SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No Fee required) For the fiscal year ended
December 31, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee required) For the transition period from
to
------------ ---------------.
Commission File No. 0-22587
SFB Bancorp, Inc.
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(Name of Small Business Issuer in Its Charter)
Tennessee 62-1683732
- --------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
632 East Elk Avenue, Elizabethton, Tennessee 37643
- --------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (423) 543-3518
---------------
Securities registered under to Section 12(b) of the Exchange Act: None
------
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO .
----- ----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $4,009,000
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the average bid and asked price of the registrant's
Common Stock on March 1, 1998 was $10.4 million.
As of December 31, 1997, there were issued and outstanding 767,000
shares of the registrant's Common Stock.
Transition Small Business Disclosure Format (check one): YES NO X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal
Year ended December 31, 1997. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders for the Fiscal Year ended December 31, 1997.
(Part III)
<PAGE>
PART I
SFB BANCORP, INC. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR
ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS
ANNUAL REPORT ON FORM 10-KSB AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AN FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVINGS HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS
INVOLVED IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS
NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
Item 1. Description of Business
- --------------------------------
General
SFB Bancorp, Inc. (the "Company") is a Tennessee corporation organized
in March 1997 at the direction of Security Federal Bank (the "Bank" or "Security
Federal") to acquire all of the capital stock that the Bank issued in its
conversion from the mutual to stock form of ownership (the "Conversion"). On May
29, 1997, the Bank completed the Conversion and became a wholly owned subsidiary
of the Company. The Company is a unitary savings and loan holding company which,
under existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Bank
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<PAGE>
retains a specified amount of its assets in housing-related investments. The
Company conducts no significant business or operations of its own other than
holding all of the outstanding stock of the Bank and investing the Company's
portion of the net proceeds obtained in the Conversion.
The Bank, chartered in 1963 under the name Security Federal Savings and
Loan Association, is a federally chartered stock savings bank headquartered in
Elizabethton, Tennessee. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS") and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of and
owns capital stock in the FHLB of Cincinnati, which is one of the 12 regional
banks in the FHLB System.
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate.
Competition
Security Federal is one of many financial institutions serving its
market area which consists of Carter County, Tennessee and the adjacent
Tennessee counties of Johnson, Unicoi, Washington, and Sullivan. The competition
for deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, and multi-state regional
banks in the Bank's market area. Deposit competition 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 other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
3
<PAGE>
Lending Activities
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Bank's loan portfolio by type of loan and type of
security on the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1996 1997
-------------------------- ---------------------------
Amount Percent Amount Percent
------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Real Estate Loans:
One- to four-family................................ $29,653 77.67% $31,382 75.63%
Construction....................................... 1,125 2.95 1,600 3.86
Commercial......................................... 1,288 3.37 1,433 3.45
Multi-family residential........................... 912 2.39 687 1.65
Land............................................... 1,732 4.54 2,982 7.19
Commercial business loans............................ 558 1.46 425 1.02
Consumer Loans:
Automobile loans................................... 1,949 5.11 2,119 5.10
Share loans........................................ 435 1.14 517 1.25
Other.............................................. 524 1.37 351 .85
------- ------ ------- ------
Total loans..................................... 38,176 100.00% 41,496 100.00%
====== ======
Less:
Loans in process................................... 942 429
Deferred loan origination fees and costs........... 122 118
Allowance for loan losses.......................... 304 301
------- -------
Total loans, net................................ $36,808 $40,648
======= =======
</TABLE>
Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's
loan portfolio, including loans held for sale, at December 31, 1997. The table
does not include prepayments or scheduled principal repayments. All mortgage
loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
One- to four-family residential................... $ 109 $1,574 $29,699 $31,382
Construction...................................... 460 69 1,071 1,600
Commercial........................................ -- 376 1,057 1,433
Multi-family residential.......................... -- 72 615 687
Land.............................................. 604 2,079 299 2,982
Commercial business loans......................... 345 80 -- 425
Consumer.......................................... 753 2,204 30 2,987
------ ------ ------- -------
Total Amount Due............................. $2,271 $6,454 $32,771 $41,496
====== ====== ======= =======
</TABLE>
4
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 1998, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One- to four-family residential............. $29,131 $2,142 $31,273
Construction................................ 1,060 80 1,140
Commercial.................................. 1,183 250 1,433
Multi-family................................ 580 107 687
Land........................................ 1,647 731 2,378
Commercial business loans and
consumer.................................. 1,973 341 2,314
------- ------ -------
Total................................... $35,574 $3,651 $39,225
======= ====== =======
</TABLE>
One- to Four-Family Residential Loans. Security Federal's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans secured by property in the Bank's primary market area. The Bank
generally originates one- to four-family residential mortgage loans in amounts
up to 97% 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
85%. The maximum loan-to-value ratio on mortgage loans secured by nonowner
occupied properties generally is limited to 85%. The Bank primarily originates
and retains 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.
Security Federal also offers adjustable rate mortgage loans. The
interest rate on adjustable rate mortgage loans is based on an index plus a
stated margin. The Bank may offer discounted initial interest rates on
adjustable rate mortgage loans but the Bank requires that the borrower qualify
for the adjustable rate mortgage loans at the fully indexed rate (the index rate
plus the margin). Adjustable rate mortgage loans provide for periodic interest
rate adjustments upward or downward of up to 2% per adjustment. The interest
rate may not increase more than 5% over the life of the loan and may not
decrease below the initial interest rate. Adjustable rate mortgage loans
typically reprice every one, three or five years and provide for terms of up to
30 years.
Adjustable rate mortgage 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 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.
Mortgage loans originated and held by the Bank generally include a
due-on-sale clause, which gives the Bank 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 the Bank's consent.
