U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22587
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SFB BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Tennessee 62-1683732
- --------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
632 East Elk Avenue, Elizabethton, Tennessee 37643
- ------------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 543-1000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
------------ ----------
As of November 6, 1998, there were 728,650 shares of the Registrant's common
stock, par value $0.10 per share, outstanding. The Registrant has no other
classes of common equity outstanding.
Transitional small business disclosure format:
Yes X No
------------ ----------
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Elizabethton, Tennessee
Index
<TABLE>
<CAPTION>
PART I. Page(s)
- ------- -------
<S> <C>
FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets-(Unaudited) as of December 31, 1997 and September 30, 1998.........................3
Consolidated Statements of Comprehensive Income - (Unaudited) for the three and
nine month periods ended September 30, 1997 and 1998...........................................................4
Consolidated Statements of Cash Flows - (Unaudited) for the nine months
ended September 30, 1997 and 1998............................................................................5
Notes to (Unaudited) Consolidated Financial Statements.......................................................6-8
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................................9-13
PART II.
- --------
OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................14
Item 2. Changes in Securities..............................................................................14
Item 3. Defaults Upon Senior Securities....................................................................14
Item 4. Submission of Matters to a Vote of Security Holders................................................14
Item 5. Other Information..................................................................................14
Item 6. Exhibits and Reports on Form 8-K................................................................14-15
Signatures................................................................................................... 16
</TABLE>
2
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
(in thousands )
<TABLE>
<CAPTION>
December 31, September 30,
------------ ------------
Assets 1997 1998
------ ---- ----
<S> <C> <C>
Cash on hand $ 453 $ 620
Interest-earning deposits in other banks 4,139 1,922
Investment securities:
Held to maturity (market value of $526
in 1997 and $1,223 in 1998) 577 1,219
Available for sale (amortized cost of $1,149
in 1997 and $2,425 in 1998) 1,148 2,432
Loans receivable, net 40,648 41,013
Mortgage-backed securities:
Available for sale (amortized cost of $5,117 in
1997 and $3,971 in 1998) 5,030 3,934
Premises and equipment, net 575 742
Federal Home Loan Bank stock 423 446
Accrued interest receivable 316 270
Prepaid expenses and other assets 28 62
-------- --------
Total assets $ 53,337 $ 52,660
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 40,587 $ 40,288
Advance payments by borrowers for taxes and insurance 199 444
Accrued expenses and other liabilities 144 228
Income taxes payable:
Current 164 --
Deferred 62 72
-------- --------
Total liabilities 41,156 41,032
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.10 par value, 1,000,000 shares authorized;
none outstanding) -- --
Common stock ($.10 par value, 4,000,000 shares authorized;
767,000 shares issued and outstanding at December 31, 1997 and 77 77
728,650 outstanding at September 30, 1998)
Paid-in capital 7,336 7,365
Retained earnings, substantially restricted 5,373 5,690
Treasury shares, at cost (38,350 shares) -- (596)
Accumulated other comprehensive income (loss) (53) (18)
Unearned compensation:
Employee stock ownership plan (552) (506)
Restricted stock plan -- (384)
-------- --------
Total stockholders' equity 12,181 11,628
-------- --------
Total liabilities and stockholders' equity $ 53,337 $ 52,660
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 827 $ 864 $2,399 $2,541
Mortgage-backed securities 77 56 239 188
Investments 29 56 79 132
Interest-earning deposits 61 35 121 131
------ ------ ------ ------
Total interest income 994 1,011 2,838 2,992
------ ------ ------ ------
Interest expense:
Deposits 489 502 1,491 1,470
Federal Home Loan Bank advances -- -- 3 --
------ ------ ------ ------
Total interest expense 489 502 1,494 1,470
------ ------ ------ ------
Net interest income 505 509 1,344 1,522
Provision for loan losses 3 8 3 23
------ ------ ------ ------
Net interest income after provision
for loan losses 502 501 1,341 1,499
Non-interest income:
Loan fees and service charges 37 40 107 115
Other 3 4 9 9
------ ------ ------ ------
Total non-interest income 40 44 116 124
