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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-27951
SECURITY FINANCIAL BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 35-2085053
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9321 WICKER AVENUE, ST. JOHN, INDIANA 46373
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(Address of principal executive offices)
(219) 365-4344
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year,
if changes since last report)
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of February 1, 2000,
Security Financial had 1,938,460 shares outstanding.
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SECURITY FINANCIAL BANCORP, INC.
FORM 10-QSB
INDEX
Page
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PART I. FINANCIAL INFORMATION FOR SECURITY FEDERAL
BANK, A FEDERAL SAVINGS BANK
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at
December 31, 1999 and June 30, 1999................................ 3
Consolidated Statements of Operations for the Three and Six
Months Ended December 31, 1999 and 1998............................ 4-5
Consolidated Statement of Changes in Equity
for the Six Months Ended December 31, 1999......................... 6
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1999 and 1998........................ 7
Notes to Consolidated Financial Statements......................... 8-9
Item 2. Management's Discussion and Analysis or Plan of Operation..........10-19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 20
Item 2. Changes in Securities.............................................. 20
Item 3. Defaults Upon Senior Securities.................................... 20
Item 4. Submission of Matters to a Vote of Security Holders................ 20
Item 5. Other Information.................................................. 20
Item 6. Exhibits and Reports on Form 8-K................................... 20
SIGNATURES................................................................. 21
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PART I. FINANCIAL INFORMATION FOR
SECURITY FEDERAL BANK, A FEDERAL SAVINGS BANK
Item 1. Financial Statements.
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SECURITY FEDERAL BANK, A FEDERAL SAVINGS BANK
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 1999 (UNAUDITED)
DECEMBER 31, JUNE 30,
1999 1999
---------- -----------
ASSETS:
Cash and due from financial institutions........................ $ 5,640 $ 3,175
Interest-bearing deposits in financial institutions............. 16,875 1,345
---------- -----------
Cash and cash equivalents.................................... 22,515 4,520
Securities available for sale................................... 21,802 17,873
Loans held for sale............................................. -- 3,430
Loans receivable, net of allowance for loan losses of $1,478 at
December 31, 1999 and $1,469 at June 30, 1999................... 137,554 148,316
Federal Home Loan Bank stock.................................... 5,300 5,300
Other real estate owned......................................... 426 295
Premises and equipment, net..................................... 5,580 5,766
Mortgage loan servicing rights.................................. 73 3,959
Other assets.................................................... 2,480 2,036
---------- -----------
Total assets............................................... $ 195,730 $ 191,495
========== ===========
LIABILITIES AND EQUITY:
Liabilities:
Demand, NOW and money market deposits........................ $ 18,315 $ 20,970
Savings...................................................... 60,455 45,356
Time deposits................................................ 96,328 99,568
---------- -----------
Total deposits............................................... 175,098 165,894
Borrowed funds............................................... -- 5,000
Advances from borrowers for taxes and insurance.............. 597 602
Other liabilities............................................ 1,227 1,467
---------- -----------
Total liabilities...................................... 176,922 172,963
Equity:
Retained earnings, substantially restricted.................. 18,955 18,592
Accumulated other comprehensive income....................... (147) (60)
----------- ------------
Total equity.............................................. 18,808 18,532
----------- ------------
Total liabilities and equity........................... $ 195,730 $ 191,495
=========== ============
(See accompanying notes to consolidated financial statements)
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SECURITY FEDERAL BANK, A FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 (UNAUDITED)
(in thousands)
DECEMBER 31, DECEMBER 31,
1999 1998
------------- --------------
Interest and dividend income:
Loans, including fees........................... $ 2,958 $ 4,324
Securities...................................... 375 436
Other interest-earning assets................... 81 77
------- -------
Total interest income..................... 3,414 4,837
Interest expense:
Deposits........................................ 1,549 2,132
Borrowed funds.................................. 8 440
------- -------
Total interest income..................... 1,557 2,572
------- -------
Net interest income....................... 1,857 2,265
Provision for loan losses....................... 25 75
------- -------
Net interest income after provision
for loan losses.......................... 1,832 2,190
Noninterest income:
Service charges and other fees.................. 35 79
Loan servicing fees, net of amortization........ 4 (281)
Gain on sale of loans........................... 10 649
