10-K 1 d11350.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2002 [ ] TRANSITION REPORT UNDER 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. (Name of small business issuer in its charter) DELAWARE 35-2085053 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9321 Wicker Avenue, St. John, Indiana 46373 (Address of principal executive offices) (ZIP Code) Issuer's telephone number, including area code: (219) 365-4344 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. X -------- The issuer's gross revenues for the fiscal year ended June 30, 2002 were $13,294,000. The aggregate market value of the voting and nonvoting common equity held by nonaffiliates was $27,784,771, based upon the price ($20.35 per share) as quoted on the Nasdaq SmallCap Market for September 14, 2002. Solely for purposes of this calculation, the shares held by the directors and officers of the registrant are deemed to be held by affiliates. The number of shares outstanding of the registrant's Common Stock as of September 14, 2002 was 1,864,191. 74,269 shares were repurchased and held as treasury stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2002 Annual Report to Stockholders and of the Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated by reference in Parts II and II, respectively, of this Form 10-K. INDEX Part I Page Item 1. Business.............................................................3 Item 2. Properties..........................................................32 Item 3. Legal Proceedings...................................................32 Item 4. Submission of Matters to a Vote of Security Holders.................32 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................................................33 Item 6. Selected Financial Data.............................................33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........33 Item 8. Financial Statements and Supplementary Data.........................33 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............................. ..................33 Part III Item 10. Directors and Executive Officers of the Registrant..................33 Item 11. Executive Compensation..............................................33 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.........................................33 Item 13. Certain Relationships and Related Transactions......................34 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....34 This report contains certain "forward-looking statements" within the meaning of the federal securities laws. These statements are not historical facts, rather they are statements based on Security Financial Bancorp, Inc.'s current expectations regarding its business strategies, intended results, and future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends," and similar expressions. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could affect actual results include interest rate trends; the general economic climate in the market area in which Security Financial Bancorp, Inc. operates, as well as nationwide; Security Financial Bancorp, Inc.'s ability to control costs and expenses; competitive products and pricing; loan delinquency rates; and changes in federal and state legislation and regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Security Financial Bancorp, Inc. assumes no obligation to update any forward-looking statements. PART I ITEM 1. BUSINESS General Security Financial Bancorp, Inc. (Security Financial), headquartered in St. John, Indiana, was formed in September 1999 as the holding company for Security Federal Bank & Trust (Security Federal) in connection with the conversion of Security Federal from a mutual to a stock form of ownership. The conversion was completed on January 5, 2000 through the sale of 1,938,460 shares of common stock by Security Financial at a price of $10.00 per share. Security Financial's primary business activity is the ownership of all of Security Federal's capital stock. Security Financial is subject to the regulation of the Office of Thrift Supervision and the Securities and Exchange Commission. Security Financial is listed on the Nasdaq SmallCap Market under the symbol SFBI. Security Federal's principal business is attracting deposits from the general public and originating 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. Security Federal also offers insurance products through its wholly owned insurance agency, The Boulevard, Inc., and trust services through its trust department. Security Federal is regulated by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Security Federal's deposits are federally insured by the Federal Deposit Insurance Corporation. Security Federal is a member of the Federal Home Loan Bank System. Market Area Security Federal is headquartered in St. John, Indiana which is in Lake County. Security Federal's primary deposit gathering and lending area is concentrated in the communities surrounding its five banking offices located in Lake County and one banking office located in Porter County, as well as Cook and Will Counties in Illinois. Lake and Porter Counties are located in the northwest corner of Indiana, immediately southeast of Chicago, Illinois. It is approximately 30 miles from the heart of Lake County to the heart of neighboring Chicago. Several major highways, truck lines, and railways serve the area, providing versatility and convenience of transportation. Expanding airport facilities provide service for corporate and business needs. While primarily a home to several steel manufacturers, Lake County has a diversified mix of industry groups, including insurance and financial services, manufacturing, service, government, and retail. Some of the major employers in the area include U.S. Steel, NIPSCO Industries, Inc., Whiteco Industries, Porter Memorial Hospital, Valparaiso University, Valparaiso Community Schools, and McGill Manufacturing, Avery Graphics, ISPAT/Inland Steel, Jupiter Aluminum, LaSalle Steel, Post Tribune, The Times, and Walsh & Kelly. 3 Competition Security Federal faces intense competition for the attraction of deposits and origination of loans in its primary market area. Its most direct competition for deposits has historically come from the several commercial banks operating in Security Federal's primary market area and, to a lesser extent, from other financial institutions, such as brokerage firms, credit unions, and insurance companies. Security Federal has faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. Security Federal's competition for loans comes primarily from the commercial banks and loan brokers operating in its primary market area. Competition for deposits and the origination of loans may limit Security Federal's growth in the future. 4 Lending Activities Loan Portfolio Analysis. The following table presents the composition of Security Federal's loan portfolio at the dates indicated. Security Federal had no concentration of loans exceeding 10% of total loans receivable other than as disclosed below.

(1) Excludes loans held for sale. 5 One-to-Four-Family Real Estate Loans. Currently, Security Federal originates loans secured by one-to-four-family residences located in its primary market area. In the past, Security Federal purchased ARM loans originated through correspondent relationships and secured by properties located outside of its primary market area, many of which Security Federal continues to hold in its portfolio. Security Federal offers a variety of fixed- and adjustable-rate mortgage loan products. The loan fees charged, interest rates, and other provisions of Security Federal's mortgage loans are determined by Security Federal on the basis of its own pricing criteria and market conditions. Generally, all loans originated by Security Federal conform to secondary market underwriting standards. Security Federal's fixed-rate loans typically have maturities of 10 to 30 years, although 30-year loans constitute the largest percentage of originations. Security Federal also offers five- and seven-year balloon mortgages based on a 30-year amortization schedule. Security Federal's ARM loans are typically based on a 15-year or 30-year amortization schedule. Interest rates and payments on Security Federal's ARM loans generally are adjusted annually after a specified period ranging from three to five years to a rate typically equal to 2.75% above the one-year constant maturity Treasury index. Security Federal currently offers ARM loans with initial rates below those that would prevail under the foregoing computation, determined by Security Federal based on market factors and competitive rates for loans having similar features offered by other lenders for such initial periods. The maximum amount by which the interest rate may be increased or decreased in a given period on Security Federal's ARM loans is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan. Security Federal qualifies the borrower based on the borrower's ability to repay the ARM loan based on the maximum interest rate at the first adjustment in the case of one-year ARM loans and based on the initial interest rate in the case of ARM loans that adjust after three or more years. Security Federal does not originate negative amortization loans. The terms and conditions of the ARM loans offered by Security Federal, including the index for interest rates, may vary from time to time. Security Federal believes that the annual adjustment feature of its ARM loans also provides flexibility to meet competitive conditions as to initial rates. Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment. As a result of the low interest rate environment in recent years, Security Federal has experienced a strong customer preference for fixed-rate loans. The retention of ARM loans in Security Federal's loan portfolio helps reduce Security Federal's exposure to changes in the interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs due to changed rates to be paid by the customer. It is possible that, during periods of rising interest rates, the risk of default on ARM loans may increase as a result of repricing and the increased costs to the borrower. Furthermore, because the ARM loans originated by Security Federal generally provide, as a marketing incentive, for initial rates of interest below the rates that would apply were the adjustment index used for pricing initially (discounting), these loans are subject to increased risks of default or delinquency. Another consideration is that although ARM loans allow Security Federal to increase the sensitivity of its asset base to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, Security Federal has no assurance that yields on ARM loans will be sufficient to offset increases in Security Federal's cost of funds. While fixed-rate, one-to-four-family residential real estate loans are normally originated with 10- to 30-year terms, such loans typically remain outstanding for substantially shorter periods. This is because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all mortgage loans in Security Federal's loan portfolio contain due-on-sale clauses providing that Security Federal may declare the unpaid amount due and payable upon the sale of the property securing the loan. Security Federal enforces these due-on-sale clauses to the extent permitted by law and as business judgment dictates. Thus, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates, and the interest rates payable on outstanding loans. Security Federal requires title insurance insuring the status of its first lien on real estate secured loans and also requires that the fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least equal to the outstanding loan balance. 6 Security Federal's residential mortgage loans typically do not exceed 80% of the appraised value of the property. Security Federal's lending policies permit Security Federal to lend up to 97% of the appraised value of the property; however, Security Federal requires private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the property. Security Federal obtains appraisals on all first mortgage real estate loans from outside appraisers. Multi-Family and Commercial Real Estate Loans. Security Federal originates and purchases mortgage loans for the acquisition, refinancing, and construction of multi-family and commercial real estate properties. Security Federal began offering commercial loans in 1996. Multi-family and commercial real estate loans are amortizing loans that are generally originated with fixed interest rates with rates tied to the U.S. Treasury index but are occasionally originated with variable rates with rates tied to the prime lending rate. The maximum term for a fixed-rate, multi-family loan generally is five years. The maximum loan-to-value ratio for a multi-family or commercial loan is 75%. At June 30, 2002, the largest multi-family loan had a committed balance of $1.1 million and was secured by an apartment building located in Chicago, Illinois and was performing according to its original terms. This is a loan participation with a correspondent bank. At June 30, 2002, Security Federal's commercial real estate loans were secured by office, retail, and owner occupied properties, the majority of which are located in Indiana and Illinois. Security Federal had commitments for two loans totaling $1.5 million in Colorado. The outstanding balances on these two loans were $500,000 at June 30, 2002. At June 30, 2002, Security Federal's largest commercial real estate loan had an outstanding balance of $1.7 million. The loan is secured by a strip center located in Dyer, Indiana. At June 30, 2002, this loan was performing according to its original terms. Multi-family and commercial real estate lending affords Security Federal an opportunity to receive interest at rates higher than those generally available from one-to-four-family residential lending. However, loans secured by these properties usually are greater in amount and are more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one-to-four-family residential mortgage loans. Because payments on loans secured by income producing properties are often dependent on the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. Security Federal seeks to minimize these risks by generally limiting the maximum loan-to-value ratio to up to 75% for multi-family and commercial real estate loans and by strictly scrutinizing the financial condition of the borrower, the cash flow of the project, the quality of the collateral, and the management of the property securing the loan. Security Federal also generally obtains loan guarantees from financially capable parties based on a review of personal financial statements. Residential Construction Loans. Security Federal originates residential construction loans to local home builders and to individuals for the construction and acquisition of personal residences. Construction loans to individuals are made on the same terms as Security Federal's mortgage loans, but provide for the payment of interest only during the construction phase, which is usually six months, with a contingency for an additional six months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Before making a commitment to fund a construction loan, Security Federal requires an appraisal of the property by an independent certified appraiser. Security Federal also reviews and inspects each project before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed through approved title companies after inspection based on the percentage of completion. Construction lending affords Security Federal the opportunity to earn higher interest rates with shorter terms to maturity relative to single-family permanent mortgage lending. Construction lending, however, is generally considered to involve a higher degree of risk than single-family permanent mortgage lending because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost of the project. These loans are generally more difficult to evaluate and monitor. If the estimate of construction cost proves to be inaccurate, Security Federal may be required to advance funds beyond the amount originally committed to protect the value of the project. If 7 the estimate of value upon completion proves to be inaccurate, Security Federal may be confronted with a project whose value is insufficient to ensure full repayment. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry more risk because the payoff for the loan depends on the builder's ability to sell the property before the construction loan is due. It is Security Federal's general policy to obtain regular financial statements from builders so that it can monitor their financial strength and ability to repay. Consumer and Other Loans. Another significant lending activity of Security Federal is the origination of consumer and other loans. Security Federal's consumer and other loans consist primarily of home equity and second mortgage loans and automobile loans. Most of these loans are made to existing customers. Security Federal originates fixed and open-end home equity loans. Open-end equity loans are in the form of lines of credit. Security Federal's home equity loans have variable interest rates tied to the six-month U.S. Treasury index and the prime lending rate. Security Federal imposes a maximum loan-to-value ratio on its home equity loans of 80% after considering both the first and second mortgage loans. The maximum loan-to-value rate on Security Federal's second mortgage loans is 80%. Both Security Federal's home equity and second mortgage loans are limited in term to 120 months. Security Federal's home equity loans and second mortgages may have greater credit risk than one-to-four-family residential mortgage loans because they are secured by mortgages subordinated to an existing first mortgage on the property. Security Federal also originates consumer loans secured by automobiles and, occasionally, boats and other recreational vehicles. Automobile loans are secured by both new and used cars and light trucks. Both new and used cars are financed for a period of up to 66 months, and the rate on such loans is fixed for the term of the loan. In the past, Security Federal also offered indirect automobile loans. The indirect automobile loans were originated through automobile dealers located in Indiana and Illinois. These dealers provided Security Federal applications to finance vehicles sold by their dealerships. At June 30, 2002, $867,000, or 48.2%, of all automobile loans were indirect automobile loans. Security Federal no longer offers indirect automobile loans. Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss, or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as Security Federal, and a borrower may be able to assert against such assignee claims and defenses that it has against the seller of the underlying collateral. Commercial Business Loans. Security Federal makes commercial business loans primarily in its market area to a variety of professionals, sole proprietorships, and small businesses. Security Federal offers a variety of commercial lending products, including term loans for fixed assets and working capital, revolving lines of credit, letters of credit, and Small Business Administration guaranteed loans. Secured commercial business loans are generally made in amounts up to $500,000, although Security Federal's policy would permit it to lend up to its legal lending limit of $4.4 million. Unsecured lines of credit generally are made for up to $250,000. Term loans are generally offered with fixed rates of interest of up to 5 years. Business lines of credit have adjustable rates of interest and are subject to annual review and renewal. Business loans with variable rates of interest adjust on a daily basis and are generally indexed to the prime rate as published in The Wall Street Journal. 8 In making commercial business loans, Security Federal considers the financial statements of the borrower, Security Federal's lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, and the value of the collateral. Commercial business loans are generally secured by a variety of collateral, primarily equipment, assets, and accounts receivable, and are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loans are made in amounts of up to 75% of the adjusted value of the collateral securing the loan. Unlike mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment or other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise, and may fluctuate in value. At June 30, 2002, the Company had a $7.0 million loan relationship with an insurance company located in Deerfield, Illinois. The commercial loan is a participation purchased from a correspondent bank. Because the total loan relationship would exceed Security Federal's legal lending limit, Security Financial, the holding company, owns $3.0 million of the participation. At June 30, 2002, the loans at both Security Federal and Security Financial were performing according to their original terms. Loans to One Borrower. The maximum amount that Security Federal may lend to one borrower is limited by federal regulations. At June 30, 2002, Security Federal's regulatory limit on loans to one borrower was $4.4 million. At that date, Security Federal's largest amount of loans to one borrower, including the borrower's related interests, was $4.0 million and consisted of four loans. These loans were performing according to its original terms at June 30, 2002. Maturity of Loan Portfolio. The following table presents certain information at June 30, 2002 regarding the dollar amount of loans maturing in consolidated portfolio based on their contractual terms to maturity but does not include potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as becoming due within one year. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income, and allowance for loan losses.