------ ------ ------ ------
Non-interest expenses:
Compensation 112 154 361 520
Employee benefits 15 32 49 98
Net occupancy expense 19 21 53 60
Deposit insurance premiums 7 7 15 19
Data processing 19 22 55 64
Other 70 74 179 243
------ ------ ------ ------
Total non-interest expenses 242 310 712 1,004
------ ------ ------ ------
Income before income taxes 300 235 745 619
Income tax expense 111 86 272 229
------ ------ ------ ------
Net income 189 149 473 390
Other comprehensive income:
Net unrealized gains (losses) on
securities available for sale net of
income taxes of $29 and $14, for the
three months, and $37 and $23, for the nine
months, respectively 44 21 61 35
------ ------ ------ ------
Comprehensive income $ 233 $ 170 $ 534 $ 425
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 473 $ 390
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 39 41
Provision for loan losses 3 23
Increase (decrease) in reserve for uncollected interest 4 15
Deferred income taxes (benefit) (2) (15)
Net increase (decrease) in deferred loan fees (11) 1
Accretion of discounts on investment securities, net (15) (15)
Amortization of premiums on mortgage-backed securities 9 10
Amortization of unearned compensation 30 216
Repurchase of shares - RSP -- (525)
FHLB stock dividends (22) (23)
(Increase) decrease in other assets (17) (34)
(Increase) decrease in accrued interest receivable (25) 31
Increase (decrease) in accrued expenses and other liabilities 107 84
Increase (decrease) in current income taxes 136 (164)
------- -------
Net cash provided by operating activities 709 35
------- -------
Investing activities:
Purchase of investment securities held to maturity (500) (710)
Maturity of investment securities held to maturity 94 84
Purchase of investment securities available for sale (550) (2,475)
Maturities of investment securities available for sale 550 1,200
Principal payments on mortgage-backed securities
available for sale 589 1,135
Proceeds from sale real estate 10 --
Net (increase) decrease in loans (3,127) (389)
Purchase of premises and equipment (47) (208)
------- -------
Net cash used by investing activities (2,981) (1,363)
------- ------
Financing activities:
Net increase (decrease) in deposits (912) (299)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 278 245
Repayment of FHLB advances (800) --
Issuance of common stock 7,056 --
Purchase of treasury stock -- (596)
Payment of accrued conversion cost (286) --
Payment of cash dividend -- (72)
------- -------
Net cash provided (used) by financing activities 5,336 (722)
------- -------
Increase (decrease) in cash and cash equivalents 3,064 (2,050)
Cash and cash equivalents at beginning of period 1,414 4,592
------- -------
Cash and cash equivalents at end of period $ 4,478 $ 2,542
======= =======
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 1,478 $ 1,452
Income taxes 129 426
Noncash transactions
Unrealized gain (loss) on securities available for sale, net of deferred tax
liability 61 35
Loans to facilitate sale of real estate 40 --
Loan charge off's -- 6
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
SFB BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands)
1. Basis of Preparation
--------------------
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated balance sheets, consolidated statements of comprehensive
income, consolidated statements of stockholders' equity, and consolidated
statements of cash flows in conformity with generally accepted accounting
principles. However, all adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. All such adjustments are of a normal
recurring nature. The statements of comprehensive income for the three and
nine month periods ending September 30, 1998 are not necessarily
indicative of the results which may be expected for the entire year or any
other interim period.
It is suggested that these consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto for the Company for the year ended December 31, 1997 which are
included in the Form 10-KSB by reference (file no. 0-22587).
2. Earnings Per Share
------------------
Basic earnings per share amounts for the three and nine month periods
ending September 30, 1998 and the three months ending September 30, 1997,
are based on the average number of shares outstanding throughout the
period less unallocated ESOP shares, which are not considered as
outstanding for purposes of this calculation. Diluted earnings per share
are based on the dilutive effect for potential common shares outstanding
during the period which would include unpurchased shares granted for the
Bank's Restricted Stock Plan and shares granted under the Company's Stock
Option Plan. No earnings per share disclosure has been included for the
nine months ending September 30, 1997, since the initial stock offering
was only completed in May 1997. Therefore, it was determined that this
information would not be meaningful.