Other........................................... 155 176
------- -------
Total noninterest income.................. 204 623
Noninterest expense:
Compensation and benefits....................... 1,036 1,662
Occupancy and equipment......................... 363 384
SAIF deposit insurance premium.................. 37 91
Advertising and promotions...................... 44 67
Data processing................................. 150 199
Other........................................... 281 401
------- -------
Total noninterest expense................. 1,911 2,804
------- -------
Income before income taxes......................... 125 9
Income tax benefit................................. -- --
------- -------
Net income......................................... $ 125 $ 9
======= =======
See accompanying notes to consolidated financial statements
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SECURITY FEDERAL BANK, A FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 (UNAUDITED)
(in thousands)
DECEMBER 31, DECEMBER 31,
1999 1998
------------- --------------
Interest and dividend income:
Loans, including fees........................................ $ 6,043 $ 8,671
Securities................................................... 729 878
Other interest-earning assets................................ 122 194
-------- --------
Total interest income.................................. 6,894 9,743
Interest expense:
Deposits..................................................... 3,103 4,435
Borrowed funds............................................... 81 891
-------- --------
Total interest income.................................. 3,184 5,326
-------- --------
Net interest income.......................................... 3,710 4,417
Provision for loan losses.................................... 100 200
-------- --------
Net interest income after provision for loan losses.......... 3,610 4,217
Noninterest income:
Service charges and other fees............................... 60 184
Loan servicing fees, net of amortization..................... 5 (504)
Gain on sale of loans........................................ 70 1,280
Other........................................................ 547 413
-------- --------
Total noninterest income............................... 682 1,373
Noninterest expense:
Compensation and benefits.................................... 2,002 3,412
Occupancy and equipment...................................... 797 774
SAIF deposit insurance premium............................... 75 185
Advertising and promotions................................... 134 128
Data processing.............................................. 310 442
Other........................................................ 611 822
-------- --------
Total noninterest expense.............................. 3,929 5,763
-------- --------
Income (loss) before income taxes............................... 363 (173)
Income tax benefit.............................................. -- --
-------- --------
Net income (loss)............................................... $ 363 $ (173)
======== =========
See accompanying notes to consolidated financial statements
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SECURITY FEDERAL BANK, A FEDERAL SAVINGS BANK
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 (UNAUDITED)
(in thousands)
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL EQUITY
----------- ------------ --------------
Balance at June 30, 1999.................... $18,592 $ (60) $18,532
Comprehensive income:
Net income............................... 363 -- 363
Change in unrealized loss on securities
available for sale..................... -- (87) (87)
--------
Total comprehensive income......... 276
------- -------- -------
Balance at December 31, 1999................ $18,955 $ (147) $18,808
======= ======== =======
See accompanying notes to consolidated financial statements
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SECURITY FEDERAL BANK, A FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(in thousands)
DECEMBER 31, DECEMBER 31,
1999 1998
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 363 $ (173)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation.................................................... 324 319
Provision for loan losses....................................... 100 200
(Gain) loss on sale of foreclosed real estate................... (37) (23)
Origination and purchase of loans held for sale................. (17,715) (199,747)
Proceeds from sales of loans held for sale...................... 10,912 205,607
Change in mortgage loan servicing rights........................ 4,066 7,355
Gain on sale of loans........................................... (70) (1,280)
Gain on sale mortgage servicing rights.......................... (180) --
Accretion of discount on securities............................. (150) (119)
Change in other assets.......................................... (387) (5,263)
Change in other liabilities..................................... (240) 29
-------- ---------
Net cash from operating activities........................... (3,014) 6,905
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale............. 6,095 14,093
Principal payments on securities available for sale................... 802 581
Purchase of securities available for sale............................. (10,820) (20,082)
Change in loans....................................................... 20,294 13,068
Change in premises and equipment, net................................. (138) (308)
Proceeds from sale of other real estate............................... 577 448
-------- ---------
Net cash from investing activities.............................. 16,810 7,800
