UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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.
- --------------------------------------------------------------------------------
(Exact name of registrant 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)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X)] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: as of November 1, 2001,
Security Financial had 1,928,960 shares outstanding.
SECURITY FINANCIAL BANCORP, INC.
FORM 10-Q
INDEX
Page
----
PART I: FINANCIAL INFORMATION FOR SECURITY FINANCIAL
BANCORP, INC.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2001
and June 30, 2001 3
Consolidated Statements of Income for the Three Months
Ended September 30, 2001 and 2000 4
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended September 30, 2001 5
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
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 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
2
PART I--FINANCIAL INFORMATION FOR
SECURITY FINANCIAL BANCORP, INC.
Item 1. Financial Statements.
---------------------
SECURITY FINANCIAL BANCORP, INC.
Consolidated Balance Sheets
September 30, 2001 and June 30, 2001
(Dollars in thousands, except per share data)
(Unaudited)
September 30, June 30,
2001 2001
----- ----
Assets:
Cash and due from financial institutions $ 4,882 $ 4,938
Interest-bearing deposits in financial institutions 20,042 21,563
----------- -----------
Cash and cash equivalents 24,924 26,501
Securities available for sale 45,011 46,197
Loans held for sale 1,141 1,139
Loans receivable, net of allowance for loan losses of $1,485 at
September 30, 2001 and $1,486 at June 30, 2001 113,751 111,147
Federal Home Loan Bank stock 5,300 5,300
Cash surrender value of life insurance 6,249 6,164
Other real estate owned 204 197
Premises and equipment, net 5,279 5,414
Accrued interest receivable 1,214 1,505
Other assets 692 1,353
----------- -----------
Total assets $ 203,765 $ 204,917
=========== ===========
Liabilities and Stockholders' Equity:
Liabilities:
Demand, NOW and money market deposits $ 20,232 $ 20,568
Savings 39,534 38,951
Time deposits 89,815 89,981
----------- -----------
Total deposits 149,581 149,500
Federal Home Loan Bank advances 15,000 15,000
Other borrowed funds 75 100
Advances from borrowers for taxes and insurance 546 428
Accrued interest payable and other liabilities 1,326 1,819
----------- -----------
Total liabilities 166,528 166,847
Stockholders' Equity:
Common stock 194 194
Additional paid-in capital 18,332 18,461
Unearned ESOP (1,370) (1,396)
Unearned stock awards (1,071) -
Retained earnings, substantially restricted 21,178 20,940
Accumulated other comprehensive income (loss) 258 (129)
Treasury stock at cost (284) -
----------- -----------
Total stockholders' equity 37,237 38,070
----------- -----------
Total liabilities and stockholders' equity $ 203,765 $ 204,917
=========== ===========
See accompanying notes to consolidated financial statements.
3
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Income
For the Three Months Ended September 30, 2001 and 2000
(Unaudited)
(In thousands, except per share data)
September 30,
2001 2000
---- ----
Interest and dividend income:
Loans, including fees $ 2,212 $ 2,725
Securities 923 701
Other interest-earning assets 229 155
----------- -----------
Total interest income 3,364 3,581
Interest expense:
Deposits 1,424 1,597
Borrowed funds 194 -
----------- -----------
Total interest expense 1,618 1,597
----------- -----------
Net interest income 1,746 1,984
Provision for loan losses 45 65
----------- -----------
Net interest income after provision for loan losses 1,701 1,919
Noninterest income:
Service charges and other fees 76 61
Loan charges and servicing fees 55 65
Gain on sale of loans from secondary market activities 31 20
Gain (loss) on sale of other real estate owned 30 (40)
Increase in cash surrender value of life insurance 85 -
Other 120 100
----------- -----------
Total noninterest income 397 206
Noninterest expense:
Compensation and benefits 820 899
Occupancy and equipment 309 377
SAIF deposit insurance premium 7 8
Advertising and promotions 33 97
Data processing 91 105
Other 529 270
----------- -----------
Total noninterest expense 1,789 1,756
----------- -----------
Income before income taxes 309 369
Income taxes 71 -
----------- -----------
Net income $ 238 $ 369
=========== ===========
Earnings per share - basic and diluted $ .13 $ .21
Comprehensive income $ 625 $ 384
See accompanying notes to consolidated financial statements.
