UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-27951
SECURITY FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 35-2085053
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9321 WICKER AVENUE, ST. JOHN, INDIANA 46373
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(Address of principal executive offices)
(219) 365-4344
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year,
if changes since last report)
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 1, 2000, Security
Financial had 1,938,460 shares outstanding.
<PAGE>
SECURITY FINANCIAL BANCORP, INC.
FORM 10-QSB
INDEX
Page
----
PART I. FINANCIAL INFORMATION FOR SECURITY FINANCIAL
BANCORP, INC.
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at
March 31, 2000 and June 30, 1999................................. 3
Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 2000 and 1999............................. 4
Consolidated Statement of Changes in Equity
for the Nine Months Ended March 31, 2000......................... 6
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2000 and 1999........................ 7
Notes to Consolidated Financial Statements....................... 8
Item 2. Management's Discussion and Analysis or Plan of Operation........ 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................ 19
Item 2. Changes in Securities............................................ 19
Item 3. Defaults Upon Senior Securities.................................. 19
Item 4. Submission of Matters to a Vote of Security Holders.............. 19
Item 5. Other Information................................................ 20
Item 6. Exhibits and Reports on Form 8-K................................. 20
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION FOR
SECURITY FINANCIAL BANCORP, INC.
Item 1. Financial Statements.
---------------------
SECURITY FINANCIAL BANCORP, INC.
Consolidated Balance Sheets
March 31, 2000 and June 30, 1999
(unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Assets:
Cash and due from financial institutions ...................... $ 5,162 $ 3,175
Interest-bearing deposits in financial institutions ........... 4,274 1,345
--------- ---------
Cash and cash equivalents .................................. 9,436 4,520
Time deposits in financial institutions ....................... 5,000 --
Securities available for sale ................................. 27,522 17,873
Loans held for sale ........................................... 547 3,430
Loans receivable, net of allowance for loan losses of $1,393 at
March 31, 2000 and $1,469 at June 30, 1999 ................. 136,393 148,316
Federal Home Loan Bank stock .................................. 5,300 5,300
Other real estate owned ....................................... 511 295
Premises and equipment, net ................................... 5,563 5,766
Mortgage loan servicing rights ................................ -- 3,959
Other assets .................................................. 1,772 2,036
--------- ---------
Total assets ........................................... $ 192,044 $ 191,495
========= =========
Liabilities and Equity:
Liabilities:
Demand, NOW and money market deposits ...................... $ 18,173 $ 20,970
Savings .................................................... 43,740 45,356
Time deposits .............................................. 92,274 99,568
--------- ---------
Total deposits ............................................. 154,187 165,894
Borrowed funds ............................................. -- 5,000
Advances from borrowers for taxes and insurance ............ 757 602
Other liabilities .......................................... 1,050 1,467
--------- ---------
Total liabilities .................................... 155,994 172,963
Equity
Common Stock ............................................... 194 --
Additional paid-in capital ................................. 18,386 --
Unearned ESOP .............................................. (1,525) --
Retained earnings, substantially restricted ................ 19,184 18,592
Accumulated other comprehensive loss ....................... (189) (60)
--------- ---------
Total equity ............................................ 36,050 18,532
--------- ---------
Total liabilities and equity ......................... $ 192,044 $ 191,495
========= =========
</TABLE>
(See accompanying notes to consolidated financial statements)
3
<PAGE>
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and March 31, 1999
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
Interest and dividend income:
Loans, including fees .................................................. $ 2,782 $ 3,875
Securities ............................................................. 497 346
Other interest-earning assets .......................................... 224 105
-------- --------
Total interest income ............................................ 3,503 4,326
Interest expense:
Deposits ............................................................... 1,509 1,847
Borrowed funds ......................................................... 3 416
-------- --------
Total interest income ............................................ 1,512 2,263
-------- --------
Net interest income .............................................. 1,991 2,063
Provision for loan losses .............................................. 50 75
-------- --------
Net interest income after provision for loan losses .............. 1,941 1,998
Noninterest income:
Loan servicing fees, net of amortization ............................... 2 7
Gain on sale of loans .................................................. 13 87
Other .................................................................. 175 277
-------- --------
Total noninterest income ......................................... 190 371
Noninterest expense:
Compensation and benefits .............................................. 1,014 1,301
Occupancy and equipment ................................................ 384 391
SAIF deposit insurance premium ......................................... 8 48
Advertising and promotions ............................................. 68 47
Data processing ........................................................ 145 177
Other .................................................................. 283 415
-------- --------
Total noninterest expense ........................................ 1,902 2,379
-------- --------
Income (loss) before income taxes ......................................... 229 (20)
Income tax benefit ........................................................ -- --
-------- --------
Net income (loss) ......................................................... $ 229 $ (20)
======== ========
Earnings per share - basic and diluted .................................... $ 0.13 N/A
========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Operations
For the Nine Months Ended March 31, 2000 and March 31, 1999
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
Interest and dividend income:
Loans, including fees .................................................. $ 8,825 $ 12,546
Securities ............................................................. 1,226 1,224
Other interest-earning assets .......................................... 346 299
------- --------
Total interest income ............................................ 10,397 14,069
Interest expense:
Deposits ............................................................... 4,612 6,282
Borrowed funds ......................................................... 84 1,307
------- --------
Total interest income ............................................ 4,696 7,589
------- --------
Net interest income ................................................... 5,701 6,480
Provision for loan losses .............................................. 150 275
------- --------
Net interest income after provision for loan losses ................... 5,551 6,205
Noninterest income:
Loan servicing fees, net of amortization ............................... 7 (497)
Gain on sale of loans .................................................. 83 1,367
Other .................................................................. 782 874
------- --------
Total noninterest income ......................................... 872 1,744
Noninterest expense:
Compensation and benefits .............................................. 3,016 4,713
Occupancy and equipment ................................................ 1,181 1,165
SAIF deposit insurance premium ......................................... 83 233
Advertising and promotions ............................................. 202 175
Data processing ........................................................ 455 619
Other .................................................................. 894 1,237
------- --------
Total noninterest expense ........................................ 5,831 8,142
------- --------
Income (loss) before income taxes ......................................... 592 (193)
Income tax benefit ........................................................ -- --
------- --------
Net income (loss) ......................................................... $ 592 $ (193)
======= ========
Earnings per share - basic and diluted .................................... $ 0.13 N/A
=======
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
SECURITY FINANCIAL BANCORP, INC.
Statement of Changes in Equity
For the Nine Months Ended March 31, 2000
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Unearned Retained Comprehensive Total
Stock Capital ESOP Earnings Income (loss) Equity
-------- ----------- --------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 .............. $ -- $ -- $ -- $18,592 $ (60) $ 18,532
Issuance of common stock, net of
conversion costs ...................... 194 18,384 (1,551) -- -- 17,027
ESOP shares earned .................... -- 2 26 -- -- 28
Comprehensive income:
Net income ......................... -- -- -- 592 -- 592
Change in unrealized loss on
securities available for sale ... -- -- -- -- (129) (129)
--------
Total comprehensive income ... 463
---- ------- ------- ------- ----- --------
Balance at March 31, 2000 ............. $194 $18,386 $(1,525) $19,184 $(189) $ 36,050
==== ======= ======= ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
SECURITY FINANCIAL BANCORP, INC.
Consolidated Statements of Cash Flows
For Nine Months Ended March 31, 2000 and 1999
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ 592 $ (193)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation ..................................................... 475 478
Provision for loan losses ........................................ 150 275
Gain on sale of foreclosed real estate ........................... (49) (26)
Origination and purchase of loans held for sale .................. (19,466) (249,026)
Proceeds from sales of loans held for sale ....................... 12,124 286,461
Change in mortgage loan servicing rights ......................... 3,984 4,588
Gain on sale of loans ............................................ (83) (1,367)
Gain on sale of loans mortgage servicing rights .................. (180) --
ESOP expense ..................................................... 28 --
Amortization of mortgage servicing rights ........................ 155 1,830
Accretion of discount on securities .............................. (213) (177)
Change in other assets ........................................... 349 498
Change in other liabilities ...................................... (417) 49
---------- ----------
Net cash from operating activities ............................ (2,551) 43,390
Cash flows from investing activities:
Increase in time deposits with other financial institutions ............ (5,000) --
Proceeds from maturities of securities available for sale .............. 8,092 30,183
Principal payments on securities available for sale .................... 1,028 1,781
Purchase of securities available for sale .............................. (18,770) (23,118)
Change in loans ........................................................ 21,101 25,071
Change in premises and equipment, net .................................. (272) (705)
Proceeds from sale of other real estate ................................ 813 463
---------- ----------
Net cash from investing activities ............................... 6,992 33,675
Cash flows from financing activities:
Change in deposits ..................................................... (11,707) (61,259)
Change in advance payments by borrowers for taxes and insurance ........ 155 27
Repayments of advances from Federal Home Loan Bank ..................... (5,000) (5,000)
Change in Federal Home Loan Bank overnight line of credit .............. -- (1,815)
Net proceeds from stock issuance ....................................... 17,027 --
---------- ----------
Net cash from financing activities ............................... 475 (68,047)
---------- ----------
Net increase in cash and cash equivalents ................................. 4,916 9,018
Cash and cash equivalents at beginning of period .......................... 4,520 8,502
---------- ----------
Cash and cash equivalents at end of period ................................ $ 9,436 $ 17,520
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................ $ 4,711 $ 7,618
Transfer from loans to foreclosed real estate .......................... 980 --
Transfer loans held for sale to loans receivable ....................... 10,308 --
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
SECURITY FINANCIAL BANCORP, INC.
Notes to Consolidated Financial Statements
(1) Organization
Security Financial Bancorp Inc. ("Security Financial") was incorporated
under the laws of Delaware in September 1999 for the purpose of serving as the
holding company of Security Federal Bank & Trust ("Security Federal") as part of
Security Federal's conversion from the mutual to stock form of organization. The
conversion, completed on January 5, 2000 resulted in Security Financial issuing
an aggregate of 1,938,460 shares of its common stock, par value $.01 per share,
at a price of $10 per share. Prior to the conversion, Security Financial had not
engaged in any material operations and had no assets or income. Security
Financial is currently a savings and loan holding company and is subject to
regulation by the Office of Thrift Supervision and the Securities and Exchange
Commission. Prior to the conversion, Security Federal was known as Security
Federal Bank, a Federal Savings Bank.
(2) Accounting Principles
The accompanying unaudited financial statements of Security Financial,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-QSB and of
Regulation S-B. Accordingly, the financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of a normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the current fiscal year.
These financial statements should be read in conjunction with the
consolidated financial statements included in Security Financial's offering
prospectus prepared in connection with the conversion filed with the Securities
and Exchange Commission.
(3) Earnings per Share
Earnings per share is computed under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Amounts reported
as earnings per share reflect earnings since January 5, 2000 (date of the
conversion) available to common stockholders divided by the weighted average
number of common shares outstanding since that date.
8
<PAGE>
(4) Segment Information
The segment financial information provided below has been derived from
the internal financial reporting system used by management to monitor and manage
the financial performance of Security Financial and Security Federal. The two
reportable segments identified below are Security Federal's mortgage banking and
banking operations. The accounting policies of the two segments are the same as
those described in the significant accounting policies. Loan servicing fees and
net gains from loan sales provide the revenues in the mortgage banking operation
while the interest income earned on loans and securities less the interest paid
on deposits and borrowings provide the revenues in the banking operation. All
operations are domestic. During 1999, as part of its recent business strategy,
Security Financial sold substantially all of its loan servicing rights.
Nine months ended Mortgage
March 31, 2000 Banking Banking Total
- -------------- ------- ------- -----
Net interest income ......................... $ 5,572 $ 129 $ 5,701
Provision for loan losses ................... (150) -- (150)
Loan servicing fees, net of amortization .... -- 7 7
Gain on sale of loans from secondary
market activities ......................... -- 83 83
Gain on sale of mortgage servicing rights ... -- 180 180
Other noninterest income .................... 578 24 602
Compensation and benefits ................... (2,724) (292) (3,016)
Other noninterest expense ................... (2,295) (520) (2,815)
--------- ----- ---------
Income (loss) before income taxes ........... $ 981 $(389) $ 592
========= ===== =========
Segment assets .............................. $ 191,497 $ 547 $ 192,044
Nine months ended Mortgage
March 31, 1999 Banking Banking Total
- -------------- ------- -------- -----
Net interest income ......................... $ 5,374 $ 1,106 $ 6,480
Provision for loan losses ................... (275) -- (275)
Loan servicing fees, net of amortization .... (104) (393) (497)
Gain on sale of loans from secondary
market activity ........................... -- 1,367 1,367
Other noninterest income .................... 639 235 874
Compensation and benefits ................... (3,312) (1,401) (4,713)
Other noninterest expense ................... (932) (2,497) (3,429)
--------- -------- ---------
Income (loss) before income taxes ........... $ 1,390 $(1,583) $ (193)
========= ======== =========
Segment assets .............................. $ 202,558 $ 17,333 $ 219,891
9
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
The following analysis discusses changes in the financial condition and
results of operations at and for the three and nine months ended March 31, 2000,
and should be read in conjunction with Security Financial's unaudited
consolidated financial statements and the notes thereto, appearing in Part I,
Item 1 of this document.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Security Financial
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Reform Act of 1995, and is including this statement for purposes of these safe
harbor provisions. Forward- looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of Security
Financial, are generally identified by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. Security
Financial's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations of Security Financial 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
Security Financial'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. Further
information concerning Security Financial and its business, including additional
factors that could materially affect Security Financial's financial results, is
included in Security Financial's filings with the SEC.
Security Financial does not undertake - and specifically disclaims any
obligation - to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
General
Security Financial is the holding company for Security Federal, a
federally chartered savings bank. Security Financial does not transact any
material business other than through Security Federal. Security Federal is
engaged primarily in attracting deposits from the general public and using such
deposits to fund originations of one- to-four-family residential mortgage loans,
consumer loans, including home equity and second mortgage loans, and
multi-family and commercial real estate loans, and other loans primarily in its
market areas, and, to a substantially lesser extent, to acquire securities.