Residential Construction Loans. Security Federal offers 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
5
<PAGE>
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
97% with private mortgage insurance. Because residential construction loans are
not rewritten if permanent financing is obtained from the Bank, these loans are
made on terms similar to those of the Bank's single family residential loans and
may be paid off over terms of up to 30 years, with payment in full due within 15
years.
On a limited basis, the Bank also originates speculative loans to
residential builders who have established business relationships with the Bank.
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, the Bank considers the number of units that the builder has on a
speculative bid basis that remain unsold. The Bank's 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. The Bank's
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, the Bank 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 that the
Bank originates 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. 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 $450,000 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 conditions in the economy. To minimize
these risks, the Bank generally limit this type of lending to their market area
and to borrowers who are otherwise well known to the Bank.
Commercial Business Loans. Security Federal offers commercial business
loans to benefit from the higher fees and interest rates and the shorter term to
maturity. 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.
6
<PAGE>
Consumer Loans. Consumer loans consist of home equity, automobile,
farm, mobile home, and demand loans secured by savings deposit accounts. These
type 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. The Bank's President has
unlimited loan approval authority. The loan committee generally approves all
residential mortgage loans of $25,000 or more, and the Bank's Board of Directors
ratifies all mortgage loans and consumer loans at its regular monthly meeting.
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 one of
the members of the Bank's Board of Directors and an outside independent fee
appraiser.
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, 1997, commitments to
cover originations of mortgage loans and undisbursed funds for loans-in-process
were $489,500 and $429,000, respectively.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At December 31,
-------------------------
1996 1997
-------- -------
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential................................................ $ 235 $ 150
Commercial..................................................................... 60 --
Consumer......................................................................... 16 59
------ ------
Total nonaccrual loans....................................................... 311 209
Accruing loans which are contractually past due 90 days or more.................. - -
------ ------
Total nonperforming loans.................................................... 311 209
Real estate owned................................................................ 60 -
------ ------
Total nonperforming assets....................................................... $371 $209
====== ======
Nonaccrual and 90 days past due as a percentage of net loans..................... 0.84% 0.51%
Nonaccrual and 90 days past due as a percentage of total assets.................. 0.67% 0.39%
Total nonperforming assets as a percentage of total assets....................... 0.80% 0.39%
</TABLE>
7
<PAGE>
At December 31, 1997, interest income that would have been recorded on
loans accounted for on a nonaccrual basis under the original terms of such loans
was immaterial.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions 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 obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified as 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 does not
currently warrant classification in one of the aforementioned categories.
When an insured institution 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 an insured institution 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. An institution'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 loan
loss allowances. A portion of the general loan loss allowance established to
cover possible losses related to assets classified as substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
In accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at December 31, 1997, the Bank had
classified approximately $306,000 of assets as substandard, and $30,000 of
assets as special mention. The Bank did not have any assets classified as
doubtful or loss.
Foreclosed Real Estate. 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, 1997,
the Bank had no foreclosed real estate.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in the 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 the 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) the Bank's past loan loss experience,
(ii) known and inherent risks in the 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.
Management monitors the allowance for loan losses and make additions to
the allowance as economic conditions dictate. There can be no assurance that the
allowance for losses will be adequate
8
<PAGE>
to cover losses which may in fact be realized in the future and that additional
provisions for losses will not be required.
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------
1996 1997
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding ......................................... $ 38,176 $ 41,496
======== ========
Average loans outstanding ....................................... $ 36,437 $ 39,881
======== ========
Allowance at beginning of period ................................ $ 279 $ 304
Provision ....................................................... 30 10
Recoveries ...................................................... -- --
Charge-offs (consumer loans in 1996) ............................ (5) (13)
-------- --------
Allowance at end of period ...................................... $ 304 $ 301
======== ========
Allowance for loan losses as a percent of total loans outstanding 0.80% 0.73%
Net loans charged off as percent of average loans outstanding ... -- 0.03%
Ratio of allowance to nonperforming loans ....................... 97.7% 144.0%
</TABLE>
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1996 1997
------------------------- --------------------------
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.............. $144 77.67% $136 75.63%
Construction................................. 20 2.95 25 3.86
Commercial................................... 45 3.37 40 3.45
Multi-family residential..................... 20 2.39 20 1.65
Land......................................... 25 4.54 30 7.19
Commercial business and consumer............... 50 9.08 50 8.22
---- ------ ---- ------
Total allowance for loan losses........... $304 100.00% $301 100.00%
==== ====== ==== ======
</TABLE>
Investment Activities and Mortgage-Backed Securities
General. The Bank is 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. The Bank has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be
9
<PAGE>
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities. The Bank classifies
its investments as securities available for sale or investment securities held
to maturity in accordance with SFAS No. 115. At December 31, 1997, the Bank's
investment portfolio policy allowed investments in instruments such as U.S.
Treasury obligations, U.S. federal agency or federally sponsored agency
obligations, municipal obligations, mortgage-backed securities, banker's
acceptances, certificates of deposit, federal funds, including FHLB overnight
and term deposits, as well as investment grade corporate bonds, commercial paper
and the mortgage derivative products described below. The Board of Directors may
authorize additional investments.
The Bank's investment securities available for sale and investment
securities held to maturity portfolios at December 31, 1997 did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's equity, excluding those issued by the United States Government or its
agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has 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, the principal
and interest payments on which 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 the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include Federal Home Loan Mortgage
Association ("FHLMC"), Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA"), and Small Business
Administration ("SBA").
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a 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.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as 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. 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.
Real Estate Mortgage Investment Conduits ("REMIC") 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.
