primarily due to increases in residential and commercial real estate loans. For a detailed breakdown of the composition of our loan portfolio, see "Note 4 - Loans Receivable, Net" of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 The following schedule illustrates the maturities of Security Federal's loan portfolio, excluding loans held for sale, at December 31, 2023. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period when the contract is due. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

 One Year or Less

 After One Year Through Five Years

 After Five Years Through Fifteen Years

 After Fifteen Years

 Total

 $

 51,270

 $

 50,343

 $

 1,926

 $

 $

 104,508

 17,537

 47,849

 12,246

 95,251

 172,883

 23,836

 190,399

 40,284

 10,283

 264,802

 7,482

 20,148

 5,656

 —

 33,286

 4,800

 2,980

 8,322

 18,395

 6,473

 13,574

 4,473

 —

 24,520

 Total

 $

 111,398

 $

 325,293

 $

 72,907

 $

 124,898

 $

 634,496

 The following table sets forth the amount of total loans due after December 31, 2024, with fixed or adjustable interest rates.

 Fixed-Rate

 Adjustable-Rate

 Total

 $

 18,495

 $

 34,743

 $

 53,238

 69,509

 85,837

 155,346

 192,458

 48,508

 240,966

 22,634

 3,170

 25,804

 —

 29,697

 29,697

 18,044

 18,047

 Total

 $

 321,140

 $

 201,958

 $

 523,098

 Loan Originations/ Renewals, Purchases and Sales

 In addition to interest earned on loans, the Bank receives loan origination fees or "points" for originating loans. Loan origination points are a percentage of the principal amount of the loan which are charged to the borro wer for the creation of the loan. The Bank's loan origination fees are generally 1% on conventional residential mortgages, and 0.25% to 1% on commercial real estate loans and commercial and agricultural loans.

 Loan origination and commitment fees are volatile sources of income. These fees vary with the volume and type of loans and commitments made and purchased and with competitive conditions in mortgage markets, which in turn are governed by the demand for and availability of money. The Bank also receives other fees and charges related to existing loans, conversion fees, assumption fees, late charges and other fees collected in connection with a change in borrower or other loan modifications.

 Security Federal currently sells substantially all conforming fixed rate loans with terms of 15 years or greater in the secondary mortgage market. These loans are sold in order to provide a source of funds and as one of the strategies available to close the gap between the maturities of the Bank's interest-earning assets and interest-bearing liabilities. Currently, most fixed rate, long-term mortgage loans are being originated based on Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") underwriting standards.

 Secondary market sales are made to other banks or institutional investors. Generally, all loans sold to investors are without recourse. For the past several years, substantially all loans have been sold on a servicing released basis. During the year ended December 31, 2023, Security Federal sold $22.1 million in fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with banks or other investors, are carried in the Bank's "loans held for sale" portfolio. At December 31, 2023, the Bank had $967,000 of loans held for sale. These loans are fixed rate residential loans that have been originated in the Bank's name and have closed. Virtually all these loans have commitments to be purchased by investors and the majority of these loans were price locked with the investors on the same day or shortly after the loan was price locked with the Bank's customers. Therefore, these loans present little market risk for the Bank. The Bank usually delivers loans to, and receives funding from, the investor within 30 days. Security Federal originates all its loans held for sale on a "best efforts" basis, meaning that the Bank suffers no penalty if it is unable to deliver a loan to a potential investor.

 Federal law restricts the Bank's permissible lending limits to one borrower to the greater of $500,000 or 15% of unimpaired capital and surplus. At December 31, 2023, the Bank's legal lending limit under this restriction was $24.4 million. At that date, the Bank's largest loan relationship to a single borrower was $12.3 million, comprised of three loans for commercial real estate properties. These loans were performing in accordance with their repayment terms at December 31, 2023.

 South Carolina law restricts the Bank's permissible lending limits to one borrower to 10% of unimpaired capital, or $16.3 million at December 31, 2023, unless prior approval is granted by a two-thirds vote of the Board of Directors, in which case the limit is increased to 15% of unimpaired capital. During 2023, the Board approved the increased loan limits to 15% of unimpaired capital.

 Loan Solicitation and Processing

 The Bank actively solicits mortgage loan applications from existing customers, real estate agents, builders, real estate developers and others. The Bank also receives mortgage loan applications from customer referrals and from walk-in customers. Detailed loan applications are obtained to determine the borrower's creditworthiness and ability to repay. The more significant items on loan applications are verified using credit reports, financial statements and confirmations. After analysis of the loan application and property or collateral involved, including an appraisal of the property (residential appraisals are obtained through independent fee appraisers), a lending decision is made in accordance with the underwriting guidelines of the Bank. These guidelines are generally consistent with Freddie Mac and Fannie Mae guidelines for residential real estate loans. With respect to commercial real estate loans, the Bank also reviews the capital adequacy of the business, the income potential of the property, the ability of the borrower to repay the loan and honor its other obligations, and general economic and industry conditions.

 Upon receipt of a loan application and all required related information from a prospective borrower, the loan application is submitted for approval or rejection. The residential mortgage loan underwriters approve loans which meet Freddie Mac and Fannie Mae underwriting requirements. The Chairman of the Company, the Chief Executive Officer of the Company and the Bank, the President of the Bank, the President of the Company, the Chief Financial Officer, the Executive Vice President/Business Development, the Senior Vice President/Chief Lending Officer and Senior Vice President/Mortgage Lending individually have the authority to approve loans of $500,000 or less, except as set forth above for conforming conventionally underwritten, single family mortgage loans, which are approved by the underwriters. Loans in excess of $500,000 and up to $1.0 million require the approval of any three of the following: Chairman of the Company, the Chief Executive Officer of the Company and the Bank, the President of the Bank, the President of the Company, the Chief Financial Officer, the Executive Vice President/Financial Services, the Chief Lending Officer, or the Secretary of the Executive Committee. Any loan in excess of $1.0 million must be approved by the Bank's Executive Committee, which operates as the Bank's Loan Committee. The loan approval limits discussed above are the aggregate of all loans to any one borrower or entity, not including loans that are secured by the borrower's primary residence, and are conventionally underwritten.

 The general policy of Security Federal is to issue loan commitments to qualified borrowers for a specified term, generally for a period of 45 days or less. With management approval, commitments may be extended for up to an additional 45 days. At
 December 31, 2023, the Ban
 k had $2.2 million in ou tstanding commitments on mortgage loans not yet closed compared to
 $970,000 at
 December 31, 2022. Security Federal had outstanding commitments available on all lines of credit (including letters of credit, commercial, undisbursed loans in process, home equity, credit cards and other consumer loans) totaling
 $157.9 million at
 December 31, 2023. For a more detailed discussion, see "Note 18 - Commitments and Contingencies" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Residential and Construction Real Estate Lending

 At December 31, 2023, the Bank had $172.9 million, or 27.2% of it s total outstanding loan portfolio, in residential mortgage loans. These loans have adjustable or fixed rates and include permanent residential mortgage loans.

 Security Federal offers a variety of ARM loans with adjustable rates of interest which vary according to specified indices. The Bank's ARM loans generally have a loan term of 15 to 30 years with initial rate adjustments every one, three, five or seven years during the term of the loan. After the initial rate adjustment, the loan rate then adjusts annually. Most of the Bank's ARM loans contain a 200 basis point limit as to the maximum amount of change in the interest rate at any adjustment period and a 500 or 600 basis point limit over the life of the loan. The Bank generally originates ARM loans to retain in its portfolio. These loans are generally made consistent with Freddie Mac and Fannie Mae guidelines. The Bank sells the majority of its longer term fixed rate mortgage loans at origination.

 Despite the benefits of ARM loans to the Bank's asset/liability management program, these loans also pose potential additional risks, primarily because as interest rates rise, the underlying payment by the borrower rises, increasing the potential for default. At the same time, marketability of the underlying property may be adversely affected by higher interest rates.

 When originating residential mortgage loans, the Bank assesses the borrower's creditworthiness, evaluates their ability to make principal and interest payments, and considers the property's value securing the loan. The Bank generally makes loans on residential properties in amounts of 95% or less of the appraised value of the collateral. When loans are made for amounts which exceed 80% of the appraised value of the underlying real estate, the Bank's general policy is to require private mortgage insurance on the portion of the loan in excess of 80% of the appraised value. In general, the Bank restricts its residential lending to South Carolina and the nearby Evans and Augusta, Georgia market.

 Many of the residential mortgage loans we retain in our portfolio consist of loans that do not satisfy acreage limits, income, credit, conforming loan limits (i.e., jumbo mortgages) or various other requirements imposed by Freddie Mac or Fannie Mae. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Freddie Mac or Fannie Mae credit requirements because of personal and financial reasons (i.e., bankruptcy, length of time employed, etc.), and other aspects, which do not conform to their underwriting guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. We believe that these loans satisfy the needs of borrowers in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans. We also retain jumbo loans which exceed the conforming loan limits and therefore, are not eligible to be purchased by Freddie Mac or Fannie Mae.

 Construction loans consist of loans to construct a borrower's primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. Construction loans are generally made for periods of six months to one year with either adjustable or fixed rates. At December 31, 2023, construction loans totaled $104.5 million, or 16.5%, of the Bank's loan portfolio. On loans of this type, the Bank seeks to evaluate the financial condition and prior performance of the builder, as well as the borrower's creditworthiness and his or her general ability to make principal and interest payments, and the value of the property that will secure the loan. On construction loans offered to individuals (non-builders), the Bank offers a construction/permanent loan. The borrower pays interest on the loan during the one year construction phase. After construction, the loan then automatically converts, depending on the borrower's upfront selection, to a one year ARM, a three year/one year ARM, or a five year/one year ARM loan in which the borrower will pay principal and interest. The borrower also has the option, after the construction period only, to convert the loan to a fixed rate residential mortgage loan which the Bank immediately sells on the secondary market on a servicing released basis.

 The commercial real estate loans originated by the Bank are primarily secured by non-residential commercial properties, churches, hotels, and residential developments. At December 31, 2023, the Bank had $264.8 million, or 41.7% of its total loan portfolio, in commercial real estate loans.

 Commercial real estate loans from the Bank typically have amortization terms ranging from 10 to 20 years, offered with either adjustable or fixed rates. Adjustable rates are linked to the prime rate as quoted in The Wall Street Journal, adjusting daily, with instituted floors (typically 4% to 6% since 2009). In cases where ceilings are applied, the loan will typically require a balloon payment within 60 months. Fixed-rate commercial real estate loans usually involve a balloon payment within 36 to 60 months.

 Commercial real estate lending entails significant additional credit risk when compared to residential lending. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. To minimize the risks associated with this type of loan, the Bank generally limits the maximum loan-to-value ratio for commercial real estate to a range of 65% to 80%, based on appraisals of the property at the time of the loan by appraisers designated by the Bank, and strictly scrutinizes the credit history, financial condition and cash flow of the borrower, the quality of the collateral and the expertise of management of the property securing the loan. Although the creditworthiness of the business and its principals is of primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.

 Commercial and Agricultural Business (Non Real Estate) Loans

 Commercial and agricultural business loans originated by the Bank are primarily secured by business equipment, furniture and fixtures, inventory and receivables, or are unsecured. At December 31, 2023, the Bank had $33.3 million, or 5.3% of its total loan portfolio, in commercial and agricultural business loans.

 Commercial and agricultural business loans are typically originated on terms of three to 60 months, featuring both adjustable and fixed interest rate terms. Adjustable rates are tied to the prime rate as quoted in The Wall Street Journal, adjusting daily, with floo rs (typically 4% to 6% since 2009) set by the Bank. Loans with ceilings usually involve a balloon payment in 60 months. Fixed-rate commercial and agricultural business loans typically have an amortization period of five years or less.

 Commercial and agricultural business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with lending that is secured by real estate. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan-to-collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial and agricultural business loans often have equipment, inventory, accounts receivable or other business assets as collateral, the liquidation of collateral in the event of a borrower default is often not a sufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other conditions. Accordingly, the repayment of a commercial and agricultural business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment. The Bank seeks to minimize these risks by strictly scrutinizing the borrower's current financial condition, ability to pay, past earnings and payment history. In addition, the current financial condition and payment history of all principals are reviewed. Typically, the Bank requires the principal or owners of a business to guarantee all loans made to their business by the Bank. Although the creditworthiness of the business and its principals is of primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.

 HELOC and Consumer Loans

 The Bank provides consumer loans for various personal, family or household purposes, covering financing for home improvements, residential lots, automobiles, boats, mobile homes, recreational vehicles and education. Additionally, the Bank offers home equity lines of credit ("HELOCs"), which are open-end lines secured by mortgage liens on the borrower's primary or secondary residence. Borrowers make minimum interest-only monthly on drawn lines. HELOC terms extend up to a maximum of 20 years, with a variable interest rate tied to the prime rate and floats monthly.

 In 2012, the Bank instituted interest rate floors, currently ranging from 3.00% to 6.00%, for new HELOC originations, with a maximum loan-to-value ratio of 80%. The Bank also offers secured and unsecured lines of credit. Although consumer loans typically involve a higher level of risk than residential mortgage loans, they generally provide higher yields and have shorter terms to maturity. At December 31, 2023, the Bank had $34.5 million in outstanding HELOCs, representing 5.4% of its loan portfolio.

 At December 31, 2023, the Bank also had $24.5 million in consumer loans, constituting 3.9% of its lo an portfolio, which included amounts outstanding on credit cards and personal lines of credit. As of December 31, 2023, the Bank had issued approved credit card lines of $14.8 million, with $3.4 million outstanding on the same date.

 The Bank's underwriting standards for consumer loans include a determination of the applicant's payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant's monthly income is determined by verification of gross monthly income from primary employment, and from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.

 Loan Delinquencies and Defaults

 The Bank's collection procedures provide that when a residential or commercial real estate loan is approximately 20 days past due, the borrower is contacted by mail and payment is requested. If the delinquency continues for another 10 days, subsequent efforts are made to contact the delinquent borrower and establish a program to bring the loan current. In certain instances, the Bank may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs. If the loan continues in a delinquent status for 60 days or more, the Bank generally initiates foreclosure proceedings after the customer has been notified by certified mail. The Bank's non-accrual loans were $6.8 million at December 31, 2023 compared to $6.3 million at December 31, 2022. For a more detailed discussion of our non-accrual loans, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 4 - Loans Receivable, Net" in the Notes to Consolidated Financial Stateme nts contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Classified Assets

 Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered to be of lesser quality as "substandard," "doubtful" or "loss" assets. The regulations require commercial banks to classify their own assets and to establish prudent general allowances for loan losses for assets classified "substandard" or "doubtful." For the portion of assets classified as "loss," an institution is required to either establish specific allowances of 100% of the amount classified or charge off such amount. In addition, the State Board and/or FDIC may require the establishment of a general allowance for credit losses based on assets classified as "substandard" and "doubtful" or based on the general quality of the asset portfolio of a Bank. See "Regulation - Regulation of the Bank."

 The Company uses a risk-based approach based on the following credit quality measures consistent with regulatory guidelines when analyzing the loan portfolio: pass, caution, special mention, and substandard. For a more detailed discussion of our credit quality measures, see "Note 4- Loans Receivable, Net - Credit Quality Indicators" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 At December 31, 2023, $11.9 million of the total loan balance was classified "substandard" compared to $9.2 million at December 31, 2022. At December 31, 2023, $13.9 million of the total loan balance was designated as "special mention" compared to $7.1 million at December 31, 2022. At December 31, 2023, $134.9 million of the total loan balance was designated as "caution" compared to $105.4 million at December 31, 2022. The Bank had no loans classified as "doubtful" or "loss" at December 31, 2023 and 2022.

 Modifications to Borrowers Experiencing Financial Difficulty

 The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

 Modifications made to borrowers experiencing financial difficulty typically have their impact already factored into the allowance for credit losses. This is due to the measurement methodologies utilized in estimating the allowance. Consequently, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

 In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. As such multiple types of modifications may have been made on the same loan within the current reporting period each much be reported. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction. Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

 Provision for Credit Losses on Loans

 Security Federal recognizes that it will experience credit losses during the course of making loans and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the underlying security for the loan. The Bank seeks to establish and maintain sufficient reserves for estimated losses on specifically identified loans and real estate where such losses can be estimated. Additionally, general reserves for estimated possible losses are established on specified portions of the Bank's portfolio such as consumer loans and higher risk residential construction mortgage loans based on management's estimate of the potential loss for loans which normally can be classified as higher risk. Specific and general reserves are based on, among other criteria: (1) the risk characteristics of the loan portfolio, (2) current economic conditions on a local as well as a statewide basis, (3) actual losses experienced historically and (4) the level of reserves for possible losses in the future.

 In determining the adequacy of the allowance for credit losses on loans, management reviews past experience of loan charge-offs, the level of past due and non-accrual loans, the size and mix of the portfolio, general economic conditions in the market area, and individual loans to identify potential credit problems. The level of the allowance for credit losses reflects management's continuing evaluation of this risk based on the Bank's past loss experience. The allowance is management's best estimate for offsetting risk for our estimated possible losses. There can be no guarantee that the estimate is adequate or accurate. Management believes that the allowance for credit losses on loans is at a level adequate to provide for inherent loan losses. Although management believes that it has considered all relevant factors in its estimation of future losses, future adjustments to the allowance may be necessary if conditions change substantially from the assumptions used in making the original estimations. Regulators will from time to time evaluate the allowance for credit losses which is subject to adjustment based upon the information available to the regulators at the time of their examinations.

 For a breakdown of the activity within the allowance for credit losses by loan category for the years ended December 31, 2023 and 2022, see "Note 4- Loans Receivable, Net - Allowance for Credit Losses" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 The following table summarizes net (recoveries) charge-offs as a percentage of average loans outstanding in each loan category for the years indicated.

 2023

 2022

 (Dollars in Thousands)

 Net Charge-offs (Recoveries)

 Average Loans

 Ratio

 Net Charge-offs (Recoveries)

 Average Loans

 Ratio

 $

 (16

)

 $

 105,433

 (0.02

)%

 $

 (35

)

 $

 104,516

 (0.03

)%

 (54

)

 143,691

 (0.04

)

 (46

)

 94,075

 (0.05

)

 (20

)

 256,927

 (0.01

)

 (132

)

 243,104

 (0.05

)

 (10

)

 33,396

 (0.03

)

 31,338

 0.20

 HELOC

 (37

)

 32,750

 (0.11

)

 (52

)

 29,652

 (0.18

)

 24,511

 0.53

 23,563

 0.48

 Total

 $

 (7

)

 $

 596,708

 (0.00

)%

 $

 (91

)

 $

 526,248

 (0.02

)%

 The following table presents an allocation of the allowance for credit losses at December 31, 2023 and 2022. The allocation is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount is available to absorb losses occurring in any category of loans.

 2023

 2022

 % of

 % of

 loans in

 loans in

 category

 category

 $

 1,828

 %

 $

 2,323

 %

 3,551

 %

 2,124

 %

 5,052

 %

 4,805

 %

 %

 %

 HELOC

 %

 %

 %

 %

 Total

 $

 12,569

 %

 $

 %

 Subsidiaries

 At December 31, 2023, the Company had two subsidiaries, Security Federal, its wholly owned operating bank subsidiary, and Security Federal Statutory Trust (the "Trust"), which issued and sold fixed and floating rate capital securities of the Trust. Under current accounting guidance, the Trust is not consolidated in the Company's financial statements.

 At December 31, 2023, Security Federal had two subsidiaries, SFINV and SFINS. SFINV was formed to hold investment securities and allow for better management of the securities portfolio. SFINS is an insurance agency offering auto, business and home insurance. Security Federal's net investment in its subsidiaries totaled $17.0 million at December 31, 2023.

 Investment Activities

 The Bank has authority to invest in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies, certificates of deposit at insured institutions, mutual funds, bankers' acceptances and federal funds. The Bank may also invest a portion of its assets in certain commercial paper and corporate debt securities. See "Regulation - Regulation of the Bank."

 As a member of the Federal Home Loan Bank ("FHLB") System, Security Federal must maintain minimum levels of investments that are liquid assets as defined in Federal regulations. See "Regulation - Regulation of the Bank - Federal Home Loan Bank System." Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has maintained its liquid assets at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. Management regularly reviews and updates cash flow projections to assure that adequate liquidity is provided.

 At December 31, 2023, our investment portfolio totaled $700.7 million. Security Federal has an investment portfolio of available for sale ("AFS") and held to maturity ("HTM") securities, the majority of which are mortgage-backed securities ("MBS"). MBS can serve as collateral for borrowings and, through repayments, as a source of liquidity. MBS do not have a fixed maturity date. Under the Bank's risk-based capital requirement, MBS have a risk weight of 20% (or 0% in the case of Government National Mortgage Association ("Ginnie Mae") securities) compared to the 50% risk weight carried by residential loans. Small Business Administration ("SBA") bonds are backed by the full faith and credit of the U.S. government and carry a zero percent risk base when calculating risk-based assets for regulatory capital purposes. Student loan pools are typically 97% guaranteed by the U.S. government. The FHLB, Fannie Mae and Freddie Mac are government sponsored enterprises ("GSEs") and the securities and bonds issued by GSEs are not backed by the full faith and credit of the U.S. government. AFS securities are carried at fair value.

 HTM securities are carried at amortized cost, adjusted for the amortization of any related premiums or the accretion of any related discounts into interest income. For more detailed information regarding the Bank's investment portfolios, see "Note 2 - Investments, Available for Sale" and "Note 3 - Investments, Held to Maturity" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Sources of Funds

 Deposit accounts have traditionally been a principal source of the Bank's funds for use in lending and for other general business purposes. The Bank attracts both short-term and long-term deposits from the general public by offering a wide assortment of account types and rates. The Bank offers regular savings accounts, checking accounts, various money market accounts, fixed interest rate certificates with varying maturities, and individual retirement accounts. In addition to deposits, the Bank derives funds from loan repayments, cash flows generated from operations (including interest credited to deposit accounts), FHLB of Atlanta advances, borrowings from the Federal Reserve Bank ("FRB") of Richmond, sales of investment securities, sales of securities under agreements to repurchase, and loan sales. See "Borrowings" below. Scheduled loan payments are a relatively stable source of funds while deposit inflows and outflows and the related cost of such funds have varied widely. FHLB of Atlanta advances, borrowings from the FRB and the sale of securities under agreements to repurchase, referred to as retail repurchase agreements, may be used on a short-term basis to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels and may be used on a longer-term basis in support of expanded lending activities. The availability of funds from loan and investment sales is influenced by general interest rates. For additional information, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this 2023 Form 10-K.

 Deposits

 The Bank attracts both short-term and long-term deposits from the general public by offering a wide assortment of account types and rates. The Bank offers regular savings accounts, checking accounts, various money market accounts, fixed interest rate certificates with varying maturities, negotiated rate $100,000 or above jumbo certificates of deposit ("Jumbo CDs") and individual retirement accounts. The Bank believes that, based on its experience over the past several years, its savings and transaction accounts are stable sources of deposits. The Bank relies upon locally obtained Jumbo CDs to maintain its deposit levels. At December 31, 2023, deposits totaled $1.2 billio n. At that date, approximately $327.7 million of our deposit portfolio was unins ured, including $121.9 million in public deposits which are fully collateralized. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

 At December 31, 2023, the Bank had one deposit relationship totaling approximately 5.2% of outstanding deposits. At December 31, 2022, the Bank had no deposit relationships greater than 5% of outstanding deposits.