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits.................................................... 9,204 (11,742)
Change in advance payments by borrowers for taxes and insurance....... (5) (289)
Repayments of advances from Federal Home Loan Bank.................... (5,000) --
Change in Federal Home Loan Bank overnight line of credit............. -- (1,051)
-------- ---------
Net cash from financing activities.............................. 4,199 (13,082)
-------- ---------
Net increase in cash and cash equivalents................................ 17,995 1,623
Cash and cash equivalents at beginning of period......................... 4,520 8,502
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $22,515 $ 10,125
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................................... $ 3,195 $ 5,342
Income taxes....................................................... -- --
Transfer from loans to foreclosed real estate......................... 671 101
Transfer loans held for sale to loans receivable...................... 10,803 --
See accompanying notes to consolidated financial statements
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SECURITY FEDERAL BANK, A FEDERAL SAVINGS BANK
Notes to Consolidated Financial Statements
(1) Organization
------------
Security Financial Bancorp Inc. ("Security Financial") was incorporated
under the laws of Delaware in September 1999 for the purpose of serving as the
holding company of Security Federal Bank & Trust ("Security Federal") as part of
Security Federal's conversion from the mutual to stock form of organization. The
conversion, completed on January 5, 2000 resulted in Security Financial issuing
an aggregate of 1,938,460 shares of its common stock, par value $.01 per share,
at a price of $10 per share. Prior to the conversion, Security Financial had not
engaged in any material operations and had no assets or income. Security
Financial is currently a savings and loan holding company and is subject to
regulation by the Office of Thrift Supervision and the Securities and Exchange
Commission. Prior to the conversion, Security Federal was known as Security
Federal Bank, a Federal Savings Bank. The accompanying unaudited financial
statements for the three and six months ended, and at, December 31, 1999,
including the "Management's Discussion and Analysis or Plan of Operation" in
Item 2 of this Form 10-QSB, reflect such information for Security Federal Bank,
a Federal Savings Bank and its subsidiaries only.
(2) Accounting Principles
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The accompanying unaudited financial statements of Security Federal Bank,
a Federal Savings Bank, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with instructions to
Form 10-QSB and of Regulation S-B. Accordingly, the financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of a normal recurring nature) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended December 31, 1999 are not necessarily indicative of
the results that may be expected for the current fiscal year.
For further information, refer to the consolidated financial statements
included in Security Financial's offering prospectus prepared in connection with
the conversion filed with the Securities and Exchange Commission.
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(3) Segment Information
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The segment financial information provided below has been derived from the
internal financial reporting system used by management to monitor and manage the
financial performance of the Bank. The two reportable segments identified below
are the Bank's mortgage banking and banking operations. The accounting policies
of the two segments are the same as those described in the significant
accounting policies. Loan servicing fees and net gains from loan sales provide
the revenues in the mortgage banking operation while the interest income earned
on loans and securities less the interest paid on deposits and borrowings
provide the revenues in the banking operation. All operations are domestic.
Six months ended Mortgage
December 31, 1999 Banking Banking Total
- ----------------- ------- ------- -----
Net interest income $ 3,581 $ 129 $ 3,710
Provision for loan losses (100) - (100)
Loan servicing fees, net of amortization - 5 5
Gain on sale of loans from secondary
market activities - 70 70
Gain on sale of mortgage servicing rights - 180 180
Other noninterest income 403 24 427
Compensation and benefits (1,710) (292) (2,002)
Other noninterest expense (1,407) (520) (1,927)
--------- -------- --------
Income (loss) before income taxes $ 767 $ (404) $ 363
========= ======== ========
Segment assets $195,657 $ 73 $195,730
Six months ended Mortgage
December 31, 1998 Banking Banking Total
- ----------------- ------- ------- -----
Net interest income $ 3,482 $ 935 $ 4,417
Provision for loan losses (200) - (200)
Loan servicing fees, net of amortization (104) (400) (504)
Gain on sale of loans from secondary
market activity - 1,280 1,280
Other noninterest income 412 185 597
Compensation and benefits (2,372) (1,040) (3,412)
Other noninterest expense (571) (1,780) (2,351)
--------- ------- --------
Income (loss) before income taxes $ 647 $ (820) $ (173)
========= ======= ========
Segment assets $226,978 $47,884 $274,862
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Item 2. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended December 31,
1999, and should be read in conjunction with the Bank's Consolidated Financial
Statements and the notes thereto, appearing in Part I, Item 1 of this document.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward -looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the SEC.