4
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended September 30, 2001
(Unaudited)
(In thousands)
Accumulated
Other Total
Additional Unearned Compre- Stock-
Common Paid-In Unearned Stock Retained hensive Treasury holders'
STOCK CAPITAL ESOP AWARDS EARNINGS INCOME (LOSS) STOCK EQUITY
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at
June 30, 2001 $ 194 $ 18,461 $ (1,396) $ - $ 20,940 $ (129) $ - $ 38,070
ESOP shares earned - 21 26 - - 47
Comprehensive income:
Net income - - - - 238 - - 238
Change in unrealized
loss on securities
available for sale - - - - - 387 - 387
---------
Total compre-
hensive
income - - - - - - - 625
Purchase of treasury
stock - - - - - - (1,562) (1,562)
Stock awards issued - (150) - (1,128) - - 1,278 -
Stock awards earned - - - 57 - - - 57
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at
September 30, 2001 $ 194 $ 18,332 $ (1,370) $ (1,071) $ 21,178 $ 258 $ (284) $ 37,237
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2001 and 2000
(Unaudited)
(In thousands)
September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 238 $ 369
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 135 161
Provision for loan losses 45 65
Loss (gain) on other real estate owned (30) 40
Origination and purchase of loans held for sale (2,756) (2,196)
Proceeds from sales of loans held for sale 2,785 1,790
Gain on sale of loans for secondary market (31) (20)
ESOP expense 47 42
Stock award expense 57 -
Accretion of discount on securities (93) (72)
Increase in cash surrender value of life insurance (85) -
Change in accrued interest receivable other assets 693 97
Change in accrued interest payable other liabilities (493) (88)
----------- -----------
Net cash from operating activities 512 188
Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale 9,135 4,940
Principal payments on securities available for sale 721 322
Purchase of securities available for sale (7,931) (6,928)
Change in loans (2,670) 4,698
Change in premises and equipment, net - (197)
Proceeds from sale of other real estate 44 205
----------- -----------
Net cash from investing activities (701) 3,040
Cash flows from financing activities:
Change in deposits 81 (2,391)
Change in advance payments by borrowers for taxes and insurance 118 139
Proceeds from borrowed funds - 175
Repayment of borrowed funds (25) -
Purchase of treasury stock (1,562) -
----------- -----------
Net cash for financing activities (1,388) (2,077)
----------- -----------
Net change in cash and cash equivalents (1,577) 1,151
Cash and cash equivalents at beginning of period 26,501 9,854
----------- -----------
Cash and cash equivalents at end of period $ 24,924 $ 11,005
=========== ===========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 1,616 $ 1,581
Taxes 60 -
Transfer from loans to foreclosed real estate 21 -
See accompanying notes to consolidated financial statements.
6
SECURITY FINANCIAL BANCORP, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(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-Q and Article
10 of Regulation S-X. 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 months
ended September 30, 2001 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, 2001
Form 10-KSB.
(3) Earnings per Share
The following table presents a reconciliation of the components used to
compute basic and diluted earnings per share for the quarters ended September
30, 2001 and 2000:
2001 2000
---- ----
BASIC
Net income $ 238 $ 369
=========== ===========
Weighted average common shares outstanding $ 1,767 $ 1,786
=========== ===========
Basic earnings per common share $ .13 $ .21
=========== ===========
7
All options and unearned stock awards were included in the computation of
diluted earnings per share for the three months ended September 30, 2001.
2001 2000
---- ----
DILUTED
Net income $ 238 $ 369
=========== ===========
Weighted average common shares outstanding 1,767 1,786
Diluted effect of stock options and stock awards 14 -
----------- -----------
Diluted average common shares $ 1,781 $ 1,786
=========== ===========
Diluted earnings per share $ .13 $ .21
=========== ===========
In October 2000, the Company's stockholders approved the Security
Financial Bancorp, Inc. 2000 Stock-Based Incentive Plan ("Incentive Plan"). In
the quarter ended September 30, 2001, the Company repurchased 83,047 shares of
treasury stock at a cost of $1.6 million. The Company allocated 77,538 shares of
the treasury stock to the Incentive Plan, at an average cost of $16.88 per
share, with 66,834 shares awarded to directors and key employees. These shares
vest over a five-year period. The unamortized cost of the shares not yet earned
(vested) is reported as a reduction of stockholders' equity.