10
<PAGE>
Investment Activities
Investment Portfolio. The following table sets forth the carrying value
of the Bank's securities at the dates indicated. At December 31, 1997, the
approximate fair value of the Bank's securities available for sale was
$6,178,000 resulting in a net unrealized loss of $88,000.
<TABLE>
<CAPTION>
At December 31,
-------------------------
1996 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
U.S. government and agency securities available for sale......... $ 597 $1,148
U.S. government securities....................................... 398 418
Political subdivision notes...................................... 317 159
Mortgage-backed securities available for sale.................... 5,768 5,030
FHLB Stock....................................................... 394 423
------ ------
Total.......................................................... $7,474 $7,178
====== ======
</TABLE>
11
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, market value and weighted average yields for the
Bank's investment securities portfolio at December 31, 1997. The following table
does not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------------------------
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 and
agencies securities
available for sale..... $ 899 5.55% $249 5.50% $ -- --% $ -- --% $ 1,148 5.54% $1,148
U.S. government
securities............... -- -- 418 5.91 -- -- 418 5.91 367
Political subdivision
notes.................... 34 4.95 125 4.50 -- -- -- -- 159 4.60 159
Mortgage-backed
securities available
for sale:
GNMA................... 6 9.50 -- -- -- -- 682 6.99 688 7.02 688
FHLMC.................. -- -- 4 7.00 -- -- 65 7.93 69 7.88 69
FHLMC Remic............ 109 5.50 387 5.54 632 5.50 609 5.33 1,737 5.46 1,737
FNMA................... -- -- 7 11.00 -- -- 607 6.57 614 6.11 614
FNMA Remic............. -- -- -- -- -- -- 1,922 5.58 1,922 5.58 1,922
FHLB stock (1)........... -- -- -- -- -- -- 423 7.30 423 7.30 423
------ ---- ---- ---- ------ ---- ------ ---- ------- ---- ------
Total.................. $1,048 5.55% $772 5.44% $1,050 5.66% $4,308 6.11% $ 7,178 5.85% $7,127
====== ==== ==== ==== ====== ==== ====== ==== ======= ==== ======
</TABLE>
- ----------------------------
(1) Recorded at cost.
12
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. The Bank derives funds from amortization
and prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities 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 the Bank's primary market area through the offering of a selection
of deposit instruments including regular savings accounts, money market
accounts, and term certificate accounts. Deposit account terms vary according to
the minimum balance required, the time period the funds must remain on deposit,
and the interest rate, among other factors. At December 31, 1997, the Bank had
no brokered accounts.
Time Deposits. The following table indicates the amount of the Bank's
time deposits of $100,000 or more by time remaining until maturity as of
December 31, 1997.
Maturity Period Time Deposits
--------------- -------------
(Dollar in Thousands)
Within three months........................................ $1,393
More than three through six months......................... 1,991
More than six through nine months.......................... 3,031
Over nine months........................................... 1,121
------
Total............................................. $7,536
======
Borrowings
The Bank may obtain advances from the FHLB of Cincinnati to supplement
its supply of lendable funds. Advances from the FHLB of Cincinnati are typically
secured by a pledge of the Bank's stock in the FHLB of Cincinnati and a portion
of the Bank's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Bank, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements.
The following table sets forth information concerning borrowings during
the periods indicated.
Year Ended June 30,
----------------------------
1996 1997
------ -------
(Dollars In Thousands)
Ending balance............................. $ 800 $ --
Average balance during year ............... 92 50
Maximum month-end balance during the year.. 800 900
Average interest rate during the year...... 5.85% 6.00%
Weighted average rate at year end.......... 5.85% --%
13
<PAGE>
Employees
At December 31, 1997 the Bank had 17 full-time and 3 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its 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 the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for
14
<PAGE>
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.
Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, the Bank 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. The Bank cannot predict the impact of its conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator. The FDIC may also prohibit an insured
depository institution from engaging in any activity the FDIC determines poses a
serious threat to the SAIF.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup assignment.
In addition, the FDIC is authorized to increase deposit insurance rates on a
semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"),
predominantly commercial banks, were required to pay substantially lower, or
virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $264,000 pre-tax
expense for this assessment at September 30, 1996. Beginning January 1, 1997,
deposit insurance assessments for SAIF members were reduced to approximately
.064% of deposits on an annual basis; this rate may continue through the end of
1999. During this same period, BIF members are expected to be annually assessed
approximately .013% of deposits. Thereafter, assessments for BIF and SAIF
members should be the same and the SAIF and BIF may be merged. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank substantially declined.
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) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
15
<PAGE>
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
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 shareholders 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 approval. As of
December 31, 1997, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. 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.
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution, and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
the capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. Under certain
other circumstances, savings associations will be required to file a notice with
OTS prior to making the capital distribution. The OTS proposed limitations on
capital distributions are similar to the limitations imposed upon national
banks. The Bank is unable to predict whether or when the proposed regulation
will become effective.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it 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 associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be
16
<PAGE>
in compliance with the QTL test on a monthly basis in nine out of every 12
months. As of December 31, 1997, the Bank was in compliance with its QTL
requirement with 87.82% of its assets invested in QTIs.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from 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, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets in each calendar quarter
equal to a certain percentage of the sum of its net withdrawable deposit
accounts and borrowings payable in one year or less at the end of the preceding
quarter, or the average daily balance of its net withdrawable deposit accounts
and borrowings payable in one year or less during the preceding quarter. The
liquidity requirement may vary from time to time (between 4% and 10%) depending
upon economic conditions and savings flows of all savings associations. At
December 31, 1997, the Bank's required liquidity ratio was 4.00%, an its actual
ratio was 12.46%.