The Company does not undertake - and specifically disclaims any obligation
- - to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
Security Financial is the holding company for Security Federal, a
federally chartered savings bank. Security Financial does not transact any
material business other than through Security Federal. Security Federal is
engaged primarily in attracting deposits from the general public and using such
deposits to fund originations of one- to-four-family residential mortgage loans,
consumer loans, including home equity and second mortgage loans, and
multi-family and commercial real estate loans, and other loans primarily in its
market areas, and, to a substantially lesser extent, to acquire securities.
Security Federal's revenues historically have been derived principally from
interest earned on loans and securities, and gains from sales of first mortgage
loans in the secondary market
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and fees from the servicing of first mortgage loans. The operations of Security
Federal are influenced significantly by general economic conditions and by
policies of financial institution regulatory agencies, primarily the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation. Security
Federal's cost of funds is influenced by interest rates on competing investments
and general market interest rates. Lending activities and mortgage loan sales
volumes are affected by the demand for financing of real estate and other types
of loans, which in turn is affected by the interest rates at which such
financings may be offered.
Security Federal's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans receivable and
securities and the average rate paid on deposits, as well as the relative
amounts of such assets and liabilities. Security Federal, like other thrift
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
MANAGEMENT'S STRATEGY
RECENT HISTORY OF MANAGEMENT'S STRATEGY. In 1996, Security Federal began
pursuing a strategic plan to increase its asset size largely through expansion
of its mortgage loan origination and mortgage banking operations, which included
the origination and purchase of loans for sale in the secondary mortgage market,
which if sold, were sold with loan servicing retained. At June 30, 1998,
Security Federal's portfolio of loans serviced for others totalled $1.04
billion. Assets increased from $252.5 million, to $302.4 million from June 30,
1996 to June 30, 1997. The growth was initially funded through FHLB borrowings
until the borrowing limit was reached. At that point, Security Federal resorted
to attracting greater deposits. By competing for deposits with above-market
rates, Security Federal dramatically increased interest expense. Interest
expense increased from $10.9 million for the fiscal year ended June 30, 1997 to
$15.5 million for the fiscal year ended June 30, 1998. Furthermore, the decision
to pursue an aggressive growth strategy dramatically increased non-interest
expense due to, among other things, an increase in employees, which created a
corresponding increase in compensation expense and other operating expenses.
Non-interest expense increased by $617,000 from the fiscal year ended June 30,
1997 to the fiscal year ended June 30, 1998. The income produced by Security
Federal's mortgage banking activities, including its loan sale and servicing
operations, was not sufficient to cover the increased expense of these
activities. Consequently, Security Federal began experiencing losses.
Specifically, Security Federal experienced net losses of $1.2 million, $834,000
and $608,000 for each of the three fiscal years ended June 30, 1997, 1998 and
1999, respectively.
In 1998, the Board of Directors decided that the aggressive growth
strategy should be abandoned. John P. Hyland was hired as President and Chief
Executive Officer in October 1998 and began addressing ways in which both
interest and non-interest expenses could be reduced. Security Federal reduced
assets from $355.4 million at December 31, 1997 to $288.1 million at June 30,
1998 and to $191.5 million at June 30, 1999, substantially through the sale of
loans. Additionally, Security Federal sold substantially all of its servicing
rights related to loans serviced for others. This enabled management to address
means to cut expenses by reducing costs related to its former loan servicing
operations, including reductions in staff and various other expenses.
Non-interest expense
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decreased by $3.3 million from $13.6 million for the fiscal year ended June 30,
1998 to $10.3 million for the fiscal year ended June 30, 1999. Furthermore, the
reduction in the mortgage banking activities reduced the pressure on Security
Federal to seek sources of funds. Security Federal greatly reduced interest
expense by reducing high interest certificates of deposit and borrowings. As a
result, interest expense related to deposits decreased from $10.8 million to
$7.9 million for the fiscal years ended June 30, 1998 to June 30, 1999,
respectively, and interest expense related to borrowed funds decreased from $4.6
million to $1.6 million for the same corresponding periods.