6
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------
Weighted average shares outstanding
-----------------------------------------------
For Nine
For Three Months Ended Months Ended
September 30, September 30,
---------------------- -------------------
1997 1998 1998
-------- -------- -------
<S> <C> <C> <C>
Common Shares Outstanding 767,000 753,661 762,505
Less: Unallocated ESOP shares (59,742) (51,653) (53,169)
-------- -------- --------
Basic EPS computation 707,258 702,008 709,336
Effect of dilutive securities:
Restricted Stock Plan -- -- 38
Stock Options -- -- 166
-------- -------- --------
Diluted EPS computation 707,258 702,008 709,540
Basic net income per share $ .27 $ .21 $ .55
Diluted net income per share $ .27 $ .21 $ .55
</TABLE>
3. Stock Option Plan and Restricted Stock Plan
-------------------------------------------
On June 1, 1998, the stockholders of the Company approved the Company's
Stock Option Plan (SOP) and Restricted Stock Plan (RSP) at the Company's
annual meeting. 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. The Company announced on June 15, 1998, in a
press release that it would repurchase up to 4% of its outstanding common
stock to fund its approved RSP, and on July 15, 1998, announced in a press
release that it would initially repurchase up to 5% for its approved SOP.
As of September 30, 1998, a total of 30,680 shares of common stock have
been purchased to fund the RSP and 38,350 have been purchased and held in
treasury to fund shares granted under the SOP.
The Company granted and awarded on June 1, 1998 under its approved SOP and
RSP 73,630 and 30,678 shares, respectively. The stock options were granted
to employees and non-employee directors at an exercise price of $16.69 per
share and are exercisable at the rate of 20% on the date of grant and 20%
annually thereafter. No shares have been exercised as of September 30,
1998.
The shares awarded under the RSP will be earned and vested to the
employees and non-employee directors over a four year period with 20%
vesting on the date of grant and 20% annually thereafter. Compensation
expense recognized for the three and nine month periods ending September
30, 1998 for the RSP awards was approximately $26,000 and $141,000,
respectively.
7
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Asset Quality
-------------
The following table provides information regarding the Bank's
nonperforming loans (i.e., loans which are contractually past due 90 days
or more) at December 31, 1997 and September 30, 1998, respectively. As of
the dates indicated, the Bank had no loans categorized as troubled debt
restructuring within the meaning of SFAS 15.
December 31, September 30,
1997 1998
---- ----
Nonaccrual loans $ 209 $ 411
Repossessed real estate -- --
------- -------
Total nonperforming assets $ 209 $ 411
======= =======
Nonperforming loans to net loans 0.51% 1.00%
Nonperforming assets to total assets 0.39% 0.78%
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following discussion and analysis is intended to assist in understanding the
financial condition and the results of operations of the Company. References to
the "Company" include SFB Bancorp, Inc. and/or Security Federal Bank as
appropriate.
Comparison of Results of Operations for the Three and Nine Months Ending
September 30, 1997 and 1998
Net Income. Net income for the three months ending September 30, 1998, decreased
$40,000 to $149,000 compared to $189,000 in 1997. Net income decreased $83,000
to $390,000 for the nine months ending September 30, 1998 compared to $473,000
in 1997. The decreases for the three and nine months ending September 30, 1998,
were primarily the result of increases in compensation and employee benefits,
offset by an increase in net interest income.
Net Interest Income. Net interest income increased $4,000 from $505,000 for the
three months ending September 30, 1997 to $509,000 for the three months ending
September 30, 1998. Net interest income increased $178,000, or 13.2%, from
approximately $1.3 million for the nine months ending September 30, 1997 to
approximately $1.5 million for the nine months ending September 30, 1998. The
improvement in net interest income for the three month period in 1998 primarily
reflects an increase in the interest rate spread of 53 basis points from 2.59%
for three months ending September 30, 1997 to 3.12% for the three months ending
September 30, 1998. Average interest-earning assets in excess of average
interest-bearing liabilities remained relatively constant during the period. The
overall increase in net interest income for the nine months ending September 30,
1998, primarily reflects an increase in average interest-earning assets over
average interest-bearing liabilities of approximately $683,000, as compared to
the same period in 1997. The interest rate spread increased 14 basis points from
2.87% for the nine months ending September 30, 1997 to 3.01% for the nine months
ending September 30, 1998. The increase in the average interest-earning assets
for the nine months ending September 30, 1998, reflects the infusion of the
proceeds raised in the Company's stock offering which was completed in late May
of 1997. Therefore, the nine months ending September 30, 1997, only had the
stock proceeds available to be deployed for approximately four months in 1997,
whereas for 1998, the Company was able to invest the funds for the full nine
months.
