As filed with the Securities and Exchange Commission on April 9, 1997
Registration No. 333-23505
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT
NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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SFB Bancorp, Inc.
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(Exact name of Small Business Issuer as specified in charter)
Tennessee 6035 Requested
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(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or Identification No.)
organization)
632 East Elk Avenue, Elizabethton, Tennessee 37643-3378
(423) 543-3518
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(Address, including zip code, and telephone number,
including area code, of principal executive offices and
principal place of business)
Mr. Peter W. Hampton
President
SFB Bancorp, Inc.
632 East Elk Avenue, Elizabethton, Tennessee 37643-3378
(423) 543-3518
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(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Charles E. Sloane, Esq.
Gregory J. Rubis, Esq.
Felicia C. Battista, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
<PAGE>
PROSPECTUS
Up to ^ 667,000 Shares of Common Stock
SFB BANCORP, INC.
632 East Elk Avenue
Elizabethton, Tennessee 37643
(423) 543-3518
Security Federal Savings Bank is converting from the mutual form to the
stock form of organization. As part of the conversion, Security Federal Savings
Bank will become a wholly owned subsidiary of SFB Bancorp, Inc. SFB Bancorp,
Inc. was formed in March 1997 and upon consummation of the conversion will own
all of the shares of Security Federal Savings Bank. The common stock of SFB
Bancorp, Inc. is being offered to the public in accordance with a Plan of
Conversion. The Plan of Conversion must be approved by a majority of the votes
eligible to be cast by members of Security Federal Savings Bank ^ and by the
Office of Thrift Supervision. The offering will not go forward, if Security
Federal Savings Bank does not receive these approvals and SFB Bancorp, Inc. does
not sell at least the minimum number of shares.
TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted
Security Federal Savings Bank to be between $4,930,000 to ^ $6,670,000, which
establishes the number of shares to be offered. ^ Subject to the Office of
Thrift Supervision approval, up to 767,000 shares, an additional 15% above the
maximum number of shares may be offered. Based on these estimates, we are making
the following offering of shares of common stock:
o Price Per Share: $10
o Number of Shares
Minimum/Maximum: 493,000 to ^ 667,000
o Underwriting Commissions and Expenses
Minimum/Maximum: $385,000 to $400,000
o Net Proceeds to SFB Bancorp
Minimum/Maximum: $4,545,000 to ^ $6,270,000
Please refer to Risk Factors beginning on page 1 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, or any other state securities regulators have approved the sale of
these securities or determined this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe, call the Stock Information Center at (423)
543-3518
TRIDENT SECURITIES, INC.
^
, 1997
<PAGE>
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TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering.................... (i)
Summary........................................................... (iii)
Selected Financial and Other Data................................. ^(vi)
Risk Factors...................................................... 1
Proposed Purchases by Directors and Officers...................... 3
Use of Proceeds................................................... 4
Dividends......................................................... 4
Market for the Common Stock....................................... 5
Capitalization.................................................... 6
Pro Forma Data.................................................... 7
Historical and Pro Forma Capital Compliance....................... 11
The Conversion.................................................... 12
Consolidated Statements of Income of Security
Federal Savings Bank............................................ ^ 26
Management's Discussion and Analysis of
Financial Condition and Results of Operations................... ^ 27
Business of the SFB Bancorp, Inc.................................. ^ 36
Business of Security Federal Savings Bank......................... ^ 36
Regulation........................................................ ^ 53
Taxation.......................................................... ^ 58
Management of the SFB Bancorp, Inc................................ ^ 60
Management of Security Federal Savings Bank....................... 60 ^
Restrictions on Acquisitions of SFB Bancorp, Inc.................. ^ 66
Description of Capital Stock...................................... ^ 69
Legal and Tax Matters............................................. ^ 71
Experts........................................................... ^ 71
Change in Auditor................................................. ^ 71
Registration Requirements......................................... ^ 71
Additional Information............................................ ^ 72
Index to Consolidated Financial Statements of
Security Federal Savings Bank................................... ^ 73
Glossary.......................................................... A-1
This document contains forward-looking statements which involve risks and
uncertainties. SFB Bancorp, Inc.'s actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 1 of this document.
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
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<PAGE>
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: How will I benefit from the Offering?
A: The offering means that you will have the chance to become a stockholder
of our newly formed holding company, SFB Bancorp, Inc. which will allow
you to share in our future as a federal stock savings bank. The stock
offering will increase our capital and funds for lending and investment
activities, which will give us greater flexibility to diversify operations
and expand into other geographic markets. As a stock savings institution
operating through a holding company structure, we will have the ability to
plan and develop long-term growth and improve our future access to the
capital markets. ^ You might also receive dividends and benefit from the
appreciation of our stock, if there is an active market. See page 34.
Q: How do I purchase the stock?
A: You must complete and return the Stock Order Form to us together with your
payment, on or before ___________, 1997. See pages ^ 19 to ^ 21.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares (or $250). The maximum purchase is
15,000 shares (or $150,000), for any individual person or persons ordering
through a single account. In certain instances, your purchase might be
grouped together with purchases by ^ persons with other accounts and in
that event the aggregate purchases may not exceed 25,000 shares. We may
decrease or increase the maximum purchase limitation without notifying
you. In the event that the offering is oversubscribed, shares will be
allocated based upon a formula. See pages ^ 23 to ^ 24.
Q: What happens if there ^ are not enough shares to fill all orders?
A: You might not receive any or all of the shares you want to purchase. If
there is an oversubscription, the stock will be offered on a priority
basis to the following persons:
o Persons who had a deposit account with us on December 31, 1995. Any
remaining shares will be offered to:
o Tax Qualified Employee Plans, including the employee stock ownership
plan of Security Federal Savings Bank. Any remaining shares will be
offered to:
o Persons who had a deposit account with us on March 31, 1997. Any
remaining shares will be offered to:
o Depositors and certain borrowers of ours, as of ___________, 1997.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public with preference
given to people who live in Carter County, Tennessee.
See pages ^ 16 to 19.
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(i)
<PAGE>
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Q: What particular factors should I consider when deciding whether or not to
buy the stock?
A: Because of the small size of the offering, there may not be an active
market for the shares, which may make it difficult to resell any shares
you may own. Also, before you decide to purchase stock, you should also
read the Risk Factors section on pages 1-3 of this document.
Q: As a depositor or borrower member of Security Federal Savings Bank, what
will happen if I do not purchase any stock?
A: You presently have voting rights while we are in the mutual form; however,
once we convert to the stock form you will lose your voting rights unless
you purchase stock. You are not required to purchase stock. Your deposit
account, certificate accounts and any loans you may have with us will be
not be affected. See pages ^ 14 to ^ 16.
Q: Who Can Help Answer Any Other Questions I May Have About The Stock
Offering?
A: ^ In order to make an informed investment decision, you should read this
entire document. This section highlights selected information and may not
contain all of the information that is important to you. In addition, you
should contact:
Stock Information Center
SFB Bancorp, Inc.
632 East Elk Avenue
Elizabethton, Tennessee
(423) 543-3518
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(ii)
<PAGE>
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire document, including
the consolidated financial statements and the notes to the consolidated
financial statements of Security Federal Savings Bank. References is this
document to "we", "us", "our" refer to Security Federal Savings Bank. In certain
instances where appropriate, "us" or "our" refers collectively to SFB Bancorp,
Inc. and Security Federal Savings Bank. References in this document to ^"SFB
Bancorp" refers to SFB Bancorp, Inc.
The Companies
SFB Bancorp, Inc.
632 East Elk Avenue
Elizabethton, Tennessee 37643-3378
(423) 543-3518
SFB Bancorp, Inc. is not an operating company and has not engaged in any
significant business to date. It was formed in March 1997, as a Tennessee
corporation to be the holding company for Security Federal Savings Bank. The
holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. Please see page ^ 34.
Security Federal Savings Bank
632 East Elk Avenue
Elizabethton, Tennessee 37643-3378
(423) 543-3518
We are a community and customer oriented federal mutual savings bank. We
were chartered to profitably provide financial services to individuals, families
and small business. Historically, we have emphasized residential mortgage
lending, primarily originating one- to four-family mortgage loans. At December
31, 1996, we had total assets of $46.6 million, deposits of $40.8 million, and
total equity of $4.7 million. After the completion of the conversion, we will
change our name to "Security Federal Bank." Please see pages ^ 35 to 50.
The Stock Offering
Between 493,000 and 667,000 shares of common stock are being offered at
$10 per share. ^ As a result of changes in market and financial conditions prior
to completion of the conversion or to fill the order of our employee stock
ownership plan and subject to the Office of Thrift Supervision approval, the
offering may be increased to 767,000 shares without further notice to you.
Stock Purchases
The shares of common stock will be offered on the basis of priorities. As
a depositor or borrower member, you will receive subscription rights to purchase
the shares. The shares will be offered first in a Subscription Offering and any
remaining shares will be offered in a Community Offering and a ^ Syndicated
Community Offering. See pages ^ 16 to 18.
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(iii)
<PAGE>
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Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro forma
market value of the common stock by Feldman Financial Advisors, Inc., an
appraisal firm experienced in appraisals of savings institutions. Feldman
Financial Advisors, Inc. has estimated that in its opinion, as of March 14, 1997
the aggregate pro forma market value of the common stock ranged between $4.9
million and $6.7 million (with a mid-point of $5.8 million). The pro forma
market value of the shares is our market value after giving effect to the sale
of shares in this offering. The appraisal was based in part upon our financial
condition and operations and the effect of the additional capital raised by the
sale of common stock in this offering. The $10.00 price per share
was determined by our board of directors and is the
price most commonly used in stock offerings involving conversions of mutual
savings institutions. ^ The independent appraisal will be updated prior to the
consummation of the Conversion. If the pro forma market value of the Common
Stock is either below $4.9 million or above $7.6 million, you, will be notified
by us and you will have the opportunity to modify or cancel your order. See
pages 22 to 23.
Termination of the Offering
The Subscription Offering will terminate at ______ p.m., Eastern Time, on
____________ ___, 1997. The Community Offering, if any, may terminate at any
time without notice but no later than ______________ ___, 1997, without approval
by the OTS.
Benefits to Management from the Offering
Our full-time employees will participate in the offering through purchases
of stock by our employee stock ownership plan, which is a form of retirement
plan. We also intend to implement a restricted stock plan and a stock option
plan following completion of the Conversion, which will benefit Mr. Hampton and
other officers and directors. However, the restricted stock plan and stock
option plan may not be adopted until after the Conversion and are subject to
stockholder approval and compliance with OTS regulations. See pages ^ 61 to ^
64.
Use of the Proceeds Raised from the Sale of Common Stock
SFB Bancorp, Inc. will use approximately 50% of the net proceeds from the
stock offerings to purchase the common stock to be issued by us in the
Conversion and to make a loan to our employee stock ownership plan to fund its
purchase of stock in the Conversion. The balance of the funds will be retained
as SFB Bancorp, Inc.'s initial capitalization. See page 4.
Dividends
SFB Bancorp, Inc. expects initially to pay semi-annual cash dividends on
the common stock at a rate of 3% per annum commencing after December 31, 1997.
See page 4.
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(iv)
<PAGE>
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Market for the Common Stock
Since the size of the offering is relatively small, it is unlikely that an
active and liquid trading market for the trading market will develop and be
maintained. Investors should have a long-term investment intent. Persons
purchasing shares may not be able to sell their shares ^ or at a price equal to
or above $10.00. See page 5.
Important Risks in Owning SFB Bancorp, Inc.'s Common Stock
Before you decide to purchase stock in the offering, you should read the
Risk Factor section on pages 1-^ 3 of this document.
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(v)
<PAGE>
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SELECTED FINANCIAL AND OTHER DATA
We are providing the following summary financial information about us for
your benefit. This information is derived from our audited financial statements
for each of the fiscal years shown below. The following information is only a
summary and you should read it in conjunction with our consolidated (including
consolidated data from operations of our subsidiary) financial statements and
notes beginning on page F-1.
Selected Financial Data
At December 31,
----------------------------
1995 1996
---- ----
(Dollars in Thousands)
Total assets................ $ 45,482 $ 46,579
Loans receivable, net....... 32,782 36,808
Mortgage-backed securities . 7,299 5,768
Investment securities....... 1,414 1,312
Deposits.................... 40,637 40,765
Total equity................ 4,426 4,676
Other Data:
Number of:
Real estate loans outstanding 893 954
Deposit accounts............ 3,550 3,535
Full service offices........ 2 2
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(vi)
<PAGE>
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Summary of Operations
For the Years Ended
December 31,
--------------------
1995 1996
---- ----
(In Thousands)
Interest income........... $3,401 $3,474
Interest expense......... 1,981 1,977
----- -----
Net interest income....... 1,420 1,497
Provision for loan losses. 30 30
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Net interest income after
provision for loan losses 1,390 1,467
Non interest income....... 152 156
Non interest expense (1).. 957 1,204
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Income before income taxes 585 419
Income tax expense........ 221 157
------ ------
Net income................ $ 364 $ 262
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(1) Includes a non-recurring expense of $264,000 for the year ended December
31, 1996 for a one-time deposit premium to recapitalize the SAIF.
Key Operating Ratios
At and For the Years
Ended
December 31,
1995 1996
Performance Ratios:
Return on average assets (net income divided by
average totla assets)................................. 0.81% 0.57%
Return on average equity (net income divided by
average equity)....................................... 8.58% 5.67%
Ratio of average equity to average total assets
(average equity divided by average total assets)...... 9.46% 10.08%
Equity to assets at period end.......................... 9.73% 10.04%
Net interest rate spread................................ 2 .87% 2.92%
Net interest margin..................................... 3.26% 3.36%
Average interest-earning assets to average interest-
bearing liabilities................................... 108.56% 109.84%
Non-interest expenses to total assets................... 2.10% 2.58%
Non-interest expenses to average total assets........... 2 .13% 2.62%
Asset Quality Ratios:
Non-performing loans to total assets.................... 0.46% 0.67%
Non-performing assets to total assets................... 0.46% 0.80%
Non-performing loans to total loans..................... 0.62% 0.81%
Allowance for loan losses to total loans at the
end of period......................................... 0.83% 0.80%
Allowance for loan losses to non-performing loans....... 134.78% 97.75%
Net interest income after provision for loan losses,
to total non-interest expenses........................ 148.38% 124.34%
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(vii)
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in evaluating an investment in our common
stock.
Lack of Active Market for Common Stock
Due to the small size of the offering, it is highly unlikely that an
active trading market will develop and be maintained. ^ If an active market does
not develop, you may not be able to sell your shares promptly or at a price
equal to or above the price you paid for the shares, or sell your shares at all.
The common stock may not be appropriate as a short-term investment. See "Market
For The Common Stock."
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
Return on average equity (net income divided by average equity) is a ratio
used by many investors to compare the performance of a savings institution to
its peers. As a result of the Conversion, our equity will increase
substantially. Our expenses also will increase because of the costs associated
with our employee stock ownership plan, restricted stock ownership plan, and the
costs of being a public company. Because of ^ the increases in our equity and
expenses, our return on equity may decrease as compared to our performance in
previous years. Initially, we intend to invest the net proceeds in short term
investments which generally have lower yields than residential mortgage loans.
At December 31, 1995 and 1996 our return on average equity was 8.58% and 5.67%,
respectively. A lower return on equity could ^ reduce the trading price of our
shares. See "Use of Proceeds."
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit, like that of most financial institutions, is
substantially dependent on our net interest income, which is the difference
between the interest income we earn on our interest-earning assets (such as
mortgage loans) and the interest expense we pay on our interest-bearing
liabilities (such as deposits). Substantially all of our mortgage loans have
rates of interest which are fixed for the term of the loan ("fixed rate") and
are originated with terms of 15 years, while deposit accounts have significantly
shorter terms to maturity. Because our interest-earning assets generally have
fixed rates of interest and have longer effective maturities than our
interest-bearing liabilities, the yield on our interest-earning assets generally
will adjust more slowly to changes in interest rates than the cost of our
interest-bearing liabilities. As a result, our net interest income will be
adversely affected by material and prolonged increases in interest rates. In
addition, rising interest rates may adversely affect our earnings because there
might be a lack of customer demand for loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. Historically lower interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities,
as borrowers refinanced their mortgages in order to reduce their borrowing cost.
Under these circumstances, we are subject to reinvestment risk to the extent
that we are not able to reinvest such prepayments at rates which are comparable
to the rates on the prepaid loans or securities.
1
<PAGE>
Dependence on President and Possible New Management
Our successful operations depend to a considerable degree on our
President, Peter W. Hampton, who is 77 years of age. ^ We have entered into a
three year employment agreement with Mr. Hampton. The employment agreement is
subject to a buyout provision if he is terminated by us without "just cause".
However, the loss of Mr. Hampton's services could adversely affect us. While the
board of directors is seeking to attract and retain additional management either
as a successor or supplement to Mr. Hampton, there is no assurance that such
individuals will be attracted or retained. If such individuals are retained,
their participation in our management could result in changes to our operating
strategy which could affect our profitability. See "Management of Security
Federal Savings Bank^ " and "-- Employment Agreement."
Intent to Remain Independent
We have operated as an independent community oriented savings association
since 1963. It is our intention to continue to operate as an independent
community oriented savings association following the Conversion. Accordingly, ^
you are urged not to subscribe for shares of our common stock if you are
anticipating a quick sale by us. See "Business of SFB Bancorp, Inc."
^ Anti-Takeover Provisions and Statutory Provisions That Could Discourage
Hostile Acquisitions of Control
Provisions in ^ SFB Bancorp's charter and bylaws, the general corporation
law of the state of Tennessee, and certain federal regulations may make it
difficult and expensive to pursue a tender offer, change in control or takeover
attempt which we oppose. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current board of directors or
management of SFB Bancorp more difficult. In addition, these provisions may
reduce the trading price of our stock. See "Restrictions on Acquisitions of SFB
Bancorp, Inc."
Possible Voting Control by Directors and Officers
The proposed purchases of the common stock by our directors, officers and
employee stock ownership plan, as well as the potential acquisition of the
common stock through the stock option plan and restricted stock plan, could make
it difficult to obtain majority support for stockholder proposals which are
opposed by us. ^ In addition, the voting of those shares could enable us to
block the approval of transactions (i.e., business combinations and amendment to
our charter and bylaws) requiring the approval of 80% of the stockholders under
the SFB Bancorp's charter. See "Management of Security Federal Savings Bank --
Executive Compensation," "Description of Capital Stock," and "Restrictions on
Acquisitions of SFB Bancorp, Inc."
Possible Dilutive Effect of RSP and Stock Options
^ If the Conversion is completed and shareholders approve the restricted
stock plan and stock option plan, we will issue stock to our officers and
directors through ^ these plans. If the shares for the restricted stock plan and
stock ^ options are issued from our authorized but unissued stock, your
ownership percentage could be diluted by up to approximately 13% and the trading
price of our stock may be reduced. See "Pro Forma Data^ ," "Management of
Security Federal Savings Bank, -- Proposed Future Stock Benefit Plans, and --
Restricted Stock Plan."
2
<PAGE>
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by
the OTS and FDIC. A bill has been introduced to the House Banking Committee that
would consolidate the OTS with the Office of the Comptroller of the Currency
("OCC"). If this regulation is approved we could be forced to become a state or
national commercial bank. If we become a commercial bank, our investment
authority and the ability of SFB Bancorp to engage in diversified activities may
be limited, which could affect our profitability. See "Regulation."
Restrictions on Repurchase of Shares
Generally, during the first year following the Conversion, SFB Bancorp may
not repurchase its shares. During each of the second and third years following
the Conversion, SFB Bancorp may repurchase up to 5% of its outstanding shares.
During those periods, if we decide that additional repurchases would be a good
use of funds, we would not be able to do so, without obtaining OTS approval.
There is no assurance that OTS approval would be given. See "The
Conversion--Restrictions on Repurchase of Stock."
PROPOSED PURCHASES BY DIRECTORS AND OFFICERS
The following table sets forth the approximate purchases of common stock
by each director and executive officer and their "associates" in the Conversion.
All shares will be purchased for investment purposes and not for purposes of
resale. The table, assumes that 580,000 shares (the midpoint of the EVR) of the
common stock will be sold at $10.00 per share and that sufficient shares will be
available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Purchased(1)
---- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Estill L. Caudill, Jr. Director 200 $ 2,000 .03%
Julian T. Caudill Director 5,000 50,000 .86
John R. Crockett, Jr. Director 100 1,000 .02
Peter W. Hampton President and
Director 15,000 150,000 2.59
Peter W. Hampton, Jr. Vice Chairman and
Director 10,000 100,000 1.72
Donald W. Tetrick Chairman and
Director 10,000 100,000 1.72
------ ------- ----
40,300 $403,000 6.95%
====== ======= ====
</TABLE>
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(1) Does not include shares purchased by the ESOP.
3
<PAGE>
USE OF PROCEEDS
SFB Bancorp will use 50% of the net proceeds from the offering to purchase
all of the capital stock we will issue in connection with the Conversion. A
portion of the net proceeds to be retained by SFB Bancorp will be loaned to our
employee stock plan to fund its purchase of 8% of the shares sold in the
Conversion. On a short-term basis, the balance of the net proceeds retained by
SFB Bancorp initially will be invested in short-term investments. Although there
are no current plans, the net proceeds subsequently may be used to fund
acquisitions of other financial services institutions or to diversify into
non-banking activities. The net proceeds may also serve as a source of funds for
the payment of dividends to stockholders or for the repurchase of the shares. A
portion of the net proceeds may also be used to fund the purchase of 4% of the
shares for a restricted stock plan (the RSP) which is anticipated to be adopted
following the Conversion. See "Pro Forma Data."
The funds we received from the sale of our capital stock to SFB Bancorp
will be added to our general funds and be used for general corporate purposes
including: (i) investment in mortgages and other loans, (ii) U.S. Government and
federal agency securities, (iii) mortgage-backed securities, (iv) funding loan
commitments or (v) repaying FHLB advances. However, initially we intend to
invest the net proceeds in short-term investments until we can deploy the
proceeds into higher yielding loans. The funds added to our capital will further
strengthen our capital position. We may use a portion of the funds for
establishment of a branch office. We are currently in the initial stages of
exploring possible site locations.
The net proceeds may vary because the total expenses of the Conversion may
be more or less than those estimated. We expect our estimated expenses to be
between $385,000 and $400,000. Our estimated investable net proceeds will range
from $4.0 million to $5.5 million (or up to $6.3 million in the event the
maximum estimated valuation range is increased to $7.7 million). See "Pro Forma
Data." The net proceeds will also vary if the number of shares to be issued in
the Conversion is adjusted to reflect a change in our estimated pro forma market
value with us. Payments for shares made through withdrawals from existing
deposit accounts with us will not result in the receipt of new funds for
investment by us but will result in a reduction of our liabilities and interest
expense as funds are transferred from interest-bearing certificates or accounts.
DIVIDENDS
Upon Conversion, SFB Bancorp's board of directors will have the authority
to declare dividends on the shares, subject to statutory and regulatory
requirements. SFB Bancorp expects initially to pay semi-annual cash dividends on
the shares at a rate of 3% per annum ($0.30 per share per annum based on the
$10.00 per share offering price) commencing after December 31, 1997. However,
declarations of dividends by the board of directors will depend upon a number of
factors, including: (i) the amount of the net proceeds retained by SFB Bancorp
in the Conversion, (ii) investment opportunities available, (iii) capital
requirements, (iv) regulatory limitations, (v) results of operations and
financial condition, (vi) tax considerations, and (vii) general economic
conditions. Upon review of such considerations, the board may authorize future
dividends if it deems such payment appropriate and in compliance with applicable
law and regulation. ^ In addition, from time to time in an effort to manage
capital at a ^ desirable level, the board may determine ^ to pay special cash
dividends. Special cash dividends may be paid in addition to, or in lieu of,
regular cash dividends. There can be no assurance that regular or special
dividends will be paid, or, if paid, will continue to be paid. See "Historical
and Pro Forma Capital Compliance," "The Conversion -- Effects of Conversion to
Stock Form on Savers and Borrowers of Security Federal Savings Bank --
Liquidation Account" and "Regulation -- Dividend and Other Capital Distribution
Limitations."
4
<PAGE>
SFB Bancorp is not subject to OTS regulatory restrictions on the payment
of dividends to its stockholders although the source of such dividends^ will be
dependent in part^ upon the receipt of dividends from us. SFB Bancorp is
subject, however, to the requirements of Tennessee law, which generally limit
the payment of dividends to amounts that will not affect the ability of SFB
Bancorp, after the dividend has been distributed, to pay its debts in the
ordinary course of business.
In addition to the foregoing, the portion of our earnings which have been
appropriated for bad debt reserves and deducted for federal income tax purposes
cannot be used by us to pay cash dividends to SFB Bancorp without the payment of
federal income taxes by us at the then current income tax rate on the amount
deemed distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation -- Federal Taxation" and Note 10
to the Consolidated Financial Statements. SFB Bancorp does not contemplate any
distribution by us that would result in a recapture of our bad debt reserve or
otherwise create federal tax liabilities.
MARKET FOR THE COMMON STOCK
As a newly organized company, SFB Bancorp has never issued capital stock,
and consequently there is no established market for the common stock. Following
the completion of the offering, it is anticipated that the common stock will be
traded on the Nasdaq SmallCap Market under the symbol "_______." One of the
conditions for quotation on the Nasdaq SmallCap Market is that at least two
market makers make or agree to make, a market in the common stock. Making a
market may include the solicitation of potential buyers and sellers in order to
match buy and sell orders. Trident Securities ^ is expected to make a market in
the common stock. SFB Bancorp expects that before the Conversion is completed it
will obtain a commitment from another market maker. However, Trident Securities
or any other market maker will not be subject to any ^ obligation ^ with respect
to such efforts ^. There is no assurance that there will be two market makers.
If the common stock cannot be listed on the Nasdaq SmallCap Market, it is
expected to be quoted and traded on the OTS "Electronic Bulletin Board" or the
National Quotation Bureau, Inc., "Pink Sheets."
The development of an active trading market depends on the existence of ^
willing buyers and sellers. Due to the small size of the offering, it is highly
unlikely that an active trading market will develop and be maintained. You could
have difficulty disposing of your shares and you should not view the shares as a
short-term investment. ^ You may not be able to sell your shares ^ at a price
equal to or above the price you paid for the shares.
5
<PAGE>
CAPITALIZATION
The following table presents, as of December 31, 1996, our historical
capitalization and the consolidated capitalization of SFB Bancorp after giving
effect to the Conversion and the other assumptions set forth below and under
"Pro Forma Data," based upon the sale of shares at the minimum, midpoint,
maximum, and 15% above the maximum of the EVR at a price of $10.00 per share:
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based on the Sale of
-----------------------------------------------
Historical 493,000 580,000 667,000 767,000
Capitalization Shares at Shares at Shares at Shares At
at December 31, $10.00 $10.00 $10.00 $10.00
1996 Per Share Per Share Per Share Per Share
--------------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1) ................................. $ 40,765 $40,765 $40,765 $40,765 $40,765
Other Borrowings............................ 800 800 800 800 800
------ ------ ------ ------ ------
Total deposits and other borrowings........ $ 41,565 $41,565 $41,565 $41,565 $41,565
======= ====== ====== ====== ======
Stockholders' Equity:
Preferred Stock, $.10 par value per share,
1,000,000 shares authorized; none to be
issued.................................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.10 par value, 4,000,000
shares authorized; total shares to be
issued as reflected....................... -- 49 58 67 77
Additional paid in capital................... -- 4,496 5,342 6,203 7,193
Total equity(4)............................ 4,676 4,676 4,676 4,676 4,676
Less:
Common stock acquired by ESOP.............. -- (394) (464) (534) (614)
Common stock acquired by RSP............... -- (197) (232) (267) (307)
----- ------ ------ ------ ------
Total stockholders' equity................... $4,676 $8,630 $9,380 $10,145 $11,025
===== ===== ===== ====== ======
</TABLE>
- ---------------------
(1) Excludes accrued interest payable on deposits. Withdrawals from savings
accounts for the purchase of stock have not been reflected in these
adjustments. Any withdrawals will reduce pro forma capitalization by the
amount of such withdrawals.
(2) Does not reflect the increase in the number of shares of common stock
after the Conversion in the event of implementation of the Option Plan or
RSP. See "Management of Security Federal Savings Bank - Proposed Future
Stock Benefit Plans - Stock Option Plan" and "- Restricted Stock Plan."
(3) Assumes that 8% and 4% of the shares issued in the Conversion will be
purchased by the ESOP and RSP, respectively. No shares will be purchased
by the RSP in the Conversion. It is assumed on a pro forma basis that the
RSP will be adopted by the board of directors, approved by stockholders of
the Company, and reviewed by the OTS. It is assumed that the RSP will
purchase common stock in the open market within one year of the Conversion
in order to give an indication of its effect on capitalization. The pro
forma presentation does not show the impact of: (a) results of operations
after the Conversion, (b) changing market prices of shares of common stock
after the Conversion, or (c) a smaller than 4% purchase by the RSP.
Assumes that the funds used to acquire the ESOP shares will be borrowed
from the Company for a ten year term at the prime rate as published in The
Wall Street Journal. For an estimate of the impact of the ESOP on
earnings, see "Pro Forma Data." The Bank intends to make contributions to
the ESOP sufficient to service and ultimately retire its debt. The amount
to be acquired by the ESOP and RSP is reflected as a reduction of
stockholders' equity. The issuance of authorized but unissued shares for
the RSP in an amount equal to 4% of the outstanding shares of common stock
will have the effect of diluting existing stockholders' interests by 3.9%.
There can be no assurance that stockholder approval of the RSP will be
obtained. See "Management of Security Federal Savings Bank - Proposed
Future Stock Benefit Plans - Restricted Stock Plan."
(4) The equity of the Bank will be substantially restricted after the
Conversion. See "Dividends," "Regulation - Dividends and Other Capital
Distribution Limitations," "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of Security Federal Savings Bank
Liquidation Account" and Note 17 to the Consolidated Financial Statements.
6
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be determined
until the Conversion is completed. However, net proceeds are currently estimated
to be between $4.5 million and $7.3 million at the minimum and maximum, as
adjusted, of the ^ estimated valuation range ("EVR"), based upon the following
assumptions: (i) 8% of the shares will be sold to the ESOP and 40,300 shares
will be sold to officers, directors, and members of their immediate families;
(ii) Trident will have received sales fees of $92,000; (iii) no shares will be
sold in a Syndicated Community Offering by selected dealers; (iv) other
Conversion expenses, excluding the sales fees paid to Trident, will be $308,000;
and (v) 4% of the shares will be sold to the RSP. Because management of the
Savings Bank presently intends to adopt the RSP within the first year following
the Conversion, a purchase by the RSP in the Conversion has been included with
the pro forma data to give an indication of the effect of a 4% purchase by the
RSP, at a $10.00 per share purchase price in the market, even though the RSP
does not currently exist and is prohibited by OTS regulation from purchasing
shares in the Conversion. The pro forma presentation does not show the effect
of: (a) results of operations after the Conversion, (b) changing market prices
of the shares after the Conversion or (c) less than a 4% purchase by the RSP.
The following table sets forth, our historical net earnings and stockholders'
equity prior to the Conversion and the pro forma consolidated net earnings and
stockholders' equity of SFB Bancorp following the Conversion. Unaudited pro
forma consolidated net earnings and stockholders' equity have been calculated
for the fiscal year ended December 31, 1996 as if the common stock to be issued
in the Conversion had been sold at January 1, 1996, and the estimated net
proceeds had been invested at 5.20% for the fiscal year ended December 31, 1996,
which was approximately equal to the one-year U.S. Treasury bill rate during
November 30, 1996. The one-year U.S. Treasury bill rate, rather than an
arithmetic average of the average yield on interest-earning assets and average
rate paid on deposits, has been used to estimate income on net proceeds because
it is believed that the one-year U.S. Treasury bill rate is a more accurate
estimate of the rate that would be obtained on an investment of net proceeds
from the offering. In calculating pro forma income, an effective state and
federal income tax rate of 38.00% has been assumed for the respective periods,
resulting in an after tax yield of 3.22% for the fiscal year ended December 31,
1996. Withdrawals from deposit accounts for the purchase of shares are not
reflected in the pro forma adjustments. The computations are based upon the
assumptions that 493,000 shares (minimum of EVR) shares, 580,000 (midpoint of
EVR), 667,000 shares (maximum of EVR) or 767,000 shares (maximum, as adjusted,
of the EVR) are sold at a price of $10.00 per share. As discussed under "Use of
Proceeds," SFB Bancorp expects to retain 50% of the net Conversion proceeds,
part of which will be loaned to the ESOP to fund its purchase of 8% of shares
issued in the Conversion. It is assumed that the yield on the net proceeds of
the Conversion retained by SFB Bancorp will be the same as the yield on the net
proceeds of the Conversion transferred to us. Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares. Per share amounts have been computed as if the
shares had been outstanding at the beginning of the periods or at the dates
shown, but without any adjustment of per share historical or pro forma
stockholders' equity to reflect the earnings on the estimated net proceeds.
The stockholders' equity information is not intended to represent the fair
market value of the shares, or the current value of our assets or liabilities,
or the amounts, if any, that would be available for distribution to stockholders
in the event of liquidation. For additional information regarding the
liquidation account, see "The Conversion -- Certain Effects of the Conversion to
Stock Form on Savers and Borrowers of Security Federal Savings Bank --
Liquidation Account" and Note 17 to the Consolidated Financial Statements. The
pro forma income derived from the assumptions set forth above should not be
considered indicative of the actual results of our operations for any period.
Such pro forma data may be materially affected by a change in the price per
share or
7
<PAGE>
number of shares to be issued in the Conversion and by other factors. For
information regarding investment of the proceeds see "Use of Proceeds" and "The
Conversion -- Stock Pricing" and "--Number of Shares to be Issued in the
Conversion."
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
---------------------------------------------------------
493,000 580,000 667,000 767,000
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................ $4,930 $5,800 $ 6,670 $7,670
Less estimated offering expenses.............. (385) (400) (400) (400)
------ ----- ----- -----
Estimated net proceeds...................... 4,545 5,400 6,270 7,270
Less: ESOP funded by the Company........ (394) (464) (534) (614)
RSP funded by the Company......... (197) (232) (267) (307)
------ ----- ----- -----
Estimated investable net proceeds:.......... $ 3,954 $4,704 $5,469 $6,349
====== ===== ===== =====
Net income:
Historical net income....................... $ 262 $ 262 $ 262 $ 262
Pro forma earnings on investable net proceeds 127 151 176 204
Pro forma ESOP adjustment(1)................ (24) (29) (33) (38)
Pro forma RSP adjustment(2)................. (24) (29) (33) (38)
---- ------ ------ ----
.Total........................................ $ 341 $ 355 $ 372 $ 390
==== ====== ====== ====
Net income per share:
Historical net income per share............. $ 0.57 $ 0.49 $ 0.42 $ 0.37
Pro forma earnings on net proceeds.......... 0.28 0.28 0.28 0.29
Pro forma ESOP adjustment(1)................ (0.05) (0.05) (0.05) (0.05)
Pro forma RSP adjustment(2)................. (0.05) (0.05) (0.05) (0.05)
----- ------ ----- -----
.Total........................................ $ 0.75 $ 0.67 $ 0.60 $ 0.56
===== ====== ====== =====
Stockholders' equity:(3)
Historical.................................. $4,676 $ 4,676 $ 4,676 $ 4,676
Estimated net proceeds(2)................... 4,545 5,400 6,270 7,270
Less: Common stock acquired by ESOP(1).. (394) (464) (534) (614)
. Common stock acquired by RSP(2).......... (197) (232) (267) (307)
----- ------ ------ ------
.Total........................................ $8,630 $ 9,380 $10,145 $11,025
===== ====== ====== ======
Stockholders' equity per share:(3)
Historical.................................. $ 9.48 $ 8.06 $ 7.01 $ 6.10
Estimated net proceeds(2)................... 9.22 9.31 9.40 9.48
Less: common stock acquired by ESOP(1).. (0.80) (0.80) (0.80) (0.80)
. common stock acquired by RSP(2).......... (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
.Total........................................ $ 17.50 $ 16.17 $ 15.21 $ 14.38
====== ====== ====== ======
Offering price as a percentage of pro forma
stockholders' equity per share(4)........... 57.14% 61.84% 65.75% ^ 69.54%
====== ====== ====== =======
Ratio of offering price to pro forma earnings
per share(4)................................ 13.33x 14.93x 16.67x 17.86x
====== ======= ======= ======
</TABLE>
^--------------------
Footnotes follow table
8
<PAGE>
^--------------------
(1) Assumes 8% of the shares sold in the Conversion are purchased by the ESOP,
and that the funds used to purchase such shares are borrowed from SFB
Bancorp. The approximate amount expected to be borrowed by the ESOP is not
reflected as a liability but is reflected as a reduction of capital. We
intend to make annual contributions to the ESOP over a ten year period in
an amount at least equal to the principal and interest requirement of the
debt. The pro forma net income assumes: (i) that 493,000, 580,000, 667,000,
and 767,000 shares at the minimum, mid-point, maximum and maximum, as
adjusted of the EVR, were committed to be released during the year ended
December 31, 1996 at an average fair value of $10.00 per share in
accordance with Statement of Position ("SOP") 93-6 of the American
Institute of Certified Public Accountants ("AICPA"); (ii) the effective tax
rate was 38% for such period; and (iii) only the ESOP shares committed to
be released were considered outstanding for purposes of the per share net
earnings. The pro forma stockholders' equity per share calculation assumes
all ESOP shares were outstanding, regardless of whether such shares would
have been released. Because SFB Bancorp will be providing the ESOP loan,
only principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. As a result, to the extent the value of
the shares appreciates over time, compensation expense related to the ESOP
will increase. For purposes of the preceding tables, it was assumed that a
ratable portion of the ESOP shares purchased in the Conversion were
committed to be released during the period ended December 31, 1996. See
Note 5 below. If it is assumed that all of the ESOP shares were included in
the calculation of earnings per share for the period ended at December 31,
1996, earnings per share would have been $.69, $.61, $.56 and $.51 at
December 31, 1996, respectively, based on the sale of shares at the
minimum, midpoint, maximum and the maximum, as adjusted, of the EVR. See
"Management Security Federal Savings Bank - Other Benefits - Employee Stock
Ownership Plan."
(2) Assumes issuance to the RSP of 19,720, 23,200, 26,680, and 30,680 shares at
the minimum, mid-point, maximum, and maximum, as adjusted of the EVR. The
assumption in the pro forma calculation is that (i) shares were purchased
by SFB Bancorp following the Conversion, (ii) the purchase price for the
shares purchased by the RSP was equal to the purchase price of $10 per
share and (iii) 20% of the amount contributed was an amortized expense
during such period. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the Purchase Price. As we
accrue compensation expense to reflect the five year vesting period of such
shares pursuant to the RSP, the charge against capital will be reduced
accordingly. Implementation of the RSP within one year of Conversion would
require regulatory and stockholder approval at a meeting of our
stockholders to be held no earlier than six months after the Conversion.
For purposes of this table, it is assumed that the RSP will be adopted by
the board of directors, reviewed by the OTS, and approved by the
stockholders, and that the RSP will purchase the shares in the open market
within the year following the Conversion. If the shares to be purchased by
the RSP are assumed at January 1, 1996, to be newly issued shares purchased
from SFB Bancorp by the RSP at the Purchase Price, at the minimum,
midpoint, maximum and maximum, as adjusted, of the EVR, pro forma
stockholders' equity per share would have been $16.83, $15.55, $14.62, and
$13.82 at December 31, 1996, respectively, and pro forma earnings per share
would have been $.71, $.63, $.58, and $.53 for the year ended December 31,
1996, respectively. As a result of the RSP, stockholders' interests will be
diluted by approximately 3.9%. See "Management of Security Federal Savings
Bank - Proposed Future Stock Benefit Plans - Restricted Stock Plan."