CURRENT BUSINESS STRATEGY. Security Federal's current strategic plan is to
enhance profitability through increasing interest income as well as non-interest
income, while managing growth, maintaining asset quality and reducing expenses.
Management seeks to accomplish these goals by emphasizing its retail banking
services through its network of branch offices. Security Federal seeks to obtain
high quality residential, home equity and second mortgage loans by maintaining a
high level of local visibility and offering a high level of customer service.
Security Federal is also seeking high quality commercial real estate loans, a
variety of consumer loans, commercial business loans and construction loans,
which will yield higher returns, in the communities it serves as market
conditions permit. Additionally, as part of its mortgage banking operations,
Security Federal has established strong relationships with a number of
correspondent banks and mortgage brokers which generate a significant volume of
loan originations. Security Federal intends to continue its mortgage banking
operations, although all loans sold will be sold with servicing released, which
management believes will increase its non-interest income and reduce interest
rate risk. Adjustable-rate mortgage loans and 15-year fixed-rate loans will be
retained, while most longer-term fixed-rate loans will be sold in the secondary
market.
Security Federal continues to seek means to reduce expenses. Although
compensation expense has been substantially reduced through the reduction in
staff levels and streamlined operating procedures, additional reductions may
occur as a result of Security Federal's decision to eliminate its loan servicing
operation. Furthermore, the reduction in staff that has already occurred has
resulted in additional savings in employee benefits expense, as well as the
expense of software and data processing related to the loan servicing
operations. Management is reviewing opportunities for further cost reductions in
those, as well as other, areas. While management is considering branching
opportunities, including, possibly into the Chicago area, management intends to
evaluate the cost of any expansion strategy and to continue to reduce operating
costs at its current seven branch offices.
Management has also addressed interest expense and intends to continue to
build and maintain non-certificate accounts, including business checking,
consumer checking and other related accounts. These accounts generally carry
lower costs than certificate accounts and are believed to represent primarily
"core" deposits that are less vulnerable to interest rate changes (and
competition from other financial products) than certificate accounts.
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COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND JUNE 30, 1999
Total assets increased 2.2% to $195.7 million at December 31, 1999 from
$191.5 million at June 30, 1999. The increase was primarily due to the $15.8
million in proceeds raised in the Company's initial public offering offset by a
$14.2 million decrease in loans and loans held for sale and a $3.9 million
decrease in mortgage servicing assets. Proceeds raised in the initial public
offering were held in interest-bearing deposit accounts as of December 31, 1999
as the offering did not close until January 5, 2000.
The proceeds from the decrease in loans and servicing rights were used to
fund a $2.7 million decrease in demand, NOW and money market deposit accounts
and reduce borrowings from the Federal Home Loan Bank by $5.0 million.
Total equity at December 31, 1999 was $18.8 million compared to $18.5
million at June 30, 1999 as a result of Security Federal's net income for the
six months ended December 31, 1999 of $363,000 offset by a $87,000 decline in
the fair value of securities available for sale.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND
1998
GENERAL. Net income for the three month period ended December 31, 1999 was
$125,000 compared to net income of $9,000 for the comparable period in 1998, an
increase of $116,000. The increase is primarily attributable to an improved net
interest margin and reduced compensation and benefits associated with the
significant reduction in the number of personnel employed in loan servicing and
other operations. The loan servicing portion of the business was substantially
eliminated during 1999.
INTEREST INCOME. Interest income for the quarter ended December 31, 1999
was $3.4 million compared to $4.8 million for the quarter ended December 31,
1998, a decrease of $1.4 million, or 29.2%. The decrease was primarily
attributable to a decrease in the average balance of interest earning assets to
$173.6 million for the three months ended December 31, 1999 from $246.5 for the
same period in 1998 due primarily to loan sales in connection with Security
Federal's change in business strategy. The yield on interest earning assets
increased slightly to 7.88% for the three month period ended December 31, 1999
compared to 7.84% for the same period in 1998.