(4) Comprehensive Income
Three Months Ended
September 30,
2001 2000
---- ----
Net income $ 238 $ 369
Comprehensive income - net of taxes
Unrealized gain on securities available for sale
arising during period 387 15
----------- -----------
Comprehensive income $ 625 $ 384
=========== ===========
(5) Subsequent Events
On August 22, 2001, PL Capital LLC and certain persons affiliated with it
(including two of Security Financial's present directors) filed a lawsuit in the
Court of Chancery of the State of Delaware against Security Financial and its
remaining directors styled PL CAPITAL LLC ET AL. V. BONAVENTURA, ET AL., Civil
Action No. 19068 (the "Action"). The Action sought: (i) a declaration that
proper notice of 2001 meeting had not been given, that a press release issued by
Security Financial subsequent to the initial filing of the lawsuit was
misleading and that the directors of Security Financial (other than the
Plaintiffs) had breached their fiduciary duties, and (ii) reimbursement of
attorney's fees. On September 28, 2001, the Court ruled in favor of the
Plaintiffs on the first matter. The Court has not ruled in the matter of legal
fees. The Plaintiffs have asserted a claim of $295,000 for reimbursement of such
fees. At this time, management is unable to determine the ultimate outcome of
this matter.
8
Item 2. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
The Company has exceeded $25 million in public float as of the end of
each of the last two fiscal years. As a result, it is no longer considered a
small business issuer.
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.
Forward-Looking Statements
This quarterly 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.
General
The Company is engaged primarily in attracting deposits from the
general public and using such deposits to originate loans secured by
one-to-four-family residential real estate properties and commercial real estate
properties located in its market area 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.
9
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.
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended September 30, 2001 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 SEPTEMBER 30, 2001 AND JUNE 30, 2001
Total assets decreased by $1.1 million from $204.9 million at June 30,
2001 to $203.8 million at September 30, 2001.
Total loans increased to $113.8 million at September 30, 2001 from
$111.1 million at June 30, 2001, or 2.4%, primarily due to the funding of
commercial loans at the Bank and Company. Commercial loan balances increased by
about $8.3 million during the quarter. Residential mortgage loan balances
continue to decline as loans pay down or refinance. These balances do not get
replaced by new originations because the Bank sells the majority of the fixed
rate long-term mortgages that it originates. Consumer loans continued to decline
as loans from the Bank's discontinued indirect lending program pay down.
Total deposits increased to $149.6 million at September 30, 2001, from
$149.5 million at June 30, 2001, an increase of $81,000. There were no
significant shifts in deposit composition during the quarter.
Total stockholders' equity at September 30, 2001 was $37.2 million
compared to $38.0 million at June 30, 2001. The decrease resulted from the
funding of the Company's Incentive Plan, which totaled $1.3 million and the
purchase of treasury stock totaling $284,000. This was partially offset by
Security Financial's net income for the three months ended September 30, 2001 of
$ 238,000, a $387,000 increase in the fair value of securities available for
sale, net of taxes; a $47,000 increase related to the release of ESOP shares;
and a $57,000 increase related to Incentive Plan stock awards earned.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000
General. Net income for the three-month period ended September 30, 2001
was $238,000 compared to net income of $369,000 for the comparable period in
2000, a decrease of $131,000. The decrease is primarily attributable to legal
fees incurred by the Company related to a shareholder lawsuit and income tax
expense of $71,000 in the current period versus no income tax expense recorded
in the comparable period in fiscal 2001. Income before taxes was $309,000 for
the three-month period ended September 30, 2001 compared to $369,000 for the
comparable period in fiscal 2001.
10
Interest Income. Interest income for the quarter ended September 30,
2001 was $3.4 million compared to $3.6 million for the quarter ended September
30, 2000, a decrease of $217,000, or 5.6%. The decrease was primarily
attributable to a significant decrease in the yield earned on our interest
earning assets which decreased to 7.17% for the three-month period ended
September 30, 2001 from 8.03% for the same period in 2001. The decrease in
interest income due to changes in rate was offset slightly by an increase in the
average balance of interest earning assets to $187.7 million for the three
months ended September 30, 2001 from $178.3 million for the same period in 2000.
Interest Expense. Interest expense for the quarter ended September 30,
2001 was stable at $1.6 million compared to the same period in 2000, increasing
only $21,000, or 1.3%, for the quarter ended September 30, 2001, which is
primarily attributable to an increase in the average balance of interest-bearing
liabilities to $162.9 million for the quarter ended September 30, 2001 from
$147.3 million during the quarter ended September 30, 2000. The increase in the
average balance of interest-bearing liabilities was due primarily to $15.0
million of advances from the Federal Home Loan Bank of Indianapolis. The effect
of the change in volume was offset by a decrease in interest rates paid on our
deposits. The cost of funds decreased to 3.97% for the three months ended
September 30, 2001 from 4.34% for the three months ended September 30, 2000,
reflecting a general decrease in interest rates in the quarter ended September
30, 2001.