(1) Excludes loans held for sale. 9 The following table presents the dollar amount of all loans due after June 30, 2003, which have fixed interest rates and have floating or adjustable interest rates.

(1) Excludes loans held for sale. Scheduled contractual principal repayments of loans do not reflect the actual life of the loans. The average life of a loan is substantially less than its contractual term because of prepayments. In addition, due-on-sale clauses on loans generally give Security Federal the right to declare loans immediately due and payable if, among other things, the borrower sells the real property when the mortgage and the loan is not repaid. The average life of a mortgage loan tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, tends to decrease when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. Loan Solicitation and Processing. Security Federal's lending activities follow written, nondiscriminatory, underwriting standards and loan origination procedures established by Security Federal's Board of Directors and management. Loan originations come from a number of sources. The customary sources of loan originations are loan origination officers, realtors, referrals, and existing customers. Various executive officers have the authority to approve secured and unsecured loans as permitted by the Board of Directors. Currently, Mr. Hyland has authority to approve secured and unsecured loans with balances of up to and including $500,000 and $250,000, respectively. Larger loans must be approved by either Mr. Hyland and at least two other members of Security Federal's corporate loan committee, four members of the corporate loan committee, or the loan committee of the Board. Any loans exceeding $2.0 million must be approved by the Board. Loan Originations, Purchases, and Sales. Security Federal's mortgage lending activities are conducted primarily by loan personnel operating at its full service banking offices. All loans originated by Security Federal are underwritten by Security Federal pursuant to Security Federal's policies and procedures. Security Federal originates both adjustable-rate and fixed-rate mortgage loans. Security Federal's ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future level of interest rates. Security Federal recently has sought to expand its commercial lending to enhance the yield on its loan portfolio and to encourage business relationships with the borrowers, including through checking and other accounts and other loans. Additionally, as part of its mortgage lending activities, Security Federal purchases whole loans and, to a limited extent, loan participations, with servicing performed by others. 10 In an effort to manage its interest rate risk position, Security Federal generally sells the fixed-rate mortgage loans with terms in excess of 15 years that it originates. However, Security Federal has retained and will retain selected 30-year fixed-rate loans in order to build its loan portfolio and increase the yield on its interest-earning assets. The sale of loans in the secondary mortgage market reduces Security Federal's risk that the interest rates paid to depositors will increase while Security Federal holds long-term fixed-rate loans in its portfolio. It also allows Security Federal to continue to fund loans when savings flows decline or funds are not otherwise available. Security Federal generally sells loans, servicing released without recourse to various secondary market loan purchasers. Gains, net of origination expense, from the sale of such loans are recorded at the time of sale. Generally a loan is committed to be sold and a price for the loan is fixed at the time of application and the interest rate is accepted by the customer. This eliminates the risk to Security Federal that a rise in market interest rates will reduce the value of a mortgage before it can be sold. In the past, Security Federal generally retained the servicing rights on the mortgage loans it sold. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. In October 1998, however, Security Federal sold the servicing rights related to approximately $920.0 million in loans serviced for others. In August 1999, Security Financial arranged for the sale of the remaining servicing rights held by Security Federal, relating to approximately $320.0 million in loans serviced for others. Currently, all loans sold by Security Federal are sold servicing released. 11 The following table presents total loans (including loans held for sale) originated, purchased, sold, and repaid during the periods indicated.

12 Loan Commitments. Security Federal issues commitments for loans conditioned upon the occurrence of certain events. Commitments are made in writing on specified terms and conditions and are typically honored for up to 90 days from approval. At June 30, 2002, Security Federal had fixed-rate loan commitments totaling $3.6 million, ranging in rates from 5.75% to 7.50%. Security Federal had $2.3 million of variable rate loan commitments outstanding at June 30, 2002. Loan Fees. In addition to interest earned on loans, Security Federal receives income from fees in connection with loan originations, loan modifications, and late payments and for miscellaneous services related to its loans. Income from these activities varies from period to period depending upon the volume and type of loans made and competitive conditions. Security Federal charges loan origination fees for fixed-rate loans, which are calculated as a percentage of the amount borrowed. As required by applicable accounting principles, loan origination fees and discount points in excess of loan origination costs are deferred and recognized over the contractual remaining lives of the related loans on a level yield basis. Discounts and premiums on loans purchased are accreted and amortized in the same manner. At June 30, 2002, Security Federal had $95,000 of net deferred loan fees. Security Federal recognized $108,000 and $118,000 of loan fees during the years ended June 30, 2002 and 2001, respectively, in connection with loan refinancings, payoffs, sales, and ongoing amortization of outstanding loans. Nonperforming Assets and Delinquencies. When a borrower fails to make a required loan payment, Security Federal attempts to cure the deficiency by contacting the borrower and seeking the payment. A late notice is mailed after 15 days of delinquency. In most cases, deficiencies are cured promptly. If a delinquency continues beyond the 30th day of the delinquency, a phone call to the borrower is usually made by the 45th day of delinquency. On or about the 60th day of delinquency, Security Federal sends a certified letter to the borrower giving the borrower 30 days in which to cure the delinquency. While Security Federal generally prefers to work with borrowers to resolve problems, Security Federal will institute foreclosure or other proceedings after the 90th day of a delinquency, as necessary, to minimize any potential loss. Management informs the Board of Directors monthly of the amount of loans delinquent more than 60 days, all loans in foreclosure, and all foreclosed and repossessed property that Security Federal owns. Security Federal ceases accruing interest on mortgage loans when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Security Federal does not continue to accrue interest on mortgage loans past due 90 days or more. The amount of interest foregone on nonaccrual loans was $114,000 during fiscal 2002. The amount of interest foregone on nonaccrual loans was not material during fiscal 2001. 13 The following table presents information with respect to Security Federal's nonperforming assets at the dates indicated. For the years presented, Security Federal has had no impaired loans or troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates).

