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, 2000
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, 2001,
Security Financial had 1,938,460 shares outstanding.
1
SECURITY FINANCIAL BANCORP, INC.
FORM 10-QSB
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION FOR SECURITY FINANCIAL
BANCORP, INC.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 2000
and June 30, 2000 3
Consolidated Statements of Income for the Three and Six
Months Ended December 31, 2000 and 1999 4 and 5
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended December 31, 2000 6
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis and Results
of Operations 8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
PART I--FINANCIAL INFORMATION FOR
SECURITY FINANCIAL BANCORP, INC.
Item 1. FINANCIAL STATEMENTS.
---------------------
SECURITY FINANCIAL BANCORP, INC.
Consolidated Balance Sheets
December 31, 2000 and June 30, 2000
(Dollars in thousands, except per share unaudited)
December 31, June 30,
2000 2000
---- ----
Assets:
Cash and due from financial institutions $ 5,188 $ 5,463
Interest-bearing deposits in financial institutions 485 4,391
----------- -----------
Cash and cash equivalents 5,673 9,854
Certificates of deposit in other financial institutions 7,000 7,000
Securities available for sale 38,248 27,097
Loans held for sale 311 357
Loans receivable, net of allowance for loan losses of $1,496 at
December 31, 2000 and $1,449 at June 30, 2000 123,332 131,693
Federal Home Loan Bank stock 5,300 5,300
Cash surrender value of life insurance policies 3,000 -
Other real estate owned 95 347
Premises and equipment, net 5,626 5,483
Other assets 2,493 2,475
----------- -----------
Total assets $ 191,098 $ 189,606
=========== ===========
Liabilities and Stockholders' Equity:
Liabilities:
Demand, NOW and money market deposits $ 19,498 $ 18,394
Savings 39,489 41,914
Time deposits 91,058 91,281
----------- -----------
Total deposits 150,045 151,589
Borrowed funds 2,463 -
Advances from borrowers for taxes and insurance 378 491
Other liabilities 839 1,040
----------- -----------
Total liabilities 153,725 153,120
Stockholders' Equity:
Common stock 194 194
Additional paid-in capital 18,426 18,395
Unearned ESOP (1,447) (1,499)
Retained earnings, substantially restricted 20,210 19,570
Accumulated other comprehensive loss (10) (174)
----------- -----------
Total stockholders' equity 37,373 36,486
----------- -----------
Total liabilities and stockholders' equity $ 191,098 $ 189,606
=========== ===========
See accompanying notes to consolidated financial statements.
3
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Income
For the Three Months Ended December 31, 2000 and 1999
(Unaudited)
(In thousands)
2000 1999
---- ----
Interest and dividend income:
Loans, including fees $ 2,637 $ 2,958
Securities 777 375
Other interest-earning assets 151 81
----------- -----------
Total interest income 3,565 3,414
Interest expense:
Deposits 1,645 1,549
Borrowed funds 2 8
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Total interest expense 1,647 1,557
----------- -----------
Net interest income 1,918 1,857
Provision for loan losses 25 25
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Net interest income after provision for loan losses 1,893 1,832
Noninterest income:
Service charges and other fees 60 35
Gain on sale of loans from secondary market activities 12 10
Gain on sale of mortgage servicing rights -- 2
Other 161 157
----------- -----------
Total noninterest income 233 204
Noninterest expense:
Compensation and benefits 852 1,036
Occupancy and equipment 358 363
SAIF deposit insurance premium 8 37
Advertising and promotions 18 44
Data processing 103 150
Loss (gain) on sale of other real estate owned (12) (37)
Other 422 318
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Total noninterest expense 1,749 1,911
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Income before income taxes 377 125
Income taxes 106 -
----------- -----------
Net income $ 271 $ 125
=========== ===========
Earnings per share - basic and diluted $ .15 $ N/A
Comprehensive income $ 419 $ 57
See accompanying notes to consolidated financial statements.
