10-Q/A 1 g10qa-27277.txt 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q/A (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, 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 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 9321 WICKER AVENUE, ST. JOHN, INDIANA 46373 -------------------------------------------------------------------------------- (Address of principal executive offices and ZIP code) (219) 365-4344 -------------------------------------------------------------------------------- (Registrant's telephone number) Not Applicable -------------------------------------------------------------------------------- (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 February 1, 2002, Security Financial had 1,868,256 shares outstanding. 1 SECURITY FINANCIAL BANCORP, INC. FORM 10-Q INDEX

2 PART I--FINANCIAL INFORMATION FOR SECURITY FINANCIAL BANCORP, INC. Item 1. FINANCIAL STATEMENTS. --------------------- SECURITY FINANCIAL BANCORP, INC. Consolidated Balance Sheets December 31, 2001 and June 30, 2001 (Unaudited) (Dollars in thousands, except per share)

See accompanying notes to consolidated financial statements. 3 SECURITY FINANCIAL BANCORP, INC. Consolidated Statements of Income For the Three Months Ended December 31, 2001 and 2000 (Unaudited) (In thousands)

See accompanying notes to consolidated financial statements. 4 SECURITY FINANCIAL BANCORP, INC. Consolidated Statements of Income For the Six Months Ended December 31, 2001 and 2000 (Unaudited) (In thousands)

See accompanying notes to consolidated financial statements. 5 SECURITY FINANCIAL BANCORP, INC. Consolidated Statement of Changes in Stockholders' Equity For the Six Months Ended December 31, 2001 (Unaudited) (In thousands)

See accompanying notes to consolidated financial statements. 6 SECURITY FINANCIAL BANCORP, INC. Consolidated Statements of Cash Flows For Six Months Ended December 31, 2001 and 2000 (Unaudited) (In thousands)

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-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 and six months ended December 31, 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 December 31, 2001 and 2000:

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the six months ended December 31, 2001 and 2000:

At December 31, 2001, options to purchase 17,445 shares and 3,000 unearned stock awards were not included in the computation of diluted earnings per share because the options' exercise price and the stock awards' grant price were greater than the average market price of the common stock for the quarter and six-month period and were therefore antidilutive. 9 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. 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. 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 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. 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 10 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 and six months ended December 31, 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 December 31, 2001 and June 30, 2001. Total assets decreased by $5.9 million to $199.0 million at December 31, 2001 from $204.9 million at June 30, 2001. Total loans declined to $109.5 million at December 31, 2001 from $111.1 million at June 30, 2001, or 1.4%. Residential mortgage loan balances declined due to loans being paid down or refinanced in the lower interest rate environment. These balances were not 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 decreased to $146.0 million at December 31, 2001, from $149.5 million at June 30, 2001, a decline of 2.3% as management let higher-priced funding sources run off. Time deposits decreased by $6.1 million, savings accounts increased by $3.0 million and other deposits decreased by $400,000. Total stockholders' equity at December 31, 2001 was $37.1 million compared to $38.1 million at June 30, 2001. The decrease resulted from the purchase of treasury stock totaling $1.7 million. Of the treasury stock purchased $1.3 million was allocated to the Company's Stock-Based Incentive Plan. This was partially offset by Security Financial's net income for the six months ended December 31, 2001 of $334,000; and a $97,000 increase in the fair value of securities available for sale, net of taxes. Comparison of Operating Results for the Three Months Ended December 31, 2001 and 2000 General. Net income for the three-month period ended December 31, 2001 was $96,000 compared to net income of $271,000 for the comparable period in 2000, a decrease of $175,000. The decrease is primarily attributable to legal fees and other expenses incurred by the Company related to a shareholder lawsuit in the current period and a $279,000 decrease in net interest income. These declines were partially offset by a $187,000 increase in noninterest income and a $76,000 decrease in income tax expense. Interest Income. Interest income for the quarter ended December 31, 2001 was $3.0 million compared to $3.6 million for the quarter ended December 31, 2000, a decrease of $517,000, or 14.5%. The decrease was primarily attributable to a significant decrease in the yield earned on our interest earning assets which decreased to 6.61% for the three-month period ended December 31, 2001 from 8.09% for the same period in 2000. The decrease in interest income due to changes in rate was offset slightly by an increase in the average balance of interest earning 11 assets to $184.5 million for the three months ended December 31, 2001 from $176.3 million for the same period in 2000. The yield earned on the Company's cash balances decreased approximately 360 basis points for the compared periods. Interest Expense. Interest expense for the quarter ended December 31, 2001 was $1.4 million compared to $1.6 million for the quarter ended December 31, 2000, a decrease of $238,000 or 14.5%. The decrease was primarily attributable to a significant decrease in the rates paid on interest bearing liabilities. The Company's interest expense to average interest-earning assets decreased to 3.05% for the three-month period ended December 31, 2001 from 3.74% for the same period in 2000. Our cost of funds decreased to 3.53% for the three months ended December 31, 2001 from 4.50% for the three months ended December 31, 2000, reflecting a general decrease in interest rates in the quarter ended December 31, 2001. The decrease in interest expense due to changes in rate was offset partially by an increase in the average balance of interest-bearing liabilities to $159.8 million for the quarter ended December 31, 2001 from $146.5 million during the quarter ended December 31, 2000. The increase in the average balance of interest-bearing liabilities was due primarily to an increase in advances from the Federal Home Loan Bank of Indianapolis in 2001. Net Interest Income. Net interest income decreased to $1.6 million for the three-month period ended December 31, 2001 from $1.9 million, a decrease of $279,000, or 14.5%. The net interest margin decreased to 3.55% from 4.35% during the same periods. The decrease in the net interest margin is attributable primarily to a significant decrease in market interest rates, particularly on the short end of the yield curve. Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb 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 borrowers ability to repay, and other factors. Smaller balance homogeneous mortgaged 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 it 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 $45,000 and $25,000 for the three months ended December 31, 2001 and 2000, respectively. We used the same methodology and generally similar assumptions in assessing the adequacy of the allowance for both periods. The provision for the three months ended December 31, 2001 reflects an increase in loans classified as substandard from $2.3 million at September 30, 2001 to $3.0 million at December 31, 2001. The allowance for loan losses was $1.5 million, or 1.37%, of loans outstanding at December 30, 2001, as compared with $1.5 million, or 1.32%, of loans outstanding at June 30, 2001. 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 12 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 December 31, 2001 is maintained at a level that represents management's best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable. Noninterest Income. Noninterest income was $432,000 for the three months ended December 31, 2001 compared to $245,000 for the three-month period ended December 31, 2000, an increase of $187,000, or 76.3%. The increase is primarily attributable to $88,000 of income on bank owned life insurance that was purchased during the 2nd and 3rd quarters of fiscal 2001, a $57,000 increase in gains on the sale of mortgage loans from secondary market activities and an increase in service charges on deposit accounts of $25,000. Noninterest Expense. Noninterest expense for the quarter ended December 31, 2001 was $1.9 million compared to $1.8 million for the quarter ended December 31, 2000, an increase of $139,000, or 7.9%. The increase was primarily attributable to legal fees of $394,000 for the quarter ended December 31, 2001 compared to $45,000 for the quarter ended December 31, 2000. Of the $394,000 in legal fees, $285,000 will be paid to PL Capital LLC in a one-time settlement of their legal fees associated with the lawsuit styled PL CAPITAL LLC ET AL. V. BONAVENTURA, ET AL. Reimbursement of a portion of the legal fees is expected to be received from the Company's insurance provider. The increase was partially offset by a $63,000 reduction in occupancy and equipment expense, a $39,000 decrease in data processing expense, and a $26,000 reduction in compensation and benefits expense. 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. The Company recorded income tax expense of $30,000 for the three months ended December 31, 2001. This compares to $106,000 of income tax expense for the quarter ended December 31, 2000. Comparison of Operating Results for the Six Months Ended December 31, 2001 and 2000 General. Net income for the six-month period ended December 31, 2001 was $334,000 compared to net income of $640,000 for the comparable period in 2000, a decrease of $306,000. The decrease is primarily attributable to legal fees and other expenses incurred by the Company related to a shareholder lawsuit in the current period. Interest Income. Interest income for the six months ended December 31, 2001 was $6.4 million compared to $7.1 million for the six months ended December 31, 2000, a decrease of $734,000, or 10.3%. The decrease was primarily attributable to a significant decrease in the yield earned on our interest earning assets which decreased to 6.91% for the six-month period ended December 31, 2001 from 8.08% for the same period in 2000. 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 $185.8 million for the six months ended December 31, 2001 from $176.8 million for the same period in 2000. The yield earned on the Company's cash balances decreased approximately 296 basis points for the compared periods. 13 Interest Expense. Interest expense for the six months ended December 31, 2001 was $3.0 million compared to $3.2 million for the six months ended December 31, 2000, a decrease of $217,000 or 6.7%. The decrease was primarily attributable to a significant decrease in the rate paid on interest bearing liabilities. The Company's interest expense to average interest-earning assets decreased to 3.26% for the six-month period ended December 31, 2001 from 3.67% for the same period in 2000. Our cost of funds decreased to 3.69% for the six months ended December 31, 2001 from 4.42% for the six months ended December 31, 2000, reflecting a general decrease in interest rates in the six-month period ended December 31, 2001. The decrease in interest expense due to changes in rate was offset partially by an increase in the average balance of interest-bearing liabilities to $163.9 million for the six months ended December 31, 2001 from $146.9 million for the six months ended December 31, 2000. The increase in the average balance of interest-bearing liabilities was due primarily to an increase in advances from the Federal Home Loan Bank of Indianapolis in 2001. Net Interest Income. Net interest income decreased to $3.4 million for the six-month period ended December 31, 2001 from $3.9 million, a decrease of $517,000, or 13.3%. The net interest margin decreased to 3.65% from 4.41% during the same periods. The decrease in the net interest margin is attributable primarily to a significant decrease in market interest rates, particularly on the short end of the yield curve. Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, peer group information, and prevailing economic conditions. This evaluation is inherently subjective as it 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 $90,000 for the six months ended June 30, 2001 and 2000. We used the same methodology and generally similar assumptions in assessing the adequacy of the allowance for both periods. The provision for the six months ended December 31, 2001 reflects an increase in loans classified as substandard from $2.1 million at June 30, 2001 to $3.0 million at December 31, 2001. Noninterest Income. Noninterest income was $829,000 for the six months ended December 31, 2001 compared to $451,000 for the six months ended December 31, 2000, an increase of $378,000, or 83.8%. The increase is primarily attributable to $173,000 of income on bank owned life insurance that was purchased during the 2nd and 3rd quarters of fiscal 2001, an increase in gains on the sale of mortgage loans from secondary market activities of $68,000, gains on the sale of other real estate owned of $40,000 in the current period versus a $28,000 loss in the comparable period and an increase in service charges on deposit accounts of $40,000. Noninterest Expense. Noninterest expense for the six months ended December 31, 2001 was $3.7 million compared to $3.5 million for the six months ended December 31, 2000, an increase of $172,000, or 4.9%. The increase is primarily attributable to a $542,000 increase in legal fees, a majority of which related to one-time costs associated with a shareholder lawsuit for the compared periods. Reimbursement of a portion of the legal fees is expected to be 14 received from the Company's insurance provider. The increase was partially offset by a $131,000 reduction in occupancy and equipment expense, a $105,000 reduction in compensation and benefits expense, a $63,000 reduction in advertising and promotion expense and a $53,000 decrease in data processing expense. 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. The Company recorded income tax expense of $101,000 for the six months ended December 31, 2001. This compares to $106,000 of income tax expense for the six months ended December 31, 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. 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 $39,000 and $670,000 for the six months ended December 31, 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 December 31, 2001, cash and cash equivalents totaled $27.5 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, 2001, the Company had the ability to borrow a total of approximately $29.7 million from the Federal Home Loan Bank of Indianapolis. On that date, the Company had $15.0 million of outstanding advances. At December 31, 2001, the Company had outstanding commitments to originate loans of $4.8 million. Of this total, $1.6 million had fixed rates and $3.2 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 December 31, 2001 totaled $69.0 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 15 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. Security Federal's actual and required capital amounts and rates are presented below (in thousands).