(1) Total nonaccruing loans equals total nonperforming loans. (2) Nonperforming assets consist of nonperforming loans, impaired loans, real estate owned and other repossessed assets. 14 The following table sets forth the delinquencies in Security Federal's loan portfolio as of the dates indicated.

Real Estate Owned. Real estate acquired by Security Federal as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until sold. When property is acquired, it is recorded at fair market value at the date of foreclosure, establishing a new cost basis. If the fair value declines, Security Federal records a valuation allowance through expense. Costs after acquisition are expensed. At June 30, 2002, Security Federal had $129,000 of real estate owned, consisting of $53,000 of vacant land and the remainder in residential property. Asset Classification. The Office of Thrift Supervision has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, Office of Thrift Supervision examiners have authority to identify problem assets during examinations and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful can be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "special mention." Security Federal monitors "special mention" assets. 15 The aggregate amounts of Security Federal's classified and special mention assets at the dates indicated were as follows:

At June 30, 2002, assets designated substandard consisted of real estate owned of $129,000, residential mortgage loans totaling $1.7 million, home equity and second mortgages totaling $211,000, automobile loans totaling $133,000, commercial loans totaling $1.3 million, and other loans of $40,000. Assets designated as special mention consisted of $533,000 in residential mortgage loans, $113,000 of vacant land, $1,000 of home equity and second mortgages, and $7,000 of automobile loans. Allowance for Loan Losses. In originating loans, Security Federal recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions, and in the case of a secured loan, the quality of the security for the loan. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is for probable incurred credit losses and is based on management's evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. At June 30, 2002, Security Federal had an allowance for loan losses of $1.5 million. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while Security Federal believes that it has established its existing allowance for loan losses as required by accounting principles generally accepted in the United States, there can be no assurance that regulators, in reviewing Security Federal's loan portfolio, will not request Security Federal to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect Security Federal's financial condition and results of operations. 16 The following table presents an analysis of Security Federal's allowance for loan losses.

17 The following table presents the approximate allocation of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category.

(1) Excludes loans held for sale. 18 Securities Activities Security Financial is permitted under federal law to invest in various types of liquid assets, including U.S. government obligations, securities of various federal agencies and of state and municipal governments, deposits at the Federal Home Loan Bank of Indianapolis, certificates of deposit of federally insured institutions, certain bankers' acceptances, and federal funds. Within certain regulatory limits, Security Financial may also invest a portion of its assets in commercial paper and corporate debt securities. Savings institutions like Security Financial are also required to maintain an investment in Federal Home Loan Bank of Indianapolis stock. Security Financial is required under federal regulations to maintain a minimum amount of liquid assets. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires that securities be categorized as "held to maturity," "trading securities," or "available for sale," based on management's intent as to the ultimate disposition of each security. Statement of Financial Accounting Standards No. 115 allows debt securities to be classified as "held to maturity" and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold those securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security's prepayment risk, increases in loan demand, or other similar factors cannot be classified as "held to maturity." Debt and equity securities held for current resale are classified as "trading securities." These securities are reported at fair value, and unrealized gains and losses on the securities would be included in earnings. Security Financial does not currently use or maintain a trading account. Debt and equity securities not classified as either "held to maturity" or "trading securities" are classified as "available for sale." These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of equity. At June 30, 2002, all of Security Financial's mortgage-backed securities and investment securities were classified as "available for sale." All of Security Financial's securities carry market risk insofar as increases in market rates of interest may cause a decrease in their market value. They also carry prepayment risk insofar as they may be called before maturity in times of low market interest rates, so that Security Financial may have to invest the funds at a lower interest rate. Security Financial's investment policy permits engaging in hedging activities directly related to its mortgage banking activities. Investments are made based on certain considerations, which include the interest rate, yield, settlement date and maturity of the investment, Security Financial's liquidity position, and anticipated cash needs and sources. The effect that the proposed investment would have on Security Financial's credit and interest rate risk and risk-based capital is also considered. Security Financial purchases securities to provide necessary liquidity for day-to-day operations. Security Financial also purchases securities when investable funds exceed loan demand. The following table presents the amortized cost and fair value of Security Financial's securities, by accounting classification and by type of security, at the dates indicated.

19 All of Security Financial's mortgage-backed securities are issued or guaranteed by agencies of the U.S. government. Accordingly, they carry lower credit risk than mortgage-backed securities of a private issuer. However, mortgage-backed securities still carry market risk, the risk that increases in market interest rates may cause a decrease in market value, and prepayment risk, the risk that the securities will be repaid before maturity and that Security Federal will have to reinvest the funds at a lower interest rate. At June 30, 2002, Security Financial did not own any securities other than U.S. government and agency securities, which had an aggregate book value in excess of 10% of Security Financial's retained earnings at that date. The following presents the activity in the mortgage-backed securities and securities portfolios for the periods indicated.

(1) All mortgage-backed securities are classified as available for sale. (2) All securities are classified as available for sale. The following table presents certain information regarding the carrying value (which equals fair value), weighted average yields, and maturities or periods to repricing of Security Financial's debt securities at June 30, 2002, all of which are available for sale.

20 Deposit Activities and Other Sources of Funds General. Deposits are the major external source of funds for Security Federal's lending and other investment activities. In addition, Security Federal also generates funds internally from loan principal repayments and prepayments and maturing investment securities. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. Security Federal may use borrowings from the Federal Home Loan Bank of Indianapolis to compensate for reductions in the availability of funds from other sources. Presently, Security Federal has no other borrowing arrangements aside from Federal Home Loan Bank of Indianapolis advances. Deposit Accounts. A majority of Security Federal's depositors reside in Indiana and Illinois. Security Federal's deposit products include savings accounts, checking and NOW accounts, certificates of deposit, individual retirement accounts, and money market accounts. Deposit account terms vary with the principal differences being the minimum balance deposit, early withdrawal penalties, and the interest rate. Security Federal reviews its deposit mix and pricing weekly. Security Federal does not utilize brokered deposits and currently does not and does not intend to solicit jumbo certificates of deposit at rates above those available generally in the market. Security Federal believes that it is competitive in the interest rates it offers on its deposit products. Security Federal determines the rates paid based on a number of factors, including rates paid by competitors, Security Federal's need for funds and cost of funds, borrowing costs, and movements of market interest rates. Historically, Security Federal has relied predominately on certificates of deposit with terms of more than one year. In the unlikely event Security Federal is liquidated, depositors will be entitled to full payment of their deposit accounts before any payment is made to Security Financial as the sole stockholder of Security Federal. The following table indicates the amount of Security Federal's jumbo certificates of deposit by time remaining until maturity as of June 30, 2002. Jumbo certificates of deposits have principal balances of $100,000 or more.

21 The following table presents information concerning average balances and rates paid on Security Federal's deposit accounts at the dates indicated.

Deposit Flow. The following table presents the balances, with interest credited, and changes in dollar amounts of deposits in the various types of accounts offered by Security Federal between the dates indicated.

22 Time Deposits by Rates and Maturities. The following table presents the amount of time deposits in Security Federal categorized by rates and maturities at the dates indicated.

Deposit Activity. The following table presents the deposit activity of Security Federal for the periods indicated.

Borrowings. Security Federal has the ability to use advances from the Federal Home Loan Bank of Indianapolis to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank of Indianapolis functions as a central reserve bank providing credit for savings associations and certain other member financial institutions. As a member of the Federal Home Loan Bank of Indianapolis, Security Federal is required to own capital stock in the Federal Home Loan Bank of Indianapolis and is authorized to apply for advances on the security of the capital stock and certain of its mortgage loans and other assets, principally securities that are obligations of or guaranteed by the U.S. government or its agencies, provided certain creditworthiness standards have been met. Advances are made under several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. At June 30, 2002, Security Federal had the ability to borrow a total of approximately $28.4 million from the Federal Home Loan Bank of Indianapolis. At that date, Security Federal had $15.0 million of advances outstanding. The following tables presents certain information regarding Security Federal's use of Federal Home Loan Bank of Indianapolis advances during the periods and at the dates indicated.

