SECURITY FEDERAL CORP

Previous wording

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. Adverse economic conditions in our market areas could impact our growth rate, reduce our customers’ ability to repay loans, and adversely impact our business, financial condition, and results of operations. Broader economic factors such as inflation, unemployment and money supply fluctuations also may adversely affect our profitability. Trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers. These developments may, in turn, negatively impact these businesses and, by extension, our operations and financial performance.

Current wording

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. Adverse economic conditions in our market areas could impact our growth rate, reduce our customers’ ability to repay loans, and adversely impact our business, financial condition, and results of operations. Broad economic factors such as inflation, unemployment and money supply fluctuations also may adversely affect our profitability. Trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers. These developments may, in turn, negatively impact these businesses and, by extension, our operations and financial performance.

Previous wording

The determination of the appropriate level of the allowance for credit losses involves a high degree of subjectivity and requires significant estimates of current credit risks and future trends, which may change materially. If our estimates are incorrect, the allowance may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need to increase the allowance through the provision for credit losses, recorded as a charge against income. Additionally, management recognizes that new growth in loan portfolios, new loan products, and the refinancing of existing loans can result in portfolios comprised of unseasoned loans, which may not perform as historically or projected. This increases the risk that the 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, 2024. 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, 2024 and 2023 - Provision for Credit Losses” contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this 2024 Form 10-K.

Current wording

The determination of the appropriate level of the allowance for credit losses involves a high degree of subjectivity and requires significant estimates of current credit risks and future trends, which may change materially. If our estimates are incorrect, the allowance may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need to increase the allowance through the provision for credit losses, recorded as a charge against income. Additionally, management recognizes that new growth in loan portfolios, new loan products, and the refinancing of existing loans can result in portfolios comprised of unseasoned loans, which may not perform as historically or projected. This increases the risk that the allowance may be insufficient to absorb losses without significant additional provisions. Our allowance for credit losses on loans was 1.97% of total loans outstanding (excluding loans held for sale) at December 31, 2025. 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, 2025 and 2024 - Provision for Credit Losses” contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this 2025 Form 10-K.

Previous wording

At December 31, 2024, our non-performing assets (which consist of non-accrual loans) were $7.6 million, or 0.47% of total assets. Our non-performing assets adversely affect our net income in various ways:

Current wording

At December 31, 2025, our non-performing assets (which consist of non-accrual loans and other real estate owned ("OREO")) were $5.8 million, or 0.36% of total assets. Our non-performing assets adversely affect our net income in various ways:

Previous wording

While commercial real estate lending offers the potential for higher returns compared to single-family residential lending, it is more susceptible to fluctuations in regional and local economic conditions, presenting challenges in accurately predicting potential losses. Evaluating collateral and conducting financial statement analysis for these loans requires a more intricate approach during underwriting and continual assessment. At December 31, 2024, we had $288.5 million of commercial real estate loans, representing 41.2% of our total loan portfolio.

Current wording

While commercial real estate lending offers the potential for higher returns compared to single-family residential lending, it is more susceptible to fluctuations in regional and local economic conditions, presenting challenges in accurately predicting potential losses. Evaluating collateral and conducting financial statement analysis for these loans requires a more intricate approach during underwriting and continual assessment. At December 31, 2025, we had $295.3 million of commercial real estate loans, representing 43.0% of our total loan portfolio.

Previous wording

We originate construction loans for 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, 2024, we had $109.9 million in construction loans, representing 15.7% of our total loan portfolio.

Current wording

We originate construction loans for 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, 2025, we had $66.6 million in construction loans, representing 9.7% of our total loan portfolio.

Previous wording

At December 31, 2024, $36.9 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.

Current wording

At December 31, 2025, $37.9 million or 5.5% 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.

Previous wording

Factors beyond our control can significantly influence the fair value of securities in our portfolio and may cause adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions regarding the securities, defaults by, or other adverse events affecting, the issuer or the underlying securities, and changes in market interest rates, as well as continued instability in the capital markets. Any of these factors, among others, could result in realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially affect on our business, financial condition and results of operations. The process for determining whether the 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 declines in market value will not result in other-than-temporary impairments of these assets, leading to accounting charges that could have a material adverse effect on our net income and capital levels. For the year ended December 31, 2024, we did not incur any other-than-temporary impairments in our securities portfolio.