INTEREST EXPENSE. Interest expense for the quarter ended December 31, 1999
was $1.6 million compared to $2.6 million for the same period in 1998. This
represents a decrease of $1.0 million, or 38.5%, which is attributable to a
decline in the average balance of interest bearing liabilities to $167.2 million
for the 1999 period from $245.0 million during the 1998 period, as the loan sale
proceeds referred to above were used to reduce various high-cost funding
sources. The cost of funds fell to 3.72% for the three months ended December 31,
1999 from 4.20% for the three months ended December 31, 1998.
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NET INTEREST INCOME. Net interest income decreased to $1.9 million for the
three month period ended December 31, 1999 from $2.3 million, a decline of
$408,000, or 18.0%. The decrease was attributable to the decline in the levels
of interest-earning assets. The net interest margin improved to 4.28% from 3.68%
during the same periods. The increase in both the net interest margins are both
attributable primarily to management's reduction of high cost funding sources
including negotiated rate certificates of deposit and borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $25,000 for
the three months ended December 31, 1999 compared to $75,000 for the three
months ended December 31, 1998. Management increases the allowance for loan
losses through a provision charged to expense for loan growth based on a
statistical percentage developed considering past loss experiences, delinquency
trends, general economic conditions and other factors. Security Federal's loss
experience increased with net charge-offs of $61,000 for the quarter ended
December 31, 1999 compared to $28,000 for the quarter ended December 31, 1998.
NONINTEREST INCOME. Noninterest income was $204,000 for the three months
ended December 31, 1999 compared to $623,000 for the three month period ended
December 31, 1998, a decline of $419,000, or 67.3%. The decrease is primarily
attributable to a sharp reduction in the level of gains on sale of loans into
the secondary market which fell to $10,000 for the quarter ended December 31,
1999 from $649,000 for the same period in 1998. This decline was offset by the
elimination of loan servicing fees and related amortization of mortgage
servicing rights in 1999 compared to a net expense of $281,000 for the three
months ended December 31, 1998. The expense amount for the 1998 period was
caused by a high volume of loan prepayments forcing Security Federal to
accelerate the amortization of mortgage servicing rights. Additionally, other
noninterest income (including service charges and other fees) declined to
$190,000 for the 1999 period from $255,000 in 1998 due primarily to a decline in
commitment fees on construction and commercial loans.
NONINTEREST EXPENSE. Noninterest expense for the quarter ended December
31, 1999 was $1.9 million compared to $2.8 million for the quarter ended
December 31, 1998, a decrease of $895,000, or 31.9%. The decline is primarily
attributable to a $626,000 reduction in compensation and benefits related to the
substantial reduction in the number of employees during 1999 as part of
management's plan to reduce operating expenses and Security Federal's
discontinuation of loan servicing activities.
INCOME TAXES. There was no provision for income taxes for the three months
ended December 31,1999 and December 31, 1998 due to the utilization of net
operating loss carryforwards. Security Federal had generated net operating
losses in prior years which are being carried forward and will be used to offset
future tax liabilities until fully utilized. Management anticipates that these
carryforwards will be exhausted by the end of fiscal 2001.
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COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND
1998
GENERAL. Net income for the six month period ended December 31, 1999 was
$363,000 compared to a net loss of $173,000 for the comparable period in 1998,
an increase of $536,000. The increase is primarily attributable to an improved
net interest margin and reduced compensation and benefits associated with the
significant reduction in the number of personnel employed in loan servicing and
other operations. The loan servicing portion of the business was substantially
eliminated during 1999.
INTEREST INCOME. Interest income for the six months ended December 31,
1999 was $6.9 million compared to $9.7 million for the six months ended December
31, 1998, a decrease of $2.8 million, or 28.9%. The decrease was primarily
attributable to a decrease in the average balance of interest earning assets due
primarily to loan sales in connection with Security Federal's change in business
strategy. The yield on interest earning assets improved to 7.94% for the three
month period ended December 31, 1999 compared to 7.88% for the same period in
1998.
INTEREST EXPENSE. Interest expense for the six months ended December 31,
1999 was $3.2 million compared to $5.3 million for the same period in 1998. This
represents a decrease of $2.1 million, or 40.2%, which is attributable to a
decline in the average balance of interest bearing liabilities. Accordingly, the
loan sale proceeds referred to above were used to reduce various high-cost
funding sources. The cost of funds fell to 3.76% for the six months ended
December 31, 1999 from 4.52% for the six months ended December 31, 1998.