 The following table includes deposit accounts and associated weighted average interest rates for each category of deposit at the dates indicated.

 2023

 2022

 Average Balance

 % of Total

 Weighted Avg Rate

 Average Balance

 % of Total

 Weighted Avg Rate

 Interest bearing checking

 $

 102,009

 %

 0.99

 %

 $

 114,065

 %

 0.60

 %

 Savings and money market

 590,248

 %

 2.66

 %

 589,849

 %

 0.27

 %

 Certificates of deposit

 208,221

 %

 2.88

 %

 143,619

 %

 0.42

 %

 Total interest bearing deposits

 900,478

 %

 2.30

 %

 847,533

 %

 0.34

 %

 Non-interest checking

 259,616

 %

 267,246

 %

 Total Deposits

 $

 1,160,094

 %

 $

 1,114,779

 %

 For additional information regarding our deposits, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 9 - Deposits" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Borrowings

 At December 31, 2023, the Bank had $119.2 million in borrowings from the FRB's Bank Term Funding Program ("BTFP"). Depository institutions may also borrow from the FRB's discount window for periods as long as 90 days, and borrowings are prepayable and renewable by the borrower daily. At December 31, 2023, the average borrowing rate was 4.60%.

 As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta and is authorized to apply for advances from the FHLB of Atlanta. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe the acceptable uses to which these advances may be utilized as well as limitations on the size of the advances and repayment provisions. At December 31, 2023, the Bank had no outstanding advances from the FHLB of Atlanta.

 At December 31, 2023, the Bank had $19.2 million in other borrowings consisting of retail repurchase agreements with an average rate of 1.49%.

 For additional information regarding our borrowings, see "Note 10 - FHLB Advances and FRB Borrowings" and "Note 11 - Other Borrowings" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K. See also, "Regulation - Regulation of the Bank - Federal Home Loan Bank System" in this 2023 Form 10-K.

 At December 31, 2023, the Company had $5.2 million in junior subordinated debentures. The debentures accrue and pay distributions quarterly at a f loating rate of three-month Secured Overnight Financing Rate ("SOFR") as adjusted by the relevant spread adjustment of 0.26161 plus 170 basis points, resulting in a rate of 6.47% at December 31, 2023. The debentures were callable by the Company in September 2011, and quarterly thereafter, with a final maturity date of December 15, 2036. See "Note 12 - Junior Subordinated Debentures" of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 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 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 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. See "Note 13 – Subordinated Debentures" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Competition

 The Bank serves the counties of Aiken, Lexington, Richland and Saluda, South Carolina, and the counties of Columbia and Richmond, Georgia through its 19 full service branch offices located in Aiken, Ballentine, Clearwater, Columbia, Graniteville, Langley, Lexington, North Augusta, Ridge Spring, Wagener, and West Columbia, South Carolina, and Augusta and Evans, Georgia.

 Security Federal faces strong competition both in originating loans and in attracting deposits. Competition in originating loans comes primarily from other commercial banks, federal savings institutions, mortgage bankers and credit unions who also make loans in the Bank's market area, and more recently, financial technology (or "FinTech") companies.

 The Bank competes for loans principally on the basis of the interest rates and loan fees it charges, the types of loans it makes and the quality of services it provides to borrowers. The Bank faces substantial competition in attracting deposits from federal savings institutions, commercial banks, money market and mutual funds, credit unions and other investment vehicles.

 The ability of the Bank to attract and retain deposits depends on its ability to provide an investment opportunity that satisfies the requirements of investors as to rate of return, liquidity, risk and other factors. The Bank attracts a significant amount of deposits through its branch offices primarily from the communities in which those branch offices are located. Therefore, competition for those deposits is principally from federal savings institutions, credit unions and commercial banks located in the same communities. FinTech companies also compete for consumer deposit relationships. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, online/mobile services, and convenient branch locations with interbranch deposit and withdrawal privileges at each.

 Human Capital

 We continually strive to recruit the most talented, motivated employees in their respective fields. By providing opportunities for personal and professional growth coupled with an environment that values teamwork and work-life balance, we are able to attract and retain outstanding individuals. We pride ourselves on providing excellent benefits, competitive salaries and the opportunity for participation in our long-term success.

 At December 31, 2023, we employed 258 employees. Our employees are not represented by any collective bargaining agreement. Management is committed to providing equality of opportunity in all aspects of employment through a co mprehensive affirmative action plan that is updated annually. As of December 31, 2023, our workforce was 71% female and 29% male, and women held 66% of the Bank's management roles. The ethnicity of our workforce was 76% White, 17% Black, 3% Asian, 3% Hispanic or Latino, 1% Two or More Races and less than 1% Indian.

 The following chart depicts the percentage of self-identified females and minorities in our workforce at December 31, 2023, by job classification as defined by the Equal Employment Opportunity Commission ("EEOC"):

 Job Classification

 Female

 Minority (1)

 Distribution by EEOC Job Classification

 Executive / Senior level officers

 3.9

 %

 3.2

 %

 8.1

 %

 Mid-level officers and managers

 22.5

 %

 16.1

 %

 20.2

 %

 Professionals

 19.2

 %

 19.4

 %

 24.8

 %

 Sales

 1.6

 %

 —

 %

 1.9

 %

 Administrative support

 52.8

 %

 61.3

 %

 45.0

 %

 Total

 100.0

 %

 100.0

 %

 100.0

 %

 (1) Includes employees self-disclosed as Asian, Black, Hispanic or Latino, Indian, or Two or More Races.

 Benefits - We provide competitive comprehensive benefits to employees. We value the health and well-being of our employees and strive to provide programs to support this. Benefit programs available to eligible employees may include 401(k) savings plan, employee stock ownership plan, health and life insurance, employee assistance program, paid holidays, paid time off, and other leave as applicable.

 Board of Directors - The Company's board of directors is comprised of the Company's Chief Executive Officer, President and nine non-employee directors. The non-employee directors are represented by 11% female and 11% minority.

 Training and Education - We understand the importance of our employees' skills and knowledge in achieving organizational success. Consequently, we actively promote ongoing training and continuing education for our workforce. Our compliance training program ensures that all employees and officers receive annual training courses to stay well-informed about the rules relevant to their roles.

 Information about our Executive Officers

 The following table sets forth information regarding the executive officers of the Company and the Bank at December 31, 2023.

 Age at December 31,

 Position

 Name

 2023

 Company

 Bank

 J. Chris Verenes

 Chief Executive Officer

 Chief Executive Officer Chairman of the Board

 Roy G. Lindburg

 President

 —

 Philip R. Wahl

 —

 President

 Darrell Rains

 Chief Financial Officer

 Chief Financial Officer

 The following is a description of the principal occupation and employment of the executive officers of the Company and the Bank during at least the past five years:

 J. Chris Verenes is Chief Executive Officer of the Company and Chairman of the Board and Chief Executive Officer of the Bank, positions he has held since January 1, 2012 and January 1, 2011, respectively. Prior to that, he served as President of the Bank since 2004. Before joining the Bank, Mr. Verenes held a variety of management positions with Washington Group International, from 1996 to 2004. Prior to his employment by Washington Group International, Mr. Verenes served as Controller for Riegel Textile Corporation, as Director of Control Data and Business and Technology Center, and as Executive Director of the South Carolina Democratic Party.

 Roy G. Lindburg was appointed President of the Company in June 2014. Prior to that, he served as the Chief Financial Officer of the Company and the Bank since January 1995. Mr. Lindburg was named Executive Vice President and appointed to the Company's and the Bank's Boards of Directors in 2005. Prior to joining Security Federal, Mr. Lindburg was employed by Keokuk Bancshares/First Community Bank in Keokuk, Iowa from 1986 to 1994. Mr. Lindburg is a Certified Public Accountant.

 Philip R. Wahl was appointed President of the Bank effective August 2019. Prior to that, he served as the Bank's Augusta Market President since 2017. Prior to joining the Bank, Mr. Wahl held a variety of management positions with local and national banks in the Augusta area during his 35 year banking career. Most recently, he was employed by First Community Bank from 2012 to 2016. He currently serves on the Georgia Health Sciences Foundation Board of Trustees and is Chairman of the Board of the Augusta Convention & Visitors Bureau.

 Darrell Rains was appointed Chief Financial Officer of the Company and the Bank effective July 2020. Prior to that, he served as the Bank's Executive Vice President of Insurance, Mortgage and Trust Services since June 2019. Before joining the Bank, he was the Chief Financial Officer at Woodside Communities from 2017 to 2019 and the Chief Financial Officer of Southeastern Bank Financial Corporation and successors from 2005 to 2017. Mr. Rains has over 30 years of experience in the banking industry. He is a Certified Public Accountant.

 REGULATION

 The following is a brief description of certain laws and regulations which are applicable to the Company and the Bank. Descriptions of laws and regulations here and elsewhere in this 2023 Form 10-K do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the United States Congress or in the South Carolina State Legislature that may affect the operations of the Company and the Bank. In addition, the regulations governing the Company and the Bank may be amended from time to time by the State Board, the FDIC, the Federal Reserve, the SEC and the Consumer Protection Financial Bureau ("CFPB"). Any such legislation or regulatory changes in the future could have an adverse effect on our operations and financial condition. We cannot predict whether any such changes may occur.

 As a bank holding company, the Company is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve. The Company also is subject to the rules and regulations of the SEC under the federal securities laws. The Bank, as a state-chartered commercial bank, is subject to regulation and oversight by the State Board, the applicable provisions of South Carolina law and by the regulations of the State Board adopted thereunder. In some circumstances, the law and regulations of other states can apply. The Bank also is subject to regulation and examination by the FDIC, which insures its deposits to the maximum extent permitted by law.

 Regulation of the Bank

 The Bank is an FDIC-insured, state-chartered commercial bank and is subject to various statutory requirements and rules and regulations promulgated and enforced primarily by the FDIC and the State Board. These statutes, rules, and regulations relate to insurance of deposits, required reserves, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches and other aspects of the business of the Bank. The FDIC has broad authority to prohibit the Bank from engaging in what it determines to be unsafe or unsound banking practices. In addition, federal law imposes a number of restrictions on state-chartered, FDIC-insured banks, and their subsidiaries. These restrictions cover many matters, examples of which include prohibitions against engaging as a principal in certain activities and the requirement of prior notification of branch closings. The Bank is not a member of the Federal Reserve System.

 The Bank is required to file periodic reports with the FDIC and the State Board and is subject to periodic examinations and evaluations by those regulatory authorities. Based on these evaluations, the regulators may revalue the assets of an institution and require that it establish specific reserves to compensate for the differences between the determined value and the book value of these assets. The FDIC and the State Board may each accept the results of an examination by the other in lieu of conducting an independent examination.

 Deposit Insurance and Other FDIC Programs

 The Deposit Insurance Fund ("DIF") of the FDIC insures deposits in the Bank up to $250,000 per separately insured deposit ownership right or category and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums (assessments) and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. For the year ended December 31, 2023, the Bank paid $621,000 in FDIC premiums.

 The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base, which is its average consolidated total assets minus its Tier 1 capital. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. At December 31, 2023, total base assessment rates ranged from 2.5 to 32 basis points subject to certain adjustments.

 Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DIF reserve ratio to decline below the statutory minimum of 1.35% as of June 30, 2020. In September 2020, the FDIC Board of Directors adopted a Restoration Plan to restore the reserve ratio to at least 1.35% within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act. The Restoration Plan maintained the assessment rate schedules in place at the time and required the FDIC to update its analysis and projections for the deposit insurance fund balance and reserve ratio at least semiannually. In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35% by September 30, 2028, the statutory deadline to restore the reserve ratio. Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by 2 basis points, applicable to all insured depository institutions.

 In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment period of 2023. The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum level of 1.35% by September 30, 2028. Revised assessment rate schedules will remain in effect unless and until the reserve ratio meets or exceeds 2%, absent further action by the FDIC Board. A significant increase in insurance premiums or a special assessment levied by the FDIC could likely have an adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what changes in insurance assessment rates may be made in the future.

 The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what changes in insurance assessment rates may be made in the future.

 Prompt Corrective Action

 Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution's category depends upon where its capital levels are in relation to relevant capital measures, which include risk-based capital measures, a common equity Tier 1 ("CET1") measure, a leverage ratio measure and certain other factors. The well-capitalized category is described below in "Capital Requirements". An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits, generally. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.

 Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions that become more extensive as an institution becomes more severely undercapitalized. Failure by institutions to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on their activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for review by the banking agencies may be dependent on compliance with capital requirements.

 At December 31, 2023, the Bank was categorized as "well capitalized" under the prompt corrective action regulations of the FDIC. For additional information, see "Capital Requirements" below and "Note 15 - Regulatory Matters" in the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Capital Requirements

 The Bank is subject to capital regulations adopted by the FDIC, which establish minimum required ratios for a common equity Tier 1 ("CET1") capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the maintenance of the following minimum capital ratios: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies. However, the Federal Reserve Board has provided a "Small Bank Holding Company" exception to its consolidated capital requirements, and bank holding companies with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve Board.

 Federal law required the federal banking agencies, including the FDIC, to establish a "community bank leverage ratio" of between 8% and 10% for institutions with total consolidated assets of less than $10 billion. Institutions with capital complying with the ratio and otherwise meeting the specified requirements and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The community bank leverage ratio was established at 9% Tier 1 capital to total average assets, effective January 1, 2022. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. The Bank has opted out of the community bank leverage ratio.

 In addition to the minimum CET1, Tier 1, and total capital ratios, the capital regulations require a capital conservation buffer consisting 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, engaging in share repurchases, and paying discretionary bonuses.

 To be considered "well capitalized," a depository institution must have a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10%, a CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5%, and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level. As of December 31, 2023, the Bank met the requirements to be "well capitalized" and met the fully phased-in capital conservation buffer requirement.

 The FASB has adopted a new accounting standard, referred to as Current Expected Credit Loss, or CECL. Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL. The federal banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC) have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital. Management did not elect the option to phase in the day-one adverse effects of CECL over a three-year period, and instead, elected to record the full effects of the adoption of CECL in 2023. For more on this new accounting standard, see "Note 1- Significant Accounting Policies-Recently Issued or Adopted Accounting Standards" in the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Federal Home Loan Bank System

 The Bank is a member of the FHLB of Atlanta, which is one of 11 regional FHLBs that administer the home financing credit function of financial institutions. The FHLBs are subject to the oversight of the Federal Housing Finance Agency and each FHLB serves as a reserve or central bank for its members within its assigned region. The FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System and make loans or advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB of Atlanta are required to be fully secured by sufficient collateral as determined by the FHLB of Atlanta. In addition, all long-term advances are required to provide funds for residential home financing. At December 31, 2023, the Bank had no outstanding advances from the FHLB of Atlanta under an available credit facility of $424.4 million, which is limited to available collateral. See "Business - Sources of Funds - Borrowings."

 As a member, the Bank is required to purchase and maintain stock in the FHLB of Atlanta. At
 December 31, 2023, the Bank had $922,000 in FHLB of Atlanta stock, which was in compliance with this requirement. In past years, the Bank has received dividends on its FHLB of Atlanta stock. These dividend yields averag
 ed 5.03% for t he year ended
 December 31, 2023 and 4.88% for the year ended
 December 31, 2022.

 The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have in the past affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB of Atlanta stock in the future. A reduction in value of the Bank's FHLB of Atlanta stock may result in a decrease in net income and possibly the Bank's capital.

 Affiliate Transactions

 The Company and the Bank are separate and distinct legal entities. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies. Transactions deemed to be "covered transactions" under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of the bank subsidiary's capital and surplus and, with respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

 Community Reinvestment Act

 The Bank is also subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate federal bank regulatory agency to assess a bank's performance under the CRA in meeting the credit needs of the community serviced by the Bank, including low and moderate income neighborhoods. The regulatory agency's assessment of a bank's record is made available to the public. Further, a bank's CRA performance rating must be considered in connection with a bank's application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution, and in connection with certain applications by a bank holding company, such as bank acquisitions. The Bank received an "outstanding" rating during its most recent CRA examination.

 On October 24, 2023, the federal banking agencies, including the FDIC issued a final rule designed to strengthen and modernize regulations implementing the CRA. The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes in the banking industry including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type. The Bank cannot predict the impact the changes to the CRA will have on its operations at this time.

 Dividends

 Dividends from the Bank constitute the major source of funds for dividends which may be paid by the Company to shareholders. The amount of dividends payable by the Bank to the Company depends upon the Bank's earnings and capital position, and is limited by federal and state laws, regulations and policies, including the capital conservation buffer requirement discussed above. 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.

 The amount of dividends actually paid during any one period will be strongly affected by the Bank's management policy of maintaining a strong capital position. Federal law further provides that no insured depository institution may pay a cash dividend if it would cause the institution to be "undercapitalized," as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice.

 Activities and Investments of Insured State-Chartered Financial Institutions

 Federal law generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors', trustees' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, (iv) acting as agent for a customer in many capacities, and (v) acquiring or retaining the voting shares of a depository institution if certain requirements are met.

 Federal Reserve System

 The Federal Reserve requires that all depository institutions maintain reserves on transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the Federal Reserve reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At December 31, 2023, the Bank was in compliance with the reserve requirements in place at that time.

 Standards for Safety and Soundness

 The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution's size and complexity and the nature and scope of its activities. The information security program must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. Management of the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a plan of compliance.

 Environmental Issues Associated with Real Estate Lending

 The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), a federal statute, generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term "owner and operator" excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this "secured creditor exemption" has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potentially hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

 Privacy Standards and Cybersecurity

 The Bank is subject to FDIC regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999. These regulations require the Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices. In addition, the federal banking agencies recently adopted rules providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents. Specifically, the new rules require a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a "computer-security incident" rising to the level of a "notification incident" has occurred. Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization's operations, its ability to deliver banking products and services, or the stability of the financial sector. Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization's customers for four or more hours.

 In July 2023, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. The new rules require registrants to disclose on Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident's nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant. For information regarding the Company's cybersecurity risk management, strategy and governance, see "Item 1C. Cybersecurity" contained in Part I of this 2023 Form 10-K.

 Bank Secrecy Act / Anti-Money Laundering Laws

 The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

 Other Consumer Protection Laws and Regulations

 The Dodd-Frank Act established the CFPB and empowered it to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, the Bank is generally subject to supervision and enforcement by the FDIC and the State Board with respect to our compliance with federal and state consumer financial protection laws and regulations.

 The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.

 Regulation of the Company

 The Company, as the sole shareholder of the Bank, is a registered bank holding company with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended ("BHCA"), and the regulations promulgated thereunder. This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank.

 As a bank holding company, the Company is required to file with the Federal Reserve semi-annual and periodic reports and such additional information as the Federal Reserve may require and is subject to regular examinations by the Federal Reserve. The Federal Reserve may examine the Company, and any of its subsidiaries, and charge the Company for the cost of the examination. The Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

 The Bank Holding Company Act

 Under the BHCA, the Company is supervised by the Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, the Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company should serve as a source of strength to its subsidiary bank by having the ability to provide financial assistance to its subsidiary bank during periods of financial distress to the bank, and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary bank. A bank holding company's failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength provisions of the Dodd-Frank Act. The Company and any subsidiaries that it may control are considered "affiliates" within the meaning of the Federal Reserve Act, and transactions between the Bank and affiliates (except subsidiaries of the Bank) are subject to numerous restrictions. With some exceptions, the Company and its subsidiaries, are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by the Company, or by its affiliates.

 Acquisitions

 The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. The list of activities determined by regulation to be closely related to banking within the meaning of the BHCA includes, among other things: operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers' checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. The Federal Reserve must approve the acquisition (or acquisition of control) of a bank or other FDIC-insured depository institution by a bank holding company, and the appropriate federal banking regulator must approve a bank's acquisition (or acquisition of control) of another bank or other FDIC-insured institution.

 Capital Requirements

 As discussed above, bank holding companies with less than $3.0 billion in consolidated assets are generally no longer subject to the Federal Reserve's capital regulations, which are essentially the same as the capital regulations applicable to the Bank described under the caption "Capital Requirements" above. If the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at December 31, 2023, the Company would have exceeded all regulatory requirements. The Federal Reserve expects a holding company's subsidiary banks to be well capitalized under the prompt corrective action regulations. For additional information, see "Note 15 - Regulatory Matters" of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Dividends

 As a South Carolina corporation, the Company is subject to restrictions on the payment of dividends under South Carolina law. In addition, the Company is an entity separate and distinct from its principal subsidiary, Security Federal Bank, and derives substantially all of its revenue in the form of dividends from this subsidiary. Accordingly, the Company is, and will be, dependent upon dividends from the Bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on its common stock. The Company is also subject to certain federal regulatory considerations. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality and overall financial condition, and that it is inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Dividends are also subject to restriction if the capital conservation buffer requirement is not met.

 Stock Repurchases

 Bank holding companies, except for certain "well-capitalized" and highly rated bank holding companies, are required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.

 Federal Securities Laws

 The Company's common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We are subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

 Sarbanes-Oxley Act of 2002

 As a public company that files periodic reports with the SEC under the Exchange Act, the Company is subject to the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. Our policies and procedures have been updated to comply with the requirements of the Sarbanes-Oxley Act.

 Jumpstart Our Business Startups ("JOBS") Act

 The JOBS Act was signed into law on April 5, 2012 and allows banks and bank holding companies to terminate the registration of a class of securities under Section 12(g) and Section 12(b) of the Exchange Act if such class is held of record by less than 1,200 persons. The Company's Board continues to evaluate the costs and advantages and disadvantages of being an SEC registered company and the effects of deregistering its shares of common stock, including among other things, the resulting decrease in the liquidity of its shares.

 TAXATION

 Federal Taxation

 The Company and the Bank report their income on a calendar year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Bank or the Company.

 To the extent that the Bank makes "nondividend distributions" to the Company, these distributions will be considered to result in distributions from the balance of its bad debt reserve as of December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased since December 31, 1987) and then from the supplemental reserve for losses on loans ("Excess Distributions"), and an amount based on the Excess Distributions will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Bank makes a "nondividend distribution," then approximately one and one-half times the Excess Distribution would be includable in gross income for federal income tax purposes, assuming a 21% corporate income tax rate (exclusive of state and local taxes). See "Regulation - Regulation of the Bank - Dividends" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.

 The Company may carryforward net operating losses indefinitely. As of December 31, 2023, management determined 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 $63,000.

 The Company may exclude from its income dividends received from the Bank as a wholly-owned subsidiary of the Company that files a consolidated return with the Bank. The corporate dividends-received deduction is 100%, or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payer of the dividend. Corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.