4
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Income
For the Six Months Ended December 31, 2000 and 1999
(Unaudited)
(In thousands)
December 31, December 31,
2000 1999
---- ----
Interest and dividend income:
Loans, including fees $ 5,362 $ 6,043
Securities 1,478 729
Other interest-earning assets 306 122
----------- -----------
Total interest income 7,146 6,894
Interest expense:
Deposits 3,242 3,103
Borrowed funds 2 81
----------- -----------
Total interest expense 3,244 3,184
----------- -----------
Net interest income 3,902 3,710
Provision for loan losses 90 100
----------- -----------
Net interest income after provision for loan losses 3,812 3,610
Noninterest income:
Service charges and other fees 121 65
Gain on sale of loans from secondary market activities 32 70
Gain on sale of mortgage servicing rights -- 180
Other 326 367
----------- -----------
Total noninterest income 479 682
Noninterest expense:
Compensation and benefits 1,751 2,002
Occupancy and equipment 735 797
SAIF deposit insurance premium 16 45
Advertising and promotions 115 134
Data processing 208 310
Loss (gain) on sale of other real estate owned 28 (37)
Other 692 678
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Total noninterest expense 3,545 3,929
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Income before income taxes 746 363
Income taxes 106 -
----------- -----------
Net income $ 640 $ 363
=========== ===========
Earnings per share - basic and diluted $ .36 N/A
Comprehensive income $ 804 $ 276
See accompanying notes to consolidated financial statements.
5
SECURITY FINANCIAL BANCORP, INC.
Statement of Changes in Stockholders' Equity
For the Six Months Ended December 31, 2000
(Unaudited)
(In thousands)
Accumulated Total
Additional Other Stock-
Common Paid-in Unearned Retained Comprehensive Holders'
Stock Capital Esop Earnings Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 194 $ 18,395 $ (1,499) $ 19,570 $ (174) $ 36,486
ESOP shares earned -- 31 52 -- -- 83
Comprehensive income:
Net income -- -- -- 640 -- 640
Change in unrealized gain
on securities available-
for-sale -- -- -- -- 164 164
----------
Total comprehensive
income -- -- -- -- -- 804
--------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 $ 194 $ 18,426 $ (1,447) $ 20,210 $ (10) $ 37,373
========= ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
6
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Cash Flows
For Six Months Ended December 31, 2000 and 1999
(Unaudited)
(In thousands)
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 640 $ 363
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 319 324
Provision for loan losses 90 100
Loss (gain) on other real estate owned 28 (37)
Origination and purchase of loans held for sale (3,805) (17,715)
Proceeds from sales of loans held for sale 3,883 10,912
Change in mortgage loan servicing rights - 4,066
Gain on sale of loans for secondary market (32) (70)
Gain on sale of loans mortgage servicing rights - (180)
ESOP expense 83 -
Accretion of discount on securities (188) (150)
Change in other assets (147) (387)
Change in other liabilities (201) (240)
----------- -----------
Net cash from operating activities 670 (3,014)
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 16,940 6,095
Principal payments on securities available for sale 610 802
Purchase of securities available for sale (28,240) (10,820)
Change in loans 8,228 20,294
Investment in life insurance policies (3,000) -
Change in premises and equipment, net (462) (138)
Proceeds from sale of other real estate 267 577
----------- -----------
Net cash from investing activities (5,657) 16,810
Cash flows from financing activities:
Change in deposits (1,544) 9,204
Change in advance payments by borrowers for taxes and insurance (113) (5)
Proceeds from borrowed funds 150 -
Repayments of advances from Federal Home Loan Bank - (50,000)
Change in Federal Home Loan Bank line of credit 2,313 -
----------- -----------
Net cash for financing activities 806 4,199
----------- -----------
Net increase (decrease) in cash and cash equivalents (4,181) 17,995
Cash and cash equivalents at beginning of period 9,854 4,520
----------- -----------
Cash and cash equivalents at end of period $ 5,673 $ 22,575
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,216 $ 3,195
Transfer from loans to foreclosed real estate 43 671
See accompanying notes to consolidated financial statements.
7
SECURITY FINANCIAL BANCORP, INC.
Notes to Consolidated Financial Statements
(1) Organization
Security Financial Bancorp Inc. ("Security Financial" or the "Company")
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" or the "Bank") 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 a total 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.
(2) Accounting Principles
The accompanying unaudited financial statements of Security Financial,
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, 2000 are not necessarily indicative of the results that may
be expected for the current fiscal year.
These financial statements should be read in conjunction with the
consolidated financial statements included in Security Financial's June 30, 2000
Form 10-KSB.
(3) Earnings per Share
Earnings per share is computed under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Amounts reported
as earnings per share reflect earnings available to common stockholders divided
by weighted average common shares outstanding of 1,791,160.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.
The following presents management's discussion and analysis of the results
of operations and financial condition of Security Financial as of the dates and
for the periods indicated. This discussion should be read in conjunction with
the Company's consolidated financial statements and the notes thereto and other
financial data appearing elsewhere in the annual report.