(3) Assumes that following the consummation of the Conversion, SFB Bancorp will
adopt the Option Plan, which if implemented within one year of Conversion
would be subject to regulatory review and board of director and stockholder
approval, and that such plan would be considered and voted upon at a
meeting of SFB Bancorp stockholders to be held no earlier than six months
after the Conversion. Under the Option Plan, employees and directors could
be granted options to purchase an aggregate amount of shares equal to 10%
of the shares issued in the Conversion at an exercise price equal to the
market price of the shares on the date of grant. In the event the shares
issued under the Option Plan were awarded, the interests of existing
stockholders would be diluted. At the minimum, midpoint, maximum and the
maximum, as adjusted, of the EVR, if all shares under the Option Plan were
newly issued at the beginning of the respective periods and the exercise
price for the option shares were equal to the Purchase Price, the number of
outstanding shares would increase to 542,300, 638,000, 733,700, and
843,700, respectively, pro forma
9
<PAGE>
stockholders' equity per share would have been $16.82, $15.61, $14.74, and
$13.98 at December 31, 1996, respectively, and pro forma earnings per share
would have been $.67, $.60, $.54, and $.49 at December 31, 1996,
respectively.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the over its liabilities. The calculations are based
upon the number of shares issued in the Conversion, without giving effect
to SOP 93-6. The amounts shown do not reflect the federal income tax
consequences of the potential restoration to income of the tax bad debt
reserves for income tax purposes, which would be required in the event of
liquidation. The amounts shown also do not reflect the amounts required to
be distributed in the event of liquidation to eligible depositors from the
liquidation account which will be established upon the consummation of the
Conversion. Pro forma stockholders' equity information is not intended to
represent the fair market value of the shares, the current value of our
assets or liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the Conversion and by other factors.
(5) Pro forma net income per share calculations include the number of shares
assumed to be sold in the Conversion and, in accordance with SOP 93-6,
exclude ESOP shares which would not have been released during the period.
Accordingly, 35,496, 41,760, 48,024, and 55,224 shares have been subtracted
from the shares assumed to be sold at the minimum, mid-point, maximum, and
maximum, as adjusted, of the EVR, respectively, and 3,944, 4,640, 5,336,
and 6,136 shares are assumed to be outstanding at the minimum, mid-point,
maximum, and maximum, as adjusted of the EVR. See Note 1 above.
10
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
. The following table presents our historical and pro forma capital position
relative to its capital requirements as of December 31, 1996. For a discussion
of the assumptions underlying the pro forma capital calculations presented
below, see "Use of Proceeds," "Capitalization" and "Pro Forma Data." The
definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to us, see "Regulation -- Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma(1)
------------------------------------------------------------------------------------
$4,930,000 $5,800,000 $6,670,000 $7,670,000
Historical Minimum Midpoint Maximum Maximum, as adjusted
-------------------- -------------------- -------------------- -------------------- ---------------------
Percent Percent Percent Percent Percent
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital.......... $4,676 10.04% $6,357 13.07% $6,680 13.62% $7,010 14.18% $7,390 14.81%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Tangible Capital...... $4,784 10.25% $6,465 13.26% $6,788 13.81% $7,118 14.36% $7,498 14.99%
Tangible Capital
Requirement......... 700 1.50 731 1.50 737 1.50 743 1.50 750 1.50
----- ----- ----- ------ ----- ----- ----- ------ ----- -----
Excess................ $4,084 8.75% $5,734 11.76% $6,051 12.31% $6,375 12.86% $6,748 13.49%
===== ==== ===== ===== ===== ===== ===== ===== ===== =====
Core Capital.......... $4,784 10.25% $6,465 13.26% $6,788 13.81% $7,118 14.36% $7,498 14.99%
Core Capital
Requirement(3)...... 1,401 3.00 1,463 3.00 $ 1,475 3.00% $ 1,487 3.00% $ 1,500 3.00%
------ ----- ----- ----- ------- ------- ------- ------ ------- -------
Excess............... $3,383 7.25% $5,002 10.26% $5,313 10.81% $5,631 11.36% $5,998 11.99%
===== ==== ===== ===== ===== ===== ===== ====== ===== =====
Total Risk-Based
Capital(4).......... $5,084 20.19% $6,765 26.43% $7,088 27.61% $7,418 28.81% $7,798 30.17%
Risk-Based Capital
Requirement......... 2,014 8.00 2,047 8.00 2,054 8.00 2,060 8.00 2,067 8.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Excess................ $3,070 12.19% $4,718 18.43% $5,034 19.61% $ 5,358 20.81% $5,731 22.17%
===== ===== ===== ===== ===== ===== ====== ===== ===== =====
</TABLE>
^--------------------
(1) Institutions must value available for sale debt securities at amortized
cost, rather than at fair value, for purposes of calculating regulatory
capital. Institutions are still required to comply with SFAS No. 115 for
financial reporting purposes. The pro forma data has been adjusted to
reflect reductions in capital that would result from an assumed 8%
purchase by the ESOP and 4% purchase by the RSP as of December 31, 1996.
It is assumed that SFB Bancorp will retain 50% of net conversion proceeds.
See "Use of Proceeds."
(2) GAAP, adjusted, or risk-weighted assets as appropriate.
(3) The unrealized loss on securities available for sale of $108,000 has been
added to GAAP Capital to arrive at Tangible and Core Capital.
(4) Proposed regulations of the OTS could increase the core capital
requirement to a ratio between 4% and 5%, based upon an association's
regulatory examination rating. See "Regulation - Regulatory Capital
Requirements." Risk-Based Capital includes Tangible Capital plus $300,000
of the Bank's allowance for loan losses. Risk- weighted assets as of
December 31, 1996 totaled approximately $25.2 million. Net proceeds
available for investment by us are assumed to be invested in interest
earning assets that have a 20% risk-weighting.
11
<PAGE>
THE CONVERSION
Our board of directors and the OTS have approved the Plan subject to the
Plan's approval by our members at a special meeting of members, and subject to
the satisfaction of certain other conditions imposed by the OTS in its approval.
OTS approval, however, does not constitute a recommendation or endorsement of
the Plan by the OTS.
General
On January 15, 1997, our board of directors adopted a Plan of Conversion,
pursuant to which we will convert from a federally chartered mutual savings bank
to a federally chartered stock savings bank and become a wholly owned subsidiary
of SFB Bancorp. The Conversion will include adoption of the proposed Federal
Stock Charter and Bylaws which will authorize the issuance of capital stock by
us. Under the Plan, our capital stock is being sold to SFB Bancorp and the
common stock of SFB Bancorp is being offered to our customers and then to the
public. The Conversion will be accounted for at historical cost in a manner
similar to a pooling of interests.
The OTS has approved SFB Bancorp's application to become a savings and
loan holding company and to acquire all of our common stock to be issued in the
Conversion. Pursuant to such OTS approval, SFB Bancorp plans to retain 50% of
the net proceeds from the sale of shares of its common stock and to use the
remaining 50% to purchase all of the common stock we will issue in the
Conversion.
The shares are first being offered in a Subscription Offering to holders
of subscription rights. To the extent shares of common stock remain available
after the Subscription Offering, shares of common stock may be offered in a
Community Offering. The Community Offering, if any, may commence anytime
subsequent to the commencement of the Subscription Offering. Shares not
subscribed for in the Subscription and Community Offerings may be offered for
sale by SFB Bancorp in a Syndicated Community Offering. We have the right, in
our sole discretion, to accept or reject, in whole or in part, any orders to
purchase shares of the common stock received in the Community and Syndicated
Community Offering. See "-- Community Offering" and "-- Syndicated Community
Offering."
Shares of common stock in an amount equal to our pro forma market value as
a stock savings institution must be sold in order for the Conversion to become
effective. The Community Offering must be completed within 45 days after the
last day of the Subscription Offering period unless such period is extended by
us with the approval of the OTS. The Plan provides that the Conversion must be
completed within 24 months after the date of the approval of the Plan by our
members.
In the event that we are unable to complete the sale of common stock and
effect the Conversion within 45 days after the end of the Subscription Offering,
we may request an extension of the period by the OTS. No assurance can be given
that the extension would be granted if requested. Due to the volatile nature of
market conditions, no assurances can be given that our valuation would not
substantially change during any such extension. If the EVR of the shares must be
amended, no assurance can be given that such amended EVR would be approved by
the OTS. Therefore, it is possible that if the Conversion cannot be completed
within the requisite period, we may not be permitted to complete the Conversion.
A substantial delay caused by an extension of the period may also significantly
increase the expense of the Conversion. No sales of the shares may be completed
in the offering unless the Plan is approved by our members.
12
<PAGE>
The completion of the offering is subject to market conditions and other
factors beyond our control. No assurance can be given as to the length of time
following approval of the Plan at the meeting of our members that will be
required to complete the Community Offering or other sale of the shares being
offered in the Conversion. If delays are experienced, significant changes may
occur in our estimated pro forma market value upon Conversion together with
corresponding changes in the offering price and the net proceeds to be realized
by us from the sale of the shares. In the event the Conversion is terminated, we
would be required to charge all Conversion expenses against current income and
any funds collected by us in the offering would be promptly returned to each
potential investor, plus interest at the prescribed rate.
Effects of Conversion to StAock Form on Depositors and Borrowers of Security
Federal Savings Bank
Voting Rights. Currently in our mutual form, our depositor and borrower
members have voting rights and may vote for the election of directors. Following
the Conversion, depositors and borrower members will cease to have voting
rights.
Savings Accounts and Loans. The balances, terms and FDIC insurance
coverage of savings accounts will not be affected by the Conversion.
Furthermore, the amounts and terms of loans and obligations of the borrowers
under their individual contractual arrangements with us will not be affected by
the Conversion.
Tax Effects. We have received an opinion from our counsel, Malizia, Spidi,
Sloane & Fisch, P.C. on the federal tax consequences of the Conversion. The
opinion has been filed as an exhibit to the registration statement on which this
prospectus is a part and covers those federal tax matters that are material to
the transaction. The opinion provides, in part, that: (i) the Conversion will
qualify as a reorganization under Section 368(a)(1)(F) of the Code, and no gain
or loss will be recognized by us in either our mutual form or our stock form, or
by SFB Bancorp, by reason of the proposed Conversion; (ii) no gain or loss will
be recognized by us upon the receipt of money from SFB Bancorp for our stock,
and no gain or loss will be recognized by SFB Bancorp upon the receipt of money
for the shares; (iii) our assets in either our mutual or our stock form will
have the same basis before and after the Conversion; (iv) the holding period of
our assets will include the period during which the assets were held by us in
our mutual form prior to conversion; (v) no gain or loss will be recognized by
the Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Members upon the issuance to them of withdrawable savings accounts in us in the
stock form in the same dollar amount as their savings accounts in us in the
mutual form plus an interest in the liquidation account of us in the stock form
in exchange for their savings accounts in us in the mutual form; (vi) provided
that the amount to be paid for the shares pursuant to the subscription rights is
equal to the fair market value of such shares, no gain or loss will be
recognized by Eligible Account Holders, Supplemental Eligible Account Holders,
and Other Members under the Plan upon the distribution to them of
nontransferable subscription rights to purchase shares; (vii) the basis of each
account holder's savings accounts in us after the Conversion will be the same as
the basis of his savings accounts in us prior to the Conversion, decreased by
the fair market value of the nontransferable subscription rights received and
increased by the amount, if any, of gain recognized on the exchange; (viii) the
basis of each account holder's interest in the liquidation account will be zero;
(ix) the holding period of the common stock acquired through the exercise of
subscription rights shall begin on the date on which the subscription rights are
exercised; (x) we will succeed to and take into account the earnings and profits
or deficit in earnings and profits of us, in our mutual form, as of the date of
Conversion; (xi) immediately after Conversion, we will succeed to the bad debt
reserve accounts of the Savings Bank in its mutual form, and the bad debt
reserves will have the same character in our hands after Conversion as if no
distribution or transfer had occurred; and (xii) the
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creation of the liquidation account will have no effect on our taxable income,
deductions or addition to reserve for bad debts either in our mutual or stock
form.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part on
the assumption that the exercise price of the subscription rights to purchase
shares will be approximately equal to the fair market value of those shares at
the time of the completion of the proposed Conversion. With respect to the
subscription rights, we have received an opinion of Feldman which, based on
certain assumptions, concludes that the subscription rights to be received by
Eligible Account Holders and other eligible subscribers do not have any economic
value at the time of distribution or at the time the subscription rights are
exercised, whether or not a public offering takes place. Such opinion is based
on the fact that such rights are: (i) acquired by the recipients without payment
therefor, (ii) non-transferable, (iii) of short duration, and (iv) afford the
recipients the right only to purchase shares at a price equal to their estimated
fair market value, which will be the same price at which shares for which no
subscription right is received in the Subscription Offering will be offered in
the Community Offering. If the subscription rights granted to Eligible Account
Holders or other eligible subscribers are deemed to have an ascertainable value,
receipt of such rights would be taxable only to those Eligible Account Holders
or other eligible subscribers who exercise the subscription rights in an amount
equal to such value (either as a capital gain or ordinary income), and we could
recognize gain on such distribution.
We are also subject to Tennessee income taxes and have received an opinion
from Crisp Hughes & Co., L.L.P. that the Conversion will be treated for
Tennessee state tax purposes similar to the Conversion's treatment for federal
tax purposes.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane &
Fisch, P.C., Feldman and Crisp Hughes & Co., L.L.P. have no binding effect or
official status, and no assurance can be given that the conclusions reached in
any of those opinions would be sustained by a court if contested by the IRS or
the Tennessee tax authorities. Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members are encouraged to consult with their own tax
advisers as to the tax consequences in the event the subscription rights are
deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of our complete liquidation in
our present mutual form, each depositor is entitled to equal distribution of any
of our assets, pro rata to the value of his accounts, remaining after payment of
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
accounts was to the total value of all deposit accounts in us at the time of
liquidation.
Upon a complete liquidation after the Conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of ours. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his deposit
account plus accrued interest. A depositor would not have an interest in the
residual value of our assets above that amount, if any.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
$4,676,000. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he continues to maintain his deposit account with us, would be
entitled on a complete liquidation of us after Conversion, to an interest in the
liquidation account prior to any payment to stockholders. Each Eligible Account
Holder would have an initial interest in such liquidation account
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for each deposit account held in us on the qualifying date, December 31, 1995.
Each Supplemental Eligible Account Holder would have a similar interest as of
the qualifying date, March 31, 1997. The interest as to each deposit account
would be in the same proportion of the total liquidation account as the balance
of the deposit account on the qualifying dates was to the aggregate balance in
all the deposit accounts of Eligible Account Holders and Supplemental Eligible
Account Holders on such qualifying dates. However, if the amount in the deposit
account on any annual closing date of ours (December 31) is less than the amount
in such account on the respective qualifying dates, then the interest in this
special liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest would cease to exist if
such deposit account were closed. The interest in the special liquidation
account will never be increased despite any increase in the related deposit
account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we in our converted form are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
Subscription Rights and the Subscription Offering
In accordance with OTS regulations, non-transferable subscription rights
to purchase shares of the common stock have been granted to all persons and
entities entitled to purchase shares in the Subscription Offering under the
Plan. The number of shares which these parties may purchase will be determined,
in part, by the total number of shares to be issued and by the availability of
the shares for purchase under the categories set forth in the Plan. If the
Community Offering, as described below, extends beyond 45 days following the
completion of the Subscription Offering, subscribers will be resolicited.
Subscription priorities have been established for the allocation of stock to the
extent that shares are available after satisfaction of all subscriptions of all
persons having prior rights and subject to the maximum and minimum purchase
limitations set forth in the Plan and as described below under "-- Limitations
on Purchases of Shares." The following priorities have been established:
Category 1: Eligible Account Holders. Each Eligible Account Holder (which
collectively encompasses all names on a joint account) will receive
non-transferable subscription rights on a priority basis to purchase that number
of shares of common stock which is equal to the greater of 15,000 shares
($150,000), or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares to be issued by a fraction of
which the numerator is the amount of the qualifying deposit of the Eligible
Account Holder and the denominator is the total amount of qualifying deposits of
all Eligible Account Holders. If such allocation results in an oversubscription,
shares shall be allocated among subscribing Eligible Account Holders so as to
permit each such account holder, to the extent possible, to purchase the lesser
of 100 shares or the total amount of his subscription. Any shares not so
allocated shall be allocated among the subscribing Eligible Account Holders on
an equitable basis, related to the amounts of their respective qualifying
deposits as compared to the total qualifying deposits of all subscribing
Eligible Account Holders. Subscription rights received by officers and directors
in this category based on their increased deposits in us in the one-year period
preceding December 31, 1995, are subordinated to the subscription rights of
other Eligible Account Holders. See "-- Limitations on Purchases and Transfer of
Shares."
Category 2: Tax-Qualified Employee Benefit Plans. Our tax-qualified employee
benefit plans ("Employee Plans") have been granted subscription rights to
purchase up to 8% of the total shares issued in the Conversion. The ESOP is an
Employee Plan.
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The right of Employee Plans to subscribe for shares is subordinate to the
right of the Eligible Account Holders to subscribe for shares. However, in the
event the offering result in the issuance of shares above the maximum of the EVR
(i.e., more than 667,000 shares), the Employee Plans have a priority right to
fill their subscription (the ESOP, the only Employee Plan, currently intends to
purchase up to 8% of the common stock issued in the Conversion). The Employee
Plans may, however, determine to purchase some or all of the shares covered by
their subscriptions after the Conversion in the open market or, if approved by
the OTS, out of authorized but unissued shares in the event of an
oversubscription.
Category 3: Supplemental Eligible Account Holders. Each Supplemental Eligible
Account Holder (which collectively encompasses all names on a joint account) who
is not an Eligible Account Holder will receive non-transferable subscription
rights to purchase that number of shares which is equal to the greater of 15,000
shares ($150,000), or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
allocation made in this paragraph results in an oversubscription, shares shall
be allocated among subscribing Supplemental Eligible Account Holders so as to
permit each such account holder, to the extent possible, to purchase the lesser
of 100 shares or the total amount of his subscription. Any shares not so
allocated shall be allocated among the subscribing Supplemental Eligible Account
Holders on an equitable basis, related to the amounts of their respective
qualifying deposits as compared to the total qualifying deposits of all
subscribing Supplemental Eligible Account Holders. See "-- Limitation on
Purchases and Transfer of Shares."
The right of Supplemental Eligible Account Holders to subscribe for shares
is subordinate to the rights of the Eligible Account Holders and Employee Plans
to subscribe for shares.
Category 4: Other Members. Each Other Member (which collectively encompasses all
names on a joint account) who is not an Eligible Account Holder or Supplemental
Eligible Account Holder, will receive non-transferable subscription rights to
purchase up to 15,000 shares ($150,000) to the extent such shares are available
following subscriptions by Eligible Account Holders, Employee Plans, and
Supplemental Eligible Account Holders. In the event there are not enough shares
to fill the orders of the Other Members, the subscriptions of the Other Members
will be allocated so that each subscribing Other Member will be entitled to
purchase the lesser of 100 shares or the number of shares ordered. Any remaining
shares will be allocated among Other Members whose subscriptions remain
unsatisfied on a 100 share (or whatever lesser amount is available) per order
basis. See "-- Limitation on Purchases and Transfer of Shares."
Members in Non-Qualified States. We will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for the shares pursuant to the Plan reside. However, no
person will be offered or allowed to purchase any shares under the Plan if he
resides in a foreign country or in a state with respect to which any of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares under the Plan reside in that state or foreign country; (ii) the
granting of subscription rights or offer or sale of shares of common stock to
those persons would require either us, or our employees to register, under the
securities laws of that state or foreign country, as a broker or dealer or to
register or otherwise qualify our securities for sale in that state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise. No payments will be made in lieu of the granting
of subscription rights to any person.
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Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights.
Subscription rights may be exercised only by the person to whom they are granted
and only for his account. Each person subscribing for shares will be required to
certify that he is purchasing shares solely for his own account and has not
entered into an agreement or understanding regarding the sale or transfer of
those shares. The regulations also prohibit any person from offering or making
an announcement of an offer or intent to make an offer to purchase subscription
rights or shares of common stock prior to the completion of the Conversion.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
believed by us to involve the transfer of subscription rights.
Expiration Date. The Subscription Offering will expire at __________ p.m.,
Eastern Time, on __________ ____, 199____, (Expiration Date). Subscription
rights will become void if not exercised prior to the Expiration Date.
Community Offering
To the extent that shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of common
stock to certain members of the general public residing in Tennessee and certain
other states with a preference to natural persons residing in Carter County,
Tennessee under such terms and conditions as may be established by the board of
directors. In the Community Offering, no person may purchase more than 15,000
shares and no person, together with associates of and persons acting in concert
with such persons, may purchase more than 25,000 shares. In the event there are
not sufficient shares to fill all orders, the remaining shares would be
allocated in the same manner as shares would be allocated in the "Other Members"
category. See "Category 4: Other Members."
The Community Offering may commence at any time after the commencement of
the Subscription Offering. The Community Offering once commenced, may expire at
any time without notice but no later than __________ p.m., Eastern Time, on
__________ ____, 1997 unless extended with the permission of the OTS. Purchases
of shares in the Community Offering are subject to our right in our sole
discretion, to accept or reject such purchases in whole or in part either at the
time and receipt of an order, or as soon as practicable following the completion
of the Community Offering.
In the event Community Offering orders are not filled, funds received by
us will be promptly refunded with interest at our passbook rate. In the event an
insufficient number of shares are available to fill all orders in the Community
Offering, the available shares will be allocated on an equitable basis
determined by the board of directors, provided however that a preference will be
given to natural persons residing in Carter County, Tennessee. If regulatory
approval is received to extend the Community Offering beyond 45 days following
the completion of the Subscription Offering, subscribers will be resolicited.
Shares sold in the Community Offering will be sold at the Purchase Price.
Syndicated Community Offering
As part of the Community Offering, the Plan provides that, if necessary,
shares of common stock not purchased in the Subscription and Community Offerings
may be offered for sale to the general public
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in a Syndicated Community Offering through a syndicate of selected dealers to be
formed and managed by Trident. The Syndicated Community Offering, if any, will
be conducted to achieve a wide distribution of shares subject to our right to
reject orders in whole or in part in our sole discretion in the Syndicated
Community Offering. Neither Trident nor any registered broker-dealer shall have
any obligation to take or purchase any shares in the Syndicated Community
Offering.
Shares sold in the Syndicated Community Offering will be sold at the
Purchase Price. See "-- Stock Pricing."
No individual purchaser in the Syndicated Community Offering may purchase
more than 15,000 shares of common stock and no individual purchaser together
with any associate or group of persons acting in concert may purchase more than
25,000 shares. SFB Bancorp is directly responsible for the payment of selling
commissions to other NASD firms and licensed brokers participating in the
Syndicated Community Offering. Other firms may participate under a selected
dealers arrangement. Selected dealers typically receive a fee of up to 5% of the
sales price of shares sold by the selected dealer in the Syndicated Community
Offering, and Trident's management fee will be unchanged by the number of shares
sold, if any, by Selected Dealers. See "The Conversion -- Marketing
Arrangements."
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by SFB Bancorp with the approval
of the OTS and subscribers are resolicited.
Ordering and Receiving Shares
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an original order form. Persons ordering shares in the
Subscription Offering must deliver by mail or in person a properly completed and
executed original order form to us prior to the Expiration Date. Order forms
must be accompanied by full payment for all shares ordered. See "-- Payment for
Shares." Subscription rights under the Plan will expire on the Expiration Date,
whether or not we have been able to locate each person entitled to subscription
rights. Once submitted, subscription orders cannot be revoked without our
consent unless the Conversion is not completed within 45 days of the Expiration
Date.
Persons and entities not purchasing shares in the Subscription Offering
may, subject to availability, purchase shares in the Community Offering by
returning to us a completed and properly executed order form along with full
payment for the shares ordered.
In the event an order form (i) is not delivered and is returned to us by
the United States Postal Service or we are unable to locate the addressee, (ii)
is not received or is received after the Expiration Date, (iii) is defectively
completed or executed, or (iv) is not accompanied by full payment for the shares
subscribed for (including instances where a savings account or certificate
balance from which withdrawal is authorized is insufficient to fund the amount
of such required payment), the subscription rights for the person to whom such
rights have been granted will lapse as though that person failed to return the
completed order form within the time period specified. We may, but will not be
required to, waive any irregularity on any order form or require the submission
of corrected order forms or the remittance of full payment for subscribed shares
by such date as we specify. The waiver of an irregularity on an order form in no
way obligates us to waive any other irregularity on that or any other order
form. Waivers will be considered on a case by case basis. Photocopies of order
forms, payments from private third parties, or electronic transfers of funds
will not be accepted. Our interpretation of the terms and
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conditions of the Plan and of the acceptability of the order forms will be
final. We have the right to investigate any irregularity on any order form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
Payment for Shares. Payment for shares of common stock may be made (i) in
cash, if delivered in person, (ii) by check or money order, or (iii) by
authorization of withdrawal from savings accounts (including certificates of
deposit) maintained with us or (iv) by IRA held by us. Appropriate means by
which such withdrawals may be authorized are provided in the order form. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be used by the subscriber for any purpose other than to purchase the shares.
Where payment has been authorized to be made through withdrawal from a savings
account, the sum authorized for withdrawal will continue to earn interest at the
contract rate until the Conversion has been completed or terminated. Interest
penalties for early withdrawal applicable to certificate accounts will not apply
to withdrawals authorized for the purchase of shares; however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook savings account rate subsequent to
the withdrawal. Payments made in cash or by check or money order, will be placed
in a segregated savings account and interest will be paid by us at our passbook
savings account rate from the date payment is received until the Conversion is
completed or terminated. An executed order form, once received by us, may not be
modified, amended, or rescinded without our consent, unless the Conversion is
not completed within 45 days after the conclusion of the Subscription Offering,
in which event subscribers may be given an opportunity to increase, decrease, or
rescind their order. In the event that the Conversion is not consummated, all
funds submitted pursuant to the offering will be refunded promptly with
interest.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares in the offering, provided that such IRAs are not maintained on deposit
with us. Persons with IRAs maintained with us must have their accounts
transferred to an unaffiliated institution or broker to purchase shares in the
offering. The Stock Information can assist you in transferring your
self-directed IRA. Because of the paperwork involved, persons owning IRAs with
us who wish to use their IRA account to purchase stock in the Offering, must
contact the Stock Information Center no later than May ____, 1997.
Trident may enter into agreements with broker-dealers (Selected Dealers)
to assist in the sale of the shares in the Syndicated Community Offering. See
also "-- Plan of Distribution" and "-- Marketing Arrangements." No orders may be
placed or filled by or for a Selected Dealer during the Subscription Offering.
After the close of the Subscription Offering, Trident will instruct Selected
Dealers as to the number of shares to be allocated to each Selected Dealer. Only
after the close of the Subscription Offering and upon allocation of shares to
Selected Dealers may Selected Dealers take orders from their customers. During
the Subscription and Community Offerings, Selected Dealers may only solicit
indications of interest from their customers to place orders with SFB Bancorp as
of a certain date ("Order Date") for the purchase of shares. When and if Trident
and we believe that sufficient orders have not been received in the Subscription
and the Community Offerings to consummate the Conversion, Trident will request,
as of the Order Date, Selected Dealers to submit orders to purchase shares for
which they have previously received indications of interest from their
customers. Selected Dealers will send confirmations of the orders to their
customers on the next business day after the Order Date. Selected
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Dealers will debit the accounts of their customers on the "Settlement Date". The
Settlement Date will be three business days after the Order Date. Customers who
authorize Selected Dealers to debit their brokerage accounts are required to
have the funds for payment in their account by the Settlement Date. On the
Settlement Date, Selected Dealers will remit funds to the account established by
us for each Selected Dealer. Each customer's funds so forwarded to us along with
all other accounts held in the same title, will be insured by the FDIC up to
$100,000. After payment has been received by us from Selected Dealers, funds
will earn interest at our passbook savings account rate until the consummation
of the Conversion. Funds will be returned promptly, with interest, in the event
the Conversion is not consummated as described above.
However, Selected Dealers who do not hold or receive funds for customers
or carry accounts of, or for, customers will (1) instruct their customers who
wish to subscribe in the offering to make their checks payable to us and (2)
will transmit customer checks directly to us by noon of the next business day
after receipt by such Selected Dealer.
The ESOP may subscribe for shares by submitting its order form along with
evidence of a loan commitment from a financial institution or SFB Bancorp for
the purchase of the shares during the Subscription Offering and by making
payment for shares on the date of completion of the Conversion.
Federal regulations prohibit us from lending funds or extending credit to
any person to purchase shares in the Conversion.
Delivery of Stock Certificates. Certificates representing shares of common
stock issued in the Conversion will be mailed to the person(s) at the address
noted on the order form, as soon as practicable following consummation of the
Conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
Plan of Distribution
Materials for the offering have been distributed to eligible subscribers
by mail. Additional copies are available at our main office. Our officers may be
available to answer questions about the Conversion. Responses to questions about
us will be limited to the information contained in this document. Officers will
not be authorized to render investment advice. All subscribers for the shares
being offered will be instructed to send payment directly to us. The funds will
be held in a segregated special escrow account and will not be released until
the closing of the Conversion or its termination.
Marketing Arrangements
Trident has been engaged as our financial advisor in connection with the
offering. Trident has agreed to exercise its best efforts to assist us in the
sale of the shares in the offering. As compensation, Trident will receive a
commission equal to 1.85% of the aggregate dollar amount of capital stock sold
to investors who reside in Carter County, Tennessee, a commission equal to 1.50%
on sales to investors residing in contiguous Tennessee counties, a commission
equal to 1.15% on sales to investors residing in other Tennessee counties and a
commission equal to 0.95% on sales to investors residing outside the state of
Tennessee, except no commissions shall be payable on shares purchased by
officers, directors, employees or their associates or employee benefit plans,
and commissions shall be capped at the midpoint of the Estimated Valuation Range
($5,800,000). If shares are offered for sale in a Syndicated Community Offering,
Trident will organize and manage the syndicate of selected broker-dealers for no
additional fee.
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The commission to be paid to any such selected broker-dealers will be at the
discretion of the management of SFB Bancorp and is not expected to exceed 5%.
Fees paid to Trident and to any other broker-dealer may be deemed to be
underwriting fees, and Trident and such broker-dealers may be deemed to be
underwriters. We have agreed to reimburse Trident for allocable expenses,
including legal fees, up to $31,000 in the aggregate. Also, we have agreed to
indemnify Trident for reasonable costs and expenses in connection with certain
claims or liabilities which might be asserted against Trident. This
indemnification covers the investigation, preparation of defense and defense of
any action, proceeding or claim relating to misrepresentation or breach of
warranty of the written agreement among Trident and us or the omission or
alleged omission of a material fact required to be stated or necessary in the
prospectus or other documents.
The shares will be offered principally by the distribution of this
document and through activities conducted at a Stock Information Center located
at our main office. The Stock Information Center is expected to operate during
our normal business hours throughout the offering. A registered representative
employed by Trident will be working at, and supervising the operation of, the
Stock Information Center. Trident will assist us in responding to questions
regarding the Conversion and the offering and processing order forms. Our
personnel will be present in the Stock Information Center to assist Trident with
clerical matters and to answer questions related solely to our business.
Stock Pricing
Feldman, an independent economic consulting and appraisal firm, which is
experienced in the evaluation and appraisal of business entities, including
savings institutions involved in the conversion process has been retained by us
to prepare an appraisal of our estimated pro forma market value. Feldman will
receive a fee of $12,500 for preparing the appraisal and its assistance in
connection with the preparation of a business plan and will be reimbursed up to
$2,500 for reasonable out-of-pocket expenses. We have agreed to indemnify
Feldman under certain circumstances against liabilities and expenses arising out
of or based on any misstatement or untrue statement of a material fact contained
in the information supplied by us to Feldman.
The appraisal was prepared by Feldman in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors including, but not limited to, our financial
condition and operating trends, the competitive environment within which we
operate, operating trends of certain savings institutions and savings and loan
holding companies, relevant economic conditions, both nationally and in the
state of Tennessee which affect the operations of savings institutions, and
stock market values of certain savings institutions. In addition, Feldman has
advised us that it has considered the effect of the additional capital raised by
the sale of the shares on our estimated aggregate pro forma market value.
On the basis of the above, Feldman has determined, in its opinion, that as
of March 14, 1997 our estimated aggregate pro forma market value was $5,800,000.
OTS regulations require, however, that the appraiser establish a range of value
for the stock to allow for fluctuations in the aggregate value of the stock due
to changing market conditions and other factors. Accordingly, Feldman has
established a range of value from $4,930,000, to $6,670,000 for the offering
(the Estimated Valuation Range or EVR). The Estimated Valuation Range will be
updated prior to consummation of the Conversion and the Estimated Valuation
Range may increase to $7,670,000.
The board of directors has reviewed the independent appraisal, including
the stated methodology of the independent appraiser and the assumptions used in
the preparation of the independent appraisal.
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The board of directors is relying upon the expertise, experience and
independence of the appraiser and is not qualified to determine the
appropriateness of the assumptions.
In order for stock sales to take place Feldman must confirm to the OTS
that, to the best of Feldman's knowledge and judgment, nothing of a material
nature has occurred which would cause Feldman to conclude that the Purchase
Price on an aggregate basis was incompatible with Feldman's estimate of our pro
forma market value of us in converted form at the time of the sale. If, however,
facts do not justify such a statement, an amended Estimated Valuation Range may
be established.
The appraisal is not a recommendation of any kind as to the advisability
of purchasing these shares. In preparing the appraisal, Feldman has relied upon
and assumed the accuracy and completeness of financial and statistical
information provided by us. Feldman did not independently verify the financial
statements and other information provided by us, nor did Feldman value
independently our assets and liabilities. The appraisal considers us only as a
going concern and should not be considered as our liquidation value. Moreover,
because the appraisal is based upon estimates and projections of a number of
matters which are subject to change, the market price of the common stock could
decline below $10.00.
Change in Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the completion
of the Subscription and Community Offerings, we may significantly increase or
decrease the number of shares to be issued in the Conversion. In the event of an
increase in the valuation, we may increase the total number of shares to be
issued in the Conversion. An increase in the total number of shares to be issued
in the Conversion would decrease a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and increase the pro forma
net income and net worth (book value) on an aggregate basis. In the event of a
material reduction in the valuation, we may decrease the number of shares to be
issued to reflect the reduced valuation. A decrease in the number of shares to
be issued in the Conversion would increase a subscriber's percentage ownership
interest and the pro forma net worth (book value) per share and decrease pro
forma net income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the Conversion
results in an offering which is either less than $4,930,000 or more than
$6,670,000. Any adjustments to the EVR as a result of changes in market and
financial conditions or in order to fill the order of our employee stock
ownership plan would be subject to OTS review and may increase the maximum of
the EVR to $7,670,000.
Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional limitations to be placed upon the
purchase of the shares in the Conversion. The minimum purchase is 25 shares and
the maximum purchase for any individual person, or group of persons ordering
through a single account, is 15,000 shares. No persons, together with
associates, or group of persons acting in concert, may purchase more than 25,000
shares except for the Employee Plans which may purchase up to 8% of the shares
sold. The OTS regulations governing the Conversion provide that officers and
directors and their associates may not purchase, in the aggregate, more than 35%
of the shares issued pursuant to the Conversion.
Depending on market conditions and the results of the offering, the board
of directors may increase or decrease any of the purchase limitations without
the approval of our members and without
22
<PAGE>
resoliciting subscribers. If the maximum purchase limitation is increased,
persons who ordered the maximum amount will be given the first opportunity to
increase their orders. In doing so the preference categories in the offerings
will be followed.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the EVR of up to 15% (the "Adjusted Maximum"),
the additional shares will be allocated in the following order of priority: (i)
to fill the Employee Plans' subscription of up to 8% of the Adjusted Maximum
number of shares (the ESOP currently intends to subscribe for 8%); (ii) in the
event that there is an oversubscription by Eligible Account Holders, to fill
unfulfilled subscriptions of Eligible Account Holders exclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfulfilled subscriptions to Supplemental
Eligible Account Holders exclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unfulfilled
subscriptions of Other Members exclusive of the Adjusted Maximum; and (v) to
fill unfulfilled subscriptions in the Community Offering to the extent possible,
exclusive of the Adjusted Maximum.
The term "associate" of a person means (i) any corporation or organization
(other than us or a majority-owned subsidiary of ours) of which such person is
an officer or partner or is, directly or indirectly, the beneficial owner of 10%
or more of any class of equity securities, (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person serves as director or in a similar fiduciary capacity (excluding
tax-qualified employee stock benefit plans), and (iii) any relative or spouse of
such person or any relative of such spouse, who has the same home as such person
or who is a director or officer of us, or any of our subsidiaries. For example,
a corporation of which a person serves as an officer would be an associate of
that person, and therefore all shares purchased by that corporation would be
included with the number of shares which that person individually could purchase
under the above limitations.
The term "officer" may include our chairman of the board, president, vice
presidents in charge of principal business functions, Secretary and Treasurer
and any other person performing similar functions. All references herein to an
officer shall have the same meaning as used for an officer in the Plan.
The term "residing," as used in relation to the preference afforded
natural persons in Carter County, Tennessee, means any natural person who
occupies a dwelling within Carter County, has an intention to remain within
Carter County (manifested by establishing a physical, on-going, non-transitory
presence within Carter County), and continues to reside in Carter County at the
time of the offering. We may utilize deposit or loan records or such other
evidence provided to us to make the determination whether a person is residing
in Carter County. Such determination shall be in our sole discretion.
To order shares in the Conversion, persons must certify that their
purchase does not conflict with the purchase limitations. In the event that the
purchase limitations are violated by any person (including any associate or
group of persons affiliated or otherwise acting in concert with such persons),
we will have the right to purchase from that person at $10.00 per share all
shares acquired by that person in excess of that purchase limitations. If the
excess shares have been sold by that person, we may recover the profit from the
sale of the shares by that person. We may assign our right either to purchase
the excess shares or to recover the profits from their sale.
Shares of common stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by our directors and officers. For
certain restrictions on the shares purchased by
23
<PAGE>
directors and officers, see " -- Restrictions on Sales and Purchases of Shares
by Directors and Officers." In addition, under guidelines of the NASD, members
of the NASD and their associates are subject to certain restrictions on the
transfer of securities purchased in accordance with subscription rights and to
certain reporting requirements upon purchase of such securities.
Restrictions on Repurchase of Shares
Generally, during the first year following the Conversion, SFB Bancorp may
not repurchase its shares and during the second and third years following the
Conversion, SFB Bancorp may repurchase five percent of the outstanding shares
provided they are purchased in open-market transactions. Repurchases must not
cause us to become undercapitalized and at least 10 days prior notice of the
repurchase must be provided to the OTS. The OTS may disapprove a repurchase
program upon a determination that (1) the repurchase program would adversely
affect our financial condition, (2) the information submitted is insufficient
upon which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the OTS may grant special permission to repurchase shares after six
months following the Conversion and to repurchase more than five percent during
each of the second and third years. In addition, SEC rules also govern the
method, time, price, and number of shares of common stock that may be
repurchased by SFB Bancorp and affiliated purchasers. If, in the future, the
rules and regulations regarding the repurchase of stock are liberalized, SFB
Bancorp may utilize the rules and regulations then in effect.
Restrictions on Sales and Purchases of Shares by Directors and Officers
Shares purchased by directors and officers of SFB Bancorp may not be sold
for one year following completion of the Conversion. An exception to this rule
is a disposition of shares in the event of the death of the director or officer.
Any shares issued to directors and officers as a stock dividend, stock split, or
otherwise with respect to restricted stock shall be subject to the same
restrictions.
For three years following the Conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
Interpretation and Amendment of the Plan
We have the authority to interpret and amend the Plan. Our interpretations
are final. Amendments to the Plan after the receipt of member approval will not
need further member approval unless required by the OTS.
Conditions and Termination
Completion of the Conversion requires (i) the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
24
<PAGE>
Other
All statements made in this document are hereby qualified by the contents
of the Plan of Conversion, the material terms of which are set forth herein. The
Plan of Conversion is attached to the Proxy Statement. Copies of the Plan are
available from us and we should be consulted for further information. Adoption
of the Plan by our members authorizes us to interpret, amend or terminate the
Plan.