 The Company, the Bank and its consolidated subsidiaries have been audited or their books closed without audit by the IRS with respect to consolidated federal income tax returns through December 31, 2022. For additional information regarding income taxes, see "Note 14 - Income Taxes" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 State Taxation

 South Carolina has adopted the Internal Revenue Code as it relates to commercial banks, effective for taxable years beginning after December 31, 1986. The Bank is subject to South Carolina income tax at the rate of 4.5%. The Bank has not been audited by the State of South Carolina during the past five years. The Company's income tax returns have not been audited by federal or state authorities within the last five years. For additional information regarding income taxes, see "Note 14 - Income Taxes" in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Item 1A. Risk Factors.

 An investment in our common stock involves various risks which are particular to Security Federal Corporation, our industry, and our market area. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all the other information included in this report and our other documents filed with and furnished to the SEC. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, liquidity, cash flows, results of operations and prospects. The market price of our common stock could decline significantly due to any of these identified or other risks, and you could lose some or all your investment.

 Risks Related to Macroeconomic Conditions

 Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.

 Our operations are significantly affected by the general economic conditions of the states of South Carolina and Georgia and the specific local markets in which we operate. Our entire real estate portfolio consists primarily of loans secured by properties located in Aiken, Richland, and Lexington Counties in South Carolina and Columbia and Richmond Counties in Georgia. Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade. Changes in agreements or relationships between the United States and other countries may also affect these businesses.

 A deterioration in economic conditions in the market areas we serve, be it due to inflation, a recession, war, geopolitical conflicts, adverse weather conditions, the impact of COVID-19 variants, or other factors could result in the following consequences, any of which, could have a materially adverse effect on our business, financial condition, or results of operations:

 •

 Elevated instances of loan delinquencies, problematic assets, and foreclosures.

 •

 An increase in our allowance for credit losses on loans;

 •

 Reduced demand for our products and services, potentially leading to a decline in our overall loans or assets.

 •

 Depreciation in collateral values linked to our loans, thereby diminishing borrowing capacities and asset values tied to existing loans.

 •

 Reduced net worth and liquidity of loan guarantors, possibly impairing their ability to meet commitments to us.

 •

 Reduction in our low-cost or noninterest-bearing deposits.

 A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Many of the loans in our portfolio are secured by real estate. Any deterioration in the real estate markets associated with the collateral securing mortgage loans could significantly impact borrowers' repayment capabilities and the value of collateral. Real estate values are affected by various factors, including economic conditions, governmental rules or policies, and natural disasters such as earthquakes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.

 External economic factors, such as changes in monetary policy and inflation, may have an adverse effect on our business, financial condition and results of operations.

 Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Inflation has risen sharply since the end of 2021 and throughout 2022 at levels not seen for over 40 years. Inflationary pressures, while easing recently, remained elevated throughout the first half of 2023. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business clients to repay their loans may deteriorate quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.

 Risks Related to Our Lending Activities

 Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.

 Lending money is a substantial part of our business, and each loan carries risks related to potential non-repayment or insufficient collateral to guarantee repayment. Various factors contribute to this risk, including:

 •

 The cash flow generated by the borrower or the project being financed.

 •

 Uncertainties and fluctuations in the future value of collateral for secured loans.

 •

 The duration or term of the loan.

 •

 The individual characteristics and creditworthiness of a borrower.

 •

 Changes in economic and industry conditions over time.

 We maintain an allowance for losses on loans, which is a reserve established through a provision for credit losses charged to expense, that we believe is appropriate to provide for lifetime expected credit losses in our loan portfolio. The appropriate level of the allowance for credit losses on loans is determined by management through periodic reviews and consideration of several factors, including, but not limited to:

 •

 Collective loss reserve: Assessing loans on a pooled basis with comparable risk traits, drawing from our historical default and loss data, macroeconomic indicators, feasible forecasts, regulatory standards, management's foresight into future events, and specific qualitative elements.

 •

 Individual loss reserve: Evaluating individual loans with distinct risk characteristics, weighing the present value of anticipated future cash flows or the fair value of the underlying collateral.

 The determination of the appropriate level of the allowance for credit 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. If our estimates are incorrect, the allowance for credit losses may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need for increases in our allowance for credit losses through the provision for credit losses which is recorded as a charge against income. Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. Our allowance for credit losses on loans was 1.98% of total loans outstanding (excluding loans held for sale) at December 31, 2023. For additional information concerning our allowance for credit losses, see "Management's Discussion and Analysis of Financial Condition - Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022 - Provision for Credit Losses" contained in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" of this 2023 Form 10-K.

 In addition, bank regulatory agencies periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize additional loan charge-offs. Any increases in the provision for credit losses may result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations and capital.

 If our non-performing assets increase, our earnings will be adversely affected.

 At December 31, 2023, our non-performing assets (which consist of non-accrual loan s and OREO) were $6.8 million, or 0.44% of total ass ets. Our non-performing assets adversely affect our net income in various ways:

 •

 Interest income is recorded solely on a cash basis for non-accrual loans and any non-performing investment securities.

 •

 No interest income is recorded for OREO.

 •

 Expected loan losses are accounted for through a current-period provision for credit losses.

 •

 Writing down property values within our OREO portfolio to mirror changing market values or recognizing other-than-temporary impairment on non-performing investment securities leads to increased non-interest expenses.

 •

 Legal fees related to resolving problematic assets, along with carrying costs like taxes, insurance, and maintenance fees for our OREO, increase non-interest expenses.

 •

 Active management involvement in resolving non-performing assets may divert attention from more profitable activities.

 If additional borrowers become delinquent and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.

 Our level of commercial real estate loans may expose us to increased lending risks.

 While commercial real estate lending offers the potential for higher returns compare
 d to single-family residential lending, it is more susceptible to fluctuations in regional and local economic conditions, presenting challenges in predicting potential losses accurately. Evaluating collateral and conducting financial statement analysis for these loans necessitates a more intricate approach during underwriting and continual assessment. At
, we had $264.8 million of commercial real estate loans, representing 41.7% of our total loan portfolio.

 Commercial real estate loans typically involve larger principal amounts than other types of lending, and some borrowers hold multiple loans with us. Consequently, adverse developments in a single loan or credit relationship can significantly increase our risk exposure compared to single-family residential loans. Repayment of these loans is dependent on income generated or anticipated from the property securing the loan in amounts sufficient to cover operating expenses and debt service. Economic fluctuations or local market changes can impact this cash flow. For instance, failure to secure or renew leases can impair the borrower's ability to repay the loan. Commercial real estate loans also pose a greater credit risk than one-to-four family residential real estate loans, primarily because the collateral i s less liquid. Further, many of these loans include large balloon payments upon maturity, increasing the risk of default as borrowers may need to sell or refinance the property to pay off the loan at maturity.

 Unlike residential loans, a secondary market for most types of commercial real estate loans is not readily available, limiting our ability to mitigate credit risk by selling our interest. Foreclosing on these loans often entails longer holding periods due to fewer potential purchasers for the collateral. Consequently, charge-offs on commercial real estate loans may be comparatively higher on a per-loan basis than those in our residential or consumer loan portfolios.

 Our construction real estate loans are based upon estimates of costs and the value of the completed project.

 We originate construction loans on single-family residences, multi-family dwellings and projects, and commercial real estate, as well as loans for the acquisition and development and construction of residential subdivisions and commercial projects. At December 31, 2023, we had $104.5 million of construction loans, representing 16.5% of our total loan portfolio.

 Construction lending involves inherent risks due to estimating costs in relation to project values. Uncertainties in construction costs, market value, and regulatory impacts make accurately evaluating total project funds and loan-to-value ratios challenging. Factors like shifts in housing demand and unexpected building costs can significantly vary actual results from estimates. Additionally, this type of lending often involves higher principal amounts and might be concentrated among a few builders. A downturn in housing or real estate markets could escalate delinquencies, defaults, foreclosures, and compromise collateral value.

 Some builders have multiple loans with our institution and also hold residential mortgage loans for rental properties with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. Moreover, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing. Thus, repayment depends heavily on project success and the borrower's ability to sell, lease, or secure permanent financing, rather than their ability to repay principal and interest directly. Misjudging a project's value could leave us with inadequate security and potential losses upon completion. Actively monitoring construction loans, involving cost comparisons and on-site inspections, adds complexity and cost. Market interest rate hikes also might significantly impact construction loans, affecting end-purchaser borrowing costs, potentially reducing demand or the homeowner's ability to finance the completed home. Further, properties under construction are hard to sell and often need completion for successful sales, complicating problem loan resolution. This might require additional funds or engaging another builder, incurring additional costs and market risks. Moreover, speculative construction loans pose additional risks, especially regarding finding end-purchasers for finished projects.

 Construction loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers for the finished homes may not be identified either during or following the construction period, known as speculative construction loans. Speculative construction loans pose additional risks, especially regarding finding end-purchasers for finished projects. Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be significantly impacted by supply and demand conditions.

 Construction, acquisition and development ("A&D") loans carry additional risk due to the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks are particularly sensitive to supply and demand dynamics, significantly impacting this lending type. Consequently, such loans often entail substantial fund disbursements, where repayment depends on the project's success and the borrower's capability to develop, sell, or lease the property. This reliance differs from the borrower's or guarantor's independent ability to repay principal and interest. At December 31, 2023, there were no non-performing A&D loans; however, a material increase in non-performing construction and development loans could significantly impact our financial condition and results of operations.

 Repayment of our commercial and agricultural business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

 A
 t
, $33.3 million or 5.3% of our total loans were commercial and agricultural business loans. These loans carry distinct risks compared to residential and commercial real estate loans. Unlike real estate lending, which relies on predetermined loan-to-collateral values and views liquidation of the underlying real estate as the primary source of repayment in case of default, our commercial and agricultural business loans are primarily predicated on the borrower's cash flow and secondarily on provided collateral. The borrower's cash flow, often unpredictable, serves as the primary repayment source, supported by collateral such as equipment, inventory, or accounts receivable. However, relying solely on collateral in the event of default may be insufficient due to uncollectible receivables, obsolete inventory, or other factors.

 Our real estate lending exposes us to the risk of environmental liabilities.

 In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

 If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

 We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the property taken in as OREO, and at certain other times during the assets holding period. Our net book value in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset's net book value over its fair value. If our valuation process is incorrect, or if the property declines in value after foreclosure, the fair value of our investments in OREO may not be sufficient to recover our net book value in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in OREO could have a material adverse effect on our financial condition and results of operations. In addition, bank regulators periodically review our OREO and may require us to recognize further charge-offs. Significant charge-offs, as required by such regulators, may have a material adverse effect on our financial condition and results of operations.

 Our securities portfolio may be negatively impacted by fluctuations in market value, changes in the tax code, and interest rates.

 Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by, or other adverse events affecting, the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material effect on our business, financial condition and results of operations. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security to assess the probability of receiving all contractual principal and interest payments on the security. There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets, and would lead to accounting charges that could have a material adverse effect on our net income and capital levels. For the year ended December 31, 2023, we did not incur any other-than-temporary impairments on our securities portfolio.

 Risk Related to Changes in Market Interest Rates

 Changes in interest rates may reduce our net interest income, and may result in higher defaults in a rising rate environment.

 Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, and particularly, the Federal Reserve. Since March 2022, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, including 225 basis points during 2023, to a range of 5.25% to 5.50% as of December 31, 2023. The FOMC has paused increases to the target federal funds rate but has not ruled out future increases. If the FOMC further increases the targeted federal funds rates, overall interest rates will likely rise, which will negatively impact our net interest income and may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S. economy.

 We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.

 Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates-up or down-could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yields on interest-earning assets catch up.

 Changes in the slope of the "yield curve", or the spread between short-term and long-term interest rates-could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.

 A sustained increase in market interest rates could adversely affect our earnings. As is the case with many financial institutions, we attempt to increase our proportion of deposits comprising either no or relatively low-interest-bearing accounts, which has been challenging over the last couple years. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans and other investments.

 Changes in interest rates also affect the value of our investment securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders' equity. At December 31, 2023, we had an accumulated other comprehensive loss of $35.0 million, which is reflected as a reduction to shareholders' equity.

 Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management and Market Risk" included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this 2023 Form 10-K.

 An increase in interest rates, change in the programs offered by governmental sponsored entities ("GSE"), or our ability to qualify for such programs may reduce our mortgage revenues, which would negatively impact our non-interest income.

 Our mortgage banking operations provide a meaningful portion of our non-interest income. We generate mortgage revenues primarily from gains on the sale of single-family mortgage loans underwritten pursuant to programs currently offered by Freddie Mac and Fannie Mae. These entities account for a substantial portion of the secondary market in residential mortgage loans. Future changes in their programs, including our eligibility to participate in such programs, the criteria for loans to be accepted, or laws that significantly affect the activity of such entities, could materially adversely affect the success of our mortgage banking operations and, consequently, our results of operations.

 Changes in economic conditions significantly impact mortgage loan production levels. A slowdown in the housing market, decreased economic activity, or higher interest rates can particularly affect this aspect of our operations. Sustained periods of economic downturn or elevated interest rates have the potential to adversely impact mortgage originations, subsequently affecting income derived from our mortgage lending activities.

 Our results of operations are also significantly impacted by non-interest expenses related to mortgage banking activities, encompassing salaries, employee benefits, occupancy, equipment, data processing, and other operating costs.

 Failure to generate an adequate volume of loans for sale may adversely affect our results of operations. In addition, during periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. Moreover, deteriorating economic conditions may increase the potential for homebuyers to default on their mortgages. In instances where we have originated loans sold to investors, we may be required to repurchase such loans or provide a financial settlement to investors. Such situations arise if it is proven that borrowers furnished incomplete or inaccurate information on their loan applications, if appraisals are deemed unacceptable, or if loans were not underwritten as per the specified loan program outlined by the investor. If repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected.

 Risk Related to Regulatory and Compliance Matters

 New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.

 The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit our shareholders. These regulations may sometimes impose significant limitations on operations. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on an institution's operations, the classification of assets by the institution and the adequacy of an institution's allowance for credit losses. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition transactions.

 The significant federal and state banking regulations that affect us are described in this report under "Business - Regulation" in Item 1 of this 2023 Form 10-K. These regulations, along with the existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business and/or otherwise adversely affect us and our profitability. Additionally, actions by regulatory agencies or significant litigation against us and may lead to penalties that materially affect us. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes. We cannot predict what restrictions may be imposed upon us with future legislation.

 Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

 The USA PATRIOT Act and Bank Secrecy Acts and related regulations require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury's Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts and beneficial owners of accounts. Failure to comply with these regulations could result in fines or sanctions. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of regulatory approvals to proceed with certain aspects of our business plan, including acquisitions.

 Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 The Company ' s reported financial results depend on management ' s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses in the future.

 The Company's accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations. The Company's management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management's judgment regarding the most appropriate manner to report the Company's financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in the Company's reporting materially different results than would have been reported under a different alternative.

 Certain accounting policies are critical to presenting the Company's financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include, but are not limited to the allowance for credit losses on loans, securities and unfunded commitments; the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans; income taxes, including tax provisions and realization of deferred tax assets; and the fair value of assets and liabilities. Because of the uncertainty of estimates involved in these matters, the Company may be required, among other things, to significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the reserve provided. For more information, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" contained in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this 2023 Form 10-K.

 We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect our profitability.

 Our business operations are significantly influenced by the extensive body of accounting regulations in the United States. Regulatory bodies periodically issue new guidance, altering accounting rules and reporting requirements, which can substantially affect the preparation and reporting of our financial statements. These changes might necessitate retrospective application, potentially leading to restatements of prior period financial statements.

 One such significant change in 2023 was the implementation of the CECL model, which we adopted on January 1, 2023. Under the CECL model, financial assets carried at amortized cost, such as loans and held-to-maturity debt securities, are presented at the net amount expected to be collected. This forward-looking approach in estimating expected credit losses contrasts starkly with the prior, "incurred loss" model, which delays recognition until a loss is probable. CECL mandates considering historical experience, current conditions, and reasonable forecasts affecting collectability, leading to periodic adjustments of financial asset values. However, this forward-looking methodology, reliant on macroeconomic variables, introduces the potential for increased earnings volatility due to unexpected changes in these indicators between periods. An additional consequence of CECL is an accounting asymmetry between loan-related income, recognized periodically based on the effective interest method, and credit losses, recognized upfront at origination. This asymmetry might create the perception of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses. Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized.

 As a result of the change in methodology from the incurred loss model to the CECL model, on January 1, 2023, the Company recorded a one-time increase in the allowance for credit losses on loans of $784,000 and the reserve for unfunded commitments of $1.2 million, and an after-tax decrease to opening retained earnings of $1.6 million.

 Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed, or the cost of that capital may be exceedingly high.

 We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our capital resources will satisfy our capital requirements for the foreseeable future. Nonetheless, we may at some point need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital, if needed, on terms that are acceptable to us. If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by our banking regulators, we may be subject to additional adverse regulatory action.

 Risks Related to Cybersecurity, Third Parties and Technology

 We are subject to certain risks in connection with our use of technology.

 Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.

 Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation.

 Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions. Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

 Our security measures may not protect us from system failures or interruptions.

 While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While we select third-party vendors carefully, we do not control their actions. If our third-party providers encounter difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

 We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations. The board of directors oversees the risk management process, including the risk of cybersecurity, and engages with management on cybersecurity issues.

 Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.

 As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer's information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

 We are subject to certain risks in connection with our data management or aggregation.

 We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed. While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.

 Risks Related to Our Business and Industry Generally

 We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

 Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where Security Federal conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our Chief Executive Officer, J. Chris Verenes, and certain other employees. In addition, our success has been and continues to be highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to identify and attract suitable candidates to replace such directors.

 Ineffective liquidity management could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.

 Maintaining sufficient liquidity is essential to our business. Any inability to secure funds through deposits, borrowings, loan or investment sales, or other means could significantly impact our liquidity in a negative manner. Our primary liquidity sources include deposit increases, and when necessary, FHLB advances, borrowing from the FRB, and other borrowings. While historically, we have managed to replace maturing deposits and advances as needed, future replacements may be uncertain due to various factors. Changes in our financial condition, the financial condition of the FHLB or FRB, or market conditions could impede our ability to replace these funds. Factors such as reduced business activity in our South Carolina and Georgia markets, adverse operating results, or regulatory actions against us might also impede access to our liquidity sources. External factors like disruptions in financial markets, negative industry sentiments, or shifts in credit markets could further impede our ability to access funds. Changes in underwriting guidelines by the FHLB or alterations in lending policies may limit our ability to borrow, significantly impacting our access to funds. Moreover, dependence on more expensive funding sources due to large-scale withdrawals or the inability to replace brokered deposits could strain our ability to meet our obligations, originate loans, or invest in securities. The availability of additional financing in the future might be uncertain or come at unreasonable terms, affecting our financial condition, operations, growth prospects, and overall future.

 Additionally, while collateralized public funds tend to mitigate some credit sensitivity, they also limit standby liquidity due to collateral restrictions. These funds, while historically a stable funding source, are contingent upon the fiscal policies and cash flow needs of individual municipalities. At December 31, 2023, $141.4 million of our deposits were public funds.

 If we fail to meet the expectations of our stakeholders with respect to our environmental, social and governance ( " ESG ") practices, including those relating to sustainability, it may have an adverse effect on our reputation and results of operation.

 Our reputation may also be negatively impacted by our diversity, equity and inclusion ("DEI") efforts if they fall short of expectations. In addition, various private third-party organizations have developed ratings processes for evaluating companies on their approach to ESG and DEI matters. These ratings may be used by some investors to assist with their investment and voting decisions. Any unfavorable ratings may lead to reputational damage and negative sentiment among our investors and other stakeholders. Furthermore, increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

 The Company ' s ability to pay dividends and make subordinated debt payments is subject to the ability of the Bank to make capital distributions to the Company.

 The Company is a separate legal entity from its subsidiary and does not have significant operations of its own. The long-term ability of the Company to pay dividends to its stockholders and debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level. The availability of dividends from the Bank is limited by the Bank's earnings and capital, as well as various statutes and regulations. In the event, the Bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common stock or make payments on its outstanding debt. Consequently, the inability to receive dividends from the Bank could adversely affect the Company's financial condition, results of operations, and future prospects. At December 31, 2023, the Company had $128.3 million in unrestricted cash to support dividend and debt payments.

 Item 1B. Unresolved Staff Comments

 None.

 Item 1C. Cybersecurity

 The Company relies extensively on various information systems and other electronic resources to operate our business. In addition, nearly all of our customers, service providers and other business partners on whom we depend, including the providers of our online banking, mobile banking and accounting systems, use their own electronic information systems. Any of these systems can be compromised, including by employees, customers and other individuals who are authorized to use them, and bad actors using sophisticated and a constantly evolving set of software, tools and strategies to do so. The nature of our business, as a financial-services provider, and our relative size, make us and our business partners high-value targets for these bad actors to pursue. See "Risks Related to Information Security and Business Interruption" section of the Risk Factors included in Item 1A of this 2023 Form 10-K for additional information.

 Accordingly, we have devoted significant resources to assessing, identifying and managing risks associated with cybersecurity threats, including:

 Implementing an Information Security Program that establishes policies and procedures for security operations and governance;

 Establishing an Information Technology Steering Committee that is responsible for security administration, including conducting regular assessments of our information systems, existing controls, vulnerabilities and potential improvements;

 Implementing layers of controls and not allowing excessive reliance on any single control;

 Employing a variety of preventative and detective tools designed to monitor, block and provide alerts regarding suspicious activity;

 Continuously evaluating tools that can detect and help respond to cybersecurity threats in real-time;

 Leveraging people, processes and technology to manage and maintain cybersecurity controls;

 Maintaining a third party risk management program designed to identify, assess and manage risks associated with external service providers;

 Performing due diligence with respect to our third-party service providers, including their cybersecurity practices;

 Engaging third-party cybersecurity consultants, who conduct periodic penetration testing, vulnerability assessments and other procedures to identify potential weaknesses in our systems and processes; and

 Conducting periodic cybersecurity training for our employees and the Company's Board.

 The Information Security Program is a key part of our overall risk management system, which is administered by our Information Technology Steering Committee. The program includes administrative, technical and physical safeguards to help protect the security and confidentiality of customer records and information.

 From time-to-time, we have identified cybersecurity threats that require us to make changes to our processes and to implement additional safeguards. While none of these identified threats or incidents have materially affected us, it is possible that threats and incidents we identify in the future could have a material adverse effect on our business strategy, results of operations and financial condition.

 The Company's management team is responsible for the day-to-day management of cybersecurity risks we face and oversees the Information Technology Steering Committee. The Information Technology Steering Committee manages the oversight of the information security assessment, development of policies, standards and procedures, testing, training and security report processes for the Company. The Information Technology Steering Committee is comprised of officers with the appropriate expertise and authority to oversee the Information Security Program.

 In addition, the Company's Board is responsible for the oversight of risk management, including cybersecurity risks. In that role, the Company's Board, with support from the Company's management and third party cybersecurity advisors, are responsible for ensuring that the risk management processes designed and implemented by management are adequate and functioning as designed. The Board reviews and approves an information security program, vendor management policy (including third-party service providers), acceptable use policy, incident response policy and business continuity planning policy on an annual basis. All the aforementioned policies are developed and implemented by management of the Company. To carry out their duties, the Board receives updates from the Information Technology Steering Committee regarding cybersecurity risks and the Company's efforts to prevent, detect, mitigate and remediate any cybersecurity.

