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, 2002
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
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, 2002,
Security Financial had 1,864,191 shares outstanding.
1
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, 2002
and June 30, 2002 3
Consolidated Statements of Income for the Three Months
Ended September 30, 2002 and 2001 4
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended September 30, 2002 5
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
Item 4. Controls and Procedures 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
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 19
2
PART I--FINANCIAL INFORMATION FOR
SECURITY FINANCIAL BANCORP, INC.
Item 1. FINANCIAL STATEMENTS.
SECURITY FINANCIAL BANCORP, INC.
Consolidated Balance Sheets
September 30, 2002 and June 30, 2002
(Dollars in thousands, except per share data)
(Unaudited)
September 30, June 30,
2002 2002
---- -----
Assets:
Cash and due from financial institutions $ 6,087 $ 5,729
Interest-bearing deposits in financial institutions 34,275 36,515
----------- -----------
Cash and cash equivalents 40,362 42,244
Securities available for sale 37,217 33,980
Loans held for sale 1,743 1,468
Loans receivable, net of allowance for loan losses of $1,470 at
September 30, 2002 and $1,479 at June 30, 2002 101,558 105,489
Federal Home Loan Bank stock 5,300 5,300
Cash surrender value of life insurance 6,567 6,489
Other real estate owned 166 129
Premises and equipment, net 4,591 4,681
Accrued interest receivable 998 930
Other assets 401 482
----------- -----------
Total assets $ 198,903 $ 201,192
=========== ===========
Liabilities and Stockholders' Equity:
Liabilities:
Demand, NOW and money market deposits $ 21,844 $ 21,615
Savings 45,925 45,650
Time deposits 78,108 81,028
----------- -----------
Total deposits 145,877 148,293
Federal Home Loan Bank advances 15,000 15,000
Advances from borrowers for taxes and insurance 375 197
Accrued interest payable and other liabilities 525 760
----------- -----------
Total liabilities 161,777 164,250
Stockholders' Equity:
Common stock 19 19
Additional paid-in capital 18,636 18,610
Unearned ESOP (1,266) (1,293)
Unearned stock awards (891) (955)
Retained earnings, substantially restricted 22,016 21,891
Accumulated other comprehensive income 76 129
Treasury stock at cost (1,464) (1,459)
----------- -----------
Total stockholders' equity 37,126 36,942
----------- -----------
Total liabilities and stockholders' equity $ 198,903 $ 201,192
=========== ===========
See accompanying notes to consolidated financial statements.
3
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Income
For the Three Months Ended September 30, 2002 and 2001
(Unaudited)
(In thousands, except per share data)
September 30,
2002 2001
---- ----
Interest and dividend income:
Loans, including fees $ 1,811 $ 2,212
Securities 485 923
Other interest-earning assets 152 229
----------- -----------
Total interest income 2,448 3,364
Interest expense:
Deposits 870 1,424
Borrowed funds 194 194
----------- -----------
Total interest expense 1,064 1,618
----------- -----------
Net interest income 1,384 1,746
Provision for loan losses 10 45
----------- -----------
Net interest income after provision for loan losses 1,374 1,701
Noninterest income:
Service charges and other fees 93 76
Increase in cash surrender value of life insurance 78 85
Loan charges and servicing fees 51 55
Gain on sale of loans 71 31
Gain on sale of other real estate owned - 30
Insurance commission income 45 49
Other 61 71
----------- -----------
Total noninterest income 399 397
Noninterest expense:
Compensation and benefits 796 820
Occupancy and equipment 245 309
SAIF deposit insurance premium 6 7
Advertising and promotions 28 33
Legal fees 201 236
Data processing 46 91
Other 287 293
----------- -----------
Total noninterest expense 1,609 1,789
----------- -----------
Income before income taxes 164 309
Income taxes 39 71
----------- -----------
Net income $ 125 $ 238
=========== ===========
Earnings per share - basic and diluted $ .07 $ .13
Comprehensive income $ 72 $ 625
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, 2002
(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, 2002 $ 19 $ 18,610 $ (1,293) $ (955) $ 21,891 $ 129 $ (1,459) $ 36,942
ESOP shares earned - 26 27 - - - - 53
Forfeited stock awards 5 (5)
Comprehensive income:
Net income - - - - 125 - - 125
Change in unrealized
gain on securities
available for sale - - - - - (53) - (53)
---------
Total compre-
hensive
income 72
Stock awards earned - - - 59 - - - 59
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at
September 30, 2002 $ 19 $ 18,636 $ (1,266) $ (891) $ 22,016 $ 76 $ (1,464) $ 37,126
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2002 and 2001
(Unaudited)
(In thousands)
September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 125 $ 238
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 91 135
Provision for loan losses 10 45