16 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 SFAS No. 142, 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 noncertificate accounts. At December 31, 2001, $62.1 million, or 43%, 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 45% of Security Federal's loans carry adjustable 17 interest rates. Finally, Security Federal has focused a significant portion of its investment activities on securities with terms of five years or less. At December 31, 2001, $5.4 million, or 13%, 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 September 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 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. 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. 18 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. Following the Court's ruling, the Plaintiffs sought reimbursement of their legal fees from the Defendants. The Defendants and the Plaintiffs have agreed in principle to settle this matter for an amount of $285,000. 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) 19 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) 10.7 Employment Agreement between Security Financial Bancorp, Inc. and Security Federal Bank & Trust and Patrick J. Hunt (5) ------------------------------------------------- (1) Incorporated 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-Q 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, 2001, 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-Q 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. 20 (b) Reports on Form 8-K On October 2, 2001, the Company filed a Current Report on Form 8-K attaching as an exhibit a press release reporting the final disposition of legal action initiated against the Company in August 2001. Specifically, the press release reported 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 a July 13 Company press release was not in fact published, the Company cannot enforce its advance notice bylaw against Mr. Cainkar, a Company shareholder, 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: February 22, 2002 By: /s/ John P. Hyland ------------------- John P. Hyland President and Chief Executive Officer Date: February 22, 2002 By: /s/ Patrick J. Hunt ------------------- Patrick J. Hunt Executive Vice President and Chief Financial Officer 21

SECURITY FINANCIAL BANCORP INC 10-Q/A