 Item 2. Properties

 As of December 31, 2023, we owned the buildings and land for 12 of our branch offices and our operations center, leased the land and owned improvements for one office, and leased five other offices, including our main office. The Ridge Spring branch is owned by the Town of Ridge Spring, with some capital improvements made by Security Federal. Additionally, we own three other properties: one lot originally purchased for a future branch site and another for a new Operations Center, currently for sale, and a property consisting of land and a building that is located adjacent to our 1705 Whiskey Road office that is currently leased. We also rent and sublease the building at 234 Richland Avenue, which is adjacent to our main office. See "Note 5 - Premises and Equipment, Net and Leases" of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this 2023 Form 10-K.

 Item 3. Legal Proceedings

 The Company is involved as plaintiff or defendant in various legal actions arising in the course of its business. It is the opinion of management, after consultation with counsel, that the resolution of these legal actions will not have a material adverse effect on the Company's financial condition and results of operations.

 Item 4. Mine Safety Disclosure s

 Not applicable.

 Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Market Information and Holders: The Company's stock is traded on the OTC Pink Open Market under the symbol "SFDL.OB." As of March 21, 2024, the Company had approximately 281 sh areholders of record, not including shares held in street name. Any over-the-counter market quotations of the Company's stock reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.

 Dividends: Our Board of Directors has declared quarterly cash dividends on our common stock for 125 consecutive quarters. Our cash dividend payout policy is reviewed regularly by management and the Board of Directors. Any dividends declared and paid in the future would depend upon a number of factors, including capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by federal regulations.

 Purchases of Equity Securities by Issuer and Affiliated Purchasers. On June 23, 2023, the Company announced that its Board of Directors approved a share repurchase program for the purchase of up to three percent, or approximately 97,612 shares, of the Company's outstanding common stock as of that date. The June 2023 repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The following table summarizes common stock repurchases during the three months ended December 31, 2023

 Period

 Total Number of Shares Repurchased as Part of Publicly Announced Program

 Average Price Paid Per Share

 Maximum Number of Shares That May Yet Be Repurchased

 October 1, 2023 - October 31, 2023

 1,684

 $

 22.84

 83,228

 November 1, 2023 - November 30, 2023

 $

 20.75

 83,086

 December 1, 2023 - December 31, 2023

 11,900

 $

 20.80

 71,186

 Total

 13,726

 Equity Compensation Plan Information. The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is incorporated herein by reference.

 Item 6. [Reserved]

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

 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

 This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto, that appear in Part II, "Item 8. Financial Statements and Supplementary Data" and should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this 2023 Form 10-K.

 General

 As a South Carolina corporation, the Company is authorized to engage in any activity permitted by South Carolina General Corporation Law. Functioning as a single bank holding company, the Company leverages this structure to potentially broaden the scale and range of financial services beyond the current offerings of the Bank. This holding company setup not only grants the Company enhanced flexibility compared to the Bank but also allows for diversification of business activities through existing or newly formed subsidiaries, acquisitions, mergers with financial institutions, and other companies. Presently, there are no existing arrangements or agreements regarding such acquisitions, and the Company's future activities will be funded through the ongoing operations of the Bank and borrowings from third parties. Additionally, potential funding sources may include the sale of additional securities or income generated by the Company's various activities, although no plans for such actions are in place at this time.

 The investment and other activities of the Company have had no significant impact on the results of operations for the periods presented in the Consolidated Financial Statements included herein. Given that all material business operations are conducted through the Bank, the following discussion of financial results primarily indicative of the activities of the Bank.

 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 and casualty insurance products through its subsidiary, SFINS.

 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.

 Critical Accounting Estimates

 We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.

 The significant accounting policies of the Company are described in Note 1 of the Notes to the Consolidated Financial Statements included under "Item 8. Financial Statements and Supplementary Data," in this 2023 Form 10-K.

 The Company believes the allowance for credit 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 unexpectedly large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings. The Company considers the allowance for credit losses to be a critical accounting policy, requiring significant judgments, estimates, and assumptions in preparing its Consolidated Financial Statements. An unexpectedly large loss could deplete the allowance, necessitating increased provisions that may negatively impact earnings. The CECL method is employed for credit loss provisioning, with all credit losses and recoveries charged and credited, respectively, to the related allowance. Additions to the allowance are determined based on various factors, including collateral value, borrower guarantees, repayment ability, loan portfolio composition, and economic conditions. Monthly evaluations are conducted, adjusting the allowance in response to changes. While management uses the best available information, future adjustments may be necessary if economic conditions differ significantly from assumptions. Further details on the estimation process and methodology are discussed in the "Financial Condition" and "Comparison of the Years Ended December 31, 2023 and 2022 - Provision for Credit Losses" sections of this 2023 Form 10-K.

 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.

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

 Financial Condition - Assets

 Total assets increased $168.4 million or 12.2% to $1.5 billion at December 31, 2023 from $1.4 billion at December 31, 2022. This increase was primarily due to increases in cash and cash equivalents, net loans receivable and, to a lesser extent, other assets, partially offset by a decrease in investment securities.

 Cash and cash equivalents increased $99.8 million or 350.1% to $128.3 million at December 31, 2023 compared to $28.5 million at December 31, 2022, due to increased deposits and borrowings. Total investment securities decreased $16.9 million or 2.4% to $700.7 million at December 31, 2023 from $717.6 million at December 31, 2022 as maturities, sales and principal paydowns exceeded purchases of investments during the year. The Company purchased $66.3 million of investment securities during the year ended December 31, 2023 compared to $210.3 million during 2022.

 Loans receivable, net, including loans held for sale, increased $72.6 million or 13.2% to $622.5 million at December 31, 2023 from $549.9 million at December 31, 2022 primarily due to increases in residential mortgage and commercial real estate loans. In addition, HELOCs, other consumer loans, and commercial and agricultural loans also increased, while construction loans decreased during 2023 as compared to 2022.

 Residential mortgage loans held for investment increased $62.8 million or 57.1% to $172.9 million at December 31, 2023 from $110.1 million at December 31, 2022. Similarly, commercial real estate loans increased $12.6 million or 5.0% to $264.8 million at December 31, 2023 from $252.2 million at December 31, 2022, while c onstruction loans decreased $8.3 million or 7.3% to $104.5 million at December 31, 2023 from $112.8 million at December 31, 2022.

 Further, commercial and agricultural loans increased to $33.3 million at December 31, 2023 up from $30.6 million at December 31, 2022. HELOCs increased to $34.5 million at December 31, 2023 up from $31.7 million at December 31, 2022 and other consumer loans increased to $24.5 million at December 31, 2023, up from $23.6 million at December 31, 2022.

 Loans held for sale, comprised of fixed rate residential loans, increased $54,000 or 5.9% to $967,000 at December 31, 2023 from $913,000 at December 31, 2022. Typically, long-term fixed-rate residential real estate loans, when newly originated, are not retained in the portfolio but are promptly sold, unlike ARM loans, which are generally held in the portfolio. The Bank sells all its fixed-rate residential loans on a service-released basis. The total value of fixed-rate residential loans sold to institutional investors on a service-released basis was $21.6 million during the year ended December 31, 2023, compared to $48.5 million during the year ended December 31, 2022.

 Property and equipment, net increased $677,000 or 2.4% to $28.6 million at December 31, 2023 from $28.0 million at December 31, 2022 due to capital costs related to branch improvements and construction of the Bank's newest branch.

 Other assets increased $10.1 million or 52.2% to $29.3 million at December 31, 2023 from $19.2 million at December 31, 2022. The increase was primarily the result of a $10.8 million increase in principal payments receivable on investment securities, which was related to the maturity of one investment security that matured on December 31, 2023 but payment was not received until the beginning of 2024.

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

 Financial Condition - Non-Performing Assets

 The Bank's non-performing assets increased $432,000 or 6.8% to $6.8 million at December 31, 2023, from $6.4 million at December 31, 2022. Non-performing assets represented 0.44% and 0.49% of total assets at December 31, 2023 and 2022, respectively.

 The following table presents information regarding the Bank's non-performing loans at the dates indicated.

 As of December 31, 2023

 At December 31, 2022

 $

 %

 # of loans

 # of loans

 Change

 Change

 Non-Performing Loans:

 Construction

 $

 $

 $

 654.8

 %

 Residential Mortgage

 1,307

 1,545

 (238

)

 (15.4

)

 4,125

 4,282

 (157

)

 (3.7

)

 (63

)

 (55.8

)

 HELOC

 118.5

 113.8

 Total Non-Performing Loans

 6,825

 6,273

 8.8

 %

 Other Non-Performing Assets:

 OREO

 —

 (120

)

 (100.0

)%

 Total Non-Performing Assets

 $

 6,825

 $

 6,393

 $

 6.8

 %

 Non-Performing Loans to Total Loans

 1.08

 %

 1.14

 %

 Non-Performing Assets to Total Assets

 0.44

 %

 0.49

 %

 Allowance for Credit Losses on Loans to Non-Performing Loans

 184.16

 %

 178.19

 %

 Allowance for Credit Losses on Loans to Total Loans

 1.98

 %

 2.09

 %

 (1)

 PERCENT OF GROSS LOANS RECEIVABLE HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.

 Non-performing loans increased in the construction, HELOC and other consumer loan categories during 2023 compared to 2022. There were no OREO properties at December 31, 2023 compared to $120,000 at December 31, 2022. The ratio of the allowance for credit losses to total loans was 1.98% and 2.09% at December 31, 2023 and 2022, respectively.

 The largest increase in non-performing loans occurred in construction loans, which increased $753,000 or 654.8% to $868,000 at December 31, 2023 from $115,000 at December 31, 2022. Non-performing construction loans consisted of four loans to four borrowers with an average loan balance of $217,000 at December 31, 2023, compared to two loans to two borrowers with an average loan balance of $57,000 at December 31, 2022.

 Non-performing HELOCs increased $224,000 or 118.5% to $413,000 at December 31, 2023 from $189,000 at December 31, 2022. Non-performing HELOCs consisted of five loans to five borrowers with an average loan balance of $83,000 at December 31, 2023, compared to five loans to five borrowers with an average loan balance of $38,000 at December 31, 2022.

 Non-performing commercial real estate loans totaled $4.1 million at December 31, 2023, down slightly from $4.3 million at December 31, 2022. Non-performing commercial real estate loans consisted of five loans to five borrowers with an average loan balance of $825,000 at December 31, 2023, compared to three loans to three borrowers with an average loan balance of $1.1 million at December 31, 2022.

 Non-performing residential mortgage loans totaled $1.3 million at December 31, 2023, down slightly from $1.5 million at December 31, 2022. Non-performing residential mortgage loans at December 31, 2023 consisted of 16 loans to 16 borrowers with an average loan balance of $82,000, the largest of which was $291,000, compared to 16 loans to 16 borrowers with an average loan balance of $97,000, the largest of which was $250,000, at December 31, 2022.

 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.

 The Bank conducts a monthly review of its loan portfolio and allowance for credit losses. In determining the appropriate allowance during the years ended December 31, 2023 and 2022, management considered various factors, including national and state unemployment rates, benefit claim levels, government financial assistance, inflation, consumer spending trends, and the Bank's largest commercial loan relationships.

 Effective January 1, 2023, we adopted Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, also known as CECL. This adoption resulted in a $2.0 million increase in the allowance for credit losses, comprised of increases in the allowance for credit losses on loans of $784,000 and on unfunded commitments of $1.2 million. The cumulative effect adjustment to retained earnings was $1.6 million, net of tax. For additional information, refer to "Recently Issued or Adopted Accounting Standards" in Note 1 of the Notes to Consolidated Financial Statements included under "Item 8. Financial Statements and Supplementary Data" in this 2023 Form 10-K.

 Management will continue monitoring economic conditions and collaborating with borrowers to navigate this challenging economic climate. Future additions to the allowance for credit losses depend on factors such as loan portfolio performance, economic conditions, real estate values, and interest rates. There is no assurance that future periods won't require additions to the allowance. Determining the appropriate level of the allowance involves a high degree of subjectivity and significant estimates, all of which are subject to 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 credit losses. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted. In addition, bank regulatory agencies periodically review our allowance for credit 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 credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit 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.

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

 Financial Condition - Liabilities and Shareholders' Equity

 Total deposits increased $84.9 million or 7.6% to $1.19 billion at December 31, 2023, up from $1.11 billion at December 31, 2022. The increase was the result of an $88.7 million or 62.5% increase in certificates of deposit balances and a $53.2 million or 15.2% increase money market account balances. These increase were partially offset by decreases in checking and savings account balances, which declined by $37.0 million or 7.3% and $19.9 million or 18.4%, respectively, during the same period. Management attributes the shift in the deposit mix to depositors seeking higher yielding CDs and other investment altern atives. The majority of the Bank's deposits are originated within the Bank's immediate market area.

 Brokered time deposits were $6.5 million and $6.0 million at December 31, 2023 and 2022, respectively. The Bank uses brokered time deposits to manage interest rate risk because they are accessible in bulk at rates typically only slightly higher than those in our market areas. A portion of these brokered time deposits give the Bank a call option that allows the Bank the choice to redeem them early should rates change. In addition, the Bank had $5.0 million in non-certificate brokered deposits at both December 31, 2023 and 2022. Brokered deposits were 1.0% of total deposits at both December 31, 2023 and 2022.

 Total uninsured deposits (those that exceeded the FDIC insurance limit of $250,000) totaled $327.7 million and $350.1 million at December 31, 2023 and 2022, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements. Certificates of deposits that exceeded the FDIC insurance limit of $250,000 totaled $50.2 million and $30.3 million at December 31, 2023 and 2022, respectively. The following table summarizes the maturity schedule of certificates of deposit with a balance of $250,000 or more at December 31, 2023:

 Within 3 Months

 $

 13,887

 After 3 Months, Within 6 Months

 9,327

 After 6 Months, Within 12 Months

 20,679

 After 12 Months

 6,346

 $

 50,239

 Certificates of deposit scheduled to mature in one year or less totaled $198.3 million at December 31, 2023 compared to $97.2 million at December 31, 2022. 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.

 The Bank had no outstanding FHLB advances at December 31, 2023 and 2022. The Com pany had $119.2 million in outstanding borrowings under the FRB's BTFP with a weighted average borrowing rate of 4.60% at December 31, 2023 com pared to $44.1 million in borrowings from the FRB discount window with a weighted average borrowing rate of 4.50% at December 31, 2022. During 2023, the Company elected to participate in the BTFP, allowing the Company to refinance its existing borrowings from the FRB discount window to receive a lower fixed rate. Advances made under the BTFP are for up to one year and would be extended at the one year overnight index swap ("OIS") rate as of the day the advance is made plus 10 basis points. Effective January 24, 2024, the FRB announced that future advances under the BTFP through its expiration on March 11, 2024 would be no lower than the interest rate on reserve balances in effect on the date the advance is made. The interest rate will be fixed for the term of the advance on the day the advance is made. At December 31, 2023, the Company had pledged as collateral for these borrowings investment securities with an amortized cost and fair value of $381.0 million and $350.6 million, compared to an amortized cost and fair value of $72.6 million and $69.2 million, respectively, at December 31, 2022, respectively.

 Other borrowings decreased $8.4 million or 30.5% to $19.2 million at December 31, 2023 from $27.6 million at December 31, 2022. 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 1.49% and 0.75% at December 31, 2023 and 2022, respectively. The Company had pledged, as collateral for these repurchase agreements, investment securities with amortized costs and fair values of $44.7 million and $42.0 million at December 31, 2023, and $52.3 million and $49.8 million at December 31, 2022, respectively.

 At both December 31, 2023 and 2022, the Company had $5.2 million in junior subordinated debentures outstanding and $26.5 million in subordinated debentures ("Notes") outstanding. During the year ended December 31, 2022, the Company repurchased $3.5 million in principal amount of the Notes. For additional information, refer to Notes 12 and 13 of the Notes to Consolidated Financial Statements included under "Item 8. Financial Statements and Supplementary Data" in this 2023 Form 10-K.

 Total shareholders' equity increased $12.1 million or 7.6% to $172.4 million at December 31, 2023 from $160.2 million at December 31, 2022. The increase was primarily attributable to net income of $10.2 million during 2023 and a $5.7 million decrease in accumulated other comprehensive loss, net of tax, related to the unrecognized gain in value of AFS securities during the year ended December 31, 2023. These increases were partially offset by $1.7 million in dividends paid to common shareholders and a $1.6 million, net of tax, adjustment to retained earnings related to the adoption of ASC 326 on January 1, 2023. Book value per common share was $27.68 at December 31, 2023 compared to $23.76 at December 31, 2022.

 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.

 2023 vs. 2022

 2022 vs. 2021

 (Decrease) Increase Due to

 (Decrease) Increase Due to

 Change in

 Change in

 (Dollars in Thousands)

 Volume

 Rate

 Net

 Volume

 Rate

 Net

 Interest-Earning Assets:

 Loans: (1)

 $

 3,727

 $

 3,463

 $

 7,190

 $

 $

 (2,150

)

 $

 (1,559

)

 Taxable Investment Securities

 (78

)

 12,681

 12,603

 1,784

 5,410

 7,194

 Non-taxable Investment Securities (2)

 (114

)

 (80

)

 (395

)

 (379

)

 Deposits in Other Banks

 2,571

 (11

)

 2,560

 Total Interest-Earning Assets

 $

 6,106

 $

 16,167

 $

 22,273

 $

 2,425

 $

 3,019

 $

 5,444

 Interest-Bearing Liabilities:

 Deposits:

 Certificate Accounts

 $

 $

 5,000

 $

 5,384

 $

 (133

)

 $

 (139

)

 $

 (272

)

 Other Interest Bearing Deposits

 (39

)

 12,446

 12,407

 1,449

 1,552

 Total Deposits

 17,446

 17,791

 (30

)

 1,310

 1,280

 Borrowings

 1,372

 1,538

 2,910

 (252

)

 (76

)

 Total Interest-Bearing Liabilities

 1,717

 18,984

 20,701

 (282

)

 1,486

 1,204

 Effect on Net Tax Equivalent Interest Income (2)

 $

 4,389

 $

 (2,817

)

 $

 1,572

 $

 2,707

 $

 1,533

 $

 4,240

 (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

 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 compares detailed average balances, average yields on interest earning assets, and average costs of interest bearing liabilities at December 31, 2023 and 2022. The average balances were derived from the daily balances throughout the periods indicated. The average yields or costs were calculated by dividing the income or expense by the average balance of the corresponding assets or liabilities. Nonaccrual loans are included in earning assets in the following 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,

 2023

 2022

 Average Balance

 Interest

 Yield/Rate

 Average Balance

 Interest

 Yield/Rate

 Interest-Earning Assets:

 Loans (1)

 $

 597,235

 $

 32,827

 5.50

 %

 $

 525,396

 $

 25,637

 4.88

 %

 Taxable Investment Securities

 692,591

 28,749

 4.15

 %

 695,960

 16,145

 2.32

 %

 Non-taxable Investments (2)

 20,513

 3.73

 %

 23,651

 3.58

 %

 Deposits in Other Banks

 52,499

 2,762

 5.26

 %

 3,649

 5.56

 %

 Total Interest-Earning Assets

 $

 1,362,838

 $

 65,104

 4.78

 %

 $

 1,248,656

 $

 42,831

 3.43

 %

 Interest-Bearing Liabilities:

 Checking, Savings and Money Market Accounts

 $

 692,257

 $

 14,710

 2.12

 %

 $

 703,914

 $

 2,304

 0.33

 %

 Certificate Accounts

 208,221

 5,991

 2.88

 %

 143,619

 0.42

 %

 Total Interest-Bearing Deposits

 900,478

 20,701

 2.30

 %

 847,533

 2,911

 0.34

 %

 Junior Subordinated Debt

 5,155

 7.06

 %

 5,155

 3.49

 %

 Subordinated Debt

 1,393

 5.26

 %

 29,332

 1,548

 5.28

 %

 FHLB Advances and Other Borrowings (3)

 89,122

 3,271

 3.67

 %

 45,477

 0.86

 %

 Total Interest-Bearing Liabilities

 $

 1,021,255

 $

 25,729

 2.52

 %

 $

 927,497

 $

 5,028

 0.54

 %

 Net Interest Rate Spread

 2.26

 %

 2.89

 %

 Tax Equivalent Net Interest Income/Margin (2)

 $

 39,375

 2.89

 %

 $

 37,803

 3.03

 %

 Less: tax equivalent adjustment (2)

 Net Interest Income

 $

 39,248

 $

 37,550

 (1)

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

 (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, 2023 and 2022. THE TAX-EQUIVALENT INTEREST INCOME ADJUSTMENT RELATES TO THE TAX EXEMPT MUNICIPAL BONDS INCLUDED IN OUR INVESTMENT PORTFOLIO DURING THE PERIODS INDICATED.

 (3)

 INCLUDES FHLB ADVANCES, BORROWINGS FROM THE FRB AND REPURCHASE AGREEMENTS.

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

 Comparison of the Years Ended December 31, 2023 and 2022

 Net income was $10.2 million or $3.14 per basic common share for both the years ended December 31, 2023 and 2022. While net interest income increased $1.7 million to $39.2 million during the year ended December 31, 2023 compared to the prior year, this increase was offset by increases in the provision for credit losses, non-interest expense and the provision for income taxes. Additionally, there was a slight decrease in non-interest income.

 Net Interest Income

 Net interest income increased $1.7 million or 4.5% to $39.2 million for the year ended December 31, 2023, compared to $37.5 million in 2022. The increase was primarily due to higher interest income from loans and investments, which was partially offset by an increase in interest expense. The net interest margin on a tax-equivalent basis decreased 14 basis points to 2.89% for the year ended December 31, 2023 from 3.03% for the year ended December 31, 2022.

 Total average interest-earning assets increased $114.2 million or 9.1% to $1.36 billion for the year ended December 31, 2023 from $1.25 billion for the year ended December 31, 2022, with a 135 basis point increase in the average yield earned on these assets. Similarly, average interest-bearing liabilities increased $93.8 million or 10.1% to $1.0 billion for the year ended December 31, 2023 from $927.5 million for the year ended December 31, 2022, with an increase of 198 basis points in the average cost. The interest rate spread on a tax-equivalent basis decreased 63 basis points to 2.26% for the year ended December 31, 2023 from 2.89% in 2022.

 Total interest income increased $22.4 million or 52.6% to $65.0 million for the year ended December 31, 2023, compared to $42.6 million for the year ended December 31, 2022 as a result of increased interest income across all interest earning assets.

 Total tax-equivalent interest income on investments increased $12.5 million, or 73.7%, due to a 178 basis point increase in the average yield earned on these assets during 2023 compared to 2022, partially offset by a $6.5 million decrease in the aggregate average balance of these interest-earning assets.

 Interest income on loans increased $7.2 million or 28.0% to $32.8 million for the year ended December 31, 2023 compared to $25.6 million for the year ended December 31, 2022. The increase was due to a $71.8 million increase in the average balance of loans outstanding during the year ended December 31, 2023 combined with a 62 basis point increase in the average loan yield.