25
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Income
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1996
---- ----
Interest income:
<S> <C> <C>
Loans $ 2,782 $ 2,940
Mortgage-backed securities 441 379
Investments 95 90
Interest earning deposits 83 65
-------- --------
Total interest income 3,401 3,474
-------- --------
Interest expense:
Deposits 1,968 1,975
Federal Home Loan Bank advances 13 2
-------- --------
Total interest expense 1,981 1,977
-------- --------
Net interest income 1,420 1,497
Provision for loan losses 30 30
-------- --------
Net interest income after provision
for loan losses 1,390 1,467
-------- --------
Noninterest income:
Loan fees and service charges 139 145
Security losses - (2)
Other 13 13
-------- --------
Total noninterest income 152 156
-------- --------
Noninterest expenses:
Compensation 456 448
Employee benefits 99 59
Net occupancy expense 72 73
Deposit insurance premiums 91 357
Data processing 63 72
Other 176 195
-------- --------
Total noninterest expenses 957 1,204
-------- --------
Income before income taxes 585 419
Income tax expense 221 157
-------- --------
Net income $ 364 $ 262
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to assist you in understanding our financial condition
and results of operations. The information in this section should also be read
with our Consolidated Financial Statements and Notes to the Consolidated
Financial Statements elsewhere in this document.
SFB Bancorp has recently been formed and accordingly, has no results of
operations. The following discussion relates only to our financial condition and
results of operations and our wholly owned subsidiary.
Our results of operations depend primarily on net interest income, which
is determined by (i) the difference between rates of interest we earn on our
interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest -earning
assets and interest-bearing liabilities. Our results of operations are also
affected by non-interest income, including, primarily, income from customer
deposit account service charges, loan servicing fee income, gains and losses
from the sale of investments and mortgage-backed securities and non-interest
expense, including, primarily, compensation and employee benefits, federal
deposit insurance premiums, office occupancy costs, and data processing cost.
Our results of operations also are affected significantly by general and
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities, which events
are beyond our control.
Asset/Liability Management
^ Our assets and liabilities may be analyzed by examining the extent to
which our assets and liabilities are interest rate sensitive and by monitoring
the expected effects of interest rate changes on our net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period, if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by pursuing certain
strategies designed to decrease the vulnerability of our earnings to material
and prolonged changes in interest rates.
Because of the lack of customer demand for adjustable rate loans in our
market area, we primarily originate fixed-rate real estate loans ^. To manage
the interest rate risk of this type of loan portfolio, we ^ limit maturities of
fixed-rate loans to no more than 15 years and maintain a portfolio of liquid
assets. Maintaining ^ liquid assets tends to reduce potential net income because
liquid assets usually provide a lower yield than ^ less liquid^ assets. At
December 31, 1996, the average weighted term to maturity of our mortgage loan
portfolio was slightly less than 12 years and the average weighted term of our
deposits was slightly less than 6 months.
27
<PAGE>
Net Portfolio Value
In recent years, we have measured our interest rate sensitivity by
computing the "gap" between the assets and liabilities which were expected to
mature or reprice within certain time periods, based on assumptions regarding
loan prepayment and deposit decay rates formerly provided by the OTS. However,
the OTS now requires the computation of amounts by which the net present value
of an institution's cash flow from assets, liabilities and off balance sheet
items (the institution's net portfolio value or "NPV") would change in the event
of a range of assumed changes in market interest rates. These computations
estimate the effect on an institution's NPV from instantaneous and permanent 1%
to 4% (100 to 400 basis points) increases and decreases in market interest
rates. ^ The following table presents our NPV at December 31, 1996, as
calculated by the OTS, which is based upon quarterly information that we
voluntarily provided to the OTS.
Percentage Change in Net Portfolio Value
----------------------------------------
Changes Board
in Market Projected Policy
Interest Rates Change (1) Limit (2)
-------------- ---------- ---------
(basis points)
+ 400 (68) % (85)%
+ 300 (52) (65)
+ 200 (34) (45)
+ 100 (17) (25)
0
- 100 13 (25)
- 200 19 (45)
- 300 22 (65)
- 400 29 (85)
- --------------------
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(2) Limits are established by our Board of Directors.
These calculations indicate that we would be deemed to have a more than
normal level of interest rate risk under applicable regulatory capital
requirements. See "Regulations."
While we cannot predict future interest rates or their effects on our NPV
or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have
28
<PAGE>
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. In the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
making calculations set forth above. Additionally, an increased credit risk may
result as the ability of many borrowers to service their debt may decrease in
the event of an interest rate increase.
The board of directors ^ reviews our asset and liability policies. The
board of directors meets quarterly to review interest rate risk and trends, as
well as liquidity and capital ratios and requirements. Management ^ administers
the policies and determinations of the board of directors with respect to our
asset and liability goals and strategies. Management expects that our asset and
liability policies and strategies will continue as described above so long as
competitive and regulatory conditions in the financial institution industry and
market interest rates continue as they have in recent years.
Financial Condition
Total consolidated assets increased by $1.1 million or 2.4% from $45.5
million at December 31, 1995 to $46.6 million at December 31, 1996. Total
liabilities increased $847,000 or 2.1% at December 31, 1996 as compared to
December 31, 1995. The increase in assets for the period was primarily
attributable to the growth in our loan portfolio of $4.0 million which was the
result of increased loan demand generally due to economic growth in our ^
secondary market ^ area. Loan growth was funded mainly from cash and
interest-earning deposits of approximately $876,000, net maturities and
repayments on investment and mortgage-backed securities of approximately $1.7
million and Federal Home Loan Bank advances of $800,000.
Results Of Operations for the Years Ending December 31, 1995 and 1996
Net Income. Net income decreased $102,000 or 28.0% from $364,000 for 1995
to $262,000 for 1996. The decrease was primarily the result of the recognition
of the one-time SAIF special insurance assessment in the amount of $164,000
(after taxes) which was partially offset by an increase in net interest income
of $77,000. Excluding the SAIF special assessment, net income would have
increased $62,000 or 17% from 1995.
Net Interest Income. Net interest income is the most significant component
of our income from operations. Net interest income is the difference between
interest we receive on our interest-earning assets (primarily loans, investment
and mortgage-backed securities) and interest we pay on our interest-bearing
liabilities (primarily deposits and borrowed funds). Net interest income depends
on the volume of and rates earned on interest-earning assets and the volume of
and rates paid on interest-bearing liabilities.
The following table sets forth a summary of average balances of assets and
liabilities with corresponding interest income and interest expense as well as
average yield and cost information. Average balances are derived from monthly
balances, however, we do not believe the use of month-end balances has caused
any material difference in the information presented. There have been no tax
equivalent adjustments made to the yields.
29
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31, At December 31,
--------------------------------------------------------------- ----------------------
1995 1996 1996
----------------------------- -------------------------------- ----------------------
Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance ^Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -----------
Interest-earning assets: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1).............. $32,388 $2,782 8.59% $34,997 $2,940 8.40% $36,808 8.53
Investment securities ........... 1,419 71 5.00 1,353 64 4.73 1,312 5.72
Interest-earning deposits........ 1,729 83 4.80 1,267 65 5.13 1,018 5.00
Federal Home Loan Bank stock..... 355 24 6.76 380 26 6.84 394 7.00
Mortgage-backed securities....... 7,627 441 5.78 6,558 379 5.78 5,768 5.75
------ ----- ----- ------ --------
Total interest-earning assets...... 43,518 3,401 7.81 44,555 3,474 7.80 45,300 8.00
----- -----
Non-interest-earning assets....... 1,336 1,327 1,279
------ ------ -------
Total assets $44,854 $45,882 $ 46,579
====== ====== =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 8,842 248 2.80 $ 9,136 232 2.54 9,111 2.52
Certificates of deposit.......... 31,085 1,720 5.53 31,391 1,743 5.55 31,654 5.82
Short-term borrowings............ 158 13 8.23 36 2 5.56 800 5.85
------ ----- ----- ----- ------
Total interest-bearing liabilities. 40,085 1,981 4.94 40,563 1,977 4.88 41,565 5.10
----- -----
Non-interest bearing liabilities... 527 695 338
------ ------ ------
Total Liabilities.................. 40,612 41,258 41,903
------ ------ ------
Total equity....................... 4,242 4,624 4,676
------ ----- ------
Total liabilities and retained
earnings......................... $44,854 $45,882 $46,579
====== ====== ======
Net interest income................ $1,420 $1,497
===== =====
Interest rate spread (2)........... 2.87% 2.92% 2.90%
Net yield on interest-earning
assets(3)........................ 3.26% 3.36% ^--
Ratio of average interest earning
assets to average interest-
bearing liabilities.............. 108.56% 109.84% 108.99%
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
30
<PAGE>
The table below sets forth information regarding changes in our interest
income and interest expense for the periods indicated. For each category of our
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate); (ii) changes in rate (changes in rate multiplied by old
volume); (iii) changes in rate-volume (changes in rate multiplied by the change
in volume).^
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1995 vs. 1994 1996 vs. 1995
------------------------------------ ------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------ ------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable........ $ 80 $(110) $ (4) $(34) $224 $ (62) $ (4) $ 158
Mortgage-backed securities (67) 34 (4) (37) (62) - - (62)
Investment securities... (7) 2 (1) (6) (2) (3) - (5)
Other interest-earning assets 100 ^(5) (30) 65 (22) 6 (2) (18)
--- ---- --- --- --- ---- ----- ----
Total interest-earning asset$106 $ (79) $ (39) $(12) $138 $ (59) $ (6) $ 73
=== ==== ==== === ==== ==== ==== ====
Interest expense:
Savings accounts........ $ 7 $ 441 $ 4 $452 $ 30 $ (24) $ 1 $ 7
Other liabilities....... (8) 15 (8) (1) (8) (4) 1 (11)
--- ---- ---- --- --- ---- ---- ----
Total interest-bearing
liabilities......... $ (1) $ 456 $ (4) $451 $ 22 $ (28) $ 2 $ (4)
=== ==== ==== === === ==== ==== ====
Net change in interest income $107 $(535) $ (35) $(463) $116 $ (31) $ (8) $ 77
=== ==== ==== ==== === ==== ==== ====
</TABLE>
Our net interest income increased $77,000 or 5.4% to $1.5 million in 1996
compared to $1.4 million in 1995. The increase was due primarily to the growth
of average interest-earning assets from $43.5 million in 1995 to $44.6 million
in 1996. In addition, our interest rate spread increased from 2.87% in 1995 to
2.92% in 1996 and our net interest margin increased from 3.26% in 1995 to 3.36%
for 1996.
The increase in our average interest-earning assets of $1.0 million
reflects an increase of $2.6 million in average loans, a decrease of $1.0
million in average mortgage-backed securities and a decrease of $462,000 in
average interest-earning deposits.
Our interest rate spread and net interest margin increased in 1996
compared to 1995. This was due to the decrease in the yield on average
interest-earning assets from ^ 7.81% in 1995 to 7.80% in 1996 ^ being exceeded
by the decrease in the interest cost of average interest bearing liabilities
from 4.94% in 1995 to ^ 4.88% in 1996.
31
<PAGE>
The yield on our average interest-earning assets decreased in 1996 due to
a decline in the yield on loans and investment securities. As general market
rates of interest were relatively stable during 1995 and 1996, the decline in
the yield on our loans in 1996 reflected the impact of competition for new loan
originations. The decline in yield on our investment securities reflected the
investment of the proceeds received from the maturities of those securities at
lower interest rates.
The decrease in the cost of our average interest-bearing liabilities was
due primarily to decreases in the cost of interest-bearing demand deposits from
2.80% in 1995 to 2.54% in 1996 and short-term borrowings from 8.33% in 1995 to
5.56% in 1996 offset partially by an increase in the cost of certificates of
deposit from 5.53% in 1995 to 5.55% in 1996 and an increase in the average
balance of $306,000. The lower cost of demand deposits reflects our reduction of
deposit rates to match the decrease in interest rates during 1996 and the
decrease in cost of borrowings reflects the reduction in average advances from
the Federal Home Loan Bank and the decrease in interest rates.
Provision for Loan Losses. Our provision for loan losses for both 1995 and
1996 was $30,000. The $30,000 provision for loan losses for both years was due
to our assessment of market and economic conditions. Our loan portfolio consists
primarily of one-to four family mortgage loans and we have experienced little
change in the composition of our loan portfolio. In addition, we have
experienced minimal charge-offs in the past two years.
Historically, we have emphasized our loss experience over other factors in
establishing the provision for loan losses. We review the allowance for loan
losses in relation to ^(i) our past loan loss experience, (ii) known and
inherent risks in our portfolio, (iii) adverse situations that may affect the
borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions. The allowance for loan losses
to non-performing loans ^, our "coverage ratio" indicates that we have covered
any losses that we might incur in the near future. At December 31, 1995 and ^
1996, our allowance for loan losses of $279,000 and $304,000, respectively,
covered our non-performing loans of $207,000 and $371,000, respectively, by 135%
and 98%. See Business of Security Federal Savings Bank, " --Non-Performing
Assets and Analysis for Loan Losses."
Non-Interest Income. Our non-interest income increased approximately
$4,000 in 1996 as compared to 1995. ^ Since we increased our loan originations
and increased our service charge rates, loan fees and service charges on
customers' accounts increased by approximately $6,000 ^. Our non-interest income
was offset by a $2,000 loss incurred on the sale of mortgage-backed securities.
Non-Interest Expense. Our non-interest expense increased by $247,000 or
25.8% from $957,000 for 1995 to $1.2 million for 1996. The increase was
primarily attributable to the one-time special SAIF assessment of $264,000.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of October 1, 1996. Based on our
deposits as of March 31, 1995, the date for measuring the amount of the special
assessment pursuant to the Act, our special assessment was $264,000. Due to the
recapitalization of the SAIF, we expect lower premiums for deposit insurance in
future periods. See "Regulation - Savings Institution - Federal Deposit
Insurance Corporation."
Pursuant to the Act, we will pay, in addition to our normal deposit
insurance premium as a member of the SAIF, an annual amount equal to
approximately 6.4 basis points of outstanding SAIF deposits toward the
retirement of the Financing Corporation Bonds ("Fico Bonds") issued in the
1980's to assist in the recovery of the savings and loan industry. Members of
the Bank Insurance Fund ("BIF"),
32
<PAGE>
by contrast, will pay, in addition to their normal deposit insurance premium,
approximately 1.3 basis points. Beginning no later than January 1, 2000, the
rate paid to retire the Fico Bonds will be equal for members of the BIF and the
SAIF. The Act also provides for the merging of the BIF and the SAIF by January
1, 1999 provided there are no financial institutions still chartered as savings
associations at that time. Should the insurance funds be merged before January
1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal. See also "Regulation - Savings Institution Regulation- Insurance
of Deposit Accounts."
In addition, our employee benefits decreased by $40,000 in 1996 compared
to 1995. We changed group insurance carriers which reduced this expense by
approximately $18,000. Retirement plan expense decreased $17,000 due to
available plan forfeitures which could be used to fund a portion of our
contribution in 1996. We do not expect to recognize any plan forfeitures for the
fiscal year ending 1997. However, if such plan forfeitures become available, we
intend to use such forfeitures to fund a portion of our contributions in 1997.
However, if we do not recognize any plan forfeitures, retirement plan expense in
1997 would increase by approximately $17,000.
Income Tax Expense. Our income tax expense for 1996 was $157,000 compared
to $221,000 for 1995. The $64,000 decrease was the result of pre-tax income
decreasing by $166,000, which was primarily the result of the SAIF special
assessment.
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time depending upon
economic conditions and deposit flows, is based upon a percentage of our
deposits and short-term borrowings. The required ratio currently is 5.0% and our
liquidity ratio average was 9.52% and 5.08% at December 31, 1995 and 1996,
respectively. The decrease in our average liquidity rate at December 31, 1996
was the result of the one-time SAIF assessment and the increase in loan growth.
It is our belief that upon completion of the Conversion our liquidity ratio will
increase.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of
Cincinnati. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are predicable sources of funds, deposit
flows and loan prepayments are greatly influenced by the general level of
interest rates, economic conditions and competition. We use our liquidity
resources principally to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, to maintain liquidity, and to meet operating
expenses.
Net cash provided by our operating activities (the cash effects of
transactions that enter into our determination of net income -- e.g., non-cash
items, depreciation, provision for loan losses, FHLB stock dividends) for the
year ended December 31, 1996 was $338,000 as compared to $559,000 for the year
ended December 31, 1995.
Net cash used in our investing activities cash (i.e., cash receipts,
primarily from our investment securities and mortgage-backed securities
portfolios and our loan portfolio) for the year ended December 31, 1996 totalled
$2.6 million, an increase of $3.0 million from December 31, 1995. The increase
was primarily attributable to our use of $3.0 million in cash to fund the
increase in loan originations of $3.5 million.
33
<PAGE>
Net cash provided by our financing activities (i.e., cash receipts
primarily from net increases in deposits and net FHLB advances) for 1996
totalled $899,000. This is a result of a net increase in deposits of $128,000,
an increase in net advances from the FHLB of $800,000 offset by a decrease in
advance payments by borrowers of $29,000. Approximately $500,000 of net advances
from the FHLB were used to fund the loan growth.
Net cash provided by our financing activities for 1995 totalled $653,000.
This was the result of a net increase in deposits of $1.3 million, an increase
in advance payments by borrowers of $17,000 offset by repayments of FHLB
advances of $700,000. The increase in deposits during 1995 was the result of our
continued solicitation of deposits supplemented by a special limited time
offering of certificates of deposits, at higher rates offered by our competitors
in our market area. FHLB advances are short-term loans with no prepayment
penalty. As funds become available, we pay off the advances before the maturity
date of the advances.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Further, the disparity in Fico
Bond interest payments as described herein could result in us losing deposits to
BIF members that have lower costs of funds and therefore are able to pay higher
rates of interest on deposits. Management monitors projected liquidity needs and
determines the level desirable, based in part on our commitments to make loans
and management's assessment of our ability to generate funds.
We are subject to federal regulations that impose certain minimum capital
requirements. For a discussion on such capital levels, see "Historical and Pro
Forma Capital Compliance" and "Regulation Regulatory Capital Requirements."
Impact of Inflation and Changing Prices
Our consolidated financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. As a result, interest rates have a greater impact on our
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Recent Accounting Pronouncements
FASB Statement on Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of. In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 121, which became effective for fiscal years beginning after
December 15, 1995. This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is evaluated
based upon the estimated future cash flows expected to result from the use of
the asset and its eventual disposition. If expected cash flows are less than the
carrying amount of the asset, an impairment loss is recognized. Additionally,
this Statement requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The adoption of SFAS No. 121 had no material
effect on our financial condition or results of operation.
34
<PAGE>
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995. Pro forma disclosures must
include the effects of all awards granted in fiscal years beginnings after
December 15, 1994. We will continue to use the "intrinsic value based method" as
prescribed by APB Opinion No. 25. Accordingly, we do not believe the impact of
adopting SFAS' No. 123 will be material to our financial statements.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 supersedes SFAS No. 122, accounting for
mortgage servicing rights. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover substantially all of
its recorded investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. The FASB has
proposed to defer the effective date of SFAS No. 125 until January 1, 1998 for
certain transactions including repurchase agreements, dollar-roll, securities
lending and similar transactions. We have not yet determined the effect, if any,
SFAS No. 125 will have on our financial statements.
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued SOP 93-6 Employers' Accounting for Employee Stock Ownership
Plan. SOP 93-6 addresses accounting for shares of stock issued to employees by
an employee stock ownership plan. SOP 93-6 requires that the employer record
compensation expense in an amount equal to the fair value of shares committed to
be released from the ESOP to employees. SOP 93-6 is effective for fiscal years
beginning after December 15, 1993 and relates to shares purchased by an ESOP
after December 31, 1992. If the common stock appreciates over time, SOP 93-6
will increase compensation expense relative to the ESOP, as compared with prior
guidance that required recognition of compensation expense based on the cost of
the shares acquired by the ESOP. The amount of any such increase, however,
cannot be determined at this time because the expense will be based on the fair
value of the shares committed to be released to employees, which amount is not
determinable. See "Pro Forma Data."
35
<PAGE>
BUSINESS OF SFB BANCORP, INC.
SFB Bancorp is not an operating company and has not engaged in any
significant business to date. It was formed in March 1997, as a Tennessee
Corporation to be the holding company for Security Federal Savings Bank. The
holding company structure and retention of proceeds will facilitate: (i)
diversification into non-banking activities, (ii) acquisitions of other
financial institutions, such as savings institutions, (iii) expansion within
existing and into new market areas and (iv) stock repurchases without adverse
tax consequences. There are no present plans regarding diversification,
acquisitions or expansion.
We have operated as an independent community oriented savings association
since 1963. It is our intention to continue to operate as an independent
community oriented savings association following the Conversion.
Since SFB Bancorp will own only one savings association, it generally will
not be restricted in the types of business activities in which it may engage;
provided, that we retain a specified amount of our assets in housing-related
investments. SFB Bancorp initially will not conduct any active business and does
not intend to employ any persons other than officers but will utilize our
support staff from time to time.
The office of the SFB Bancorp is located at 632 East Elk Avenue,
Elizabethton, Tennessee. The telephone number is (423) 543-3518.
BUSINESS OF SECURITY FEDERAL SAVINGS BANK
The principal sources of funds for our activities are deposits, payments
on loans and borrowings from the FHLB of Cincinnati. Our deposits totaled $40.8
million at December 31, 1996. Funds are used principally for the origination of
loans secured by first mortgages on one- to four-family residences which are
located in our market area. Such loans totalled $29.7 million, or 77.67%, of our
total loans receivable portfolio at December 31, 1996. Our principal source of
revenue is interest received on loans and our principal expense is interest paid
on deposits.
Market Area
Our primary market area consists of Carter County, and our secondary
market area consists of the adjacent counties of Johnson, Unicoi, Washington and
Sullivan, Tennessee. Elizabethton is considered to be part of the greater
Tri-Cities, (Kingsport, Johnson City, Bristol), Tennessee area. The Tri-Cities'
area economy is based on a mixture of agriculture (primarily tobacco, small
grains and cattle) and manufacturing (primarily chemical, textiles, metal
products and small industries), as well as a variety of service, wholesale and
retail businesses and governmental agencies. Eastman Chemical which is based in
Kingsport, is the state of Tennessee's largest employer.
Carter County has not experienced significant growth in recent years;
however, the adjacent counties of Johnson, Unicoi, Washington, and Sullivan,
have experienced significant growth and have expanding economies. The adjacent
counties have more diversified economies and higher income levels than Carter
County.
36
<PAGE>
Economic growth in our market area remains dependent upon the local
economy. In addition, our deposit and loan activity is significantly affected by
economic conditions in our market area. Based on our primary market area's
semi-rural location and stable demographics, we expect our market area to be
relatively stable in the future. We will look to the adjacent counties for
economic progress and opportunities.
Lending Activities
Most of our loans are mortgage loans which are secured by one- to
four-family residences. We also make consumer, land acquisition, residential
construction, commercial real estate and commercial business loans.
At December 31, 1996, the loans totalled $38.2 million of which $29.7
million were mortgage loans secured by one-to four-family residences. Loans
originated by us primarily have rates of interest which are fixed for the term
of the loan ("fixed rate"). To a much lesser extent, we originate loans with
rates of interest which may adjust from period to period during the term of the
loan ("adjustable rate").
To date, we neither purchased nor sold loans.
The following table sets forth information concerning the types of loans
held by us.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1995 1996
---------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Type of Loans:
Real Estate Loans:
<S> <C> <C> <C> <C>
One- to four- family ................ $26,396 78.53% $29,653 77.67%
Construction......................... 724 2.15 1,125 2.95
Commercial........................... 1,173 3.49 1,288 3.37
Multi-family residential............. 780 2.32 912 2.39
Land................................. 1,534 4.56 1,732 4.54
Commercial business loans.............. 660 1.96 558 1.46
Consumer Loans:
Automobile loans..................... 1,455 4.33 1,949 5.11
Other................................ 477 1.43 524 1.37
Share loans.......................... 414 1.23 435 1.14
------- ------ ------- ------
Total loans...................... 33,613 100.00% 38,176 100.00%
====== =====
Less:
Loans in process..................... 447 942
Deferred loan origination fees....... 105 122
Allowance of loan losses ............ 279 304
------- -------
Total loans, net.................. $32,782 $36,808
====== ======
</TABLE>
37
<PAGE>
The following table sets forth the estimated maturity of our loan
portfolio at December 31, 1996. The table does not include the effects of
possible prepayments or scheduled repayments. All mortgage loans are shown as
maturing based on the date of the last payment required by the loan agreement.
<TABLE>
<CAPTION>
Real Estate Loans
------------------------------------------------------------------
Commercial
One- to four- Business
Family Multi-family and
Residential Construction Commercial Residential Land Consumer Total
----------- ------------ ---------- ----------- ---- -------- -----
(In Thousands)
Amounts due:
<S> <C> <C> <C> <C> <C> <C> <C>
Within 1 year..... $ 24 $ 303 $ 17 $ - $ 704 $1,138 $2,186
Over 1 to 2 years. 51 - - - 141 316 508
Over 2 to 3 years. 169 - - - 163 579 911
Over 3 to 5 years 809 - 9 - 490 1,383 2,691
Over 5 to 10 years 4,521 135 663 832 234 50 6,435
Over 10 to 20 years 22,842 687 599 80 - - 24,208
Over 20 years..... 1,237 - - - - - 1,237
------ ------- ------- -------- ------- ------- -------
Total amount due.. $29,653 $1,125 $1,288 $ 912 $1,732 $3,466 $38,176
====== ======= ======= ======== ======= ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans for which
final payment is not due until after December 31, 1997. The table also shows the
amount of loans which have fixed rates of interest and those which have
adjustable rates of interest.
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
Real Estate Loans:
One- to four-family
residential.......... $26,895 $2,734 $29,629
Construction........... 822 - 822
Commercial real estate. 984 287 1,271
Multi-family residential 796 116 912
Land loans............. 915 113 1,028
Commercial business and
consumer............... 2,304 24 2,328
------ ------ ------
Total.................. $32,716 $3,274 $35,990
====== ===== ======
</TABLE>
38
<PAGE>
The following table contains information concerning changes in the amount
of mortgage loans held by us.
<TABLE>
<CAPTION>
For the Years Ended
-------------------
December 31,
--------------------
1995 1996
---- ----
(In Thousands)
<S> <C> <C>
Total mortgage loans receivable at beginning
of period $30,187 $30,607
Mortgage loans originated:
One- to four-family residential............ 3,643 4,683
Construction............................... 764 1,984
Commercial................................. 149 293
Multi-family............................... 166 116
Land....................................... 489 705
------- -------
Total mortgage loans originated.............. 5,211 7,781
------- -------
Mortgage loan principal repayments........... (4,791) (3,618)
Other........................................ - (60)
-------- -------
Net loan activity............................ 420 4,103
------- -------
Total mortgage loans receivable at end of period $30,607 $34,710
====== ======
</TABLE>
One- to Four-Family Residential Loans. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in our primary market area. We generally originate
one- to four-family residential mortgage loans in amounts up to 95% of the
lesser of the appraised value or purchase price, with private mortgage insurance
required on loans with a loan-to-value ratio in excess of 90%. The maximum
loan-to-value ratio on mortgage loans secured by nonowner occupied properties
generally is limited to 80%. We primarily originate and retain fixed-rate
balloon loans having terms of up to 15 years, with principal and interest
payments calculated using up to a 30-year amortization period.
We also offer adjustable-rate mortgage ("ARM") loans. The interest rate on
ARM loans is based on an index plus a stated margin. We may offer ^ discounted
initial interest rates ^ on ARM loans but we require that the borrower qualify
for the ARM loan at the fully indexed rate (the index rate plus the margin). ARM
loans provide for periodic interest rate adjustments upward or downward of up to
2% per year . The interest rate may not increase more than 5% over the life of
the loan and may not decrease below the original interest rate. ARM loans
typically reprice every year and provide for terms of up to 30 years with most
loans having terms of between 15 and 30 years. ARM loans are offered to all
applicants; however, consumer preference in our market area for ARM loans has
been weak.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability
39
<PAGE>
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates. At December 31, 1996, less than 10% of our
one- to four-family residential loans we hold had adjustable rates of interest.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property securing the mortgage
loan without our consent.
Residential Construction Loans. We make residential construction loans on
one- to four-family residential property to the individuals who will be the
owners and occupants upon completion of construction. These loans are made on a
long-term basis and are classified as construction/permanent loans. Usually no
principal payments are required during the first six to eight months. After that
time, the payments are set at an amount that will pay off the amount of the loan
over the term of the loan. The maximum loan to value ratio is 95%. Because
residential construction loans are not rewritten if permanent financing is
obtained from us, these loans are made on terms similar to those of our single
family residential loans and may be paid off over terms of up to 30 years, with
payments in full due within 15 years.
We also originate speculative loans to residential builders who have
established business relationships with us. These speculative loans typically
are made for a term of twelve months and may not require principal payments
during the term of the loan. In underwriting such loans, we consider the number
of units that the builder has on a speculative bid basis that remain unsold. Our
experience has been that most speculative loans are repaid well within the
twelve month period. Speculative loans are generally originated with a loan to
value ratio that does not exceed 80%.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. Our risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the estimated
cost of construction. If the estimate of construction cost and the marketability
of the property upon completion of the project prove to be inaccurate, we may be
compelled to advance additional funds to complete the construction. Furthermore,
if the final value of the completed property is less than the estimated amount,
the value of the property might not be sufficient to assure the repayment of the
loan. For speculative loans we originate to builders, the ability of the builder
to sell completed dwelling units will depend, among other things, on demand,
pricing and availability of comparable properties, and general economic
conditions.
Commercial and Multi-Family Loans. Our commercial real estate loans are
secured by churches, office buildings, and other commercial properties.
Multi-family loans are secured by apartment and condominium buildings. These
loans generally have not exceeded $250,000 or had terms greater than 10 years.
Commercial and multi-family real estate lending entails significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse
40
<PAGE>
conditions in the economy. To minimize these risks, we generally limit this type
of lending to our market area and to borrowers who are otherwise well known to
us.
Commercial Business Loans. We offer commercial business loans to benefit
from the higher fees and interest rates and the shorter term to maturity. Our
commercial business loans consist of equipment, lines of credit and other
business purpose loans, which generally are secured by either the underlying
properties or by the personal guarantees of the borrower.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
Consumer Loans. We offer consumer loans in order to provide a wider range
of financial services to our customers. Consumer loans totalled $2.9 million, or
7.62% of our total loans at December 31, 1996. Our consumer loans consist of
home equity, automobile, farm, mobile home, and demand loans secured by savings
deposit accounts.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. Mr. Hampton, our President, has
unlimited loan authority. The loan committee ratifies all 15 year fixed-rate
residential mortgage loans of $25,000 or more and all consumer loans. Commercial
real estate loans and commercial business loans generally are approved in
advance by the loan committee.
Upon receipt of a completed loan application from a prospective borrower,
a credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or ^
other estimate of ^ value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are processed by Director Crockett and
Mr. McCutcheon, an outside fee appraiser. During 1996, appraisal fees of
approximately $15,000 were paid to Director Crockett by us.
Construction/permanent loans are made on individual properties. Funds
advanced during the construction phase are held in a loans-in-process account
and disbursed at various stages of completion, following physical inspection of
the construction by a loan officer or appraiser.
Either title insurance or a title opinion is generally required on all
real estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.
Loan Commitments. Verbal commitments are given to prospective borrowers on
all approved real estate loans. Generally, the commitment requires acceptance
within 30 days of the date of issuance. At December 31, 1996, commitments to
cover originations of mortgage loans and consumer loans were
41
<PAGE>
$765,000 and $400,000, respectively, and undisbursed funds for loans-in-process
were $942,000. We believe that virtually all of our commitments will be funded.
Loans to One Borrower. The maximum amount of loans which we may make to
any one borrower may not exceed the greater of $500,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our maximum loan-to-one borrower limit was approximately
$700,000 at December 31, 1996. At December 31, 1996, the aggregate loans
outstanding to our three largest borrowers, in excess of $250,000, were
approximately $433,000, $429,000 and $354,000, respectively. As of that date,
these loans were secured loans and each of these loans were performing loans and
within our lending limits.
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 30 days past due, a
notice of nonpayment is sent to the borrower. If, after 60 days, payment is
still delinquent, the borrower will receive a letter and/or telephone call from
us and may receive a visit from one of our representatives. If the loan
continues in a delinquent status for 90 days past due and no repayment plan is
in effect, a notice of right to cure default is sent to the borrower giving 30
additional days to bring the loan current before foreclosure is commenced. Our
loan committee meets regularly to determine when foreclosure proceedings should
be initiated. The customer will be notified when foreclosure is commenced. At
December 31, 1996, our loans past due between 60 and 89 days totalled $555,000.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent or when,
in our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information regarding
nonaccrual loans and real estate owned. As of the dates indicated, we had no
loans categorized as troubled debt restructurings within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At December 31,
----------------
1995 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential...................... $197 $235
Commercial........................................... - 60
Consumer.............................................. 10 16
---- ----
Total nonaccrual loans............................. 207 311
Accruing loans which are contractually past due
90 days or more..................................... - -
---- -----
Total nonperforming loans.......................... 207 311
Real estate owned...................................... - 60
---- ----
Total nonperforming assets............................. $207 $371
=== ===
Nonaccrual and 90 days past due as a percentage
of net loans........................................ 0.63% 0.84%
Nonaccrual and 90 days past due as a percentage of
total assets......................................... 0.46% 0.67%
Total nonperforming assets as a percentage of
total assets......................................... 0.46% 0.80%
</TABLE>
42
<PAGE>
Interest income that would have been recorded on loans accounted for on a
nonaccrual basis under the original terms of such loans was immaterial for the
years ended December 31, 1995 and December 31, 1996, respectively.
Classified Assets. OTS regulations provide for a classification system for
problem assets of savings associations which covers all problem assets. Under
this classification system, problem assets of savings associations such as ours
are classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
savings association will sustain "some loss" if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When a savings associa^ tion classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. A savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which may order the establishment of additional general or specific
loss allowances. A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining a savings association's regulatory capital. Specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
At December 31, 1996, n^ o assets were classified as doubtful or loss but
loans were classified as substandard and special mention in amounts equal to
$349,000 and $11,000, respectively.
Foreclosed Real Estat^ e. Real estate acquired by us as a result of
foreclosure is recorded as "real estate owned" until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less disposal costs. Any
write-down of real estate owned is charged to operations. At December 31, 1996,
real estate owned was $60,000.
Allowances for Loan Lo^ sses. Our policy is to provide for losses on
unidentified loans in our loan portfolio. A provision for loan losses is charged
to operations based on management's evaluation of the potential losses that may
be incurred in our loan portfolio. The evaluation, including a review of all
loans on which full collectibility of interest and principal may not be
reasonably assured, considers: (i) our past loan loss experience, (ii) known and
inherent risks in our portfolio, (iii) adverse situations that may affect the
borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.
43
<PAGE>
We will continue to mon^ itor our allowance for loan losses and make
future additions to the allowance as economic conditions dictate. Although we
maintain our allowance for loan losses at a level that we consider adequate for
the inherent risk of loss in our loan portfolio, future losses could exceed
estimated amounts and additional provisions for loan losses could be required.
In addition, our determination as to the amount of its allowance for loan losses
is subject to review by the OTS, as part of its examination process. After a
review of the information available, the OTS might require the establishment of
an additional allowance.
The following table il^ lustrates the allocation of the allowance for loan
losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1995 1996
------------------------ ------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential $134 78.53% $144 77.67%
Construction.................. 15 2.15 20 2.95
Commercial.................... 40 3.49 45 3.37
Multi-family residential...... 15 2.32 20 2.39
Land.......................... 25 4.56 25 4.54
Commercial business and consumer 50 8.95 50 9.08
----- ------ --- ------
Total allowance for loan losses $279 100.00% $304 100.00%
=== ====== === ======
</TABLE>
The following table sets forth information with respect to our allowance
for loan losses at the dates and for the periods indicated:
At December 31,
-------------------------
1995 1996
---- ----
(Dollars in Thousands)
Total loans outstanding........................... $33,614 $38,176
====== ======
Average loans outstanding......................... $33,178 $36,437
====== ======
Allowance at beginning of period.................. $250 $279
Provision......................................... 30 30
Recoveries........................................ - -
Charge-offs (consumer loans in 1995 and 1996)..... (1) (5)
--- ---
Allowance at end of period........................ $279 $304
=== ===
Allowance for loan losses as a percent of total
loans outstanding............................... 0.83% 0.80%
Net loans charged off as percent of average loans
outstanding..................................... - -
Ratio of allowance to nonperforming loans......... 134.8 97.7
44
<PAGE>
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation - Federal
Home Loan Bank System" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." The
level of liquid assets varies depending upon several factors, including: (i) the
yields on investment alternatives, (ii) our judgment as to the attractiveness of
the yields then available in relation to other opportunities, (iii) expectation
of future yield levels, and (iv) our projections as to the short-term demand for
funds to be used in loan origination and other activities. We classify our
investment securities as "available for sale" or "held to maturity" in
accordance with SFAS No. 115. At December 31, 1996, our investment portfolio
policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) local municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, (vii) federal funds, including FHLB
overnight and term deposits (up to six months), and (viii) investment grade
corporate bonds, commercial paper and mortgage derivative products. See "--
Mortgage-backed Securities." The board of directors may authorize additional
investments.
Our investment securities "available for sale" and "held to maturity"
portfolios at December 31, 1996 did not contain securities of any issuer with an
aggregate book value in excess of 10% of our equity, excluding those issued by
the United States Government or its agencies.
Mortgage-backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. The
quasi-governmental agencies guarantee the payment of principal and interest to
investors and include FHLMC, Government National Mortgage Association ("GNMA"),
and FNMA.
Our mortgage-backed securities portfolio was classified as "available for
sale" at December 31, 1996. Each security was issued by GNMA, FHLMC or FNMA.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
The interest rate risk characteristics of the underlying pool of mortgages
(i.e., fixed-rate or adjustable-rate) and the prepayment risk, are passed on to
the certificate holder. The life of a mortgage-backed pass-through security is
equal to the life of the underlying mortgages. Mortgage-backed securities issued
by FHLMC and GNMA make up a majority of the pass-through certificates market.
45
<PAGE>
Real Estate Mortgage Investment Conduits ("REMIC's") are typically issued
by a special purpose entity, which may be organized in a variety of legal forms,
such as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities or mortgage loans, which are used to collateralize the
mortgage related securities. Once combined, the cash flows can be divided into
"tranches" or "classes" of individual securities, thereby creating more
predictable average lives for each security than the underlying pass-through
pools of mortgage loans. Accordingly, under this security structure, all
principal paydowns from the various mortgage pools or mortgage loans are
allocated to a mortgage-related securities' class or classes structured to have
priority until it has been paid off. These securities generally have fixed
interest rates, and as a result, changes in interest rates generally would
affect the market value and possibly the prepayment rates of such securities.
The characterization of a mortgage-related security as a REMIC relates solely to
the tax treatment of the mortgage related security under the Internal Revenue
Code.
Securities Portfolio. The following table sets forth the carrying (i.e.,
amortized cost) value of our investment securities and mortgage-backed
securities, at the dates indicated. At December 31, 1996, the market value of
our investment securities, held to maturity, was ^ $613,000. The market value of
our investment securities and mortgage-backed securities, available for sale,
were $597,000 and $5.8 million, respectively. At December 31, 1996, the
portfolios of the investment securities available for sale and mortgage-backed
securities available for sale contained net unrealized losses of $2,000 and
$173,000, respectively.
At December 31,
-----------------------
1995 1996
---- ----
(Dollars in Thousands)
Investment Securities:
U.S. government and agency securities
available for sale...................... $ 751 $ 599
U.S. government securities................ 378 398
Political subdivision notes............... 289 317
----- -----
Total investment securities.......... 1,418 1,314
----- -----
Mortgage-backed securities:
GNMA.................................... 954 812
FHLMC................................... 3,067 2,300
FNMA.................................... 3,430 2,829
----- -----
Total mortgage-backed securities..... 7,451 5,941
----- -----
Total................................ $8,869 $7,255
===== =====
46
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investment securities portfolio at December 31, 1996 by
contractual maturity. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------------------------------------------------
Less than 1 to Over 5 to Over 10 Total
1 year 5 years 10 years years Securities
----------------- ------------------ ------------------ ----------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities.... $ - -% $ 349 5.39% $ - -% $398 5.15% $ 747 5.22% $ 643
U.S. Agency
securities.... - - 250 6.39 - - - - 250 6.39 250
Political
subdivision
notes......... 127 6.75 34 6.63 156 6.03 - - 317 6.39 317
--- ---- ----- ---- ----- ---- ---- ------ ----- ---- -----
Total........... $127 6.75% $ 633 5.85% $ 156 6.03% $398 5.15% $1,314 5.72% $1,210
=== ==== ===== ==== ===== ==== === ==== ===== ==== =====
</TABLE>
NOTE: Yields on tax exempt obligations have been computed on a tax
equivalent basis.