Gain on other real estate owned - (30)
Origination and purchase of loans held for sale (7,079) (2,756)
Proceeds from sales of loans held for sale 6,875 2,785
Gain on sale of loans (71) (31)
ESOP expense 53 47
Stock award expense 59 57
Net amortization (accretion) on securities 112 (93)
Increase in cash surrender value of life insurance (78) (85)
Change in accrued interest receivable and other assets 48 693
Change in accrued interest payable and other liabilities (235) (493)
----------- -----------
Net cash from operating activities (90) 512
Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale 16,645 9,135
Principal payments on securities available for sale 105 721
Purchase of securities available for sale (20,187) (7,931)
Change in loans 3,844 (2,670)
Change in premises and equipment, net (1) -
Proceeds from sale of other real estate 40 44
----------- -----------
Net cash from investing activities 446 (701)
Cash flows from financing activities:
Change in deposits (2,416) 81
Change in advance payments by borrowers for taxes and insurance 178 118
Repayment of borrowed funds - (25)
Purchase of treasury stock - (1,562)
----------- -----------
Net cash for financing activities (2,238) (1,388)
----------- -----------
Net change in cash and cash equivalents (1,882) (1,577)
Cash and cash equivalents at beginning of period 42,244 26,501
----------- -----------
Cash and cash equivalents at end of period $ 40,362 $ 24,924
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,068 $ 1,616
Taxes 110 60
Transfer from loans to foreclosed real estate 77 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, 2002 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, 2002
Form 10-K.
(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, 2002 and 2001:
2002 2001
---- ----
BASIC
Net income $ 125 $ 238
======= ========
Weighted average common shares outstanding 1,683 1,767
======= ========
Basic earnings per common share $ .07 $ .13
======= ========
7
All options and unearned stock awards were included in the computation of
diluted earnings per share for the three months ended September 30, 2002.
2002 2001
---- ----
Diluted
Net income $ 125 $ 238
======= ========
Weighted average common shares outstanding 1,683 1,767
Diluted effect of stock options and stock awards 26 14
Diluted average common shares 1,709 1,781
======= ========
Diluted earnings per share $ .07 $ .13
======= ========
(4) Comprehensive Income
Three Months Ended
September 30,
2002 2001
---- ----
Net income $ 125 $ 238
Comprehensive income - net of taxes
Unrealized gain (loss) on securities available for sale
arising during period (53) 387
-------- --------
Comprehensive income $ 72 $ 625
======== ========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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
8
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, commercial loans 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. Security
Federal also offers insurance products through its wholly owned insurance
agency, The Boulevard, Inc., and trust services through its trust department.
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.
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended September 30, 2002 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.
9
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND JUNE 30, 2002
Total assets decreased by $2.3 million from $201.2 million at June 30, 2002
to $198.9 million at September 30, 2002.
Net loans decreased to $101.6 million at September 30, 2002 from $105.5
million at June 30, 2002, or 3.7%. Residential mortgage loan balances declined
by $3.5 million 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 declined by $500,000
as loans from the Bank's discontinued indirect lending program pay down.
Commercial loan balances were up slightly.
Total deposits decreased to $145.9 million at September 30, 2002, from
$148.3 million at June 30, 2002, a decrease of $2.4 million. The decrease was
caused by a $2.9 million decline in time deposits.
Total stockholders' equity at September 30, 2002 was $37.1 million compared
to $36.9 million at June 30, 2002. The increase resulted from net income for the
three months ended September 30, 2002 of $125,000; a $53,000 increase related to
the release of ESOP shares; and a $59,000 increase related to Incentive Plan
stock awards earned. The increase was partially offset by a $53,000 decrease in
the fair value of securities available for sale, net of taxes.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
General. Net income for the three-month period ended September 30, 2002 was
$125,000 compared to net income of $238,000 for the comparable period in 2001, a
decrease of $113,000. The decrease is primarily attributable to a $362,000
decrease in net interest income. This decrease in net interest income was
partially offset by a decrease of $180,000 in noninterest expense, a decrease of
$35,000 in the loan loss provision, and a $32,000 decrease in income taxes.