Security Federal's revenues historically have been derived principally from
interest earned on loans and securities, and gains from sales of first mortgage
loans in the secondary market
10
<PAGE>
and fees from the servicing of first mortgage loans. The operations of Security
Federal 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. Security
Federal'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.
Security Federal'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. Security Federal, 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.
Management's Strategy
Recent History of Management's Strategy. In 1996, Security Federal
began pursuing a strategic plan to increase its asset size largely through
expansion of its mortgage loan origination and mortgage banking operations,
which included the origination and purchase of loans for sale in the secondary
mortgage market, which if sold, were sold with loan servicing retained. At June
30, 1998, Security Federal's portfolio of loans serviced for others totalled
$1.04 billion. Assets increased from $252.5 million, to $302.4 million from June
30, 1996 to June 30, 1997. The growth was initially funded through FHLB
borrowings until the borrowing limit was reached. At that point, Security
Federal resorted to attracting greater deposits. By competing for deposits with
above-market rates, Security Federal dramatically increased interest expense.
Interest expense increased from $10.9 million for the fiscal year ended June 30,
1997 to $15.5 million for the fiscal year ended June 30, 1998. Furthermore, the
decision to pursue an aggressive growth strategy dramatically increased
non-interest expense due to, among other things, an increase in employees, which
created a corresponding increase in compensation expense and other operating
expenses. Non-interest expense increased by $617,000 from the fiscal year ended
June 30, 1997 to the fiscal year ended June 30, 1998. The income produced by
Security Federal's mortgage banking activities, including its loan sale and
servicing operations, was not sufficient to cover the increased expense of these
activities. Consequently, Security Federal began experiencing losses.
Specifically, Security Federal experienced net losses of $1.2 million, $834,000
and $608,000 for each of the three fiscal years ended June 30, 1997, 1998 and
1999, respectively.
In 1998, the Board of Directors decided that the aggressive growth
strategy should be abandoned. John P. Hyland was hired as President and Chief
Executive Officer in October 1998 and began addressing ways in which both
interest and non-interest expenses could be reduced. Security Federal reduced
assets from $355.4 million at December 31, 1997 to $288.1 million at June 30,
1998 and to $191.5 million at June 30, 1999, substantially through the sale of
loans. Additionally, Security Federal sold substantially all of its servicing
rights related to loans serviced for others. This enabled management to address
means to cut expenses by reducing costs related to its former loan servicing
operations, including reductions in staff and various other expenses.
Non-interest expense
11
<PAGE>
decreased by $3.3 million from $13.6 million for the fiscal year ended June 30,
1998 to $10.3 million for the fiscal year ended June 30, 1999. Furthermore, the
reduction in the mortgage banking activities reduced the pressure on Security
Federal to seek sources of funds. Security Federal greatly reduced interest
expense by reducing high interest certificates of deposit and borrowings. As a
result, interest expense related to deposits decreased from $10.8 million to
$7.9 million for the fiscal years ended June 30, 1998 to June 30, 1999,
respectively, and interest expense related to borrowed funds decreased from $4.6
million to $1.6 million for the same corresponding periods.
Current Business Strategy. Security Federal's current strategic plan is
to enhance profitability through increasing interest income as well as
non-interest income, while managing growth, maintaining asset quality and
reducing expenses. Management seeks to accomplish these goals by emphasizing its
retail banking services through its network of branch offices. Security Federal
seeks to obtain high quality residential, home equity and second mortgage loans
by maintaining a high level of local visibility and offering a high level of
customer service. Security Federal is also seeking high quality commercial real
estate loans, a variety of consumer loans, commercial business loans and
construction loans, which will yield higher returns, in the communities it
serves as market conditions permit. Additionally, as part of its mortgage
banking operations, Security Federal has established strong relationships with a
number of correspondent banks and mortgage brokers which generate a significant
volume of loan originations. Security Federal intends to continue to originate
mortgage loans for sale in the secondary market, although all loans sold will be
sold with servicing released, which management believes will increase its non-
interest income and reduce interest rate risk. Most adjustable-rate mortgage
loans and 15-year fixed-rate loans will be retained, while most longer-term
fixed-rate loans will be sold in the secondary market.
Security Federal continues to seek means to reduce expenses. Although
compensation expense has been substantially reduced through the reduction in
staff levels and streamlined operating procedures, additional reductions may
occur as a result of Security Federal's decision to eliminate its loan servicing
operation. Furthermore, the reduction in staff that has already occurred has
resulted in additional savings in employee benefits expense, as well as the
expense of software and data processing related to the loan servicing
operations. Management is reviewing opportunities for further cost reductions in
those, as well as other, areas. While management is considering branching
opportunities, including, possibly into the Chicago area, management intends to
evaluate the cost of any expansion strategy and to continue to reduce operating
costs at its current seven branch offices. As part of Security Federal's
continuing efforts to decrease non-interest expense, Security Federal has
decided to close its Merrillville branch office effective April 30, 2000. This
office is located in an area where many banking institutions are competing
aggressively for the same customers and has only $2.9 million in total deposits.
Management believes eliminating this office will provide Security Federal with
greater flexibility and resources to pursue branch sites that are located in
areas where greater business opportunities exist.
Management has also addressed interest expense and intends to continue
to build and maintain non-certificate accounts, including business checking,
consumer checking and other related
12
<PAGE>
accounts. These accounts generally carry lower costs than certificate accounts
and are believed to represent primarily "core" deposits that are less vulnerable
to interest rate changes (and competition from other financial products) than
certificate accounts.
Comparison of Financial Condition at March 31, 2000 and June 30, 1999
Total assets remained fairly level at $192.0 million at March 31, 2000
compared to $191.5 million at June 30, 1999. The $15.0 million cash proceeds
(net of deposits withdrawn by customers to purchase Security Financial stock
in the initial offering) from Security Financial's initial public offering was
offset by the loss of deposits related to escrow accounts and principal and
interest payments for loans serviced for others being held for disbursement to
the loans' owners. The loss of these deposits is related to the Bank's mortgage
servicing business, which was sold during the nine month period ended March 31,
2000, generating a one time gain of $181,000. Total assets were also decreased
by the repayment of $5.0 million of borrowings from the Federal Home Loan Bank.
Total loans declined to $136.4 million at March 31, 2000 from $148.3
million at June 30, 1999 or 8.02% primarily due to the decline in the
origination of residential mortgages due to the general slow-down in the housing
market; both new construction and purchases of existing homes. Also impacting
the decline in the origination of residential mortgages was the Bank's decision
to terminate its mortgage servicing business as part of its decision to
terminate its high growth strategy in favor of a more controlled growth strategy
funded primarily with core deposits, which was made because of the related high
overhead and market risk related to that business. Consumer loans declined as
the Bank discontinued its indirect lending program due to high overhead and
excessive charge offs.
Total deposits decreased to $154.2 million at March 31, 2000, from
$165.9 million at June 30, 1999 a decline of 7.05%. Due to the decline in loans
held for sale and the decision to exit the mortgage banking business, the Bank
allowed certain high cost short term CDs (generally 1 year or less) to mature
and leave the Bank. Additionally, the Bank lost $3.1 million of escrow accounts
and principal and interest payments on loans serviced for others. Over $2.0
million was withdrawn by customers to purchase the Company's stock in the
initial public offering.
Total equity at March 31, 2000 was $36.1 million compared to $18.5
million at June 30, 1999. The increase resulted from the proceeds raised in the
initial public offering and Security Financial's net income for the nine months
ended March 31, 2000 of $592,000 offset by a $129,000 decline in the fair value
of securities available for sale.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
1999
General. Net income for the three month period ended March 31, 2000 was
$229,000 compared to a net loss of $20,000 for the comparable period in 1999, an
increase of $249,000. The increase is primarily attributable to an improved net
interest margin and reduced compensation and benefits associated with the
significant reduction in the number of personnel employed in loan
13
<PAGE>
servicing and other operations. The loan servicing portion of the business was
substantially reduced during 1999.
Interest Income. Interest income for the quarter ended March 31, 2000
was $3.5 million compared to $4.3 million for the quarter ended March 31, 1999,
a decrease of $800,000, or 18.6%. The decrease was primarily attributable to a
decrease in the average balance of interest earning assets to $180.7 million for
the three months ended March 31, 2000 from $220.3 million for the same period in
1999 due primarily to loan sales in connection with Security Federal's change in
business strategy. The yield on interest earning assets decreased slightly to
7.76% for the three month period ended March 31, 2000 compared to 7.85% for the
same period in 1999.
Interest Expense. Interest expense for the quarter ended March 31, 2000
was $1.5 million compared to $2.3 million for the same period in 1999. This
represents a decrease of $751,000 or 32.3%, which is attributable to a decline
in the average balance of interest bearing liabilities to $150.8 million for the
2000 period from $207.5 million during the 1999 period, as the loan sale
proceeds referred to above were used to reduce various high-cost funding
sources. The cost of funds fell to 3.35% for the three months ended March 31,
2000 from 4.11% for the three months ended March 31, 1999.
Net Interest Income. Net interest income decreased to $2.0 million for
the three month period ended March 31, 2000 from $2.1 million, a decline of
$72,000, or 3.5%. The decrease was attributable to the decline in the levels of
interest-earning assets. The net interest margin improved to 4.41% from 3.74%
during the same periods. The increase in the net interest margin is attributable
primarily to management's reduction of high cost funding sources including
negotiated rate certificates of deposit and borrowings. Additionally the capital
raised through the stock offering is an interest free source of funds and helped
improve the net interest margin.
Provision for Loan Losses. The provision for loan losses was $50,000
for the three months ended March 31, 2000 compared to $75,000 for the three
months ended March 31, 1999. Management increases the allowance for loan losses
through a provision charged to expense for loan growth based on a statistical
percentage developed considering past loss experiences, delinquency trends,
general economic conditions and other factors. Security Federal's loss
experience decreased with net charge-offs of $135,000 for the quarter ended
March 31, 2000 compared to $236,000 for the quarter ended March 31, 1999.
Noninterest Income. Noninterest income was $190,000 for the three
months ended March 31, 2000 compared to $371,000 for the three month period
ended March 31, 1999, a decline of $181,000, or 48.8%. The decrease is primarily
attributable to a reduction in the level of gains on sale of loans into the
secondary market which fell to $13,000 for the quarter ended March 31, 2000 from
$87,000 for the same period in 1999. Additionally, other noninterest income
declined to $175,000 for the 2000 period from $277,000 in 1999 due primarily to
a decline in commitment fees on construction loans, and late charge fees
primarily on loans serviced for others.
14
<PAGE>
Noninterest Expense. Noninterest expense for the quarter ended March
31, 2000 was $1.9 million compared to $2.4 million for the quarter ended March
31, 1999, a decrease of $477,000, or 20.1%. The decline is primarily
attributable to a $287,000 reduction in compensation and benefits related to the
substantial reduction in the number of employees during 1999 as part of
management's plan to reduce operating expenses and Security Federal's
discontinuation of loan servicing activities.
Income Taxes. There was no provision for income taxes for the three
months ended March 31, 2000 and March 31, 1999 due to the utilization of net
operating loss carryforwards. Security Federal had generated net operating
losses in prior years which are being carried forward and will be used to offset
future tax liabilities until fully utilized. Management anticipates that these
carryforwards will be exhausted by the end of fiscal 2001.
Comparison of Operating Results for the Nine Months Ended March 31, 2000 and
1999
General. Net income for the nine month period ended March 31, 2000 was
$592,000 compared to a net loss of $193,000 for the comparable period in 1999,
an increase of $785,000. The increase is primarily attributable to an improved
net interest margin and reduced compensation and benefits associated with the
significant reduction in the number of personnel employed in loan servicing and
other operations. The loan servicing portion of the business was substantially
eliminated during 1999.
Interest Income. Interest income for the nine months ended March 31,
2000 was $10.4 million compared to $14.1 million for the nine months ended March
31, 1999, a decrease of $3.7 million, or 26.2%. The decrease was primarily
attributable to a decrease in the average balance of interest earning assets due
primarily to loan sales in connection with Security Federal's change in business
strategy. The yield on interest earning assets improved to 7.94% for the three
month period ended March 31, 2000 compared to 7.87% for the same period in 1999.
Interest Expense. Interest expense for the nine months ended March 31,
2000 was $4.7 million compared to $7.6 million for the same period in 1999. This
represents a decrease of $2.9 million, or 38.2%, which is attributable to a
decline in the average balance of interest bearing liabilities. Accordingly, the
loan sale proceeds referred to above were used to reduce various high-cost
funding sources. The cost of funds fell to 3.59% for the nine months ended March
31, 2000 from 4.25% for the nine months ended March 31, 1999.
Net Interest Income. Net interest income decreased to $5.7 million for
the nine month period ended March 31, 2000 from $6.5 million, a decline of
$779,000, or 12.0%. The decrease was attributable to the decline in the levels
of interest earning assets. The net interest margin improved to 4.35% from 3.62%
during the same periods. The increase in margin is attributable primarily to
management's reduction of high cost funding sources including negotiated rate
certificates of deposit and borrowings.
15
<PAGE>
Provision for Loan Losses. The provision for loan losses was $150,000
for the nine months ended March 31, 2000 compared to $275,000 for the nine
months ended March 31, 1999. This represents a decrease of $125,000, or 45.5%.
Management increases the allowance for loan losses through a provision charged
to expense for loan growth based on a statistical percentage developed
considering past loss experiences, delinquency trends, general economic
conditions and other factors. Security Federal's loss experience has declined
with net charge-offs of $226,000 for the nine months ended March 31, 2000
compared to $332,000 for the nine months ended March 31, 1999.