47
<PAGE>
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and, to a much lesser extent, maturities of
investment securities and mortgage-backed securities, borrowings and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally from
within our primary market area through the offering of a selection of deposit
instruments including regular savings accounts, money market accounts, and term
certificate accounts. IRA accounts are also offered. Deposit account terms vary
according to the minimum balance required, the time period the funds must remain
on deposit, and the interest rate.
The interest rates paid by us on deposits are set weekly at the direction
of our senior management. Interest rates are determined based on our liquidity
requirements, interest rates paid by our competitors, and our growth goals and
applicable regulatory restrictions and requirements.
Passbook savings, money market and NOW accounts constituted $9.1 million,
or 22.35%, of our deposit portfolio at December 31, 1996. Certificates of
deposit constituted $31.7 million or 77.65% of the deposit portfolio of which
$7.6 million or 18.55% of the deposit portfolio were certificates of deposit
with balances of $100,000 or more. The majority of these certificates represent
a mix of deposits from long-standing customers and public monies. Such deposits
are offered at negotiated rates and provide us with a stable source of funds. As
of December 31, 1996, we had no brokered deposits.
48
<PAGE>
At December 31, 1996, our deposits were represented by the various types
of savings programs described below.
<TABLE>
<CAPTION>
Minimum Balance as of Percentage of
Category Term Interest Rate Balance Amount December 31, 1996 total Deposits
- -------- ---- ------------- -------------- -------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Now Accounts............ None 2.00% $ 100 $ 2,904 7.12%
Super Now............... None 2.26% 100 83 0.20%
Passbook savings........ None 3.00% 10 4,456 10.93%
Christmas club.......... None 3.75% 10 46 0.11%
Money market accounts... None 2.50% 2,500 1,622 3.98%
Certificates of Deposit:
Fixed Term, Fixed Rate 91 day 4.25% 500 215 0.53%
Fixed Term, Fixed Rate 182 day 5.18% 500 5,054 12.40%
Fixed Term, Fixed Rate 1 year 5.50% 500 7,968 19.55%
Fixed Term, Fixed Rate 18 months 5.50% 500 1,074 2.63%
Fixed Term, Fixed Rate 2 year 5.75% 500 521 1.28%
Fixed Term, Fixed Rate 30 months 5.83% 500 1,868 4.58%
Fixed Term, Fixed Rate 4 year 5.83% 500 326 0.80%
Fixed Term, Fixed Rate No longer offered 7.25% 500 300 0.74%
Fixed Term, Fixed Rate IRA 18 months 5.50% 10 3,325 8.16%
Fixed Term, Fixed Rate IRA 30 months 5.83% 10 348 0.85%
Negotiable 5.82% less than 100,000 3,094 7.59%
Negotiable 5.78% 100,000 7,561 18.55%
------ -----
Total $40,765 100.00%
====== ======
</TABLE>
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
As of December 31,
-------------------
1995 1996
---- ----
(In Thousands)
Interest Rate
2.00-4.00%...................... $ 138 $ 53
4.01-6.00%...................... 20,745 29,128
6.01-8.00%...................... 10,472 2,473
8.01 and over................... 16 -
------- --------
$31,371 $31,654
======= =======
49
<PAGE>
The following table sets forth the amount and maturities of our time
deposits at December 31, 1996.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------
After
December 31, December 31, December 31, December 31,
Interest Rate 1997 1998 1999 2000 Total
- ------------- ------ ------ ------ ------ -------
(In Thousands)
<C> <C> <C> <C> <C> <C>
2.01-4.00%... $ 53 $ - $ - $ - $ 53
4.01-6.00%... 23,764 4,565 640 159 29,128
6.01-8.00%... 2,034 221 214 4 2,473
8.01 and over - - - - -
------- ------ ---- ---- -------
Total $25,851 $4,786 $854 $163 $31,654
====== ===== === === ======
</TABLE>
The following table sets forth our savings activity for the periods
indicated:
Year Ended December 31,
-----------------------
1995 1996
---- ----
(In Thousands)
Beginning balance.............. $39,301 $40,637
------ ------
Net increase (decrease) before
interest credited............ (21) (1,338)
Interest credited.............. 1,357 1,466
----- -----
Net increase (decrease) in
savings deposits ........... 1,336 128
----- ------
Ending balance................. $40,637 $40,765
====== ======
The following table indicates the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31, 1996.
Certificates
Maturity Period of Deposit
- --------------- ----------
(In Thousands)
Within three months.................. $1,206
Three through six months............. 2,224
Six through twelve months............ 3,235
Over twelve months................... 896
------
$7,561
======
50
<PAGE>
Borrowings. Advances (borrowing) may be obtained from the FHLB of
Cincinnati to supplement our supply of lendable funds. Advances from the FHLB of
Cincinnati are typically secured by a pledge of our stock in the FHLB of
Cincinnati, a portion of our first mortgage loans and other assets. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. We may borrow up to $2.3 million from the FHLB of
Cincinnati. If the need arises, we may also access the Federal Reserve Bank
discount window to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. At December 31, 1996, borrowings from the FHLB of
Cincinnati totaled $800,000 and consisted of a 90 day cash management advance
with a 90 day term and a variable interest rate (5.85% at December 31, 1996)
that adjusted daily. Since that date, a substantial portion of the borrowings
had been repaid without incurring a prepayment penalty.
Competition
Competition for deposits comes from other insured financial institutions
such as commercial banks, thrift institutions, credit unions, finance companies,
and multi-state regional banks in our market areas. Competition for funds also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
commercial banks, thrift institutions, credit unions and mortgage bankers, many
of whom have far greater resources than we have. There are two credit unions,
one thrift institution, three commercial banks and five finance companies in our
market area.
We have been able to maintain our position in mortgage loan originations,
market share, and deposit accounts throughout our market areas by virtue of our
local presence, competitive pricing, and referrals from existing customers. We
are smaller in asset size compared to the many financial institutions serving
our market areas. The deposit base of our market areas is sought by many of
these financial institutions.
Subsidiary Activity
We are permitted to invest up to 2% of our assets in the capital stock of
or loans to subsidiary corporations. Additional investment of 1% of assets is
permitted when such additional investment is utilized primarily for community
development purposes. At December 31, 1996, we had one subsidiary, SFS, Inc.
("SFS"). SFS was formed in 1978 to hold stock in our outside data processing
servicer. Our investment in our subsidiary totalled $16,000 at December 31,
1996. As of December 31, 1996, SFS had not conducted any operations other than
to hold the stock of that servicer. We have no present plans to activate SFS.
51
<PAGE>
Properties
We operate from our main office and one branch office. Our total
investment in office property and equipment was $1,550,000 with a net book value
of $533,000 at December 31, 1996.
<TABLE>
<CAPTION>
Net Book Value
Of Real Property
or Leasehold
Year Leased Improvements
Location Leased or Owned or Acquired and Equipment
- -------- --------------- ----------- -------------
<S> <C> <C> <C>
MAIN OFFICE:
632 East Elk Avenue Owned 1980 $354,402
Elizabethton, Tennessee
37643
BRANCH OFFICE:
510 Wallace Avenue Owned 1989 $179,109
Elizabethton, Tennessee
37643
</TABLE>
In addition we own property at the intersection of Riverside Drive and
Hattie Avenue, Elizabethton, Tennessee which consists of a single-family
dwelling that we rent for $400 per month and a paved parking area for our
customers and employees. At December 31, 1996, the net book value of the
property was $5,000.
Personnel
At December 31, 1996 we had 18 full-time and two part-time employees. None
of our employees are represented by a collective bargaining group. We believe
that our relationship with our employees is good.
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
52
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to us.
The description does not purport to be complete and is qualified in its entirety
by references to applicable laws and regulation.
Holding Company Regulation
General. SFB Bancorp will be required to register and file reports with
the OTS and will be subject to regulation and examination by the OTS. In
addition, the OTS will have enforcement authority over SFB Bancorp and any
non-savings institution subsidiaries. This will permit the OTS to restrict or
prohibit activities that it determines to be a serious risk to us. This
regulation and is intended primarily for the protection of our depositors and
not for the benefit of you, as stockholders of SFB Bancorp.
QTL Test. Since SFB Bancorp will only own one savings institution, it will
be able to diversify its operations into activities not related to banking, but
only so long as we satisfy the QTL test. If SFB Bancorp controls more than one
savings institution, it would lose the ability to diversify its operations into
non-banking related activities, unless such other savings institutions each also
qualify as a QTL or were acquired in a supervised acquisition. See "- Qualified
Thrift Lender Test."
Restrictions on Acquisitions. SFB Bancorp must obtain approval from the
OTS before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
Savings Institution Regulation
General. As a federally chartered, SAIF-insured savings institution, we
are subject to extensive regulation by the OTS and the FDIC. Our lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements. We are also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve System").
The OTS, in conjunction with the FDIC, regularly examines us and prepares
reports for the consideration of our board of directors on any deficiencies that
the OTS finds in our operations. Our relationship with our depositors and
borrowers is also regulated to a great extent by federal and state law,
especially in such matters as the ownership of savings accounts and the form and
content of our mortgage documents.
We must file reports with the OTS and the FDIC concerning our activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
financial institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulations, whether by the OTS, the FDIC or the United States
Congress could have a material adverse impact on our respective operations.
53
<PAGE>
Insurance of Deposit Accounts. The FDIC is authorized to establish
separate annual assessment rates for deposit insurance for members of the BIF
and the SAIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such assessment rates if
such target level has been met. The FDIC has established a risk-based assessment
system for both SAIF and BIF members. Under this system, assessments are set
within a range, based on the risk the institution poses to its deposit insurance
fund. This risk level is determined based on the institution's capital level and
the FDIC's level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior thrift failures, the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required reserve level during the third calendar quarter of 1995. As a
result, deposit insurance premiums for deposits insured by the BIF were
substantially less than premiums for deposits such as ours which are insured by
the SAIF. Legislation to capitalize the SAIF and to eliminate the significant
premium disparity between the BIF and the SAIF became effective September 30,
1996. The recapitalization plan provided for a special assessment equal to $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain BIF institutions holding
SAIF-insured deposits were required to pay a lower special assessment. Based on
its deposits at March 31, 1995, on November 27, 1996, we paid a pre-tax special
assessment of $264,000.
The recapitalization plan also provides that the cost of prior thrift
failures which were funded through the issuance of the Fico Bonds will be shared
by members of both the SAIF and the BIF. This will increase BIF assessments for
healthy banks to approximately $.013 per $100 of deposits in 1997. SAIF
assessments for healthy savings institutions in 1997 will be approximately $.064
per $100 in deposits and may be reduced but not below the level set for healthy
BIF institutions.
The FDIC has lowered the rates on assessments paid to the SAIF and widened
the spread of those rates. The FDIC's action established a base assessment
schedule for the SAIF with rates ranging from 4 to 31 basis points, and an
adjusted assessment schedule that reduces these rates by 4 basis points. As a
result, the effective SAIF rates range from 0 to 27 basis points as of October
1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member savings
institutions for the last quarter of calendar 1996, to reflect the assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure for making limited adjustments to the base assessment rates by
rulemaking without notice and comment, for both the SAIF and the BIF.
The recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings institutions under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, we might have to convert to a different financial
institution charter and be regulated under federal law as a bank, including
being subject to the more restrictive activity limitations imposed on national
banks. We cannot predict the impact of our conversion to, or regulation as, a
bank until the legislation requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. Our capital ratios are set forth under "Historical and Pro Forma Capital
Compliance."
54
<PAGE>
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The ^ risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" leval of interest rate risk^ to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less than
$300 million in assets and a risk-based capital ratio above 12% are generally
exempt from filing the interest rate risk schedule with their Thrift Financial
Reports. However, the OTS may require any exempt institution that it determines
may have a high level of interest rate risk exposure to file such schedule on a
quarterly basis and may be subject to an additional capital requirement based
upon its level of interest rate risk as compared to its peers. However, due to
our net size and risk-based capital level, we are exempt from the interest rate
risk component.
Dividend and Other Capital Distribution Limitations. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration of
dividends to SFB Bancorp, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends by us to SFB Bancorp. In addition,
we may not declare or pay a cash dividend on its capital stock if the effect
would be to reduce our regulatory capital below the amount required for the
liquidation account to be established at
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the time of the Conversion. See "The Conversion - Effects of Conversion to Stock
Form on Depositors and Borrowers of Security Federal Savings Bank -Liquidation
Account."
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of
December 31, 1996, we qualified as a Tier 1 institution.
In the event our capital falls below our fully phased-in requirement or
the OTS notifies us that we are in need of more than normal supervision, we
would become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose to make any capital distribution, and Tier 2 institutions that propose
to make a capital distribution in excess of the noted safe harbor level, must
obtain OTS approval prior to making such distribution. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. The OTS has
proposed rules relaxing certain approval and notice requirements for
well-capitalized institutions.
A savings institution is prohibited from making a capital distribution if,
after making the distribution, the savings institution would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a qualified
thrift lender ("QTL") test. If we maintain an appropriate level of qualified
thrift investments ("QTIs") (primarily residential mortgages and related
investments, including certain mortgage-related securities) and otherwise
qualified as a QTL, we will continue to enjoy full borrowing privileges from the
FHLB of Cincinnati. The required percentage of QTIs is 65% of portfolio assets
(defined as all assets minus intangible assets, property used by the institution
in conducting its business and liquid assets equal to 10% of total assets).
Certain assets are subject to a percentage limitation of 20% of portfolio
assets. In addition, savings institution may include shares of stock of the
FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a
monthly basis in nine out of every 12 months. As of December 31, 1996, we never
were in compliance with its QTL requirement with approximately 86.1% of our
assets invested in QTIs.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these
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transactions are restricted to an aggregate percentage of savings institution's
capital and collateral in specified amounts must usually be provided by
affiliates in order to receive loans from the savings institution. Our
affiliates include SFB Bancorp and any company which would be under common
control with us. In addition, a savings institution may not extend credit to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of any affiliate that is not a subsidiary. The OTS has
the discretion to treat subsidiaries of savings institution as affiliates on a
case-by-case basis.
Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1996, our required liquid
asset ratio was 5.0% and our actual ratio was 5.08%. Monetary penalties may be
imposed upon associations for violations of liquidity requirements.
Federal Home Loan Savings Bank System. We are a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB of
Cincinnati in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year. At December 31, 1996, we had $394,000 in FHLB stock, at cost,
which was in compliance with this requirement. The FHLB imposes various
limitations on advances such as limiting the amount of certain types of real
estate related collateral to 30% of a member's capital and limiting total
advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1996, dividends paid by
the FHLB of Cincinnati to us totalled $26,000.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1996, our reserve met the minimum level required by the Federal Reserve
System.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. We had no borrowings from the Federal Reserve System at
December 31, 1996.
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TAXATION
Federal Taxation
We are subject to the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), in the same general manner as other corporations. However,
prior to August 1996, savings institutions such as us, which met certain
definitional tests and other conditions prescribed by the Code could benefit
from certain favorable provisions regarding their deductions from taxable income
for annual additions to their bad debt reserve. The amount of the bad debt
deduction that a qualifying savings institution could claim with respect to
additions to its reserve for bad debts was subject to certain limitations. We
reviewed the most favorable way to calculate the deduction attributable to an
addition to our bad debt reserve on an annual basis.
In August 1996, the Code was revised to equalize the taxation of thrifts
and banks. Thrifts, such as us, no longer have a choice between the percentage
of taxable income method and the experience method in determining additions to
bad debt reserves. Thrifts with $500 million of assets or less may still use the
experience method, which is generally available to small banks currently. Larger
thrifts must use the specific charge off method regarding bad debts. Any reserve
amounts added after 1987 will be taxed over a six year period beginning in 1996;
however, bad debt reserves set aside through 1987 are generally not taxed. A
savings institution may delay recapturing into income its post-1987 bad debt
reserves for an additional two years if it meets a residential-lending test.
This law is not expected to have a material impact on us. At December 31, 1996,
we had $246,000 of post 1987 bad-debt reserves.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method was
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year did not exceed
6% of such loans outstanding at such time.
Under the experience method, the bad debt deduction may be based on (i) a
six-year moving average of actual losses on qualifying and non-qualifying loans,
or (ii) a fill-up to the institution's base year reserve amount, which is the
tax bad debt reserve determined as of December 31, 1987.
The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage of taxable income bad debt deduction thus computed was reduced by the
amount permitted as a deduction for non-qualifying loans under the experience
method. The availability of the percentage of taxable income method permitted
qualifying savings institutions to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally (approximately 31.3%
assuming the maximum percentage bad debt deduction).
If a savings institution's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period, which is
immediately accruable for financial
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reporting purposes. As of December 31, 1996, at least 60% of our assets were
qualifying assets as defined in the Code. No assurance can be given that we will
meet the 60% test for subsequent taxable years.
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution to you, our stockholders
(including distributions made on dissolution or liquidation), unless we include
the amount in income, along with the amount deemed necessary to pay the
resulting federal income tax. As of December 31, 1996, we had $825,000 of
accumulated earnings, representing our base year tax reserve, for which federal
income taxes have not been provided. If such amount is used for any purpose
other than bad debt losses, including a dividend distribution or a distribution
in liquidation, it will be subject to federal income tax at the then current
rate.
Generally, for taxable years beginning after 1986, the Code also requires
most corporations, including savings institutions, to utilize the accrual method
of accounting for tax purposes. Further, for taxable years ending after 1986,
the Code disallows 100% of a savings institution's interest expense deemed
allocated to certain tax-exempt obligations acquired after August 7, 1986.
Interest expense allocable to (i) tax-exempt obligations acquired after August
7, 1986 which are not subject to this rule, and (ii) tax-exempt obligations
issued after 1982 but before August 8, 1986, are subject to the rule which
applied prior to the Code disallowing the deductibility of 20% of the interest
expense.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by determining
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. Thus, our AMTI
is increased by an amount equal to 75% of the amount by which our adjusted
current earnings exceeds our AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million
is imposed on corporations, including us, whether or not an AMT is paid. Under
pending legislation, the AMT rate would be reduced to zero for taxable years
beginning after December 31, 1994, but this rate reduction would be suspended
for taxable years beginning in 1995 and 1996 and the suspended amounts would be
refunded as tax credits in subsequent years.
SFB Bancorp may exclude from its income 100% of dividends received from us
as a member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if SFB Bancorp owns more than 20% of the
stock of a corporation paying a dividend. The above exclusion amounts, with the
exception of the affiliated group figure, were reduced in years in which we
availed ourself of the percentage of taxable income bad debt deduction method.
Our federal income tax return has not been audited by the IRS.
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State Taxation
The state of Tennessee imposes an excise tax on savings institutions at
the rate of 6% of net taxable income, which is computed based on federal taxable
income subject to certain adjustments. The state of Tennessee also imposes
franchise and privilege taxes on savings institutions which have not been a
material expense for us.
MANAGEMENT OF SFB BANCORP, INC.
Our board of directors consist of the same individuals who serve as
directors of our subsidiary, Security Federal Savings Bank. Our charter and
bylaws require that directors be divided into three classes, as nearly equal in
number as possible. Each class of directors to serve for a three-year period,
with approximately one-third of the directors elected each year. Our officers
will be elected annually by our board and serve at the board's discretion. See
"Management of Security Federal Savings Bank."
MANAGEMENT OF SECURITY FEDERAL SAVINGS BANK
Directors and Executive Officers
Our board of directors is composed of six members each of whom serves for
a term of three years. Our proposed stock charter and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Each class of directors to serve for a three-year period, with approximately
one-third of the directors elected each year. Our officers are elected annually
by our board and serve at the board's discretion.
The following table sets forth information with respect to our directors
and executive officers, all of whom will continue to serve in the same
capacities after the Conversion. We have no other executive officers.
<TABLE>
<CAPTION>
Age at Current
December Director Term
31, 1996 Position Since Expires
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Directors
Donald W. Tetrick 79 Chairman of the Board and 1963 1999
Director
Peter W. Hampton 77 President and Director 1963 1998
Peter W. Hampton, Jr. 46 Vice Chairman of the 1994 1999
Board and Director
John R. Crockett, Jr. 76 Secretary, Treasurer and 1963 1997
Director
Julian T. Caudill 78 Director 1963 1997
Estill L. Caudill, Jr. 80 Director 1963 1998
</TABLE>
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The business experience for the past five years of each of the directors
and executive officers is as follows:
Donald W. Tetrick has been a member of the board of directors and Chairman
of the Board since 1963. Mr. Tetrick is the secretary of the Elizabethton
Kiwanis Club, the Carter County Chamber of Commerce and a member of the board of
directors of First United Methodist Church. Mr. Tetrick is also a retired
funeral home director.
Peter W. Hampton has been the President and a member of the board of
directors since 1963. Mr. Hampton is a member of the Elizabethton/Carter County
Economic Development Commission and the Carter County Chamber of Commerce. Mr.
Hampton is the father of Peter W. Hampton, Jr.
Peter W. Hampton, Jr. has been a member of the board of directors since
1994 and has served as Vice Chairman of the Board since December, 1996. Since
1977, Mr. Hampton ^ has been an attorney in the law firm of Hampton & Street^
and has been employed as our General Counsel since 1994. Mr. Hampton is the son
of Peter W. Hampton.
John R. Crockett, Jr. has been a member of the our board of directors and
the secretary and treasurer since 1963. Mr. Crockett is a retired realtor.
Julian T. Caudill has been a member of the board of directors since 1963.
Mr. Caudill is a retired pharmacist. Mr. Caudill is a member of the Elizabethton
Rotary Club and the American Cancer Society. He is the brother of Estill L.
Caudill, Jr.
Estill L. Caudill, Jr. has been a member of the board of directors since
1963. Mr. Caudill is a retired physician. Mr. Caudill is the brother of Julian
T. Caudill.
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the board
and through activities of its committees. During the year ended December 31,
1996, the board of directors held 12 regular meetings and one special meeting.
No director attended fewer than 75% of the total meetings of the board of
directors and committees on which such director served during the year ended
December 31, 1996.
All of the directors are members of the executive/loan committee. The
executive/loan committee is principally responsible for (i) insuring that our
lending policies are implemented and observed, (ii) approving certain loan
applications, and (iii) approving other operational and administrative matters.
The executive/loan committee met 51 times during the fiscal year ended December
31, 1996.
Director Compensation
Each of the directors is paid a monthly fee of $600. Additionally, each
director is also a member of the Executive/Loan Committee and receives a fee of
$35 per meeting attended. Total aggregate fees paid to the current directors for
the year ended December 31, 1996 were $45,940.
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Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
December 31, 1996. No other employee earned in excess of $100,000 for the year
ended December 31, 1996.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------
Other Annual All Other
Compensation Compensation
Name and Principal Position Salary Bonus (1) (2)
- --------------------------- ------ ----- ----- ----
<S> <C> <C> <C> <C>
Peter W. Hampton, President $73,614 $24,500 $9,280 $9,811
</TABLE>
- --------------------
(1) Consists of director and committee fees of $7,750 and $1,530 of health,
life and disability insurance premiums paid on behalf of the executive.
(2) Consists of payments made on behalf of the executive for our Savings Plan.
Employment Agreement. We have entered into an employment agreement with
our President, Peter W. Hampton. Mr. Hampton's base salary under the employment
agreement is $73,614. The employment agreement has a term of three years. The
agreement is terminable by us for "just cause" as defined in the agreement. If
we terminate Mr. Hampton without just cause, Mr. Hampton will be entitled to a
continuation of his salary from the date of termination through the remaining
term of the agreement. The employment agreement contains a provision stating
that in the event of the termination of employment in connection with any change
in control of us, Mr. Hampton will be paid a lump sum amount equal to 2.99 times
his five year average annual taxable cash compensation. If such payments had
been made under the agreement as of December 31, 1996, such payments would have
equaled approximately $265,000. The aggregate payments that would have been made
to Mr. Hampton would be an expense to us, thereby reducing our net income and
our capital by that amount. The agreement may be renewed annually by our board
of directors upon a determination of satisfactory performance within the board's
sole discretion. If Mr. Hampton shall become disabled during the term of the
agreement, he shall continue to receive payment of 100% of the base salary for a
period of 12 months and 60% of such base salary for the remaining term of such
agreement. Such payments shall be reduced by any other benefit payments made
under other disability programs in effect for our employees.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employee of
ours, to be implemented upon the completion of the Conversion. Participating
employees are employees who have completed one year of service with us or our
subsidiary and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash. In
accordance with the Plan, the ESOP may borrow funds with which to acquire up to
8% of the common stock to be issued in the Conversion. The ESOP intends to
borrow funds from SFB Bancorp. The loan is expected to be for a term of ten
years at an annual interest rate equal to the prime rate as published in The
Wall Street Journal. Presently it
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is anticipated that the ESOP will purchase up to 8% of the common stock to be
issued in the offering (i.e., $464,000, based on the midpoint of the EVR). The
loan will be secured by the shares purchased and earnings of ESOP assets. Shares
purchased with such loan proceeds will be held in a suspense account for
allocation among participants as the loan is repaid. We anticipate contributing
approximately $46,400 annually (based on a $464,000 purchase) to the ESOP to
meet principal obligations under the ESOP loan, as proposed. It is anticipated
that all such contributions shall be tax-deductible. This loan is expected to be
fully repaid in approximately 10 years.
Shares sold above the maximum of the EVR (i.e., more than 667,000 shares)
may be sold to the ESOP before satisfying remaining unfilled orders of Eligible
Account Holders to fill the ESOP's subscription or the ESOP may purchase some or
all of the shares covered by its subscription after the Conversion in the open
market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation,
excluding bonuses. All participants must be employed at least 1,000 hours in a
plan year, or have terminated employment following death, disability or
retirement, in order to receive an allocation. Participant benefits become
vested in plan payments as follows: after 1 year of service - 10%, 2 years -
20%, 3 years - 30%, 4 years - 40%, 5 years - 60%, 6 years - 80% and 7 years
- -100%. Employment prior to the adoption of the ESOP shall be credited for the
purposes of vesting. Vesting will be accelerated upon retirement, death,
disability, change in control of SFB Bancorp, or termination of the ESOP.
Forfeitures will be reallocated to participants on the same basis as other
contributions in the plan year. Benefits may be payable in the form of a lump
sum upon retirement, death, disability or separation from service. Our
contributions to the ESOP are discretionary and may cause a reduction in other
forms of compensation. Therefore, benefits payable under the ESOP cannot be
estimated.
The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the board of directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
Savings Plan. We sponsor a tax-qualified defined contribution savings and
retirement plan ("Savings Plan") for the benefit of our employees. The funds
contributed are deposited in savings accounts with us. Employees become eligible
to participate under the Savings Plan after reaching age 21 and completing one
year of service. We intend to amend the Savings Plan to permit participants to ^
voluntarily direct the investment of plan assets for the purchase of the common
stock in the Conversion. Purchases through the Savings Plan will be pursuant to
the subscription rights of the underlying savings deposits. Such directed
investments will be includable in the participants individual purchase
limitations in the Conversion.
Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Normal retirement age under the Savings Plan is
age 65. It is intended that the Savings Plan operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code.
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Costs associated with the Savings Plan were $46,000 and $29,000 for the
fiscal years ended December 31, 1995 and 1996. Future Bank contributions to the
Savings Plan may be reduced as a result of the implementation of the ESOP.
Proposed Future Stock Benefit Plans
Stock Option Plan. The boards of directors intend to adopt a stock option
plan (the Option Plan) following the Conversion, subject to approval by you and
SFB Bancorp's stockholders, at a stockholders meeting to be held no sooner than
six months after the Conversion. The Option Plan would be in compliance with the
OTS regulations in effect. See "-- Restrictions on Benefit Plans." If the Option
Plan is implemented within one year after the Conversion, in accordance with OTS
regulations, a number of shares equal to 10% of the aggregate shares of common
stock to be issued in the offering (i.e., 58,000 shares based upon the sale of
580,000 shares at the midpoint of the EVR) would be reserved for issuance by SFB
Bancorp upon exercise of stock options to be granted to officers, directors and
employees of us from time to time under the Option Plan. The purpose of the
Option Plan would be to provide additional performance and retention incentives
to certain officers, directors and employees by facilitating their purchase of a
stock interest in ^ SFB Bancorp. Under the OTS regulations, the Option Plan,
would provide for a term of 10 years, after which no awards could be made,
unless earlier terminated by the board of directors pursuant to the Option Plan^
and the options would vest over a five year period (i.e., 20% per year),
beginning one year after the date of grant of the option. Options would be
granted based upon several factors, including seniority, job duties and
responsibilities, job performance, our financial performance and a comparison of
awards given by other savings institutions converting from mutual to stock form.
SFB Bancorp would receive no monetary consideration for the granting of
stock options under the Option Plan. It would receive the option price for each
share issued to optionees upon the exercise of such options. Shares issued as a
result of the exercise of options will be either authorized but unissued shares
or shares purchased in the open market by SFB Bancorp. However, no purchases in
the open market will be made that would violate applicable regulations
restricting purchases by SFB Bancorp. The exercise of options and payment for
the shares received would contribute to the equity of SFB Bancorp.
If the Option Plan is implemented more than one year after the Conversion,
the Option Plan will comply with such OTS regulations and policies that are
applicable at such time.
Restricted Stock Plan. The board of directors intends to adopt the RSP ^
following the Conversion, the objective of which is to enable us to retain
personnel and directors of experience and ability in key positions of
responsibility. SFB Bancorp expects to hold a stockholders' meeting no sooner
than six months after the Conversion in order for stockholders to vote to
approve the RSP. If the RSP is implemented within one year after the Conversion,
in accordance with applicable OTS regulations, the shares granted under the RSP
will be in the form of restricted stock vesting over a five year period (i.e.,
20% per year) beginning one year after the date of grant of the award.
Compensation expense in the amount of the fair market value of the common stock
granted will be recognized pro rata over the years during which the shares are
payable. Until they have vested, such shares may not be sold, pledged or
otherwise disposed of and are required to be held in escrow. Any shares not so
allocated would be voted by the RSP Trustees. The RSP will be implemented in
accordance with applicable OTS regulations. See "-- Restrictions on Stock
Benefit Plans." Awards would be granted based upon a number of factors,
including seniority, job duties and responsibilities, job performance, our
performance and a comparison of awards given by other institutions converting
from mutual to stock form. The RSP would be managed
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<PAGE>
by a committee of non-employee directors (the "RSP Trustees"). The RSP Trustees
would have the responsibility to invest all funds contributed by us to the trust
created for the RSP (the "RSP Trust").
We ^ expect to contribute sufficient funds to the RSP so that the RSP
Trust can purchase, in the aggregate, up to 4% of the amount of common stock
that is sold in the Conversion. The shares purchased by the RSP would be
authorized but unissued shares or would be purchased in the open market. In the
event the market price of the common stock is greater than $10.00 per share, our
contribution of funds will be increased. Likewise, in the event the market price
is lower than $10.00 per share, our contribution will be decreased. In
recognition of their prior and expected services to us and SFB Bancorp, as the
case may be, the officers, other employees and directors responsible for
implementation of the policies adopted by the board of directors and our
profitable operation will, without cost to them, be awarded stock under the RSP.
Based upon the sale of 580,000 shares of common stock in the offering at the
midpoint of the EVR, the RSP Trust is expected to purchase up to 23,200 shares
of common stock.
If the RSP is implemented more than one year after the Conversion, the RSP
will comply with such OTS regulations and policies that are applicable at such
time.
Restrictions on Stock Benefit Plans. OTS regulations provide that in the
event we implement stock option or management and/or employee stock benefit
plans are implemented within one year from the date of Conversion, such plans
must comply with the following restrictions: (1) the plans must be fully
disclosed in the prospectus, (2) for stock option plans, the total number of
shares for which options may be granted may not exceed 10% of the shares issued
in the Conversion, (3) for restricted stock plans, the shares may not exceed 3%
of the shares issued in the Conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the Conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25% of the available awards under the Option Plan or the RSP, (6)
directors who are not employees may not receive more than 5% individually or 30%
in the aggregate of the awards under any plan, (7) all plans must be approved by
a majority of the total votes eligible to be cast at any duly called meeting of
the Company's stockholders held no earlier than six months following the
Conversion, (8) for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant, (9) for restricted
stock plans, no stock issued in a conversion may be used to fund the plan, (10)
neither stock option awards nor restricted stock awards may vest earlier than
20% as of one year after the date of stockholder approval and 20% per year
thereafter, and vesting may be accelerated only in the case of disability or
death (or if not inconsistent with applicable OTS regulations in effect at such
time, in the event of a change in control), (11) the proxy material must clearly
state that the OTS in no way endorses or approves of the plans, and (12) prior
to implementing the plans, all plans must be submitted to the Regional Director
of the OTS within five days after stockholder approval with a certification that
the plans approved by the stockholders are the same plans that were filed with
and disclosed in the proxy materials relating to the meeting at which
stockholder approval was received.
Certain Related Transactions
Peter W. Hampton, Jr., is a partner of the law firm of Hampton & Street in
Elizabethton, Tennessee. We have retained the services of Mr. Hampton's firm,
and the firm performs certain legal work for us. Fees paid to the law firm by
borrowers of ours for services performed on our behalf, were $65,000 during 1996
and such fees were less than $60,000 during 1995. See "Business -- Loan Approval
Authority and Underwriting."^
65
<PAGE>
RESTRICTIONS ON ACQUISITIONS OF SFB BANCORP, INC.
While the board of directors is not aware of any effort that might be made
to obtain control of SFB Bancorp after Conversion, the board of directors
believes that it is appropriate to include certain provisions as part of ^ SFB
Bancorp's charter to protect the interests of SFB Bancorp and its stockholders
from hostile takeovers ("anti-takeover") which the board of directors might
conclude are not in the best interests of us or our stockholders. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the board of directors but which individual stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over the current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current board of directors or management of SFB Bancorp more difficult.
The following discussion is a general summary of the material provisions
of the charter, bylaws, and certain other regulatory provisions of SFB Bancorp,
which may be deemed to have such an "anti-takeover" effect. The description of
these provisions is necessarily general and reference should be made in each
case to the charter and bylaws of SFB Bancorp which are incorporated herein by
reference. See "Available Information" as to how to obtain a copy of these
documents.
Provisions of SFB Bancorp Charter and Bylaws
Limitations on Voting Rights. The charter of SFB Bancorp provides that in
no event shall any record owner of any outstanding common stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of the then outstanding shares of common stock (the "Limit") be
entitled or permitted to any vote in respect of the shares held in excess of the
Limit. In addition, for a period of five years from the completion of our
Conversion, no person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of SFB
Bancorp. After five years from the date of the Conversion, a beneficial holder
submitting a proxy or proxies totalling more than 10% of the then outstanding
shares of common stock will be able to vote in the following manner: the number
of votes which may be cast by such a beneficial owner shall be a number equal to
the total number of votes that a single record owner of all common stock owned
by such person would be entitled to cast, multiplied by a fraction, the
numerator of which is the number of shares of such class or series which are
both beneficially owned and owned of record by such beneficial owner and the
denominator of which is the total number of shares of common stock beneficially
owned by such beneficial owner. The impact of these provisions on the submission
of a proxy on behalf of a beneficial holder of more than 10% of the common stock
is (1) to disregard for voting purposes and require divestiture of the amount of
stock held in excess of 10% (if within five years of the Conversion more than
10% of the common stock is beneficially owned by a person) and (2) limit the
vote on common stock held by the beneficial owner to 10% or possibly reduce the
amount that may be voted below the 10% level (if more than 10% of the common
stock is beneficially owned by a person more than five years after the
Conversion). Unless the grantor of a revocable proxy is an affiliate or an
associate of such a 10% holder or there is an arrangement, agreement or
understanding with such a 10% holder, these provisions would not restrict the
ability of such a 10% holder of revocable proxies to exercise revocable proxies
for which the 10% holder is neither a beneficial nor record owner. A person is a
beneficial owner of a security if he has the power to vote or direct the voting
of all or part of the voting rights of the security, or has the power to dispose
of or direct the disposition of the security. The charter of SFB Bancorp further
provide that this provision limiting voting rights may only be amended upon the
vote of 80% of the outstanding shares of voting stock.
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<PAGE>
Election of Directors. Certain provisions of SFB Bancorp's charter and
bylaws will impede changes in majority control of the board of directors. SFB
Bancorp's charter provides that the board of directors of SFB Bancorp will be
divided into three classes, with directors in each class elected for three-year
staggered terms. Thus, it would take two annual elections to replace a majority
of SFB Bancorp's board. SFB Bancorp's charter provides that the size of the
board of directors may be increased or decreased only if two-thirds of the
directors then in office concur in such action. The charter also provides that
any vacancy occurring in the board of directors, including a vacancy created by
an increase in the number of directors, shall be filled for the remainder of the
unexpired term by a majority vote of the directors then in office. Finally, the
charter and the bylaws impose certain notice and information requirements in
connection with the nomination by stockholders of candidates for election to the
board of directors or the proposal by stockholders of business to be acted upon
at an annual meeting of stockholders.
The charter provides that a director may only be removed for cause by the
affirmative vote of at least 80% of the shares of SFB Bancorp entitled to vote
generally in an election of directors cast at a meeting of stockholders called
for that purpose.
Restrictions on Call of Special Meetings. The charter of SFB Bancorp
provides that a special meeting of stockholders may be called only pursuant to a
resolution adopted by a majority of the board of directors, or a Committee of
the board or other person so empowered by the bylaws. The charter also provides
that any action required or permitted to be taken by the stockholders of SFB
Bancorp may be taken only at an annual or special meeting and prohibits
stockholder action by written consent in lieu of a meeting.
Absence of Cumulative Voting. SFB Bancorp's charter provides that
stockholders may not cumulate their votes in the election of directors.
Authorized Shares. The charter authorizes the issuance of 4,000,000 shares
of common stock and 1,000,000 shares of preferred stock. The shares of common
stock and preferred stock were authorized in an amount greater than that to be
issued in the Conversion to provide SFB Bancorp board of directors with as much
flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and the exercise of stock options.
However, these additional authorized shares may also be used by the board of
directors consistent with its fiduciary duty to deter future attempts to gain
control of SFB Bancorp. The board of directors also has sole authority to
determine the terms of any one or more series of Preferred Stock, including
voting rights, conversion rates, and liquidation preferences. As a result of the
ability to fix voting rights for a series of Preferred Stock, the board has the
power, to the extent consistent with its fiduciary duty, to issue a series of
Preferred Stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. SFB Bancorp's
board currently has no plans for the issuance of additional shares, other than
the issuance of additional shares upon exercise of stock options.
Procedures for Certain Business Combinations. The Charter requires the
affirmative vote of at least 80% of the outstanding shares of SFB Bancorp
entitled to vote in the election of director in order for SFB Bancorp to engage
in or enter into certain "Business Combinations," as defined therein, with any
Principal Shareholder (as defined below) or any affiliates of the Principal
Shareholder, unless the proposed transaction has been approved in advance by SFB
Bancorp's board of directors, excluding those who were not directors prior to
the time the Principal Shareholder became the Principal Shareholder. The term
"Principal Shareholder" is defined to include any person and the affiliates and
associates of the
67
<PAGE>
person (other than SFB Bancorp or its subsidiary) who beneficially owns,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
SFB Bancorp. Any amendment to this provision requires the affirmative vote of at
least 80% of the shares of SFB Bancorp entitled to vote generally in an election
of directors.
Amendment to Charter and Bylaws. Amendments to SFB Bancorp's charter must
be approved by SFB Bancorp's board of directors and also by a majority of the
outstanding shares of SFB Bancorp's voting stock, provided, however, that
approval by at least 80% of the outstanding voting stock is generally required
for certain provisions (i.e., provisions relating to restrictions on the
acquisition and voting of greater than 10% of the common stock; number,
classification, election and removal of directors; amendment of Bylaws; call of
special stockholder meetings; director liability; certain business combinations;
power of indemnification; and amendments to provisions relating to the foregoing
in the Charter).