Net Interest Income. Net interest income decreased to $1.7 million for
the three-month period ended September 30, 2001 from $2.0 million, a decrease of
$230,000, or 11.6%. The net interest margin decreased to 3.72% from 4.45% during
the same periods. The decrease in the net interest margin is attributable
primarily to a significant decrease in market interest rates.
Provision for Loan Losses. The provision for loan losses was $45,000
for the three months ended September 30, 2001 compared to $65,000 for the three
months ended September 30, 2000. 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 $397,000 for the three
months ended September 30, 2001 compared to $206,000 for the three-month period
ended September 30, 2000, an increase of $191,000, or 92%. The increase is
primarily attributable to $85,000 of income on bank owned life insurance that
was purchased during the 2nd and 3rd quarters of fiscal 2001, a gain on the sale
of real estate owned of about $30,000 compared to a $40,000 loss for the same
period in prior year, a reduction in the loss from subsidiaries of $20,000 and
increases of about $15,000 in deposit service charges.
Noninterest Expense. Noninterest expense for the quarter ended
September 30, 2001 remained at $1.8 million compared to the quarter ended
September 30, 2000. An increase in legal fees of $193,000 were offset by a
$79,000 reduction in compensation and benefits, continued decreases in occupancy
and equipment expense totaling $68,000, a $14,000 decrease in data processing
expense, and a $64,000 decrease in advertising expense.
11
Income Taxes. Tax net operating loss carry forwards were fully utilized
during the quarter ended December 31, 2000, causing the Company to begin
recognizing income tax expense. Future periods will be impacted by the
recognition of federal and state income tax at statutory rates. The Company
recorded income tax expense of $71,000 for the quarter ended September 30, 2001.
This compares to no income tax expense being recorded during the quarter ended
September 30, 2000.
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.
Recent legislation repealed the Office of Thrift Supervision (OTS)
minimum liquidity ratio requirements. OTS regulations now require the Bank to
maintain sufficient liquidity to maintain the Bank's safe and sound operation.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities, and
financing activities. Cash flows provided by operating activities were $512,000
and $188,000 for the three months ended September 30, 2001 and 2000,
respectively. Net cash from investing activities consisted primarily of
disbursements for loan originations and the purchase of securities, offset by
principal collections on loans and proceeds from maturation and calls of
securities. Net cash from financing activities consisted primarily of the
activity in deposit and escrow accounts and the purchase of treasury stock.
The Company's most liquid assets are cash and cash equivalents. The
levels of these assets are dependent on the Company's operating, financing,
lending, and investing activities during any given period. At September 30,
2001, cash and cash equivalents totaled $24.9 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 September 30, 2001, the
Company had the ability to borrow a total of approximately $35 million from the
Federal Home Loan Bank of Indianapolis. On that date, the Company had $15
million of outstanding advances.
At September 30, 2001, the Company had outstanding commitments to
originate loans of $6.7 million. Of this total, $3.9 million had fixed rates and
$2.8 million had not locked in a rate yet. 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 September 30, 2001 totaled $75.1 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
12
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 September 30, 2001, the Company was in compliance with all
applicable capital requirements.
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 September 30, 2001:
Total capital
(to risk-
weighted
assets) $ 29,627 25.2% $ 9,399 8.0% $ 11,749 10.0%
Tier 1 capital
(to risk-
weighted
assets) 28,375 24.2 4,699 4.0 7,049 6.0
Core capital
(to adjusted
assets) 28,375 14.3 7,941 4.0 9,927 5.0
As of June 30, 2001:
Total capital
(to risk-
weighted
assets) $ 29,129 25.2% $ 9,250 8.0% $ 11,563 10.0%
Tier 1 capital
(to risk-
weighted
assets) 27,923 24.1 4,625 4.0 6,938 6.0
Core capital
(to adjusted
assets) 27,923 13.9 8,026 4.0 10,032 5.0
13
IMPACT OF ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 141, BUSINESS
COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. In July
2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,
BUSINESS COMBINATIONS, which requires that all business combinations be
accounted for under a single method, the purchase method. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 requires that
the purchase method be used for business combinations initiated after June 30,
2001. Since this accounting standard applies to business combinations initiated
after June 30, 2001, it will have no effect on the Company's financial
statements unless the Company enters into a business combination transaction.