Noninterest Income. Noninterest income was $872,000 for the nine months
ended March 31, 2000 compared to $1.7 million for the nine month period ended
March 31, 1999, a decline of $872,000, or 50.0%. The decrease is primarily
attributable to a sharp reduction in the level of gains on sale of loans from
secondary market activities which fell to $83,000 for the nine months ended
March 31, 2000 from $1.4 million for the same period in 1999. This decline was
offset by an increase in loan servicing fees, net of related amortization of
mortgage servicing rights in 2000 from a net expense of $497,000 for the nine
months ended March 31, 1999. The expense amount for the 1999 period was caused
by a high volume of loan prepayments forcing Security Federal to accelerate the
amortization of mortgage servicing rights. Additionally, other noninterest
income remained relatively stable at $782,000 for the 2000 period compared to
$874,000 for the same period in 1999. However, the 2000 amount includes a
$181,000 gain from the sale of servicing rights, which offset a decline of
$117,000 in commitment fees on construction and commercial loans and a decline
of $73,000 in late fees primarily on loans serviced for others.
Noninterest Expense. Noninterest expense for the nine months ended
March 31, 2000 was $5.8 million compared to $8.1 million for the nine months
ended March 31, 1999, a decrease of $2.3 million, or 28.4%. The decline is
primarily attributable to a $1.7 million reduction in compensation and benefits
related to the substantial reduction in the number of employees during 1999 as
part of management's plan to reduce operating expenses and Security Federal's
discontinuation of loan servicing activities.
Income Taxes. There was no provision for income taxes for the nine
months ended March 31, 2000 due to the utilization of net operating loss
carryforwards. There was no provision for income taxes for the nine months ended
March 31, 1999 due to the operating loss during this period. Security Federal
had generated net operating losses in prior years which are being carried
forward and will be used to offset tax liabilities until fully utilized.
Management anticipates that these carryforwards will be exhausted by the end of
fiscal 2001.
Liquidity and Capital Resources
Security Financial'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.
16
<PAGE>
Security Federal generally manages the pricing of its deposits to be competitive
and to increase core deposit relationships.
Federal regulations require Security Federal to maintain minimum levels
of liquid assets. The required percentage has varied from time to time based
upon economic conditions and savings flows and is currently 4.0% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, government agency
and corporate securities and other obligations generally having remaining
maturities of less than five years. Security Federal has historically maintained
its liquidity ratio for regulatory purposes at levels in excess of those
required. At March 31, 2000, Security Federal's liquidity ratio for regulatory
purposes was 24.03%.
Security Financial's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities and
financing activities. Cash flows used in operating activities were $2.6 million
for the nine months ended March 31, 2000. Net cash from investing activities
consisted primarily of disbursements for loan originations and the purchase of
securities, offset by principal collections on loans, proceeds from maturation
and sales of securities. Net cash from financing activities consisted primarily
of activity in deposit accounts, Federal Home Loan Bank advances, and proceeds
from the issuance of common stock, net of conversion costs.
Security Financial's most liquid assets are cash and short-term
investments. The levels of these assets are dependent on Security Financial's
operating, financing, lending and investing activities during any given period.
Security Financial has other sources of liquidity if a need for additional funds
arises, including securities maturing within one year and the repayment of
loans. Security Financial may also utilize the sale of securities
available-for-sale, federal funds purchased, and Federal Home Loan Bank advances
as a source of funds. At March 31, 2000, Security Federal had the ability to
borrow a total of approximately $67.6 million from the Federal Home Loan Bank of
Indianapolis. On that date, Security Federal had no outstanding advances.
At March 31, 2000, Security Federal had outstanding commitments to
originate loans of $1,156,000, $876,000 of which had fixed interest rates. These
loans are to be secured by properties located in its market area. Security
Federal 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 Federal Home Loan Bank borrowings. Certificates of
deposit which are scheduled to mature in one year or less from March 31, 2000
totaled $70.5 million. Management believes, based on past experience, that a
significant portion of such deposits will remain with Security Federal. Based on
the foregoing, in addition to Security Federal's high level of core deposits and
capital, Security Financial 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. Security Financial 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
17
<PAGE>
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 Security Federal requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the Federal Home Loan Bank of Indianapolis.
Security Federal is subject to various regulatory capital requirements
imposed by the Office of Thrift Supervision. At March 31, 2000, Security Federal
was in compliance with all applicable capital requirements.
Security Federal's actual and required capital amounts and rates are
presented below (in thousands).
<TABLE>
<CAPTION>
Requirement
to be Well
Requirement Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Total capital (to risk-weighted
assets)........................ $27,203 22.6% $9,636 8.0% $12,045 10.0%
Tier 1 capital (to risk-weighted
assets)........................ 26,121 21.7 4,818 4.0 7,227 6.0
Core capital (to adjusted assets) 26,121 14.1 7,409 4.0 9,261 5.0
</TABLE>
Impact of Accounting Pronouncements and Regulatory Policies
Accounting for Derivative Instruments and Hedging Activities. Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," issued in June 1998 (as amended by SFAS No.
137), standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. The Statement requires
entities to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value, gains and
losses, of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reasons for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair value, cash
flows or foreign currencies. The statement is effective for financial statements
issued for periods beginning after June 15, 2000. Currently, Security Financial
is evaluating the effects of the statement.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
None.
Item 2. Changes in Securities.
----------------------
Use of Proceeds. On January 5, 2000, Security Financial
completed an offering of securities registered pursuant to the
Securities Act of 1933, as amended. In connection therewith:
1. The effective date of the registration statement on Form SB-2,
as amended (File No. 333-87397) was November 9, 1999.
2. The offering of securities was not underwritten. Charles Webb
& Company, a Division of Keefe, Bruyette & Woods, Inc. acted
as marketing agent.
3. The class of securities registered was common stock, $0.01 par
value per share. The amount of such securities registered was
2,777,250 shares at an offering price of $10.00 per share. The
offering terminated on December 15, 1999 with the sale of
1,938,460 shares at a price of $10.00 per share.
4. The total offering expenses incurred by Security Financial
were $806,500, none of which were paid directly or indirectly
to directors or officers of Security Financial or their
associates.
5. The net proceeds of the offering were $18.6 million of which
$1.6 million was loaned to Security Federal's employee stock
ownership plan to purchase stock in the offering. One-half of
the net proceeds were invested in the subsidiary bank and the
remaining was invested in short-term securities. These uses of
proceeds do not represent a material change in the use of
proceeds described in Security Financial's prospectus dated
November 10, 1999.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
19
<PAGE>
Item 5. Other Information.
------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
10.1 ESOP Loan Documents
10.2 Employment Agreement between Security
Federal Bank & Trust and John P. Hyland
10.3 Employment Agreement between Security
Financial Bancorp, Inc. and John P. Hyland
10.4 Security Federal Bank & Trust Employee
Severance Compensation Plan
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
None
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SECURITY FINANCIAL BANCORP, INC.
Date: May 12, 2000 By: /s/ John P. Hyland
------------------
John P. Hyland
President and Chief Executive
Officer
Date: May 12, 2000 By: /s/ James H. Foglesong
----------------------
James H. Foglesong
Executive Vice President and Chief
Financial Officer
21
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Loan Agreement") is made and entered in as of the
5th day of January, 2000, by and between the SECURITY FEDERAL BANK & TRUST
EMPLOYEE STOCK OWNERSHIP PLAN TRUST ("Borrower"), a trust forming part of the
Security Federal Bank & Trust Employee Stock Ownership Plan ("ESOP"); and
SECURITY FINANCIAL BANCORP, INC. ("Lender"), a corporation organized and
existing under the laws of the State of Delaware.
W I T N E S S E T H
WHEREAS, the Borrower is authorized to purchase shares of common stock of
Security Financial Bancorp, Inc. ("Common Stock"), either directly from Security
Financial Bancorp, Inc. or in open market purchases in an amount not to exceed
155,076 shares of Common Stock.
WHEREAS, the Borrower is authorized to borrow funds from the Lender for
the purpose of financing authorized purchases of Common Stock; and
WHEREAS, the Lender is willing to make a loan to the Borrower for such
purpose:
NOW, THEREFORE, the parties agree hereto as follows:
ARTICLE I
---------
DEFINITIONS
-----------
The following definitions shall apply for purposes of this Loan Agreement,
except to the extent that a different meaning is plainly indicated by the
context:
Business Day means any day other than a Saturday, Sunday or other day on
------------
which banks are authorized or required to close under federal or local law.
Code means the Internal Revenue Code of 1986 (including the corresponding
----
provisions of any succeeding law).
Default means an event or condition which would constitute an Event of
-------
Default. The determination as to whether an event or condition would constitute
an Event of Default shall be determined without regard to any applicable
requirements of notice or lapse of time.
ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended (including the corresponding provisions of any succeeding law).
Event of Default means an event or condition described in Article 5.
----------------
Loan means the loan described in section 2.1
----
<PAGE>
Loan Documents means, collectively, the Loan Agreement, the Promissory
--------------
Note and the Pledge Agreement and all other documents now or hereafter executed
and delivered in connection with such documents, including all amendments,
modifications and supplements of or to all such documents.
Pledge Agreement means the agreement described in section 2.8(a).
----------------
Principal Amount means the face amount of the Promissory Note, determined
----------------
as set forth in section 2.1(c).
Promissory Note means the promissory note described in section 2.3.
---------------
Register means the register described in section 2.9.
--------
ARTICLE II
----------
THE LOAN; PRINCIPAL AMOUNT;
---------------------------
INTEREST; SECURITY; INDEMNIFICATION
-----------------------------------
Section 2.1 The Loan; Principal Amount.
---------------------------
(a) The Lender hereby agrees to lend to the Borrower such amount, and at
such time, as shall be determined under this Section 2.1; provided, however,
that in no event shall the aggregate amount lent under this Loan Agreement from
time to time exceed the greater of (i) $1,550,769 or (ii) the aggregate amount
paid by the Borrower to purchase up to 155,076 shares of Common Stock.
(b) Subject to the limitations of Section 2.1(a), the Borrower shall
determine the amounts borrowed under this Agreement, and the time at which such
borrowings are effected. Each such determination shall be evidenced in a writing
which shall set forth the amount to be borrowed and the date on which the Lender
shall disburse such amount, and such writing shall be furnished to the Lender by
notice from the Borrower. The Lender shall disburse to the Borrower the amount
specified in each such notice on the date specified therein or, if later, as
promptly as practicable following the Lender's receipt of such notice; provided,
however, that the Lender shall have no obligation to disburse funds pursuant to
this Agreement following the occurrence of a Default or an Event of Default
until such time as such Default or Event of Default shall have been cured.
(c) For all purposes of this Loan Agreement, the Principal Amount on any
date shall be equal to the excess, if any, of:
(i) the aggregate amount disbursed by the Lender pursuant to section
2.1(b) on or before such date; over
2
<PAGE>
(ii) the aggregate amount of any repayments of such amounts made before
such date.
The Lender shall maintain on the Register a record of, and shall record in the
Promissory Note, the Principal Amount, any changes in the Principal Amount and
the effective date of any changes in the Principal Amount.
Section 2.2 Interest.
---------
(a) The Borrower shall pay to the Lender interest on the Principal Amount,
for the period commencing with the first disbursement of funds under this Loan
Agreement and continuing until the Principal Amount shall be paid in full, at
the rate of eight and one half percent (8.50%) per annum. Interest payable under
this Agreement shall be computed on the basis of a year of 365 days and actual
days elapsed (including the first day but excluding the last) occurring during
the period to which the computation relates.
(b) Accrued interest on the Principal Amount shall be payable by the
Borrower on the dates set forth in Schedule I to the Promissory Note. All
interest on the Principal Amount shall be paid by the Borrower in immediately
available funds.
(c) Anything in the Loan Agreement or the Promissory Note to the contrary
notwithstanding, the obligation of the Borrower to make payments of interest
shall be subject to the limitation that payments of interest shall not be
required to be made to the Lender to the extent that the Lender's receipt
thereof would not be permissible under the law or laws applicable to the Lender
limiting rates of interest which may be charged or collected by the Lender. Any
such payment referred to in the preceding sentence shall be made by the Borrower
to the Lender on the earliest interest payment date or dates on which the
receipt thereof would be permissible under the laws applicable to the Lender
limiting rates of interest which may be charged or collected by the Lender. Such
deferred interest shall not bear interest.
Section 2.3 Promissory Note.
----------------
The Loan shall be evidenced by the Promissory Note of the Borrower
attached hereto as an exhibit payable to the order of the lender in the
Principal Amount and otherwise duly completed.
Section 2.4 Payment of Trust Loan.
----------------------
The Principal Amount of the Loan shall be repaid in accordance with
Schedule I to the Promissory Note on the dates specified therein until fully
paid.
3
<PAGE>
Section 2.5 Prepayment.
-----------
The Borrower shall be entitled to prepay the Loan in whole or in part, at
any time and from time to time; provided, however, that the Borrower shall give
notice to the Lender of any such prepayment; and provided, further, that any
partial prepayment of the Loan shall be in an amount not less than $1,000. Any
such prepayment shall be: (a) permanent and irrevocable; (b) accompanied by all
accrued interest through the date of such prepayment; (c) made without premium
or penalty; and (d) applied on the inverse order of the maturity of the
installment thereof unless the Lender and the Borrower agree to apply such
prepayments in some other order.
Section 2.6 Method of Payments.
-------------------
(a) All payments of principal, interest, other charges (including
indemnities) and other amounts payable by the Borrower hereunder shall be made
in lawful money of the United States, in immediately available funds, to the
Lender at the address specified in or pursuant to this Loan Agreement for
notices to the Lender, on the date on which such payment shall become due. Any
such payment made on such date but after such time shall, if the amount paid
bears interest, and except as expressly provided to the contrary herein, be
deemed to have been made on, and interest shall continue to accrue and be
payable thereon until, the next succeeding Business Day. If any payment of
principal or interest becomes due on a day other than a Business Day, such
payment may be made on the next succeeding Business Day, and when paid, such
payment shall include interest to the day on which payment is in fact made.