The bylaws may be amended by a majority vote of the board of directors or
the affirmative vote of the holders of at least 80% of the outstanding shares of
SFB Bancorp entitled to vote in the election of Directors cast at a meeting
called for that purpose.
Benefit Plans. In addition to the provisions of SFB Bancorp's charter and
bylaws described above, certain benefit plans of ours adopted in connection with
the Conversion contain provisions which also may discourage hostile takeover
attempts which the boards of directors might conclude are not in the best
interests for us or our stockholders. For a description of the benefit plans and
the provisions of such plans relating to changes in control, see "Management of
Security Federal Savings Bank - Certain Benefit Plans and Agreements."
Regulatory Restrictions. A federal regulation prohibits any person prior
to the completion of a conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire control of
a savings association unless at least 60 days prior
68
<PAGE>
written notice has been given to the OTS and the OTS has not objected to the
proposed acquisition. Control is defined for this purpose as the power, directly
or indirectly, to direct the management or policies of a savings association or
to vote more than 25% of any class of voting securities of a savings
association. Under federal law (as well as the regulations referred to below)
the term "savings association" includes state-chartered and federally chartered
SAIF-insured institutions, federally chartered savings and loans and savings
banks whose accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an insured
institution, a person, other than a company, must give 60 days notice to the OTS
and have received no OTS objection to such acquisition of control, and a company
must apply for and receive OTS approval of the acquisition. Control, involves a
25% voting stock test, control in any manner of the election of a majority of
the institution's directors, or a determination by the OTS that the acquiror has
the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of an institution's voting stock, if the acquiror also is subject
to any one of either "control factors," constitutes a rebuttable determination
of control under the regulations. The determination of control may be rebutted
by submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
SFB Bancorp is authorized to issue 4,000,000 shares of the common stock,
$0.10 par value per share, and 1,000,000 shares of serial preferred stock, $.10
par value per share. SFB Bancorp currently expects to issue up to 767,000 shares
of common stock in the Conversion. SFB Bancorp does not intend to issue any
shares of serial preferred stock in the Conversion, nor are there any present
plans to issue such preferred stock following the Conversion. The aggregate par
value of the issued shares will constitute the capital account of SFB Bancorp.
The balance of the purchase price will be recorded for accounting purposes as
additional paid-in capital. See "Capitalization." The capital stock of SFB
Bancorp will represent nonwithdrawable capital and will not be insured by us,
the FDIC, or any other government agency.
Common Stock
Voting Rights. Each share of the common stock will have the same relative
rights and will be identical in all respects with every other share of the
common stock. The holders of the common stock will possess exclusive voting
rights in SFB Bancorp, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of the
common stock will be entitled to only one vote for each share held of record on
all matters submitted to a vote of holders of the common stock and will not be
permitted to cumulate their votes in the election of SFB Bancorp's directors.
69
<PAGE>
Liquidation. In the unlikely event of the complete liquidation or
dissolution of SFB Bancorp, the holders of the common stock will be entitled to
receive all assets of SFB Bancorp available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of SFB
Bancorp (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any serial preferred
stock which may be issued in the future; and (iv) any interests in the
liquidation account established upon the Conversion for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who continue to have
their deposits with us.
Restrictions on Acquisition of the Common Stock. See "Certain Restrictions
on Acquisition of SFB Bancorp" for a discussion of the limitations on
acquisition of shares of the common stock.
Other Characteristics. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Therefore, the board of directors may sell shares of
capital stock of SFB Bancorp without first offering such shares to existing
stockholders of SFB Bancorp. The common stock is not subject to call for
redemption, and the outstanding shares of common stock when issued and upon
receipt by SFB Bancorp of the full purchase price therefor will be fully paid
and non-assessable.
Issuance of Additional Shares. Except in the Subscription and Community
Offerings and possibly pursuant to the RSP or Option Plan, the SFB Bancorp has
no present plans, proposals, arrangements or understandings to issue additional
authorized shares of the common stock. In the future, the authorized but
unissued and unreserved shares of the common stock will be available for general
corporate purposes, including, but not limited to, possible issuance: (i) as
stock dividends; (ii) in connection with mergers or acquisitions; (iii) under a
cash dividend reinvestment or stock purchase plan; (iv) in a public or private
offering; or (v) under employee benefit plans. See "Risk Factors -- Possible
Dilutive Effect of RSP and Stock Options and Effect of Purchases by the RSP and
ESOP" and "Pro Forma Data." Normally no stockholder approval would be required
for the issuance of these shares, except as described herein or as otherwise
required to approve a transaction in which additional authorized shares of the
common stock are to be issued.
For additional information, see "Dividends," "Regulation" and "Taxation"
with respect to restrictions on the payment of cash dividends; "-- Restrictions
on Transferability by Directors and Officers" relating to certain restrictions
on the transferability of shares purchased by directors and officers; and
"Certain Restrictions on Acquisition of SFB Bancorp" for information regarding
restrictions on acquiring common stock of SFB Bancorp.
Serial Preferred Stock
None of the 1,000,000 authorized shares of serial preferred stock of SFB
Bancorp will be issued in the Conversion. After the Conversion is completed, the
board of directors of SFB Bancorp will be authorized to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the common stock as to dividend rights, liquidation preferences, or both, and
may have full or limited voting rights. The board of directors, without
stockholder approval, can issue serial preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the common stock. The board of directors has no present intention to issue
any of the serial preferred stock.
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<PAGE>
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by Malizia,
Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for Trident
^ may be passed upon by Housley, Kantarian & Bronstein, P.C., Washington, D.C.
The federal income tax consequences of the Conversion have been passed upon for
us by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. The Tennessee
income tax consequences of the Conversion have been passed upon for us by Crisp
Hughes & Co., L.L.P.
EXPERTS
The consolidated financial statements of ^ Security Federal Savings Bank
as of and for the years ended December 31, 1995 and 1996 appearing in this
document have been audited by Crisp Hughes & Co., L.L.P., independent certified
public accountants, as set forth in their report which appears elsewhere in this
document, and is included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
Feldman has consented to the publication herein of a summary of its
letters to Security Federal Savings Bank setting forth its opinion as to the
estimated pro forma market value of us in the converted form and its opinion
setting forth the value of subscription rights and to the use of its name and
statements with respect to it appearing in this document.
CHANGE IN AUDITOR
On November 20, 1996, Lawson and Frizzell, ^ CPAs, our independent auditor
^, advised us that it did not wish to continue as our independent auditor
following the Conversion. The report of Lawson and Frizzell, CPA's for the
fiscal years ended December 31, 1994 and 1995 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. During the fiscal years ended December 31, 1994
and 1995 and during the period from January 1, 1995 to December 5, 1996, there
were no disagreements between ^ Lawson and Frizzell, ^ CPAs and us concerning
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. On December 5, 1996, the audit proposal of Crisp Hughes &
Co., L.L.P. for the 1996 audit year was accepted; approval of the selection of a
new auditor was obtained at a meeting of our board of directors held on December
5, 1996. Crisp Hughes & Co., L.L.P. reaudited the fiscal 1995 financial
statements in order to be identified as the auditor of record in the Conversion.
REGISTRATION REQUIREMENTS
The common stock of SFB Bancorp will be registered pursuant to Section
12(g) of the Exchange Act prior to completion of the Conversion. SFB Bancorp
will be subject to the information, proxy solicitation, insider trading
restrictions, tender offer rules, periodic reporting and other requirements of
the SEC under the Exchange Act. SFB Bancorp may not deregister the common stock
under the Exchange Act for a period of at least three years following the
Conversion.
71
<PAGE>
ADDITIONAL INFORMATION
SFB Bancorp and Security Federal Savings Bank are not currently subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
SFB Bancorp has filed with the SEC a Form SB-2 under the Securities Act of
1933, as amended, with respect to the common stock offered in this document. As
permitted by the rules and regulations of the SEC, this document does not
contain all the information set forth in the registration statement. Such
information can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
such material can be obtained from the SEC at prescribed rates. The SEC also
maintains an internet address ("Web site") that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the SEC. The address for this Web
site is "http://www.sec.gov." The statements contained in this document as to
the contents of any contract or other document filed as an exhibit to the Form
SB-2 are, of necessity, brief descriptions and are not necessarily complete;
each such statement is qualified by reference to such contract or document.
Security Federal Savings Bank has filed an Application for Conversion with
the OTS with respect to the Conversion. Pursuant to the rules and regulations of
the OTS, this document omits certain information contained in that Application.
The Application may be examined at the principal office of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Central Regional Office of the
OTS, 111 East Wacker Drive, Suite 800, Chicago, Illinois 60601-4360 without
charge.
A copy of the Charter and the Bylaws of SFB Bancorp are available without
charge from Security Federal Savings Bank.
72
<PAGE>
SECURITY FEDERAL SAVINGS BANK
and Subsidiary
Index to Consolidated Financial Statements
Page(s)
Independent Auditors' Reports .......................................... F-1
Consolidated Balance Sheets as of
December 31, 1995 and 1996............................................ F-2
Consolidated Statements of Income for the Years
Ended December 31, 1995 and 1996...................................... 26
Consolidated Statements of Equity for the
Years Ended December 31, 1995 and 1996................................ F-3
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995 and 1996................................ F-4
Notes to Consolidated Financial Statements.............................. F-6
All schedules are omitted because the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
Separate financial statements for SFB Bancorp have not been included since it
will not engage in material transactions until after the Conversion. SFB
Bancorp, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses or contingent liabilities.
73
<PAGE>
CRISP
CH
HUGHES
--& CO., L.L.P.--
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
Independent Auditors' Report
To the Board of Directors
Security Federal Savings Bank
and Subsidiary
We have audited the accompanying consolidated balance sheets of Security Federal
Savings Bank (the "Bank") and Subsidiary as of December 31, 1995 and 1996, and
the related consolidated statements of income, equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Bank as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/Crisp Hughes & Co., L.L.P.
Asheville, North Carolina
January 27, 1997
F-1
32 Orange Street - P.O. Box 3049 - Asheville, North Carolina 28802
(704) 254-2254 - FAX (704) 254-6859
Other Offices: Boone, Burnsville, Sylva, NC and Greenville, SC
Member of: The American Institute of Certified Public Accountants,
The Continental Association of CPA Firms, Inc.
The Intercontinental Accounting Associates and
The North and South Carolina Associates of CPAs
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------
Assets 1995 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 439 $ 396
Interest-earning deposits 2,290 1,018
Investment securities:
Held to maturity (market value of $604
in 1995 and $613 in 1996) 667 715
Available for sale (amortized cost of $751
in 1995 and $599 in 1996) 747 597
Loans receivable, net 32,782 36,808
Mortgage-backed securities:
Available for sale (amortized cost of $7,451 in 1995
and $5,941 in 1996) 7,299 5,768
Premises and equipment, net 553 533
Real estate - 60
Federal Home Loan Bank stock 368 394
Interest receivable 214 257
Other 123 33
-------- --------
Total assets $ 45,482 $ 46,579
======== ========
Liabilities and Equity
----------------------
Deposits $ 40,637 $ 40,765
Federal Home Loan Bank advances - 800
Advance payments by borrowers for taxes and insurance 231 202
Accrued expenses and other liabilities 168 122
Income taxes payable:
Current 5 13
Deferred 15 1
-------- --------
Total liabilities 41,056 41,903
-------- --------
Commitments and contingencies
Equity:
Retained income, substantially restricted 4,522 4,784
Unrealized losses on securities available for sale,
net of income taxes (96) (108)
-------- --------
Total equity 4,426 4,676
-------- --------
Total liabilities and equity $ 45,482 $ 46,579
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Equity
(in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
on Securities
Retained Available
Income for Sale Total
------ -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 4,158 $ (138) $ 4,020
Net income 364 - 364
Net unrealized gains on securities
available for sale, net of income
tax of $26 - 42 42
------- ------ -------
Balance at December 31, 1995 4,522 (96) 4,426
Net income 262 - 262
Net unrealized losses on securities
available for sale, net of income
tax benefit of $8 - (12) (12)
------- ------ -------
Balance at December 31, 1996 $ 4,784 $ (108) $ 4,676
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1996
Operating activities:
<S> <C> <C>
Net income $ 364 $ 262
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 61 54
Provision for loan losses 30 30
Deferred income taxes (benefit) 18 (6)
Net increase in deferred loan fees 5 16
Accretion of discounts on investment securities, net (17) (20)
Amortization of premiums on mortgage-backed securities 22 17
FHLB stock dividends (24) (26)
Losses on mortgage-backed securities sold - 2
Decrease (increase) in interest receivable 2 (43)
Decrease in other assets 45 90
Increase (decrease) in accrued expenses and other
liabilities 21 (46)
Increase in current income taxes 32 8
-------------- --------------
Net cash provided by operating activities 559 338
-------------- --------------
Investing activities:
Maturities of investment securities held to maturity 128 128
Purchase of investment securities held to maturity (100) (156)
Purchase of investment securities available for sale - (598)
Maturities of investment securities available for sale 350 750
Purchase of mortgage-backed securities available for
sale (90) -
Principal payments on mortgage-backed securities
available for sale 873 1,118
Proceeds from sale of mortgage-backed securities
available for sale - 372
Net increase in loans (615) (4,132)
Purchase of equipment (16) (34)
-------------- --------------
Net cash provided (used) in investing activities 530 (2,552)
-------------- --------------
</TABLE>
F-4
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1996
Financing activities:
<S> <C> <C>
Net increase in deposits $ 1,336 $ 128
Increase (decrease) in advance payments by borrowers
for taxes and insurance 17 (29)
Proceeds from FHLB advances - 1,100
Repayment of FHLB advances (700) (300)
-------------- --------------
Net cash provided by financing activities 653 899
-------------- --------------
Increase (decrease) in cash and
cash equivalents 1,742 (1,315)
Cash and cash equivalents at beginning of year 987 2,729
-------------- --------------
Cash and cash equivalents at end of year $ 2,729 $ 1,414
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings $ 1,952 $ 2,005
Income taxes 265 112
-------------- --------------
Noncash investing and financing activities:
Real estate acquired in satisfaction of
mortgage loans $ - $ 60
Unrealized gains (losses) on securities available
for sale, net of income tax (benefit) of $26
and $(8), respectively 42 (12)
Mortgage-backed securities held to maturity
transferred to available for sale, at amortized cost $ 4,576 $ -
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995 and 1996
(Tabular amounts in thousands)
1. Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of Security Federal Savings Bank (the
"Bank") and its subsidiary conform, in all material respects, to generally
accepted accounting principles and to general practices within the savings
and loan industry. The following summarize the more significant of these
policies and practices.
Nature of Operations - Security Federal Savings Bank, is a
federally-chartered, mutually owned savings bank. The Bank's principal line
of business is originating residential and nonresidential first mortgage
loans. The Bank's principal market is Carter County and parts of East
Tennessee. The loans are primarily with individuals; however, some
corporate borrowers have loans at the Bank.
Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Bank and its wholly-owned subsidiary, SFS, Inc.
Intercompany balances and transactions have been eliminated. SFS, Inc. is
currently inactive and its impact on the consolidated financial statements
is insignificant.
Loans Receivable - Loans receivable are carried at their unpaid principal
balance less, where applicable, net deferred loan fees and allowances for
losses. Additions to the allowances for losses are based on management's
evaluation of the loan portfolio under current economic conditions and such
other factors which, in management's judgment, deserve recognition in
estimating losses. Interest accrual is discontinued when a loan becomes 90
days delinquent unless, in management's opinion, the loan is well secured
and in process of collection. Interest income on impaired loans is
recognized on a cash basis.
F-6
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Loan Fees - Loan fees result from the origination of loans. Such fees and
certain direct incremental costs related to origination of such loans are
deferred ("net deferred loan fees") and reflected as a reduction of the
carrying value of loans. The net deferred loan fees (or costs) are
amortized using the interest method over the contractual lives of the
loans. Unamortized net deferred loan fees on loans sold prior to maturity
are credited to income at the time of sale.
Investment Securities and Mortgage-Backed Securities - Investment
securities held to maturity are stated at amortized cost since the Bank has
both the ability and positive intent to hold such securities to maturity.
Premiums and discounts on the investment securities are amortized or
accreted into income over the contractual terms of the securities using a
level yield interest method. Gains and losses on the sale of these
securities are calculated based on the specific identification method, and
sales transactions are evaluated in accordance with SFAS 115.
Investment securities and mortgage-backed securities available for sale are
carried at fair value. The Bank has identified their holdings in certain
debt securities and all mortgage-backed securities as available for sale.
The unrealized holding gains or losses on securities available for sale are
excluded from income and reported, net of related income tax effects, as a
separate component of equity until realized. Gains or losses on sales of
securities available for sale are based on the specific identification
method.
Real Estate - Real estate properties acquired through loan foreclosure are
initially recorded at fair value at the date of foreclosure. Subsequent to
foreclosure, real estate is recorded at the lower of initial fair value or
existing fair value less estimated costs to sell (net realizable value).
Real estate property held for investment is carried at the lower of cost,
including cost of property improvements incurred subsequent to acquisition
less depreciation, or net realizable value. Costs relating to development
and improvement of properties are capitalized, whereas costs relating to
the holding of property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to income if the carrying value of a
property exceeds its estimated net realizable value.
Premises and Equipment - Land is carried at cost. Office properties and
equipment are carried at cost less accumulated depreciation. Depreciation
is computed on straight-line method over the estimated useful lives of the
assets ranging from 5 to 39 years. The cost of maintenance and repairs is
charged to expense as incurred while expenditures which materially increase
property lives are capitalized.
F-7
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Federal Home Loan Bank Stock - Investment in stock of a Federal Home Loan
Bank is required by law of every federally insured savings and loan or
savings bank. The investment is carried at cost. No ready market exists for
the stock, and it has no quoted market value.
Income Taxes - The Bank and its subsidiary follow the practice of filing
consolidated income tax returns. Income taxes are allocated to the Bank as
though separate returns are being filed.
The Bank utilizes the liability method of computing income taxes in
accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the liability method,
deferred tax liabilities and assets are established for future tax return
effects of temporary differences between the stated value of assets and
liabilities for financial reporting purposes and their tax basis adjusted
for tax rate changes. The focus is on accruing the appropriate balance
sheet deferred tax amount, with the statement of income effect being the
result of changes in balance sheet amounts from period to period. Current
income tax expense is provided based upon the actual tax liability incurred
for tax return purposes.
Cash Flow Information - As presented in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand and interest-earning
deposits in other banks. The Bank considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents.
Impact of New Accounting Pronouncement - In June, 1996, the FASB issued
SFAS No. 125, Accounting for the Transfer and servicing of Financial Assets
and Extinguishment of Liabilities ("SFAS 125"). SFAS 125 supersedes SFAS
122, Accounting for Mortgage Servicing Rights. SFAS 125 provides accounting
and reporting standards for transfers and serving of financial assets and
the extinguishment of liabilities based on consistent application of a
financial components approach, after a transfer of financial assets, an
entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. SFAS 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted.
Management of the Bank will determine the effect on the Bank's financial
position and results of operations for future transactions that are covered
by this accounting standard.
F-8
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investment Securities
---------------------
The carrying values and estimated market values of investment securities
are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities to be held to
maturity:
December 31, 1995:
U.S. government security $ 378 $ - $ 63 $ 315
Municipal securities 289 - - 289
----------- -------- ----------- -----------
$ 667 $ - $ 63 $ 604
=========== ======== =========== ===========
December 31, 1996:
U.S. government security $ 398 $ - $ 102 $ 296
Municipal securities 317 - - $ 317
----------- -------- ----------- -----------
$ 715 $ - $ 102 $ 613
=========== ======== =========== ===========
Securities available for sale:
December 31, 1995:
U.S. government and
agency securities $ 751 $ - $ 4 $ 747
=========== ======== =========== ===========
December 31, 1996:
U.S. government and
agency securities $ 599 $ - $ 2 $ 597
=========== ======== =========== ===========
</TABLE>
The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
-------------------------- ---------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Securities to be held to
maturity:
Due in one year $ 127 $ 127 $ 127 $ 127
Due after one year through
five years 162 190 162 190
Due after ten years 378 398 315 296
----------- ----------- ----------- -----------
$ 667 $ 715 $ 604 $ 613
=========== =========== =========== ===========
Securities available for sale:
Due in one year $ 751 - $ 747 -
Due after one year through
five years - 599 - 597
----------- ----------- ----------- -----------
$ 751 $ 599 $ 747 $ 597
=========== =========== =========== ===========
</TABLE>
The Bank had investment securities with an amortized cost of approximately
$1,129,000 and $997,000 pledged against deposits at December 31, 1995 and
1996.
F-9
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Bank had no sales of investment securities to be held to maturity or
available for sale for the years ended December 31, 1995 and 1996.
The net unrealized losses on investment securities available for sale, net
of taxes, at December 31, 1995 and 1996, $2,600 and $1,100, respectively,
are reported as a separate component of equity.
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Real estate first mortgage loans:
One-to-four-family $ 26,396 $ 29,653
Construction 724 1,125
Commercial real estate 1,173 1,288
Multi-family residential 780 912
Land 1,534 1,732
-------------- --------------
Total real estate loans 30,607 34,710
-------------- --------------
Consumer and commercial loans:
Commercial business 660 558
Auto loans 1,455 1,949
Share loans 414 435
Other 477 524
-------------- --------------
Total consumer and commercial loans 3,006 3,466
-------------- --------------
Total loans 33,613 38,176
-------------- --------------
Less:
Undisbursed portion of loans in process 447 942
Net deferred loan fees 105 122
Allowance for loan losses 279 304
831 1,368
-------------- --------------
$ 32,782 $ 36,808
============== ==============
</TABLE>
F-10
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Bank's primary lending area for the origination of mortgage loans
includes Carter County and East Tennessee. The Bank limits uninsured loans
to 85% of the appraised value of the property securing the loan. Generally,
the Bank allows loans covered by private mortgage insurance up to 95% of
the appraised value of the property securing the loan.
The general policy is to limit loans on commercial real estate to 80% of
the lesser of appraised value or construction cost of the property securing
the loan.
The Bank's policy requires that consumer and other installment loans be
supported primarily by the borrower's ability to repay the loan and
secondarily by the value of the collateral securing the loan, if any.
Management of the Bank believes that its allowances for losses on its loan
portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In
addition, various regulatory agencies periodically review the Bank's
allowance for losses as an integral part of their examination processes.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments of information available to them at the time of
their examinations.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan", no loans in non-homogenous groups were determined to be impaired
for the year ended or as of December 31, 1996. Commercial real estate,
multi-family residential and land loans are included in the non-homogenous
group.
First mortgage loans which are contractually past due ninety days or more
total approximately $197,000 at December 31, 1995 and $295,000 at December
31, 1996. The amount the Bank will ultimately realize from these loans
could differ materially from their carrying value because of unanticipated
future developments affecting the underlying collateral or the borrower's
ability to repay the loans. If collection efforts are unsuccessful, these
loans will be subject to foreclosure proceedings in the ordinary course of
business. Management believes that the Bank has adequate collateral on
these loans and that the Bank will not incur material losses in the event
of foreclosure.
At December 31, 1996, the Bank had loans pledged against public deposits of
approximately $1,454,000.
F-11
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1996
---- ----
<S> <C> <C>
Beginning balance $ 250 $ 279
Provision charged to income 30 30
Recoveries - -
Charge-offs, net (1) (5)
----- -----
Ending balance $ 279 $ 304
===== =====
</TABLE>
4. Mortgage-Backed Securities
--------------------------
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale:
December 31, 1995:
<S> <C> <C> <C> <C>
GNMA $ 954 $ 4 $ 5 $ 953
FHLMC 105 2 - 107
FHLMC REMIC's 2,962 - 68 2,894
FNMA 812 4 13 803
FNMA REMIC's 2,618 - 76 2,542
------- ---- ----- -------
$ 7,451 $ 10 $ 162 $ 7,299
======= ==== ===== =======
December 31, 1996:
GNMA $ 812 $ 4 $ 6 $ 810
FHLMC 78 3 - 81
FHLMC REMIC's 2,222 - 79 2,143
FNMA 717 3 19 701
FNMA REMIC's 2,112 - 79 2,033
------- ---- ----- -------
$ 5,941 $ 10 $ 183 $ 5,768
======= ==== ===== =======
</TABLE>
Although mortgage-backed securities are initially issued with a stated
maturity date, the underlying mortgage collateral may be prepaid by the
mortgagee and, therefore, such securities may not reach their maturity
date.
F-12
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Bank had mortgage-backed securities with an amortized cost of
approximately $3,310,000 and $2,480,000, pledged against deposits and FHLB
advances at December 31, 1995 and 1996, respectively.
For the year ended December 31, 1996, proceeds from sales of
mortgage-backed securities were $372,000, with realized losses of $2,000.
Their were no sales of mortgage-backed securities for the year ended
December 31, 1995.
The net unrealized losses at December 31, 1995 and 1996, $152,000 and
$173,000, net of related tax benefits of $57,500 and $66,100, respectively,
are reported as a separate component of equity.
On December 15, 1995, the Bank transferred mortgage-backed securities held
to maturity with an amortized cost of approximately $4,576,000 and market
value of approximately $4,476,000 to the available for sale category. The
transfer was a result of the FASB allowing a one-time transfer of an
entity's investment portfolio without penalty.
5. Real Estate
-----------
Real estate is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
---- ----
<S> <C> <C>
Real estate acquired in settlement of loans $ - $ 60
======= ====
</TABLE>
6. Premises and Equipment
----------------------
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
---- ----
<S> <C> <C>
Land and improvements $ 202 $ 202
Buildings 782 790
Vehicles 17 17
Furniture, fixtures and equipment 516 541
------- -------
1,517 1,550
Less accumulated depreciation (964) (1,017)
------- -------
$ 553 $ 533
======= =======
</TABLE>
F-13
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
7. Interest Receivable
-------------------
Interest receivable consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1996
---- ----
<S> <C> <C>
Loans receivable $ 171 $ 220
Investments 11 10
Mortgage-backed securities 37 33
----- -----
219 263
Less allowance for uncollectible interest (5) (6)
----- -----
$ 214 $ 257
===== =====
</TABLE>
8. Deposits
--------
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Interest Rates
-----------------------
December 31, December 31,
---------------------------- -----------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Noninterest bearing
accounts $ 283 $ 793 - % - %
NOW accounts 3,079 2,194 2.02% 1.99%
Money Market accounts 1,423 1,622 3.02% 3.03%
Passbook accounts 4,481 4,502 3.05% 3.04%
Certificates of deposit 31,371 31,654 5.82% 5.55%
-------- -------- ---- ----
$ 40,637 $ 40,765 5.09% 4.87%
======== ======== ==== ====
</TABLE>
Contractual maturities of certificate accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
---- ----
<S> <C> <C> <C>
12 months or less $ 26,702 $ 25,851
After 1 but within 3 years 4,459 4,786
After 3 years 210 1,017
-------- --------
$ 31,371 $ 31,654
======== ========
</TABLE>
The Bank had deposit accounts in amounts of $100,000 or more of
approximately $10.5 million and $10.1 million at December 31, 1995 and
1996, respectively. Deposit balances in excess of $100,000 are not insured
by the Federal Deposit Insurance Corporation.
F-14
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
---- ----
<S> <C> <C>
NOW, money market, and passbook accounts $ 248 $ 232
Certificate accounts 1,725 1,747
------- -------
1,973 1,979
Less: penalties for early withdrawal (5) (4)
------- -------
Total interest on deposits $ 1,968 $ 1,975
======= =======
</TABLE>
9. Federal Home Loan Bank Advances
-------------------------------
Advances from the Federal Home Loan Bank (FHLB) are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
Contractual Maturity 1995 1996
-------------------- ---- ----
Within one year:
<S> <C> <C>
Variable rate $ - $ 800
========== =====
Weighted average rate - % 5.85%
========== =====
</TABLE>
The Bank pledges as collateral for these borrowings its FHLB stock and
selected qualifying mortgage loans (as defined) under an agreement with the
FHLB. Loans pledged at December 31, 1996, were approximately $1.3 million.
The Bank has total credit availability with the FHLB of up to $2.3 million.
10. Income Taxes
------------
Income tax expense(benefit) is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------- --
1995 1996
------------------------------------ ------------------------------------
Federal State Total Federal State Total
<S> <C> <C> <C> <C> <C> <C>
Current $ 174 $ 29 $ 203 $ 136 $ 27 $ 163
Deferred 11 7 18 (5) (1) (6)
--------- --------- --------- --------- --------- ---------
Total $ 185 $ 36 $ 221 $ 131 $ 26 $ 157
========= ========= ========= ========= ========= =========
Effective tax rate 37.8% 37.5%
========= =========
</TABLE>
F-15
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The differences between actual income tax expense and the amount computed
by applying the federal statutory income tax rate of 34% to income before
income taxes are reconciled as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1996
---- ----
<S> <C> <C>
Computed income tax expense $ 199 $ 142
Increase (decrease) resulting from:
State income tax, net of federal benefit 24 17
Other (2) (2)
----- -----
Actual income tax expense $ 221 $ 157
===== =====
</TABLE>
The components of net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Section 481(a) adjustment--bad debts $ - $ 137
Bad debt reserves 32 -
Excess tax depreciation 15 14
FHLB stock dividends 22 32
Purchased discounts on mortgage-backed securities 8 8
---- ---
77 191
---- ---
Deferred tax assets:
Bad debt reserves - 115
Accrued sick leave 3 5
Unrealized losses on securities available for sale 59 67
Other - 3
Valuation allowance - -
---- ---
62 190
---- ---
Net deferred tax liability $ 15 $ 1
==== ===
</TABLE>
The Bank's annual addition to its reserve for bad debts allowed under the
Internal Revenue Code may differ significantly from the bad debt experience
used for financial statement purposes. Such bad debt deductions for income
tax purposes are included in taxable income of later years only if the bad
debt reserves are used for purposes other than to absorb bad debt losses.
Since the Bank does not intend to use the reserve for purposes other than
to absorb losses, no deferred income taxes have been provided on the amount
of bad debt reserves for tax purposes that arose in tax years beginning
before December 31, 1987, in accordance with
F-16
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
SFAS No. 109. Therefore, retained income at December 31, 1995 and 1996,
includes approximately $825,000, representing such bad debt deductions for
which no deferred income taxes have been provided.
With the repeal of the reserve method of accounting for thrift bad debt
reserves for tax year beginning after December 31, 1995, the Bank will have
to recapture into taxable income its post-1987 excess reserves over a
six-year period. The Bank currently meets a recapture provision which
allows it to delay the start of the recapture period due to loan
origination volume. The amount of the post-1987 excess is approximately
$246,000. Since the tax effect of this excess had been previously recorded
as deferred income taxes, the Bank will have no impact on its results of
operations when the excess reserves are recaptured.
11. Pension Plan
------------
The Bank has a non-contributory defined contribution pension plan covering
all eligible employees. Under the plan agreement, prior service is not
considered. Total pension expense was $46,000 and $29,000 for the years
ended December 31, 1995 and 1996, respectively.
12. Commitments
-----------
The Bank had outstanding commitments to originate mortgage and consumer
loans of approximately $765,000 and $400,000 at December 31, 1995 and 1996,
respectively. The commitments to originate mortgage loans at December 31,
1995, were composed of fixed rate loans that had interest rates ranging
from 7.25% to 8.50% and terms ranging from 8 to 15 years. The commitments
to originate mortgage loans at December 31, 1996, were composed of fixed
rate loans of $230,000. The fixed rate loans had interest rates ranging
from 7.625% to 8.00% and terms ranging from 1 to 15 years. The remaining
loan commitments at December 31, 1996 were for consumer and commercial
loans totaling $170,000 with variable rates.
13. Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements administered
by the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-17
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations)
to adjusted total assets (as defined), and of risk-based capital (as
defined) to risk-weighted assets (as defined). Management believes, as of
December 31, 1996, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total tangible, core, and risk-based ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The following tables reconcile capital under generally accepted accounting
principles (GAAP) to regulatory capital:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
---------- ---------- ----------
<S> <C> <C> <C>
At December 31, 1995:
Total equity $ 4,426 $ 4,426 $ 4,426
Unrealized losses on securities 96 96 96
Additional capital:
General valuation allowance - - 279
---------- ---------- ----------
Regulatory capital $ 4,522 $ 4,522 $ 4,801
========== ========== ==========
At December 31, 1996:
Total equity $ 4,676 $ 4,676 $ 4,676
Unrealized losses on securities 108 108 108
Additional capital:
General valuation allowance - - 304
---------- ---------- ----------
Regulatory capital $ 4,784 $ 4,784 $ 5,088
========== ========== ==========
</TABLE>
F-18
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios are also presented in the
table (in thousands). Nothing was deducted from capital for interest-rate
risk.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Greater Than) (Greater Than)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Tangible Capital (to
adjusted total assets) $ 4,522 9.9% $ 684 1.5% $ 2,279 5%
Core Capital (to
adjusted total assets) $ 4,522 9.9% $ 1,368 3.0% $ 2,279 5%
Risk-Based (to risk-
weighted assets) $ 4,801 21.0% $ 1,825 8.0% $ 2,281 10%
As of December 31, 1996
Tangible Capital (to
adjusted total assets) $ 4,784 10.2% $ 701 1.5% $ 2,338 5%
Core Capital (to
adjusted total assets) $ 4,784 10.2% $ 1,402 3.0% $ 2,338 5%
Risk-Based (to risk-
weighted assets) $ 5,088 20.2% $ 2,014 8.0% $ 2,518 10%
</TABLE>
14. Financial Instruments with Off-Balance-Sheet Risk
-------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and lines
of credit. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial position. The contract or notional amounts of those
instruments reflect the extent of the Bank's involvement in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and lines of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
F-19
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Financial instruments, the contract amounts of which represent credit risk
for lines and letters of credit, the balances outstanding and amounts
available for use at December 31, 1996, were approximately as follows:
<TABLE>
<CAPTION>
Financial Balance Available
Instruments Outstanding For Use
----------- ----------- -------
<S> <C> <C> <C>
Consumer and other lines $ 1,000,000 $ 553,000 $ 447,000
Letters of credit 47,000 - 47,000
----------- --------- ---------
$ 1,047,000 $ 553,000 $ 494,000
=========== ========= =========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's creditworthiness. The amount of collateral obtained, if it
is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral may include
first and second mortgages; property, plant, and equipment; accounts
receivable; deposit accounts; and income-producing commercial properties.
The Bank does not anticipate any losses as a result of these transactions.
15. Employment and Change of Control Agreement
------------------------------------------
The Bank entered into an employment agreement with a key officer in 1996.
The employment agreement provides for three-year terms. Commencing on the
first anniversary date and continuing each anniversary date thereafter, the
board of directors may extend the agreement for an additional year so that
the remaining term shall be three years, unless written notice of
termination of the agreement is given by the executive officer. The
agreement provides for severance payments and other benefits in the event
of involuntary termination of employment in connection with any change in
control of the Bank. A severance payment will also be provided on a similar
basis in connection with voluntary termination of employment where,
subsequent to a change in control, the officer is assigned duties
inconsistent with their position, duties, responsibilities and status
immediately prior to such change in control. The severance payment will
equal 2.99 times the executive officer's base amount of annual compensation
as defined under the Internal Revenue Code. The payment of amounts under
the agreement may be paid within 30 days of such termination, discounted at
an agreed upon rate, or in equal installments over thirty-six months. The
Bank has not accrued any benefits under this postemployment agreement.
F-20
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
16. Financial Instruments
---------------------
The approximate stated and estimated fair value of financial instruments
are summarized below (in thousands of dollars):
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
1995 1996
------------------------ -------------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 2,729 $ 2,729 $ 1,414 $ 1,414
Investment securities 667 604 715 613
Loans receivable, net 32,782 33,881 36,808 39,042
Federal Home Loan Bank stock 368 368 394 394
Other assets 214 214 257 257
---------- ---------- ---------- ----------
$ 36,760 $ 37,796 $ 39,588 $ 41,720
========== ========== ========== ==========
Financial liabilities:
Deposits:
Demand accounts $ 9,266 $ 9,266 $ 9,111 $ 9,111
Certificate accounts 31,371 31,450 31,654 31,761
Advances from Federal
Home Loan Bank - - 800 800
Other liabilities 314 314 256 256
---------- ---------- ---------- ----------
$ 40,951 $ 41,030 $ 41,821 $ 41,928
========== ========== ========== ==========
</TABLE>
The Bank had off-balance sheet financial commitments, which include
approximately $894,000 million of commitments to originate and fund loans
and unused consumer lines of credit and letters of credit. Since these
commitments are based on current market rates, the commitment amount is
considered to be a reasonable estimate of fair market value.
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of
fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate
that value. The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
F-21
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Cash - The carrying amount of such instruments is deemed to be a reasonable
estimate of fair value.
Investments - Fair values for investment securities are based on quoted
market prices.
Loans - Fair values for loans held for investment are estimated by
segregating the portfolio by type of loan and discounting scheduled cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio. A
prepayment assumption is used as an estimate of the portion of loans that
will be repaid prior to their scheduled maturity.
Federal Home Loan Bank Stock - No ready market exists for this stock and it
has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is deemed
to be a reasonable estimate of fair value.
Deposits - The fair values disclosed for demand deposits are, as required
by SFAS 107, equal to the amounts payable on demand at the reporting date
(i.e., their stated amounts). The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates using
the rates currently offered for deposits of similar remaining maturities.
Advances from the FHLB - The estimated fair value of advances from the FHLB
is based on discounting amounts payable at contractual rates using current
market rates for advances with similar maturities.
Other Assets and Other Liabilities - Other assets represent accrued
interest receivable; other liabilities represent advances from borrowers
for taxes and insurance and accrued interest payable. Since these financial
instruments will typically be received or paid within three months, the
carrying amounts of such instruments are deemed to be a reasonable estimate
of fair value.
Fair value estimates are made at a specific point of time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Bank's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, current interest rates and prepayment trends, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value also
would affect significantly the estimates. Further, the fair value estimates
were
F-22
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
calculated as of December 31, 1995 and 1996. Changes in market interest
rates and prepayment assumptions could change significantly the estimated
fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has
significant assets and liabilities that are not considered financial assets
or liabilities including deposit franchise value, loan servicing portfolio,
real estate, deferred tax liabilities, and premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
17. Plan of Conversion
------------------
On January 15, 1997, the Bank's Board of Directors formally approved a plan
("Plan") to convert from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank subject to approval by the Bank's
members as of a still-to-be determined future voting record date. The Plan,
which includes formation of a holding company, is subject to approval by
the Office of Thrift Supervision (OTS) and includes the filing of a
registration statement with the Securities and Exchange Commission. As of
December 31, 1996, the Bank had incurred conversion costs of approximately
$10,000. If the conversion is ultimately successful, actual conversion
costs will be accounted for as a reduction in gross proceeds. If the
conversion is unsuccessful, the conversion costs will be expensed.
The Plan calls for the common stock of the Bank to be purchased by the
holding company and for the common stock of the holding company to be
offered to various parties in a subscription offering at a price based on
an independent appraisal. It is anticipated that any shares not purchased
in the subscription offering will be offered in a direct community
offering, and then any remaining shares offered to the general public in a
solicited offering.
The stockholders of the holding company will be asked to approve a proposed
stock option plan and a proposed restricted stock plan at a meeting of the
stockholders after the conversion. Shares issued to directors and employees
under these plans may be from authorized but unissued shares of common
stock or they may be purchased in the open market. In the event that
options or shares are issued under these plans, such issuances will be
included in the earnings per share calculation; thus, the interests of
existing stockholders would be diluted.
The Bank may not declare or pay a cash dividend if the effect thereof would
cause its net worth to be reduced below either the amounts required for the
liquidation account discussed below or the regulatory capital requirements
imposed by federal regulations.
F-23
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
At the time of conversion, the Bank will establish a liquidation account,
which will be a memorandum account that does not appear on the balance
sheet, in an amount equal to its retained income as reflected in the latest
consolidated balance sheet used in the final conversion prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders who continue to maintain their deposit accounts in the Bank after
conversion. In the event of a complete liquidation of the Bank (and only in
such an event), eligible depositors who continue to maintain accounts shall
be entitled to receive a distribution from the liquidation account before
any liquidation may be made with respect to common stock.