Federal Reserve System. The Federal Reserve Board 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 Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
December 31, 1997, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Description of Property
- -------------------------------
Year Leased
Location Leased or Owned or Acquired
- -------- --------------- -----------
MAIN OFFICE:
632 East Elk Avenue Owned 1980
Elizabethton, Tennessee
BRANCH OFFICE:
510 Wallace Avenue Owned 1989
Elizabethton, Tennessee
In addition the Bank owns property at the intersection of Riverside
Drive and Hattie Avenue, Elizabethton, Tennessee which consists of a
single-family dwelling that the Bank rents for $400 per month and a paved
parking area for the Bank's customers and employees.
17
<PAGE>
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See
"Item 1. Business - Lending Activities and - Regulation of the Bank," and "Item
2. Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank
are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, no material loss
is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The Company's common stock has been traded on the OTC Bulletin Board
under the trading symbol of "SFBK" since it commenced trading in June 1997. The
following table reflects high and low bid quotations as published by Bloomberg
News. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual transactions.
Dividends
Date High Low Declared
---- ---- --- --------
June 1, 1997 - June 30, 1997 $14.00 $13.38 $ --
July 1, 1997 - September 30, 1997 $15.50 $14.00 $ --
October 1, 1997 - December 31, 1997 $15.63 $14.50 $ --
18
<PAGE>
The number of shareholders of record of common stock as of March 15,
1998, was approximately 162. This does not reflect the number of persons or
entities who held stock in nominee or "street" name through various brokerage
firms. At March 15, 1998, there were 767,000 shares outstanding. The Company's
ability to pay dividends to stockholders is dependent upon the dividends it
receives from the Bank. The Bank may not declare or pay a cash dividend on any
of its stock if the effect thereof would cause the Bank's regulatory capital to
be reduced below (1) the amount required for the liquidation account established
in connection with the Conversion, or (2) the regulatory capital requirements
imposed by the OTS.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- --------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
- --------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I - Information with
Respect to Nominees for Director, Directors Continuing in Office, and Executive
Officers - Election of Directors" and " - Biographical Information" in the
"Proxy Statement" is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned
"Proposal I - Information with Respect to Nominees for
Director, Directors Continuing in Office, and Executive
Officers" in the Proxy Statement.
19
<PAGE>
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned
"Proposal I - Information with Respect to Nominees for
Director, Directors Continuing in Office, and Executive
Officers" in the Proxy Statement.
(c) Management of the Registrant knows of no arrangements,
including any pledge by any person of securities of the
Registrant, the operation of which may at a subsequent date
result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K
- -----------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report.
(1) The consolidated balance sheets of SFB Bancorp, Inc.
and subsidiary as of December 31, 1996 and 1997 and
the related consolidated statements of comprehensive
income, changes in stockholders' equity and cash
flows for each of the years in the two year period
ended December 31, 1997, together with the related
notes and the independent auditors' report of Crisp
Hughes Evans LLP, independent certified public
accountants.
(2) Schedules omitted as they are not applicable.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Charter of SFB Bancorp, Inc.
3(iii) Bylaws of SFB Bancorp, Inc.
4 Specimen Stock Certificate *
10 Employment Agreement between the Bank and Peter W.
Hampton*
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See "Item 1-
Description of Business)
23 Consent of Independent Auditors
27 Financial Data Schedule (electronic filing only)
- ---------------------
* Incorporated by reference to the registration statement on Form SB-2
(File No. 333-23505) declared effective by the SEC on April 14, 1997.
(b) Not applicable.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of
March 26, 1998.
SFB BANCORP, INC.
By:/s/Peter W. Hampton
-----------------------------------------
Peter W. Hampton
President and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 26, 1998.
/s/ Peter W. Hampton /s/ Donald W. Tetrick
- ------------------------------------ -----------------------------------------
Peter W. Hampton Donald W. Tetrick
President and Director Director
(Principal Executive Officer)
/s/ Peter W. Hampton, Jr. /s/ John R. Crockett, Jr.
- ------------------------------------ -----------------------------------------
Peter W. Hampton, Jr. John R. Crockett, Jr.
Secretary and Director Treasurer and Director
/s/ Julian T. Caudill, Jr. /s/ Estill L. Caudill, Jr.
- ------------------------------------ -----------------------------------------
Julian T. Caudill, Jr. Estill L. Caudill, Jr.
Director Director
/s/ Bobby Hyatt
- ------------------------------------
Bobby Hyatt
Assistant Vice President
(Principal Accounting Officer)
EXHIBIT 13
<PAGE>
SFB Bancorp, Inc.
- --------------------------------------------------------------------------------
To Our Stockholders:
On behalf of our Board of Directors and employees of SFB Bancorp, Inc.
(the "Company"), we are pleased to present to you our 1997 Annual Report to
Stockholders for the Company, and its wholly owned subsidiary, Security Federal
Bank (the "Bank"). This is SFB Bancorp, Inc.'s first annual report, and reflects
the financial results of the Company and its wholly owned subsidiary, the Bank,
on a consolidated basis for the year ended December 31, 1997.
The Company was formed in March 1997, as part of the Bank's conversion
from the mutual to stock form of organization. The conversion and concurrent
stock offering was consummated on May 29, 1997.
The Company's fiscal year ended December 31, 1997. Total assets of the
Company were $53,337,000, which was an increase of $6,758,000 or 14.5% from
December 31, 1996. The increase was mainly attributable to net offering proceeds
of approximately $6,770,000. Moreover, Stockholders' Equity increased $7,505,000
to $12,181,000 at December 13, 1997, from $4,676,000 at December 31, 1996. The
increase was mainly due to the net offering proceeds and comprehensive net
income of $644,000.
On behalf of the Board of Directors, management, and employees, I wish
to thank you for the trust that you have placed in us through your investment.