Interest Income. Interest income increased by $17,000 from $994,000 for the
three months ending September 30, 1997 to approximately $1.0 million for the
three months ending September 30, 1998, as the average yield on interest-earning
assets increased 56 basis points from 7.52% for the three months ending
September 30, 1997 to 8.08% for the same period in 1998. During the same three
month period, average interest-earning assets decreased approximately $583,000
as compared to 1997. This decrease was mainly the result of interest-earning
assets, primarily interest-earning assets in other banks, being used to purchase
approximately $1.1 million of the Company's stock in
9
<PAGE>
the market to fund the Bank's Restricted Stock Plan (RSP) and to repurchase
common stock under the approved stock repurchase plan. Interest income increased
$154,000 or 5.4% from approximately $2.8 million for the nine months ending
September 30, 1997, to approximately $3.0 million for the nine months ending
September 30, 1998. This increase in interest income was the result of average
interest-earning assets increasing approximately $2.0 million for the nine month
period in 1998, as compared to 1997. Furthermore, the average yield on
interest-earning assets increased 22 basis points from 7.68% for the nine months
ending September 30, 1997 to 7.90% for the nine months ending September 30,
1998.
Interest Expense. Interest expense increased by $13,000 from $489,000 for the
three months ending September 30, 1997 to $502,000 for the three months ending
September 30, 1998. Interest expense decreased by $24,000 during the nine months
ending September 30, 1998, from approximately $1.5 million for the nine months
ending September 30, 1997. The increase in interest expense for the three months
ending September 30, 1998, was primarily the result of an increase of
approximately $779,000 in the average balance of deposits compared to 1997, in
addition to a 4 basis point increase in the average cost of funds. The decrease
for the nine months ending September 30, 1998, was primarily the result of a
$1.3 million decrease in average deposits outstanding and no Federal Home Loan
Bank advances outstanding during the period, offset by a 8 basis point increase
in the average cost of funds.
Provision for Loan Losses. The provision for loan losses was $3,000 and $8,000
for the three month period ending September 30, 1997 and 1998, respectively. The
provision for loan losses was $3,000 and $23,000 for the nine month period
ending September 30, 1997 and 1998, respectively. The Company's management
routinely performs an analysis to quantify the inherent risk of loss in its
portfolio. At September 30, 1998, the allowance for loan losses was at a level
deemed adequate by management to provide for losses in the portfolio. The ratio
of allowance for loan loss to non-performing loans at September 30, 1998 was
77.37%, and nonperforming assets represented 0.78% of total consolidated assets.
Nonperforming assets were $411,000 at September 30, 1998, compared to $534,000
at September 30, 1997. Management is not aware of any trends or events inherent
to its loan portfolio that have not been provided for in its loan loss
allowance. However, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods
Non-Interest Income. Non-interest income continues to be an additional source of
income for the Company. The income is produced by fees on new loan production
and service fees on other products and services. Total non-interest income
amounted to $44,000 and $124,000 for the three and nine months ending September
30, 1998, respectively, and $40,000 and $116,000 for the three and nine months
ending September 30, 1997, respectively. Total non-interest income has remained
stable during these periods as the Company has not experienced any significant
loan or deposit growth.
Non-Interest Expense. Non-interest expense increased by $68,000 from $242,000
for the three months ending September 30, 1997 to $310,000 for 1998. The
increase for the three month period was primarily the result of increased
compensation expense of $42,000 and employee benefit expense of $17,000.