18. Deposit Insurance Assessment
----------------------------
The Bank incurred an expense for the year ended December 31, 1996 for the
one-time special assessment levied by the omnibus appropriation bill to
recapitalize the SAIF insurance fund. The special assessment for deposit
insurance premiums was approximately $264,000, with an after tax impact of
approximately $164,000. Effective January 1, 1997, the Bank began paying
reduced premium assessments in accordance with the new SAIF assessment
rates.
19. Previously Issued Financial Statements
--------------------------------------
The effect on net income of adjustments to the previously issued financial
statements for the year ending December 31, 1995, follows:
Net income as previously reported $ 395
Adjustments:
Allowance for loan losses (30)
Income tax expense (1)
--------
Net income as restated $ 364
========
F-24
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY
BIF Bank Insurance Fund of the FDIC
Community Offering Offering for sale to certain members of the
general public of any shares of common stock not
subscribed for in the Subscription Offering, including
the possible offering of common stock in a Syndicated
Community Offering
Conversion Simultaneous conversion of Security Federal Savings Bank,
to stock form, the issuance of the Security Federal
Savings Bank's outstanding common stock to SFB Bancorp
and SFB Bancorp's offer and sale of common stock
Eligible Account ^ Savings account holders of the Savings Bank with
Holders account balances of at least $50 as of the close of
business on December 31, 1995
Employee Plans Tax-qualified employee benefit plans of the Savings Bank
ERISA Employee Retirement Income Security of 1974, as amended
ESOP Employee Stock Ownership Plan
EVR or Estimated Estimated pro forma market value of the common stock
Valuation Range arranging from $4,930,000 to ^ $6,670,000
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date _________ p.m., Eastern Time, on __________ ____, 199____
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Feldman Feldman Financial Advisors, Inc.
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
NASD National Association of Securities Dealers, Inc.
Nasdaq National Association of Securities Dealers Automated
Quotation System
NOW account Negotiable order of withdrawal account
NPV Net portfolio value
Offering Subscription, Community and Syndicated Community
Offerings, collectively
- --------------------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY
Option Plan Stock Option Plan to be adopted within one year of the
Conversion
Order Form Form for ordering stock accompanied by a certification
concerning certain matters
Other Members Savings account holders and certain borrowers
(borrowers whose loans were outstanding on January 17,
1990) who are entitled to vote at the Special Meeting due
to the existence of a savings account or a borrowing,
respectively, on the Voting Record Date for the Special
Meeting
OTC Bulletin Board An electronic stock data system operated by Nasdaq
OTS Office of Thrift Supervision
Pink Sheets Trademark name for the pink paper upon which stock data
is published by the National Quotation Bureau
Plan of Conversion Plan of Security Federal Savings Bank to convert from a
federally chartered mutual savings ^ association to a
federally chartered stock savings association and the
issuance of all of Security ^Federal Savings Bank's
outstanding capital stock to SFB Bancorp and the issuance
of SFB Bancorp's stock to the public
Purchase Price $10.00 per share price of the common stock
QTI Qualified thrift investment
QTL Qualified thrift lender
RSP Restricted stock plan to be adopted within one year of
the Conversion
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards adopted by
FASB
Special Meeting Special Meeting of members of ^ Security Federal Savings
Bank called for the purpose of approving the Plan
Subscription Offering Offering of non-transferable rights to subscribe
for the common stock, in order of priority, to Eligible
Account Holders, tax-qualified employee plans,
Supplemental Eligible Account Holders and Other Members
Supplemental Eligible Depositors, who are not Eligible Account Holders of
Account Holders ^Security Federal Savings Bank, with account balances of
at least $50 on March 31, 1997
- --------------------------------------------------------------------------------
A-2
<PAGE>
Syndicated Community Offering of shares of common stock remaining after the
Offering Subscription Offering and undertaken prior to the end
and as part of the Community Offering, and
which may, at ^ our discretion ^ be made to the general
public on a best efforts basis by a selling group of
broker-dealers
Voting Record Date The close of business on __________ ____,
1997, the date for determining members entitled to vote
at the Special Meeting.
- --------------------------------------------------------------------------------
A-3
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this document in connection with
the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by Security
Federal Savings Bank, SFB Bancorp, Inc. or Trident Securities. This document
does not constitute an offer to sell, or the solicitation of an offer to buy,
any of the securities offered hereby to any person in any jurisdiction in which
such offer or solicitation would be unlawful. Neither the delivery of this
document by Security Federal Savings Bank, SFB Bancorp, Inc. or Trident
Securities nor any sale made hereunder shall in any circumstances create an
implication that there has been no change in the affairs of Security Federal
Savings Bank or SFB Bancorp, Inc. since any of the dates as of which information
is furnished herein or since the date hereof.
SFB Bancorp, Inc.
Up to ^ 667,000 Shares
(Anticipated Maximum)
Common Stock
PROSPECTUS
TRIDENT SECURITIES, INC.
Selling Agent
Dated __________ ____, 1997
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED
OR GUARANTEED.
Until the later of __________ ____, 1997, or ^ 90 days after commencement of
the offering of common stock, all dealers that buy, sell or trade these
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 27. Exhibits:
The exhibits filed as part of this Registration Statement are as
follows:
1.1 Form of Sales Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion of Security Federal Savings Bank
3(i) Charter of SFB Bancorp, Inc.
3(ii) Bylaws of SFB Bancorp, Inc.*
4 Specimen Stock Certificate of SFB Bancorp, Inc.
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
regarding legality of securities registered*
5.2 Opinion of Feldman Financial Advisors, Inc.
as to the value of subscription rights
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 State Tax Opinion of Crisp, Hughes & Co., L.L.P.
10 Employment Agreement with Peter Hampton
16 Letter on Change in Certifying Accountant *
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C.
(contained in its opinions filed as Exhibits 5.1 and 8.1)
23.2 Consent of Crisp, Hughes & Co., L.L.P.*
23.3 Consent of Feldman Financial Advisors, Inc.
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule
99.1 Stock Order Form
99.2 Appraisal Report of Feldman Financial Advisors, Inc.*
99.3 Marketing Materials
--------------
* Filed with this Amendment.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Elizabethton, Tennessee, on
April 9, 1997.
SFB BANCORP, INC.
By: /s/Peter W. Hampton
----------------------------------------
Peter W. Hampton
President and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated as of April 9, 1997.
/s/Peter W. Hampton /s/Bobby Hyatt
- ------------------------------------------- --------------------------------
Peter W. Hampton Bobby Hyatt
President and Director Assistant Vice-President
(Principal Executive and Financial Officer) (Principal Accounting Officer)
EXHIBIT 3(ii)
<PAGE>
BYLAWS
OF
SFB BANCORP, INC.
ARTICLE I
Principal Office
The home office of SFB Bancorp, Inc. (the "Company") shall be at 632 East
Elk Avenue in the City of Elizabethton, County of Carter, in the State of
Tennessee or at such other place within or without the State of Tennessee as the
board of directors shall from time to time determine. The Company may also have
offices at such other places within or without the State of Tennessee as the
board of directors shall from time to time determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the principal office of the Company or at such
other place within or without the State of Tennessee as the board of directors
may determine and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the Company for
the election of directors and for the transaction of any other business of the
Company shall be held annually at such date and time as the board of directors
may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the president or by a majority
of the board of directors or by a committee of the board of directors, whose
members will be designated from time to time by the board of directors, and
which committee will have been delegated the power and authority to call such
meetings.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, any director
or the president to preside at such meetings.
SECTION 5. Notice of Meetings. Written notice stating the place, day, and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing such duties, not less
than ten days nor more than two months before the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, notice shall be deemed to be
delivered when deposited in the United States mail, addressed to the stockholder
at the address as it appears on the stock transfer books or records of the
Company as of the record date prescribed in Section 6 of this Article II, with
postage thereon prepaid. If a stockholder is present at a meeting, or in writing
waives notice thereof before or after the meeting, notice of the meeting to such
stockholder shall be unnecessary. When any stockholders' meeting, either annual
or special, is adjourned for more than thirty days, or if after the adjournment
a new record date is fixed for the adjourned meeting, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be
necessary to give any notice of the time and place of any meeting adjourned for
thirty days or less or of the business to be transacted at such adjourned
meeting, other than an announcement at the meeting at which such adjournment is
taken.
<PAGE>
SECTION 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than seventy days, and in case of a meeting of stockholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
SECTION 7. Voting Lists. The officer or agent having charge of the stock
transfer books for shares of the Company shall make a complete record of the
stockholders entitled to vote at each meeting of stockholders or any adjournment
thereof, arranged in alphabetical order, with the address of and the number of
shares held by each. The record, shall be available beginning two business days
after notice of the meeting is given for which the list was prepared and
continuing through the meeting, shall be kept on file at the principal office of
the Company, and shall be subject to inspection by any stockholder for any
purpose germane to the meeting at any time during usual business hours. Such
record shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any stockholder for any purpose
germane to the meeting during the whole time of the meeting. The original stock
transfer books shall be the only evidence as to who are the stockholders
entitled to examine such record or transfer books or to vote at any meeting of
stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the Company
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time, subject to the notice requirements of
Section 5 of this Article II. At such adjourned meeting at which a quorum shall
be present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed by the stockholder in the manner provided by the Charter.
Proxies solicited on behalf of the management shall be voted as directed by the
stockholder or, in the absence of such direction, as determined by a majority of
the board of directors or by a majority of a committee of the board of
directors, whose members will be designated from time to time by the board of
directors, and which committee will have been delegated the power and authority
to act on behalf of the board of directors. No proxy shall be valid after eleven
months from the date of its execution unless otherwise provided in the proxy.
SECTION 10. Voting. At each election for directors every stockholder
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. Directors shall be elected by a plurality of votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Unless otherwise provided in the Charter, by
statute, or by these Bylaws, in matters other than the election of directors, a
majority of the shares present in person or represented by proxy at a lawful
meeting and entitled to vote on the subject matter, shall be sufficient to pass
on a transaction or matter.
-2-
<PAGE>
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Company to the contrary, at any meeting of the
stockholders of the Company, any one or more of such stockholders may cast, in
person or by proxy, all votes to which such ownership is entitled. In the event
an attempt is made to cast conflicting votes, in person or by proxy, by the
several persons in whose names shares of stock stand, the vote or votes to which
these persons are entitled shall be cast as directed by a majority of those
holding such stock and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, trustee, or conservator may be voted by such
person, either in person or by proxy, without a transfer of such shares into
such person's name. Shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into such receiver's name if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter, the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Company, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the Company,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board of directors or the president may
make such appointment at the meeting. In case any person appointed as inspector
fails to appear or fails or refuses to act, the vacancy may be filled by
appointment by the board of directors in advance of the meeting or at the
meeting by the chairman of the meeting or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. Nominating Committee. The board of directors, or a committee
of the board of directors delegated such power and authority by the board of
directors, shall act as a nominating committee for selecting the management
nominees for election as directors. Except in the case of a nominee substituted
as a result of the death or other incapacity of a management nominee, the
nominating committee shall deliver written nominations to the secretary at least
twenty days prior to the date of the annual meeting. Provided such committee
makes such nominations, no nominations for directors except
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<PAGE>
those made by the nominating committee shall be voted upon at the annual meeting
unless other nominations by stockholders are made in writing and delivered to
the secretary of the Company in accordance with the provisions of Article II,
Section 15 of these Bylaws.
SECTION 15. Notice for Nominations and Proposals. Nominations of
candidates for election as directors at any annual meeting of stockholders may
be made (a) by, or at the direction of, a majority of the board of directors or
a committee thereof in accordance with Section 14 of these Bylaws or (b) by any
stockholder entitled to vote at such annual meeting. Only persons nominated in
accordance with the procedures set forth in this Section 15 shall be eligible
for election as directors at an annual meeting. Ballots bearing the names of all
the persons who have been nominated for election as directors at an annual
meeting in accordance with the procedures set forth in this Section 15 shall be
provided for use at the annual meeting.
Nominations, other than those made in accordance with Section 14 of these
Bylaws, shall be made pursuant to timely notice in writing to the Secretary of
the Company as set forth in this Section 15. To be timely, a stockholder's
notice shall be delivered to, or mailed and received at, the principal office of
the Company not less than 60 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company; provided,
however, that with respect to the first scheduled annual meeting, notice by the
stockholder must be so delivered or received no later than the close of business
on the tenth day following the day on which notice of the date of the scheduled
meeting must be delivered or received no later than the close of business on the
fifth day preceding the date of the meeting. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or re-election as a director and as to the stockholder giving the
notice (i) the name, age, business address and residence address of such person,
(ii) the principal occupation or employment of such person, (iii) the class and
number of shares of Company stock which are Beneficially Owned (as defined in
Article XIII of the Charter) by such person on the date of such stockholder
notice, and (iv) any other information relating to such person that is required
to be disclosed in solicitations of proxies with respect to nominees for
election as directors, pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including, but not limited to,
information required to be disclosed by Items 4, 5, 6 and 7 of Schedule 14A to
be filed with the Securities and Exchange Commission (or any successors of such
items or schedule or, if no successor to such items exists, then in accordance
with these items as they existed upon the date of the adoption of these Bylaws);
and (b) as to the stockholder giving the notice (i) the name and address, as
they appear on the Company's books, of such stockholder and any other
stockholders known by such stockholder to be supporting such nominees and (ii)
the class and number of shares of Company stock which are Beneficially Owned by
such stockholder on the date of such stockholder notice and, to the extent
known, by any other stockholders known by such stockholder to be supporting such
nominees on the date of such stockholder notice. At the request of the board of
directors, any person nominated by, or at the direction of, the Board for
election as a director at an annual meeting shall furnish to the Secretary of
the Company that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee.
Proposals, other than those made by or at the direction of the board of
directors, shall be made pursuant to timely notice in writing to the Secretary
of the Company as set forth in this Section 15. For stockholder proposals to be
included in the Company's proxy materials, the stockholder must comply with all
the timing and informational requirements of Rule 14a-8 of the Exchange Act (or
any successor regulation or, if no successor regulation exists, then in
accordance with the regulation as it existed upon the date of the adoption of
these Bylaws). With respect to stockholder proposals to be considered at the
annual meeting of stockholders but not included in the Company's proxy
materials, the stockholder's notice shall be delivered to, or mailed and
received at, the principal office of the Company not less than
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<PAGE>
60 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders of the Company. Such stockholder's notice shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the proposal desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Company's books, of the
stockholder proposing such business and, to the extent known, any other
stockholders known by such stockholder to be supporting such proposal, (c) the
class and number of shares of the Company stock which are Beneficially Owned by
the stockholder on the date of such stockholder notice and, to the extent known,
by any other stockholders known by such stockholder to be supporting such
proposal on the date of such stockholder notice, and (d) any financial interest
of the stockholder in such proposal (other than interests which all stockholders
would have).
The board of directors may reject any nomination by a stockholder or
stockholder proposal not timely made in accordance with the requirements of this
Section 15. If the board of directors, or a designated committee thereof,
determines that the information provided in a stockholder's notice does not
satisfy the informational requirements of this Section 15 in any respect, the
Secretary of the Company shall notify such stockholder of the deficiency in the
notice. The stockholder shall have an opportunity to cure the deficiency by
providing additional information to the Secretary within such period of time,
not to exceed five days from the date such deficiency notice is given to the
stockholder, as the board of directors or such committee shall reasonably
determine. If the deficiency is not cured within such period, or if the board of
directors or such committee reasonably determines that the additional
information provided by the stockholder, together with information previously
provided, does not satisfy the requirements of this Section 15 in any respect,
then the board of directors may reject such stockholder's nomination or
proposal. The Secretary of the Company shall notify a stockholder in writing
whether such stockholder's nomination or proposal has been made in accordance
with the time and informational requirements of this Section 15. Notwithstanding
the procedures set forth in this paragraph, if neither the board of directors
nor such committee makes a determination as to the validity of any nominations
or proposals by a stockholder, the presiding officer of the annual meeting shall
determine and declare at the annual meeting whether the nomination or proposal
was made in accordance with the terms of this Section 15. If the presiding
officer determines that a nomination or proposal was made in accordance with the
terms of this Section 15, the presiding officer shall so declare at the annual
meeting and ballots shall be provided for use at the meeting with respect to
such nominee or proposal. If the presiding officer determines that a nomination
or proposal was not made in accordance with the terms of this Section 15, the
presiding shall so declare at the annual meeting and the defective nomination or
proposal shall be disregarded.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Company shall
be under the direction of its board of directors. The board of directors shall
annually elect a president from among its members and may also elect a chairman
of the board from among its members. The board of directors shall designate,
when present, any director or the president to preside at its meetings.
SECTION 2. Number, Term, and Election. The board of directors shall
initially consist of six (6) members and shall be divided into three classes as
nearly equal in number as possible. The members of each class shall be elected
for a term of three years and until their successors are elected or qualified.
The board of directors shall be classified in accordance with the provisions of
the Company's Charter. The board of directors may increase the number of members
of the board of directors but in no event shall the number of directors be
increased in excess of fifteen.
-5-
<PAGE>
SECTION 3. Place of Meetings. All annual and special meetings of the board
of directors shall be held at the principal office of the Company or at such
other place within or without the State of Tennessee as the board of directors
may determine and as designated in the notice of such meeting, if necessary.
SECTION 4. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this Bylaw at such time and date as the
board of directors may determine.
SECTION 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the president, the chairman of the board
of directors, or by one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place within or without
the State of Tennessee as the place for holding any special meeting of the board
of directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other.
SECTION 6. Notice. Written notice of any special meeting shall be given to
each director at least two days previous thereto delivered personally or by
telegram or at least five days previous thereto delivered by mail at the address
at which the director is most likely to be reached. Such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with
postage thereon prepaid if mailed or when delivered to the telegraph company if
sent by telegram. Any director may waive notice of any meeting by a writing
filed with the secretary before, during, or after the meeting. The attendance of
a director at a meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
SECTION 7. Quorum. A majority of the number of directors fixed by Section
2 of Article III shall constitute a quorum for the transaction of business at
any meeting of the board of directors, but if less than such majority is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time. Notice of any adjourned meeting shall be given in the same manner
as prescribed by Section 6 of Article III.
SECTION 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the entire
board of directors, unless a greater number is prescribed by these Bylaws, the
Charter, or the laws of Tennessee.
SECTION 9. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 10. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the principal office of the Company
addressed to the president. Unless otherwise specified herein such resignation
shall take effect upon receipt thereof by the president.
SECTION 11. Vacancies. Any vacancy occurring in the board of directors
shall be filled in accordance with the provisions of the Company's Charter. Any
directorship to be filled by reason of an
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<PAGE>
increase in the number of directors may be filled by the affirmative vote of
two-thirds of the directors then in office. The term of such director shall be
in accordance with the provisions of the Company's Charter.
SECTION 12. Removal of Directors. Any director or the entire board of
directors may be removed for cause and then only in accordance with the
provisions of the Company's Charter.
SECTION 13. Compensation. Directors, as such, may receive a stated fee for
their services. By resolution of the board of directors, a reasonable fixed sum,
and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
actual attendance at committee meetings as the board of directors may determine.
Nothing herein shall be construed to preclude any director from serving the
Company in any other capacity and receiving remuneration therefor.
SECTION 14. Presumption of Assent. A director of the Company who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
the director's dissent or abstention shall be entered in the minutes of the
meeting or unless the director shall file a written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the Company
immediately after the adjournment of the meeting. Such right to dissent shall
not apply to a director who votes in favor of such action.
ARTICLE IV
Committees of the Board of Directors
The board of directors may, by resolution passed by a simple majority of a
quorum, designate one or more committees, as they may determine to be necessary
or appropriate for the conduct of the business of the Company, and may prescribe
the duties, constitution, and procedures thereof. Each committee shall consist
of one or more directors of the Company. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of and to discharge any committee of the board. Any member of any such
committee may resign at any time by giving notice to the Company provided,
however, that notice to the board of directors, the chief executive officer, the
chairman of such committee, or the secretary shall be deemed to constitute
notice to the Company. Such resignation shall take effect upon receipt of such
notice or at any later time specified therein; and, unless otherwise specified
therein, acceptance of such resignation shall not be necessary to make it
effective. Any member of any such committee may be removed at any time, either
with or without cause, by the affirmative vote of a majority of the authorized
number of directors at any meeting of the board called for that purpose.
ARTICLE V
Officers
SECTION 1. Positions. The officers of the Company shall include a chief
executive officer, president, one or more vice presidents, a secretary, and a
treasurer, each of whom shall be elected by the board of directors. The offices
of the secretary and treasurer may be held by the same person and
-7-
<PAGE>
a vice president may also be either the secretary or the treasurer. The board of
directors may designate one or more vice presidents as executive vice president
or senior vice president. The board of directors may also elect or authorize the
appointment of such other officers as the business of the Company may require.
The officers shall have such authority and perform such duties as the board of
directors may from time to time authorize or determine. In the absence of action
by the board of directors, the officers shall have such powers and duties as
generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Company shall
be elected annually by the board of directors at the first meeting of the board
of directors held after each annual meeting of the stockholders. If the election
of officers is not held at such meeting, such election shall be held as soon
thereafter as possible. Each officer shall hold office until a successor shall
have been duly elected and qualified, until death or resignation, or until
removal in the manner hereinafter provided. Election or appointment of an
officer, employee, or agent shall not of itself create contract rights. The
board of directors may authorize the Company to enter into an employment
contract with any officer in accordance with state law; but no such contract
shall impair the right of the board of directors to remove any officer at any
time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by the vote of the majority
of the board of directors whenever, in its judgment, the best interests of the
Company will be served thereby, but such removal, other than for cause, shall be
without prejudice to the contract rights, if any, of the person so removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors and no officer shall be prevented
from receiving such salary by reason of the fact that the officer is also a
director of the Company.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Company's Charter or these Bylaws with
respect to certificates for shares, the board of directors may authorize any
officer, employee, or agent of the Company to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the Company. Such
authority may be general or confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the Company and
no evidence of indebtedness shall be issued in its name unless authorized by the
board of directors. Such authority may be general or confined to specific
instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes, or other evidences of indebtedness issued in the name
of the Company shall be signed by one or more officers, employees, or agents of
the Company in such manner as shall from time to time be determined by
resolution of the board of directors.
-8-
<PAGE>
SECTION 4. Deposits. All funds of the Company not otherwise employed shall
be deposited from time to time to the credit of the Company in any of its duly
authorized depositories as the board of directors may select.
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Company shall be
represented by certificates signed by the president or a vice president and by
the treasurer or by the secretary of the Company, and may be sealed with the
seal of the Company or a facsimile thereof. Any or all of the signatures upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent, or registered by a registrar, other than the Company itself or an
employee of the Company. If any officer who has signed or whose facsimile
signature has been placed upon such certificate shall have ceased to be such
officer before the certificate is issued, it may be issued by the Company with
the same effect as if the person were such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Company shall set forth upon the face or back that the
Company will furnish to any stockholder upon request and without charge a full
statement of the designations, preferences, limitations, and relative rights of
the shares of each class authorized to be issued, the variations in the relative
rights and preferences between the shares of each such series so far as the same
have been fixed and determined, and the authority of the board of directors to
fix and determine the relative rights and preferences of subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Company is organized under the laws of the State of Tennessee; the name
of the person to whom issued; the number and class of shares; the date of issue;
the designation of the series, if any, which such certificate represents; and
the par value of each share represented by such certificate, or a statement that
the shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any share
until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the issuance
of shares shall be paid in accordance with the provisions of Tennessee law.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the
Company shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by such person's
legal representative, who shall furnish proper evidence of such authority, or by
the person's attorney thereunto authorized by power of attorney duly executed
and filed with the Company. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name shares
of capital stock stand on the books of the Company shall be deemed by the
Company to be the owner thereof for all purposes.
SECTION 6. Stock Ledger. The stock ledger of the Company shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list required by Section 7 of Article II, or the books of the Company, or to
vote in person or by proxy at any meeting of stockholders.
-9-
<PAGE>
SECTION 7. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Company alleged to have been lost, stolen, or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or the owner's legal representative, to give the Company a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Company with respect to the certificate alleged to have been lost,
stolen, or destroyed.
SECTION 8. Beneficial Owners. The Company shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, whether or not the Company shall have express or other
notice thereof, except as otherwise provided by law.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Company shall end on the last day of December of
each year. The Company shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Charter and applicable law, the board of
directors may, at any regular or special meeting, declare dividends on the
Company's outstanding capital stock. Dividends may be paid in cash, in property,
or in the Company's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Company shall be in such form as the board of
directors shall prescribe.
ARTICLE XI
Amendments
The Bylaws may be altered, amended, or repealed or new Bylaws may be
adopted in the manner set forth in the Charter.
-10-
EXHIBIT 5.1
<PAGE>
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
Attorneys at Law
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Telephone: (202) 434-4660
Telecopier: (202) 434-4661
April 9, 1997
Board of Directors
SFB Bancorp, Inc.
632 East Elk Avenue
Elizabethton, Tennessee 37643-3378
Re: Registration Statement Under the Securities Act of 1933
-------------------------------------------------------
Ladies and Gentlemen:
This opinion is rendered in connection with the Registration Statement on
Form SB-2 to be filed with the Securities and Exchange Commission under the
Securities Act of 1933 relating to the offer and sale of up to 767,000 shares of
common stock, par value $0.10 per share (the "Common Stock"), of SFB Bancorp,
Inc. (the "Company"), including shares to be issued to certain employee benefit
plans of the Company and its subsidiary. The Common Stock is proposed to be
issued pursuant to the Plan of Conversion (the "Plan") of Security Federal
Savings Bank (the "Savings Bank") in connection with the Savings Bank's
conversion from a mutual savings bank form of organization to a stock savings
bank form of organization and reorganization into a wholly-owned subsidiary of
the Company (the "Conversion"). As special counsel to the Savings Bank and the
Company, we have reviewed the corporate proceedings relating to the Plan and the
Conversion and such other legal matters as we have deemed appropriate for the
purpose of rendering this opinion.
Based on the foregoing, we are of the opinion that the shares of Common
Stock of the Company covered by the aforesaid Registration Statement will, when
issued in accordance with the terms of the Plan against full payment therefor,
be validly issued, fully paid, and non-assessable shares of Common Stock of the
Company.
We assume no obligation to advise you of changes that may hereafter be
brought to our attention.
<PAGE>
Board of Directors
April 9, 1997
Page Two
We hereby consent to the use of this opinion and to the reference to our
firm appearing in the Company's Prospectus under the headings "The Conversion -
Effects of Conversion to Stock Form on Depositors and Borrowers of Security
Federal Savings Bank - Tax Effects" and "Legal and Tax Matters." We also consent
to any references to our legal opinion referred to under the aforementioned
headings in the Prospectus.
Very truly yours,
/s/Malizia, Spidi, Sloane & Fisch, P.C.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
EXHIBIT 16
<PAGE>
[Letterhead Lawson and Frizzell]
Lawson and Frizzell
-- Certified Public Accountants --
P.O. Box 3098 CRS
2319 Browns Mill Road - Lower Level
Johnson City, Tennessee 37602-3098
C. Stuart Lawson, CPA Telephone 423-282-0478
David E. Frizzell, CPA Fax 423-282-9158
April 4, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Pursuant to 17. C.F.R. ss.228.304(a)(3) ("Item 304"), we have reviewed the
language under the heading "CHANGE IN AUDITOR" in the prospectus included as
part of the Registration Statement on Form SB-2 to be filed with the Securities
and Exchange Commission by SFB Bancorp, Inc., the proposed parent holding
company for Security Federal Savings Bank. We do not disagree with the
statements contained therein concerning our firm.
Very truly yours,
LAWSON AND FRIZZELL, CPAs
/s/ C. Stuart Lawson
--------------------
C. Stuart Lawson, CPA
EXHIBIT 23.2
<PAGE>
[LOGO]
CRISP
CH
HUGHES
--& CO., L.L.P.--
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
Consent of Independent Auditors
We consent to the reference of our firm under the captions "Experts" and "Legal
and Tax Opinions" and the use of our report dated January 27, 1997, with respect
to the consolidated financial statements of Security Federal Savings Bank and
Subsidiary included in Amendment No. 1 to Form AC, Amendment No. 1 to the
Registration Sttement (Form SB-2) and Related Prospectus of SFB Bancorp, Inc.
/s/Crisp Hughes & Co., L.L.P.
-----------------------------
CRISP HUGHES & CO., L.L.P.
Asheville, North Carolina
April 8, 1997
32 Orange Street - P.O. Box 3049 - Asheville, North Carolina 28802
(704) 254-2254 - FAX (704) 254-6859
Other Offices: Boone, Burnsville, Sylva, NC and Greenville, SC
Member of: The American Institute of Certified Public Accountants,
The Continental Association of CPA Firms, Inc.,
The Intercontinental Accounting Associates and The North Carolina
and South Carolilna Associates of CPAs
EXHIBIT 99.2
<PAGE>
================================================================================
Security Federal Savings Bank
Elizabethton, Tennessee
Conversion Valuation Appraisal Report
Valued as of March 14, 1997
Prepared By
Feldman Financial Advisors, Inc.
Washington, D.C.
================================================================================
<PAGE>
[LOGO]
March 14, 1997
Board of Directors
Security Federal Savings Bank
632 East Elk Avenue
Elizabethton, Tennessee 37643-3378
Gentlemen:
At your request, we have completed and provide an independent appraisal
of the estimated pro forma market value of Security Federal Savings Bank (the
"Bank") in connection with the simultaneous conversion of the Bank from the
mutual to stock form of organization, the issuance of the Bank's capital stock
to SFB Bancorp, Inc. (the "Holding Company"), and the offering of shares of
common stock of the Holding Company (collectively referred to herein as the
"Conversion"). This appraisal report is furnished pursuant to the Bank's
regulatory filing of the Application for Approval of Conversion ("Form AC") with
the Office of Thrift Supervision ("OTS").
The valuation is prepared utilizing the guidelines for the valuation of
mutual to stock conversions issued by the OTS. These guidelines require, among
other things, that the appraiser consider the impact of the Conversion on the
financial condition of the Bank, the trading valuation characteristics of
comparable institutions, recent conversion offerings, acquisitions in the Bank's
market area, and the likely trading price of the newly issued stock.
Feldman Financial Advisors, Inc. ("Feldman Financial") is a financial
consulting and economic research firm that specializes in financial valuations
and analyses of business enterprises and securities in the thrift, banking, and
mortgage industries. An overview of Feldman Financial is presented in Exhibit V.
In preparing our appraisal, we conducted an analysis of the Bank that
included discussions with the Bank's management, the Bank's independent
accountants, Crisp Hughes & Co., LLP, the Bank's Conversion counsel, Malizia,
Spidi, Sloane & Fisch, P.C., and the Bank's offering manager, Trident
Securities, Inc. In addition, where appropriate, we considered information based
on other available published sources that we believe are reliable; however, we
cannot guarantee the accuracy and completeness of such information.
We also reviewed, among other factors, the economy in the Bank's primary
market area and compared the Bank's financial condition and operating
performance with that of selected publicly traded thrift institutions. We
reviewed conditions in the securities markets in general and in the market for
thrift institution common stocks in particular.
<PAGE>
Our appraisal is based on the Bank's representation that the information
contained in the Form AC and additional evidence furnished to us by the Bank and
its independent accountants are truthful, accurate, and complete. We did not
independently verify the financial statements and other information provided by
the Bank and its independent accountants, nor did we independently value the
assets or liabilities of the Bank. The valuation considers the Bank only as a
going concern and should not be considered as an indication of the liquidation
value of the Bank.
It is our opinion that, as of March 14, 1997, the estimated pro forma
market value of the Bank was $5,800,000. The resulting valuation range was
$4,930,000 at the minimum to $6,670,000 at the maximum, based on a range of 15
percent below and above the midpoint valuation. Assuming an addition 15 percent
increase above the current maximum valuation would result in an adjusted maximum
of $7,670,500.
At the midpoint valuation, 580,000 shares would be offered at $10.00 per
share. The minimum and maximum valuations are also offered at $10.00 per share,
based on 493,000 and 667,000 shares, respectively. For purposes of marketing the
stock offering, the adjusted maximum valuation of $7,670,500 has been rounded to
$7,670,000, or 767,000 shares offered at $10.00 per share.
Our valuation is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Conversion. Moreover, because the valuation is necessarily based
upon estimates and projections of a number of matters, all of which are subject
to change from time to time, no assurance can be given that persons who purchase
shares of stock in the Conversion will thereafter be able to sell such shares at
prices related to the foregoing estimate of the Bank's pro forma market value.
Feldman Financial is not a seller of securities within the meaning of any
federal or state securities laws and any report prepared by Feldman Financial
shall not be used as an offer or solicitation with respect to the purchase or
sale of any securities.
The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Bank's operating performance and financial condition, management policies, and
current conditions in the securities markets for thrift institution common
stock. Should any such new developments or changes be material, in our opinion,
to the Conversion valuation of the Bank, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in detail at that time.
Respectfully,
Feldman Financial Advisors, Inc.
By: Trent R. Feldman
--------------------------------------------
Trent R. Feldman
President
<PAGE>
TABLE OF CONTENTS
TAB PAGE
--- ----
INTRODUCTION ............................................. 1
I. Chapter One - BUSINESS OF SECURITY FEDERAL
General................................................... 4
Financial Condition ...................................... 8
Income and Expense Trends ................................ 15
Asset and Liability Management ........................... 18
Asset Quality ............................................ 19
Market Area .............................................. 22
Summary .................................................. 26
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD THRIFTS
General .................................................. 27
Selection Criteria ....................................... 29
Recent Financial Comparisons ............................. 32
III. Chapter Three - MARKET VALUE ADJUSTMENTS
General .................................................. 38
Earnings Prospects ....................................... 39
Market Area .............................................. 40
Management ............................................... 40
Dividend Policy .......................................... 41
Liquidity of the Issue ................................... 42
Subscription Interest .................................... 43
Stock Market Conditions .................................. 44
Recent Acquisition Activity .............................. 47
New Issue Discount ....................................... 49
Adjustments Conclusion ................................... 52
Valuation Approach ....................................... 52
Valuation Conclusion ..................................... 56
<PAGE>
LIST OF TABLES
TAB PAGE
--- ----
I. Chapter One - BUSINESS OF SECURITY FEDERAL
Table 1 - Selected Financial Condition Data ............. 8
Table 2 - Relative Balance Sheet Concentrations ......... 8
Table 3 - Mortgage Loan Originations .................... 10
Table 4 - Composition of Loan Portfolio ................. 10
Table 5 - Investment Portfolio .......................... 13
Table 6 - Deposit Composition ........................... 14
Table 7 - Summary of Operations ......................... 15
Table 8 - Yield and Cost Summary ........................ 16
Table 9 - Nonperforming Asset Summary ................... 20
Table 10 - Allowance for Loan Loss Summary ............... 20
Table 11 - Key Economic Indicators ....................... 24
Table 12 - Deposit Trends ................................ 25
Table 13 - Deposit Market Share .......................... 25
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD THRIFTS
Table 14 - General Information Summary /
Comparative Group Companies..................... 31
Table 15 - Key Financial Comparisons / Security Fed
and the Comparative Group........................ 33
III. Chapter Three - MARKET VALUE ADJUSTMENTS
Table 16 - Comparative Stock Market Performance ........... 45
Table 17 - Selected Interest Rate Benchmarks .............. 46
Table 18 - Acquisition Summary of Tennessee Institutions... 48
Table 19 - Recent Summary of Standard Thrift Conversions .. 50
Table 20 - Comparative Valuation Analysis ................. 53
Table 21 - Comparative Discount and Premium Analysis ...... 54
<PAGE>
INTRODUCTION
As requested, Feldman Financial Advisors, Inc. ("Feldman Financial") has
prepared an independent appraisal of the estimated pro forma market value of
Security Federal Savings Bank (the "Bank") in connection with the simultaneous
conversion of the Bank from the mutual to stock form of organization, the
issuance of the Bank's capital stock to SFB Bancorp, Inc. (the "Holding
Company"), and the offering of shares of common stock of the Holding Company
(collectively referred to herein as the "Conversion"). This appraisal report is
furnished pursuant to the Bank's regulatory filing of the Application for
Approval of Conversion ("Form AC") with the Office of Thrift Supervision
("OTS").
In the course of preparing this appraisal report, we reviewed and
discussed with the Bank's management and independent accountants, Crisp Hughes &
Co., LLP, the audited financial statements of the Bank's operations for the
years ended December 31, 1995 and 1996. We also discussed the Conversion with
the Bank's Conversion counsel, Malizia, Spidi, Sloane & Fische, and with the
Bank's offering manager, Trident Securities, Inc. We also reviewed and discussed
with management other financial matters of the Bank.
Where appropriate, we considered information based upon other available
public sources, which we believe to be reliable; however, we cannot guarantee
the accuracy or completeness of such information. We visited the Bank's primary
market area and examined the prevailing economic conditions. We also examined
the competitive environment within which the Bank operates and assessed the
Bank's relative strengths and weaknesses.
We examined and compared the Bank's financial performance with selected
segments of the thrift industry and selected publicly traded savings
institutions. We reviewed conditions in the securities markets in general and
the market for thrift institution common stocks in particular.
<PAGE>
We included in our analysis an examination of the potential effects of the
Conversion on the Bank's operating characteristics and financial performance as
they relate to the estimated pro forma market value of the Bank.
In preparing our valuation, we have relied upon and assumed the accuracy
and completeness of financial and statistical information provided by the Bank
and its independent accountants. We did not independently verify the financial
statements and other information provided by the Bank and its independent
accountants, nor did we independently value the assets or liabilities of the
Bank. The valuation considers the Bank only as a going concern and should not be
considered as an indication of the liquidation value of the Bank.
Our valuation is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Conversion. Moreover, because such valuation is necessarily based
on estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the Conversion will thereafter be able to sell such
shares at prices related to the foregoing valuation of the pro forma market
value thereof. Feldman Financial is not a seller of securities within the
meaning of any federal and state securities laws and any report prepared by
Feldman Financial shall not be used as an offer or solicitation with respect to
the purchase or sale of any securities.
The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Bank's financial performance or management policies and current conditions in
the securities market for thrift institution common stocks. Should any such
developments or changes be material, in our opinion, to the
<PAGE>
Conversion valuation of the Bank, appropriate adjustments to the estimated pro
forma market value will be made. The reasons for any such adjustments will be
explained in detail at that time.
<PAGE>
I. BUSINESS OF SECURITY FEDERAL
General
The Bank is a federally chartered mutual savings bank located in
Elizabethton, Tennessee. The Bank was founded in 1963 as a federally chartered
mutual savings and loan association. The Bank adopted a federal mutual savings
bank charter in 1990 and changed its name to its current title. The Bank is
subject to regulation by the Office of Thrift Supervision ("OTS"), its primary
federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the
insurer of its deposits through the Savings Association Insurance Fund ("SAIF").
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati. As of
December 31, 1996, the Bank had total assets of $46.6 million, total deposits of
$40.8 million, and total equity of $4.7 million or 10.04% of total assets. The
Bank exceeded all regulatory capital requirements as of December 31, 1996 with
tangible and core capital ratios of 10.25% and a risk-based capital ratio of
20.19%.
The Bank is a community-oriented financial institution engaged primarily
in the business of attracting deposits from the general public and using those
funds to originate residential mortgage loans in its primary market area.
Elizabethton, where the Bank is headquartered, is located in Carter County in
eastern Tennessee and is considered to be part of the Tri-Cities MSA (which
includes areas around Kingsport and Johnson City, Tennessee, and Bristol,
Virginia). Carter County had an estimated population of 53,334 in 1996. The Bank
considers Carter County and its contiguous counties as its market area.
The Bank traditionally has concentrated its lending activities on
conventional first mortgage loans on one- to four-family residential properties
("Single Family Mortgages"), with such loans amounting to $29.7 million or 77.7%
of total loans at December 31, 1996. The Bank
<PAGE>
also makes other real estate related loans, such as land, commercial real
estate, construction and multi-family residential loans ("Other Mortgage
Loans"), commercial business loans and consumer loans, primarily automobile
loans (collectively, "Consumer and Commercial Loans"). As of December 31, 1996,
Other Mortgage Loans were $5.1 million, or 13.2% of total loans, and Consumer
and Commercial Loans were $3.5 million, or 9.1% of total loans.