NET INTEREST INCOME. Net interest income decreased to $3.7 million for the
three month period ended December 31, 1999 from $4.4 million, a decline of
$707,000, or 16.0%. The decrease was attributable to the decline in the levels
of interest-earning assets. The net interest margin also improved to 4.26% from
3.48% during the same periods. The increase in margin is attributable primarily
to management's reduction of high cost funding sources including negotiated rate
certificates of deposit and borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $100,000 for
the six months ended December 31, 1999 compared to $200,000 for the six months
ended December 31, 1998. This represents a decrease of $100,000, or 50.0%.
Management increases the allowance for loan losses through a provision charged
to expense for loan growth based on a statistical percentage developed
considering past loss experiences, delinquency trends, general economic
conditions and other factors. Security Federal's loss experience has declined
slightly with net charge-offs of $91,000 for the six months ended December 31,
1999 compared to $96,000 for the six months ended December 31, 1998.
NONINTEREST INCOME. Noninterest income was $682,000 for the six months
ended December 31, 1999 compared to $1.4 million for the six month period ended
December 31, 1998, a decline of $691,000, or 50.3%. The decrease is primarily
attributable to a sharp reduction in the level of gains on sale of loans from
secondary market activities which fell to $70,000 for the six months ended
December 31, 1999 from $1.3 million for the same period in 1998. This decline
was offset by the
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elimination of loan servicing fees and related amortization of mortgage
servicing rights in 1999 compared to a net expense of $504,000 for the six
months ended December 31, 1998. The expense amount for the 1998 period was
caused by a high volume of loan prepayments forcing Security Federal to
accelerate the amortization of mortgage servicing rights. Additionally, other
noninterest income (including service charges and other fees) remained
relatively stable at $607,000 for the 1999 period compared to $597,000 for the
same period in 1998. However, the 1999 amount includes a $180,000 gain from the
sale of servicing rights, which offset a decline of $102,000 in commitment fees
on construction and commercial loans from 1998.
NONINTEREST EXPENSE. Noninterest expense for the six months ended December
31, 1999 was $3.9 million compared to $5.8 million for the six months ended
December 31, 1998, a decrease of $1.9 million, or 31.8%. The decline is
primarily attributable to a $1.4 million reduction in compensation and benefits
related to the substantial reduction in the number of employees during 1999 as
part of management's plan to reduce operating expenses and Security Federal's
discontinuation of loan servicing activities.
INCOME TAXES. There was no provision for income taxes for the six months
ended December 31,1999 due to the utilization of net operating loss
carryforwards. There was no provision for income taxes for the six months ended
December 31,1998 due to the operating loss during this period. Security Federal
had generated net operating losses in prior years which are being carried
forward and will be used to offset future tax liabilities until fully utilized.
Management anticipates that these carryforwards will be exhausted by the end of
fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Security Federal's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and mortgage-backed securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. Security Federal
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships.
Federal regulations require Security Federal to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 4.0% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and corporate
securities and other obligations generally having remaining maturities of less
than five years. Security Federal has historically maintained its liquidity
ratio for regulatory purposes at levels in excess of those required. At December
31, 1999, Security Federal's liquidity ratio for regulatory purposes was 16.9%.
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Security Federal's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities and
financing activities. Cash flows used in operating activities were $3.0 million
for the six months ended December 31, 1999. Net cash from investing activities
consisted primarily of disbursements for loan originations and the purchase of
securities, offset by principal collections on loans, proceeds from maturation
and sales of securities. Net cash from financing activities consisted primarily
of activity in deposit accounts and Federal Home Loan Bank advances.
Security Federal's most liquid assets are cash and short-term investments.
The levels of these assets are dependent on Security Federal's operating,
financing, lending and investing activities during any given period. Security
Federal has other sources of liquidity if a need for additional funds arises,
including securities maturing within one year and the repayment of loans.
Security Federal may also utilize the sale of securities available-for-sale,
federal funds purchased, and Federal Home Loan Bank advances as a source of
funds. At December 31, 1999, Security Federal had the ability to borrow a total
of approximately $44.0 million from the Federal Home Loan Bank of Indianapolis.