In July 2001, the FASB also issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which requires that goodwill no longer be amortized to
earnings but instead be reviewed for impairment. The amortization of goodwill
ceases upon adoption of the Statement, which for most companies will be January
1, 2002. This pronouncement will not have a material effect on the Company's
financial statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
----------------------------------------------------------
In an attempt to manage its exposure to changes in interest rates,
management monitors Security Federal's interest rate risk. The Board of
Directors reviews at least quarterly Security Federal's interest rate risk
position and profitability. The Board of Directors also reviews Security
Federal's portfolio, formulates investment strategies, and oversees the timing
and implementation of transactions to ensure attainment of Security Federal's
objectives in the most effective manner. In addition, the Board reviews on a
quarterly basis Security Federal's asset/liability position, including
simulations of the effect on Security Federal's capital of various interest rate
scenarios.
In managing its asset/liability mix, Security Federal, depending on the
relationship between long- and short-term interest rates, market conditions, and
consumer preference, often places more emphasis on managing short-term net
interest margin than on better matching the interest rate sensitivity of its
assets and liabilities in an effort to enhance net interest income. Management
believes that the increased net interest income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of declining
or stable interest rates, provide high enough returns to justify the increased
exposure to sudden and unexpected increases in interest rates.
The Board has taken a number of steps to manage Security Federal's
vulnerability to changes in interest rates. First, Security Federal uses
customer service and marketing efforts to increase Security Federal's
non-certificate accounts. At September 30, 2001, $59.8 million, or 40%, of
Security Federal's deposits consisted of demand, NOW, money market accounts, and
savings. Security Federal believes that these accounts represent "core"
deposits, which are generally somewhat less interest rate sensitive than other
types of deposit accounts. Second, while Security Federal continues to originate
30-year, fixed-rate residential loans, all such loans are sold in the secondary
market. Currently, over 49% of Security Federal's loans carry adjustable
interest rates. Finally, Security Federal has focused a significant portion of
14
its investment activities on securities with terms of five years or less. At
September 30, 2001, $5.0 million, or 11%, of Security Federal's securities had
terms to maturity of five years or less based on their carrying value in
addition to Security Federal's mortgage-backed securities, which provide for
regular principal repayments.
The Office of Thrift Supervision provides the Company with the
information presented in the following table. It presents the change in the
Company's net portfolio value at June 30, 2001 that would occur upon an
immediate change in interest rates based on Office of Thrift Supervision
assumptions, but without effect to any steps that management might take to
counteract that change. The June 30, 2001 information is the most recent data
available as of the filing date.
Change in NPV as % of
Interest Rates Portfolio Value of Assets
-------------------------
in Basis Points Net Portfolio Value NPV Basis Point
-------------------
(Rate Shock) Amount $ Change % Change Ratio Change
------------ ------ -------- -------- ----- ------
(Dollars in thousands)
300 $ 25,265 (10,739) (29.8)% 12.84% -431 bp
200 30,624 (5,380) (14.9) 15.10 -205 bp
100 33,444 (2,560) (7.1) 16.20 -95 bp
Static 36,004 - - 17.15 -
(100) 36,184 180 .05 17.15 0 bp
(200) 35,699 (305) (.8) 16.89 -26 bp
(300) 35,177 (827) (2.3) 16.61 -54 bp
The Office of Thrift Supervision uses certain assumptions in assessing
the interest rate risk of savings associations. These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under differing interest rate scenarios, among others.
Based upon the model at June 30, 2001, the effect of an immediate 300 basis
point increase or decrease would have a negative impact on the net portfolio
value.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
15
PART II--OTHER INFORMATION FOR
SECURITY FINANCIAL BANCORP, INC.
Item 1. Legal Proceedings.
------------------
On August 22, 2001, PL Capital LLC and certain persons affiliated
with it (including two of Security Financial's present directors)
filed a lawsuit in the Court of Chancery of the State of Delaware
against Security Financial and its remaining directors styled PL
CAPITAL LLC ET AL. V. BONAVENTURA, ET AL., Civil Action No. 19068. A
description of this action and the Court's ruling are found in the
Company's Current Reports on Form 8-K filed with the Securities and
Exchange Commission and referred to below in Part II, Item 6 of this
Quarterly Report on Form 10-Q. The Plaintiffs in the action are
currently seeking from the Defendants reimbursement of the
Plaintiffs' legal fees. The Court has indicated that it will hear
this matter in mid-January 2002. No determination of the amount of
Plaintiffs' legal fees that Defendants must ultimately pay, if any,
will be made until that time.