The Bank conducts operations from its main office and a branch office,
both located in Elizabethton. The Bank has an automated teller machine ("ATM")
at its branch office. The Bank's market offers a stable economy and expansion
opportunities in the contiguous counties.
The Bank offers both fixed-rate and adjustable-rate Single Family
Mortgages for portfolio retention. Fixed-rate loans composed 90.8% of the Bank's
Single Family Mortgage portfolio, while adjustable-rate loans accounted for 9.2%
at December 31, 1996. The Bank has not sold mortgages into the secondary market,
but will consider selling loans into the secondary market, if and when
appropriate. In addition, the Bank originates and holds Other Mortgage Loans and
Consumer and Commercial Loans, both of which can be either fixed or adjustable
rate.
The Bank's primary deposit gathering and loan origination activities are
concentrated around its market area, which includes Carter County and adjacent
counties. The Bank attracts loans through its branch offices and by advertising
within its market area and does not utilize any outside loan originators. The
Bank's operations are almost exclusively confined to its local market. The
Bank's market area has experienced steady economic growth during recent years
and it is generally anticipated that the market area will continue to experience
relatively stable growth in the near term.
<PAGE>
The credit quality of the Bank's loan portfolio is generally excellent
with non-performing loans measuring only 0.81% of total loans at December 31,
1996. The Bank's allowance for loan losses totaled $304,000 at year-end 1996, or
0.80% of gross total loans and 97.75% of non-performing loans. The Bank believes
that its underwriting policies and credit monitoring systems are excellent and
that the Bank can maintain its superior credit quality in the future. The
allowance for loan losses will be continuously evaluated by management to assure
that general and specific reserves adequately cover known and potential risk
exposure.
The Bank's returns on average assets ("ROAA") declined each year from
1.52% in 1993 to 0.57% in 1996. The decline in income from 1993 to 1994 was only
$70,000, from 1.52% to 1.36% ROAA, and was due to a relatively large pre-tax
provision for loan losses of $30,294 and a pre-tax reduction in non-interest
income of $96,962. The decline was greater as ROAA decreased to 0.81% in 1995,
due largely to an increase in interest expense of approximately $450,000, while
interest income rose by less than $100,000. In 1996, the Bank's ROAA was reduced
by $164,000 (after-tax) due to the one-time assessment levied by the FDIC on all
SAIF-insured institutions to recapitalize the SAIF. Excluding this assessment,
the Bank's net income for 1996 would have been $426,000 or a 0.93% ROAA, which
is an improvement over the 0.81% ROAA in 1995. The improvement in adjusted
earnings for 1996 was largely due to significantly increased net interest income
and modestly increased fee income, while at the same time operating expenses
(without the SAIF assessment) declined modestly.
The Bank believes the Conversion will facilitate its ability to meet its
strategic goals and objectives. The Conversion is intended to: (1) provide
increased capital to support expansion of the Bank's operations; (2) provide
future access to capital markets; (3) enhance the offering of financial products
and services to customers; (4) help the Bank maintain a favorable competitive
<PAGE>
position relative to its immediate competitors; and (5) afford the Bank's
depositors and others to become stockholders of the Holding Company and thereby
participate more directly in the future performance of the Bank.
The remainder of Chapter I examines in more detail the trends addressed
in this section, including the impact of changes in the Bank's economic and
competitive environment and recent management initiatives. Exhibits I-1 and I-2
in the Appendix supplement this discussion. Exhibit I-1 summarizes the Bank's
statements of financial condition at December 31, 1995 and 1996. Exhibit I-2
presents the Bank's statements of income for the years ended December 31, 1995
and 1996.
<PAGE>
Financial Condition
Table 1 and Table 2 present selected financial condition data as of
December 31, in the years 1993 through 1996. Table 1 shows summary balances from
the statement of financial condition and Table 2 displays relative balance sheet
concentrations.
Table 1
Selected Financial Condition Data
As of December 31, 1992 to 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
============================================================================
As of December 31,
--------------------------------------------
1996 1995 1994 1993
----------------------------------------------------------------------------
=============================== ========== =========== ========= ===========
<S> <C> <C> <C> <C>
Total assets $46,579 $45,482 $44,330 $45,090
Loan receivable, net 36,808 32,782 32,477 30,835
Mortgage-backed securities (1) 5,768 7,299 2,857 --
Investment securities 1,414 1,312 5,766 11,297
Deposits 40,765 40,637 39,301 40,796
Total equity 4,676 4,426 3,639 3,576
============================================================================
</TABLE>
(1) Held for sale only; MBS held to maturity are included with Investment
Securities
Table 2
Relative Balance Sheet Concentrations
III. As of December 31, 1992 to 1996
(Percent of Total Assets)
<TABLE>
<CAPTION>
==================================================================================
As of December 31,
------------------------------------------
1996 1995 1994 1993
================================================================================
<S> <C> <C> <C> <C>
Assets
Cash and securities 18.2 25.2 24.0 29.0
Loans receivable, net 79.0 72.1 73.3 68.4
Other assets 2.7 2.8 2.7 2.7
----- ----- ----- -----
Total assets 100.0 100.0 100.0 100.0
===== ===== ===== =====
Liabilities and Equity
Deposits 90.5
FHLB advances 87.5 89.3 88.7 90.5
Other liabilities 1.7 0.0 1.6 0.0
Equity 0.7 0.9 1.6 7.9
----- ----- ----- -----
Total liabilities and equity 100.0 100.0 100.0 100.0
====== ===== ===== =====
================================================================================
</TABLE>
<PAGE>
Asset Composition
- -----------------
The Bank's asset growth was relatively flat between 1993 and 1996, as
the Bank concentrated on building equity rather than asset growth. During the
same period, net loans increased by $6.0 million and the ratio of loans to
deposits increased substantially from 75.6% at year-end 1993 to 90.3% at
year-end 1996 as the Bank decreased its investment portfolio and deployed those
funds in higher yielding loans. The Bank's loans to total assets ratio increased
each year from 1993 through 1996, and at December 31, 1996, the Bank's total
loans were 79.0% of assets, or $36.8 million.
Table 3 is a summary of the Bank's mortgage loan originations in 1995
and 1996. Single Family Mortgage originations increased from $3.6 million in
1995 to $4.7 million in 1996. Other Mortgage Loan originations increased from
$1.6 million in 1995 to $3.1 million in 1995. The majority of the increase in
Other Mortgage Loan originations was attributable to construction loan
originations, which more than doubled from $0.7 million in 1995 to $2.0 million
in 1996.
Table 4 shows a summary composition of the Bank's loan portfolio as of
December 31, 1995 and December 31, 1996. Single Family Mortgages have been the
predominant component of the Bank's loan portfolio, but their concentration
declined slightly over the past two years from 78.5% of loans at year-end 1995
to 77.7% of loans at year-end 1996. Other Mortgage Loans increased modestly from
12.5% of loans at year-end 1995 to 13.2% at year-end 1996, while Consumer and
Commercial Loans increased only marginally from 8.9% to 9.1% of total loans.
<PAGE>
Table 3
Mortgage Loan Originations
At December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
===========================================================================================
At December 31,
1995 1996
===========================================================================================
<S> <C> <C>
Total mortgage loans receivable at beginning of period $30,187 $30,607
------- -------
Loans originated:
One- to four-family residential 3,643 4,683
Construction 764 1,984
Commercial 149 293
Multi-family 166 116
Land 489 705
-------- --------
Total mortgage loans originated 5,211 7,781
------- -------
Mortgage loan principal repayments (4,791) (3,618)
Other - (60)
---------- --------
Net loan activity 420 4,103
-------- -------
Total mortgage loans receivable at end of period $30,607 $34,710
====== ======
============================================================================================
</TABLE>
Table 4
Composition of Loan Portfolio
At December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
============================================================================================
At December 31,
1995 1996
============================================================================================
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Percent
Type of Loans:
Real Estate Loans:
One- to four- family $26,396 78.53% $29,653 77.67%
Construction 724 2.15 1,125 2.95
Commercial 1,173 3.49 1,288 3.37
Multi-family residential 780 2.32 912 2.39
Land 1,534 4.56 1,732 4.54
Commercial business loans 660 1.96 558 1.46
Consumer Loans:
Automobile loans 1,455 4.33 1,949 5.11
Other 477 1.43 524 1.37
Share loans 414 1.23 435 1.14
-------- -------- -------- --------
Total loans 33,613 100.00% 38,176 100.00%
====== ======
Less:
Loans in process 447 942
Deferred loan origination fees 105 122
Allowance of loan losses 279 304
-------- --------
Total loans, net $32,782 $36,808
====== ======
============================================================================================
</TABLE>
<PAGE>
The Bank had land loans with aggregate outstanding balances of $1.7
million, or 4.5% of total loans at December 31, 1996. The Bank makes such loans
to developers and builders who plan to develop the land for sale for residential
housing construction.
Commercial real estate loans totaled only $1.3 million or 3.4% of total
loans as of year-end 1996. These loans are secured by churches, professional
offices and other non-residential properties located within the Bank's market
area. Commercial real estate loans generally do not exceed $250,000 and have
terms no longer than 10 years.
At December 31, 1996, construction loans amounted to a modest $1.1
million, or 2.9% of total loans. Substantially all construction loans were
secured by residential properties in the Bank's local market area. Residential
construction loans are made on one- to four-family residential property to the
individuals who will be the owners and occupants upon completion of
construction. These loans are made on a long-term basis and are classified as
construction/permanent loans, usually with no principal payments required during
the first six to eight months, after which the payments are set at an amount to
amortize over the term of the loan. The Bank also makes loans to residential
builders who have established business relationships with the Bank for the
purpose of building homes for sale to a party after building has commenced.
These loans typically are made for a term of twelve months, may not require
principal payments during the period of the loan, and generally have a loan to
value ratio no greater than 80%.
Consumer loans totaled $2.9 million or 7.6% of total loans at year-end
1996. The majority of consumer loans is secured by automobiles, with other
consumer loans consisting of home equity, farm, mobile home and demand loans
secured by savings deposit accounts.
Commercial business loans amounted to $0.6 million or 1.5% of total
loans at year-end
<PAGE>
1996. Commercial business loans generally include equipment loans, lines of
credit and other business purpose loans, which generally are secured by either
the underlying properties or by the personal guarantees of the borrower.
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets. At year-end 1996, the Bank's average liquidity ratio of
5.08% exceeded the 5.0% required by OTS regulations. (The average liquidity rate
at December 31, 1995, was 9.52%. The decrease in the average liquidity rate from
1995 to 1996 was the result of the one-time SAIF assessment and the increase in
loan growth. It is the Bank's belief that upon completion of the Conversion, the
liquidity ratio will increase.) The Bank uses investment securities to provide
liquidity for funding loan originations or deposit withdrawals and to improve
the match between the maturities and repricing of its interest-rate sensitive
assets and liabilities.
As shown in Table 5, the Bank's investment portfolio amounted to $7.3
million, or 15.6% of assets, at year-end 1996. Investments consisted of U.S.
government and agency obligations, mortgage-backed securities issued by
government-sponsored agencies, and political subdivision notes. As of year-end
1996, the Bank did not hold any instruments considered high-risk mortgage
securities. An amount of negative $108,000, representing the net after-tax
unrealized loss on investment securities classified as available-for-sale, was
included as a separate component of the Bank's total equity at December 31,
1996.
<PAGE>
Table 5
Investment Portfolio
At December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
==============================================================================================
At December 31,
1995 1996
==============================================================================================
<S> <C> <C>
Investment Securities:
U.S. government and agency securities available for sale $ 751 $ 599
U.S. government securities 378 398
Political subdivision notes 289 317
------ ------
Total investment securities 1,418 1,314
----- -----
Mortgage-backed Securities:
GNMA 954 812
FHLMC 3,067 2,300
FNMA 3,430 2,829
----- -----
Total mortgage-backed securities 7,451 5,941
----- -----
Total $8,869 $7,255
===== =====
==============================================================================================
</TABLE>
Liability Composition
- ---------------------
Deposits and loan repayments are the major sources of the Bank's funds
for lending and other investment purposes. Table 6 presents a summary of the
Bank's deposits as of December 31, 1996. Certificates of deposit composed the
largest category of the Bank's deposits, amounting to $31.7 million, or 77.6% of
total deposits at year-end 1996. Passbook savings accounts totaled $4.5 million
or 10.9% of total deposits, followed by NOW accounts at $3.0 million or 7.3%,
and money market accounts at $1.6 million or 4.0%.
The Bank only occasionally utilizes advances from the FHLB of Cincinnati
to supplement its supply of lendable funds. At year-end 1996, the Bank had
$800,000 of FHLB advances outstanding that consisted of a 90-day cash management
advance with a 90-day term and a variable interest rate that was 5.85% at
December 31, 1996.
<PAGE>
Table 6
Deposit Composition
As of December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
==============================================================================================
Minimum
Balance
Minimum as of % of
Interest Balance Dec. 31, Total
Deposit Category Term Rate Amount 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Now Accounts None 2.00% $100 $ 2,904 7.12%
==============================================================================================
Super Now None 2.26% 100 83 0.20%
Passbook savings None 3.00% 10 4,456 10.93%
Christmas club None 3.75% 10 46 0.11%
Money market accounts None 2.50% 2,500 1,622 3.98%
Certificates of Deposit:
Fixed Term, Fixed Rate 91 day 4.25% 500 215 0.53%
Fixed Term, Fixed Rate 182 day 5.18% 500 5,054 12.40%
Fixed Term, Fixed Rate 1 year 5.50% 500 7,968 19.55%
Fixed Term, Fixed Rate 18 months 5.50% 500 1,074 2.63%
Fixed Term, Fixed Rate 2 year 5.75% 500 521 1.28%
Fixed Term, Fixed Rate 30 months 5.83% 500 1,868 4.58%
Fixed Term, Fixed Rate 4 year 5.83% 500 326 0.80%
Fixed Term, Fixed Rate No longer offered 7.25% 500 300 0.74%
Fixed Term, Fixed Rate IRA 18 months 5.50% 10 3,325 8.16%
Fixed Term, Fixed Rate IRA 30 months 5.83% 10 348 0.85%
Negotiable 5.82% less than 100,000 3,094 7.59%
Negotiable 5.78% 100,000 7,561 18.55%
-------- -----
Total $40,765 100.00%
====== ======
==============================================================================================
</TABLE>
Equity Capital
- --------------
The Bank has consistently maintained capital well in excess of
regulatory requirements. At December 31, 1996, the Bank's total equity of $4.7
million was 10.0% of total assets. Included in the Bank's equity at year-end
1996 were net unrealized security losses of $108,000. The Bank's core and
tangible capital ratios were 10.25%, higher than the respective regulatory
requirements of 1.50% and 3.00%. The Bank's risk-based capital ratio was 20.25%
as of December 31, 1996, as compared to the required ratio of 8.00%. As
indicated earlier, the Bank's business strategy has included building capital
levels rather than focusing on growth.
<PAGE>
Income and Expense Trends
Table 7 displays the components of income and expense for the years
ended December 31, 1995 and 1996 in both dollars and as a percent of average
assets. Table 8 displays weighted average yields and costs for the same periods.
Table 7
Summary of Operations
Years Ended December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
==============================================================================================
Year ended December 31,
1995 1996
==============================================================================================
<S> <C> <C>
Interest income $3,401 $3,474
Interest expense 1,981 1,977
----- -----
Net interest income 1,420 1,497
----- -----
Provision for loan losses 30 30
Net interest income after provision for loan losses 1,390 1,467
----- -----
Noninterest income 152 156
General & administrative expense 957 940
Special SAIF assessment -- 264
----- -----
Income before taxes 585 419
Income tax expense 221 157
------ -----
Net income $ 364 $ 262
====== ======
- ---------------------------------------------------------------------------------------------
As a Percent of Average Assets
- ---------------------------------------------------------------------------------------------
Average assets ($ mil.) $44.9 $46.0
Interest income 7.57% 7.55%
Interest expense 4.41 4.29
---- ----
Net interest income 3.16 3.25
Provision for loan losses 0.07 0.07
---- ----
Net interest income after provision for loan losses 3.10 3.19
Noninterest income 0.34 0.34
General & administrative expense 2.13 2.04
Special SAIF assessment -- 0.57
---- ----
Income before taxes 1.30 0.91
Income tax expense 0.49 0.34
---- ----
Net income 0.81% 0.57%
</TABLE>
<PAGE>
Net income decreased from $364,000 in 1995 to $262,000 in 1996. Had the
Bank not incurred the special one-time SAIF assessment, after-tax earnings would
have increased by $164,000 to $426,000, such increase driven by a decline in
interest expense and lower operating expenses.
Table 8
Yield and Cost Summary
Year Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
==============================================================================================
Year Ended
December 31,
-------------------
1995 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Weighted Average Yields
-----------------------
Loans receivable 8.59% 8.40%
Investment securities 5.00 4.73
Interest earning deposits 4.80 5.13
FHLB stock 6.76 6.84
Mortgage-backed securities 5.78 5.78
Total interest-earning assets 7.81 7.80
Weighted Average Costs
----------------------
Passbook, NOW and money market accts. 2.80 2.54
Certificates of deposit 5.53 5.55
FHLB advances 8.23 5.56
Total interest-bearing liabilities 4.94 4.88
Net Interest Spread 2.87% 2.92%
Net Interest Margin 3.26% 3.36%
======================================================================================
</TABLE>
Net Interest Income: Net interest income increased by 5.4% from $1.4
million in 1995 to $1.5 million in 1996. The slight increase in net interest
income is reflected in the small improvement in the net interest margin from
3.26% to 3.36%. Overall, average yields on assets remained about the same from
1995 to 1996. The average cost of FHLB advances declined significantly, from
8.23% in 1995 to 5.56% in 1996, and the average balance dropped from
<PAGE>
$158,000 to $36,000, while average rates on deposits declined modestly and
deposit balances increased by only 1.5%, causing an overall drop in the average
cost of interest-bearing liabilities from 4.94% to 4.88%. Overall, the six basis
points drop in the average cost of liabilities exceeded the one basis point
decrease in average yield on assets.
Provision for Loan Losses: The Bank's provision for loan losses was
$30,000 in both 1995 and 1996. Historically, management has emphasized the
Bank's loss experience over other factors in establishing the provision for loan
losses. In addition, management reviews the allowance for loan losses in
relation to the composition of the loan portfolio, the outlook for the general
economic climate and loss expectations.
Non-interest Income: The Bank's non-interest income increased by 2.6.%,
from $152,000 in 1995 to $156,000 in 1996, and remained at 34 basis points in
relation to average assets. Non-interest income generally comprised loan
origination fees and service charges on deposits. The $4,000 increase in
non-interest income for 1996 resulted from a $6,000 increase from services
charges on demand accounts and loan fees, offset by a $2,000 loss incurred on
the sale of mortgage-backed securities.
Other Expenses: Core operating expenses, excluding the special one-time
SAIF assessment, decreased from $957,000 in 1995 to $940,000 in 1996. (The
special SAIF assessment was $264,000 in 1996.) The core operating expense ratio
decreased from 2.13% of average assets in 1995 to 2.04% in 1996.
Income Tax Expense: The Bank's income tax expense declined from $221,000
to $157,000 due to the decrease in earnings before taxes, such decrease largely
attributable to the one-time SAIF assessment. The effective tax rate was 37.8%
in 1995 and 37.5% in 1996. The Bank's expected statutory tax rate is 38.0% based
on combined federal and state income taxes.
<PAGE>
Asset and Liability Management
The Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Bank has sought to reduce its earnings vulnerability to changes in market
interest rates by limiting the maturity of fixed rate loans held to maturity.
Because of the lack of market acceptance of adjustable rate loans, the Bank
primarily originates fixed-rate real estate loans with maturities of no more
than 15 years. The Bank relies on retail deposits as its primary external source
of funds.
The OTS provides a net market value methodology to measure the interest
rate risk exposure of thrift institutions. This exposure is a measure of the
potential decline in the net portfolio value ("NPV") of the institution based
upon upward or downward movement in interest rates. NPV is computed as the
present value of the expected net cash flows from an institution's assets and
liabilities. Under proposed OTS regulations, an institution's "normal" level of
interest rate risk in the event of a 200 basis point movement in interest rates
is a decrease in the institution's NPV in an amount not exceeding 2.0% of the
present value of its assets.
At December 31, 1996, based on information provided by the OTS, it was
estimated that the Bank's NPV would decrease 17%, 34%, 52% and 68% and increase
29%, 22%, 19% and 13% in the event of 1%, 2% 3% and 4% increases and decreases
in market rates, respectively. Based on the above evaluations, the Bank's
interest rate risk is somewhat greater than the amount treated as "normal" under
the OTS regulations. The reason for the greater than normal interest rate risk
is the high percentage of fixed-rate loans in the Bank's loan portfolio.
<PAGE>
Asset Quality
The Bank's asset quality has been strong. Table 9 summarizes the Bank's
nonperforming assets as of December 31, 1995 and 1996. The ratio of
nonperforming assets to total assets was 0.80% at year-end 1996. The Bank had
one property categorized as real estate owned, with a balance of $60,000 as of
December 31, 1996. The Bank's ratio of delinquent loans to net total loans
measured 1.5% at year-end 1996. At December 31, 1996, the Bank had no assets
classified as doubtful or loss, but had loans classified as substandard and
special mention in amounts equal to $349,000 and $11,000, respectfully. Table 10
summarizes the changes in the Bank's allowance for loan losses from 1995 to
1996. Loan loss reserves increased from $279,000 at year-end 1995 to $304,000 at
year-end 1996, or from 0.83% to 0.80% of gross loans. Net loan charge-offs were
minimal each year, $1,000 in 1995 and $5,000 in 1996.
<PAGE>
Table 9
Nonperforming Asset Summary
As of December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
==============================================================================================
At December 31,
-------------------
1995 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential $197 $235
Commercial - 60
Consumer 10 16
---- ----
Total nonaccrual loans 207 311
Accruing loans which are contractually past due
90 days or more: - -
------ ------
Total nonperforming loans 207 311
Real estate owned - 60
------ ----
Total nonperforming assets $207 $371
=== ===
Nonaccrual and 90 days past due as a percentage
of net loans 0.63% 0.84%
Nonaccrual and 90 days past due as a percentage
of total assets 0.46% 0.67%
Total nonperforming assets as a percentage
of total assets 0.46% 0.80%
=======================================================================================
</TABLE>
Table 10
Allowance for Loan Losses Summary
As of December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
======================================================================================
At December 31,
---------------------
1995 1996
======================================================================================
<S> <C> <C>
Total loans outstanding $33,614 $38,176
====== ======
Average loans outstanding $33,178 $36,437
====== ======
Allowance at beginning of period $250 $279
Provision 30 30
Recoveries - -
Charge-offs (l) (5)
------- -----
Allowance at end of period $279 $304
Allowance for loan losses as a percent of total
loans outstanding 0.83% 0.80%
Net loans charged off as percent of average
loans outstanding - -
Ratio of allowance to nonperforming loans 134.8 97.7
======================================================================================
</TABLE>
<PAGE>
Properties
At December 31, 1996, the net book value of the Bank's office property
and equipment totaled $553,000 or 1.1% of assets. The Bank owns its main office,
which was acquired in 1980, and its branch office, which was acquired in 1989.
An ATM is installed at the branch location. The Bank also owns another property
in Elizabethton, Tennessee, which consists of an adjacent paved parking area for
Bank customers and employees and a single-family dwelling that the Bank rents
for $400 per month.
<PAGE>
Market Area
The Bank's main office and branch office both are located in the town of
Elizabethton, Tennessee. Elizabethton is located in the eastern part of the
state in Carter County, and its considered part of the greater Tri-Cities area.
The Bank's market area consists of Carter County and adjacent counties. The
area's economy is based on a mixture of agriculture (primarily tobacco, small
grains and cattle) and manufacturing (primarily textiles, chemical, metal
products and small industries), as well as a variety of service, wholesale and
retail businesses and government agencies. Carter County has not experienced
significant growth in recent years. However, the adjacent counties of Johnson,
Unicoi, Washington and Sullivan have experienced higher growth. The Bank will
look to the adjacent counties for growth opportunities.
Table 11 displays selected demographic data for the United States, the
state of Tennessee, the Tri-Cities MSA and Carter County. While Tennessee's
population growth has been, and is expected to be, higher than that of the U.S.,
the Tri-Cities MSA and Carter County show a slower historical and projected
population growth. This reflects the generally stable industrial base in the
area and also the lower than average income levels in the area. Although
projected population growth is expected to lag behind the U.S. and State
averages, income levels are projected to grow somewhat faster than the U.S. and
about the same as the State.
Table 12 summarizes deposit market trends for Elizabethton and Carter
County. Table 13 shows recent deposit trends for each of the banks and thrifts
in Carter County. Total deposits in banks and thrifts in Carter County increased
5.3% from $400 million in 1994 to $421 million in 1996. Two institutions, Carter
County Bank and Citizens Bank, each have more than 30% of the deposit market
share in Carter County. The Bank ranks fourth out of five financial
institutions, with almost 10% of the county's deposits. Carter County has five
institutions (three banks and two thrifts) operating 17 branches. The Bank has
concentrated its efforts at maintaining strong capital and high
<PAGE>
quality assets, rather than growing its assets size or market share. Therefore,
the Bank has not grown as fast as the other banks in Carter County.
In summary, the Bank's market area can be characterized as a region with
low to moderate incomes, with modest population growth, and comparatively high
expectations for per capita income growth. The region represents an attractive
market with a stable economy that can be served by a community financial
institution such as the Bank.
<PAGE>
Table 11
Key Economic Indicators
United States, Tennessee, Tri-Cities MSA, and Carter County
<TABLE>
<CAPTION>
==============================================================================================================
United Tri-Cities Carter
Key Economic Indicators States Tennessee MSA County
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Population
----------
Total Population - 1996 264,992,224 5,294,786 456,168 53,334
5-year projection percent change 4.9% 6.5% 3.5% 2.8%
1990 - 1996 percent change 6.6% 8.6% 4.6% 3.6%
Households
----------
Total Households - 1996 98,935,240 2,048,281 183,246 21,480
5-year projection percent change 5.4% 7.5% 4.9% 4.2%
1990 - 1996 percent change 7.6% 10.5% 7.4% 6.4%
Per Capita Income
-----------------
Per Capita Income - 1996 $18,415 $16,699 $15,664 $13,311
5-year projection percent change 21.7% 28.1% 28.6% 27.4%
1990 - 1996 percent change 27.9% 36.2% 37.1% 35.7%
Average Household Income
------------------------
Average Household Income - 1996 $48,762 $42,754 $38,590 $32,241
5-year projection percent change 20.7% 26.7% 26.5% 25.6%
1990 - 1996 percent change 26.7% 34.0% 33.5% 32.2%
Median Household Income
-----------------------
Median Household Income - 1996 $36,625 $31,616 $28,711 $24,366
5-year projection percent change 15.4% 21.2% 20.6% 20.7%
1990 - 1996 percent change 21.7% 27.2% 28.1% 27.1%
Average Household Income by Income Level - 1996
-----------------------------------------------
$ 0 - 24 K 34.0% 39.9% 43.9% 51.2%
$25 - 49K 31.5% 31.8% 31.2% 31.7%
$50K + 34.5% 28.3% 24.9% 17.2%
Annual Household Income by Income Level - Projected 2001
--------------------------------------------------------
$ 0 - 24 K 29.1% 33.1% 36.5% 43.1%
$25 - 49K 28.6% 28.9% 29.1% 31.4%
$50K + 42.3% 38.0% 34.5% 25.5%
==============================================================================================================
</TABLE>
Sources: SNL Securities; Claritas
<PAGE>
Table 12
Deposit Trends for Elizabethton, Carter County, and Tri-Cities MSA
For All Banks, Thrifts and Credit Unions
Deposit Data as of June 30th Date
(Dollars in Thousands)
<TABLE>
<CAPTION>
=============================================================================================
'94-'96 1996 1996
1994 1995 1996 Percent No. of Avg. Deps
Area Deposits Deposits Deposits Change Offices per Office
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ellizabethton $359,950 $378,937 $374,908 4.2% 12 $31,242
Carter County 437,488 463,154 467,970 7.0% 22 21,271
Johnson City MSA 5,196,553 5,360,644 5,632,509 8.4% 220 25,602
=============================================================================================
</TABLE>
Table 13
Deposit Market Share for Carter County
For Banks and Thrifts (and Excluding Credit Unions)
June 30, 1994 to June 30, 1996
<TABLE>
<CAPTION>
=================================================================================================================
1996 1995 1994 1994-1996
----------------- ----------------- ------------------------------
Number of Deposits % of Deposits % of Deposits % of Growth
Institution Name Branches Type ($000s) Total ($000s) Total ($000s) Total Rate (%)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carter County Bank 6 B $127,289 30.2% $123,638 29.3% $123,649 30.9% 2.9%
Citizens Bank 6 B 134,075 31.8% 141,974 33.7% 126,424 31.6% 6.1%
Elizabethton 2 T 109,114 25.9% 104,571 24.8% 100,461 25.1% 8.6%
Federal
First American 1 B 10,728 2.5% 11,816 2.8% 10,187 2.5% 5.3%
Security 2 T 40,355 9.6% 39,804 9.4% 39,640 9.9% 1.8%
-- ------- ---- ------- ---- ------- ---- ----
Federal
Total in Carter County 17 $421,561 100.0% $421,803 100.0% $400,361 100.0% 5.3%
===================================================================================================================
</TABLE>
<PAGE>
Summary
The Bank has benefited from the general decline and recent stability of
interest rates. The Bank's asset size has remained relatively stable over the
past four years because the Bank concentrated on building equity rather than
asset growth. Over the same time period, the Bank deployed a greater percentage
of its assets into loans and a lower percentage in investments, thereby steadily
increasing the loans-to-deposits ratio. Although earnings declined from 1995 to
1996, adjusted earnings (excluding the one-time SAIF assessment) for 1996 would
have been higher than earnings for 1995. The Bank's operating expense ratio
trend was favorable, as the ratio was lower in 1996 than in 1995. The Bank's
asset quality is excellent, and no significant changes in lending policy are
contemplated; however, because of the high concentration of fixed rate loans in
the Bank's portfolio, the Bank's interest rate profile carries some added risk.
Achievement of the Bank's lending and deposit goals will be influenced greatly
by local economic conditions. The Bank believes that its can continue its
current operating strategies, expand lending into adjacent counties, and achieve
its profit and growth goals.
II. COMPARISONS WITH PUBLICLY HELD THRIFTS
General
The comparative market approach provides a sound basis for determining
estimates in going-concern valuations where a regular and active market exists
for the stocks of peer institutions. The comparative market approach was
utilized in valuing the to-be-issued common stock of the Bank because: (1)
reliable market and financial data are readily available for comparable
institutions; (2) the comparative market method is required by the applicable
regulatory guidelines; and (3) other alternative valuation methods (such as
income capitalization, liquidation analysis, or discounted cash flow) are
unlikely to produce a valuation relevant to the future trading patterns of the
issued stock. The generally employed valuation method in initial public
offerings, where possible, is the comparative market approach and can be relied
upon to determine initial market value in a thrift stock conversion.
The comparative market approach derives a value from the trading
patterns of selected peer institutions which, due to certain factors such as
financial performance and operating strategies, enable the appraiser to estimate
the potential value of the subject institution in a stock conversion offering.
The pricing and trading history of recent initial public offerings of thrifts
are also examined to provide evidence of the "new issue discount" that must be
considered. In Chapter II, our valuation analysis focuses on the selection and
comparison of the Bank with a comparable group of publicly held thrift
institutions (the "comparative group"). Chapter III details the new issue
discount we believe is appropriate to the Bank's offering.
Exhibits II-1 through II-5 contain key financial comparisons of the Bank
with the comparative group based on measures of profitability, income and
expense components, yield-cost structure, capital levels, balance sheet
composition, growth rates, and credit risk. Selection
<PAGE>
criteria utilized for purposes of determining the comparative group and a
comparison of the Bank's financial performance with the comparative group are
summarized on the following pages.
<PAGE>
Selection Criteria
Selected market price and financial performance data for thrifts listed
on the New York and American Stock Exchanges and those thrifts traded on the
over-the-counter ("OTC") markets listed on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") and OTC "electronic
bulletin board" are shown in Exhibit IV-1. Several criteria, discussed below,
were used to select the individual members of the comparative group from the
overall universe of publicly held thrifts.
- Operating characteristics - An institution's operating
characteristics are the most important factors in selecting a
comparative group because they affect investors' expected rates of
return on a company's stock under various business/economic
scenarios, and they influence the market's general perception of the
quality and attractiveness of a given company. Operating
characteristics, which may vary in importance during the business
cycle, include financial variables such as profitability, balance
sheet growth, capitalization, asset quality, and other factors such
as lines of business and management strategies.
- Degree of marketability and liquidity - Marketability of a stock
reflects the relative ease and promptness with which a security may
be sold when desired, at a representative current price, without
material concession in price merely because of the necessity of sale.
Marketability also connotes the existence of buying interest as well
as selling interest and is usually indicated by trading volumes and
the spread between the bid and asked price for a security. Liquidity
of the stock issue refers to the organized market exchange process
whereby the security can be converted into cash. We attempted to
limit our selection to companies that have access to a regular
trading market. We eliminated from the comparative group companies
with market prices that were materially influenced by publicly
announced or widely rumored acquisitions. However, the expectation of
continued industry consolidation is embedded in the thrift equity
securities market.
- Geographic Location - The region of the country where a company
operates is also of importance in selecting the comparative group.
The operating environment for savings institutions varies from region
to region with respect to business and economic environments, real
estate market conditions, speculative takeover activity, and
investment climates. Economic and investor climates also can vary
greatly within a region, particularly due to takeover activity.
<PAGE>
The Bank's operations are similar to those of a typical small thrift.
Residential real estate loans are the most significant part of the Bank's
portfolio, and only small concentrations of commercial and consumer-related
loans are held in the Bank's portfolio. Lending is generally done in the local
market area, and all loans are held for portfolio rather than being sold into
the secondary market. The Bank is further characterized by its low level of
nonperforming assets and strong capital ratio. Additionally, in determining the
comparative group composition, we also focused on the Bank's solid profitability
levels and high concentration of residential loans.
Specifically, we initiated a search for thrifts in the Southeast and
Midwest with total assets between approximately $25 million and $100 million,
reporting a core return on average assets between 0.5% and 1.5%. We also gave
additional consideration to thrifts whose post-conversion equity ratios are in
the range of 10% to 25%, and we excluded companies with extraordinarily high
capital ratios above 30%.
A general overview of the 13 members selected for the comparative group
is presented in Table 14. Twin City Bancorp, with total assets of $105 million,
is the largest comparative group member and the only company located in
Tennessee. Six companies are based in the bordering state of Kentucky. One
company is based in each of the bordering states of North Carolina and Georgia.
One company is located in West Virginia. The remaining three companies are in
Indiana. While some differences inevitably exist between the Bank and the
individual companies, we believe that the comparative group on the whole
provides a meaningful basis of comparison for valuation purposes.
<PAGE>
Table 14
General Information Summary
Comparative Group Companies
As of the Latest Period Ended December 31, 1996
<TABLE>
<CAPTION>
Total Equity/
No. of Conv. Assets Assets
Company City State Offices Date ($mil.) (%)
------- ---- ----- ------- ---- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Security Federal Savings Elizabethon TN 2 -- 46,579 10.04
Bank
Comparative Group
- -----------------
Beckley Bancorp, Inc. Beckley WV 2 07/08/94 44,975 24.56
CCF Holding Company Jonesboro GA 3 07/12/95 88,509 14.84
CKF Bancorp, Inc. Danville KY 1 01/04/95 60,038 25.15
Fort Thomas Financial Corp. Fort Thomas KY 2 06/28/95 91,109 17.22
Home Financial Bancorp Spencer IN 1 07/02/96 39,030 20.14
Home Savings Bank Siler City NC 1 11/16/95 52,822 18.05
Kentucky First Bancorp, Inc. Cynthiana KY 2 08/29/95 87,874 17.15
Logansport Financial Corp. Logansport IN 1 06/14/95 77,668 19.86
PenFed Bancorp, Inc. Falmouth KY 1 03/24/95 28,615 17.34
Pioneer Financial Winchester KY 3 07/16/87 74,515 11.34
Corporation
Princeton Federal Bank, FSB Princeton KY 1 04/29/94 31,026 14.03
Sobieski Bancorp, Inc. South Bend IN 3 03/31/95 78,978 17.65
Twin City Bancorp Bristol TN 3 01/04/95 105,263 12.71
</TABLE>
<PAGE>
Recent Financial Comparisons
Table 15 summarizes certain key financial comparisons, detailed in
Exhibit II, between the Bank and the comparative group. Individual comparative
company data are as of the latest available period for the 12 months ended
December 31, 1996, except loan portfolio composition data are as of September
30, 1996 (the latest regulatory data available). The Bank's financial data are
as of or for the 12 months ended December 31, 1996, on a pre-conversion basis.
The Bank's ROAA was 0.57%, slightly less than the 0.67% average reported
by the comparative group. The Bank's core earnings, which excludes the special
SAIF assessment, measured 0.94%, similar to the 0.94 % comparative group
average. Although the Bank's capital level is lower than that of the comparative
group average, the Bank's low general and administrative expense and slightly
higher other operating income offset the equity disadvantage. The Bank's core
9.56% return on average equity was higher than the corresponding average of
5.05% for the comparative group, largely because the Bank's pre-conversion
equity is significantly lower than the post-conversion equity enjoyed by the
comparative group.
The Bank's net interest income of 3.25% relative to average assets was
lower than the comparative group's average of 3.76%, due to higher interest
expense. The Bank's net interest spread of 292 basis points was only slightly
lower than the comparative group's average of 298 basis points. The Bank's 7.80%
yield on earning assets was slightly higher than the 7.71% comparative group
average. The Bank's 4.87% cost of funds was higher than the comparative group's
average of 4.73%, reflecting the Bank's lower equity level. The Bank's balance
of net interest-earning assets averaged 8.67% of total assets, well below the
comparative group's average of 18.02%. This disparity also reflected the Bank's
lower capital level.
<PAGE>
Table 15
Key Financial Comparisons
Security Federal and the Comparative Group
As of the Latest Twelve Months Ended December 31, 1996
Comp.
Security Group
Federal Average
------- -------
Profitability
- -------------
LTM Return on Average Assets 0.45 % 0.47 %
Core Return on Average Assets 0.76 0.70
LTM Return on Average Equity 8.98 3.01
Core Return on Average Equity 12.74 4.35
Income and Expense (% of avg. assets)
- -------------------------------------
Total Interest Income 8.21 7.55
Total Interest Expense 4.59 3.92
Net Interest Income 3.62 3.63
Provision for Loan Losses 0.12 0.10
Other Operating Income 0.39 0.36
Net Gains & Nonrecurring Income 0.01 0.12
General & Administrative Expense 2.70 2.82
Real Estate Expense (Income) 0.00 (0.01)
Nonrecurring Expense 0.48 0.47
Yield-Cost Data
- ---------------
Yield on Earning Assets 8.43 7.77
Cost of Funds 4.93 4.77
----- ----
Net Interest Spread 3.50 3.00
- ------------------- ---- ----
Asset Utilization (% of avg. assets)
Avg. Interest-earning Assets 97.43 97.28
Avg. Interest-bearing Liabilities 93.07 82.34
------ -----
Net Interest-earning Assets 4.36 14.94
<PAGE>
Table 15 (continued)
Key Financial Comparisons
Security Federal and the Comparative Group
As of the Latest Twelve Months Ended December 31, 1996
<TABLE>
<CAPTION>
Comp.