Trust Services In 1997, Security Federal established a Trust Services department within Security Federal, which provides trust and investment services to individuals, partnerships, corporations, and institutions. Security Federal believes that the trust department allows it to provide investment opportunities and fiduciary services to both current and prospective customers. Consistent with Security Federal's operating strategy, Security Federal will continue to emphasize the growth of its trust service operations to grow assets and increase fee-based income. Security Federal has implemented several policies governing the practices and procedures of the trust department, including policies relating to maintaining confidentiality of trust records, investment of trust property, handling conflicts of interest, and maintaining impartiality. At June 30, 2002, the trust department managed 261 accounts with aggregate assets of $7.8 million. The trust department is monitored by the Board of Directors' Trust Committee. Personnel As of June 30, 2002, Security Federal had 53 full-time employees and 21 part-time employees, none of whom is represented by a collective bargaining unit. Security Federal believes that its relationship with its employees is good. Subsidiary Activities Security Financial's sole subsidiary is Security Federal. The following are descriptions of Security Federal's wholly owned subsidiaries. The Boulevard, Inc. The Boulevard, Inc. (Boulevard) was originally formed in 1970 but later became inactive until 1999. It currently operates as a wholly owned service corporation of Security Federal. Boulevard is a certified insurance agent and currently acts as a sub-agent for other insurance agencies, offering insurance products including property and casualty and life and health insurance. Boulevard also intends to offer financial services in the near future. Other Subsidiaries. Security Federal has two other wholly owned subsidiaries: Strategic Financial Corp. and Family Home Service Corp. Strategic Financial Corp. and Family Home Service Corp. have both been inactive since 1997. REGULATION AND SUPERVISION General As a savings and loan holding company, Security Financial is required by federal law to file reports with, and otherwise comply with, the rules and regulations of the Office of Thrift Supervision. Security Federal is subject to extensive regulation, examination, and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as the deposit insurer. Security Federal is a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings Association Insurance Fund managed by the Federal Deposit Insurance Corporation. Security Federal must file reports with the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The Office of Thrift Supervision and/or the Federal Deposit Insurance Corporation conduct periodic examinations to test Security Federal's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan 24 loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, or the Congress, could have a material adverse impact on Security Financial, Security Federal, and their operations. Certain of the regulatory requirements applicable to Security Federal and to Security Financial are referred to below or elsewhere in this report. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this report does not purport to be a complete description of such statutes and regulations and their effects on Security Federal and Security Financial. Holding Company Regulation Security Financial is a nondiversified unitary savings and loan holding company within the meaning of federal law. Under prior law, a unitary savings and loan holding company, such as Security Financial was not generally restricted as to the types of business activities in which it may engage, provided that Security Federal continued to be a qualified thrift lender. See "Federal Savings Institution Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Security Financial will not qualify for the grandfather and will be limited to such activities. Upon any nonsupervisory acquisition by Security Financial of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the Office of Thrift Supervision, Security Financial would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain activities authorized by Office of Thrift Supervision regulation. A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the Office of Thrift Supervision and from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision considers the financial and managerial resources and future prospects of Security Financial and the institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community, and competitive factors. The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. Security Federal must notify the Office of Thrift Supervision 30 days before declaring any dividend to Security Financial. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision, and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Federal Savings Institution Regulation Business Activities. The activities of federal savings institutions are governed by federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal association (e.g., commercial, nonresidential real property loans and consumer loans) are limited to a specified percentage of the institution's capital or assets. 25 Capital Requirements. The Office of Thrift Supervision capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS rating system), and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage, and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The capital regulations also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. For the present time, the Office of Thrift Supervision has deferred implementation of the interest rate risk capital charge. At June 30, 2002, Security Federal met each of its capital requirements. The following table presents Security Federal's capital position at June 30, 2002.

Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3%, or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized," and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions, and expansion. The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. 26 Insurance of Deposit Accounts. Security Federal is a member of the Savings Association Insurance Fund. The Federal Deposit Insurance Corporation maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for Savings Association Insurance Fund member institutions are determined semiannually by the Federal Deposit Insurance Corporation and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation (FICO) to recapitalize the predecessor to the Savings Association Insurance Fund. During 2002, FICO payments for Savings Association Insurance Fund members approximated 2.1 basis points. The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in Savings Association Insurance Fund insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Security Federal. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices; is in an unsafe or unsound condition to continue operations; or has violated any applicable law, regulation, rule, order, or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The management of Security Federal does not know of any practice, condition, or violation that might lead to termination of deposit insurance. Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. QTL Test. Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12-month period. A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of June 30, 2002, Security Federal met the qualified thrift lender test. Recent legislation has expanded the extent to which education loans, credit card loans, and small business loans may be considered "qualified thrift investments." Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares, and payments to stockholders of another institution in a cash-out merger. Under the current regulation, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the two top categories); the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years; the institution would be undercapitalized following the distribution, or the distribution would otherwise be contrary to a statute, regulation, or agreement with Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Security Federal, it is a subsidiary of a holding company. In the event Security Federal's capital fell below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of more than normal supervision, Security Federal's ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such distribution would constitute an unsafe or unsound practice. 27 Transactions with Related Parties. Security Federal's authority to engage in transactions with "affiliates" (e.g., any company that controls or is under common control with an institution, including Security Financial and its nonsavings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with nonaffiliated companies. In addition, savings institutions are prohibited from lending to any affiliate which is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. Security Federal's authority to extend credit to executive officers, directors, and 10% shareholders ("insiders"), as well as entities such persons control, is also governed by federal law. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law limits both the individual and aggregate amount of loans Security Federal may make to insiders based, in part, on Security Federal's capital position and requires certain board approval procedures to be followed. Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers, and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Office of Thrift Supervision determines that a savings institution fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the standard. Federal Home Loan Bank System Security Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Security Federal, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 1/20 of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. Security Federal was in compliance with this requirement with an investment in Federal Home Loan Bank stock at June 30, 2002 of $5.3 million. The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced or interest on future Federal Home Loan Bank advances increased, Security Federal's net interest income would likely also be reduced. Recent legislation has changed the structure of the Federal Home Loan Banks' funding obligations for insolvent thrifts, 28 revised the capital structure of the Federal Home Loan Banks, and implemented entirely voluntary membership for Federal Home Loan Banks. Management cannot predict the effect that these changes may have with respect to its Federal Home Loan Bank membership. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on transaction accounts over $5.5 million to and including $42.8 million; a 10% reserve ratio is applied above $42.8 million. The first $5.0 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The accounts are adjusted annually. Security Federal complies with the foregoing requirements. FEDERAL AND STATE TAXATION Federal Taxation General. Security Financial and Security Federal report their income on a fiscal year ending June 30, consolidated basis using the accrual method of accounting. The federal income tax laws apply to Security Financial and Security Federal in the same manner as to other corporations with some exceptions, including particularly Security Federal's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to Security Federal or Security Financial. Security Federal's federal tax returns have been either audited or closed under the statute of limitations through tax year ended June 30, 1996. Bad Debt Reserves. For fiscal years beginning before December 31, 1995, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986, as amended, were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Thrift institutions eligible to be treated as "small banks," those with assets of $500 million or less, are allowed to use the experience method that applies to "small banks," while thrift institutions that are treated as large banks, those with assets exceeding $500 million, are required to use only the specific charge-off method. As a result, the percentage of taxable income method of accounting for bad debts is no longer available for any financial institution. A thrift institution required to change its method of computing reserves for bad debts will treat the change as a change in method of accounting, initiated by the taxpayer, and having been made with the consent of the Internal Revenue Service. Any adjustment required to be taken into income with respect to a change in accounting method generally will be taken into income ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995, subject to a two-year suspension if the "residential loan requirement" is satisfied. Under the residential loan requirement provision, the recapture required by the new legislation will be suspended for each of two successive taxable years, beginning with Security Federal's 1996 taxable year, in which Security Federal originates a minimum of certain residential loans based upon the average of the principal amounts of these loans that Security Federal makes during its six taxable years preceding its current taxable year. Security Federal is required to recapture or take into income over a six-year period the excess of the balance of its tax bad debt reserves as of June 30, 1996 over the balance of the reserves as of June 30, 1988. As a result, Security Federal incurred an additional tax liability of approximately $224,000, beginning in 1998 over a six-year period. 29 Distributions. If Security Federal makes "nondividend distributions" to Security Financial, they will be considered to have been made from Security Federal's unrecaptured tax bad debt reserves, including the balance of its reserves as of June 30, 1988, to the extent of the "nondividend distributions" and then from Security Federal's supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed but not more than the amount of those reserves will be included in Security Federal's income. Nondividend distributions include distributions in excess of Security Federal's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of Security Federal's current or accumulated earnings and profits will not be so included in Security Federal's income. The amount of additional taxable income triggered by a nondividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if Security Federal makes a nondividend distribution to Security Financial, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Security Federal does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. Savings Association Insurance Fund Recapitalization Assessment. Federal legislation enacted in 1996 levied a 65.7 cent fee on every $100 of thrift deposits held on March 31, 1995. For financial statement purposes, this assessment was reported as an expense for the quarter ended September 30, 1996. The law includes a provision which states that the amount of any special assessment paid to capitalize the Savings Association Insurance Fund under this legislation is deductible in the year of payment. State Taxation Indiana imposes an 8.5% franchise tax based on a financial institution's adjusted gross income as defined by statute. In computing adjusted gross income, deductions for municipal interest, the bad debt deduction computed using the reserve method, and pre-1990 net operating losses are disallowed. Security Federal's state franchise tax returns have not been audited for the past five tax years. Utilization of Operating Loss Carryforwards Security Federal had generated operating losses, which were used to offset and recoup tax liabilities from prior periods as allowed by the Internal Revenue Code. The amount of operating losses not used are carried forward and used to offset future tax liabilities until the deductions are exhausted. Security Federal had operating loss carryforwards for Indiana income tax purposes totalling $417,000 at June 30, 2000. These carryforwards, which expire in 2013, were fully utilized during fiscal 2001. 30 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of Security Financial Bancorp and Security Federal.

(1) As of June 30, 2002. The executive officers of Security Financial and Security Federal are elected annually and hold office until their successors have been elected and qualified or until they are removed or replaced. Biographical Information Below is certain information regarding the directors and executive officers of Security Federal. Unless otherwise stated, each director and executive officer has held his or her current occupation for the last five years. John P. Hyland has served as President and Chief Executive Officer of Security Financial and Security Federal since September 1999 and October 1998, respectively. Prior to joining Security Federal, Mr. Hyland served as Director, President, and Chief Executive Officer of Southwest Financial Bank and Trust, Orland Park, Illinois, and as Director and Vice President for Southwest Financial Corporation, the holding company for Southwest Financial Bank and Trust. Patrick J. Hunt has served as Executive Vice President and Chief Financial Officer of Security Financial and Security Federal since March 2001. Prior to joining Security Federal, Mr. Hunt was employed by financial institutions in positions of Chief Financial Officer, Banking Center President, and Chief Operating Officer. Joann Duhon joined Security Federal in 1996 as Assistant Vice President, Regional Branch Manager. In July, 1997, Ms. Duhon was appointed Executive Vice President, Retail Banking. Prior to joining Security Federal, Ms. Duhon was a Branch Manager for Peoples Bank, East Chicago. John F. Nicholas joined Security Federal in May 1996 as a Staff Appraiser and, in November 1996, was appointed to Assistant Vice President and CRA Officer. In 1997, Mr. Nicholas was appointed Manager, Residential Construction Lending. In 1998, Mr. Nicholas was appointed Executive Vice President, Mortgage Banking. In June 2000, Mr. Nicholas was appointed Executive Vice President of Business Development. In 2002, Mr. Nicholas was given the additional responsibility of marketing for Security Federal. Prior to joining Security Federal, Mr. Nicholas was a real estate appraiser with Richard Adomatis & Associates. Kevin Dunn joined Security Federal in 1996 as an Assistant Vice President. In May 1998, Mr. Dunn was appointed Interim President and Chief Executive Officer, a position in which he served until October 1998. Since October 1998, Mr. Dunn was appointed as Executive Vice President. Since June 2000, Mr. Dunn has served as Executive Vice President of Consumer and Real Estate Lending. Prior to joining Security Federal, Mr. Dunn was a Certified Thrift Examiner with the Office of Thrift Supervision, Central Region. Joann Halterman joined Security Federal in 1976 as a Teller. In 1998, Ms. Halterman was appointed as Assistant Vice President, Human Resources and, in February 1999, was appointed Vice President, Human Resources/Marketing. 31 Kent R. Huntoon joined Security Federal in 1996 as Retail Sales Manager, Trust Officer and Insurance Manager and Vice President and General Manager of The Boulevard, Inc., a wholly owned subsidiary of Security Federal. Prior to joining Security Federal, Mr. Huntoon served as a registered representative of Prudential Insurance Co. of America. ITEM 2. PROPERTIES Properties The following table sets forth Security Federal's offices, as well as certain additional information relating to these offices, as of June 30, 2002.