We stand committed to enhancing your investment in the Company through safe and
sound operations.
Sincerely,
/s/ Peter W. Hampton
Peter W. Hampton
President and Chief Executive Officer
1
<PAGE>
Stock Market Information
- ------------------------
The table below reflects the stock trading and dividend payment
frequency of the Company for each quarter completed in the period June 1, 1997
through December 31, 1997. Since its issuance on May 29, 1997, the Company's
common stock has been traded on the OTC Bulletin Board under the trading
symbol "SFBK". The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
Dividend
Date High Low Declared
---- ---- --- --------
June 1, 1997 - June 30, 1997 $ 14.00 $ 13.38 $ 0.00
July 1, 1997 - September 30, 1997 $ 15.50 $ 14.00 $ 0.00
October 1, 1997 - December 31, 1997 $15.63 $ 14.00 $ 0.00
The number of shareholders of record as of March 15, 1998, was
approximately 162. This does not reflect the number of persons or entities who
held stock in "street" name through various brokerage firms. At March 15, 1998,
there were 767,000 shares outstanding.
The Company's ability to pay dividends to stockholders is subject to
the requirements of Tennessee law, which generally limits the payment of
dividends to amounts that will not affect the ability of the Company to pay its
debts as they become due in the normal course of business. Further, the
Company's ability to pay dividends is also dependent upon the dividends it
receives from the Bank. Generally, the Bank may not declare or pay a cash
dividend if the effect thereof would cause the Bank's regulatory capital to be
reduced below (1) the amount required for the liquidation account established in
connection with the Conversion, or (2) the regulatory capital requirements
imposed by the OTS.
2
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Financial Condition (Dollars in Thousands)
At December 31, 1997 1996 1995
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets $ 53,337 $ 46,579 $ 45,482
Loans receivable, net 40,648 36,808 32,782
Mortgage-backed securities 5,030 5,768 7,299
Investment securities 1,725 1,312 1,414
Deposits 40,587 40,765 40,637
Total equity 12,181 4,676 4,426
--------------------------------------------------------------------------------------------------------
</TABLE>
Summary of Operations (Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 3,850 $ 3,474 $ 3,401
Interest expense 1,987 1,977 1,981
--------------- --------------- ---------------
Net interest income 1,863 1,497 1,420
Provision for loan losses 10 30 30
--------------- --------------- ---------------
Net interest income after provision
for loan losses 1,853 1,467 1,390
Noninterest income 159 156 152
Noninterest expense 1,054 1,204 957
--------------- --------------- ---------------
Income before income taxes 958 419 585
Income tax expense 369 157 221
--------------- --------------- ---------------
Net income $ 589 $ 262 $ 364
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Other Selected Data
Year Ended December 31, 1997 1996 1995
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.18% 0.57% 0.81%
Return on average equity 6.99% 5.67% 8.58%
Interest rate spread 3.00% 2.92% 2.87%
Non-performing loans to total loans 0.50% 0.81% 0.62%
Non-performing loans to total assets 0.39% 0.67% 0.46%
Allowance for loan losses to total loans 0.73% 0.80% 0.83%
--------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company was recently formed, therefore its results from operations
consist primarily of interest income from the investing of funds from the
proceeds generated by the sale of common stock and expense incurred in the
maintaining of the investment portfolio. The Bank's results of operations are
primarily dependent on its net interest income, which is the difference between
the interest income earned on its assets, primarily loans and investments, and
the interest expense on its liabilities, primarily deposits and borrowings. Net
interest income may be affected significantly by general economic and
competitive conditions and policies of regulatory agencies, particularly those
with respect to market interest rates. The results of operations are also
influenced by the level of non-interest expenses, such as employee salaries and
benefits and other income, such as loan-related fees and fees on deposit-related
services.
Asset/Liability Management
The Bank's net interest income is sensitive to changes in interest
rates, as the rates paid on interest-bearing liabilities generally change faster
than the rates earned on interest-earning assets. As a result, net interest
income will frequently decline in periods of rising interest rates and increase
in periods of decreasing interest rates.
The Board of Directors reviews the Bank's asset/liability policy and
meets quarterly to review interest rate risk and trends, as well as liquidity
and capital ratios and requirements. Rates on deposits are primarily based on
the Bank's need for funds and a review of rates offered by other financial
institutions in the Bank's market area. Interest rates on loans are primarily
based on the interest rates offered by other financial institutions in the
Bank's primary market area as well as the Bank's cost of funds. The Bank's
principal strategy is to manage the interest rate sensitivity of
interest-earning assets and to attempt to match the maturities of
interest-earning assets with interest-bearing liabilities, while allowing for a
mismatch in an effort to increase net interest income.
Because of the lack of customer demand for adjustable rate loans in the
Bank's market area, the Bank primarily originates fixed-rate real estate loans
which approximated 93% of the loan portfolio at December 31, 1997. To manage the
interest rate risk of this type of loan portfolio, the Bank limits maturities of
fixed-rate loans to no more than 15 years and maintains 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, 1997, the average weighted term to maturity of the Bank's mortgage loan
portfolio was slightly less than 12 years and the average weighted term of the
Bank's deposits was slightly less than 6 months.
4
<PAGE>
Net Portfolio Value
The Bank computes amounts by which the net present value of cash flow
from assets, liabilities and off balance sheet items ("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 the Bank's NPV from an
instantaneous and permanent 1% to 4% (100 to 400 basis points) increases and
decreases in market interest rates. Based upon OTS assumptions, the following
table presents the Bank's NPV at December 31, 1997.