 Interest income on deposits with other banks increased $2.6 million, over 1,200%, to $2.8 million for the year ended December 31, 2023 compared to $203,000 for the year ended December 31, 2022, due to a $48.9 million increase in the average balance of deposits with other banks outstanding during the year ended December 31, 2023. The average yield earned on these deposits was 5.26% for the year ended December 31, 2023, down from 5.56% the prior year.

 Total interest expense increased $20.7 million or 411.7% to $25.7 million for the year ended December 31, 2023, compared to $5.0 million for the year ended December 31, 2022, due to a 198 basis point increase in the average cost of interest-bearing liabilities and a $93.8 million or 10.1% increase in the average balance of these liabilities. The increase in interest expenses was driven predominantly by higher rates paid on deposits, which increased 196 basis points to 2.30% during 2023 from 0.34% in 2022. The average balance of interest-bearing deposits increased $52.9 million or 6.2% to $900.5 million during the year ended December 31, 2023 compared to $847.5 million during 2022.

 Interest expense on borrowings increased $2.9 million or 741.1% to $3.3 million during the year ended December 31, 2023 from $389,000 during the prior year. The increase was attributable to both a $43.6 million or 96.0% increase in the average balance of these liabilities and a 281 basis point increase in the average cost of borrowing to 3.67% in 2023 from 0.86% during 2022.

 Provision for Credit Losses

 We recorded a provision for credit losses of $246,000 for the year ended December 31, 2023 compared to no provision during the year ended December 31, 2022. Non-performing assets increased $432,000, or 6.8%, to $6.8 million at December 31, 2023 from $6.4 million at December 31, 2022. Non-performing assets represented 0.44% and 0.49% of total assets at December 31, 2023 and 2022, respectively.

 The determination of the provision for credit losses is an integral part of management's ongoing monthly assessment of the loan portfolio's credit and the sufficiency of the allowance for credit losses. The Company follows established policies and procedures for evaluating and monitoring credit quality, employing both internal and external loan reviews to promptly identify potential problem loans. The Asset Classification Committee conducts a monthly review and the Board of Directors performs a quarterly evaluation of the adequacy of the allowance for credit losses.

 Management believes the allowance for credit losses at December 31, 2023 is adequate based on its best estimates of the probable losses in the loan portfolio; however, these estimates are subject to uncertainty. Since the allowance for credit losses is an estimation, there is no guarantee that actual credit losses will not exceed the allowance or that further increases in the allowance will not be necessary in the future. A significant deterioration in national and local economic conditions, triggered by factors like inflation, recession, unemployment or money supply fluctuations, could lead to a substantial increase in the allowance for credit losses, potentially adversely impacting the Company's financial condition and results of operations. In addition, bank regulatory agencies may require us to make additional provisions to the allowance for credit losses during examinations, based on their own judgments and estimates.

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

 Non-Interest Income

 Non-interest income decreased $222,000 or 2.3% to $9.4 million for the year ended December 31, 2023 from $9.6 million for the year ended December 31, 2022. The decrease was primarily attributable to a decrease in gain on sales of loans, which was partially offset by increases in service fees on deposit accounts, trust income, grant income and ATM and check card fee income.

 Gain on sales of loans decreased $1.1 million or 63.3% to $626,000 for the year ended December 31, 2023 compared to $1.7 million in 2022 as the dollar volume of loans sold to investors decreased. The Bank sold $21.6 million of loans in 2023 compared to $48.5 million during 2022.

 Service fees on deposit accounts increased $150,000 or 14.0% to $1.2 million for the year ended December 31, 2023 compared to $1.1 million in 2022 due to an increase in deposit accounts. Trust income increased $311,000 or 20.1% to $1.9 million during the year ended December 31, 2023 compared to $1.5 million in 2022 due to an increase in assets under management. ATM and check card fee income increased $202,000 or 7.2% to $3.0 million for the year ended December 31, 2023 compared to $2.8 million in 2022 reflecting higher transaction volume.

 The Bank received $437,000 and $171,000 in grant income during the years ended December 31, 2023 and 2022, respectively. In both 2023 and 2022, the Bank was granted awards through the CDFI Fund Bank Enterprise Award program. These grants were allocated to support the Bank's ongoing initiatives in community development financing and service activities within the most economically distressed communities.

 Non-Interest Expense

 Non-interest expense increased $1.7 million or 4.9% to $35.9 million during the year ended December 31, 2023 compared to $34.2 million during 2022. This increase was a result of increases in all non-interest expense categories, with the exception of a reduction in write-downs of land held for sale and a slight decrease in advertising expenses.

 Compensation and employee benefits increased $263,000 or 1.3% to $20.3 million during the year ended December 31, 2023 from $20.1 million for the year ended December 31, 2022, primarily due to annual cost-of-living increases and an increase in the number of full time equivalent employees as a result of a new branch opened in 2023. Occupancy expense increased $364,000 or 12.9% primarily due to an increase in depreciation expense on buildings as a result of our newest branch added in 2023.

 FDIC insurance expense increased by $246,000 or 65.7% due to increased rates in 2023. Data processing expenses increased $547,000 or 72.1% as a result of the Company's decision during 2023 to transition data and proof operations from on-site to outsourced through our third-party core processor. In addition to the incremental increase in third-party costs, the volume of customers and transactions also increased when compared to the prior year.

 There were no write-downs of the fair value of land held for sale during 2023 compared to a $433,000 write-down in 2022 based on an updated appraisal.

 Other non-interest expense increased $343,000 or 7.5% to $4.9 million for the year ended December 31, 2023 compared to $4.5 million during 2022 due to increased operations and the addition of a new branch in 2023.

 Provision for Income Taxes

 The provision for income taxes decreased $421,000 or 15.6% to $2.3 million during the year ended December 31, 2023 compared to $2.7 million for the year ended December 31, 2022. The decrease was due to lower pre-tax income in 2023 and a $395,600 reduction in income tax expense as a result of tax credits associated with the new branch opened in 2023. The Company's combined federal and state effective tax rate was 18.3% for 2023 compared to 20.9% for 2022.

 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.

 2023

 2022

 Bank's Shareholders' Equity (1)

 $

 151,329

 $

 142,652

 Reduction for Goodwill

 1,200

 1,200

 Tangible Capital

 Core Capital

 Supplemental Capital

 10,328

 9,956

 Total Risk-Based Capital

 $

 160,457

 $

 151,408

 (1)

 EXCLUDES UNREALIZED LOSSES ON INVESTMENT SECURITIES OF $35.1 MILLION AND $40.8 MILLION December 31, 2023 and 2022, RESPECTIVELY.

 The Bank is subject to minimum capital requirements imposed by the FDIC. Based on capital levels at December 31, 2023, the Bank was considered to be well capitalized. At December 31, 2023, 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 10.4%, 17.8%, 19.0%, and 17.8%, 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 CET1 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, 2023, the Bank's capital conservation buffer was 11.0%.

 For additional information regarding the Bank's and Company's regulatory capital compliance, see the discussion included in Note 15 of the Notes to Consolidated Financial Statements included under "Item 8. Financial Statements and Supplementary Data" in this 2023 Form 10-K.

 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. Our primary sources of funds include deposits, scheduled loan and investment security repayments, including interest payments, maturities and sales of loans and investment securities, borrowings from the FRB, 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 borrowings from the FRB, FHLB advances and other borrowings varies depending on loan demand, deposit inflows, and the use of investment leverage strategies that we might employee to increase net interest income.

 Our principal use of funds is the origination of mortgages and other loans and the purchase of investment securities. The Bank's liquidity is impacted by the volume of loans sold and principal payments received. During the years ended December 31, 2023 and 2022, the Bank sold $22.1 million and $53.3 million in loans, respectively. During the same periods, the net increase in loans outstanding to include originations and principal repayments, excluding loans held for sale, totaled $72.6 million and $53.5 million, respectively. Further, purchases of investment securities totaled $66.3 million during 2023 compared to $210.3 million during 2022. Other uses of funds during the year ended December 31, 2023, included repayment of certain borrowings, purchases and improvements of premises and equipment, and dividend payments to shareholders totaling $1.6 million in the aggregate.

 In the normal course of business, we make 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. We make personal, commercial, and real estate lines of credit available to customers and 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 HELOCs, credit cards, and commercial loans amounted to $157.9 million at December 31, 2023. HELOCs 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 $13.3 million at December 31, 2023, 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, principle payments received on investments, and short-term borrowing capacity. See Note 18 of the Notes to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" in this 2023 Form 10-K 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. Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during 2024 that would materially impact liquidity. We also have purchase obligations, generally with remaining terms of less than three years and contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor. For the year ending December 31, 2024, we project that fixed commitments will include $522,000 of operating lease payments. See Note 5 of the Notes to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" in this 2023 Form 10-K for additional information regarding our operating leases.

 The Bank's liquidity has been positively impacted by increases in deposit levels in recent years. During the year ended December 31, 2023, deposits increased by $84.9 million. Our liquid assets in the form of cash and cash equivalents, certificates of deposit at other banks and investments increased to $831.3 million at December 31, 2023 from $747.2 million at December 31, 2022. Total certificates of deposit scheduled to mature in one year or less totaled $198.3 million at December 31, 2023. 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.

 Primary sources of short-term liquidity for the Bank include borrowings from the FRB, the FHLB of Atlanta, and a $50.0 million line of credit with the Pacific Coast Bankers Bank.

 During the first quarter of 2023, the Company elected to participate in the FRB's BTFP, allowing the Company to refinance its existing borrowings from the FRB discount window to receive a lower fixed rate. Advances made under the BTFP are for up to one year and would be extended at the one year OIS rate as of the day the advance is made plus 10 basis points. Effective January 24, 2024, the FRB announced that future advances under the BTFP through its expiration on March 11, 2024 would be no lower than the interest rate on reserve balances in effect on the date the advance is made. The interest rate will be fixed for the term of the advance on the day the advance is m ade. At December 31, 2023, the Company had pledged as collateral for these borrowings investment securities with an amortized cost and fair value of $381.0 million and $350.6 million. Depository institutions may also borrow from the FRB discount window for periods as long as 90 days, and borrowings are prepayable and renewable by the borrower daily. Also during 2023, t he Company entered the FRB's Borrower-In-Custody ("BIC") program, which allows for the pledging of various loan types to secure FRB borrowings. As of December 31, 2023, the Company had pledged loan collateral for FRB borrowings with an amortized cost and collateral value of $93.6 million and $65.5 million, respectively.

 The Bank maintains an approved line of credit with the FHLB of Atlanta, allowing for borrowing of up to 25% of the Bank's assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. As of December 31, 2023, the Bank has the ability to borrow $424.4 million based on the collateral value of pledged investment securities and loans. Management believes that future liquidity can be met through the Bank's deposits, which totaled $1.2 billion at December 31, 2023, as well as through sales and maturities of investment securities, and loans sold to investors. During the years ended December 31, 2023 and 2022, sales and maturities of investment securities totaled $86.6 million and $131.6 million, and loans sold to investors totaled $22.1 million and $53.3 million, respectively.

 Historically the Bank's cash flow from operating activities has been relatively stable. The cash flows from investing activities vary with sales of investment securities and with the need to invest excess funds or utilize leverage strategies with the purchase of investment securities. The cash flows from financing activities vary depending on the need for borrowings from the FRB, FHLB advances and other borrowings. The Bank's management regularly reviews its liquidity position and has implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluates and monitors the total amount of purchased funds used to support the balance sheet and funding from noncore sources. 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 the 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 the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends. At December 31, 2023, Security Federal Corporation (on an unconsolidated basis) had liquid assets of $37.8 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 $0.14 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 2024 at this rate of $0.14 per share, our average total dividends paid each quarter would be approximately $452,000 based on the number of our current outstanding shares at December 31, 2023.

 In addition, in June 2023, the Company ann ounced that its Board of Directors approved a share repurchase program for the purchase of up to three percent, or approximately 97,612 shares, of the Company's outstanding common stock as of that date. In general, stock-repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. During the year ended December 31, 2023, the Company repurchased 26,426 shares of its common stock at an aggregate cost of $582,000, leaving 71,186 shares available for further repurchase under the June 2023 stock repurchase program at December 31, 2023. The repurchase program does not obligate the Company to purchase any particular number of shares. For additional information, see Part II, Item 5 - "Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities."

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

 Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises principally from interest rate risk inherent in our lending, investing, deposit and borrowings activities. Management actively monitors and manages its interest rate risk exposure. In addition to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on our financial condition and result 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 Bank'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. Oversight of the Bank's asset liability strategy is conducted by the Asset Liability Management Committee ("ALCO").

 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 to 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 and our 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 analysis 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, and 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.

 NII Simulation - The Bank's primary focus is on NII simulation. Using NII simulation, the Bank measures earnings exposure over both a 12 and 24 month period under multiple instantaneous rate shock scenarios. The Bank's policy provides the maximum acceptable negative impact on net interest income 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.

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

 Change in Market Rates

 Maximum Allowable Change in NII Over

 Hypothetical Change in NII Over

 (in Basis Points)

 12 Months

 24 Months

 12 Months

 24 Months

 (20

)%

 (20

)%

 (13

)%

 (23

)%

 (15

)%

 (15

)%

 (9

)%

 (16

)%

 (10

)%

 (10

)%

 (6

)%

 (10

)%

 (8

)%

 (8

)%

 (3

)%

 (5

)%

 —

 —

 %

 —

 %

 —

 %

 —

 %

 (100

)

 (8

)%

 (8

)%

 (1

)%

 (2

)%

 (200

)

 (10

)%

 (10

)%

 (3

)%

 (6

)%

 (300

)

 (15

)%

 (15

)%

 (6

)%

 (10

)%

 (400

)

 (20

)%

 (20

)%

 (9

)%

 (15

)%

 The Bank performs a liquidity analysis, a component of managing liquidity risk and monitoring the Bank's asset liability strategy. This analysis compares outstanding sources of liquidity to applicable policy parameters. The Bank was in compliance with policy parameters as of December 31, 2023 and 2022. In addition, the Bank performs a contingency funding plan analysis which incorporates various simulations in order to evaluate Bank's funding resources under stressed conditions. Both the liquidity and contingency funding plan analysis are performed by the ALCO and presented to the Board of Directors quarterly.

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

 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 12 or 24 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

 Hypothetical change in EVE

 (40

)%

 (36

)%

 (30

)%

 (31

)%

 (20

)%

 (16

)%

 (10

)%

 (0

)%

 —

 —

 %

 —

 %

 (100

)

 (10

)%

 %

 (200

)

 (20

)%

 %

 (300

)

 (30

)%

 %

 (400

)

 (40

)%

 %

 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.

 Item 8. Financial Statements and Supplementary Data

 Report of Independent Registered Public Accounting Firm

 Consolidated Balance Sheets at December 31, 2023 and 2022

 Consolidated Statements of Income for the Years Ended December 31, 2023 and 2022

 Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2023 and 2022

 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2023 and 2022

 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022

 [Letterhead of Elliot Davis, LLP]

 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 Subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, other comprehensive income (loss), shareholders' equity and cash flows for the years then ended, 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, 2023 and 2022 and the results of its operations and its cash flows for the years then ended, 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.

 Change in Accounting Principle

 As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No. 326, Financial Instruments – Credit Losses ("ASC 326"). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Our opinion is not modified with respect to this matter. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

 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 Credit Losses

 The Company reported a gross loan portfolio of $634.5 million and related allowance for credit losses ("ACL") of $12.6 million as of December 31, 2023. As described by the Company in Notes 1 and 4, the Company adopted the Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses ("ASC 326") on January 1, 2023. In order to measure expected credit losses on a collective basis, the Company has elected to utilize a weighted- average remaining life ("WARM") methodology for all segments. Loans not sharing similar risk characteristics are evaluated on an individual basis. The WARM method applies a loss rate to a given pool of loans over the estimated remaining life of the given pool. The remaining life of the pool is based on Company historical data. In addition, a 6- month forecast is applied to each segment, based on external sources, with immediate reversion to historical loss rates at the end of the forecast period. Additionally, a qualitative scorecard is used by management to assess the need for adjustments to expected credit loss estimates for information not already captured in the quantitative loss estimation process. The qualitative scorecard evaluates certain risks such as portfolio risk, economic trends, lending policies, credit administration risk, and industry conditions.

 We identified the Company's estimate of the allowance for credit losses as a critical audit matter. The principal considerations for our determination of the ACL as a critical audit matter related to the high degree of complexity and judgment in the determination of significant model assumptions, specifically, the qualitative factor adjustments to quantitative loss rates. Auditing these complex judgments and assumptions made by the Company involves 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 appropriateness of the methodology applied in the adoption of ASC 326.

 We obtained an understanding of how management developed the allowance for credit losses, specifically the determination of the qualitative factors.

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

 We tested the completeness and accuracy of significant inputs to the model including the underlying data used to develop the qualitative factors.

 We validated the mathematical accuracy of the calculation.

 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 allowance for credit losses for loans.

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

 /s/ Elliott Davis, LLC

 Columbia, South Carolina

 CONSOLIDATED BALANCE SHEETS

 2023

 2022

 Assets:

 Cash and Cash Equivalents

 $

 $

 Certificates of Deposit with Other Banks

 2,350

 1,100

 Investment Securities:

 Available For Sale ("AFS")

 537,640

 550,148

 Held To Maturity ("HTM") (Fair Value of $ 158,540 and $ 161,464 at December 31, 2023 and December 31, 2022, Respectively)

 163,072

 167,438

 Total Investments

 700,712

 717,586

 Loans Receivable, Net:

 Held For Sale

 Held For Investment (Net of Allowance of $ 12,569 and $ 11,178 at December 31, 2023 and December 31, 2022, Respectively)

 621,562

 549,004

 Total Loans Receivable, Net

 622,529

 549,917

 Accrued Interest Receivable

 5,512

 4,811

 Operating Lease Right-of-Use Assets

 1,402

 1,861

 Land Held for Sale

 1,097

 Premises and Equipment, Net

 28,637

 27,960

 Federal Home Loan Bank ("FHLB") Stock, at Cost

 Other Real Estate Owned ("OREO")

 —

 Bank Owned Life Insurance ("BOLI")

 27,954

 27,318

 Goodwill

 1,200

 1,200

 Other Assets

 29,231

 19,243

 Total Assets

 $
 1,549,671

 $
 1,381,366

 Liabilities:

 Deposit Accounts

 $
 1,194,997

 $
 1,110,085

 Borrowings from Federal Reserve Bank ("FRB")

 119,200

 44,080

 Other Borrowings

 19,180

 27,588

 Junior Subordinated Debentures

 5,155

 5,155

 Subordinated Debentures

 Operating Lease Liabilities

 1,442

 1,904

 Other Liabilities

 10,835

 5,821

 Total Liabilities

 1,377,309

 1,221,133

 Commitments (Note 18)

 Shareholders' Equity:

 Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP, $ 1,000 Par Value; ( 82,949 Shares Authorized, Issued and Outstanding at December 31, 2023 and December 31, 2022)

 $

 $

 Common Stock, $ 0.01 Par Value; 5,000,000 Shares Authorized; 3,456,136 Shares Issued and 3,228,777 Shares Outstanding at December 31, 2023 and 3,453,817 Shares Issued and 3,252,884 Shares Outstanding at December 31, 2022

 Additional Paid-In Capital ("APIC")

 18,287

 18,230

 Treasury Stock, at Cost ( 227,359 and 200,933 Shares Outstanding at December 31, 2023 and December 31, 2022, Respectively)

 ( 4,913
)

 ( 4,331
)

 Accumulated Other Comprehensive Loss ("AOCL")

 ( 35,050
)

 ( 40,779
)

 Retained Earnings

 111,054

 104,129

 Total Shareholders' Equity

 172,362

 160,233

 Total Liabilities and Shareholders' Equity

 $
 1,549,671

 $
 1,381,366

 CONSOLIDATED STATEMENTS OF INCOME

 (Dollars in thousands, except per share amounts)

 2023

 2022

 Interest Income:

 Loans

 $

 32,827

 $

 25,637

 Taxable Investment Securities

 28,749

 16,145

 Tax-exempt Investment Securities

 Other

 2,762

 Total Interest Income

 64,977

 42,578

 Interest Expense:

 Deposits

 20,701

 2,911

 FHLB Advances and Other Borrowings

 3,271

 Subordinated Debentures

 1,393

 1,548

 Junior Subordinated Debentures

 Total Interest Expense

 25,729

 5,028

 Net Interest Income

 39,248

 37,550

 Provision for Credit Losses

 —

 Net Interest Income after Provision for Credit Losses

 39,002

 37,550

 Non-Interest Income:

 Loss on Sales of Investment Securities, Net

 —

 ( 2

)

 Gain on Sale of Loans

 1,705

 Service Fees on Deposit Accounts

 1,220

 1,071

 Commissions From Insurance Agency

 Trust Income

 1,860

 1,548

 BOLI Income

 ATM and Check Card Fee Income

 3,018

 2,816

 Grant Income

 Other

 Total Non-Interest Income

 9,390

 9,612

 Non-Interest Expense:

 Compensation and Employee Benefits

 20,313

 20,050

 Occupancy

 3,175

 2,811

 Advertising

 Depreciation and Maintenance of Equipment

 2,450

 2,291

 FDIC Insurance Premiums

 Write Down of Land Held for Sale

 —

 Consulting

 Debit Card Expenses

 1,434

 1,267

 Data Processing

 1,305

 Other

 4,890

 4,547

 Total Non-Interest Expense

 35,914

 34,225

 Income Before Income Taxes

 12,478

 12,937

 Provision For Income Taxes

 2,288

 2,709

 $

 $

 Net Income Per Common Share (Basic)

 $

 3.14

 $

 3.14

 Cash Dividend Per Share On Common Stock

 $

 0.52

 $

 0.76

 Weighted Average Shares Outstanding (Basic)

 3,248,149

 3,252,884

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 2023

 2022

 $

 $

 Other Comprehensive Income (Loss)

 Unrealized Gains (Losses) on Securities:

 Unrealized Holding Gains (Losses) on AFS Securities, Net of Taxes of $ 1.6 million and $( 14.9) million at December 31, 2023 and 2022, Respectively

 5,720

 ( 46,003
)

 Reclassification Adjustment for Losses Included in Net Income, Net of Taxes of $ 0 and $( 1) thousand at December 31, 2023 and 2022, Respectively

 —

 Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $ 2,800 and $ 2,000 at December 31, 2023 and 2022, Respectively

 Other Comprehensive Income (Loss)

 5,729

 ( 45,995
)

 Comprehensive Income (Loss)

 $
 15,919

 $
 ( 35,767
)

 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

 Preferred Stock

 Common Stock

 Treasury Stock

 Retained

 (Shares and Dollars in thousands)

 APIC

 AOCI (Loss)

 Earnings

 Total

 December 31, 2021

 —

 $

 —

 3,454

 $

 $

 ( 4,331

)

 $

 18,230

 $

 5,216

 $

 96,373

 $

 115,523

 —

 —

 —

 —

 —

 —

 —

 —

 Other Comprehensive Loss, Net of Tax

 —

 —

 —

 —

 —

 —

 —

 ( 45,995

)