Item 2. Changes in Securities.
---------------------
None.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
On November 13, 2001, the annual meeting of stockholders was held.
Vincent Cainkar, Sheila Donoghue, and Jay D. Johnson were elected to
serve as directors with terms expiring in 2004. The directors whose
terms continued and the years their terms expire are as follows:
Howard O. Cyrus, Sr. (2002), Dr. Peter Ferrini (2002); Richard J.
Lashley (2002); Robert L. Lauer (2002); John P. Hyland (2003); Tula
Kavadias (2003); John Wm. Palmer (2003); and Philip T. Rueth (2003).
The Company's stockholders also ratified the appointment of Crowe,
Chizek and Company LLP as the Company's independent public accountants
for the year ending June 30, 2002 and approved the stockholder
proposal.
16
The following are the results of the annual meeting:
ELECTION OF DIRECTORS.
FOR WITHHELD
--------------------- ----------------------
Nominees for
THREE YEAR TERMS NUMBER NUMBER
-------------------------- -------------------- --------------------
Mary Beth Bonaventura 533,587 9,318
------------------- -------------------
Lawrence R. Parducci 533,634 9,271
------------------- -------------------
Robert A. Vellutini 536,335 6,571
------------------- -------------------
Vincent Cainkar 1,001,807 14,000
------------------- -------------------
Sheila Donoghue 1,001,807 14,000
------------------- -------------------
Jay D. Johnson 1,001,807 14,000
------------------- -------------------
RATIFICATION OF INDEPENDENT AUDITORS.
BROKER
FOR AGAINST ABSTAIN NON-VOTE
----------------- ------------------ ------------------ ------------
1,408,021 134,282 12,815 3,594
----------------- ------------------ ------------------ ------------
STOCKHOLDER PROPOSAL.
BROKER
FOR AGAINST ABSTAIN NON-VOTE
----------------- ------------------ ------------------ ------------
926,371 549,990 78,757 3,594
----------------- ------------------ ------------------ ------------
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits and Reports On Form 8-K.
---------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Security Financial
Bancorp, Inc. (1)
3.2 Amended Bylaws of Security Financial Bancorp, Inc. (6)
4.0 Form of Stock Certificates of Security Financial
Bancorp, Inc. (1)
10.1 ESOP Loan Documents (2)
17
10.2 Employment Agreement between Security Federal Bank &
Trust and John P. Hyland (2)
18
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)
10.7 Employment Agreement between Security Financial
Bancorp, Inc. and Security Federal Bank & Trust and
Patrick J. Hunt (5)
-------------------------------------------------
(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.
(5) Incorporated herein by reference from the exhibits to
the Form 10-QSB for the quarter ended March 31, 2001,
filed May 15, 2001.
(6) Incorporated herein by reference from the exhibits to
the Form 10-KSB for the year ended June 30, 2001, filed
September 28, 2001.
(b) Reports on Form 8-K.
On August 29, 2001, the Company filed a Current Report
on Form 8-K attaching as an exhibit a press release
regarding a complaint filed by PLC Capital LLC and certain
persons affiliated with it (including two of the Company's
present directors) filed in the Court of Chancery of the
State of Delaware against the Company and its remaining
directors styled PL --- CAPITAL LLC ET AL. V. BONAVENTURA,
ET AL., Civil Action No. 19068.
-----------------------------------------
On September 7, 2001, the Company filed an amended
Current Report on Form 8-K/A correcting certain dates
provided in the Current Report on Form 8-K filed August 29,
2001.
19
On October 2, 2001, the Company filed a Current
Report on Form 8-K attaching as an exhibit a press release
reporting that the Court of Chancery of the State of
Delaware in the case of PL CAPITAL LLC ET AL. V.
BONAVENTURA, ET AL. had ruled that as a matter of law, the
risk of nonpublication was borne by the Company, and because
the July 13 press release was not in fact published, the
Company cannot enforce its advance notice bylaw against Mr.
Cainkar, who filed an intent to nominate directors with the
Company less than 90 days prior to the Company's upcoming
annual meeting.
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: November 14, 2001 By: /s/John P. Hyland
-----------------
John P. Hyland
President and Chief Executive
Officer
Date: November 14, 2001 By: /s/ Patrick J. Hunt
-------------------
Patrick J. Hunt
Executive Vice President and Chief
Financial Officer
20