(b) Notwithstanding anything to the contrary contained in this Loan
Agreement or the Promissory Note, the Borrower shall not be obligated to make
any payment, repayment or prepayment on the Promissory Note if doing so would
cause the ESOP to cease to be an employee stock ownership plan within the
meaning of section 4975(e)(7) of the Code or qualified under section 401(a) of
the Code or cause the Borrower to cease to be a tax exempt trust under section
501(a) of the Code or if such act or failure to act would cause the Borrower to
engage in any "prohibited transaction" as such term is defined in the section
4975(c) of the Code and the regulations promulgated thereunder which is not
exempted by section 4975(c)(2) or (d) of the Code and the regulations
promulgated thereunder or in section 406 of ERISA and the regulations
promulgated thereunder which is not exempted by section 408(b) of ERISA and the
regulations promulgated thereunder; provided, however, that in each case, the
Borrower, may act or refrain from acting pursuant to this section 2.6(b) on the
basis of an opinion of counsel, and any opinion of such counsel. The Borrower
may consult with counsel, and any opinion of such counsel shall be full and
complete authorization and protection in respect of any action taken or suffered
or omitted by it hereunder in good faith and in accordance with such opinion of
counsel. Nothing contained in this section 2.6(b) shall be construed as imposing
a duty on the Borrower to consult with counsel. Any obligation of the Borrower
to make any payment, repayment or prepayment on the Promissory Note or refrain
from taking any other act hereunder or under the Promissory Note which is
excused pursuant to this section 2.6(b) shall be considered a binding obligation
of the Borrower, or both, as the case may be, for the purposes of determined
whether a Default or Event of Default has occurred hereunder or
4
<PAGE>
under the Promissory Note and nothing in this section 2.6(b) shall be construed
as providing a defense to any remedies otherwise available upon a Default or an
Event of Default hereunder (other than the remedy of specific performance).
Section 2.7 Use of Proceeds of Loan.
------------------------
The entire proceeds of the Loan shall be used solely for acquiring shares
of Common Stock, and for no other purpose whatsoever.
Section 2.8 Security.
---------
(a) In order to secure the due payment and performance by the Borrower of
all of its obligations under this Loan Agreement, simultaneously with the
execution and delivery of this Loan Agreement by the Borrower, the Borrower
shall:
(i) pledge to the Lender as Collateral (as defined in the Pledge
Agreement), and grant to the Lender a first priority lien on and security
interest in, the Common Stock purchased with the Principal Amount, by the
execution and delivery to the lender of the Pledge Agreement attached
hereto as an exhibit; and
(ii) execute and deliver, or cause to be executed and delivered, such
other agreement, instruments and documents as the Lender may reasonable
require in order to effect the purposes of the Pledge Agreement and this
Loan Agreement.
(b) The Lender shall release from encumbrance under the Pledge Agreement
and transfer to the Borrower, as of the date on which any payment or repayment
of the Principal Amount is made, a number of shares of Common Stock held as
Collateral determined pursuant to the applicable provisions of the ESOP.
Section 2.9 Registration of the Promissory Note.
------------------------------------
(a) The Lender shall maintain a Register providing for the registration of
the Principal Amount and any stated interest and of transfer and exchange of the
Promissory Note. Transfer of the Promissory Note may be effected only by the
surrender of the old instrument and either the reissuance by the Borrower of the
old instrument to the new holder or the issuance by the Borrower of a new
instrument to the new holder. The old Promissory Note so surrendered shall be
canceled by the Lender and returned to the Borrower after such cancellation.
(b) Any new Promissory Note issued pursuant to section 2.9(a) shall carry
the same rights to interest (unpaid and to accrue) carried by the Promissory
Note so transferred or exchanged so that there will not be any loss or gain of
interest on the note surrender. Such new Promissory Note shall be subject to all
of the provisions and entitled to all of the benefits of this Agreement. Prior
to due presentment for registration or transfer, the Borrower may deem and treat
the registered holder of any Promissory Note as the holder thereof for purposes
of payment and other purposes. A notation
5
<PAGE>
shall be made on each new Promissory Note of the amount of all payments of
principal and interest theretofore paid.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
----------------------------------------------
The Borrower hereby represents and warrants to the Lender as follows:
Section 3.1 Power, Authority, Consents.
---------------------------
The Borrower has the power to execute, deliver and perform this Loan
Agreement, the Promissory Note and Pledge Agreements, all of which have been
duly authorized by all necessary and proper corporate or other action.
Section 3.2 Due Execution, Validity, Enforceability.
----------------------------------------
Each of the Loan Documents, including, without limitation, this Loan
Agreement, the Promissory Note and the Pledge Agreement, have been duly executed
and delivered by the Borrower; and each constitutes the valid and legally
binding obligation of the Borrower, enforceable in accordance with its terms.
Section 3.3 Properties, Priority of Liens.
------------------------------
The liens which have been created and granted by the Pledge Agreement
constitute valid, first liens on the properties and assets covered by the Pledge
Agreement, subject to no prior or equal lien.
Section 3.4 No Defaults, Compliance with Laws.
----------------------------------
The Borrower is not in default in any material respect under any
agreement, ordinance, resolution, decree, bond, note, indenture, order or
judgement to which it is an party or by which it is bound, or any other
agreement or other instrument by which any of the properties or assets owned by
it is materially affected.
Section 3.5 Purchase of Common Stock.
-------------------------
Upon consummation of any purchase of Common Stock by the Borrower with the
proceeds of the Loan, the Borrower shall acquire valid, legal and marketable
title to all of the Common Stock so purchased, free and clear of any liens,
other than a pledge to the Lender of the Common Stock so purchased pursuant to
the Pledge Agreement. Neither the execution and delivery of the Loan Documents
nor the performance of any obligation thereunder violates any provisions of law
or conflicts with or results in a breach of or creates (with or without the
giving of notice of lapse of
6
<PAGE>
time, or both) a default under any agreement to which the Borrower is a party or
by which it is bound or any of its properties is affected. No consent of any
federal, state, or local governmental authority, agency, or other regulatory
body, the absence of which could have a materially adverse effect on the
Borrower or the Trustee, is or was required to be obtained in connection with
the execution, delivery, or performance of the Loan Documents and the
transaction contemplated therein or in connection therewith, including without
limitation, with respect to the transfer of the shares of Common Stock purchased
with the proceeds of the Loan pursuant thereto.
Section 3.6 ESOP; Contributions.
--------------------
As of the effective date of the ESOP sponsor's mutual-to-stock conversion,
the ESOP and the Borrower will be duly created, organized and maintained by the
ESOP sponsor in compliance with all applicable laws, regulations and rulings.
The ESOP will qualify as an "employee stock ownership plan" as defined in
section 4975(e)(7) of the Code. The ESOP provides that the ESOP sponsor may make
contributions to the ESOP in an amount necessary to enable the Trustee to
amortize the Loan in accordance with the terms of the Promissory Note; provided,
however, that no such contributions shall be required if they would adversely
affect the qualification of the ESOP under section 401(a) of the Code.
Section 3.7 Trustee.
--------
The trustees of the ESOP have been duly appointed by the ESOP sponsor.
Section 3.8 Compliance with Laws; Actions.
------------------------------
Neither the execution and delivery by the Borrower of this Loan Agreement
or any instruments required thereby, nor compliance with the terms and
provisions of any such documents by the lender, constitutes a violation of any
provision of any law or any regulation, order, writ, injunction or decree or any
court or governmental instrumentality, or an event of default under any
agreement, to which the Borrower is a party of which the Borrower is bound or to
which the Borrower is subject, which violation or event of default would have a
material adverse effect on the Borrower. There is no action or proceeding
pending or threatened against either the ESOP or the Borrower before any court
or administrative agency.
7
<PAGE>
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES OF THE LENDER
--------------------------------------------
The Lender hereby represents and warrants to the Borrower as follows:
Section 4.1 Power, Authority, Consents.
---------------------------
The Lender has the power to execute, deliver and perform this Loan
Agreement, the Pledge Agreement and all documents executed by the Lender in
connection with the Loan, all of which have been duly authorized by all
necessary and proper corporate or other action. No consent, authorization or
approval or other action by any governmental authority or regulatory body, and
no notice by the Lender to, or filing by the Lender with any governmental
authority or regulatory body is required for the due execution, delivery and
performance of this Loan Agreement.
Section 4.2 Due Execution, Validity, Enforceability.
----------------------------------------
This Loan Agreement and the Pledge Agreement have been duly executed and
delivered by the Lender, and each constitutes a valid and legally binding
obligation of the Lender, enforceable in accordance with its terms.
ARTICLE V
---------
EVENTS OF DEFAULT
-----------------
Section 5.1 Events of Default under Loan Agreement.
---------------------------------------
Each of the following events shall constitute an "Event of Default"
hereunder:
(a) Failure to make any payment or mandatory prepayment of principal of
the Promissory Note when due, or failure to make any payment of interest on the
Promissory Note not later than five (5) Business Days after the date when due.
(b) Failure by the Borrower to perform or observe any term, condition or
covenant of this Loan Agreement or of any of the other Loan Documents, including
without limitation, the Promissory Note and the Pledge Agreement.
(c) Any representation or warranty made in writing to the Lender in any of
the Loan Documents, or any certificate, statement or report made or delivered in
compliance with this Loan Agreement, shall have been false or misleading in any
material respect when made or delivered.
8
<PAGE>
Section 5.2 Lender's Rights upon Event of Default.
--------------------------------------
If an Event of Default under this Loan Agreement shall occur and be
continuing, the Lender shall have no rights to assets of the Borrower other
than: (a) contributions (other than contributions of Common Stock) that are made
by the ESOP sponsor to enable the Borrower to meet its obligations pursuant to
this Loan Agreement and earnings attributable to the investment of such
contributions and (b) "Eligible Collateral" (as defined in the Pledge
Agreement); provided, however, that; (i) the value of the Borrower's assets
transferred to the Lender following an Event of Default in satisfaction of the
due and unpaid amount of the Loan shall not exceed the amount in default
(without regard to amounts owing solely as a result of any acceleration of the
Loan); (ii) the Borrower's assets shall be transferred to the Lender following
an Event of Default only to the extent of the failure of the Borrower to meet
the payment schedule of the Loan; and (iii) all rights of the Lender to the
Common Stock purchased with the proceeds of the Loan covered by the Pledge
Agreement following an Event of Default shall be governed by the terms of the
Pledge Agreement.
ARTICLE VI
----------
Miscellaneous Provisions
------------------------
Section 6.1 Payments Due to the Lender.
---------------------------
If any amount is payable by the Borrower to the Lender pursuant to any
indemnity obligation contained herein, then the Borrower shall pay, at the time
or times provided therefor, any such amount and shall indemnify the Lender
against and hold it harmless from any loss of damage resulting from or arising
out of the nonpayment or delay in payment of any such amount. If any amounts as
to which the Borrower has so indemnified the Lender hereunder shall be assessed
or levied against the Lender, the Lender may notify the Borrower and make
immediate payment thereof, together with interest or penalties in connection
therewith, and shall thereupon be entitled to and shall receive immediate
reimbursement therefor from the Borrower together with interest on each such
amount as provided in section 2.2(c). Notwithstanding any other provision
contained in this Loan Agreement, the covenants and agreements of the Borrower
contained in this section 6.1 shall survive: (a) payment of the Promissory Note
and (b) termination of this Loan Agreement.
Section 6.2 Payments.
---------
All payments hereunder and under the Promissory Note shall be made without
set-off or counterclaim and in such amounts as may be necessary in order that
all such payments shall not be less than the amounts otherwise specified to be
paid under this Loan Agreement and the Promissory Note, subject to any
applicable tax withholding requirements. Upon payment in full of the Promissory
Note, the Lender shall mark such Promissory Note "Paid" and return it to the
Borrower.
9
<PAGE>
Section 6.3 Survival.
---------
All agreements, representations and warranties made herein shall
survive the delivery of this Loan Agreement and the Promissory Note.
Section 6.4 Modifications, Consents and Waivers; Entire Agreement.
------------------------------------------------------
No modification, amendment or waiver of or with respect to any provision
of this Loan Agreement, the Promissory Note, the Pledge Agreement, or any of the
other Loan Documents, nor consent to any departure from any of the terms or
conditions thereof, shall in any event be effective unless it shall be in
writing and signed by the party against whom enforcement thereof is sought. Any
such waiver or consent shall be effective only in the specific instance and for
the purpose for which given. No consent to or demand on a party in any case
shall, of itself, entitle it to any other or further notice or demand in similar
or other circumstances. This Loan Agreement embodies the entire agreement and
understanding between the Lender and the Borrower and supersedes all prior
agreements and understandings relating to the subject matter hereof.
Section 6.5 Remedies Cumulative.
--------------------
Each and every right granted to the Lender hereunder or under any other
document delivered hereunder or in connection herewith, or allowed it by law or
equity, shall be cumulative and may be exercised from time to time. No failure
on the part of the Lender or the holder of the Promissory Note to exercise, and
no delay in exercising, any right shall operate as a waiver thereof, nor shall
any single or partial exercise of any right preclude any other or future
exercise thereof or the exercise of any other right. The due payment and
performance of the obligations under the Loan Documents shall be without regard
to any counterclaim, right of offset or any other claim whatsoever which the
Borrower may have against the Lender and without regard to any other obligation
of any nature whatsoever which the Lender may have to the Borrower, and no such
counterclaim or offset shall be asserted by the Borrower in any action, suit or
proceeding instituted by the Lender for payment or performance of such
obligations.
Section 6.6 Further Assurances; Compliance with Covenants.
----------------------------------------------
At any time and from time to time, upon the request of the Lender, the
Borrower shall execute, deliver and acknowledge or cause to be executed,
delivered and acknowledged, such further documents and instruments and do such
other acts and things as the Lender may reasonably request in order to fully
effect the terms of this Loan Agreement, the Promissory Note, the Pledge
Agreement, the other Loan Documents and any other agreements, instruments and
documents delivered pursuant hereto or in connection with the Loan.
10
<PAGE>
Section 6.7 Notices.