 —

 ( 45,995

)

 Preferred Stock Issuance

 —

 —

 —

 —

 —

 —

 —

 Cash Dividends on Common Stock

 —

 —

 —

 —

 —

 —

 —

 —

 ( 2,472

)

 ( 2,472

)

 $

 3,454

 $

 $

 ( 4,331

)

 $

 18,230

 $

 ( 40,779

)

 $

 104,129

 $

 160,233

 —

 —

 —

 —

 —

 —

 —

 —

 Adoption of CECL

 —

 —

 —

 —

 —

 —

 —

 —

 ( 1,578

)

 ( 1,578

)

 Other Comprehensive Income, Net of Tax

 —

 —

 —

 —

 —

 —

 —

 5,729

 —

 5,729

 Treasury Stock Purchase

 —

 —

 —

 —

 ( 582

)

 —

 —

 —

 ( 582

)

 Employee Stock Purchase Plan Issuance

 —

 —

 —

 —

 —

 —

 —

 Cash Dividends on Common Stock

 —

 —

 —

 —

 —

 —

 —

 —

 ( 1,687

)

 ( 1,687

)

 $

 3,456

 $

 $

 ( 4,913

)

 $

 18,287

 $

 ( 35,050

)

 $

 111,054

 $

 172,362

 CONSOLIDATED STATEMENTS OF CASH FLOWS

 For the Years Ended December 31,

 2023

 2022

 CASH FLOWS FROM OPERATING ACTIVITIES:

 $

 $

 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:

 Depreciation Expense

 2,145

 1,966

 Discount Accretion and Premium Amortization, Net

 3,919

 6,498

 Provisions for Credit Losses

 —

 Earnings on BOLI

 ( 636

)

 ( 608

)

 Origination of Loans Held For Sale

 ( 21,551

)

 ( 48,485

)

 Proceeds From Sale of Loans Held For Sale

 22,123

 53,315

 Gain on Sales of Loans

 ( 626

)

 ( 1,705

)

 Loss on Sales of Investment Securities

 —

 Loss on Disposal of Premises and Equipment

 —

 Gain on Sale of OREO

 ( 2

)

 —

 Write-down of OREO

 Write-down of Land Held For Sale

 —

 Loss on Sale of Land Held For Sale

 —

 Increase in Accrued Interest Receivable

 ( 701

)

 ( 1,059

)

 Amortization of Operating Lease Right-of-Use ("ROU") Assets

 Change in Other Assets

 ( 11,621

)

 Change in Lease Liabilities and Other Liabilities

 4,857

 ( 63

)

 Net Cash Provided By Operating Activities

 8,855

 21,872

 CASH FLOWS FROM INVESTING ACTIVITIES:

 Purchase of AFS Securities

 ( 46,033

)

 ( 59,675

)

 Proceeds from Payments and Maturities of AFS Securities

 61,841

 102,463

 Proceeds from Sale of AFS Securities

 —

 22,375

 Purchase of HTM Securities

 ( 20,253

)

 ( 150,633

)

 Proceeds from Payments and Maturities of HTM Securities

 24,762

 6,794

 Investment in Certificates of Deposits with Other Banks

 ( 1,250

)

 —

 Purchase of FHLB Stock

 ( 696

)

 ( 65

)

 Redemption of FHLB Stock

 —

 Net Increase in Loans Receivable

 ( 74,687

)

 ( 53,546

)

 Proceeds from Sale of Land Held for Sale

 —

 Proceeds from Sale of OREO

 —

 Purchase and Improvement of Premises and Equipment

 ( 2,851

)

 ( 4,688

)

 Net Cash Used By Investing Activities

 ( 58,485

)

 ( 136,975

)

 CASH FLOWS FROM FINANCING ACTIVITIES:

 Increase (Decrease) in Deposit Accounts

 84,912

 ( 5,878

)

 (Repayments) Proceeds from Other Borrowings, Net

 ( 8,408

)

 Repurchase of Subordinated Debentures

 —

 ( 3,500

)

 Proceeds from FRB Borrowings

 446,055

 400,880

 Repayment of FRB Borrowings

 ( 370,935

)

 ( 356,800

)

 Purchases of Treasury Stock

 ( 582

)

 —

 Proceeds from Employee Stock Purchase Plan

 —

 Proceeds from Issuance of Preferred Stock

 —

 Dividends to Common Stock Shareholders

 ( 1,687

)

 ( 2,472

)

 Net Cash Provided By Financing Activities

 149,412

 115,982

 Net Increase in Cash and Cash Equivalents

 99,782

 Cash and Cash Equivalents at Beginning of Year

 27,623

 Cash and Cash Equivalents at End of Year

 $

 $

 CONSOLIDATED STATEMENTS OF CASH FLOWS

 For the Years Ended December 31,

 2023

 2022

 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 Cash Paid During the Period For:

 Interest

 $

 23,019

 $

 4,670

 Income Taxes

 $

 2,091

 $

 2,159

 Supplemental Schedule of Non Cash Transactions:

 Change in Unrealized Gains on AFS Securities, Net of Taxes

 $

 5,729

 $

 ( 45,995

)

 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 Investments, Inc. ("SFINV"), Security Federal Insurance, Inc. ("SFINS"), and Security Financial Services Corporation ("SFSC"). SFINV was formed to hold investment securities and allow for better management of the securities portfolio. SFINS is an insurance agency offering auto, business, and home insurance. Effective April 30, 2022, Collier Jennings Financial Corporation, a wholly owned subsidiary of SFINS, and its subsidiaries, Security Federal Auto Insurance, The Auto Insurance Store Inc., and Security Federal Premium Pay Plans Inc. ("SFPPP") and its wholly owned premium finance subsidiary were dissolved. SFPPP's ownership interests in four other premium finance subsidiaries were disposed of at an immaterial gain. Additionally, effective April 30, 2022, previously inactive SFSC was dissolved. All significant intercompany transactions and balances have been eliminated in consolidation.

 The Company also 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.

 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 Securities

 Investment 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 AFS investment securities are determined using the specific identification method. The Company had no investment securities classified as trading.

 Allowance for Credit Losses – Available for Sale Securities

 Management evaluates all AFS investment securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit losses, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (reversal of) credit losses. Losses are charged against the allowance for credit losses when management believes an AFS security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At December 31, 2023, there was no allowance for credit losses related to the AFS portfolio. Accrued interest receivable on AFS securities totaled $ 2.9 million at December 31, 2023 and was excluded from the estimate of credit losses.

 Allowance for Credit Losses – Held to Maturity Securities

 Management measures expected credit losses on HTM debt securities on a collective basis by major security type. The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Additionally, private label collateralized mortgage obligation ("CMO") securities which are not explicitly or implicitly guaranteed by the U.S. government are evaluated utilizing underlying pool data such as historical loss rates, loan-to-value ratios and credit enhancement data. See "Note 3 - Investments, Held to Maturity" for additional information regarding the major HTM security types. There was no allowance for credit losses on HTM securities at December 31, 2023. Accrued interest receivable on HTM securities totaled $ 788,000 at December 31, 2023 and was excluded from the estimate of credit losses.

 Loans Receivable Held for Investment

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

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

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

 Allowance for Credit Losses on Loans

 The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do
 not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses on loans represents management's estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses on loans is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

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

 Real Estate

 o

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

 o

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

 o

 Commercial Mortgage - Commercial mortgages can be broadly categorized into owner-occupied and non-owner-occupied loans. Owner-occupied commercial mortgages involve financing for the purchase or refinancing of nonresidential properties that are occupied by the borrowing operating companies. The collateral for these loans typically includes office buildings, warehouses, manufacturing facilities, and other commercial or industrial properties. These loans hinge on the borrowers' ability to achieve business results consistent with the projections made at the loan origination. Although the loans are secured by real property to mitigate risk, there is a possibility that the liquidation of collateral may not fully satisfy the obligation. Non-owner-occupied commercial mortgages are used for purchasing or refinancing investment nonresidential properties. The collateral for these loans encompasses office buildings and complexes, retail facilities, multifamily complexes, land under development, and various other commercial or industrial real estate. The primary risk associated with non-owner-occupied commercial mortgage loans is contingent upon the ability of the income-producing property that collateralizes the loan to generate sufficient cash flow for servicing the debt. Despite being collateralized by real property to mitigate risk, there remains the possibility that the liquidation of collateral will not entirely meet the obligation.

 Commercial and Agricultura l - Commercial and agricultural loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and agricultural loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease.

 Consumer loans

 o

 Home equity - Home equity loans consist of home equity lines of credit and other lines of credit secured by first or second liens on the borrower's primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values.

 o

 Other - Consumer loans consist of loans to finance unsecured home improvements, student loans, automobiles and revolving lines of credit that can be secured or unsecured. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.

 The Company calculates the allowance for credit losses on loans for each pool of loans using a remaining life loss methodology with a
 two quarter reasonable and supportable forecast period and an immediate reversion period. Management believes that the Company's historical loss experience provides the best basis for its assessment of expected credit losses on loans to determine the allowance for credit losses on loans. The Company uses its own internal data to measure historical credit loss experience within the loan pools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss rates over the calculated remaining life of loans by pool.

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

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

 Management evaluates the carrying value of the loans periodically and the allowance is adjusted accordingly. 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 credit 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.

 Allowance for Credit Losses – Unfunded Commitments

 Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses - unfunded commitments unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for unfunded commitments, which is included in the provision for credit losses in the Company's consolidated income statements. The allowance for credit losses – unfunded commitments is estimated by loan segment at each balance sheet date using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third -party guarantees. The allowance for credit losses - unfunded commitments is included in other liabilities on the Company's consolidated balance sheets.

 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 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 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.

 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

 Land held for sale is reported at the lower of the carrying amount and fair value l ess costs to sell. During the year ended December 31, 2022, the Company recorded a write down on land for sale totaling $ 433,000 due to a reduction in fair value less costs to sell. No write-downs on land held for sale were recorded during 2023.

 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 differences between the provision for credit 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.

 Advertising Expense

 Advertising and p ublic relations costs are generally expensed as incurred. External costs relating to direct mailing are expensed in the period in which the direct mailings are sent. Advertising and public relations costs of $ 980,000 and $ 988,000 were included in the Company's results of operations for the years ended December 31, 2023 and 2022, respectively.

 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, 2023 and 2022; and therefore, no dilutive options in the calculation of diluted EPS for those periods. The following tables show the Company's net income per common share for the years indicated.

 2023

 2022

 (Dollars in thousands, except EPS)

 Income

 EPS

 Income

 EPS

 Basic EPS

 $

 3,248,149

 $
 3.14

 $

 3,252,884

 $
 3.14

 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 credit 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

 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.

 Reclassifications

 Certain amounts in prior years' consolidated financial statements have been reclassified to conform to current period classifications. There were no changes to previously reported net income or shareholders' equity.

 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:

 On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") 2016 - 13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Accounting Standards Codification ("ASC") 326. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and HTM debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.

 In addition, CECL made changes to the accounting for AFS debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on AFS debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $ 784,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $ 1.2 million, which is recorded within "Other Liabilities." The Company recorded a net decrease to retained earnings of $ 1.6 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards ("Incurred Loss"). The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. The adoption of CECL had an insignificant impact on the Company's HTM and AFS securities portfolios.

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

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

 In December 2023, the FASB amended the Income Taxes topic in the Accounting Standards Codification to improve the transparency of income tax disclosures. The amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company does not expect these amendments to have a material effect on its financial statements.

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

 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.

 NOTE 2 - INVESTMENTS, AVAILABLE FOR SALE

 AFS securities are recorded at fair market value. There was no allo wance for credit losses for AFS securities as of December 31, 2023. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of AFS securities at the dates indicated were as follows:

 Gross Unrealized Gains

 Gross Unrealized Losses

 Fair value

 $
 51,022

 $

 $
 ( 728
)

 $
 50,366

 Small Business Administration ("SBA") Bonds

 79,014

 ( 2,677
)

 76,753

 21,501

 ( 908
)

 21,236

 64,669

 —

 ( 11,554
)

 53,115

 Mortgage-Backed Securities ("MBS")

 368,081

 ( 31,942
)

 336,170

 Total AFS Securities

 $
 584,287

 $
 1,162

 $
 ( 47,809
)

 $
 537,640

 Gross Unrealized Gains

 Gross Unrealized Losses

 Fair value

 $
 60,855

 $

 $
 ( 1,709
)

 $
 59,158

 102,293

 ( 3,247
)

 99,630

 22,537

 ( 1,632
)

 21,310

 65,250

 —

 ( 14,480
)

 50,770

 MBS

 353,222

 ( 33,972
)

 319,280

 Total AFS Securities

 $
 604,157

 $
 1,031

 $
 ( 55,040
)

 $
 550,148

 Student Loan Pools are typically 97% guaranteed by the United States government while SBA bonds are 100% backed by the full faith and credit of the United States government. The majority of the Bank's MBS are issued or guaranteed by an agency of the United States government such as Ginnie Mae, or by Government Sponsored Entities ("GSEs"), including Fannie Mae and Freddie Mac. Ginnie Mae MBS are backed by the full faith and credit of the United States government, while those issued by GSEs are not. Also included in MBS are private label collateralized mortgage obligation ("CMO") securities, which are issued by non-gov ernmental real estate mortgage investment conduits and are not backed by the full faith and credit of the United States government. At December 31, 2023 the Bank held an amortized cost and fair value of $ 83.3 million and $ 76.7 million in private label CMO securities, compared to an amortized cost and fair value of $ 60.1 million and $ 53.8 million at December 31, 2022, respectively.

 The amortized cost and fair value of AFS securities at December 31, 2023 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties. Since MBS are not due at a single maturity date, they are disclosed separately, rather than allocated over the maturity groupings below.

 Due in one year or less

 $

 $

 Due after one year to five years

 7,646

 7,664

 Due after five to ten years

 73,665

 69,452

 Due after ten years or more

 134,890

 124,349

 MBS

 368,081

 336,170

 Total AFS Securities

 $
 584,287

 $
 537,640

 The amortized cost and fair value of AFS securities pledged as collateral for certain deposit accounts, FHLB advances, FRB, and other borrowings were $ 533.7 million and $ 490.5 million at December 31, 2023, and $ 318.0 million and $ 297.0 million at December 31, 2022, respectively.

 There were no sales of AFS securities during the year ended December 31, 2023, and therefore, no proceeds from sales, gross gains or gross losses were recorded during 2023. The Bank received $ 22.4 million in gross proceeds from sales of AFS securities and recognized gross gains of $ 159,000 and gross losses of $ 161,000 during the year ended December 31, 2022.

 The following tables 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 at the dates indicated.

 Less than 12 Months

 12 Months or More

 Total

 Fair

 Fair

 Fair

 Value

 #

 Value

 #

 Value

 $

 $

 $
 43,872

 $

 $
 44,249

 $

 2,200

 39,151

 2,672

 41,351

 2,677

 —

 —

 —

 12,965

 12,965

 —

 —

 —

 53,115

 11,554

 53,115

 11,554

 MBS

 36,069

 292,864

 31,508

 328,933

 31,942

 $
 38,646

 $

 $
 441,967

 $
 47,369

 $
 480,613

 $
 47,809

 Less than 12 Months

 12 Months or More

 Total

 Fair

 Fair

 Fair

 Value

 #

 Value

 #

 Value

 $
 24,768

 $

 $
 30,684

 $
 1,071

 $
 55,452

 $
 1,709

 8,404

 45,969

 3,126

 54,373

 3,247

 8,051

 4,929

 12,980

 1,632

 14,428

 3,197

 36,342

 11,283

 50,770

 14,480

 MBS

 146,016

 11,133

 170,578

 22,839

 316,594

 33,972

 $
 201,667

 $
 15,808

 $
 288,502

 $
 39,232

 $
 490,169

 $
 55,040

 At December 31, 2023, the Company's AFS security portfolio consisted of 514 securities, 416 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company's SBA bonds, MBS, and taxable municipal bonds. Management's evaluation of those securities is discussed below. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether an allowance for credit loss is deemed necessary.

 At December 31, 2023, there were 120 SBA Bonds, 67 of which had unrealized losses. These unrealized losses related principally to changes in market interest rates. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not recognize unrealized losses into income at December 31, 2023. SBA securities are fully backed by the U.S. government.

 MBS

 At December 31, 2023, approximately 81% of the AFS MBS held by the Company were issued or guaranteed by an agency of the U.S. government such as Ginnie Mae, or by Government Sponsored Entities ("GSEs"), including Fannie Mae and Freddie Mac. Ginnie Mae MBS are backed by the full faith and credit of the U.S. government, while those issued by GSEs are not. At December 31, 2023, there were 194 of these securities in an unrealized loss position. This impairment is believed to be caused by the current interest rate environment. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Because the decline in market value is attributable to the current interest rate environment and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, unrealized losses were not recognized into income as of December 31, 2023.

 Also included in MBS 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 U.S. government. At December 31, 2023 we held 53 private label CMO securities with an amortized cost and fair value of $ 83.3 million and $ 76.7 million, respectively. At that date, 49 of these securities had unrealized losses. Of the 49 securities in a loss position, 36 were rated AA or higher by Moody's, Bloomberg, and/or S&P. In addition, each of the individual securities have credit enhancements and LTVs further reducing potential realized losses. This impairment is believed to be caused by the current interest rate environment. Because the decline in market value is attributable to the current interest rate environment and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, unrealized losses were not recognized into income as of December 31, 2023.

 Municipal Bonds

 At December 31, 2023 there were 12 tax exempt municipal securities and 59 taxable municipal securities that had unrealized losses. The Company believes the unrealized losses on those investments were caused by the interest rate environment and do not relate to the underlying credit quality of the issuers. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, unrealized losses were not recognized into income as of December 31, 2023. Each of the Municipal securities held were rated "A2" (Moody's) or "AA-" (S&P) or better.

 Accrued interest receivable on AFS securities totaled $ 2.9 million at December 31, 2023 and was excluded from the estimate of credit losses.

 NOTE 3 - INVESTMENTS, HELD TO MATURITY

 HTM securities are recorded at amortized cost. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of HTM securities at the dates indicated were as follows:

 Gross Unrealized Gains

 Gross Unrealized Losses

 US Treasury Bonds

 $
 23,874

 $
 —

 $
 ( 278
)

 $
 23,596

 FHLB Bond

 1,000

 —

 —

 1,000

 16,881

 —

 17,159

 11,305

 —

 11,798

 —

 ( 28
)

 MBS

 109,050

 ( 5,093
)

 104,053

 Total HTM Securities

 $
 163,072

 $

 $
 ( 5,399
)

 $
 158,540

 Gross Unrealized Gains

 Gross Unrealized Losses

 US Treasury Bonds

 $
 34,512

 $
 —

 $
 ( 682
)

 $
 33,830

 FHLB Bond

 1,000

 —

 ( 1
)

 16,388

 ( 59
)

 16,417

 3,521

 —

 3,683

 —

 ( 60
)

 MBS

 111,065

 ( 5,451
)

 105,643

 Total HTM Securities

 $
 167,438

 $

 $
 ( 6,253
)

 $
 161,464

 At December 31, 2023, the amortized cost and fair value of HTM securities that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $ 107.5 million and $ 103.8 million compared to an amortized cost and fair value of $ 25.3 million and $ 24.5 million at December 31, 2022, respectively.

 At December 31, 2023, HTM securities had a combined book value of $ 163.1 million and an average book yield of 4.85 %, which was calculated by multiplying the carrying value of each HTM security by its yield and dividing the sum of these results by the total carrying value. The following table includes a summary of the amortized cost and average book yield of HTM securities by contractual maturity at December 31, 2023. Since MBS do not have fixed maturity dates, they are disclosed separately.

 Carrying Value

 Average Book Yield

 HTM Securities:

 Due in one year or less

 $
 11,978

 2.94
 %

 Due after one year through five years

 13,858

 3.60
 %

 Due after five years through ten years

 6,914

 6.90
 %

 Due after ten years

 21,272

 7.07
 %

 MBS

 109,050

 4.66
 %

 Total HTM Securities

 $
 163,072

 4.85
 %

 The following tables summarize gross unrealized losses and the related fair value, aggregated by investment category and length of time that individual HTM securities have been in a continuous unrealized loss position at the dates indicated.

 Less than 12 Months

 12 Months or More

 Total

 Fair

 Fair

 Fair

 Value

 Value

 Value

 US Treasury Bonds

 $
 —

 $
 —

 $
 23,596

 $

 $
 23,596

 $

 —

 —

 MBS

 40,732

 58,731

 4,635

 99,463

 5,093

 $
 40,732

 $

 $
 83,261

 $
 4,941

 $
 123,993

 $
 5,399

 Less than 12 Months

 12 Months or More

 Total

 Fair

 Fair

 Fair

 Value

 Value

 Value

 US Treasury Bonds

 $
 33,830

 $

 $
 —

 $
 —

 $
 33,830

 $

 FHLB Bond

 —

 —

 6,520

 —

 —

 6,520

 —

 —

 MBS

 88,351

 3,145

 9,334

 2,306

 97,685

 5,451

 $
 130,592

 $
 3,947

 $
 9,334

 $
 2,306

 $
 139,926

 $
 6,253

 At December 31, 2023 and 2022, 55 and 54 individual HTM securities were in a loss position, including 42 and six securities that were in a loss position for greater than 12 months, respectively. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value was attributable to changes in market interest rates and was not in the credit quality of the issuer. The Company has the ability and intent to hold these securities to maturity.

 The estimate of expected credit losses on HTM securities is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Additionally, private label CMO securities which are not explicitly or implicitly guaranteed by the U.S. government are evaluated utilizing underlying pool data such as historical loss rates, loan-to-value ratios and credit enhancement data. At December 31, 2023 the Bank held an amortized cost and fair value of $ 14.6 million and $ 14.3 million in HTM private label CMO securities, compared to an amortized cost and fair value of $ 16.7 million and $ 16.2 million at December 31, 2022, respectively. All MBS issued by government-sponsored corporations are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The state and local governments securities held by the Company are highly rated by major rating agencies.

 As a result of the analysis, the allowance for credit losses for HTM securities was not considered to be material as of December 31, 2023. The following table summarizes the amortized cost and credit ratings of our HTM securities that were considered to have greater than zero percent credit loss probability at December 31, 2023.

 Taxable Municipal Bond

 AA

 Total Taxable Municipal Bond

 Private Label MBS

 AAA

 9,259

 A

 1,663

 Not Rated

 3,695

 Total Private Label

 14,617

 As of December 31, 2023, there were no HTM securities that were classified as either nonaccrual or 90 days or more past due and still accruing. Accrued interest receivable on HTM securities totaled $ 788,000 at December 31, 2023 and was excluded from the estimate of credit losses.