Security Group
Federal Average
------- -------
Balance Sheet Composition (% of assets)
- ---------------------------------------
<S> <C> <C>
Cash and Securities 13.99 % 26.45 %
Loans Receivable, net 83.13 70.66
Real Estate 0.00 0.04
Intangible Assets 0.00 0.01
Other Assets 2.88 2.85
Total Deposits 80.99 73.82
Borrowed Funds 12.45 10.00
Other Liabilities 0.92 1.05
Total Equity 5.64 15.13
Loan Portfolio (% of total loans)
- --------------
Residential Mortgage Loans 64.37 71.95
Other Real Estate Mortgage Loans 20.38 16.27
Nonmortgage Loans 15.25 11.78
Growth Rates
- ------------
Total Assets 22.53 5.43
Total Loans 36.14 11.35
Total Deposits 10.47 2.51
Credit Risk Ratios
- ------------------
Nonperforming Loans / Total Loans 0.13 0.83
Nonperforming Assets / Total Assets 0.11 0.89
Reserves / Nonperforming Loans 459.57 134.78
Reserves / Total Loans 0.58 1.05
</TABLE>
<PAGE>
The Bank's noninterest operating income totaled 0.34% in relation to
average assets, surpassing the comparative group's average of 0.27%. The Bank
had no gains and other nonrecurring income versus the comparative group's
average of 0.06% over the past twelve months.
The Bank's core operating expense ratio was 2.04%, significantly lower
than comparative group's average of 2.82%. The Bank's nonrecurring expense
(special SAIF assessment) measured 0.57% of average assets during the observed
period, and was higher than the peer group's average of 0.46%.
The Bank's holdings of cash and securities declined to 5.85% of total
assets, which is much lower than the comparative group's ratio of 27.64%.
Conversely, net loans receivable as a percent of assets increased to 79.02%,
while the comparative group had a lower percentage at 69.78%. Only three
individual companies in the comparative group, PenFed Bancorp, Fort Thomas
Financial Corp., and CKF Bancorp had higher loan concentrations, which were of
91.8% 89.2%, and 88.6%, respectively. The Bank and the comparative group
companies all show no intangible assets. The Bank's other assets at 0.07% of
total assets was lower than the comparative group ratio of 2.52%.
The Bank's high deposit concentration at 87.5% of assets versus the
comparative group's average of 73.6% reflected the Bank's lower capital
position. The Bank's level of borrowings outstanding at 1.7% of assets was lower
than the comparable group's average of 7.6%. However, the Bank's equity level at
10.04% was below the comparative group's average of 17.70%. A majority of the
comparative group companies consists of thrifts that converted to stock form
within the past two years, a period characterized by robust stock market
conditions and infusion of substantial offering proceeds. Given its strong level
of pre-conversion equity, the Holding
<PAGE>
Company is expected to emerge with a pro forma post-conversion capital ratio
between 17.08% and 19.49% of assets. The Holding Company's post-conversion
equity level will be higher than the comparative group average, and should rival
that of six comparative group companies -Logansport Financial Corp. (19.86%),
Home Savings Bank (18.05%), Sobieski Bancorp, Inc. (17.65%), PenFed Bancorp
(17.34%), Fort Thomas Financial (17.22%) and Kentucky First Bancorp (17.15%).
Four of the other companies in the comparative group show lower capital ratios
than the pro forma results for the Bank and three show higher capital ratios.
Asset quality at the Bank was strong with nonperforming assets totaling
0.80% of total assets. In contrast, the comparative group's average
nonperforming assets ratio was only slightly stronger, at 0.76%. The Bank's
ratio of reserves to nonperforming loans at 97.75% was significantly lower than
that of the comparative group's average of 149.54%; however, the level of
nonperforming assets at the Bank and among the comparative group is relatively
low, and therefore, small differences in reserve amounts can create large
percentage variations. In relation to total gross loans, the Bank's reserve
ratio at 0.80% trailed the comparative group's average of 1.19%.
The Bank's loan portfolio has a higher level of residential mortgages
composing 77.7% compared to the comparative group's average of 72.9%.
Conversely, the Bank's other mortgage loans at 13.2% and nonmortgage loans at
9.1% of total loans were somewhat lower than the comparative group's average
ratios, which were 15.1% and 12.0%, respectively.
In summary, the Bank's earnings performance generally matched that of
the comparative group despite the fact that the Bank operated from a relative
capital disadvantage. The Bank's lower operating expenses and higher other
operating income offset its higher interest expense. The Bank's cash and
securities portfolio percentage was significantly lower than that of the
<PAGE>
comparative group average, while net loans receivable were significantly higher,
also boosting the Bank's yield on assets. The Bank's reserve ratio in relation
to total loans trailed the comparative group's average, while the Bank showed a
higher percentage of residential mortgages than the comparative group average.
<PAGE>
III. MARKET VALUE ADJUSTMENTS
IV. General
This concluding chapter of the appraisal identifies certain additional
adjustments to the Bank's estimated pro forma market value relative to the
comparative group identified in Chapter II. Adjustments also are necessary to
reflect the equity market's likely reception of a new thrift stock offering. The
adjustments discussed in this chapter are made from the viewpoints of potential
investors, which include depositors holding subscription rights and unrelated
parties who may purchase stock in the community offering. It is assumed that
these potential investors are aware of all relevant and necessary facts as they
pertain to the value of the Bank relative to other publicly held thrift
institutions and relative to alternate investments.
The market value adjustments are based on certain financial and other
criteria, which include, among other factors:
(1) Earnings Prospects
(2) Market Area
(3) Management
(4) Dividend Policy
(5) Liquidity
(6) Subscription Interest
(7) Stock Market Conditions
(8) New Issue Discount
The final section of this chapter identifies the Holding Company's
estimated pro forma market value and compares the resulting company with members
of the comparative group and the all public thrift aggregate with respect to
market valuation ratios.
<PAGE>
Earnings Prospects
- ------------------
Earnings prospects are dependent upon the sensitivity of asset yields
and liability costs to changes in market interest rates, the credit quality of
assets, the stability of non-interest components of income and expense, and the
ability to leverage the balance sheet. Each of the foregoing is an important
factor to investors in assessing earnings prospects. The Bank's core earnings
profitability during recent years was fueled by an improved net interest margin
owing to lower interest rates and increased loan production. While economic
conditions in the Bank's market area are anticipated to remain favorable, an
unexpected downturn could suppress the Bank's ability to grow, disrupt asset
quality, and strain core earnings.
The Bank's operating expense ratio was below the comparative group's
average and is likely to remain relatively low after the Conversion because no
significant changes to operations or operating strategy are contemplated except
those costs associated with being a public company and with compensation-related
stock benefits.
The Bank's funding requirements face pressure in the form of continued
intense competition for retail deposits from other financial institutions and
alternative investments. However, the Bank has a historically stable retail
deposit base and borrowing capacity available to provide for funding shortfalls
that might occur.
Overall, the Bank's recent core return on assets approximated that of
the comparative group, while its net interest income was lower than the
comparative group average because of higher interest expense. Because of its
lower pre-conversion capital, the Bank's return on equity was significantly
higher than the comparative group average. Return on equity, however, can be
expected to decline after the conversion when capital is increased.
<PAGE>
The Bank's earnings compare favorably with those of the comparative
group. The high percentage of fixed-rate residential mortgages in the Bank's
portfolio results in a higher interest rate risk exposure for the Bank.
Generally, the comparative group companies have reported solid earnings and have
somewhat more diversified loan portfolios, which potentially can result in
higher credit risk but with an offsetting lower interest rate risk. Because
earnings approximate that of the comparative group, we do not believe an
additional valuation adjustment is necessary for earnings. We do note, however,
that interest rate volatility appears to be increasing and thus can impact the
earnings outlook.
Market Area
- -----------
There were no comparable publicly held thrift institutions located
within the Bank's immediate market area. As a result, we chose institutions with
similar operating profiles located in the Southeast and Midwest regions of the
country. Most of the comparative group companies are based in small towns and
operate one or two offices. We do not believe that, on the whole, the market
area conditions of the comparative group are conspicuously different from that
facing the Bank. Accordingly, we believe that no adjustment is warranted for
market area considerations.
Management
- ----------
Management's principal challenge is to generate profitable results,
monitor credit risks, and control operating costs as the Bank carries out its
business plan. The Bank's management has demonstrated its effectiveness in
operating the Bank in a safe, sound and profitable manner. The Bank's President
has served in that position since 1963 and has amassed substantial business
<PAGE>
contacts in the local market area. The President is 77 years of age, and the
Bank's operations depend to a considerable degree on the President. The Board
currently is seeking to attract and retain additional management either as
successor or supplement to the President. If the President were to vacate his
position, changes or disruptions in operating strategy could result that may
affect the Bank's profitability. Currently, however, we assume that the Bank has
sufficient managerial resources in place to implement its operating goals and
objectives. Like most small institutions, senior management staffing at the Bank
is, by necessity, lean. We have taken into account the present management
profile of the Bank in making our valuation adjustments.
Dividend Policy
- ---------------
The Holding Company's Board of Directors intends to adopt a policy of
paying regular cash dividends following consummation of the Conversion. The
Holding Company expects initially to pay semi-annual dividends on the shares at
a rate of 3% annually based on the $10.00 per share offer price, commencing
after December 31, 1997. However, no assurance can be given for any dividend
payment. Actual declarations and payments of dividends will depend upon a number
of factors, including the amount of the net proceeds retained by the Holding
Company, capital requirements, regulatory limitations, financial operating
results, and general economic conditions. All the companies in the comparative
group pay a dividend, and the average dividend yield for the comparative group
is 2.64%. It is reasonable to believe that investors will anticipate a regular
stream of dividend payments following the Conversion given the expected
profitability and capitalization of the consolidated Holding Company. The
dividend intent calls for a yield relatively similar to that of the comparative
group. Therefore, we do not believe an adjustment is warranted for dividends.
<PAGE>
Liquidity of the Issue
- ----------------------
Following the completion of the Conversion, the Holding Company
anticipates that its common stock will be traded on the Nasdaq SmallCap Market,
which requires that at least two market makers make, or agree to make, a market
in the stock. If the common stock cannot be listed on the Nasdaq SmallCap
Market, it is expected to be quoted and traded on the OTS "Electronic Bulletin
Board" or the National Quotation Bureau, Inc., "Pink Sheets." The marketing
agent for the Bank's stock offering intends to make a post-Conversion market in
the common stock and the Holding Company expects that before the Conversion is
completed it will obtain a commitment from another market maker. However, due to
the relatively small market capitalization, it is questionable whether an active
and liquid trading market will develop or be maintained.
The liquidity of thrift stocks, as with all securities, has a
significant impact on their market valuation performance. The comparative group
contains seven companies listed on NASDAQ and one listed on the American Stock
Exchange. Of the remaining five companies, one is traded through the OTC
Bulletin Board and the other four have market price quotations reported from the
Pink Sheets of the National Quotation Bureau.
While many small-cap thrift and bank stocks have moved from pure pink
sheet status to the OTS Bulletin Board in order to increase liquidity, discounts
to exchange-listed stocks are still apparent, as are volatile bid-ask spreads.
In addition, a meaningful portion of the Holding Company's common stock is
expected to be owned by insiders and employee-related stock plans, thereby
further limiting the stock's liquidity. Prospective buyers and sellers of stock
may not be able to execute trades at representative prices when desired. Given
the active and regular trading volumes exhibited by a majority of the
comparative group members, we believe the
<PAGE>
Holding Company's estimated pro forma value should be discounted to reflect the
likely lack of stock liquidity following the Conversion.
Subscription Interest
- ---------------------
In recent years, initial public offerings of thrift stocks have
attracted a great deal of investor interest. During 1996, increased pro forma
valuations and more restrained aftermarket performance did little to deter
investors from actively participating in thrift stock conversions. Almost
two-thirds of the conversions in 1996 were oversubscribed by depositors alone,
with no shares remaining for community offerings. Contributing to this huge
demand is the growing scarcity factor of mutual candidates for thrift stock
conversions. The number of conversion offerings annually and aggregate amount of
gross proceeds annually have declined over past years.
The visibility of thrift conversions moved to the forefront once again
in late 1996 and early 1997 with the conversion of Roslyn Savings Bank, which
received orders totaling approximately $1.7 billion for an offering that was
closed at $424 million. Notwithstanding the demand for thrift stocks in initial
offerings, a strong subscription does not always indicate that the valuation
range should be increased or the offering should be priced in the upper-end of
the valuation range. Many conversion investors do not routinely purchase in the
aftermarket, particularly at higher stock prices or involving stock issues with
limited liquidity. As such, absent actual results of the Bank's subscription
offering, we do not believe any adjustment is warranted at this time.
<PAGE>
Stock Market Conditions
- -----------------------
Table 16 graphically displays the performance of the SNL Thrift Index of
all publicly traded thrifts as compared to the Standard & Poor's 500-Stock Index
("S&P 500") over the past two years. The SNL Thrift Index substantially
outperformed the S&P 500 during this period, advancing by 49.6% since year-end
1995 as compared to the broader market index up 28.4%. The index of smaller
public thrifts (less than $250 million in assets) markedly trailed the overall
thrift performance, increasing by only 18.1%. The stock market performance of
smaller public thrifts did not enjoy the beneficial impact of greater liquidity
or the visible attractiveness of acquisition speculation favoring the larger
counterparts.
Table 17 graphically depicts selected interest rates over the past two
years. General market interest rates declined throughout 1995 and propelled the
stock market to new heights. Interest rates turned upward during the first half
of 1996, responding to concerns about inflationary pressures. Thrift stocks,
which had significantly outperformed the overall market in 1995, trailed the
broader market through mid-year of 1996. However, as interest rates declined
modestly and stabilized during the second half of 1996, thrift stocks regained
momentum and were sparked additionally by another wave of mergers and
acquisitions. Resolution of the SAIF recapitalization appeared to break a logjam
that resulted in the announcements of a number of acquisitions of relatively
large thrifts.
Speculation about higher rates and the sustainability of thrift stock
valuations stalled the rally in late 1996. The market sell-off was prompted in
part as reaction to suggestions from the Federal Reserve Chairman that the stock
market was overheated and that the central bank might raise rates to head off
inflation. However, a flurry of merger activity in early 1997 pumped further
speculative fervor into thrift stocks. This latest round of merger activity
included the
<PAGE>
Table 16 - GRAPH SHOWING "COMPARATIVE STOCK MARKET PERFORMANCE"
[GRAPHIC OMITTED]
Table 16 graphically displays the performance of the SNL Thrift Index of all
publicly traded thrifts as compared to the Standard & Poor's 500-Stock Index
("S&P 500") over the past two years.
<PAGE>
Table 17 -GRAPH SHOWING "SELECTED INTEREST RATE BENCHMARKS"
[GRAPHIC OMITTED]
Table 17 graphically depicts selected interest rates over the past two years.
<PAGE>
nation's three largest thrifts involved in an unsolicited takeover battle and
pushed the SNL Thrift Index upward to new highs. Notwithstanding the spillover
effect of merger activity, many stock analysts believe that the financial sector
is headed for a near-term slowdown as valuation multiples reach record peaks.
However, operating fundamentals remain strong enough to avert a major correction
independent of the overall market.
Recent Acquisition Activity
- ---------------------------
Acquisition speculation is one factor impacting the prices of newly
converted thrifts in the aftermarket. Table 18 summarizes the acquisition
activity involving thrifts and banks based in Tennessee. Overall acquisition
premiums for Tennessee institutions are generally similar to the ratios reported
nationwide. During the past two years, there were 14 acquisitions of Tennessee
banks and 4 acquisitions of Tennessee thrifts. The acquirers consisted of
in-state commercial banks and several out-of-state banks.
Two of the state's largest banks, Union Planters Corporation and First
American Corporation, have been the most active acquirers. Union Planters
completed a large acquisition through its purchase of the state's largest
thrift, Leader Financial Corporation. Thrift acquisition activity in Tennessee
has been restrained by the limited volume of available product. Of approximately
23 independent thrifts in Tennessee, there is only one publicly traded thrift,
and many of the larger thrifts remain in mutual form. The Bank aims to maintain
a strong community-based focus and has indicated no desire to seek a sale of the
institution in the near future. Therefore, given these considerations, we do not
believe acquisition premiums are a significant factor to consider in determining
the Holding Company's estimated pro forma market value.
<PAGE>
<TABLE>
<CAPTION>
Table 18
Acqusition Summary of Tennessee Institutions
Transactions Announced Since 1995
Seller's Prior Financial Data Offer Value to
--------------------------- ---------------------------
Total TanEq./ YTD YTD Deal Book Tang. LTM Total
B/T B/T Assets Assets ROAA ROAE Date Status Value Value Book EPS Assets
Buyer St. (1) Seller (1) ($M) (%) (%) (%) Anncd. (2) $M) (%) (%) (x) (%)
----- --- --- ------ --- ---- --- --- --- ------ --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Overall Average 306 8.14 0.92 11.26 -- -- 53.2 189.1 194.2 19.37 15.61
Bank Seller Average 121 8.24 0.90 10.87 -- -- 21.1 189.4 192.7 20.18 15.63
Thrift Seller Avearage 953 7.81 1.01 12.66 -- -- 157.4 188.4 198.5 17.15 15.58
Union Planters Corp TN B Citizens of B 58 6.99 1.01 13.97 12/13/96 P NA NA NA NA NA
Hardeman
First American TN B Hartsville B 91 5.81 0.59 8.70 10/11/96 C 12.0 209.7 245.2 21.47 13.12
Corp Bancshrs
Union Planters Corp TN B SBT Bancshares B 97 12.77 1.62 12.46 10/09/96 P 21.7 174.4 174.4 16.19 22.27
First Commercial AR B W.B.T. Holding Co. B 274 6.35 0.76 13.07 10/04/96 C 45.0 NA NA NA NA
Crp
Chester County TN B Southwest TN B 32 5.93 1.01 16.92 04/05/96 C 2.8 NA NA NA NA
Bcshs Bncshrs
Union Planters TN B Leader Financial T 3,099 7.97 1.38 17.01 03/08/96 C 504.7 192.5 192.5 13.05 16.29
Corp Crp
Union Planters Corp TN B Franklin Financial T 136 8.19 0.69 6.87 03/06/96 C 20.8 152.5 188.9 23.29 15.31
Peoples First Corp KY B Guaranty FSB T 55 5.47 0.82 15.13 02/20/96 C 6.6 219.7 219.7 17.60 12.03
Sharon Bancshares TN B Weakley County B 39 8.30 0.93 11.90 10/12/95 C 5.6 174.8 174.8 16.37 14.51
Bcshs
First South Bancorp TN B West TN Bancorp B 34 8.84 0.52 5.58 10/01/95 C 4.0 177.0 177.0 15.63 11.61
Greene County TN B Premier Bancshares B 23 8.99 1.16 13.27 09/09/95 C 3.1 184.2 184.2 11.76 13.67
Bncshrs
First Union Corp NC B Brentwood Nat'l B 113 10.79 1.08 9.47 07/18/95 C 24.0 197.1 197.1 22.86 21.28
Bank
Pioneer Bancshares TN B Sweetwater Valley B 168 12.18 1.10 8.84 07/13/95 C 23.0 111.4 112.2 11.39 13.65
First American Corp TN B First City Bncrp B 348 5.84 0.36 6.81 07/05/95 C 54.9 253.5 253.5 35.19 15.79
BancorpSouth, Inc MS B Wes-Tenn Bancorp B 288 8.74 1.17 13.05 06/16/95 C 62.7 249.5 249.5 19.46 21.79
BancorpSouth, Inc MS B Shelby Bank B 22 6.46 0.36 5.12 04/12/95 C 2.6 186.7 186.7 38.24 12.05
Union Planters Corp TN B First State Bancorp B 106 7.37 0.92 12.97 02/24/95 C 12.9 165.0 165.0 13.38 12.17
First American Corp TN B Heritage Federal T 522 9.60 1.13 11.62 02/21/95 C 97.4 188.8 192.7 14.66 18.68
</TABLE>
- -----------------------------
(1) B=bank; T=thrift.
(2) P=pending; C=completed.
<PAGE>
New Issue Discount
- ------------------
A "new issue" discount that reflects investor concerns and investment
risks inherent in all initial stock offerings is a factor to be considered in
valuations of initial thrift stock offerings. The magnitude of the new issue
discount typically expands during periods of declining thrift stock prices, as
investors require larger inducements, and narrows during strong market
conditions.
The thrift conversion market continues to respond to the aftermarket
performance of recent offerings. Table 19 presents a summary of standard thrift
conversions during 1996 and 1997 year-to-date. The aftermarket performance of
thrift conversions was more subdued through the first half of 1996, similar to
the thrift stock market overall. As the thrift market regained momentum during
the second half of 1996, aftermarket performance improved even as pro forma
valuations were increased. Recently, the thrift conversion market has proven to
be resilient, with the typical offering selling out in the subscription phase
and being priced at or near the upper end of the valuation range. With
valuations increasing to reflect the strength of recent offerings, it is
uncertain when the market will reach its tolerance for higher valuations
accompanied by the prospect of companies generating lackluster returns on
equity. Aftermarket performance flourished initially in 1997; however, no thrift
conversion has been completed in February and March 1997, when the market's
historically high valuation became subject to active and regular challenge.
In the aftermarket, full conversions have been trading upward to near
90%. To price a new offering at 90% of pro forma book value, because
of the arithmetic of the calculation, would require very large increases in
valuations and produce very marginal returns on equity. This
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Table 19
===========================================================================================================================
Recent Summary of Standard Thrift Conversions
Offerings by Publicly Traded Companies in 1996 and 1997
Pre-Conversion Data Pro Forma Ratios After-Market
--------------------- ------------------------------------------
Initial Gross Total TanEq./ YTD Price/ Price/ Price/ Price/ 1-Day 1-Mo.
Conv. Price Offering Assets Assets ROA Book TanBk. EPS Assets Chg. Chg.
Company State Date ($) ($M) ($M) (%) (%) (%) (%) (%) (%) (%) (%)
------- ----- ---- --- ---- ---- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average -- -- -- 40.6 239 10.88 0.59 71.2 71.2 16.8 16.1 15.4 17.8
Empire Federal Bancorp, Inc. MT 01/27/97 10.00 25.9 87 18.29 0.72 68.1 68.1 21.5 23.0 32.5 37.5
FirstFed America Bancorp, Inc. MA 01/15/97 10.00 87.1 724 6.41 0.76 72.0 72.0 13.6 10.7 36.3 48.8
Roslyn Bancorp, Inc. NY 01/13/97 10.00 423.7 1,597 14.18 1.21 72.0 72.0 9.3 21.0 50.0 60.0
Advance Financial Bancorp WV 01/02/97 10.00 10.8 92 6.75 0.48 71.1 71.1 16.8 10.6 28.8 40.0
Home City Financial Corp. OH 12/30/96 10.00 9.5 56 9.46 0.98 71.2 71.2 13.7 14.6 NA 35.0
Century Bancorp, Inc. NC 12/23/96 50.00 20.4 81 13.83 0.86 72.1 72.1 18.9 20.0 25.3 30.3
Southern Community Bancshs. AL 12/23/96 10.00 11.4 64 9.09 0.90 74.4 74.4 14.5 15.0 30.0 35.0
Big Foot Financial Corp. IL 12/20/96 10.00 25.1 195 6.98 0.11 72.7 72.7 33.1 11.4 23.1 38.8
River Valley Bancorp IN 12/20/96 10.00 11.9 87 7.59 0.30 73.0 73.0 15.2 12.1 36.9 50.0
PS Financial, Inc. IL 11/27/96 10.00 21.8 54 21.91 2.06 71.9 71.9 17.2 29.0 16.4 25.0
Carolina Fincorp, Inc. NC 11/25/96 10.00 18.5 94 9.18 0.64 77.0 77.0 17.2 16.4 30.0 36.3
Delphos Citizens Bancorp, Inc. OH 11/21/96 10.00 20.4 88 12.27 1.10 72.2 72.2 14.6 18.8 21.3 20.6
Fulton Bancorp, Inc. MO 10/18/96 10.00 17.2 85 10.66 0.75 72.5 72.5 14.6 16.7 25.0 47.5
Chester Bancorp, Inc. IL 10/08/96 10.00 21.8 135 8.69 0.73 72.1 72.1 18.8 13.9 29.4 26.3
South Street Financial Corp. NC 10/03/96 10.00 45.0 167 12.41 0.36 76.3 76.3 26.1 21.2 NA 23.8
AFSALA Bancorp, Inc. NY 10/01/96 10.00 14.5 133 6.16 0.49 71.7 71.7 13.7 9.9 13.8 15.6
CBES Bancorp, Inc. MO 09/30/96 10.00 10.3 86 9.15 0.58 61.1 61.1 13.2 10.6 26.3 32.5
Westwood Homestead Fin. Corp. OH 09/30/96 10.00 28.4 97 14.68 (0.21) 73.8 73.8 NA 22.7 7.5 5.0
Home Bancorp of Elgin, Inc. IL 09/27/96 10.00 70.1 305 12.05 0.78 72.6 72.6 24.9 18.7 18.1 26.3
Peoples Financial Corp. OH 09/13/96 10.00 14.9 78 12.87 0.29 64.3 64.3 28.6 16.0 8.8 27.5
Park Bancorp, Inc. IL 08/12/96 10.00 27.0 159 11.03 0.11 66.7 66.7 26.2 14.5 2.5 5.0
Acadiana Bancshares, Inc. LA 07/16/96 12.00 32.8 225 7.86 (0.43) 71.9 71.9 NA 12.7 0.0 3.1
Pennwood Bancorp, Inc. PA 07/15/96 10.00 6.1 42 9.77 0.81 67.5 67.5 14.5 12.8 (5.0) (3.8)
Mitchell Bancorp, Inc. NC 07/12/96 10.00 9.8 28 21.45 (0.40) 70.0 70.0 NA 25.8 NA 10.0
Ocean Financial Corp. NJ 07/03/96 20.00 167.8 1,036 8.91 0.80 71.2 71.2 13.4 13.9 6.3 5.0
Home Financial Bancorp IN 07/02/96 10.00 5.1 33 9.85 0.92 68.0 68.0 11.4 13.1 2.5 5.0
Eagle BancGroup, Inc. IL 07/01/96 10.00 13.0 151 7.63 (0.05) 58.4 58.4 NM 7.9 12.5 11.3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table 19 (continued)
Recent Summary of Standard Thrift Conversions
Pre-Conversion Data Pro Forma Ratios After-Market
--------------------- ------------------------------------------
Initial Gross Total TanEq./ YTD Price/ Price/ Price/ Price/ 1-Day 1-Mo.
Conv. Price Offering Assets Assets ROA Book TanBk. EPS Assets Chg. Chg.
Company State Date ($M) (%) (%) (%) (%) (%) (%) (%) (%)
------- ----- ---- ---- --- --- --- --- --- --- --- ---
($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Lancaster Bancshares KY 07/01/96 10.00 9.6 35 13.69 0.80 74.7 74.7 18.5 21.3 35.0 37.5
Provident Financial Holdings CA 06/28/96 10.00 51.3 571 6.69 0.30 62.4 62.4 19.9 8.2 9.7 1.3
Prestige Bancorp, Inc. PA 06/27/96 10.00 9.6 92 7.82 0.18 63.5 63.5 28.8 9.5 3.8 (2.5)
Wayne Bancorp, Inc. NJ 06/27/96 10.00 22.3 208 8.32 0.46 62.1 62.1 18.9 9.7 11.3 12.5
Dime Community Bancorp, Inc. NY 06/26/96 10.00 145.5 665 12.04 0.92 71.1 71.1 15.5 17.9 16.9 18.8
Mechanics Savings Bank CT 06/26/96 10.00 52.9 662 3.58 (2.14) 72.0 72.0 NA 7.4 15.0 12.5
CNS Bancorp, Inc. MO 06/12/96 10.00 16.5 85 10.75 0.22 71.3 71.3 24.4 16.2 10.0 15.0
Lexington B&L Financial Corp. MO 06/06/96 10.00 12.7 50 14.40 1.17 71.1 71.1 20.8 20.2 (5.0) 1.3
First Federal Bancshares AR 05/03/96 10.00 51.5 454 7.77 0.91 65.0 65.0 10.5 10.2 30.0 36.9
Citizens First Financial Corp. IL 05/01/96 10.00 28.2 228 5.99 0.53 75.3 75.3 15.7 11.0 5.0 1.3
Reliance Bancshares, Inc. WI 04/19/96 8.00 20.5 32 29.81 1.23 74.6 74.6 32.3 38.9 4.7 (0.7)
Catskill Financial Corp. NY 04/18/96 10.00 56.9 230 12.46 0.79 74.0 74.0 18.6 19.8 3.8 3.8
Yonkers Financial Corporation NY 04/18/96 10.00 35.7 208 7.57 0.72 77.2 77.2 15.9 14.6 (2.5) (0.6)
Green Street Financial Corp. NC 04/04/96 10.00 43.0 151 14.72 1.21 73.1 73.1 14.6 22.2 28.8 23.1
FFD Financial Corp. OH 04/03/96 10.00 14.5 59 13.41 0.86 71.9 71.9 25.4 19.8 5.0 3.1
AMB Financial Corp. IN 04/01/96 10.00 11.2 69 8.93 0.56 72.9 72.9 17.9 14.0 5.0 5.0
1st Bergen Bancorp NJ 04/01/96 10.00 31.7 223 6.35 0.32 77.1 77.1 21.0 12.5 0.0 (3.8)
London Financial Corporation OH 04/01/96 10.00 5.3 34 9.44 0.44 70.4 70.4 24.5 13.4 8.1 1.3
Pittsburgh Home Financial Corp PA 04/01/96 10.00 21.8 158 6.73 0.51 75.0 75.0 17.0 12.2 10.0 6.3
Scotland Bancorp, Inc NC 04/01/96 10.00 18.4 58 14.87 1.25 77.1 77.1 16.9 24.2 22.5 17.5
Stone Street Bancorp, Inc. NC 04/01/96 15.00 27.4 85 14.53 0.87 77.2 77.2 19.1 24.4 16.7 18.3
WHG Bancshares Corp. MD 04/01/96 10.00 16.2 85 9.94 0.77 73.2 73.2 15.2 16.0 11.3 12.5
Crazy Woman Creek Bancorp WY 03/29/96 10.00 10.6 38 15.61 0.96 71.7 71.7 15.8 22.0 NA 5.0
PFF Bancorp, Inc. CA 03/29/96 10.00 198.4 1,899 5.76 0.13 70.9 70.9 25.0 9.5 13.8 16.3
Falmouth Co-Operative Bank MA 03/28/96 10.00 14.5 74 11.44 0.61 68.7 68.7 17.6 16.5 7.5 7.5
Community Federal Bancorp MS 03/26/96 10.00 46.3 162 14.46 1.28 73.4 73.4 13.6 22.2 26.3 26.3
GA Financial, Inc. PA 03/26/96 10.00 89.0 476 9.75 0.86 72.6 72.6 13.5 15.7 13.8 10.0
Broadway Financial Corp. CA 01/09/96 10.00 8.9 103 5.20 0.47 69.9 69.9 13.0 8.0 3.8 2.5
Little Falls Bancorp, Inc. NJ 01/05/96 10.00 30.4 196 8.24 0.14 73.5 73.5 36.4 13.4 13.1 10.0
</TABLE>
<PAGE>
would likely produce price declines in the aftermarket. Accordingly, thrift
conversions continue to be priced at discounts to publicly traded companies.
This is due to the relatively high equity ratios producing low returns on equity
and the uncertainty regarding the ability of an institution to leverage the
balance sheet. Investors are aware that at pro forma price/book ratios
approaching the current trading range of a majority of public thrifts,
price/earnings ratios of converting thrifts would be excessive, returns on
equity very low, and capital levels dramatically high. Based upon price/book
ratio, standard thrift conversions are being discounted by 30% to 40% relative
to the overall market.
Adjustments Conclusion
- ----------------------
The Bank's pro forma valuation should be discounted relative to the
comparative group because of the expected lack of liquidity and the new issue
discount. In addition, we have taken into account the management profile of the
Bank. Individual discounts and premiums are not necessarily additive and may, to
some extent, offset or overlay each other. Currently, conversions are often
priced at substantial discounts to peer institutions relative to price/book
ratios, but at lesser discounts to the comparable institutions' price/earnings
ratio. It is the role of the appraiser to balance the price/book and
price/earnings discounts and premiums. We believe that relative to the
comparative group, the Bank's pro forma valuation should be substantially
discounted.
Valuation Approach
- ------------------
Table 20 displays the market price and valuation data of the comparative
group companies as of March 14, 1997. Exhibit III displays the pro forma
conversion calculations and
<PAGE>
<TABLE>
<CAPTION>
Table 20
Comparative Valuation Analysis
Security Federal and the Comparative Group
Market Price Data as of March 14, 1997
Current Total Price/ Price/ Price/ Price/ Price/ Tang. Current
Stock Market LTM Core Book Tang. Total Equity/ Dividend
Price Value EPS(1) EPS(1) Value Book Assets Assets Yield
Company ($) ($M) (x) (x) (%) (%) (%) (%) (%)
------- -- ----- ---- -- ----- -- ----- - ---- - ---- - ---- - ---- - ---
Security Federal Savings Bank
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pro Forma Minimum 10.00 4.9 13.5 9.0 57.1 57.1 9.76 17.08 3.00
Pro Forma Midpoint 10.00 5.8 15.2 10.3 61.8 61.8 11.31 18.29 3.00
Pro Forma Maximum 10.00 6.7 16.7 11.5 65.7 65.7 12.81 19.49 3.00
Pro Forma Adj. Maximum 10.00 7.7 18.2 12.8 69.5 69.5 14.49 20.83 3.00
Comparative Group Average -- 12.4 20.7 17.6 105.7 105.7 18.83 17.70 2.64
Small Public Thrift Average -- 15.2 19.4 17.4 101.4 101.9 21.68 19.62 1.83
Small Thinly Traded Average -- 6.5 16.8 14.4 90.1 90.4 12.93 14.29 1.66
Beckley Bancorp, Inc. 17.50 10.5 35.0 25.0 95.3 95.3 23.41 24.56 1.60
CCF Holding Company 16.38 15.0 46.8 27.3 114.2 114.2 16.95 14.84 3.05
CKF Bancorp, Inc. 18.88 17.5 22.7 23.0 110.9 110.9 29.15 25.15 2.33
Fort Thomas Financial Corp. 11.75 18.5 39.2 24.5 117.9 117.9 20.29 17.22 2.13
Home Financial Bancorp 15.50 7.8 NA NA 99.8 99.8 20.09 20.14 1.29
Home Savings Bank 12.88 11.9 NM 40.2 124.6 124.6 22.49 18.05 3.11
Kentucky First Bancorp, Inc. 11.75 15.7 20.6 16.3 108.3 108.3 17.89 17.15 4.26
Logansport Financial Corp. 14.81 18.6 21.5 17.0 120.6 120.6 23.96 19.86 2.70
PenFed Bancorp, Inc. 12.00 3.7 21.1 13.8 73.8 73.8 12.79 17.34 0.00
Pioneer Financial Corp. 40.50 8.4 13.8 9.8 99.8 99.8 11.31 11.34 3.46
Princeton Federal Bank, FSB 17.50 4.6 29.2 18.4 103.1 103.1 14.82 14.03 5.14
Sobieski Bancorp, Inc. 14.50 12.8 72.5 30.2 85.0 85.0 16.19 17.65 1.93
Twin City Bancorp 19.00 16.2 24.7 17.8 121.2 121.2 15.41 12.71 3.37
</TABLE>
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(1) price/earnings ratios greater than 25 are excluded from averages.
<PAGE>
Table 21
Comparative Discount and Premium Analysis
Market Price Data as of March 14, 1997
<TABLE>
<CAPTION>
Relative Discounts (Premiums)
-------------------------------------
Comp. Small Small
Valuation Security Group Public Thinly-Traded
Ratio Symbol Federal Average Thrifts(1) Thrifts(2)
----- ------ ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
-------------------------------------
Price / LTM EPS P/E (x) 20.7 19.4 16.8
-------------------------------------
----------
Minimum 13.5 -53% -44% -24%
Midpoint 15.2 -36% -28% -11%
Maximum 16.7 -24% -16% -1%
Adj. Maximum 18.2 -14% -7% 8%
----------
-------------------------------------
Price / Core EPS P/E (x) 17.6 17.4 14.4
-------------------------------------
----------
Minimum 9.0 -96% -93% -60%
Midpoint 10.3 -71% -69% -40%
Maximum 11.5 -53% -51% -25%
Adj. Maximum 12.8 -38% -36% -13%
----------
-------------------------------------
Price / Book P/B (%) 105.7 101.4 90.1
Value
-------------------------------------
----------
Minimum 57.1 -85% -78% -58%
Midpoint 61.8 -71% -64% -46%
Maximum 65.7 -61% -54% -37%
Adj. Maximum 69.5 -52% -46% -30%
----------
-------------------------------------
Price / Tangible Book P/B (%) 105.7 101.9 90.4
-------------------------------------
----------
Minimum 57.1 -85% -78% -58%
Midpoint 61.8 -71% -65% -46%
Maximum 65.7 -61% -55% -38%
Adj. Maximum 69.5 -52% -47% -30%
----------
-------------------------------------
Price / Total Assets P/A (%) 18.83 21.68 12.93
-------------------------------------
----------
Minimum 9.76 -93% -122% -32%
Midpoint 11.31 -66% -92% -14%
Maximum 12.81 -47% -69% -1%
Adj. Maximum 14.49 -30% -50% 11%
----------
</TABLE>
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(1) Exchange-listed public thrifts with assets less than $100 million (2)
Non-exchange listed public thrifts with assets less than $100 million
<PAGE>
assumptions utilized in analyzing the Bank's pro valuation ratios. Table 21
compares the Bank's pro forma valuation ratios with the comparative group
average and two selected aggregates of small thrifts, defined as having assets
less than $100 million. The small public thrift aggregate includes companies
whose shares are listed traded on major stock exchanges. The thinly-traded
aggregate includes thrifts that are not listed on one of the major exchanges but
whose trading prices are reported through the pink sheets. As shown in Table 20,
valuations of the small thinly-traded thrifts are discounted relative to the
small publicly-traded thrifts, likely indicative of the lesser degree of
liquidity. The magnitude of this discount ranges from 10% to 20% based on
various measures of price/book and price/earnings ratios.
Investors continue to make decisions to purchase thrift conversion
stocks and more seasoned thrift issues based upon price/book comparisons.
Utilizing a discount of approximately 71% to the corresponding comparative group
average, the Bank's resulting pro forma price/book ratio is 61.8%, reflecting a
maximum price/book valuation of 65.7% at the high end of the range and an
adjusted maximum of 69.5%. As shown on Table 21, the Bank's pro forma price/book
ratio of 69.5% at the adjusted maximum represents a 52% discount to the
comparative group's average. The Bank's pro forma price/book ratios reflect
lesser discounts to the small thinly-traded thrift aggregate.
The price/earnings ratio is also important and was examined in deriving
our estimate of value. Given the variability in earnings, investors often
encounter some difficulty in evaluating thrift offerings based upon
price/earnings multiples. Recently, the special SAIF assessment depressed the
reported earnings of most thrifts. Therefore, we have evaluated both reported
earnings and core earnings, which attempts to exclude extraordinary items.
<PAGE>
Based on the Bank's historical earnings for the latest twelve months
("LTM") and the net return on conversion proceeds, the Bank is valued at a
midpoint price/earnings ratio of 15.2x. This pro forma ratio is discounted 36%
to the comparative group average of 20.7x and 11% to the small thinly-traded
thrift aggregate average of 16.8x. The Bank's price/earnings ratio of 18.2x at
the adjusted maximum is slightly higher than the small thinly-traded thrift
aggregate average of 16.8x.
Based on the core earnings measure, the Bank's price/earnings ratio at
the midpoint is 10.3x, and increases to 11.5x at the maximum and 12.8x at the
adjusted maximum. The aggregates, which displayed higher levels of core
profitability, displayed much higher price/core earnings ratios. In contrast to
the aggregates, the Bank's lower price/assets ratio was largely related to its
lower post-conversion capital level. Based on the midpoint offering, the Holding
Company's pro forma equity/assets ratio is 18.29% and increases to 19.49% at the
maximum offering and 20.83% at the adjusted maximum.
Valuation Conclusion
- --------------------
It is our opinion that, as of March 14, 1997, the estimated pro forma
market value of the Bank's to-be-issued common stock was $5,800,000. Based on a
range of 15% below and above the midpoint valuation, the Holding Company's pro
forma valuation range was from $4,930,000 at the minimum to $6,670,000 at the
maximum. If the range were increased by an Exhibit III displays the conversion
calculations and assumptions utilized in determining the Holding Company's
estimated pro forma market value.