(1) Represents the net book value of land, buildings, furniture, fixtures, and equipment owned by Security Federal. ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 32 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the sections titled "Stock Listing" and "Price Range of Common Stock" on page 40 in Security Financial's 2002 Annual Report to Stockholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the section titled "Selected Consolidated Financial Data" on pages 2 and 3 in Security Financial's 2002 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 4 through 12 in Security Financial's 2002 Annual Report to Stockholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the section titled "Market Risk Analysis" on page 12 in Security Financial's 2002 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements listed at Item 14 of this Form 10-K are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the sections titled "Proposal 1 - Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in Security Financial's Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the section titled "Executive Compensation" in Security Financial's Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information under the section titled "Stock Ownership" in Security Financial's Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by reference. 33 Equity Compensation Plan Information

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the section titled "Transactions with Management" in Security Financial's Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) The following are filed as a part of this report by means of incorporation by reference to Security Financial's 2002 Annual Report to Stockholders: o Report of Independent Auditors o Consolidated Statements of Financial Condition as of June 30, 2002, 2001, and 2000 o Consolidated Statements of Operations for the Years Ended June 30, 2002, 2001, and 2000 o Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2002, 2001, and 2000 o Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2001, and 2000 o Notes to Consolidated Financial Statements (2) All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) 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 Certificate 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) 34 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) 13.0 Security Financial Bancorp, Inc. 2002 Annual Report to Stockholders 21.0 Subsidiary information is incorporated herein by reference to Part I, Item 1, "Business--Subsidiary Activities" 23.0 Consent of independent auditors (filed herewith) -------------------- (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-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 None 35 CONFORMED SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SECURITY FINANCIAL BANCORP, INC. Date: September 30, 2002 By: /s/ John P. Hyland ------------------ John P. Hyland President and Chief Executive Officer Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John P. Hyland, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Security Financial Bancorp, Inc. 2. Based on my knowledge, this annual 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 annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of and for the period presented in this annual report. September 30, 2002 /s/ John P. Hyland ------------------ ------------------- Date President and Chief Executive Officer CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Patrick J. Hunt, Executive Vice President and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Security Financial Bancorp, Inc. 2. Based on my knowledge, this annual 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 annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of and for the period presented in this annual report. September 30, 2002 /s/ Patrick J. Hunt ------------------ -------------------- Date Executive Vice President and Chief Financial Officer SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth certain consolidated summary historical financial information concerning the financial position of Security Financial Bancorp, Inc. ("Security Financial" or "the Company") including its subsidiary, Security Federal Bank & Trust ("Security Federal" or "the Bank"), for the dates indicated. The financial data is derived in part from and should be read in conjunction with the consolidated financial statements and related notes of Security Financial contained later in this annual report.

(1) Net income divided by average total assets. (2) Net income divided by average total equity. (3) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. (4) Net interest income as a percentage of average interest-earning assets. (5) Noninterest expense divided by the sum of net interest income and noninterest income (excluding gain on sale of securities). (6) Nonperforming loans consist of nonaccrual loans. (7) Tangible book value per share (total stockholders equity divided by common shares outstanding) was not applicable for 1998 and 1999 as the holding company was not formed until January 2000. 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company is engaged primarily in attracting deposits from the general public and using such deposits to originate one-to-four family residential mortgage loans; commercial mortgage loans; 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 and gains from sales of first mortgage loans in the secondary market and fees from other banking-related services. The operations of the Company are influenced significantly by general economic conditions and by policies of financial institution regulatory agencies, primarily the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The Company's cost of funds is influenced by interest rates on competing investments and general market interest rates. Lending activities and mortgage loan sales volumes are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financings may be offered. The Company's net interest income is dependent primarily upon the difference or spread between the average yield earned on loans receivable and securities and the average rate paid on deposits, as well as the relative amounts of such assets and liabilities. The Company, like other thrift institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times or on a different basis than its interest-earning assets. Forward-Looking Statements This Annual Report contains certain forward-looking statements that 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. 4. 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. Comparison of Financial Condition at June 30, 2002 and June 30, 2001 Total assets at June 30, 2002 were $201.2 million compared to $204.9 million at June 30, 2001, a decrease of $3.7 million, or 1.8%. Net loans declined to $105.5 million at June 30, 2002 from $111.1 million at June 30, 2001. Residential mortgage loan balances declined by $14.6 million as loans paid down or were refinanced. These balances were not replaced by new originations because the Bank sold the majority of the fixed-rate, long-term mortgages that it originated. Consumer loans declined by $6.2 million primarily due to auto loans that were paid down from the Bank's discontinued indirect automobile lending program and financing competition from below-market automobile dealer incentives. These decreases were partially offset by an increase of $14.1 million in commercial and multi-family real estate loans and a $3.3 million increase in construction loans. The increases in these loan categories were the result of participations purchased from correspondent banks. Total equity at June 30, 2002 was $36.9 million compared to $38.1 million at June 30, 2001, a decrease of $1.2 million, or 3.2%. The decrease was primarily attributable to the Company's purchase of 143,803 of its outstanding shares through its repurchase program, 69,534 (net of 300 forfeited shares) of which were purchased by the Company's Stock-Based Incentive Plan. The decrease from the stock repurchases was partially offset by net income of $951,000, the reduction of unearned Incentive Plan shares of $232,000, the allocation of ESOP shares totaling $202,000, and the $258,000 increase in value on securities available-for-sale. The securities available-for-sale changed from an unrealized loss of $129,000 as of June 30, 2001 to an unrealized gain of $129,000 as of June 30, 2002. Comparison of Operating Results for the Years Ended June 30, 2002 and June 30, 2001 General. Net income for the year ended June 30, 2002 was $951,000 compared to $1.4 million for the year ended June 30, 2001, a decrease of $419,000. The decrease was primarily the result of a decrease in net interest income of $1.1 million, or 14.3%. The decrease in net interest income was partially offset by an increase in noninterest income of $358,000, a decrease in noninterest expense of $243,000, a decrease in income tax expense of $80,000, and a decrease in provision for loan losses of $45,000. Interest Income. Interest income for the year ended June 30, 2002 was $11.9 million compared to $14.5 million for the year ended June 30, 2001, a decrease of $2.6 million, or 18.1%. The decrease was primarily the result of the average yield on interest-earning assets decreasing to 6.53% for the year ended June 30, 2002 from 7.84% for the year ended June 30, 2001. The decrease in the average balance of interest earning assets to $181.7 million for the year ended June 30, 2002 from $184.7 million for the year ended June 30, 2001, also contributed to the decrease in interest income. 5. Interest Expense. Interest expense for the year ended June 30, 2002 was $5.3 million compared to $6.8 million for the year ended June 30, 2001, a decrease of $1.5 million, or 21.7%. The decrease was primarily the result of a decrease in market interest rates. The Company's interest expense to average interest-earning assets decreased to 2.93% for the year ended June 30, 2002 from 3.68% for the year ended June 30, 2001. Our cost of funds decreased to 3.38% for the year ended June 30, 2002 to 4.38% for the year ended June 30, 2001, reflecting a general decrease in interest rates in the year ended June 30, 2002. Net Interest Income. Net interest income of $6.5 million for the year ended June 30, 2002 reflects a decrease of $1.2 million, or 15.6%, from the same period in 2001. The decrease in net interest income was primarily a result of a decrease in the net interest margin to 3.60% for the year ended June 30, 2002 from 4.16% for the year ended June 30, 2001. The decrease in net interest margin is attributable primarily to a significant decrease in market interest rates, particularly on the short end of the yield curve and the increased liquidity of the Company. 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 $135,000 and $180,000 for the years ended June 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 1.38% of loans outstanding at June 30, 2002, as compared with $1.5 million, or 1.32% of loans outstanding at June 30, 2001. The allowance for loan losses to non-performing loans was 60.1% at June 30, 2002, as compared to 74.5% 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 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 June 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 for the year ended June 30, 2002 was $1.4 million compared to $1.1 million for the year ended June 30, 2001, an increase of $358,000, or 33.4%. The increase was primarily attributable to $163,000 of additional income on bank-owned life insurance that was purchased during the second and third quarters of fiscal 2001, an increase in gains on the sale of mortgage loans from secondary market activities of $117,000, an increase in 6. deposit service charges of $67,000, and an increase in gains on the sale of other real estate owned of $28,000. Noninterest Expense. Noninterest expense for the year ended June 30, 2002 was $6.5 million compared to $6.7 million for the year ended June 30, 2001, a decrease of $243,000, or 3.6%. The primary reasons for the decline were a reduction of approximately $268,000 in occupancy expense, an $188,000 reduction in data processing expenses, a $79,000 reduction in advertising expense, a $40,000 reduction in compensation and benefit expense and an $80,000 reduction in various other expenses. This was partially offset by an increase of $412,000 in legal expenses, the majority of which related to a shareholder lawsuit described in previous SEC filings. Income Taxes. Tax net operating loss carryforwards 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 $421,000 for the year ended June 30, 2002. This compares to $501,000 of income tax expense for the year ended June 30, 2001. The decline was the result of lower pretax earnings in 2002. Comparison of Operating Results for the Years Ended June 30, 2001 and June 30, 2000 General. Net income for the year ended June 30, 2001 was $1.4 million compared to $978,000 for the year ended June 30, 2000, an increase of $392,000. The increase was primarily the result of an $889,000, or 11.7%, decrease in noninterest expense. The decrease in noninterest expense was partially offset by an increase in income tax expense of $501,000. No income tax expense was recorded during the fiscal year ended June 30, 2000. Interest Income. Interest income for the year ended June 30, 2001 was $14.5 million compared to $14.1 million for the year ended June 30, 2000, an increase of $382,000, or 2.7%. The increase was primarily the result of an increase in the average balance of interest earning assets to $184.7 million for the year ended June 30, 2001 from $180.0 million for the year ended June 30, 2000. The average yield on interest-earning assets increased to 7.84% for the year ended June 30, 2001 from 7.83% for the year ended June 30, 2000. Interest Expense. Interest expense for the year ended June 30, 2001 was $6.8 million compared to $6.2 million for the year ended June 30, 2000, an increase of 568,000, or 9.1%. The increase was primarily the result of an increased balance of FHLB borrowings and an increase in the cost of funds, from 3.97% for the year ended June 30, 2000 to 4.38% for the same period in 2001. Net Interest Income. Net interest income of $7.7 million for the year ended June 30, 2001 reflects a decrease of $186,000, or 2.4%, from the same period in 2000. The decrease in net interest income was primarily a result of a decrease in the net interest margin to 4.16% for the year ended June 30, 2001 from 4.37% for the year ended June 30, 2000. Provision for Loan Losses. The Company's provision for loan losses for the year ended June 30, 2001 decreased $45,000 to $180,000 from $225,000 for the year ended June 30, 2000, primarily due to decreased loan charge-off activity and a decrease in gross loans outstanding during 2001. The amount of provision and allowance for estimated losses on loans is influenced by current economic conditions, actual loss experience, industry trends, and other factors. The 7. loan loss provision for the year ended June 30, 2001 is indicative of management's assessment of the adequacy of the allowance for loan losses, given trends in historical loss experience of the portfolio, and current economic conditions, as well as the fact that the majority of loans are single-family residential loans and the loan-to-values are generally less than 80%. Although management uses the best information available and maintains the allowance for loan losses at a level it that believes is adequate to provide for probable incurred losses, future adjustments to the allowance may be necessary due to economic, operating, regulatory, and other conditions that may be beyond the Company's control. Noninterest Income. Noninterest income for the year ended June 30, 2001 was $1.1 million compared to $928,000 for the year ended June 30, 2000, an increase of $145,000, or 15.6%. The increase was primarily the result of increased insurance commission income from the Bank's insurance agency subsidiary of $217,000 for the year ended June 30, 2001 compared to $19,000 for the year ended June 30, 2000 and a $163,000 increase in cash surrender value on $6.0 million of bank-owned life insurance that was purchased during the 2nd and 3rd quarters of the 2001 fiscal year. Noninterest income for the year ended June 30, 2000 included a one-time gain of $141,000 on the sale of mortgage servicing rights in connection with the Company's exit from the mortgage servicing business. Noninterest expense. Noninterest expense for the year ended June 30, 2001 was $6.7 million compared to $7.6 million for the year ended June 30, 2000, a decrease of $889,000, or 11.7%. The primary reasons for the decline were a reduction of approximately $666,000 in compensation and benefit expense due to a reduction in full-time equivalents during 2001, a $63,000 reduction in data processing expenses, a $126,000 decrease in occupancy expense, and a $61,000 decrease in FDIC insurance expense. This was partially offset by an increase of $81,000 in expenses related to the Bank's insurance agency subsidiary, which is included in other expense. Income Taxes. Tax net operating loss carryforwards 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 and the reversal of a $252,000 valuation allowance against deferred tax assets. The Company recorded income tax expense of $501,000 for the year ended June 30, 2001. This compares to no income tax expense being recorded during the previous fiscal year. 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. 8. 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 $1.4 million, $1.6 million, and $4.5 million for the years ended June 30, 2002, 2001, and 2000, respectively. Net cash from investing activities consisted primarily of disbursements for loan originations and the purchase of securities available-for-sale, offset by principal collections on loans, proceeds from maturation and calls of securities. Net cash from financing activities consisted primarily of activity in deposit accounts and FHLB advances. The Company's most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company's operating, financing, lending, and investing activities during any given period. At June 30, 2002, cash and short-term investments totaled $42.2 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 FHLB advances as a source of funds. At June 30, 2002, the Company had the ability to borrow a total of approximately $28.4 million from the Federal Home Loan Bank of Indianapolis. On that date, the Company had $15.0 million of outstanding advances. At June 30, 2002, the Company had outstanding commitments to originate loans of $5.9 million. 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 June 30, 2002 totaled $72.8 million. Management believes, based on past experience, that a significant portion of such deposits will remain with the Company. Based on the foregoing, in addition to the Company's high level of core deposits and capital, the Company considers its liquidity and capital resources sufficient to meet its outstanding short-term and long-term needs. Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations and mortgage-backed securities of short duration. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the Federal Home Loan Bank of Indianapolis. The Bank is subject to various regulatory capital requirements imposed by the OTS. At June 30, 2002, the Company was in compliance with all applicable capital requirements. See "Regulation and Supervision - Regulatory Capital Requirements" and Note 12 of the Notes to Consolidated Financial Statements. 9. 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 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 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 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 an effect on the Company's financial statements. In fiscal year 2002, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement Obligations"; SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Term Assets"; SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections"; and SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The adoption of these pronouncements is not expected to have a material effect on the Company. Effect of Inflation and Changing Prices The consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Bank is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution's performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Average Balances, Interest and Average Yields/Cost The following table presents certain information for the periods indicated regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Nonaccruing loans have been included in the average loan amounts. Average balances were derived from month-end balances. Management does not believe that the use of month-end balances instead of daily balances causes any material differences in the information presented. 10.