 NOTE 4 - LOANS RECEIVABLE, NET

 Loans receivable, net, at the dates indicated are summarized as follows:

 2023

 2022

 Balance

 % of Total Gross Loans

 Balance

 % of Total Gross Loans

 Real Estate Loans:

 Construction

 $
 104,508

 16.5
 %

 $
 112,794

 20.1
 %

 Residential Mortgage

 172,883

 27.2
 %

 110,057

 19.6
 %

 Commercial

 264,802

 41.7
 %

 252,154

 44.9
 %

 Commercial and Agricultural Loans

 33,286

 5.3
 %

 30,648

 5.5
 %

 Consumer Loans:

 Home Equity Lines of Credit ("HELOC")

 5.4
 %

 31,737

 5.7
 %

 Other Consumer Loans

 24,520

 3.9
 %

 4.2
 %

 Total Loans Held For Investment, Gross

 634,496

 100.0
 %

 560,988

 100.0
 %

 Less:

 Allowance For Credit Losses

 12,569

 Deferred Loan Fees

 12,934

 11,984

 Loans Receivable Held For Investment, Net

 $
 621,562

 $
 549,004

 Credit Quality Indicators

 The Bank categorizes loans into risk categories based on relevant information regarding the borrowers' ability to pay off 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 credit 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 credit 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 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.

 Doubtful - loans that have all of the weaknesses of Substandard loans and those weaknesses make collection or liquidation highly questionable and improbable based on current conditions and values.

 Loss - loans that are considered uncollectible and of such little values that their continuance as assets is not warranted.

 The following table presents the Company's recorded investment in loans, excluding loans held for sale, by credit quality indicators, loan segment and year of origination as of December 31, 2023.

 Term Loans by Year of Origination

 2023

 2022

 2021

 2020

 2019

 Prior

 Revolving

 Total

 Real Estate - Construction

 Pass

 $
 31,811

 $
 21,125

 $
 15,431

 $
 1,518

 $

 $
 1,322

 $
 5,089

 $
 76,913

 4,073

 14,381

 1,192

 3,148

 23,552

 —

 —

 —

 1,072

 —

 1,558

 1,474

 —

 2,485

 Total Real Estate - Construction

 36,027

 35,845

 16,956

 4,799

 3,438

 2,204

 5,239

 104,508

 —

 —

 —

 —

 —

 —

 Real Estate - Mortgage

 Pass

 28,352

 36,426

 12,290

 14,164

 3,991

 22,239

 9,708

 127,170

 15,050

 10,397

 5,954

 1,497

 1,546

 4,134

 38,727

 2,291

 —

 —

 3,463

 —

 —

 2,283

 —

 3,523

 Total Real Estate - Mortgage

 46,267

 46,981

 19,292

 16,055

 5,585

 28,846

 9,857

 172,883

 —

 —

 —

 —

 —

 —

 —

 —

 Real Estate - Commercial

 Pass

 12,702

 48,077

 49,377

 16,593

 17,806

 52,848

 2,375

 199,778

 16,951

 4,880

 4,212

 5,197

 12,831

 8,468

 52,559

 —

 5,485

 7,558

 —

 —

 —

 4,508

 —

 4,907

 Total Real Estate - Commercial

 29,866

 54,199

 54,098

 22,198

 30,637

 71,309

 2,495

 264,802

 —

 —

 —

 —

 —

 —

 —

 —

 Pass

 4,763

 5,991

 6,672

 2,128

 4,205

 24,750

 3,732

 1,131

 1,715

 7,684

 —

 —

 —

 —

 —

 Total Commercial and Agricultural

 8,953

 7,144

 8,487

 2,487

 5,124

 33,286

 —

 —

 —

 —

 —

 —

 Home Equity Lines of Credit

 Pass

 —

 —

 —

 —

 —

 —

 27,192

 27,192

 —

 —

 —

 —

 —

 —

 6,290

 6,290

 —

 —

 —

 —

 —

 —

 —

 —

 —

 —

 —

 —

 Total Home Equity Lines of Credit

 —

 —

 —

 —

 —

 —

 —

 —

 —

 —

 —

 —

 Pass

 6,543

 3,874

 1,580

 4,922

 17,912

 2,316

 1,975

 6,153

 —

 —

 —

 —

 Total Other Consumer

 9,003

 6,008

 2,564

 1,256

 5,232

 24,520

 —

 —

 $
 130,116

 $
 150,177

 $
 101,397

 $
 45,028

 $
 40,368

 $
 104,966

 $
 62,444

 $
 634,496

 Total Current Period Gross Write-Offs

 $
 -

 $

 $

 $

 $
 -

 $

 $

 $

 The table below summarizes the balance by credit quality rating and loan segment, excluding loans held for sale, at December 31, 2022.

 Pass

 $
 91,564

 $
 18,838

 $
 2,014

 $

 $
 112,794

 84,028

 22,373

 2,768

 110,057

 196,063

 47,821

 3,271

 4,999

 252,154

 25,384

 4,593

 30,648

 25,694

 5,018

 31,737

 16,515

 6,725

 $
 439,248

 $
 105,368

 $
 7,125

 $
 9,247

 $
 560,988

 Past Due and Non-accrual Loans

 The following tables present an age analysis of past due balances by category at the dates indicated.

 30-59 Days

 60-89 Days

 90 Days or

 Past Due

 Past Due

 More Past Due

 Total Past Due

 Current

 Receivable

 $

 $
 —

 $

 $
 1,614

 $
 102,894

 $
 104,508

 1,103

 1,390

 171,493

 172,883

 1,355

 263,447

 264,802

 33,202

 33,286

 34,065

 24,063

 24,520

 Total

 $
 3,275

 $

 $
 1,288

 $
 5,332

 $
 629,164

 $
 634,496

 30-59 Days

 60-89 Days

 90 Days or

 Past Due

 Past Due

 More Past Due

 Total Past Due

 Current

 Receivable

 $
 —

 $
 —

 $

 $

 $
 112,694

 $
 112,794

 1,557

 —

 2,029

 108,028

 110,057

 2,671

 3,114

 249,040

 252,154

 30,585

 30,648

 —

 31,464

 31,737

 23,230

 Total

 $
 4,705

 $

 $
 1,072

 $
 5,947

 $
 555,041

 $
 560,988

 At December 31, 2023 and 2022, the Bank did not have any loans that were 90 days or more past due and still accruing interest. At December 31, 2023, $ 5.0 million in non-accrual loans were current, $ 472,000 were 30 - 59 days past due, and $ 123,000 were 60 - 89 days past due. The remaining non-accrual loans were 90 or more days past due. 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.

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

 CECL

 Incurred Loss

 Nonaccrual Loans

 Nonaccrual Loans

 Total

 with No Allowance

 with an Allowance

 Nonaccrual Loans

 Nonaccrual Loans

 $

 $
 —

 $

 $

 1,307

 —

 1,307

 1,545

 4,125

 —

 4,125

 4,282

 —

 —

 —

 Total Nonaccrual Loans

 $
 6,825

 $
 —

 $
 6,825

 $
 6,272

 The Company did not recognize any interest income on nonaccrual loans during the year ended December 31, 2023. The following table represents the accrued interest receivables written off by reversing interest income during the year ended December 31, 2023:

 For the Year Ended

 $

 —

 $

 Allowance for Credit Losses

 The table below shows the activity in the allowance for credit losses on loans by loan category for the year ended year ended December 31, 2023 under the CECL methodology.

 For the Year Ended December 31, 2023

 Real Estate

 Commercial and

 Consumer

 Construction

 Residential

 Commercial

 Agricultural

 HELOC

 Other

 Total

 Beginning Balance

 $
 2,323

 $
 2,124

 $
 4,805

 $

 $

 $

 $

 Adjustment to Allowance for Credit Loss on Adoption of ASU 2016-13

 ( 341
)

 Provision for (Reversal of) Credit Losses

 ( 775
)

 ( 189
)

 ( 13
)

 Charge-Offs

 ( 1
)

 —

 —

 ( 16
)

 ( 1
)

 ( 157
)

 ( 175
)

 Recoveries

 Ending Balance

 $
 1,828

 $
 3,551

 $
 5,052

 $

 $

 $

 $
 12,569

 Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the Incurred Loss methodology. The following table shows the activity in the allowance for loan losses by category for year ended December 31, 2022.

 For the Year Ended December 31, 2022

 Real Estate

 Commercial and

 Consumer

 Construction

 Residential

 Commercial

 Agricultural

 HELOC

 Other

 Total

 Beginning Balance

 $
 2,401

 $
 1,663

 $
 4,832

 $
 1,242

 $

 $

 $
 11,087

 Provision for (Reversal of) Credit Losses

 ( 113
)

 ( 160
)

 ( 305
)

 —

 Charge-Offs

 —

 —

 —

 ( 105
)

 —

 ( 162
)

 ( 267
)

 Recoveries

 Ending Balance

 $
 2,323

 $
 2,124

 $
 4,805

 $

 $

 $

 $

 Allowance for Credit Losses and Collateral Dependent Loans

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

 o

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

 o

 Construction real estate loans are typically secured by commercial and residential lots.

 o

 Commercial and agricultural business loans are primarily secured by business equipment, furniture and fixtures, inventory and receivables.

 o

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

 o

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

 o

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

 The following table summarizes the amortized cost of collateral dependent loans:

 $

 3,567

 —

 —

 Total

 $
 5,210

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

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

 Allowance For Loan Losses

 Loans Receivable

 Individually Evaluated For Impairment

 Collectively Evaluated For Impairment

 Total

 Individually Evaluated For Impairment

 Collectively Evaluated For Impairment

 Total

 $
 —

 $
 2,323

 $
 2,323

 $

 $
 112,679

 $
 112,794

 —

 2,124

 2,124

 1,089

 108,968

 110,057

 —

 4,805

 4,805

 4,282

 247,872

 252,154

 —

 30,617

 30,648

 —

 31,688

 31,737

 —

 —

 Total

 $
 —

 $

 $

 $
 5,566

 $
 555,422

 $
 560,988

 The table below presents information related to impaired loans by loan category at December 31, 2022 under the Incurred Loss methodology.

 Unpaid

 Average

 Interest

 Recorded

 Principal

 Related

 Recorded

 Income

 Impaired Loans (Dollars in thousands)

 Investment

 Balance

 Allowance

 Investment

 Recognized

 $

 $

 $
 —

 $

 $
 —

 1,089

 1,626

 —

 1,133

 —

 4,282

 4,282

 —

 4,382

 —

 —

 —

 —

 —

 —

 —

 —

 —

 —

 Total

 $
 5,566

 $
 6,998

 $
 —

 $
 5,715

 $
 —

 Modifications to Borrowers Experiencing Financial Difficulty

 The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

 Modifications made to borrowers experiencing financial difficulty typically have their impact already factored into the allowance for credit losses. This is due to the measurement methodologies utilized in estimating the allowance. Consequently, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

 In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. As such multiple types of modifications may have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, or interest rate reduction. Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

 T he Company had two modified loans with a combined balance of $ 342,000 at December 31, 2023, compared to two modified loans with a combined balance of $ 385,000 at December 31, 2022. The Company did not modify any loans to borrowers experiencing financial difficulty during the years ended December 31, 2023 and 2022. As of December 31, 2023 and 2022, there were no loans modified with borrowers experiencing financial difficulty for which there was a payment default within 12 months of the restructuring date. The Company considers any loan 30 days or more past due to be in default.

 Allowance for Credit Losses - Unfunded Commitments

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

 The following table presents the balance and activity in the allowance for credit losses - unfunded loan commitments for the year ended December 31, 2023.

 Year Ended December 31, 2023

 Allowance for Credit Losses - Unfunded Commitments

 Beginning Balance

 $
 —

 Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13

 1,214

 Reversal of provision for unfunded commitments

 (355
)

 Ending Balance

 $

 NOTE 5 - PREMISES AND EQUIPMENT, NET AND LEASES

 Premises and equipment, net, at the dates indicated are summarized as follows:

 2023

 2022

 Land

 $
 6,179

 $
 6,179

 Buildings and Improvements

 32,416

 28,592

 Furniture and Equipment

 11,797

 13,848

 Construction in Progress

 3,045

 Total Premises and Equipment

 50,805

 51,664

 Less: Accumulated Depreciation

 ( 22,168
)

 ( 23,704
)

 Total Premises and Equipment, Net

 $
 28,637

 $
 27,960

 Construction in progress of $ 413,000 at December 31, 2023 primarily included building and construction costs associated with renovations to our existing branches. Depreciation expense on premises and equipment was $ 2.1 million and $ 2.0 million for the years ended December 31, 2023 and 2022, respectively. Loss on disposal of premises and equipment was $ 29,000 during 2023.

 The Company has operating leases on six of its branches. During the year ended December 31, 2023, the Company made cash payments in the amount of $ 524,000 for operating leases. The lease expense recognized during this period was $ 523,000 and is included in occupancy expense within the Consolidated Statements of Income. The operating lease liability had a net decrease of $ 462,000 during the year ended December 31, 2023. At December 31, 2023, the Company had operating lease ROU assets of $ 1.4 million and an operating lease liability of $ 1.4 million recorded on its consolidated balance sheet compared to operating lease ROU assets of $ 1.9 million and an operating lease liability of $ 1.9 million at December 31, 2022. The lease agreements have maturity dates ranging from 2025 through 2028, some of which include options for multiple five or ten year extensions. At December 31, 2023, the remaining weighted average lease term was 3.16 years and the weighted average discount rate used was 3.2 %.

 The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term. The ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date and are reduced by any lease incentives.

 At December 31, 2023, future undiscounted lease payments for operating leases with initial terms of one year or more were as follows:

 Year ended December 31,

 2024

 $

 2025

 2026

 2027

 2028

 Thereafter

 —

 Total undiscounted lease payments

 1,519

 Less: effect of discounting

 Present value of estimated lease payments (lease liability)

 $
 1,442

 NOTE 6 - GOODWILL

 The goodwill balance of $ 1.2 million remained unchanged at both December 31, 2023 and 2022. In accordance with accounting guidance, the Company evaluates its goodwill on an annual basis. The evaluations were performed as of December 31, 2023 and December 31, 2022 for the years ended December 31, 2023 and 2022, 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, 2023 and 2022.

 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 equal to 0.07 % and 0.05 % of total Bank assets at December 31, 2023 and 2022, respectively, plus a transaction component equal to 4.75 % and 4.25 % of outstanding advances (borrowings) from the FHLB of Atlanta at December 31, 2023 and 2022, respectively. The Bank was in compliance with this requirement with an investment in FHLB of Atlanta stock of $ 922,000 and $ 651,000 at December 31, 2023 and 2022, 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 had no OREO at December 31, 2023 and $ 120,000 in OREO at December 31, 2022. Transactions in OREO for the years indicated are summarized as follows:

 2023

 2022

 Balance, beginning of year

 $

 $

 Additions

 —

 —

 Sales

 ( 105
)

 —

 Write-downs

 ( 15
)

 ( 10
)

 Balance, end of year

 $
 -

 $

 There was one OREO property sold during the year ended December 31, 2023 for gross proceeds of $ 107,000, which resulted in a related gain on sale of OREO in the amount of $ 2,000. There were no sales of OREO property during the year ended December 31, 2022.

 NOTE 9 - DEPOSITS

 Deposits outstanding at the dates indicated are summarized below by account type as follows:

 Deposit Type (Dollars in thousands)

 2023

 2022

 Checking

 $
 473,936

 $
 510,984

 Money Market

 401,992

 348,833

 Savings

 88,319

 108,237

 Certificates of Deposit

 230,750

 142,031

 Total Deposits

 $
 1,194,997

 $
 1,110,085

 The Bank had $ 5.0 million in brokered deposits which are included in checking and money market deposits above at December 31, 2023 and 2022. In addition, the Bank had $ 6.5 million and $ 6.0 million in brokered time deposits at December 31, 2023 and 2022, with a weighted average interest rate of 4.54 % and 0.30 %, respectively. Brokered time deposits are included in certificates of deposit above and below. At December 31, 2023 and 2022, the Bank had $ 57,000 and $ 98,000, respectively, in overdrafts that were reclassified to loans.

 Total uninsured deposits (those that met or exceeded the FDIC insurance limit of $250,000) totaled $ 327.7 million and $ 350.1 million at December 31, 2023 and 2022, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements. Certificate of deposits that exceeded the FDIC insurance limit of $250,000 totaled $ 50.2 million and $ 30.3 million at December 31, 2023 and 2022, respectively.

 The amounts and scheduled maturities of all certificates of deposit at the dates indicated were as follows:

 2023

 2022

 Within 1 Year

 $
 198,325

 $
 97,163

 After 1 Year, Within 2 Years

 16,568

 31,551

 After 2 Years, Within 3 Years

 9,487

 6,465

 After 3 Years, Within 4 Years

 2,636

 3,178

 After 4 Years, Within 5 Years

 3,734

 3,674

 Total Certificates of Deposits

 $
 230,750

 $
 142,031

 NOTE 10 - FHLB ADVANCES AND FRB BORROWINGS

 FHLB advances are secured by a blanket collateral agreement with the FHLB by pledging the Company's portfolio of residential first mortgage loans and investment securities. The Bank's total pledged collateral for FHLB advances had an amortized cost and fair value of $ 53.6 million and $ 44.1 million at December 31, 2023 and $ 70.1 million and $ 61.1 million at December 31, 2022, respectively. At December 31, 2023 and 2022, the Company had $ 424.4 million and $ 388.3 million, respectively, in borrowing capacity at the FHLB based on the collateral value of pledged investment securities and loans. There were no outstanding FHLB advances at December 31, 2023 and 2022.

 The Com pany had $ 119.2 million in outstanding borrowings under the FRB Term Funding Program ("BTFP") with a weighted average borrowing rate of 4.60 % at December 31, 2023 com pared to $ 44.1 million in borrowings from the FRB discount window with a weighted average borrowing rate of 4.50 % at December 31, 2022. During the first quarter of 2023, the Company elected to participate in the BTFP, allowing the Company to refinance its existing borrowings from the FRB discount window to receive a lower fixed rate. Advances made under the BTFP are for up to one year and would be extended at the one year overnight index swap ("OIS") rate as of the day the advance is made plus 10 basis points. Effective January 24, 2024, the FRB announced that future advances under the BTFP through its expiration on March 11, 2024 would be no lower than the interest rate on reserve balances in effect on the date the advance is made. The interest rate will be fixed for the term of the advance on the day the advance is m ade. To determine the rate, the BTFP will use the fixed OIS rate based on the effective federal funds rate for a one -year maturity. Depository institutions may borrow from the FRB discount window for periods as long as 90 days, and borrowings are prepayable and renewable by the borrower daily. At December 31, 2023, the Company had pledged as collateral for these borrowings investment securities with an amortized cost and fair value of $ 381.0 million and $ 350.6 million, compared to an amortized cost and fair value of $ 72.6 million and $ 69.2 million, respectively, at December 31, 2022.

 During the third quarter of 2023, the Company entered the FRB's Borrower-In-Custody ("BIC") program, which allows for the pledging of various loan types to secure FRB borrowings. As of December 31, 2023, the Company had pledged loan collateral for FRB borrowings with an amortized cost and collateral value of $ 93.5 million and $ 65.5 million, respectively.

 NOTE 11 - OTHER BORROWINGS

 The Bank had $ 19.2 million and $ 27.6 million in other borrowings at December 31, 2023 and 2022, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. At December 31, 2023 and 2022, the interest rate paid on the repurchase agreements was 1.49 % and 0.75 %, respectively. The maximum amount outstanding at any month end during the year ended December 31, 2023 wa s $ 29.5 million compared to $ 42.4 million during the year ended December 31, 2022. The Bank had pledged as collateral for these repurchase agreements investment securities with amortized costs and fair values of $ 44.7 million and $ 42.0 million at December 31, 2023 and $ 52.3 million and $ 49.8 million at December 31, 2022, respectively.

 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.

 As of a result of the discontinuation of LIBOR, effective June 30, 2023, the Capital Securities transitioned from its floating rate of three month LIBOR plus 170 basis points to a replacement floating rate of three month Secured Overnight Financing Rate ("SOFR") as adjusted by the relevant spread adjustment of 0.26161 plus 170 basis points. As of December 31, 2023, this was a rate per annum equal to 7.35 %. As of December 31, 2022, the Capital Securities accrued and paid distributions quarterly at a floating rate of three month LIBOR plus 170 basis points which was a rate per annum equal to 6.47 %.

 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.

 NOTE 13 - SUBORDINATED DEBENTURES

 In November 2019, the Company sold and issued to certain institutional investors $ 17.5 million in aggregate principal amount of 5.25 % fixed-to-floating rate subordinated notes due 2029 (the "10 -Year Notes") and $ 12.5 million in aggregate principal amount of 5.25 % fixed-to-floating rate subordinated notes due 2034 (the "15 -Year Notes", and together with the 10 -Year Notes, the "Notes"). The 10 -Year Notes have a stated maturity of November 22, 2029, and bear interest at a fixed rate of 5.25 % per year, from and including November 22, 2019 but excluding November 22, 2024. From and including November 22, 2024 to but excluding the maturity date or early redemption date, the interest rate shall reset semi-annually to an interest rate equal to the then-current three -month LIBOR rate plus 369 basis points. The 15 -Year Notes have a stated maturity of November 22, 2034, and bear interest at a fixed rate of 5.25 % per year, from and including November 22, 2019 but excluding November 22, 2029. From and including November 22, 2029 to but excluding the maturity date or early redemption date, the interest rate for the 15 -Year Notes shall reset semi-annually to an interest rate equal to the then-current three -month LIBOR rate plus 357 basis points. The Notes are payable semi-annually in arrears on June 1 and December 1 of each year commencing June 1, 2020.

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

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

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

 During the year ended December 31, 2022 the Company repurchased $ 1.0 million in principal of the 10 -Year Notes and $ 2.5 million in principal of the 15 -Year Notes, leaving an aggregate remaining principal balance of $ 16.5 million and $ 10.0 million, respectively, as of December 31, 2023 and 2022.

 NOTE 14 - INCOME TAXES

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

 2023

 2022

 Current:

 Federal

 $
 2,510

 $
 2,321

 State

 Total Current Tax Expense

 2,589

 2,765

 Deferred:

 Federal

 ( 287
)

 ( 59
)

 State

 ( 14
)

 Total Deferred Tax Benefit

 ( 301
)

 ( 56
)

 Total Income Tax Expense

 $
 2,288

 $
 2,709

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

 2023

 2022

 Tax at Statutory Income Tax Rate

 $
 2,620

 $
 2,717

 State Tax

 Tax Exempt Interest

 ( 126
)

 ( 253
)

 Tax Credits

 ( 75
)

 —

 Life Insurance

 ( 133
)

 ( 128
)

 Valuation Allowance

 ( 63
)

 ( 4
)

 Other

 Total Income Tax Expense

 $
 2,288

 $
 2,709

 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2023 and 2022 are presented below. Net deferred tax assets or liabilities were included in other assets or other liabilities at December 31, 2023 and 2022.