General
The Company is engaged primarily in attracting deposits from the general public
and using such deposits to originate one-to-four-family residential mortgage
and, to a lesser extent, consumer and other loans primarily in its market areas
and to acquire securities. The Company's revenues are derived principally from
interest earned on loans and securities, gains from sales of first mortgage
loans in the secondary market, and fees from other banking-related services. The
operations of the Company 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. The Company'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.
The Company'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. The Company, 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.
Forward-Looking Statements
This Interim Report contains certain forward-looking statements, which are based
on certain assumptions and describe future plans, strategies, and expectations
of the Company. These forward-looking statements 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 that 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. The Company does not undertake--and specifically disclaims any
obligation--to publicly release the result of any revisions that 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.
9
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended December 31,
2000 and should be read in conjunction with Security Financial's unaudited
consolidated financial statements and the notes thereto, appearing in Part I,
Item 1 of this document.
Comparison of Financial Condition at December 31, 2000 and June 30, 2000.
Total assets increased by $1.5 million from $189.6 million at June 30,
2000 to $191.1 million at December 31, 2000.
Total loans declined to $123.3 million at December 31, 2000 from $131.7
million at December 31, 1999, or 6.4%, primarily due to the decline in the
origination of residential mortgages resulting from the general slow-down in the
housing market; both new construction and purchases of existing homes. Consumer
loans declined as the Bank discontinued its indirect lending program due to high
overhead and excessive charge offs. Proceeds from payments and payoffs of loans
were used to purchase securities available-for-sale, predominantly U.S.
government agencies. Total securities increased to $38.2 million at December 31,
2000, from $27.1 million at June 30, 2000, an increase of 41.2%. The Bank also
purchased $3.0 million of Bank-owned life insurance policies for officers of the
Company.
Total deposits decreased to $150.0 million at December 31, 2000, from
$151.6 million at June 30, 2000, a decline of 1.1%. Due to the decline in loans
held for sale and the decision to exit the mortgage banking business, the
Company did not attempt to retain certain high cost certificates of deposit with
original maturities greater than one year that were due to mature by
competitively repricing those products, which resulted in funds being withdrawn
from the Company as those certificates of deposit matured. To fund a portion of
the growth in total assets, the Bank borrowed $2.3 million of Federal Home Loan
Bank advances.
Total stockholders' equity at December 31, 2000 was $37.4 million
compared to $36.5 million at June 3, 2000. The increase resulted from Security
Financial's net income for the six months ended December 31, 2000 of $640,000
and a $164,000 increase in the fair value of securities available for sale, net
of taxes.
Comparison of Operating Results for the Three Months Ended December 31, 2000 and
1999
General. Net income for the three-month period ended December 31, 2000
was $271,000 compared to net income of $125,000 for the comparable period in
1999, an increase of $145,000. 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.
Interest Income. Interest income for the quarter ended December 31, 2000
was $3.6 million compared to $3.4 million for the quarter ended December 31,
1999, an increase of $151,000, or 4.4%. The increase was primarily attributable
to an increase in the average balance of interest earning assets to $177.3
million for the three months ended December 31, 2000 from $172.7 million for the
same period in 1999. The yield on interest earning assets increased slightly to
8.04% for the three-month period ended December 31, 2000 compared to 7.91% for
the same period in 1999.
10
Interest Expense. Interest expense for the quarter ended December 31,
2000 was substantially stable at $1.6 million compared to the same period in
1999, increasing $90,000, or 5.8%, for the quarter ended December 31, 2000,
which is primarily attributable to a decline in the average balance of
interest-bearing liabilities to $146.4 million for the 2000 period from $162.9
million during the 1999 period. The decrease in the average balance of
interest-bearing liabilities was due primarily to the Company's efforts to
reduce various high-cost funding sources, including borrowings, which have been
eliminated, and high-yielding certificates of deposit. The cost of funds
increased to 4.50% for the three months ended December 31, 2000 from 3.82% for
the three months ended December 31, 1999, reflecting a general increase in
interest rates in 2000.
Net Interest Income. Net interest income increased to $1.9 million for
the three-month period ended December 31, 2000 from $1.8 million, an increase of
$61,000, or 3.3%. The net interest margin improved to 4.33% from 4.30% during
the same periods. The increase in the net interest 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 $25,000 for
the three months ended December 31, 2000 and 1999. 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.
Noninterest Income. Noninterest income was $233,000 for the three months
ended December 31, 2000 compared to $204,000 for the three-month period ended
December 31, 1999, an increase of $29,000, or 14.2%. The increase is primarily
attributable to an increase in service charges on deposit accounts and an
increase in late charge fees primarily on loans serviced for others.