(1) Includes loans held for sale. (2) Includes FHLB stock. 11. Rate/Volume Analysis The following table presents the effects of changing rates and volumes on the interest income and interest expense of Security Federal. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes attributable to changes in both rate and volume, which cannot be segregated, have been allocated proportionately based on the absolute value of the change due to rate and the change due to volume.

Market Risk Analysis General. The Company's profitability depends primarily on its net interest income, which is the difference between the income it receives on its loan and investment portfolio and its cost of funds, which consists of interest paid on deposits and borrowings. Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Company's profitability is also affected by the level of income and expenses. Noninterest income includes service charges and fees. Noninterest expenses primarily include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums, and data processing expenses. The Company's results of operations are also significantly affected by general economic and competitive conditions, 12. particularly changes in market interest rates, government legislation and regulation, and monetary and fiscal policies. Qualitative Aspects of 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 June 30, 2002, $67.3 million, or 45.4%, of Security Federal's deposits consisted of demand, passbook, NOW, and money market accounts. 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 June 30, 2002, $12.1 million, or 36.5%, 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. In order to encourage institutions to reduce their interest rate risk, the Office of Thrift Supervision adopted a rule incorporating an interest rate risk component into the risk-based capital rules. Using data compiled by the Office of Thrift Supervision, Security Federal receives a report that measures interest rate risk by modeling the change in net portfolio value over a variety of interest rate scenarios. This procedure for measuring interest rate risk was developed by the Office of Thrift Supervision to replace the "gap" analysis, which is the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period. Net portfolio value is the present value of expected cash flows from assets, liabilities, and off-balance-sheet contracts. The calculation is intended to illustrate the change in net portfolio value that will occur upon an immediate change in interest rates of at least 200 basis points with no effect given to any steps that management might take to counter the effect of that interest rate movement. Under Office of Thrift Supervision regulations, an institution 13. with a greater than "normal" level of interest rate risk must take a deduction from total capital for purposes of calculating its risk-based capital. The Office of Thrift Supervision, however, has delayed the implementation of this regulation. An institution with a "normal" level of interest rate risk is defined as one whose "measured interest rate risk" is less than 2.0%. Institutions with assets of less than $300 million and a risk-based capital ratio of more than 12.0% are exempt. Security Federal is exempt because of its asset size and it has greater than 12% risk-based capital. If the proposed regulation was implemented and applied at June 30, 2002, Security Federal believes that its level of interest rate risk would not have caused it to be treated as an institution with greater than "normal" interest rate risk. Quantitative Aspects of Market Risk. The Company does not maintain a trading account for any class of financial instrument nor does it purchase high-risk derivative instruments. Furthermore, the Company has no foreign currency exchange rate risk or commodity price risk. 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 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. 14. REPORT OF INDEPENDENT AUDITORS Board of Directors Security Financial Bancorp, Inc. St. John, Indiana We have audited the accompanying consolidated statements of financial condition of Security Financial Bancorp, Inc. and its wholly owned subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Security Financial Bancorp, Inc. and its wholly owned subsidiaries as of June 30, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ Crowe, Chizek and Company LLP Oak Brook, Illinois August 21, 2002 15. SECURITY FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, 2002 and 2001 (Dollars in thousands except shares and per share data) --------------------------------------------------------------------------------

-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 16. SECURITY FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended June 30, 2002, 2001, and 2000 (Dollars in thousands except per share data) --------------------------------------------------------------------------------

-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 17. SECURITY FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended June 30, 2002, 2001, and 2000 (Dollars in thousands) --------------------------------------------------------------------------------

-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 18. SECURITY FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 2002, 2001, and 2000 (Dollars in thousands) --------------------------------------------------------------------------------

-------------------------------------------------------------------------------- (Continued) 19. SECURITY FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 2002, 2001, and 2000 (Dollars in thousands) --------------------------------------------------------------------------------