On that date, Security Federal had no outstanding advances.
At December 31, 1999, Security Federal had outstanding commitments to
originate loans of $790,000, $515,000 of which had fixed interest rates. These
loans are to be secured by properties located in its market area. Security
Federal anticipates that it will have sufficient funds available to meet its
current loan commitments. Loan commitments have, in recent periods, been funded
through liquidity or through FHLB borrowings. Certificates of deposit which are
scheduled to mature in one year or less from December 31, 1999 totaled $77.4
million. Management believes, based on past experience, that a significant
portion of such deposits will remain with Security Federal. Based on the
foregoing, in addition to Security Federal's high level of core deposits and
capital, Security Federal considers its liquidity and capital resources
sufficient to meet its outstanding short-term and long-term needs.
Liquidity management is both a daily and long-term responsibility of
management. Security Federal adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquid assets are invested generally in interest-earning overnight
deposits and short- and intermediate-term U.S. Government and agency obligations
and mortgage-backed securities of short duration. If Security Federal requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the Federal Home Loan Bank of Indianapolis. It is
anticipated that immediately upon completion of the conversion, Security
Financial's and Security Federal's liquid assets will be increased.
Security Federal is subject to various regulatory capital requirements
imposed by the Office of Thrift Supervision. At December 31, 1999, Security
Federal was in compliance with all applicable capital requirements.
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Security Federal's actual and required capital amounts and rates are
presented below (in thousands).
REQUIREMENT
TO BE WELL
REQUIREMENT CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- -------- ---------- ----------
As of December 31, 1999:
Total capital (to risk-weighted
assets)....................... $20,152 16.5% $9,745 8.0% $12,181 10.0%
Tier 1 capital (to risk-weighted
assets)....................... 18,955 15.6 4,872 4.0 7,308 6.0
Core capital (to adjusted assets) 18,955 9.7 7,836 4.0 9,794 5.0
YEAR 2000 ISSUES
GENERAL. The Year 2000 ("Y2K") issue which confronted Security Federal and
its suppliers, customers, customers' suppliers, and competitors centered on the
inability of computer systems to recognize the year 2000. Many computer programs
and systems originally were programmed with six-digit dates that provided only
two digits to identify the calendar year in the date field. These programs and
computers would have recognized "00" as the year 1900 rather than the year 2000.
Security Federal's Y2K project team was assigned the tasks of ensuring
that all systems across Security Federal were identified, analyzed for Y2K
compliance, corrected when necessary and tested, and ensured that all changes
were implemented. The Y2K project team members represent all functional areas of
Security Federal, including data processing, loan administration, accounting,
item processing and operations, compliance, human resources, and marketing.
Since January 1, 2000, Security Federal's Y2K project team has reviewed and
analyzed all systems for Y2K compliance and found no material adverse impact on
Security Federal's operations, or in turn, its financial condition and results
of operations. Security Federal continues to monitor its Y2K compliance.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," issued in June 1998 (as amended by SFAS No. 137),
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. The Statement requires
entities to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value, gains and
losses, of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reasons for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair value, cash
flows or foreign currencies. The
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statement is effective for financial statements issued for periods beginning
after June 15, 2000. Currently, Security Federal is evaluating the effects of
the statement.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE
SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," issued in October 1998, amends
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities," and Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," for
years beginning after December 15, 1998. SFAS No. 134 allows entities with
mortgage banking operations which convert pools of mortgages into securities to
classify these securities as available-for-sale, trading, or held-to-maturity,
instead of the current requirement to classify these pools as trading. Security
Federal adopted this standard on July 1, 1998. However, the impact was not
material to the consolidated financial statements.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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None.
Item 2. Changes in Securities.
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None.
Item 3. Defaults Upon Senior Securities.
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None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
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None.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits
Exhibit 27.0 Financial Data Schedule
(b) Reports on Form 8-K.
None
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SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SECURITY FINANCIAL BANCORP, INC.
Date: February 11, 2000 By: /s/ John P. Hyland
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John P. Hyland
President and Chief Executive
Officer
Date: February 11, 2000 By: /s/ James H. Foglesong
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James H. Foglesong
Executive Vice President and Chief
Financial Officer
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