Current wording

Factors beyond our control can significantly influence the fair value of securities in our portfolio and may cause adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions regarding the securities, defaults by, or other adverse events affecting, the issuer or the underlying securities, and changes in market interest rates, as well as continued instability in the capital markets. Any of these factors, among others, could result in realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially affect on our business, financial condition and results of operations. The process for determining whether the decline in fair value is the result of credit losses or other factors 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 declines in market value will not result in credit losses on these assets, leading to accounting charges that could have a material adverse effect on our net income and capital levels. At December 31, 2025, there was no allowance for credit losses in our securities portfolio.

Previous wording

In a rising rate environment, retaining deposits can become costlier. If deposit and borrowing rates rise faster than loan and investment yields, our net interest income and overall earnings could decline. Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment. Interest rate fluctuations also influence the fair value of fixed-rate investment securities, which inversely correlates with rate changes. At December 31, 2024, the fair value of our securities available for sale was $525.6 million, with unrealized net losses of $31.1 million reflected in stockholders’ equity. Further declines in fair value from rising rates could have an adverse effect on stockholders’ equity.

Current wording

In a rising rate environment, retaining deposits can become costlier. If deposit and borrowing rates rise faster than loan and investment yields, our net interest income and overall earnings could decline. Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment. Interest rate fluctuations also influence the fair value of fixed-rate investment securities, which inversely correlates with rate changes. At December 31, 2025, the fair value of our securities available for sale was $663.5 million, with unrealized net losses of $20.6 million reflected in stockholders’ equity. Further declines in fair value from rising rates could have an adverse effect on stockholders’ equity.

Previous wording

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.

Current wording

One such significant change in 2023 was the implementation of the current expected credit loss ("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.

Previous wording

Security breaches in our internet banking activities could further expose us to liability and reputational harm.** **Cybersecurity risks are particularly heightened in internet banking. Advances in criminal sophistication, technology, or vulnerabilities in third-party systems could lead to breaches that compromise the security of data and transactions, potentially discouraging customers from using our online services. While we continue to invest in systems and processes to detect and prevent breaches, no system is foolproof. A breach could result in financial losses, reputational harm, regulatory penalties, compliance costs, and legal liabilities, adversely affecting our financial condition and ability to grow our online services.

Current wording

Security breaches in our internet banking activities could further expose us to liability and reputational harm.** **Cybersecurity risks are particularly heightened in internet banking. Advances in criminal sophistication, technology, or vulnerabilities in third-party systems could lead to breaches that compromise the security of data and transactions, potentially discouraging customers from using our online services. A breach could result in financial losses, reputational harm, regulatory penalties, compliance costs, and legal liabilities, adversely affecting our financial condition and ability to grow our online services.

Previous wording

In addition, our security measures may not fully protect us from system failures or interruptions. While we have policies and procedures to mitigate these risks, we cannot guarantee their effectiveness. We also rely on third-party providers for data processing and operational support. Although we carefully select these providers, we do not control their actions. If a third-party vendor experiences disruptions, cyber-attacks, or fails to meet service standards, it could impair our ability to process transactions, deliver services, or conduct business. Transitioning to alternative vendors could involve significant delays and costs.

Current wording

We also rely on third-party providers for data processing and operational support. If a third-party vendor experiences disruptions, cyber-attacks, or fails to meet service standards, it could impair our ability to process transactions, deliver services, or conduct business. Transitioning to alternative vendors could involve significant delays and costs.

Previous wording

Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality’s fiscal policies and cash flow needs. At December 31, 2024, $131.8 million of our deposits were public funds.

Current wording

Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality’s fiscal policies and cash flow needs. At December 31, 2025, $129.8 million of our deposits were public funds.

Previous wording

Security Federal is a separate legal entity from the Bank 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 Security Federal, 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 Security Federal, Security Federal 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 our financial condition, results of operations, and future prospects. At December 31, 2024, the Company had $178.3 million in unrestricted cash to support dividend and debt payments.

Current wording

Security Federal is a separate legal entity from the Bank 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 Security Federal, 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 Security Federal, Security Federal 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 our financial condition, results of operations, and future prospects. At December 31, 2025, the Company had $75.3 million in unrestricted cash to support dividend and debt payments.