-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 20. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business: The accompanying consolidated financial statements include the accounts of Security Financial Bancorp, Inc. ("the Company") and its wholly owned subsidiary, Security Federal Bank, a Federal Savings Bank ("the Bank"). The Boulevard, Inc.; Strategic Financial Corporation; and Family Home Service Corporation, Inc. are all wholly owned subsidiaries of the Bank. All significant intercompany transactions and balances are eliminated in consolidation. The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank ("FHLB") system. The Bank maintains insurance on savings accounts with the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation. The Bank is engaged in the business of residential, commercial, and consumer lending to customers located primarily in northwest Indiana and Will and Cook Counties, Illinois. These communities are the source of substantially all of the Bank's deposit and lending activities. Mortgage loans originated for resale are originated primarily through its retail banking locations. The Boulevard, Inc. sells insurance and brokerage services. Strategic Financial Corporation and Family Home Service Corporation, Inc. are both inactive. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The allowance for loan losses, fair value of loans held for sale, and fair value of financial instruments are particularly subject to change. Statement of Cash Flows: For purposes of reporting cash flows, cash and cash equivalents is defined to include the Company's cash on hand, due from financial institutions, and short-term interest-bearing deposits in financial institutions. The Company reports net cash flows for customer loan transactions, deposit transactions, and deposits made with other financial institutions. Securities: Securities are classified as available-for-sale since the Company may decide to sell those securities for changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons. They are carried at fair value. Unrealized gains and losses on securities available-for-sale are charged or credited to a valuation allowance, which is included as a separate component of equity, net of taxes. Realized gains and losses on disposition are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. FHLB stock is carried at cost. -------------------------------------------------------------------------------- (Continued) 21. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Held for Sale: Loans intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Loans Receivable: Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and net of deferred loan origination fees and discounts. Recognition of Interest Income on Loans: Interest income on loans is recognized over the term of the loans based on the principal balance outstanding. Loan Origination Fees, Commitment Fees, and Related Costs: Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Company's historical prepayment experience. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature, such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Other Real Estate Owned: Real estate properties acquired through or in lieu of loan foreclosures are initially recorded at the lower of cost or fair value, less estimated selling expenses, at the date of foreclosure. Costs relating to improvement of property are capitalized, whereas costs relating to the holding of property are expensed. -------------------------------------------------------------------------------- (Continued) 22. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes: The Company records income tax expense based on the amount of taxes due on its tax return, plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. A valuation allowance has been recorded to reduce deferred tax assets to the amount expected to be realized. Employee Stock Ownership Plan: The cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated balance sheet as a reduction of stockholders' equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the costs of shares committed to be released is recorded as an adjustment to paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are reflected as a reduction of debt. Shares are considered outstanding for earnings per share calculations as they are committed to be released; unallocated shares are not considered outstanding. Earnings Per Common Share: Earnings per share reflect the earnings available to common stockholders for the year divided by the weighted average number of common shares outstanding during the year. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. Premises and Equipment: Land is carried at cost. Buildings; leasehold improvements; and furniture, fixtures, and equipment are carried at cost, less accumulated depreciation. Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets, which range from three to forty years. Maintenance and repairs are expensed and improvements are capitalized. Comprehensive Income: Comprehensive income consists of net income and unrealized gains and losses on securities available-for-sale. Reclassifications: Certain reclassifications were made to the prior year financial statements to conform to the 2002 presentation. -------------------------------------------------------------------------------- (Continued) 23. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 2 - SECURITIES The amortized cost and fair value of securities available-for-sale are as follows as of June 30:

Amortized cost and fair value of debt securities available-for-sale by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations.

There were no sales of securities during 2002, 2001, or 2000. At June 30, 2002, securities with an amortized cost of $33,281 and a carrying value of $33,487 contained call features at the option of the issuers. -------------------------------------------------------------------------------- (Continued) 24. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 3 - LOANS RECEIVABLE, NET Loans receivable at June 30 are summarized as follows:

Activity in the allowance for loan losses is summarized as follows for the years ended June 30:

There were no loans considered impaired as of or for the years ended June 30, 2002, 2001, and 2000. Nonaccrual loans for which interest has been reduced totaled approximately $2,462,000 and $1,994,000 at June 30, 2002 and 2001. The Company's lending activities have been concentrated primarily in Lake and Porter Counties, Indiana and Cook County, Illinois. The largest portion of the Company's loans are originated for the purpose of enabling borrowers to purchase residential and real estate property secured by first liens on such property. At June 30, 2002, approximately 42% of the Company's loans were secured by owner-occupied, one-to-four-family residential property. The Company requires collateral on all loans and generally maintains loan-to-value ratios of 80% or less. The Bank had lending transactions with directors and executive officers of the Company and the Bank, which totaled approximately $443,000 and $307,000 at June 30, 2002 and 2001. -------------------------------------------------------------------------------- (Continued) 25. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 4 - PREMISES AND EQUIPMENT, NET Premises and equipment at June 30 are summarized as follows:

NOTE 5 - DEPOSITS At June 30, 2002, scheduled maturities of certificates of deposit are as follows: 2003 $ 72,801 2004 5,128 2005 2,603 2006 454 2007 and thereafter 42 ----------- $ 81,028 ===========

NOTE 6 - BORROWED FUNDS The $15,000,000 FHLB advance has a fixed rate of 5.05% and matures January 8, 2004. On January 8, 2002, the FHLB had the option to convert the entire advance to an adjustable rate repricing quarterly at three-month LIBOR plus 200 basis points. The advance was not converted to an adjustable rate on this date. All FHLB securities owned by the Bank and all mortgage loans and mortgage-backed securities not otherwise pledged are pledged to the Federal Home Loan Bank of Indianapolis to secure advances. In addition, the Bank has an undrawn line of credit for $5,000,000 as of June 30, 2002 and 2001 with the Federal Home Loan Bank of Indianapolis. This line matures on June 5, 2003, has a variable interest rate, and is also secured by the collateral listed above. -------------------------------------------------------------------------------- (Continued) 26. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 7 - EMPLOYEE BENEFITS The Bank is part of a noncontributory multi-employer defined benefit pension plan covering substantially all of its employees. The plan is administered by the trustees of the Financial Institutions Retirement Fund ("FIRF"). Benefits of the plan are funded through payments to FIRF, which does not report relative plan assets and actuarial liabilities of the individual participating financial institutions. In November 2000, the Board of Directors amended the Plan to reduce the future benefit accrual rate. For the year ended June 30, 2002, no expense was recorded as no payment was required to be made to FIRF. Pension expense totaled $119,000 and $268,000 for the years ended June 30, 2001 and 2000. The Bank maintains a 401(k) profit sharing plan covering substantially all employees. The plan allows participant salary deferrals into the plan, as well as contributions made at the discretion of the Board of Directors. The Bank made no contributions to the plan for 2002, 2001, and 2000. NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN In 2000, the Company adopted an employee stock ownership plan ("ESOP") for the benefit of substantially all employees. The ESOP borrowed $1,550,760 from the Company and used those funds to acquire 155,076 shares of the Company's stock at $10 per share. Shares issued to the ESOP are allocated to ESOP participants based on principal and interest repayments made by the ESOP on the loan from the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company's discretionary contributions to the ESOP and earnings on ESOP assets. Principal payments are scheduled to occur over a fifteen-year period. However, in the event the Company's contributions exceed the minimum debt service requirements, additional principal payments will be made. During 2002, 2001, and 2000, 10,338, 10,338 and 5,169 shares of stock with an average fair value of $19.50, $16.37, and $12.09 were committed to be released, resulting in ESOP compensation expense of $202,000, $169,000, and $63,000, respectively. Shares held by the ESOP at June 30 are as follows:

-------------------------------------------------------------------------------- (Continued) 27. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 9 - OTHER STOCK-BASED COMPENSATION PLANS The Company has a stock option plan under the terms of which 193,846 shares of the Company's common stock were reserved for issuance. The options become exercisable on a cumulative basis in equal installments over a five-year period from the date of grant. The options expire ten years from the date of grant. A summary of the status of the Company's stock option plan and changes are presented below:

The Company applies APB Opinion 25 and related Interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized at the date of grant. Had compensation cost been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced to the pro forma amounts in the table below. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period.

-------------------------------------------------------------------------------- (Continued) 28. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 9 - OTHER STOCK-BASED COMPENSATION PLANS (Continued) The Black-Scholes option pricing valuation model was used in estimating the fair value of the options. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

The Company adopted a Management Recognition and Retention Plan ("MRP"). In June 2001, the Board of Directors awarded 66,834 shares of the Company's common stock to directors and key employees at an average price of $16.88 per share. Three hundred of these shares were forfeited in 2002 and reallocated to treasury stock. These shares vest over a five-year period. In September 2001, the Company contributed $1.3 million which allowed the MRP to acquire 66,834 shares of common stock to fund awards. In November 2001, the Company contributed $57,000 to fund an additional award of 3,000 shares to directors at an average price of $19.78 per share. These shares also vest over a five-year period. MRP compensation expense totaled $232,000 for the year ended June 30, 2002. There was no compensation recorded in the years ended 2001 and 2000. NOTE 10 - INCOME TAXES Income tax expense for the years ended June 30 is summarized as follows:

-------------------------------------------------------------------------------- (Continued) 29. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 10 - INCOME TAXES (Continued) Income tax differed from the amounts computed by applying the federal income tax rate at June 30 to income before income taxes as a result of the following:

The components of the net deferred taxes as of June 30 are as follows:

Retained earnings at June 30, 2002, 2001, and 2000 includes approximately $2,935,000 of bad debt deductions for tax years prior to 1987 for which no deferred federal income tax liability has been recorded. This deferred federal income tax liability would approximate $998,000. Tax legislation passed in August 1996 requires all thrift institutions to deduct a provision for bad debts for tax purposes based on the actual loss experience and recapture the excess bad debt reserve accumulated in the tax years after 1987. -------------------------------------------------------------------------------- (Continued) 30. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 11 - EARNINGS PER SHARE The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the years ended June 30, 2002 and 2001 and the period from January 5, 2000 to June 30, 2000:

Options to purchase 17,445 shares of common stock and 3,000 stock awards at an average price of $19.78 per share were outstanding at June 30, 2002 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common stock and the options were, therefore, antidilutive. NOTE 12 - REGULATORY CAPITAL The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet -------------------------------------------------------------------------------- (Continued) 31. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 12 - REGULATORY CAPITAL (Continued) specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 2002, that the Bank meets all of the capital adequacy requirements to which it is subject. As of June 30, 2002, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual and required capital amounts and rates are presented below (in thousands):

-------------------------------------------------------------------------------- (Continued) 32. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 13 - COMMITMENTS AND CONTINGENCIES The Company has the following commitments outstanding at June 30:

Since certain commitments to make loans and lines of credit to fund loans in process expire without being used, the amounts do not necessarily represent future cash commitments. In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company's exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of these instruments. The Company follows the same credit policy to make such commitments as is followed for those loans recorded on the consolidated balance sheet. As of June 30, 2002, fixed rate commitments to fund loans amounted to approximately $3,569,000. The interest rates on fixed rate commitments ranged from 5.75% to 7.50%. Since loan commitments may expire without being used, the amounts do not necessarily represent future cash commitments. Three of the Bank's branch facilities are leased under noncancelable lease agreements, which expire between 2002 and 2019. In addition to the monthly rent, the Bank is charged its proportionate share of taxes and maintenance. The future minimum commitments under the noncancelable leases at June 30 were: 2003 $ 230 2004 232 2005 234 2006 237 2007 239 Thereafter 760 ------- $ 1,932 =======

Rent expense approximated $236,000, $242,000, and $293,000 for the years ended June 30, 2002, 2001, and 2000. -------------------------------------------------------------------------------- (Continued) 33. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table shows the estimated fair values and the related carrying values of the Company's financial instruments at June 30, 2002 and 2001. Items that are not financial instruments are not included.