--------
Except as otherwise specifically provided for herein, all notice,
requests, reports and other communications pursuant to this Loan Agreement shall
be in writing, either by letter (delivered by hand or commercial messenger
service or sent by registered or certified mail, return receipt requested,
except for routine reports delivered in compliance with Article VI hereof which
may be sent by ordinary first-class mail) or telex or telecopier addressed as
follows:
(a) If to the Borrower:
Lawrence R. Parducci, Philip T. Rueth and Tula Kavadias, as trustees
for Security Federal Bank & Trust Employee Stock Ownership Plan
9321 Wicker Avenue
St. John, Indiana 46373
(b) If to the Lender:
Security Financial Bancorp, Inc.
9321 Wicker Avenue
St. John, Indiana 46373
Attn: John P. Hyland
Any notice, request or communication hereunder shall be deemed to have been
given on the day on which it is delivered by hand or by commercial messenger
service, or sent by telex or telecopier, to such party at its address specified
above, or, if sent by mail, on the third Business Day after the day deposited in
the mail, postage prepaid, addressed as aforesaid. Any party may change the
person or address to whom or which notices are to be given hereunder, by notice
duly given hereunder; provided, however, that any such notice shall be deemed to
have been given only when actually received by the party to whom it is
addressed.
Section 7.1 Counterparts.
-------------
This Loan Agreement may be signed in any number of counterparts which,
when taken together, shall constitute one and the same document.
Section 7.2 Construction; Governing Law.
----------------------------
The headings used in the table of contents and in this Loan Agreement are
for convenience only and shall not be deemed to constitute a part hereof. All
uses herein of any gender or of singular or plural terms shall be deemed to
include uses of the other genders or plural or singular terms, as the context
may require. All references in this Loan Agreement of an Article or section
shall be to an Article or section of this Loan Agreement, unless otherwise
specified. This Loan Agreement, the Promissory Note, the Pledge Agreement and
the other Loan Documents shall be governed by, and construed and interpreted in
accordance with, the laws of the State of Indiana.
11
<PAGE>
Section 7.3 Severability.
-------------
Wherever possible, each provision of this Loan Agreement shall be
interpreted in such manner as to be effective and valid under applicable law;
however, the provisions of this Loan Agreement are severable, and if any clause
of provision hereof shall be held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such clause or provision, or part thereof, in such jurisdiction and shall not in
any manner affect such clause or provision in any other jurisdiction, or any
other clause or provisions in this Loan Agreement in and jurisdiction. Each of
the covenants, agreements and conditions contained in this Loan Agreement
independent, and compliance by a party with any of them shall not excuse non-
compliance by such party with any other. The Borrower shall not take any action
the effect of which shall constitute a breach or violation of any provision of
this Loan Agreement.
Section 7.4 Binding Effect: No Assignment or Delegation.
--------------------------------------------
This Loan Agreement shall be binding upon and inure to the benefit of the
Borrower and its successors and the Lender and its successors and assigns. The
rights and obligations of the Borrower under this Agreement shall not be
assigned or delegated without the prior written consent of the Lender, and any
purported assignment or delegation without such consent shall be void.
IN WITNESS WHEREOF, the parties have caused this Loan Agreement to be
executed as of the date first written above.
SECURITY FEDERAL BANK & TRUST
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
/s/ Lawrence R. Parducci , as TRUSTEE
---------------------------
Lawrence R. Parducci
/s/ Philip T. Rueth , as TRUSTEE
---------------------------
Philip T. Rueth
/s/ Tula Kavadias , as TRUSTEE
---------------------------
Tula Kavadias
SECURITY FINANCIAL BANCORP, INC.
By: /s/ John P. Hyland
-------------------------------------
John P. Hyland
For the Entire Board of Directors
12
<PAGE>
PLEDGE AGREEMENT
----------------
THIS PLEDGE AGREEMENT ("Pledge Agreement") is made as of the 5th day of
January, 2000 by and between the SECURITY FEDERAL BANK & TRUST EMPLOYEE STOCK
OWNERSHIP PLAN TRUST ("Pledgor"), and SECURITY FINANCIAL BANCORP, INC., a
corporation organized and existing under the laws of the State of Delaware
("Pledgee").
W I T N E S S E T H
WHEREAS, this Pledge Agreement is being executed and delivered to the
Pledgee pursuant to the terms of a Loan Agreement ("Loan Agreement"), by and
between the Pledgor and the Pledgee;
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and in the Loan Agreement, the parties hereto do hereby covenant and agree as
follows:
Section 1. Definitions. The following definitions shall apply for purposes
------------
of this Pledge Agreement, except to the extent that a different meaning is
plainly indicated by the context; all capitalized terms used but not defined
herein shall have the respective meanings assigned to them in the Loan
Agreement:
Collateral shall mean the Pledged Shares and, subject to section 5 hereof,
----------
and to the extent permitted by applicable law, all rights with respect thereto,
and all proceeds of such Pledged Shares and rights.
ESOP shall mean the Security Federal Bank & Trust Employee Stock Ownership
----
Plan.
Event of Default shall mean an event so defined in the Loan Agreement.
----------------
Liabilities shall mean all the obligations of the Pledgor to the Pledgee,
-----------
howsoever created, arising or evidenced, whether direct or indirect, absolute or
contingent, now or hereafter existing, or due or to become due, under the Loan
Agreement and the Promissory Note.
Pledged Shares shall mean all the Shares of Common Stock of the Pledgee
--------------
purchased by the Pledgor with the proceeds of the loan made by the Pledgee to
the Pledgor pursuant to the Loan Agreement, but excluding any such shares
previously released pursuant to section 4.
Section 2. Pledge. To secure the payment of and performance of all the
-------
Liabilities, the Pledgor hereby pledges to the Pledgee, and the grants to the
Pledgee, a security interest in, and lien upon, the Collateral.
Section 3. Representations and Warranties of the Pledgor. The Pledgor
----------------------------------------------
represents, warrants, and covenants to the Pledgee as follows:
<PAGE>
(a) the execution, delivery and performance of this Pledge Agreement and
the pledging of the Collateral hereunder do not and will not conflict with,
result in a violation of, or constitute a default under, any agreement binding
upon the Pledgor;
(b) the Pledged Shares are and will continue to be owned by the Pledgor
free and clear of any liens or rights of any other person except the lien
hereunder and under the Loan Agreement in favor of the Pledgee, and the security
interest of the Pledgee in the Pledged Shares and the proceeds thereof is and
will continue to be prior to and senior to the rights of all others;
(c) this Pledge Agreement is the legal, valid, binding and enforceable
obligation of the Pledgor in accordance with its terms;
(d) the Pledgor shall, from time to time, upon request of the Pledgee,
promptly deliver to the Pledgee such stock powers, proxies, and similar
documents, satisfactory in form and substance to the Pledgee, with respect to
the Collateral as the Pledgee may reasonable request; and
(e) subject to the first sentence of section 4(b), the Pledgor shall not,
so long as any Liabilities are outstanding, sell, assign, exchange, pledge or
otherwise transfer or encumber any of its rights in and to any of the
Collateral.
Section 4. Eligible Collateral.
--------------------
(a) As used herein the term "Eligible Collateral" shall mean the amount of
Collateral which has an aggregate fair market value equal to the amount by which
the Pledgor is in default (without regard to any amounts owing solely as the
result of an acceleration of the Loan Agreement) or such lesser amount of
Collateral as may be required pursuant to section 13 of this Pledge Agreement.
(b) The Pledged Shares shall be released from this Pledge Agreement in a
manner conforming to the requirements of Treasury Regulations Section
54.4975-7(b)(8), as the same may be from time to time amended or supplemented,
and the applicable provisions of the ESOP. Subject to such Regulations, the
Pledgee may from time to time, after any Default or Event of Default, and
without prior notice to the Pledgor, transfer all or any part of the Eligible
Collateral in the name of the Pledgee or its nominee, without disclosing that
such Eligible Collateral is subject to any rights of the Pledgor and may from
time to time, whether before or after any of the Liabilities shall become due
and payable, without notice to the Pledgor, take all or any of the following
actions: (i) notify the parties obligated on any of the Eligible Collateral to
make payment to the Pledgee of any amounts due or due to become due thereunder,
(ii) release or exchange all or any part of the Eligible Collateral, or
compromise or extend or renew for any period (whether or not longer than the
original period) any obligations of any nature of any party with respect
thereto, and (iii) take control of any proceeds of the Eligible Collateral.
2
<PAGE>
Section 5. Delivery.
---------
(a) The Pledgor shall deliver to the Pledgee upon execution of this Pledge
Agreement (i) either (A) certificates for the Pledged Shares, each certificate
duly signed in blank by the Pledgor or accompanied by a stock transfer power
duly signed in blank by the Pledgor and each such certificate accompanied by all
required documentary or stock transfer tax stamps or (B) if the Trustee does not
yet have possession of the Pledged Shares, an assignment by the Pledgor of all
the Pledgor's rights to and interest in the Pledged Shares and (ii) an
irrevocable proxy, in form and substance satisfactory to the Pledgee, signed by
the Pledgor with respect to the Pledged Shares.
(b) So long as no Default or Event of Default shall have occurred and be
continuing, (i) the Pledgor shall be entitled to exercise any and all voting and
other rights pertaining to the Collateral or any part thereof for any purpose
not inconsistent with the terms of this Pledge Agreement, and (ii) the Pledgor
shall be entitled to receive any and all cash dividends or other distributions
paid in respect of the Collateral.
Section 6. Events of Default.
------------------
(a) If a Default or Event Default shall be existing, in addition to the
rights it may have under the Loan Agreement, the Promissory Note, and this
Pledge Agreement, or by virtue of any other instrument, (i) the Pledgee may
exercise, with respect to the Eligible Collateral, from time to time, any rights
and remedies available to it under the Uniform Commercial Code as in effect from
time to time in the State of Indiana or otherwise available to it and (ii) the
Pledgee shall have the right, for and in the name, place and stead of the
Pledgor, to execute endorsement, assignments, stock powers and other instruments
of conveyance or transfer with respect to all or any of the Eligible Collateral.
Written notification of intended disposition of any of the Eligible Collateral
shall be given by the Pledgee to the Pledgor at least three (3) Business Days
before such disposition. Subject to section 13 below, any proceeds of any
disposition of Eligible Collateral may be applied by the Pledgee to the payment
of expenses in connection with the Eligible Collateral, including, without
limitation, reasonable attorneys's fees and legal expenses, and any balance of
such proceeds may be applied by the Pledgee toward the payment of such of the
Liabilities as are in Default, and in such order of application, as the Pledgee
may from time to time elect. No action of the Pledgee permitted hereunder shall
impair or affect its rights in and to the Eligible Collateral. All rights and
remedies of the Pledgee expressed hereunder are in addition to all other rights
and remedies possessed by it, including, without limitation, those contained in
the documents referred to in the definition of Liability in section 1 hereof.
(b) In any sale of any of the Eligible Collateral after a Default or an
Event of Default shall have occurred, the Pledgee is hereby authorized to comply
with any limitation or restriction in connection with such sale as it may be
advised by counsel is necessary in order to avoid violation of applicable law
(including, without limitation, compliance with such procedures as may restrict
the number of prospective bidders and purchasers or further restrict such
prospective bidders or purchasers to persons who will represent and agree that
they are purchasing for their own account
3
<PAGE>
for investment and not with a view to the distribution or resale of such
Eligible Collateral), or in order to obtain such required approval of the sale
or of the purchase by any governmental regulatory authority or official, and the
Pledgor further agrees that such compliance shall not result in such sale's
being considered or deemed not to have been made in a commercially reasonable
manner, nor shall the Pledgee be liable or accountable to the Pledgor for any
discount allowed by reason of the fact that such Eligible Collateral is sold in
compliance with any such limitation or restriction.
Section 7. Payment in Full. Upon the payment in full of all outstanding
----------------
Liabilities, this Pledge Agreement shall terminate and the Pledgee shall
forthwith assign, transfer and deliver to the Pledgor, against receipt and
without recourse to the Pledgee, all Collateral then held by the Pledgee
pursuant to the Pledge Agreement.
Section 8. No Waiver. No failure or delay in the part of the Pledgee in
----------
exercising any right or remedy hereunder or under any other document which
confers or grants any rights in the Pledgee in respect of the Liabilities shall
operate as a waiver thereof nor shall any single or partial exercise of any such
rights or remedy preclude any other or further exercise thereof or the exercise
of any other right or remedy of the Pledgee.
Section 9. Binding Effect; No Assignment or Delegation. This Pledge
--------------------------------------------
Agreement shall be binding upon and inure to the benefit of the Pledgor, the
Pledgee and their respective successors and assigns, except that the Pledgor may
not assign or transfer it rights hereunder without the prior written consent of
the Pledgee (which consent shall not unreasonably be withheld). Each duty or
obligation of the Pledgor to the Pledgee pursuant to the provisions of this
Pledge Agreement shall be performed in favor of any person or entity designated
by the Pledgee, and any duty or obligation of the Pledgee to the Pledgor may be
performed by any other person or entity designated by the Pledgee.
Section 10. Governing Law. This Pledge Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of Indiana applicable to
agreements to be performed wholly within the State of Indiana.
Section 11. Notices. All notices, requests, instructions or documents
--------
hereunder shall be in writing and delivered personally or sent by United States
mail, registered or certified, return receipt requested, with proper postage
prepaid as follows:
(a) If to the Pledgee:
Security Financial Bancorp, Inc.
9321 Wicker Avenue
St. John, Indiana 46373
Attn: John P. Hyland
4
<PAGE>
(b) If to the Pledgor:
Security Federal Bank & Trust Employee Stock Ownership Plan
9321 Wicker Avenue
St. John, Indiana 46373
or at such other address as either of the parties may designate by written
notice to the other party. If delivered personally, the date on which a notice,
request, instruction or document is delivered shall be the date on which such
delivery is made, and, if deliver by mail, the sate on which such notice,
request, instruction, or document is deposited in the mail shall be the date of
delivery. Each notice, request, instruction or document shall bear the date on
which it is delivered.