Noninterest Expense. Noninterest expense for the quarter ended December
31, 2000 was $1.8 million compared to $1.9 million for the quarter ended
December 31, 1999, a decrease of $161,000, or 8.4%. The decline is primarily
attributable to a $185,000 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. The decline was offset by a
$104,000 increase in other noninterest expense, which was attributed to mailing,
postage, and other legal expense related to the Company's first annual
stockholders' meeting. Security Federal also incurred one time costs resulting
from a shareholder standstill agreement and a data processing conversion at The
Boulevard, a wholly-owned subsidiary of the Company.
Income Taxes. Security Federal had generated net operating losses in
prior years, which were being carried forward and were used to offset future tax
liabilities. These carryforwards were fully utilized during the second quarter
of fiscal 2001. Accordingly, management recorded income tax expense of $106,000
for the three months ended December 31, 2000. There was no provision for income
taxes for the three months ended December 31, 1999 due the reversal of the
valuation allowance on the deferred tax asset.
11
Comparison of Operating Results for the Six Months Ended December 31, 2000 and
1999
General. Net income for the six-month period ended December 31, 2000 was
$640,000 compared to net income of $363,000 for the comparable period in 1999,
an increase of $277,000. 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
reduced during the first quarter of fiscal year 1999.
Interest Income. Interest income for the six months ended December 31,
2000 was $7.1 million compared to $6.9 million for the six months ended December
31, 1999, an increase of $252,000, or 3.7%. The increase was primarily
attributable to an increase in the average balance of interest earning assets to
$177.8 million for the six months ended December 31, 2000 from $176.1 million
for the same period in 1999. The yield on interest earning assets increased to
8.04% for the six-month period ended December 31, 2000 compared to 7.83% for the
same period in 1999.
Interest Expense. Interest expense for the six months ended December 31,
2000 was substantially stable at $3.2 million compared to the same period in
1999, decreasing only $60,000, or 1.9%, for the six months ended December 31,
2000, which is primarily attributable to a decline in the average balance of
interest-bearing liabilities to $146.9 million for the 2000 period from $165.1
million during the 1999 period. The decrease in the average balance of
interest-bearing liabilities was due primarily to the Company's efforts to
reduce various high-cost funding sources, including borrowings and high-yielding
certificates of deposit. The cost of funds increased to 4.42% for the six months
ended December 31, 2000 from 3.86% for the six months ended December 31, 1999,
reflecting a general increase in interest rates in 2000.
Net Interest Income. Net interest income increased to $3.9 million for
the six-month period ended December 31, 2000 from $3.7 million, an increase of
$192,000, or 5.2%. The net interest margin improved to 4.39% from 4.21% during
the same periods. The increase in the net interest 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 $90,000 for
the six months ended December 31, 2000 compared to $100,000 for the six months
ended December 31, 1999. 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,
incurred losses, general economic conditions and other factors. The provision
for the six month period declined from the same period in 1999 to $93,000 of
recoveries on previously charged-off loans and a reduction in total loans
outstanding.
Noninterest Income. Noninterest income was $479,000 for the six months
ended December 31, 2000 compared to $682,000 for the six-month period ended
December 31, 1999, a decline of $203,000, or 29.8%. The decrease is primarily
attributable to the elimination of the Bank's mortgage banking operation, which
resulted in a decrease in gains on the sale of mortgage servicing rights for the
six months ended December 31, 2000 and 1999, respectively, and a reduction in
the level of gains on the sale of loans into the secondary market, which
decreased to $32,000 for the six months ended December 31, 2000 from $70,000 for
the same period in 1999. Additionally, other noninterest income declined to
$207,000 for the 2000 period
12
from $367,000 in 1999 due primarily to a decline in commitment fees on
construction loans and late charge fees primarily on loans serviced for others.
Noninterest Expense. Noninterest expense for the quarter ended December
31, 2000 was $3.5 million compared to $3.9 million for the quarter ended
December 31, 1999, a decrease of $384,000, or 9.8%. The decline is primarily
attributable to a $251,000 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. Also, impacting noninterest
expense for the period ended December 31, 2000 were lower data processing
expenses, which declined due to decreased volume of loan transactions also
related to the discontinuation of loan servicing fees.
Income Taxes. Security Federal had generated net operating losses in
prior years, which were being carried forward and were used to offset future tax
liabilities. These carryforwards were fully utilized during the second quarter
of fiscal 2001. Accordingly, management recorded income tax expense of $106,000
for the six months ended December 31, 2000. There was no provision for income
taxes for the six months ended December 31, 1999 due the reversal of the
valuation allowance on the deferred tax asset.
Liquidity and Capital Resources
The Company'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. The Company
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships.