Changes in Rates NPV Ratio %(1) Change(2)
----------------- -------------- ---------
+400 bp 13.65 -552 bp
+300 bp 15.18 -399 bp
+200 bp 16.71 -246 bp
+100 bp 18.11 -106 bp
0 bp 19.17 0 bp
-100 bp 19.73 +56 bp
-200 bp 19.72 +55 bp
-300 bp 19.76 +59 bp
-400 bp 20.07 +89 bp
- -------------------------
(1) Calculated as the estimated NPV divided by present value of total
assets.
(2) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
These calculations indicate that the Bank's net portfolio value could
be adversely affected by increases in interest rates but could be favorably
affected by decreases in interest rates. In addition, the Bank would be deemed
to have more than a normal level of interest rate risk under applicable
regulatory capital requirements.
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 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.
5
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
differences in the information presented.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------------
1996 1997
-------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------------------------------------------------------------------------------
Interest-earning assets: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1)...................... $34,997 $2,940 8.40% $38,701 $3,253 8.41%
Investment securities ................... 1,353 64 4.73 1,293 81 6.26
Interest-earning deposits................ 1,267 65 5.13 3,426 175 5.11
Federal Home Loan Bank stock............. 380 26 6.84 407 29 7.13
Mortgage-backed securities............... 6,558 379 5.78 5,392 312 5.79
------- ------ ------- ------
Total interest-earning assets.............. 44,555 3,474 7.80 49,219 3,850 7.82
------ ------
Non-interest-earning assets................ 1,327 1,701
------- -------
Total assets $45,882 $50,920
======= =======
Interest-bearing liabilities:
Interest-bearing demand deposits......... $ 9,136 232 2.54 $10,245 262 2.56
Certificates of deposit.................. 31,391 1,743 5.55 30,869 1,722 5.58
Short-term borrowings.................... 36 2 5.56 50 3 6.00
------- ------ ------- ------
Total interest-bearing liabilities......... 40,563 1,977 4.88 41,164 1,987 4.83
------ ------
Non-interest-bearing liabilities........... 695 906
------- -------
Total liabilities.......................... 41,258 42,070
------- -------
Total stockholders' equity................. 4,624 8,850
------- -------
Total liabilities and stockholders' equity. $45,882 $ 50,920
======= ========
Net interest income........................ $1,497 $1,863
====== ======
Interest rate spread (2)................... 2.92% 3.00%
Net yield on interest-earning assets(3).... 3.36% 3.79%
Ratio of average interest-earning assets to
average interest-bearing liabilities..... 109.84% 119.57%
</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.
6
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 vs. 1995 1997 vs. 1996
------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............. $ 224 $(62) $ (4) $158 $311 $ 4 $ (2) $ 313
Mortgage-backed securities... (62) -- -- (62) (67) 1 (1) (67)
Investment securities........ (2) (3) -- (5) (2) 22 - 20
Other interest-earning assets (22) 6 (2) (18) 111 - (1) 110
----- ----- --- ---- ---- ---- ---- -----
Total interest income....... $ 138 $ (59) $(6) $ 73 $353 $ 27 $ (4) $ 376
===== ===== === ==== ==== ==== ===== =====
Interest expense:
Savings accounts............. $ 30 $ (24) $ 1 $ 7 $ 29 $(16) $ (4) $ 9
Other liabilities............ (8) (4) 1 (11) 1 - - 1
----- ----- --- ---- ---- ---- ---- -----
Total interest expense..... $ 22 $ (28) $ 2 $ (4) $ 30 $(16) $ (4) $ 10
===== ===== === ==== ==== ==== ===== =====
Net change in interest income. $ 116 $ (31) $(8) $ 77 $323 $ 43 $ - $ 366
===== ===== === ==== ==== ==== ==== =====
</TABLE>
Comparison of Financial Condition
On January 15, 1997, the Board of Directors of the Bank approved a plan
of conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank and simultaneously reorganized into a
holding company form of organization (collectively, the "Conversion"). After
approval by the regulatory authorities and the Bank's members, the Conversion
was completed on May 29, 1997 and as a result, the holding company was formed
(the "Company") and the Bank became a wholly owned subsidiary of the Company. In
connection with the Conversion, the Company completed the sale of 776,000 shares
(the "Offering") at $10 per share and received net proceeds of approximately
$6,770,000.
The Company's total assets were $53,337,000 at December 31,1997, an
increase of $6,758,000 or 14.5% from $46,579,000 at December 31, 1996. The
increase in assets
7
<PAGE>
was primarily attributable to the Offering. Total cash and interest-earning
deposits increased $3,178,000, to $4,592,000 at December 31, 1997 from
$1,414,000 at December 31, 1996. This increase reflects the inflow of cash
associated with the orders received for the purchase of Common Stock in the
Offering. Investment securities increased $413,000, to $1,725,000 at December
31, 1997 from $1,312,000 at December 31, 1996. This increase consists
predominately of $551,000 of investment securities available for sale, offset by
a $138,000 reduction in investment securities held to maturity. Net loans
receivable increased 10.4%, or $3,840,000, to $40,648,000 at December 31, 1997
from $36,808,000 at December 31, 1996. Such increase reflects the economic
health of the Bank's market area and the competitive pricing of the Bank's loan
products.
Stockholders' equity increased $7,505,000 to $12,181,000 at December
31, 1997 from $4,676,000 at December 31, 1996. The increase was primarily
attributable to the net offering proceeds of approximately $6,770,000 and
comprehensive income of $644,000.
Comparison of the Results of Operations for the Years Ended December 31, 1997
and 1996
Net Income. Net income increased $394,000, or 158%, from 1996 to 1997.
The increase was primarily the result of an increase of $366,000 in net interest
income and a decrease of $150,000 in noninterest expenses offset partially by an
increase of $212,000 in income tax expense.