Non-interest expense increased by $292,000 from $712,000 for the nine
10
<PAGE>
months ending September 30, 1997 to approximately $1.0 million for the same
period in 1998. The increase was primarily the result of increased compensation
expense of $159,000, employee benefit expense of $49,000 and $64,000 of other
expense during the period. The increase in compensation expense for the quarter
ending September 30, 1998, was primarily attributable to the recognition of
additional compensation expense associated with the stockholder approved
Restricted Stock Plan (RSP). On June 1, 1998, the plan's approval resulted in an
immediate recognition of 20% of such plan expenses and subsequent monthly
accruals for the vesting benefits as earned. The expenses recognized for the RSP
during the three and nine month period ending September 30, 1998, was
approximately $26,000 and $140,000, respectively. The increase in employee
benefit expense for the three and nine months ending September 30, 1998 of
$17,000 and $49,000, respectively, was attributable to the continued recognition
of ESOP expenses for the entire three and nine month period in 1998, as compared
to only four months in the nine month period ending September 30, 1997. The
increase in other non-interest expense was mainly attributable to professional
fees and expenses incurred by the Company in connection with its first annual
meeting, SEC filings, and proxy material preparation and mailing. Net occupancy,
deposit insurance premiums, and data processing expenses remained relatively
stable during both three and nine month periods. As discussed herein, the Bank
plans to open an additional branch office in nearby Mountain City, Tennessee,
during the month of January 1999. The Company expects that non-interest expense
might increase during 1999 due to the costs associated with opening and
maintaining this new branch office.
Income Taxes. Income tax expense for the three months ending September 30, 1998
was $86,000 compared to $111,000 for the same period in 1997. Income tax expense
for the nine months ending September 30, 1998 was $229,000 compared to $272,000
for the same period in 1997. The decrease for the three and nine month periods
in 1998 was principally the result of lower pre-tax income. The effective tax
rate for both the three and nine months in 1997 and 1998 was approximately 38%.
Liquidity and Capital Resources. The Company's primary sources of funds are new
deposits, proceeds from principal and interest payments on loans, and repayments
on mortgage-backed securities. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition. The Company's primary investing activity is loan originations. The
Company maintains liquidity levels adequate to fund loan commitments, investment
opportunities, deposit withdrawals and other financial commitments. Obligations
to fund outstanding loan commitments at September 30, 1998 were approximately
$573,000.
During the quarter ended June 30, 1998, the Bank filed a notice with the OTS for
the establishment of a branch office. The Bank purchased for $135,000 land and
an existing building for the branch office which is to be located in Mountain
City, Tennessee. The Company's management estimated that costs incidental to
renovating and equipping the building to be approximately $120,000. As of
September 30, 1998, the Company had invested approximately $33,000 toward the
renovation and equipping of the building.
11
<PAGE>
At September 30, 1998, management had no knowledge of any trends, events or
uncertainties that will have or are reasonably likely to have material effects
on the liquidity, capital resources or operations of the Company. Furthermore,
at September 30, 1998, management was not aware of any current recommendations
by the regulatory authorities which, if implemented, would have such an effect.
The Bank exceeded all of its capital requirements at September 30, 1998. The
Bank had the following capital ratios at September 30, 1998:
<TABLE>
<CAPTION>
For Capital Categorized as
Actual Adequacy Purposes "Well Capitalized"(1)
---------------------------- ---------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- -------------- -------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total Capital
(To risk weighted assets) $ 8,831 29.9% $ 2,363 8.0%` $ 2,954 10.0%
Tier I Capital
(To risk weighted assets) $ 8,512 28.8% $ 1,182 4.0% $ 1,772 6.0%
Tier I Capital
(To total assets) $ 8,512 16.9% $ 886 3.0% $ 1,477 5.0%
Tangible Capital
(To total assets) $ 8,512 16.9% $ 443 1.50% $ 1,477 5.0%
</TABLE>
(1) As categorized under the Prompt Corrective Action Provisions.
Year 2000 compliance. A great deal of information has been disseminated about
the Year 2000 as it relates to computer systems. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the Year 2000 as the
Year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the Bank's operations. Data
processing is also essential to most other financial institutions and many other
companies. Substantially all of the Bank's material data processing that could
be affected by this problem is provided by a third party service bureau. The
service bureau has advised the Bank that it expects to have substantially all of
the Year 2000 problems resolved by the end of 1998. In addition, the service
bureau has informed the Bank that it will not be assessing special charges for
the renovation and testing of its hardware and software in preparation for Year
2000. However, if the service bureau is unable to resolve this potential problem
in time, the Bank would likely experience significant data processing delays,
mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on our financial condition and results of operation.