Section 12. Interpretation. Wherever possible each provision of this
---------------
Pledge Agreements shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision herein shall be prohibited by
or invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, with out invalidating the remainder of such
provision or the remaining provisions hereof.
Section 13. Construction. All provisions hereof shall be construed so as
-------------
to maintain (a) the ESOP as a qualified leveraged employee stock ownership plan
under section 401(a) and 4975(e)(7) of the Internal Revenue Code of 1986 (the
"Code"), (b) the Trust as exempt from taxation under section 501(a) of the Code
and (c) the Trust Loan as an exempt loan under section 54.4975-7(b) of the
Treasury Regulations and as described in Department of Labor Regulation section
2550.408b-3.
5
<PAGE>
IN WITNESS WHEREOF, this Pledge Agreement has been duly executed by the
parties hereto as of the day and year first above written.
SECURITY FEDERAL BANK & TRUST
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
/s/ Lawrence R. Parducci , as TRUSTEE
---------------------------
Lawrence R. Parducci
/s/ Philip T. Rueth , as TRUSTEE
---------------------------
Philip T. Rueth
/s/ Tula Kavadias , as TRUSTEE
---------------------------
Tula Kavadias
SECURITY FINANCIAL BANCORP, INC.
By: /s/ John P. Hyland
-------------------------------------
John P. Hyland
For the Entire Board of Directors
6
<PAGE>
PROMISSORY NOTE
---------------
$1,550,769 January 5, 2000
PRINCIPAL
FOR VALUE RECEIVED, the undersigned, the SECURITY FEDERAL BANK & TRUST
EMPLOYEE STOCK OWNERSHIP PLAN TRUST ("Borrower"), hereby promises to pay to the
order of SECURITY FINANCIAL BANCORP, INC. ("Lender") one million, five hundred
and fifty thousand, seven hundred and sixty-nine dollars ($1,550,769) payable in
accordance with the Loan Agreement made and entered into between the Borrower
and the Lender of even date herewith ("Loan Agreement") pursuant to which this
Promissory Note is issued.
The Principal Amount of this Promissory Note shall be payable in
accordance with the schedule attached hereto ("Schedule I").
This Promissory Note shall bear interest at the rate per annum set for or
established under the Loan Agreement, such interest to be payable in accordance
with Schedule I.
Anything herein to the contrary notwithstanding, the obligation of the
Borrower to make payments of interest shall be subject to the limitation that
payments of interest shall not be required to be made to the Lender to the
extent that the Lender's receipt thereof would not be permissible under the law
or laws applicable to the Lender limiting rates on interest which may be charged
or collected by the Lender. Any such payments on interest which are not made as
a result of the limitation referred to in the preceding sentence shall be made
by the Borrower to the Lender on the earliest interest payment date or dates on
which the receipt thereof would be permissible under the laws applicable to the
Lender limiting rates of interest which may be charges or collected by the
Lender. Such deferred interest shall not bear interest.
Payments of both principal and interest on this Promissory Note are to be
made at the principal office of the Lender or such other place as the holder
hereof shall designate to the Borrower in writing, in lawful money of the United
States of America in immediately available funds.
Failure to make any payments of principal on this Promissory Note when
due, or failure to make any payment of interest on this Promissory Note not
later than five (5) Business Days after the date when due, shall constitute a
default hereunder, whereupon the principal amount of accrued interest on this
Promissory Note shall immediately become due and payable in accordance with the
terms of the Loan Agreement.
<PAGE>
This Promissory Note is secured by a Pledge Agreement between the Borrower
and the Lender of even date herewith and is entitled to the benefits thereof.
SECURITY FEDERAL BANK & TRUST
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
/s/ Lawrence R. Parducci , as TRUSTEE
---------------------------
Lawrence R. Parducci
/s/ Philip T. Rueth , as TRUSTEE
---------------------------
Philip T. Rueth
/s/ Tula Kavadias , as TRUSTEE
---------------------------
Tula Kavadias
2
SECURITY FEDERAL BANK & TRUST
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of January 5, 2000, by
and among Security Federal Bank & Trust (the "Bank"), a federally chartered
stock savings bank, with its principal administrative office at 9321 Wicker
Avenue, St. John, Indiana 46373, Security Financial Bancorp, Inc., a corporation
organized under the laws of the State of Delaware, the holding company for the
Bank (the "Holding Company"), and John P. Hyland ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve
as President and Chief Executive Officer of the Bank. Executive shall render
administrative and management services to the Bank such as are customarily
performed by persons situated in a similar executive capacity. During said
period, Executive also agrees to serve, if elected, as an officer and director
of the Holding Company or any subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the Bank
("Board") may extend the Agreement an additional year such that the remaining
term of the Agreement shall be thirty-six (36) months unless Executive elects
not to extend the term of this Agreement by giving written notice in accordance
with Section 8 of this Agreement. The Board will review the Agreement and
Executive's performance annually for purposes of determining whether to extend
the Agreement and the rationale and results thereof shall be included in the
minutes of the Board's meeting. The Board shall give notice to Executive as soon
as possible after such review as to whether the Agreement is to be extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the
<PAGE>
faithful performance of his duties hereunder including activities and services
related to the organization, operation and management of the Bank and
participation in community and civic organizations; provided, however, that,
with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Bank, or materially affect the performance of Executive's
duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Bank may be terminated by the Bank or the Executive during
the term of this Agreement, subject to the terms and conditions of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of $175,000 per
year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any tax-qualified retirement or welfare benefit plan
or any other deferred compensation arrangement maintained by the Bank. Such Base
Salary shall be payable in accordance with the regular payroll practices of the
Bank. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually; the first such review will be made no later than one
year from the date of this Agreement. Such review shall be conducted by the
Board or by a Committee of the Board, delegated such responsibility by the
Board. The Committee or the Board may increase Executive's Base Salary at any
time. Any increase in Base Salary shall become "Base Salary" for purposes of
this Agreement. In addition to Base Salary provided in this Section 3(a), the
Bank shall also provide Executive, at no premium cost to Executive, with all
such other benefits as are provided uniformly to permanent full-time employees
of the Bank. In addition, Executive shall be entitled to incentive compensation
and bonuses as provided in any plan or arrangement of the Bank in which
Executive is eligible to participate.
(b) Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would materially adversely affect Executive's rights or
benefits thereunder; except to the extent such changes are made applicable to
all Bank employees on a non-discriminatory basis. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under all plans relating to
stock options, restricted stock awards, stock purchases, pension, thrift,
supplemental retirement, profit-sharing, employee stock ownership, group life
insurance, medical and other health and welfare coverage, education, cash or
stock bonuses that are now or hereafter made available by the Bank to its senior
executives and key management employees, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans and
arrangements. Nothing paid to Executive under any such plan
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<PAGE>
or arrangement will be deemed to be in lieu of other compensation to which
Executive is entitled under this Agreement.
(c) The Bank shall pay or reimburse Executive for all reasonable expenses
incurred by Executive performing his obligations under this Agreement and may
provide such additional compensation in such form and such amounts as the Board
may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Bank of Executive's full-time employment hereunder for any reason other than
a termination governed by Section 5(a) hereof, or Termination for Cause, as
defined in Section 7 hereof; (ii) Executive's resignation from the Bank's employ
upon any (A) material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by Executive, (B)
relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by Executive, (C) material reduction in the benefits and perquisites to
Executive from those being provided as of the effective date of this Agreement,
unless consented to by Executive, (D) a liquidation or dissolution of the Bank
or Holding Company, or (E) breach of this Agreement by the Bank. Upon the
occurrence of any event described in clauses (A), (B), (C), (D), or (E) above,
Executive shall have the right to elect to terminate his employment under this
Agreement by resignation upon not less than sixty (60) days prior written notice
given within six full months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be a sum equal to the sum of: (i)
Base Salary and bonuses in accordance with Section 3(a) of this Agreement that
would have been paid to Executive for the remaining term of this Agreement had
the Event of Termination not occurred; and (ii) all benefits, including health
insurance in accordance with Section 3(b) that would have been provided to
Executive for the remaining term of the this Agreement had an Event of
Termination not occurred; provided, however, that any payments pursuant to this
subsection and subsection 4(c) below shall not, in the aggregate, exceed three
times Executive's average annual compensation for the five most recent taxable
years that Executive has been employed by the Bank or such lesser number of
years in the event that Executive shall have been employed by the Bank for less
than five years. In the event the Bank is not in compliance with its minimum
capital requirements or if such payments pursuant to this subsection (b) would
cause the Bank's capital to be reduced below its minimum regulatory capital
requirements, such payments shall be deferred until such time as the Bank or
successor thereto is in capital compliance. At the election of Executive, which
election is to be made prior
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<PAGE>
to an Event of Termination, such payments shall be made in a lump sum as of
Executive's Date of Termination. In the event that no election is made, payment
to Executive will be made on a monthly basis in approximately equal installments
during the remaining term of the Agreement. Such payments shall not be reduced
in the event Executive obtains other employment following termination of
employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
Executive prior to his termination at no premium cost to Executive, except to
the extent such coverage may be changed in its application to all Bank or
Holding Company employees. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act and
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of Change in Control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Bank or the Holding Company representing
25% or more of the Bank's or the Holding Company's outstanding voting securities
or right to acquire such securities except for any voting securities of the Bank
purchased by the Holding Company and any voting securities purchased by any
employee benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Holding Company
or similar transaction occurs in which the Bank or Holding Company is not the
resulting entity; provided, however, that such an event listed above will be
deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods.
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<PAGE>
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation during the twelve (12) month period following the date of the Change
in Control following any demotion, loss of title, office or significant
authority or responsibility, material reduction in annual compensation or
benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death, disability, retirement or termination for
Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Bank shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
the greater of: (1) Base Salary and bonuses in accordance with Section 3(a) of
this Agreement that would have been paid to Executive for the remaining term of
this Agreement had the event described in Subsection (b) of this Section 5 not
occurred and all benefits, including health insurance, in accordance with
Section 3(b) that would have been provided to Executive for the remaining term
of this Agreement had the event described in Subsection (b) of this Section 5
not occurred; or (2) three (3) times Executive's Average Annual Compensation (as
defined herein) for the five (5) most recent taxable years that Executive has
been employed by the Bank or such lesser number of years in the event that
Executive shall have been employed by the Bank for less than five (5) years.
Such "Average Annual Compensation" shall include all taxable income paid by the
Bank, including but not limited to, Base Salary, commissions, and bonuses, as
well as contributions on Executive's behalf to any pension and/or profit sharing
plan, retirement payments, directors or committee fees and fringe benefits paid
or to be paid to Executive in any such year and payment of any expense items
without accountability or business purpose or that do not meet the Internal
Revenue Service requirements for deductibility by the Bank; provided, however,
that any payment under this provision and subsection 5(d) below shall not exceed
three (3) times Executive's Average Annual Compensation. In the event the Bank
is not in compliance with its minimum capital requirements or if such payments
would cause the Bank's capital to be reduced below its minimum regulatory
capital requirements, such payments shall be deferred until such time as the
Bank or successor thereto is in capital compliance. At the election of
Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum as of Executive's Date of Termination. In
the event that no election is made, payment to Executive will be made in
approximately equal installments on a monthly basis over a period of thirty-six
(36) months following Executive's termination. Such payments shall not be
reduced in the event Executive obtains other employment following termination of
employment.
(d) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Bank will cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Bank for Executive
prior to his severance at no premium cost to Executive, except to the extent
that such coverage may be changed in its application for all Bank
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<PAGE>
employees on a non-discriminatory basis. Such coverage and payments shall cease
upon the expiration of thirty-six (36) months following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Internal Revenue Code of 1986, as amended, or any
successor thereto, and in order to avoid such a result, Termination Benefits
will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the
value of which is one dollar ($1.00) less than an amount equal to three (3)
times Executive's "base amount", as determined in accordance with said Section
280G. The allocation of the reduction required hereby among the Termination
Benefits provided by Section 5 shall be determined by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after the Date of Termination for Cause. During the period beginning
on the date of the Notice of Termination for Cause pursuant to Section 8 hereof
through the Date of Termination for Cause, stock options and related limited
rights granted to Executive under any stock option plan shall not be exercisable
nor shall any unvested awards granted to Executive under any stock benefit plan
of the Bank, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination for Cause, such stock options and related limited
rights and any unvested awards shall become null and void and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
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<PAGE>
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and,
provided further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event Executive is
terminated for reasons other than Termination for Cause, the Bank will continue
to pay Executive his Base Salary in effect when the notice giving rise to the
dispute was given until the earlier of: 1) the resolution of the dispute in
accordance with this Agreement or 2) the expiration of the remaining term of
this Agreement as determined as of the Date of Termination. Amounts paid under
this Section are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE OF BANK BUSINESS.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Bank for a period of
one (1) year following such termination in any city, town or county in which
Executive's normal business office is located and the Bank has an office or has
filed an application for regulatory approval to establish
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<PAGE>
an office, determined as of the effective date of such termination, except as
agreed to pursuant to a resolution duly adopted by the Board. Executive agrees
that during such period and within said cities, towns and counties, Executive
shall not work for or advise, consult or otherwise serve with, directly or
indirectly, any entity whose business materially competes with the depository,
lending or other business activities of the Bank. The parties hereto,
recognizing that irreparable injury will result to the Bank, its business and
property in the event of Executive's breach of this Subsection 10(a) agree that
in the event of any such breach by Executive, the Bank, will be entitled, in
addition to any other remedies and damages available, to an injunction to
restrain the violation hereof by Executive, Executive's partners, agents,
servants, employees and all persons acting for or under the direction of
Executive. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank
to the OTS and the Federal Deposit Insurance Corporation ("FDIC") pursuant to a
formal regulatory request. In the event of a breach or threatened breach by
Executive of the provisions of this Section, the Bank will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Bank. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the Bank are
not timely paid or provided by the Bank, such amounts and benefits shall be paid
or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated January 5, 2000,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from
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any amounts due simultaneously to Executive under similar provisions of this
Agreement. Payments pursuant to this Agreement and the Holding Company Agreement
shall be allocated in proportion to the services rendered and time expended on
such activities by Executive as determined by the Holding Company and the Bank
on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. REQUIRED PROVISIONS.