Federal regulations require the Bank 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. The Bank has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At December 31, 2000,
the Bank's liquidity ratio for regulatory purposes was 28.93%.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities, and financing
activities. Cash flows used for operating activities were $2.3 million and $3.0
million for the six months ended December 31, 2000 and 1999, respectively. Net
cash from investing activities consisted primarily of disbursements for loan
originations and the purchase of securities and certificates of deposit with
other financial institutions, offset by principal collections on loans and
proceeds from maturation of securities. Net cash from financing activities
consisted primarily of the activity in deposit accounts.
13
The Company's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending, and investing activities during any given period. At December 31, 2000,
cash and short-term investments totaled $5.7 million. The Company has other
sources of liquidity if a need for additional funds arises, including securities
maturing within one year and the repayment of loans. The Company 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, 2000, the
Company had the ability to borrow a total of approximately $66 million from the
Federal Home Loan Bank of Indianapolis. On that date, the Company had $2.3
million of outstanding advances.
At December 31, 2000, the Company had outstanding commitments to
originate loans of $1.3 million, all of which had fixed interest rates. These
loans are to be secured by properties located in its market area. The Company
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 that are scheduled
to mature in one year or less from December 31, 2000 totaled $76.2 million.
Management believes, based on past experience, that a significant portion of
such deposits will remain with the Company. Based on the foregoing, in addition
to the Company's high level of core deposits and capital, the Company 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. The Company 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 the Company requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the Federal Home Loan Bank of Indianapolis.
The Bank is subject to various regulatory capital requirements imposed by
the OTS. At December 31, 2000, the Company was in compliance with all applicable
capital requirements.
14
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
Adequacy Action
Actual Purposes Provisions
------ -------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2000:
Total capital
(to risk-
weighted
assets) $ 28,421 24.5% $ 9,299 8.0% $ 11,624 10.0%
Tier 1 capital
(to risk-
weighted
assets) 27,167 23.4 4,650 4.0 6,974 6.0
Core capital
(to adjusted
assets) 27,167 14.7 7,368 4.0 9,210 5.0
As of June 30, 2000:
Total capital
(to risk-
weighted
assets) $ 27,606 23.6% $ 9,373 8.0% $ 11,717 10.0%
Tier 1 capital
(to risk-
weighted
assets) 26,506 27.4 4,687 4.0 7,030 6.0
Core capital
(to adjusted
assets) 26,506 14.5 7,321 4.0 9,151 5.0
Impact of Accounting Pronouncements and Regulatory Policies
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 Company was required to adopt this
statement as of July 1, 2000. The statement has not had any impact on the
consolidated financial statements and is currently not expected to have any
future impact, because the Company does not currently purchase derivative
instruments or enter into hedging activities.
15
PART II--OTHER INFORMATION FOR
SECURITY FINANCIAL BANCORP, INC.
Item 1. LEGAL PROCEEDINGS.
------------------
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
Item 2. CHANGES IN SECURITIES.
---------------------
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
None.
Item 5. OTHER INFORMATION.
-----------------
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
3.1 Certificate of Incorporation of Security Financial Bancorp,
Inc. (1)
3.2 Bylaws of Security Financial Bancorp, Inc. (1)
4.0 Form of Stock Certificates of Security Financial Bancorp, Inc.
(1)
10.1 ESOP Loan Documents (2)
10.2 Employment Agreement between Security Federal Bank & Trust and
John P. Hyland (2)
10.3 Employment Agreement between Security Financial Bancorp, Inc.
and John P. Hyland (2)
10.4 Security Federal Bank & Trust Employee Severance Compensation
Plan (2)
10.5 Security Financial Bancorp, Inc. Supplemental Executive
Retirement Plan (3)
10.6 Security Financial Bancorp, Inc. 2000 Stock-Based Incentive
Plan (4)
- -------------------------------------------------
(1) Incorporate herein by reference from the exhibits to Form
SB-2, Registration Statement and amendments thereto, initially
filed on September 20, 1999, Registration No. 333-87397.
(2) Incorporated herein by reference from the exhibits to the Form
10-QSB for the quarter ended March 31, 2000, filed May 12,
2000.
(3) Incorporated herein by reference from the exhibits to the Form
10-KSB for the year ended June 30, 2000, filed September 28,
2000.
(4) Incorporated herein by reference from the Company's Definitive
Proxy Statement for the 2000 Annual Meeting of Stockholders,
filed September 19, 2000.
16
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 14, 2001 By: /S/JOHN P. HYLAND
-----------------
John P. Hyland
President and Chief Executive
Officer
17