Interest Income. Interest income for the quarter ended September 30, 2002
was $2.4 million compared to $3.4 million for the quarter ended September 30,
2001, a decrease of $916,000, or 27.2%. The decrease was primarily attributable
to a significant decrease in the yield earned on our interest earning assets
which decreased to 5.31% for the three-month period ended September 30, 2002
from 7.17% for the three-month period ended September 30, 2001. A decrease in
the average balance of interest earning assets to $184.5 million for the
three-month period ended September 30, 2002 from $187.7 million for the
three-month period ended September 30, 2001, also contributed to the decrease in
interest income.
Interest Expense. Interest expense for the quarter ended September 30, 2002
was $1.1 million compared to $1.6 million for the quarter ended September 30,
2001, a decrease of $554,000, or 34.2%. The decrease was primarily attributable
to a decrease in market interest rates. The Company's interest expense to
average interest-earning assets decreased to 2.31% for the quarter ended
September 30, 2002 from 3.45% for the quarter ended September 30, 2001. The
Company's cost of funds decreased to 2.72% for the quarter ended September 30,
2002 from 3.97% for the quarter ended September 30, 2001.
10
Net Interest Income. Net interest income decreased to $1.4 million for the
three-month period ended September 30, 2002 from $1.7 million, a decrease of
$362,000, or 20.7%. The net interest margin decreased to 3.0% from 3.72% during
the same periods. The decrease in the net interest margin is primarily
attributable to a significant decrease in market interest rates.
Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, at a level management believes is appropriate to
reflect probable incurred credit losses in the loan portfolio. In evaluating the
level of the allowance for loan losses, we evaluate larger commercial,
commercial real estate, and construction loans individually for impairment based
upon collateral values, adverse situations that may affect the borrower's
ability to repay, and other factors. Smaller balance homogeneous mortgage
consumer loans are evaluated independently based upon loss factors derived from
historical loss experience, peer group information, and similar factors adjusted
for current economic conditions. This evaluation is inherently subjective as is
requires estimates that are susceptible to significant revision as more
information becomes available or as future events change. Based on our
evaluation of these factors, management made provisions of $10,000 and $45,000
for the three months ended September 30, 2002 and 2001, respectively. We used
the same methodology and generally similar assumptions in assessing the adequacy
of the allowance for both periods. The allowance for loan losses was $1.5
million, or 1.43% of loans outstanding at September 30, 2002, as compared with
$1.5 million, or 1.38% of loans outstanding at June 30, 2002. The allowance for
loan losses to non-performing loans was 58.7% at September 30, 2002, as compared
to 60.1% at June 30, 2002. The level of the allowance is based on estimates and
the ultimate losses may vary from the estimates. Management assesses the
allowance for loan losses on a monthly basis and makes provisions for loan
losses as necessary in order to maintain the adequacy of the allowance. While
management uses available information to recognize losses on loans, future loan
loss provisions may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses and may require us to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. The allowance for loan losses as of
September 30, 2002 was maintained at a level that represents management's best
estimate of probable incurred losses in the loan portfolio.
Noninterest Income. Noninterest income was $399,000 for the three months
ended September 30, 2002 compared to $397,000 for the three-month period ended
September 30, 2001, an increase of $2,000. The increase was primarily
attributable to an increase of $17,000 in deposit service charges and an
increase of $40,000 from gains on the sale of mortgage loans from secondary
market activities. These increases were partially offset by a $30,000 decrease
in gains on the sale of real estate owned, a decrease of $7,000 of income on
bank owned life insurance, a decrease in loan charges and service fees of
$4,000, a decrease in insurance commission income of $4,000, and a $10,000
decrease in other income.
Noninterest Expense. Noninterest expense decreased to $1.6 million for the
quarter ended September 30, 2002 compared to $1.8 million for the quarter ended
September 30, 2001, a decrease of $180,000, or 10.0%. The decrease was primarily
attributable to continued decreases in occupancy and equipment expense totaling
$64,000, a $45,000 decrease in data processing expense, a $35,000 decrease in
legal fees, a $24,000 reduction in compensation and benefits and a $5,000
decrease in advertising expense. Occupancy and equipment decreased primarily due
to a significant amount of furniture/equipment becoming fully depreciated. Data
processing expense decreased due to a reduction in service bureau costs related
to our computer conversion in August 2001 and compensation expense decreased due
to a decrease of two full-time equivalent employees and decreases in directors
fees.
11
Income Taxes. The Company recorded income tax expense of $39,000 for the
quarter ended September 30, 2002. This compares to $71,000 of tax expense being
recorded during the quarter ended September 30, 2001.
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.