In the event any of the foregoing provisions of this Section 15 are in
conflict with the terms of this Agreement, this Section 15 shall prevail.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to
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<PAGE>
compensation or other benefits under this Agreement. Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause as defined in Section 7 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(3) or (g)(1); the Bank 's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion: (i)
pay Executive all or part of the compensation withheld while their contract
obligations were suspended; and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. ss.1813(x)(1) all obligations of the Bank under
this contract shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the Director of the OTS
(or his designee), the FDIC or the Resolution Trust Corporation, at the time the
FDIC enters into an agreement to provide assistance to or on behalf of the Bank
under the authority contained in Section 13(c) of the Federal Deposit Insurance
Act, 12 U.S.C. ss.1823(c); or (ii) by the Director of the OTS (or his designee)
at the time the Director (or his designee) approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12
U.S.C.ss.1828(k) and 12 C.F.R. Section 545.121 and any rules and regulations
promulgated thereunder.
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16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of Indiana, without regards
to principles of conflicts of law of this state, but only to the extent not
superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
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21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank if Executive is successful on the merits pursuant
to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C.ss.1828(k) and 12 C.F.R. Section
545.121 and any rules or regulations promulgated thereunder.
23. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
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SIGNATURES
IN WITNESS WHEREOF, Security Federal Bank & Trust and Security Financial
Bancorp, Inc. have caused this Agreement to be executed and their seals to be
affixed hereunto by their duly authorized officers and directors, and Executive
has signed this Agreement, on the 5th day of January 2000.
ATTEST: SECURITY FEDERAL BANK & TRUST
/s/ EDWINA GOLEC By: /s/ MARY BETH BONAVENTURA
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For the Entire Board of Directors
[SEAL]
ATTEST: SECURITY FINANCIAL BANCORP, INC.
(Guarantor)
/s/ EDWINA GOLEC By: /s/ MARY BETH BONAVENTURA
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For the Entire Board of Directors
[SEAL]
WITNESS: EXECUTIVE
/s/ EDWINA GOLEC /s/ JOHN P. HYLAND
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John P. Hyland
SECURITY FINANCIAL BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of January 5, 2000, by
and between Security Financial Bancorp, Inc. (the "Holding Company"), a
corporation organized under the laws of Delaware with its principal offices at
9321 Wicker Avenue, St. John, Indiana 46373 and John P. Hyland ("Executive").
Any reference to "Institution" herein shall mean Security Federal Bank & Trust
or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as President and Chief Executive Officer of the Holding Company. Executive
shall render administrative and management services to the Holding Company such
as are customarily performed by persons in a similar executive capacity. During
said period, Executive also agrees to serve, if elected, as an officer or
director of any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder, including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
subsidiaries ("Subsidiaries") and participation in community, professional and
civic
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organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, Executive's
employment with the Holding Company may be terminated by the Holding Company or
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement. However, Executive shall not perform, in any respect,
directly or indirectly, during the pendency of his temporary or permanent
suspension or termination from the Institution, duties and responsibilities
formerly performed at the Institution as part of his duties and responsibilities
as President of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) Executive shall be entitled to a salary from the Holding Company or
its Subsidiaries of $175,000 per year ("Base Salary"). Base Salary shall include
any amounts of compensation deferred by Executive under any tax-qualified
retirement or welfare benefit plan or any other deferred compensation
arrangement maintained by the Holding Company and its Subsidiaries. Such Base
Salary shall be payable in accordance with the Holding Company's payroll
practices. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually; the first such review will be made no later than one
year from the date of this Agreement. Such review shall be conducted by the
Board or by a Committee of the Board delegated such responsibility by the Board.
The Committee or the Board may increase Executive's Base Salary at any time. Any
increase in Base Salary shall become "Base Salary" for purposes of this
Agreement. In addition to Base Salary provided in this Section 3(a), the Holding
Company shall also provide Executive, at no premium cost to Executive, with all
such other benefits as provided uniformly to permanent full-time employees of
the Holding Company and its Subsidiaries. In addition, Executive shall be
entitled to incentive compensation and bonuses as provided in any plan or
arrangement of the Holding Company or its Subsidiaries in which Executive is
eligible to participate.
(b) Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company and its
Subsidiaries will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under all plans relating to stock options, restricted
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stock awards, stock purchases, pension, thrift, supplemental retirement,
profit-sharing, employee stock ownership, group life insurance, medical and
other health and welfare coverage, education, cash or stock bonuses that are now
or hereafter made available by the Holding Company or its Subsidiaries to its
senior executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Executive shall be entitled to incentive compensation and
bonuses as provided in any plan of the Holding Company and its Subsidiaries in
which Executive is eligible to participate. Nothing paid to Executive under any
such plan or arrangement will be deemed to be in lieu of other compensation to
which Executive is entitled under this Agreement.
(c) The Holding Company shall pay or reimburse Executive for all
reasonable expenses incurred in the performance of Executive's obligations under
this Agreement and may provide such additional compensation in such form and
such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Holding Company of Executive's full-time employment hereunder for any reason
other than termination governed by Section 5(a) hereof, or for Cause, as defined
in Section 7 hereof; (ii) Executive's resignation from the Holding Company's
employ, upon, any (A) failure to elect or reelect or to appoint or reappoint
Executive as President and Chief Executive Officer, unless consented to by
Executive, (B) a material change in Executive's function, duties, or
responsibilities with the Holding Company or its Subsidiaries, which change
would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, unless consented to by Executive, (C) a relocation of
Executive's principal place of employment by more than 25 miles from its
location at the effective date of this Agreement, unless consented to by
Executive, (D) a material reduction in the benefits and perquisites to Executive
from those being provided as of the effective date of this Agreement, unless
consented to by Executive, (E) a liquidation or dissolution of the Holding
Company or the Institution, or (F) breach of this Agreement by the Holding
Company. Upon the occurrence of any event described in clauses (A), (B), (C),
(D), (E) or (F), above, Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full calendar months after the event
giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the sum of: (i)
the Base Salary and bonuses in accordance with Section 3(a) of this Agreement
that would have been paid to Executive for the remaining term of this Agreement
had the Event of Termination not occurred and (ii) all benefits, including
health insurance in
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accordance with Section 3(b) that would have been provided to Executive for the
remaining term of this Agreement had an Event of Termination not occurred. At
the election of Executive, which election is to be made prior to an Event of
Termination, such payments shall be made in a lump sum. In the event that no
election is made, payment to Executive will be made on a monthly basis in
approximately equal installments during the remaining term of the Agreement.
Such payments shall not be reduced in the event Executive obtains other
employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
Executive. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Holding
Company or the Institution shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Institution or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act, and the Rules and Regulations promulgated by the Office
of Thrift Supervision (or its predecessor agency), as in effect on the date
hereof (provided, that in applying the definition of Change in Control as set
forth under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board,
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Institution or the Holding Company or
similar transaction occurs or is effectuated in which the Institution or Holding
Company is not the resulting entity; provided, however, that such an event
listed above will be deemed to have occurred or to have been effectuated upon
the receipt of all required federal
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regulatory approvals not including the lapse of any statutory waiting periods,
or (D) a proxy statement has been distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Institution
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Institution
or the Holding Company shall be distributed, or (E) a tender offer is made for
20% or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d), of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or reduction
in benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death or termination for Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Holding Company shall pay Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of: (i)
the Base Salary and bonuses in accordance with Section 3(a) of this Agreement
that would have been paid to Executive for the remaining term of this Agreement
had the event described in Subsection (b) of this Section 5 not occurred, plus
the value, as calculated by a recognized firm customarily performing such
valuation, of any stock option or related rights which as of the Date of
Termination have been granted to Executive, but are not exercisable by Executive
and the value of restricted stock awards or related rights which have been
granted to Executive, but which Executive does not have a non-forfeitable or
fully vested interest as of the Date of Termination and all benefits, including
health insurance, in accordance with Section 3(b) that would have been provided
to Executive for the remaining term of this Agreement had the event described in
Subsection (b) of this Section 5 not occurred; or (ii) three (3) times
Executive's Average Annual Compensation (as defined herein) for the five (5)
preceding taxable years that Executive has been employed by the Holding Company
or its Subsidiaries or such lesser number of years in the event Executive shall
have been employed with the Holding Company or its Subsidiaries less than five
(5) years. Such Average Annual Compensation shall include all taxable income
paid by the Holding Company or its Subsidiaries, including but not limited to,
Base Salary, commissions and bonuses, as well as contributions on behalf of
Executive to any pension and profit sharing plan, severance payments, directors
or committee fees and fringe benefits paid or to be paid to Executive during
such years. At the election of Executive, which election is to be made prior to
a Change in Control, such payment shall be made in a lump sum. In the event that
no election is made, payment to Executive will be made on a monthly basis in
approximately equal installments during the remaining term of the
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Agreement. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(d) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Company will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Institution for
Executive at no premium cost to Executive prior to his severance. Such coverage
and payments shall cease upon the expiration of thirty-six (36) months following
the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
Notwithstanding Section 5, for any taxable year in which Executive shall
be liable, as determined for the payment of an excise tax under Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code") (or any successor
provision thereto), with respect to any payment in the nature of the
compensation made by the Holding Company or the Bank to (or for the benefit of)
Executive pursuant to this Agreement or otherwise, the Holding Company shall pay
to Executive an amount determined under the following formula:
An amount equal to: (E x P) + X
WHERE:
X = E x P
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1 - [(FI x (1 - SLI)) + SLI + E [+ M + PO]]
E = the rate at which the excise tax is assessed under Section
4999 of the Code;
P = the amount with respect to which such excise tax is
assessed, determined without regard to this Section 2;
FI = the highest marginal rate of federal income, employment, and
other taxes (other than taxes imposed under Section 4999 of
the Code) applicable to Executive for the taxable year in
question; and
SLI = the sum of the highest marginal rates of income and payroll
tax applicable to Executive under applicable state and local
laws for the taxable year in question; and
M = highest marginal rate of Medicare tax; and
PO = adjustment for phase out of or loss of deduction, personal
exemption or other similar items.
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With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Executive under the terms of this Section or otherwise and
on which an excise tax under Section 4999 of the Code will be assessed, the
payment determined under Section 5 shall be made to Executive on the earliest of
(i) the date the Holding Company is required to withhold such tax, (ii) the date
the tax is required to be paid by Executive, or (iii) at the time of the Change
in Control. It is the intention of the parties that the Holding Company provide
Executive with a full tax gross-up under the provisions of this Section, so that
on a net after-tax basis, the result to Executive shall be the same as if the
excise tax under Section 4999 (or any successor provisions) of the Code had not
been imposed. The tax gross-up may be adjusted if alternative minimum tax rules
are applicable to Executive.
Notwithstanding the foregoing, if it shall subsequently be determined in a
final judicial determination or a final administrative settlement to which
Executive is a party that the excess parachute payment as defined in Section
4999 of the Code, reduced as described above, is more than the amount determined
as "P," above (such greater amount being hereafter referred to as the
"Determinative Excess Parachute Payment") then the Holding Company's independent
accountants shall determine the amount (the "Adjustment Amount") the Holding
Company must pay to Executive, in order to put Executive (or the Holding
Company, as the case may be) in the same position as Executive (or the Holding
Company, as the case may be) would have been if the amount determined as "P"
above had been equal to the Determinative Excess Parachute Payment. In
determining the Adjustment Amount, the independent accountants shall take into
account any and all taxes (including any penalties and interest) paid by or for
Executive or refunded to Executive or for Executive's benefit. As soon as
practicable after the Adjustment Amount has been so determined, the Holding
Company shall pay the Adjustment Amount to Executive.
In each calendar year that Executive receives payments or benefits under
this Agreement, Executive shall report on his state and federal income tax
returns such information as is consistent with the determination made by the
independent accountants of the Holding Company as described above. The Holding
Company shall indemnify and hold Executive harmless from any and all losses,
costs and expenses (including without limitation, reasonable attorney's fees,
interest, fines and penalties) which Executive incurs as a result of reporting
such information. Executive shall promptly notify the Holding Company in writing
whenever Executive receives notice of the Bank of a judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under Section
4999 of the Code of any amount paid or payable under this Agreement is being
reviewed or is in dispute. The Holding Company shall assume control at its
expense over all legal and accounting matters pertaining to such federal tax
treatment (except to the extent necessary or appropriate for Executive to
resolve any such proceeding with respect to any matter unrelated to amounts paid
or payable pursuant to this contract) and Executive shall cooperate fully with
the Holding Company in any such proceeding. Executive shall not enter into any
compromise or settlement or otherwise prejudice any rights the Holding Company
may have in connection therewith without prior consent to the Holding Company.
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7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the
Institution, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination, such stock options and related limited rights and
any such unvested awards shall become null and void and shall not be exercisable
by or delivered to Executive at any time subsequent to such Termination for
Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be
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extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Holding Company will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but not limited
to, Base Salary) and continue him as a participant in all compensation, benefit
and insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which Executive's normal business office is located and
the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
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(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by Executive of the provisions of this Section, the
Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Holding
Company from pursuing any other remedies available to the Holding Company for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Holding Company subject to Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated January 5, 2000,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of the Holding Company and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
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13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law.
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18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. ss.1828(k) and 12 C.F.R. Part 359
and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to
12
<PAGE>
perform the Holding Company's obligations under this Agreement, in the same
manner and to the same extent that the Holding Company would be required to
perform if no such succession or assignment had taken place.
[REMAINDER OF INTENTIONALLY BLANK]
13
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Security Financial Bancorp, Inc. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and its directors, and Executive has signed this Agreement,
on the 5 day of January 2000.
ATTEST: SECURITY FINANCIAL BANCORP, INC.