Net Interest Income. Net interest income is the most significant
component of the Company's income from operations. Net interest income is the
difference between interest received on interest-earning assets (primarily loans
and investment securities) and interest paid on interest-bearing liabilities
(primarily deposits and borrowed funds). Net interest income depends on the
volume and rate earned on interest-earning assets and the volume and interest
rate paid on interest-bearing liabilities.
Net interest income increased $366,000 or 24.5%, to $1,863,000 in 1997
compared to $1,497,000 in 1996. The increase was primarily due to growth in
average interest-earning assets to $49,219,000 in 1997 from $44,555,000 in 1996.
Net interest rate spread increased to 3.00% in 1997 compared to 2.92% in 1996
and the net interest margin increased to 3.79% in 1997 from 3.36% in 1996.
The increase in average interest-earning assets of $4,664,000 reflects
increases in average loans of $3,704,000 and average interest-earning deposits
of $2,159,000 offset by a combined $1,226,000 decrease in average
mortgage-backed securities and investment securities.
The interest rate spread increased in 1997 compared to 1996 due to an
increase in the yield on average interest-earning assets to 7.82% in 1997 from
7.80% in 1996 and a decrease in the cost of average interest-bearing liabilities
to 4.83% in 1997 from 4.88% in 1996.
8
<PAGE>
The yield on average interest-earning assets increased in 1997
predominately due to an increase in yields on investment securities to 6.26% in
1997 from 4.73% in 1996. The increase in yield on investment securities was the
result of higher rates of interest and dividends. The cost of interest-bearing
liabilities decreased in 1997 primarily as a result of an increase of
approximately $1.1 million in average interest-bearing demand deposits, which
inherently have lower rates of interest, combined with an approximate $522,000
decrease in average certificates of deposits.
Interest Expense. Interest expense increased $10,000 from $1,977,000
for the year ended December 31, 1996 to $1,987,000 for the year ended December
31, 1997. The increase for 1997 was the result of a $601,000 increase in average
interest-bearing liabilities partially offset by a 5 basis point decrease in the
average cost of funds. The Bank reflected an increase in average
interest-bearing demand accounts of $1.1 million at an average cost of funds of
2.56%, while average certificates of deposits outstanding in 1997 decreased
$522,000 as compared to 1996. The combination of these events provided the Bank
with a lower average cost of funds for 1997.
Provision for Loan Losses. The provision for loan losses was $30,000
for year ended December 31, 1996 and $10,000 for the period ended December 31,
1997. The ratio of the allowance for loan losses to non-performing loans at
December 31, 1997 was 144.0% compared to 97.7% at December 31, 1996. The
allowance for loan losses as a percent of total loans outstanding was .73% at
December 31, 1997.
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. There can be no assurances, however, that future
losses will not exceed estimated amounts or that additional provisions for loan
losses will not be required in future periods.
Noninterest Expense. Noninterest expense decreased $150,000 or 12.5%,
to $1,054,,000 for the year ended December 31, 1997 from $1,204,000 for the same
period ended December 31, 1996. In 1996, the Bank accrued and expensed $264,000
for a special assessment required to recapitalize the Savings Association
Insurance Fund ("SAIF"). The SAIF insurance assessment rate paid by the Bank
before the recapitalization was 23(cent) per $100 of deposits and decreased to
6.5(cent) per $100 of deposits after the recapitalization of SAIF. Compensation
and employee benefits increased $113,000, or 22.2% to $620,000 for the year
ended December 31, 1997 from $507,000 for the same period in 1996. The increase
was primarily attributable to the recognition of ESOP compensation expense. For
financial reporting purposes, ESOP shares are recorded at their fair market
value as the shares are allocated. As a result, the compensation expense for the
ESOP was $90,000 rather than the $61,000 that was actually paid for the shares
during the Conversion. Also, the Company incurred additional expense as the
result of being a public company for seven months in 1997.
9
<PAGE>
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 operation. Data
processing is also essential to most other financial institutions and many other
companies. All of the Bank's material data processing that could be affected by
this problem is provided by a third party service bureau. The Bank's service
bureau has advised the Bank that it expects to resolve this potential problem
before the 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 does not expect to incur material costs in addressing
year 2000 issues primarily due to the fact that its third party service bureau
will not be charging additional fees for the renovation and testing of its
software in preparation for year 2000.
Income Taxes. Income tax expense increased $212,000 or 135.0%, to
$369,000 for the year ended December 31, 1997 from $157,000 for the year ended
December 31, 1996, due to the increase in income before income taxes. The
effective rate on taxes as of the year ended December 31, 1997 was 38.5%
compared to 37.5% for the same period ended December 31, 1996.
Liquidity and Capital Resources
The primary sources of funds are deposits, repayments 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 predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by the general level
of interest rates, economic conditions and competition. The Bank uses its
sources of funds 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 operating activities for the year ended December
31, 1997 totalled $856,000 as compared to $338,000 for the year ended December
31, 1996.
Net cash used by investing activities for the year ended December 31,
1997 totalled $3,467,000, an increase of $915,000 from December 31, 1996. The
increase was primarily attributable to an increase in net purchases of
investment securities of $550,000 and a decrease in proceeds from maturities,
sales, and repayments of investment and mortgage-backed securities of $676,000
offset by a decrease in loans funded of $327,000.
10
<PAGE>
Net cash provided by financing activities for 1997 totalled $5,789,000.
This was the result of $6,770,000 million in net proceeds from the Offering,
offset by a net decrease of $800,000 for FHLB advances repaid and a decrease in
deposits of $178,000.
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. Management monitors projected
liquidity needs and determines the level desirable, based in part on the Bank's
commitments to make loans and management's assessment of the Bank's ability to
generate funds.
At December 31, 1997, 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.