For purposes of the above disclosures of estimated fair value, the following assumptions were used as of June 30, 2002 and 2001. The estimated fair value for cash, cash equivalents, and certificates of deposit at other financial institutions is considered to approximate cost. The estimated fair value for securities available-for-sale is based on quoted market values for the individual securities or for equivalent securities. The estimated fair value of stock in FHLB is considered to approximate cost. The estimated fair value of loans held for sale is based on quoted market values for equivalent loans. The estimated fair value for loans receivable is based on estimates of the rate the Company would charge for similar loans at June 30, 2002 and 2001, applied for the estimated time period until the loan is assumed to reprice or be paid. -------------------------------------------------------------------------------- (Continued) 34. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued) The estimated fair value for demand, savings, NOW, and MMDA deposits and advances from borrowers for taxes and insurance is based on their carrying value. The estimated fair value for time deposits, FHLB advances, and borrowed funds is based on estimates of the rate the Company would pay on such deposits and borrowed funds at June 30, 2002 and 2001, applied for the time period until maturity. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at June 30, 2002 and 2001 and are not considered significant to this presentation. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of such items at June 30, 2002 and 2001, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. Also, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The estimated fair values at June 30, 2002 and 2001 should not necessarily be considered to apply at subsequent dates. In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights related to the Bank's loan portfolio, the trained work force, customer goodwill, and similar items. NOTE 15 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows:

-------------------------------------------------------------------------------- (Continued) 35. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS Presented below are the condensed statements of financial condition, income, and cash flows for Security Financial Bancorp, Inc. CONDENSED STATEMENTS OF FINANCIAL CONDITION June 30, 2002 and 2001

CONDENSED STATEMENTS OF INCOME Years ended June 30, 2002 and 2001 and the period January 5, 2000 to June 30, 2000

-------------------------------------------------------------------------------- (Continued) 36. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended June 30, 2002 and 2001 and the period January 5, 2000 to June 30, 2000

-------------------------------------------------------------------------------- (Continued) 37. SECURITY FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 (Table amounts in thousands except per share data) -------------------------------------------------------------------------------- NOTE 17 - CONVERSION On January 5, 2000, the Bank completed its conversion from a federally chartered mutual savings bank to a federal stock savings bank. The conversion was accomplished through the amendment of the Bank's charter to stock form; the formation of Security Financial Bancorp, Inc. ("the Company"), which acquired 100% of the Bank's outstanding common stock upon the conversion of the Bank from mutual to stock form; and the sale of the Company's common stock in an amount equal to the pro forma market value of the Bank after giving effect to the conversion. At the time of conversion, the Bank established a liquidation account in an amount equal to its total net worth as of the latest statement of financial condition appearing in the final prospectus. The liquidation account will be maintained for the benefit of eligible depositors who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The liquidation account balance is not available for payment of dividends. The Bank may not declare or pay cash dividends on or repurchase any of its shares of capital stock if the effect thereof would cause its net worth to be reduced below applicable regulatory requirements or the amount of the liquidation accounts of such a declaration and payment would otherwise violate regulatory requirements. NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)

(a) Earnings per share for the quarters and full years have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each period. (b) Net income and earning per share were affected by an increase in legal fees related to one-time settlement of a shareholder lawsuit. The net effect of this item was to decrease net income by $287,000 and earnings per share by $.17. -------------------------------------------------------------------------------- 38. DIRECTORS AND OFFICERS Directors of Security Financial Bancorp, Inc. ------------- Vincent Cainkar Attorney Howard O. Cyrus, Sr. Owner and Real Estate Broker, Cyrus Realtors, Inc. Sheila Donoghue President, Kerry Capital Corp. Dr. Peter Ferrini Retired Oral Surgeon John P. Hyland President and Chief Executive Officer Security Financial Bancorp, Inc. and Security Federal Bank & Trust Jay D. Johnson President, Lakeshore Capital, Inc. Managing Partner, Hyatt Johnson Capital, LLC Tula Kavadias Attorney and Sole Proprietor, Tula Kavadias and Associates Richard J. Lashley Managing Member, PL Capital, LLC Robert L. Lauer Vice Chairman of the Board - Security Financial Bancorp Vice President of Investments and Assistant Branch Manager, A.G. Edwards & Sons, Inc. John Wm. Palmer Chairman of Board - Security Financial Bancorp Managing Member, PL Capital, LLC Philip T. Rueth Secretary - Security Financial Bancorp Certified Public Accountant, Partner of Steiber, Rueth & Co. Directors of Security Federal Bank & Trust -------------------- Vincent Cainkar Attorney Mary Beth Bonaventura Chairman of the Board - Security Federal Bank & Trust Senior Judge, Lake Superior Court Juvenile Division Howard O. Cyrus, Sr. Owner and Real Estate Broker, Cyrus Realtors, Inc. Sheila Donoghue President, Kerry Capital Corp. Dr. Peter Ferrini Retired Oral Surgeon John P. Hyland President and Chief Executive Officer Security Financial Bancorp, Inc. and Security Federal Bank & Trust Jay D. Johnson President, Lakeshore Capital, Inc. Managing Partner, Hyatt Johnson Capital, LLC Tula Kavadias Attorney and Sole Proprietor, Tula Kavadias and Associates Richard J. Lashley Managing Member, PL Capital, LLC Robert L. Lauer Vice President of Investments and Assistant Branch Manager, A.G. Edwards & Sons, Inc. John Wm. Palmer Managing Member, PL Capital, LLC Chairman of Board - Security Financial Bancorp Lawrence R. Parducci Vice Chairman of the Board Pharmacist, Consultant and Pharmacy Insurance Solicitor, Fagar Pharmacy Philip T. Rueth Certified Public Accountant, Partner of Steiber, Rueth & Co. Robert A. Vellutini Vice President of Investments, A.G. Edwards & Sons, Inc. Principal Officers of Security Financial Bancorp, Inc. ----------------------- John P. Hyland President and Chief Executive Officer Patrick J. Hunt Executive Vice President and Chief Financial Officer Philip T. Rueth Corporate Secretary Principal Officers of Security Federal Bank & Trust -------------------- John P. Hyland President and Chief Executive Officer Patrick J. Hunt Executive Vice President and Chief Financial Officer John F. Nicholas Executive Vice President, Business Development and Marketing Kevin Dunn Executive Vice President, Consumer and Real Estate Lending Joann Gonzalez-Duhon Executive Vice President and Asst. Secretary, Retail Operations Joann Halterman Vice President and Asst. Secretary, Human Resources Kent R. Huntoon Vice President and General Manager of The Boulevard, Inc. -------------------------------------------------------------------------------- 39. INVESTOR AND CORPORATE INFORMATION Annual Meeting The annual meeting of stockholders will be held at 9:00 a.m. central time, on December 18, 2002 at the main office of the Company located at 9321 Wicker Avenue, St. John, Indiana 46373. Stock Listing Security Financial Bancorp, Inc. common stock is traded on the NASDAQ SmallCap Market under the symbol "SFBI." Price Range of Common Stock The high and low per share price of the common stock for each quarter since the common stock began trading on January 5, 2000 was as follows:

The stock price information set forth in the table above was provided by the National Association of Securities Dealers, Inc. Automated Quotation System. The closing sale price of Security Financial Bancorp, Inc.'s common stock on June 30, 2002 was $19.85. At September 14, 2002, there were 1,864,191 shares of Security Financial Bancorp, Inc. common stock outstanding (including unallocated ESOP shares). Stockholders and General Inquiries Transfer Agent John F. Nicholas Registrar and Transfer Company Security Financial Bancorp, Inc. 10 Commerce Drive 9321 Wicker Avenue Cranford, NJ 07016 St. John, Indiana 46373 1-800-368-5948 (219) 365-4344 Annual and Other Reports A copy of the Security Financial Bancorp, Inc.'s Annual Report on Form 10-K without exhibits for the year ended June 30, 2002, as filed with the Securities and Exchange Commission, may be obtained without charge by contacting John Nicholas, Security Financial Bancorp, Inc., 9321 Wicker Avenue, St. John, Indiana 46373. -------------------------------------------------------------------------------- 40. OFFICE LOCATIONS Main Office ----------- 9321 Wicker Avenue St. John, Indiana 46373 Branch Offices -------------- Chesterton 552A Indian Boundry Road Chesterton, Indiana 46304 East Chicago 4518 Indianapolis Blvd. East Chicago, Indiana 46312 Hammond 7007 Calumet Avenue Hammond, Indiana 46324 Highland 2930 Ridge Road Highland, Indiana 46322 Lowell 2090 East Commercial Avenue Lowell, Indiana 46356 -------------------------------------------------------------------------------- 41.

SECURITY FINANCIAL BANCORP INC 10-K