 2023

 2022

 Deferred Tax Assets:

 Deferred Compensation

 $

 $

 Provision for Credit Losses

 2,722

 2,420

 Reserve for Unfunded Commitments

 —

 Other Real Estate Owned

 Net Fees Deferred for Financial Reporting

 Net Operating Losses

 Unrealized Loss on AFS Securities

 11,615

 13,230

 Tax Credits

 —

 Other

 Total Gross Deferred Tax Assets

 16,277

 17,069

 Less: Valuation Allowance

 ( 401
)

 ( 464
)

 Total Deferred Tax Assets

 15,876

 16,605

 Deferred Tax Liabilities:

 FHLB Stock Basis Over Tax Basis

 Depreciation

 Prepaid Expenses

 Total Deferred Tax Liability

 1,220

 1,053

 Net Deferred Tax Asset

 $
 14,656

 $
 15,552

 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 redu ce the recorded deferred tax assets to net realizable value. As of December 31, 2023, 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 $ 63,000. The Company had state net operating losses attributable to the non-bank entities of $ 10.2 million and $ 11.7 million for the years ended December 31, 2023 and 2022, respectively.

 Retained earnings at December 31, 2023 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, 2023, 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 2020 and subsequent years are subject to examination by taxing authorities.

 NOTE 15 - 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 (the "Federal Reserve"). Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations.

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

 The tables below provide the Bank's regulatory capital requirements and actual results at December 31, 2023 and 2022.

 Actual

 For Capital Adequacy

 To Be Well Capitalized

 (Dollars in Thousands)

 Ratio

 Ratio

 Ratio

 Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)

 $

 18.2
 %

 $
 49,391

 6.0
 %

 $
 65,854

 8.0
 %

 Total Risk-Based Capital (To Risk Weighted Assets)

 160,457

 19.5
 %

 65,854

 8.0
 %

 82,318

 10.0
 %

 Common Equity Tier 1 Capital (To Risk Weighted Assets)

 18.2
 %

 37,043

 4.5
 %

 53,506

 6.5
 %

 Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)

 9.8
 %

 61,076

 4.0
 %

 76,345

 5.0
 %

 Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)

 $

 17.8
 %

 $
 47,714

 6.0
 %

 $
 63,619

 8.0
 %

 Total Risk-Based Capital (To Risk Weighted Assets)

 151,408

 19.0
 %

 63,619

 8.0
 %

 79,523

 10.0
 %

 Common Equity Tier 1 Capital (To Risk Weighted Assets)

 17.8
 %

 35,785

 4.5
 %

 51,690

 6.5
 %

 Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)

 10.4
 %

 54,372

 4.0
 %

 67,965

 5.0
 %

 In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional Common Equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At December 31, 2023 the Bank's conservation buffer was 11.5 %.

 NOTE 16 - EMPLOYEE BENEFIT PLANS

 The Company participates in a multiple employer defined co ntribution 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 $ 368,000 an d $ 357,000 for the years ended December 31, 2023 and 2022, 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 yea r. There were 2,319 shares of common stock purchased through the ESPP during the year ended December 31, 2023 compared to no employee stock purchases during the year ended December 31, 2022.

 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.

 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.

 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 must 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 under the Executive Plan regardless of the executive's performance on individual objectives or entity wide objectives.

 Participation in the ESPP, the Plan, the Branch Incentive Plan and the Executive Plan is voluntary. During the years ended December 31, 2023 and 2022, the Company incu rred expenses of $ 238,000 and $501,00 0, 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, 2023 and 2022, the Company incurred expenses of $ 411,000 and $ 490,000, respectively, for this plan, which are included in Compensation a nd Employee Benefits within the Company's Consolidated Statements of Income.

 NOTE 17 - BANK OWNED LIFE INSURANCE

 BOLI provides key person life insurance on certain officers of the Company. The cash value of the life insurance policies is recorded as a separate line item in the accompanying balance sheets at $ 28.0 million and $ 27.3 million at December 31, 2023 and 2022, 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 $ 636,000 and $ 608,000 for the growth in the cash surrender value of life insurance during the years ended December 31, 2023 and 2022, respectively. The Company received no death benefits during the years ended December 31, 2023 and 2022.

 NOTE 18 - COMMITMENTS AND CONTINGENCIES

 In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Bank 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 un used lines of credit of $ 157.9 million and $ 173.3 million and letters of credit of $ 3.4 million and $ 4.5 million at December 31, 2023 and 2022, 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 credi t card loan commitments of $ 11.3 million and $ 10.7 million and undisbursed loans in process of $ 13.3 million and $ 22.7 mil lion at December 31, 2023 and 2022, resp ectively. The Bank also had $ 2.2 million in outstanding commitments on mortgage loans approved but not yet closed at December 31, 2023 compared to $ 970,000 at December 31, 2022. 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, 2023 and 2022, the Bank had outstanding commitments to sell approximately $ 967,000 and $ 913,000 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. Under this arrangement, the Bank suffers no penalty if it is unable to deliver the loans to 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 deemed insignificant.

 NOTE 19 - 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. Loans to directors, executive officers and their affiliates are 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, executive officers and their affiliates for the years indicated, is as follows:

 2023

 2022

 Balance, Beginning of Period

 $

 $

 New Loans

 Less Loan Payments

 ( 51
)

 ( 35
)

 Balance, End of Period

 $
 1,002

 $

 Loans to all employees, officers, and directors of the Company constituted approximately 3.44 % and 2.10 % of the Company's total shareholders' equity at December 31, 2023 and 2022, respectively. Deposits from executive officers and directors of the Company and their related interests were approximately $ 21.0 million and $ 19.6 million at December 31, 2023 and 2022 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, 2023 and 2022. 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 $ 110,000 and $ 96,500 for the years ended December 31, 2023 and 2022, 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.

 NOTE 20 - 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

 2023

 2022

 Assets:

 Cash

 $
 26,842

 $
 28,813

 Investments, HTM

 50,211

 60,819

 Investment in Security Federal Statutory Trust

 Investment in Security Federal Bank

 116,279

 101,871

 Accrued Interest Receivable

 Accounts Receivable and Other Assets

 11,163

 Total Assets

 $
 204,850

 $
 192,042

 Liabilities and Shareholders' Equity:

 Accounts Payable and Other Liabilities

 $

 $

 Long-term Debt

 31,655

 31,655

 Shareholders' Equity

 172,362

 160,234

 Total Liabilities and Shareholders' Equity

 $
 204,850

 $
 192,042

 Condensed Statements of Income Data

 2023

 2022

 Income:

 Equity in Earnings of Security Federal Bank

 $
 9,595

 $
 10,668

 Investment Securities Interest Income

 2,574

 1,226

 Miscellaneous Income

 -

 Total Income

 12,169

 11,910

 Expenses:

 Interest Expense

 1,755

 1,732

 Other Expenses

 Total Expenses

 1,820

 1,797

 Income Before Income Taxes

 10,349

 10,113

 Income Tax Expense (Benefit)

 ( 115
)

 $

 $

 Condensed Statements of Cash Flow Data

 2023

 2022

 Operating Activities:

 $

 $

 Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities:

 Equity in Earnings of Security Federal Bank

 ( 9,595
)

 ( 10,668
)

 Discount Accretion and Premium Amortization, Net

 ( 235
)

 ( 125
)

 Increase in Accrued Interest Receivable

 ( 10
)

 ( 190
)

 (Increase) Decrease in Accounts Receivable and Other Assets

 ( 10,970
)

 Increase in Accounts Payable and Other Liabilities

 Net Cash Used By Operating Activities

 ( 9,942
)

 ( 647
)

 Investing Activities:

 Purchase of HTM Securities

 ( 2,934
)

 ( 62,512
)

 Proceeds from Principal Paydowns and Maturities of HTM Securities

 13,777

 1,818

 Investment in Subsidiary

 ( 660
)

 ( 7,000
)

 Net Cash Provided (Used) By Investing Activities

 10,183

 ( 67,694
)

 Financing Activities:

 Repurchase of Subordinated Debentures

 —

 ( 3,500
)

 Proceeds from Issuance of Preferred Stock

 —

 Proceeds from Employee Stock Plan Purchases

 —

 Purchase of Treasury Stock

 ( 582
)

 —

 Dividends Paid to Shareholders-Common Stock

 ( 1,687
)

 ( 2,472
)

 Net Cash (Used) Provided By Financing Activities

 ( 2,212
)

 76,977

 Net (Decrease) Increase in Cash

 ( 1,971
)

 8,636

 Cash at Beginning of Period

 28,813

 20,177

 Cash at End of Period

 $
 26,842

 $
 28,813

 NOTE 21 - 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:

 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.

 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.

 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, 2023, the Company's investment portfolio was comprised of student loan pools, government and agency bonds, MBS issued by government sponsored agencies or GSEs, private label CMO 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.

 Mortgage Loans Held for Sale

 The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with 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. These loans are classified as Level 2.

 Land Held for Sale

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

 Collateral Dependent Loans

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

 Fair value is estimated using one of 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. For instance, in scenarios where the collateral on a nonperforming commercial real estate loan is outside the Company's primary market area, management would usually order an independent appraisal promptly - either at the time the loan becomes nonperforming or immediately following the determination that the loan is collateral dependent. Conversely, for a nonperforming commercial real estate loan where management is familiar with the property and surrounding areas, and the original appraisal value significantly exceeds the recorded investment in the loan, management may choose to perform an internal analysis. This involves reviewing and adjusting the previous appraisal value for current conditions, including recent sales of similar properties in the area and relevant economic trends. These valuations are reviewed at a minimum on a quarterly basis.

 Those collateral dependent 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, 2023, all collateral dependent loans were evaluated based on the fair value of the collateral. Loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records collateral dependent loans as nonrecurring Level 3.

 Other Real Estate Owned

 Fair value adjustments to OREO are recorded at the lower of the carrying amount of the loan or the fair value of the collateral less selling costs. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Foreclosed assets are recorded as nonrecurring Level 3.

 The tables below present the balances of assets measured at fair value on a recurring basis at the dates indicated.

 $
 —

 $
 50,366

 $
 —

 $
 —

 $
 59,158

 $
 —

 —

 76,753

 —

 —

 99,630

 —

 —

 21,236

 —

 —

 21,310

 —

 —

 53,115

 —

 —

 50,770

 —

 MBS

 —

 336,170

 —

 —

 319,280

 —

 Total

 $
 —

 $
 537,640

 $
 —

 $
 —

 $
 550,148

 $
 —

 There were no liabilities measured at fair value on a recurring basis as of December 31, 2023 and 2022.

 The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The table below presents assets measured at fair value on a nonrecurring basis at the dates indicated, 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, 2023 and 2022.

 Assets (in thousands):

 Total

 Mortgage Loans Held For Sale

 $
 —

 $

 $
 —

 $

 Land Held For Sale

 —

 —

 Collateral Dependent Loans

 —

 —

 5,210

 5,210

 Total

 $
 —

 $

 $
 6,148

 $
 7,115

 Assets (in thousands):

 Total

 Mortgage Loans Held For Sale

 $
 —

 $

 $
 —

 $

 Land Held For Sale

 —

 —

 1,097

 1,097

 Collateral Dependent Loans

 —

 —

 5,566

 5,566

 OREO

 —

 —

 Total

 $
 —

 $

 $
 6,783

 $
 7,696

 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 at the dates indicated were as follows:

 Valuation

 Significant

 2023

 2022

 Level 3 Assets

 Technique

 Unobservable Inputs

 Range

 Range

 Land Held for Sale

 Appraised Value/Comparable Sales

 Discounts to appraised values for estimated holding or selling costs

 %

 %

 Collateral Dependent Loans

 Appraised Value

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

 10 % - 12 %

 8 % - 13 %

 OREO

 Appraised Value/Comparable Sales

 Discounts to appraised values for estimated holding or selling costs

 N/A

 %

 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.

 HTM Securities —Valued at quoted market prices or dealer quotes.

 Loans Receivable, Net —The fair value of loans is estimated using an exit price notion. The exit price notion uses a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument and 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, commercial and agricultural, 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 using a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company's loan portfolio. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.

 FHLB Stock —The fair value approximates the carrying value.

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

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

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

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

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

 The following tables summarize the carrying value and estimated fair value of the Company's financial instruments at the dates indicated, presented in accordance with the applicable accounting guidance.

 Carrying

 Total

 Financial Assets:

 Cash and Cash Equivalents

 $

 $

 $

 $
 —

 $
 —

 Certificates of Deposits with Other Banks

 2,350

 2,350

 —

 2,350

 —

 Investment Securities

 700,712

 696,180

 —

 696,180

 —

 Loans Receivable, Net

 621,562

 610,410

 —

 —

 610,410

 FHLB Stock

 —

 —

 Financial Liabilities:

 Deposits:

 Checking, Savings and Money Market Accounts

 $
 964,247

 $
 964,247

 $
 964,247

 $
 —

 $
 —

 Certificate Accounts

 230,750

 229,278

 —

 229,278

 —

 Borrowings from FRB

 119,200

 118,926

 118,926

 —

 —

 Other Borrowed Money

 19,180

 19,180

 19,180

 —

 —

 Subordinated Debentures

 23,036

 —

 23,036

 —

 Junior Subordinated Debentures

 5,155

 5,155

 —

 5,155

 —

 Carrying

 Total

 Financial Assets:

 Cash and Cash Equivalents

 $

 $

 $

 $
 —

 $
 —

 Certificates of Deposits with Other Banks

 1,100

 1,100

 —

 1,100

 —

 Investment Securities

 717,586

 711,612

 —

 711,612

 —

 Loans Receivable, Net

 549,004

 528,174

 —

 —

 528,174

 FHLB Stock

 —

 —

 Financial Liabilities:

 Deposits:

 Checking, Savings and Money Market Accounts

 $
 968,054

 $
 968,054

 $
 968,054

 $
 —

 $
 —

 Certificate Accounts

 142,031

 138,382

 —

 138,382

 —

 Borrowings from FRB

 44,080

 44,071

 44,071

 —

 —

 Other Borrowed Money

 27,588

 27,588

 27,588

 —

 —

 Subordinated Debentures

 24,435

 —

 24,435

 —

 Junior Subordinated Debentures

 5,155

 5,155

 —

 5,155

 —

 At December 31, 2023, the Compan y had $ 161.3 million of off-balance sheet financ ial 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.

 Because no active market exists for a significant portion of the Company'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 Company 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.

 NOTE 22 - NON-INTEREST INCOME

 The following table presents non-interest income for the years indicated. All revenue from contracts with customers within the scope of ASU No. 2014 - 09, Revenue from Contracts with Customers (Topic 606) is recognized in non-interest income, except for gains on the sale of OREO, which are included in non-interest expense when applicable.

 2023

 2022

 Non-interest income (in thousands):

 Loss on Sale of Investments, net (1)

 $
 —

 $
 ( 2
)

 Gain on Sale of Loans (1)

 1,705

 Service Fees on Deposit Accounts

 1,220

 1,071

 Commissions From Insurance Agency (1)

 Trust Income

 1,860

 1,548

 BOLI Income (1)

 ATM and Check Card Fee Income

 3,018

 2,816

 Grant Income (1)

 Other (1)

 Total non-interest income

 $
 9,390

 $
 9,612

 ( 1) Not within the scope of ASC 606

 Revenue Recognition

 The following is a discussion of key revenues within the scope of the current revenue guidance.

 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 Bank 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, management 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 performance obligation is satisfied.

 The five -step model is only applied 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 Bank 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 amount of the transaction price that is allocated to the respective performance obligation is recognized as revenue 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 monthly. The performance obligation is satisfied and the fees are recognized monthly 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.

 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.

 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 23 - PREFERRED STOCK

 On May 24, 2022, the Company entered into a Letter Agreement ("Agreement") with the U.S. Department of Treasury under the Emergency Capital Investment Program ("ECIP"). Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially low-income and underserved communities, including counties with persistent poverty, that may be disproportionately impacted by the economic effect of the COVID- 19 pandemic by providing direct and indirect capital investments in low- and moderate-income community financial institutions.

 Pursuant to the Agreement, the Company agreed to issue and sell 82,949 shares of Preferred Stock for an aggregate purchase price of $ 82.9 million in cash. This ECIP investment is treated as tier 1 capital. The Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted, not higher than 2%, based on the lending growth criteria listed in the Agreement. After the tenth anniversary of the investment date, the dividend rate will be fixed based on the average annual amount of lending in years two through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15.

 The Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies' regulatory capital regulations. The Preferred Stock is reported on the Consolidated Balance Sheets as Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP.

 NOTE 24 - 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 the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

 Management has reviewed the events occurring through the date the financial statements were issued and no additional subsequent events occurred requiring accrual or disclosure.

 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 None.

 Item 9A. Controls and Procedures

 (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Section 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out as of December 31, 2023 under the supervision and with the participation of the Company's Chief Executive Officer (principal executive officer), Chief Financial Officer (principal financial officer), and several other members of the Company's senior management as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer concluded that based on their evaluation at December 31, 2023, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner to allow timely decisions regarding required disclosure, specified in the SEC's rules and forms, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

 (b) Report of Management on Internal Control over Financial Reporting: The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

 Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2023, utilizing the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2023 is effective.

 Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the Company's financial statements are prevented or timely detected.

 All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 This 2023 Form 10-K does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management's report in this 2023 Form 10-K.

 (c) Changes in Internal Controls: There have been no changes in the Company's internal control over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 Item 9B. Other Information

 (a) None.

 (b) During the quarter ended December 31, 2023, no director or officer (as defined in Rule 16a - 1 (f) under the Act) of the Company adopted or terminated a "Rule 10b5 - 1 trading arrangement" or "non-Rule 10b5 - 1 trading arrangement," as each term is defined in Item 408 (a) of Regulation S-K.

 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 Not applicable.

 Item 10. Directors, Executive Officers and Corporate Governance

 Directors. The information contained under the section captioned "Proposal 1 - Election of Directors" in the 2024 Proxy Statement is incorporated herein by reference.

 Executive Officers. For information regarding the executive officers of the Company and the Bank, see the information contained herein under the section captioned "Item 1. Business - Executive Officers."

 Delinquent Section 16(a) Reports. The information required by Item 405 of Regulation S-K relating to directors and executive officers of Security Federal and their compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the section entitled "Delinquent 16(a) Reports," in the 2024 Proxy Statement and is incorporated herein by reference.

 Nominating Procedures. There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since last disclosed to stockholders.

 Audit Committee and Audit Committee Financial Expert. The Company has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee of the Company is composed of Directors Moore (Chairperson), Alexander, Clyburn, Thomas, Simmons and Cummins. Directors Moore, Alexander, Clyburn and Thomas are independent, as independence is defined for audit committee members in the listing standards of The Nasdaq Stock Market, LLC. Although Security Federal's common stock is not listed on Nasdaq, it has chosen to apply Nasdaq's definition of independence, as permitted by the SEC. The Board of Directors has determined there is no "audit committee financial expert" as defined by the SEC; however, the Board believes that the current members of the Audit Committee are qualified to serve based on their collective experience and background.

 Code of Ethics. The Board of Directors has adopted a Code of Ethics for the Company's officers (including its senior financial officers), directors and employees. The Code is applicable to the Company's principal executive officer and senior financial officers. The Company has posted its Code of Ethics on its website www.securityfederalbank.com.

 Item 11. Executive Compensation

 The information contained in the section captioned "Executive Compensation" in the 2024 Proxy Statement is incorporated herein by reference.

 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 (a)

 Security Ownership of Certain Beneficial Owners. The information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the 2024 Proxy Statement is incorporated herein by reference.

 (b)

 Security Ownership of Management. The information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the 2024 Proxy Statement is incorporated herein by reference.

 (c)

 Changes in Control. The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.

 (d)

 Equity Compensation Plan Information. There were no securities to be issued upon exercise of outstanding options, warrants and rights, and no securities remaining available for future issuance under the Company's equity compensation plans as of December 31, 2023.

 Item 13. Certain Relationships and Related Transactions, and Director Independence

 Related Transactions. The information contained in the section captioned "Meetings and Committees of the Board of Directors and Corporate Governance Matters - Corporate Governance - Related Party Transactions" in the 2024 Proxy Statement is incorporated herein by reference.

 Director Independence. The information contained in the section captioned "Meetings and Committees of the Board of Directors and Corporate Governance Matters - Corporate Governance - Director Independence" in the 2024 Proxy Statement is incorporated herein by reference.

 Item 14. Principal Accountant Fees and Services

 The information contained under the section captioned "Independent Registered Public Accounting Firm" in the 2024 Proxy Statement is incorporated herein by reference.

 Item 15. Exhibits and Financial Statement Schedules

 1. Financial Statements. For a list of the financial statements filed as part of this report see Part II - Item 8.

 2. Financial Statement Schedules. All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in the Annual Report filed as an exhibit hereto.

 3. Exhibit Index:

 3.1

 Articles of Incorporation, as amended (1)

 3.2

 Amended and Restated Bylaws (2)

 4.1

 Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (3)

 4.2

 Description of Capital Stock of Security Federal Corporation (4)

 10.1

 Form of 2006 Salary Continuation Agreement (5)

 10.2

 Form of Security Federal Split Dollar Agreement (5)

 10.3

 2018 Employee Stock Purchase Plan (6)

 10.4

 Letter Agreement, Dated May 24, 2022 between Security Federal Corporation and the U.S. Department of Treasury, with respect to the issuance of Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (7)

 Code of Ethics (8)

 Subsidiaries of Registrant (4)

 Consent of Elliott Davis, LLC

 31.1

 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 31.2

 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 The following materials from Security Federal Corporation's Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income (Loss); (4) Consolidated Statements of Changes in Shareholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to Consolidated Financial Statements

 __________

 (1)

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

 (2)

 Filed on January 10, 2024, as an exhibit to the Company's Current Report on Form 8-K dated January 4, 2024 and incorporated herein by reference.

 (3)

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

 (4)

 Filed on March 24, 2023 as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and incorporated herein by reference.

 (5)

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

 (6)

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

 (7)

 Filed on June 8, 2022, as an exhibit to the Company's Current Report on Form 8-K dated May 24, 2022 and incorporated herein by reference.

 (8)

 The Company elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.securityfederalbank.com.

 Item 16. Form 10-K Summary

 None.

 SIGNATURES

 Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 SECURITY FEDERAL CORPORATION

 Date: March 21, 2024

 /s/ J. Chris Verenes

 J. Chris Verenes

 Chief Executive Officer and Director

 (Duly Authorized Representative)

 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 By:

 /s/ J. Chris Verenes

 J. Chris Verenes

 Chief Executive Officer and Director

 (Principal Executive Officer)

 By:

 /s/Darrell Rains

 Darrell Rains

 Chief Financial Officer

 (Principal Financial and Accounting Officer)

 By:

 /s/Roy G. Lindburg

 Roy G. Lindburg

 President and Director

 By:

 /s/Timothy W. Simmons

 Timothy W. Simmons

 Chairman of the Board and Director

 By:

 /s/Frank M. Thomas, Jr.

 Frank M. Thomas, Jr.

 By:

 /s/Frampton W. Toole III

 Frampton W. Toole III

 By:

 /s/Richard T. Harmon

 Richard T. Harmon

 By:

 /s/Robert E. Alexander

 Robert E. Alexander

 By:

 /s/Jessica T. Cummins

 Jessica T. Cummins

 By:

 /s/Thomas L. Moore

 Thomas L. Moore

 By:

 /s/William Clyburn

 William Clyburn

 By:

 /s/Harry O. Weeks, Jr.

 Harry O. Weeks, Jr.