/s/ Edwina Golec By: /s/ Mary Beth Bonaventura
- -------------------- -------------------------------------
For the Entire Board of Directors
[SEAL]
WITNESS: EXECUTIVE
/s/ Edwina Golec By: /s/ John P. Hyland
- -------------------- -------------------------------------
John P. Hyland
14
SECURITY FEDERAL BANK & TRUST
EMPLOYEE SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of this Security Federal Bank & Trust Employee Severance
Compensation Plan is to assure the services of employees of the Bank in the
event of a Change in Control. The benefits contemplated by the Plan recognize
the value to the Bank of the services and contributions of the employees of the
Bank and the effect upon the Bank resulting from the uncertainties of continued
employment, reduced employee benefits, management changes and relocations that
may arise in the event of a Change in Control. The Board believes that the Plan
will also aid the Bank in attracting and retaining the highly qualified
individuals who are essential to its success and that the Plan's assurance of
fair treatment of the Bank's employees will reduce the distractions and other
adverse effects on employees' performance in the event of a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes an employee severance compensation plan to be known as the "Security
Federal Bank & Trust Employee Severance Compensation Plan." The purposes of the
Plan are as set forth above.
1.2 Application of Plan
The benefits provided by this Plan shall be available to all employees of
the Bank, who, at or after the Effective Date, meet the eligibility requirements
of Article III, except for those officers of the Bank who have entered into, or
who enter into in the future, and continue to be subject to, an employment or
change in control agreement with the Employer.
1.3 Contractual Right to Benefits
This plan establishes and vests in each Participant a contractual right to
the benefits to which each Participant is entitled hereunder in the event of a
Change in Control, enforceable by the Participant against the Employer, the
Bank, or both. The Plan does not provide, and should not be construed as
providing, benefits of any kind to any employee except in the event of a Change
in Control and, in the event of a Change in Control, only upon the involuntary
or voluntary termination of an employee in the manner contemplated herein.
<PAGE>
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
Whenever used in the Plan, the following terms shall have the meanings set
forth below.
"Annual Compensation" of a Participant means and includes all wages and
salary paid (including accrued amounts) by an Employer as consideration for the
Participant's service during the 12-month period ending on the last day of the
month preceding the date of a Participant's termination pursuant to Section 4.2.
"Bank" means Security Federal Bank & Trust or any successor as provided
for in Article VII hereof.
"Board" means the Board of Directors of the Bank.
"Change in Control" of the Holding Company or the Bank shall mean an event
of a nature that: (i) would be required to be reported in response to Item 1(a)
of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); or (ii) results in a Change in Control of the Institution or
the Holding Company within the meaning of the Home Owners' Loan Act of 1933, as
amended, the Federal Deposit Insurance Act, and the Rules and Regulations
promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor
agency), as in effect on the date hereof (provided, that in applying the
definition of change in control as set forth under the rules and regulations of
the OTS, the Board shall substitute its judgment for that of the OTS); or (iii)
without limitation such a Change in Control shall be deemed to have occurred at
such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of voting securities of
the Institution or the Holding Company representing 20% or more of the
Institution's or the Holding Company's outstanding voting securities or right to
acquire such securities except for any voting securities of the Institution
purchased by the Holding Company and any voting securities purchased by any
employee benefit plan of the Holding Company or its Subsidiaries, or (B)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by a Nominating Committee solely composed of members which are
Incumbent Board members, shall be, for purposes of this clause (B), considered
as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Institution or the Holding Company or similar transaction occurs
or is effectuated in which the Institution or Holding Company is not the
resulting entity; provided, however, that such an event listed above will be
deemed to have occurred or to have been effectuated upon the receipt of all
required federal regulatory approvals not including the lapse of any statutory
waiting periods, or (D) a proxy statement has been distributed soliciting
proxies from stockholders of the Holding
<PAGE>
Company, by someone other than the current management of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Bank with one or more corporations as a
result of which the outstanding shares of the class of securities then subject
to such plan or transaction are exchanged for or converted into cash or property
or securities not issued by the Institution or the Holding Company shall be
distributed, or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or Holding Company then outstanding.
"Company" means Security Financial Bancorp, Inc., a Delaware corporation,
the holding company of the Bank.
"Disability" means the permanent and total inability by reason of mental
or physical infirmity, or both, of an employee to perform the work customarily
assigned to him. Additionally, a medical doctor selected or approved by the
Board must advise the Board that it is either not possible to determine if or
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said employees lifetime.
"Effective Date" means the date the Plan is approved by the Board of the
Bank, or such other date as the Board shall designate in its resolution
approving the Plan.
"Employer" means (i) the Bank or (ii) a subsidiary of the Bank or a parent
company of the Bank which has adopted the plan pursuant to Article VI hereof.
"Expiration Date" means a date ten (10) years from the Effective Date
unless earlier terminated pursuant to Section 8.2 or extended pursuant to
Section 8.1.
"Payment" means the payment of severance compensation as provided in
Article IV hereof.
"Participant" means an employee of an Employer who meets the eligibility
requirements of Article III.
"Plan" means this Security Federal Bank & Trust Employee Severance
Compensation Plan.
"Termination for Cause" means termination because of Participant's
personal dishonesty, incompetence, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic violations
or other similar offenses) or any final cease-and-desist order.
2.2 Applicable Law
The laws of the State of Indiana shall be controlling law in all matters
relating to the Plan to the extent not preempted by federal law.
<PAGE>
2.3 Severability
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
The term "Participant" shall include all employees of an Employer who have
completed at least one year of service with the Employer at the time of any
termination pursuant to Section 4.2 herein. For purposes of this Plan, a "year
of service" shall mean a 12 consecutive month period during which an employee
was credited with at least 500 actual hours of service and "years of service"
shall be determined without regard to any break in service. Notwithstanding the
foregoing, an employee who has entered into and continues to be covered by an
individual employment contract with an Employer shall not be entitled to
participate in this Plan.
3.2 Duration of Participation
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to receipt
of a Payment shall remain a Participant in this Plan until the full amount of
such Payment has been paid to the Participant.
ARTICLE IV
PAYMENTS
4.1 Right to Payment
A Participant shall be entitled to receive from his or her Employer a
Payment in the amount provided in Section 4.3 if a Change in Control occurs and
if, within one (1) year thereafter, the Participant's employment by an Employer
shall terminate for any reason specified in Section 4.2. A Participant shall not
be entitled to a Payment if termination occurs by reason of death, voluntary
retirement, voluntary termination other than for the reasons specified in
Section 4.2, Disability or Termination for Cause.
4.2 Reasons for Termination
Following a Change in Control, a Participant shall be entitled to a
Payment in accordance with Section 4.3 if employment by an Employer is
terminated, voluntarily or involuntary, for any one or more of the following
reasons:
<PAGE>
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control, or as the
same may have been increased thereafter.
(b) The Employer materially changes Participant's function, duties
or responsibilities which would cause the Participant's position to be one of
lesser responsibility, importance or scope with the Employer than immediately
prior to the Change in Control.
(c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than thirty-five (35) miles from the location of the Participant's
job or office immediately prior to the Change in Control provided that such new
location is not closer to Participant's home.
(d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control;
provided, however, that a material reduction in benefits and perquisites
generally provided to all employees of the Bank on a non-discriminatory basis
shall not trigger a Payment pursuant to this Plan.
(e) A successor to the Employer fails or refuses to assume the
Employer's obligations under this Plan, as required by Article VII.
(f) The Employer, or any successor to the Employer, breaches any
other provisions of this Plan.
(g) The Employer terminates the employment of a Participant at or
after a Change in Control other than Termination for Cause.
4.3 Amount of Payment
(a) Each Participant entitled to a Payment under this Plan shall
receive from the Bank, a lump sum cash payment equal to one-twenty-sixth of his
Annual Compensation for each year of service up to a maximum of 100% of his
Annual Compensation; provided, however, that any Participant who holds the title
of "Vice President" or greater at the time severance benefits become payable
shall receive a Payment of not less than 50% of his Annual Compensation,
regardless of his number of years of service.
(b) Notwithstanding the provisions of paragraph (a) above, if a
Payment to a Participant who is a "Disqualified Individual" shall be in an
amount which includes an "Excess Parachute Payment," the Payment hereunder to
that Participant shall be reduced to the maximum amount which does not include
an Excess Parachute Payment. The terms "Disqualified Individual" and "Excess
Parachute Payment" shall have the same meanings as defined in Section 280G of
the Internal Revenue Code of 1986, as amended, or any successor provision
thereto. The Participant shall not be required to mitigate damages on the amount
of the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
<PAGE>
4.4 Time of Payment
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than thirty (30) business days after the termination of the
Participant's employment. If any Participant should die after termination of the
employment but before all amounts have been paid, such unpaid amounts shall be
paid to the Participant's named beneficiary, if living, otherwise to the
personal representative on behalf of or for the benefit of the Participant's
estate.
4.5 Suspension of Payment
Notwithstanding the foregoing, no payments or portions thereof shall be
made under this Plan, if such payment or portion would result in the Bank
failing to meet its minimum regulatory capital requirements as required by 12
C.F.R. ss.567.2. Any payments or portions thereof not paid shall be suspended
until such time as their payment would not result in a failure to meet the
Bank's minimum regulatory capital requirements. Any portion of benefit payments
which have not been suspended will be paid on an equitable basis, pro rata based
upon amounts due each Participant, among all eligible Participants.
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an employee of an Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock bonus,
stock ownership or any employment agreement or other plan or arrangement.
5.2 Employment Status
This Plan does not constitute a contract of employment or impose on the
Participant's Employer any obligation to retain the Participant, to maintain the
status of the Participant's employment, or to change the Employer's policies
regarding termination of employment.
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of the Bank, this Plan may be adopted by
any subsidiary of the Bank or by the Company. Upon such adoption, the subsidiary
or the Company shall become an Employer hereunder and the provisions of the Plan
shall be fully applicable to the employees of that subsidiary or the Company.
The term "subsidiary" means any corporation in which the Bank, directly or
indirectly, holds a majority of the voting power of its outstanding shares of
capital stock.
<PAGE>
ARTICLE VII
SUCCESSOR TO THE BANK
7.1 The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
plan, in the same manner and to the same extent that the Bank would be required
to perform if no such succession or assignment had taken place.
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 8.2, or unless
extended for an additional period or periods by resolution adopted by the Board
of the Bank.
Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.
8.2 Amendment and Termination
The Plan may be terminated or amended in any respect by resolution adopted
by a majority of the Board of the Bank, unless a Change in Control has
previously occurred. If a Change in Control occurs, the Plan no longer shall be
subject to amendment, change, substitution, deletion, revocation or termination
in any respect whatsoever.
8.3 Form of Amendment
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board. A
proper termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.
8.4 No Attachment
(a) Except as required by law, no right to receive payments under this
Plan shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect such action shall be null, void,
and of no effect.
<PAGE>
(b) This Plan shall be binding upon, and inure to the benefit of, each
employee, the Employer and their respective successors and assigns.
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by a
party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Employer may terminate an Employee's employment at any time, but
any termination by the Employer, other than Termination for Cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Plan. Employee shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as otherwise provided
hereunder.
10.2 If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(3) or (g)(1), the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
10.3 If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
10.4 If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. ss.1813(x)(1), all obligations of the
Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations under the Plan shall be terminated, except to the
extent determined that continuation of the Plan is necessary for the continued
operation of the Bank:
(a) by the Director or her designee, at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or
<PAGE>
(b) by the Director or her designee, at the time the Director or her
designee approves a supervisory merger to resolve problems related to operation
of the Bank or when the Bank is determined by the Director to be in an unsafe or
unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
10.6 Any payments made to a Participant pursuant to this Plan, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C.ss.1828(k) and any regulations promulgated thereunder.
ARTICLE XI
ADMINISTRATION OF THE PLAN
11.1 The Plan shall be administered by the Board (or, by a committee of
non-employee directors designated by the Board). Subject to the other provisions
of the Plan, the Board shall have authority to adopt, amend, alter and repeal
such administrative rules, guidelines and practices governing the operation of
the Plan as it shall from time to time consider advisable, to interpret the
provisions of the Plan and to decide all disputes arising in connection with the
Plan. The Board may correct any defect or supply any omission or reconcile any
inconsistency in the Plan in the manner and to the extent it shall deem
appropriate to carry the Plan into effect, in its sole and absolute discretion.
The Board's decisions and interpretations shall be final and binding. Any action
of the Board with respect to the administration of the Plan shall be taken
pursuant to a majority vote or by the unanimous written consent of its members.
Having been adopted by its Board on January 5, 2000, this Plan is
executed by duly authorized officer of the Bank this 5th day of January 2000.
Attest
/s/ Edwina Golec /s/ John P. Hyland
- ------------------------ -----------------------------------
John P. Hyland
For the Entire Board of Directors
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the unaudited
consolidated financial statements for Security Financial Bancorp, Inc. for the
nine months ended March 31, 2000 and is qualified in its entirety by reference
to such unaudited financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 5,162
<INT-BEARING-DEPOSITS> 9,274
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,522
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 137,786
<ALLOWANCE> 1,393
<TOTAL-ASSETS> 192,044
<DEPOSITS> 154,187
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,807
<LONG-TERM> 0
0
0
<COMMON> 194
<OTHER-SE> 36,856
<TOTAL-LIABILITIES-AND-EQUITY> 192,044
<INTEREST-LOAN> 8,825
<INTEREST-INVEST> 1,226
<INTEREST-OTHER> 346
<INTEREST-TOTAL> 10,397
<INTEREST-DEPOSIT> 4,612
<INTEREST-EXPENSE> 4,696
<INTEREST-INCOME-NET> 5,701
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,831
<INCOME-PRETAX> 592
<INCOME-PRE-EXTRAORDINARY> 592
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 592
<EPS-BASIC> .13
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.94
<LOANS-NON> 2,168
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 114
<ALLOWANCE-OPEN> 1,469
<CHARGE-OFFS> 253
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 1,393
<ALLOWANCE-DOMESTIC> 1,393
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 95
</TABLE>