OTS regulations 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 used in operating activities were $90,000 for the three
months ended September 30, 2002. Cash flows provided by operating activities
were $512,000 for the three months ended September 30, 2001. 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, 2002, cash
and cash equivalents totaled $40.4 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, 2002, the Company had
the ability to borrow a total of approximately $23 million from the Federal Home
Loan Bank of Indianapolis. On that date, the Company had $15 million of
outstanding advances.
At September 30, 2002, the Company had outstanding commitments to originate
loans of $8.6 million. Of this total, $7.9 million had fixed rates and $700,000
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, 2002 totaled $70.7 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.
12
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, 2002, 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, 2002:
Total capital
(to risk-
weighted
assets) $ 31,197 27.3% $ 9,132 8.0% $ 11,416 10.0%
Tier 1 capital
(to risk-
weighted
assets) 29,939 26.2 4,566 4.0 6,849 6.0
Core capital
(to adjusted
assets) 29,939 15.2 7,856 4.0 9,820 5.0
13
Requirement
to Be Well
Requirement Capitalized Under
for Capital Prompt Corrective
Adequacy Action
Actual Purposes Provisions
------ -------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 2002:
Total capital
(to risk-
weighted
assets) $ 30,949 26.8% $ 9,246 8.0% $ 11,558 10.0%
Tier 1 capital
(to risk-
weighted
assets) 29,590 25.6 4,623 4.0 6,935 6.0
Core capital
(to adjusted
assets) 29,590 14.9 7,940 4.0 9,925 5.0
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In October of 2002, the Financial Accounting Standards Board ("FASB")
released a new statement, SFAS No. 147 entitled "Acquisitions of Certain
Financial Institutions," allowing financial institutions meeting certain
criteria to reclassify unidentifiable intangible asset balances to goodwill and
cease amortization beginning as of January 1, 2002. This pronouncement is not
expected to have an impact 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.
14
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, 2002, $67.8 million, or 46%, 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
its investment activities on securities with terms of five years or less. At
September 30, 2002, $8.5 million, or 23%, 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, 2002 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, 2002 information is the most recent data available as of the filing
date.
Change in NPV as % of
Interest Rates Net Portfolio Value Portfolio Value of Assets
in Basis Points ------------------- NPV Basis Point
(Rate Shock) Amount $ Change % Change Ratio Change
------------ ------ -------- -------- ----- ------
(Dollars in thousands)
300 $ 35,389 (2,211) (5.9)% 17.36% (71) bp
200 36,562 (1,038) (2.8) 17.78 (29) bp
100 37,302 (298) (0.8) 18.02 (5) bp
Static 37,600 - - 18.07 -
(100) 37,268 (332) (0.9) 17.88 (19) 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, 2002, the effect of an immediate 300 basis point increase
or 100 basis point decrease would have a negative impact on the net portfolio
value. Due to the level of interest rates at June 30, 2002, the OTS did not
model an additional 200 or 300 basis point decrease in rates.
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
15
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.
Item 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the Chief Executive
Officer and the Chief Financial Officer of the Company concluded that the
Company's disclosure controls and procedures were adequate.
(b) CHANGES IN INTERNAL CONTROLS. The Company made no significant changes
in its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls by the
Chief Executive Officer and Chief Financial Officer.
16
PART II--OTHER INFORMATION FOR
SECURITY FINANCIAL BANCORP, INC.
Item 1. LEGAL PROCEEDINGS.
Security Financial is not a party to any pending legal proceedings.
Periodically, there have been various claims and lawsuits involving Security
Federal, such as claims to enforce liens, condemnation proceedings on properties
in which Security Federal holds security interests, claims involving the making
and servicing of real property loans, and other issues incident to Security
Federal's business. Security Federal is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of Security Federal.
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.
(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)
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)
17
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 September 6, 2002, the Company filed a Current Report on
Form 8-K reporting the date of its annual meeting. The press
release announcing the date of the annual meeting was
attached as an exhibit to the Form 8-K.
18
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, 2002 By: /s/ John P. Hyland
------------------
John P. Hyland
President and Chief Executive
Officer
Date: November 14, 2002 By: /s/ Patrick J. Hunt
-------------------
Patrick J. Hunt
Executive Vice President and Chief
Financial Officer
19
CERTIFICATION
I, John P. Hyland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Security
Financial Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
the internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect the internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ John P. Hyland
-------------------------------------
John P. Hyland
Chief Executive Officer and President
(principal executive officer)
CERTIFICATION
I, Patrick J. Hunt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Security
Financial Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
the internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect the internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Patrick J. Hunt
-----------------------------------
Patrick J. Hunt
Executive Vice President, Chief
Financial Officer