The Bank has formulated a Year 2000 Compliance Plan and a Year 2000 Contingency
Plan. The Year 2000 Compliance Plan is structured in accordance with the Office
of Thrift Supervision's Year 2000 Examination Checklist, Version 2. It addresses
the identified phases of: Awareness, Assessment, Renovation, Validation and
Implementation. The purpose of the plan is to outline the
12
<PAGE>
procedures necessary for assuring that the Bank is in readiness for the century
date change. Execution of the plan is currently on target. The Year 2000
Contingency Plan is designed to prepare the institution for returning to
operation in the event that systems do not perform as planned either before or
after the century date change. The plan addresses vital mission critical
applications and states both the plans in the event of noncompliance and dates
for when the plan will be put into effect.
The Company has contacted other material vendors and supplier regarding their
Year 2000 state of readiness. The Company has obtained written assurance from
these third party vendors indicating that they expect to be Year 2000 compliant
prior to the Year 2000.
The Bank's third party service bureau during October 1998, converted the Bank to
its new state of the art core account processing platform. This new technology
was built with Year 2000 compatible components. The service bureau during
October 1998, conducted Year 2000 proxy testing on this new platform. The Bank
expects to commence testing in December 1998. In addition, each application of
the system has been renovated to run on the new platform and date fields
expanded to a four digit year. Other service bureau products and services
utilized by the Bank are expected to be brought Year 2000 compliant by the end
of 1998 or first part of 1999.
The Bank is planning to upgrade its teller operating system during the fourth
quarter of 1998. This upgrade will further ensure Year 2000 readiness by using
Year 2000 certified software and hardware. The Company's management estimates
costs incidental to the upgrade to be approximately $100,000. The Company's
management anticipates that substantially all of such costs will be capitalized.
These costs should not be material to the Company in any single year. As of
September 30, 1998, no material costs have been capitalized in regard to Year
2000 compliance.
The Company's successful and timely completion of the Year 2000 project is based
on estimates derived by management on assumptions of future events, which are
inherently uncertain, including the progress and results of the Company's third
party service provider, testing plans, and all vendors, suppliers and customer
readiness.
13
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time, the Company and its subsidiaries may be a party
to various legal proceedings incident to its or their business. At
September 30, 1998, there were no legal proceedings to which the
Company or any subsidiary was a party, or to which of any of their
property was subject, which were expected by management to result
in a material loss.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) 3(i) Charter of SFB Bancorp, Inc.*
3(ii) Bylaws of SFB Bancorp, Inc. *
4 Specimen Stock Certificate *
10 Employment Agreement with Peter W. Hampton *
10.1 SFB Bancorp, Inc. 1998 Stock Option Plan **
10.2 Security Federal Bank Restricted Stock Plan **
27 Financial Data Schedule ( Electronic filing only)
* Incorporated by reference to the Registration Statement on
Form SB-2, File No. 333-23505.
14
<PAGE>
** Incorporated by reference to the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders, filed with
with the SEC on April 17, 1998 (File No. 0-22587).
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SFB Bancorp, Inc.
Date: November 12, 1998 By /s/ Peter W. Hampton
----------------- ----------------------------------------
Peter W. Hampton
(President and Chief Executive Officer)
Date: November 12, 1998 By /s/ Bobby Hyatt
------------------- ---------------------------------------
Bobby Hyatt
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 620
<INT-BEARING-DEPOSITS> 1,922
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<INVESTMENTS-MARKET> 1,223
<LOANS> 41,331
<ALLOWANCE> 318
<TOTAL-ASSETS> 52,660
<DEPOSITS> 40,288
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<LIABILITIES-OTHER> 744
<LONG-TERM> 0
0
0
<COMMON> 77
<OTHER-SE> 11,551
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<INTEREST-DEPOSIT> 1,470
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<INCOME-PRETAX> 619
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<NET-INCOME> 390
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<YIELD-ACTUAL> 4.02
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