Now, over a year and a half later, he sent a certified letter last week demanding the security deposit or legal action within 30 days.Please advise. 

The pet fee or deposit for the move in of 2 cats (you did charge one, I hope) should have just about covered the extra anyway.

If it's not a holiday, I would say, "No, the deposit remains in place until your lease ends."

Quote from @Phillip Austin: There are two alternatives to a security deposit, which I speak about in my book.

He knows his stuff and is really good at making IG videos: his brand is a very clever mix of being super humble, telling everyone profits are less than you think and then flashing some fat $$ he made by selling to his investors.

After searching more, I found a few BP post where people seemed to have one account for all deposits, and keep only deposits in there.

They they get a big fat default judgement against you. 

@Bob Asad at our bank, we have an escrow account for security deposits, it is set up with sub-accounts for each tenant with their security deposit amount and their SSN.

You could also charge a damage deposit, though there are pros and cons to this.

Nothing you mention is "ordinary" and you should charge for all of it. dodged a bullet there thats a very good price take it from the security deposit and call yourself lucky.