Further at December 31, 1997, management was not aware of any current
recommendations by the regulatory authorities which, if implemented, would have
such an effect.
Impact of Inflation and Changing Prices
The 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.
11
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1996 and 1997
( with Independent Auditors' Report thereon )
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Table of Contents
December 31, 1996 and 1997
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
Independent Auditors' Report
----------------------------
To the Board of Directors
SFB Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of SFB Bancorp,
Inc. and Subsidiary (the "Company") as of December 31, 1996 and 1997, and the
related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 Company as of
December 31, 1996 and 1997, 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 Evans LLP
Asheville, North Carolina
January 21, 1998
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
---------------------------
Assets 1996 1997
------ ---- ----
Cash on hand $ 396 $ 453
Interest earning deposits 1,018 4,139
Investment securities:
Held to maturity (market value of $613 in 1996
and $526 in 1997) 715 577
Available for sale (amortized cost of $599 in
1996 and $1,149 in 1997) 597 1,148
Loans receivable, net 36,808 40,648
Mortgage-backed securities:
Available for sale (amortized cost of $5,941 in
1996 and $5,117 in 1997) 5,768 5,030
Premises and equipment, net 533 575
Real estate owned 60 -
Federal Home Loan Bank stock 394 423
Accrued interest receivable 257 316
Prepaid expenses and other assets 33 28
----------- -----------
Total assets $ 46,579 $ 53,337
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 40,765 $ 40,587
Federal Home Loan Bank advances 800 -
Advance payments by borrowers for taxes and
insurance 202 199
Accrued expenses and other liabilities 122 144
Income taxes payable:
Current 13 164
Deferred 1 62
----------- -----------
Total liabilities 41,903 41,156
----------- -----------
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) - 77
Paid-in capital - 7,336
Retained income, substantially restricted 4,784 5,373
Accumulated other comprehensive income (108) (53)
Unearned compensation:
Employee stock ownership plan - (552)
----------- -----------
Total stockholders' equity 4,676 12,181
----------- -----------
Total liabilities and stockholders' equity $ 46,579 $ 53,337
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
(in thousands)
Years Ended December 31,
-----------------------------
1996 1997
---- ----
Interest income:
Loans $ 2,940 $ 3,253
Mortgage-backed securities 379 312
Investments 90 110
Interest earning deposits 65 175
----------- -----------
Total interest income 3,474 3,850
----------- -----------
Interest expense:
Deposits 1,975 1,984
Federal Home Loan Bank advances 2 3
----------- -----------
Total interest expense 1,977 1,987
----------- -----------
Net interest income 1,497 1,863
Provision for loan losses 30 10
----------- -----------
Net interest income after provision
for loan losses 1,467 1,853
----------- -----------
Noninterest income:
Loan fees and service charges 145 149
Security losses (2) -
Other 13 10
----------- -----------
Total noninterest income 156 159
----------- -----------
Noninterest expenses:
Compensation 448 498
Employee benefits 59 122
Net occupancy expense 73 75
Deposit insurance premiums 357 21
Data processing 72 74
Other 195 264
----------- -----------
Total noninterest expenses 1,204 1,054
----------- -----------
Income before income taxes 419 958
Income tax expense 157 369
----------- -----------
Net income 262 589
Other comprehensive income:
Net unrealized gains (losses) on securities
available for sale, net of tax benefit of $8
and tax expense of $32, respectively (12) 55
------------ -----------
Comprehensive income $ 250 $ 644
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Other Unearned
Common Paid-In Retained Comprehensive Compensation
Stock Capital Income Income for ESOP Total
----- ------- ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - $ - $ 4,522 $ (96) $ - $ 4,426
Comprehensive income:
Net income - - 262 - - 262
Other comprehensive income:
Unrealized loss on
securities available for
sale, net of income tax
benefit of $8 - - - (12) - (12)
--------- --------- --------- --------- --------- ---------
Comprehensive income - - 262 (12) - 250
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 - - 4,784 (108) - 4,676
Comprehensive income:
Net income - - 589 - - 589
Other comprehensive income:
Unrealized gain on
securities available for
sale, net of income tax
expense of $32 - - - 55 - 55
--------- --------- --------- --------- --------- ---------
Comprehensive income - - 589 55 - 644
--------- --------- --------- --------- --------- ---------
Sale of common stock, net
of issuance cost (767,000
shares) 77 7,307 - - (614) 6,770
Compensation earned - 29 - - 62 91
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 $ 77 $ 7,336 $ 5,373 $ (53) $ (552) $ 12,181
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December
31,
------------------------
1996 1997
---- ----
Operating activities:
Net income $ 262 $ 589
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 54 53
Provision for loan losses 30 10
Loss on sale of real estate owned -- 9
Deferred income taxes (benefit) (6) 29
Net increase (decrease) in deferred loan fees 16 (4)
Accretion of discounts on investment securities,
net (20) (21)
Amortization of premiums on mortgage-backed
securities 17 10
Amortization of unearned compensation -- 91
FHLB stock dividends (26) (29)
Losses on mortgage-backed securities sold 2 --
Decrease in other assets 90 5
Increase in accrued interest receivable (43) (59)
Increase (decrease) in accrued expenses and other
liabilities (46) 22
Increase in current income taxes 8 151
------- -------
Net cash provided by operating activities 338 856
------- -------
Investing activities:
Purchase of investment securities held to maturity (156) --
Maturities of investment securities held to maturity 128 159
Purchase of investment securities available for sale (598) (1,350)
Maturities of investment securities available for
sale 750 800
Principal payments on mortgage-backed securities
available for sale 1,118 814
Proceeds from sale of mortgage-backed securities
available for sale 372 --
Proceeds from sale of real estate -- 10
Net increase in loans (4,132) (3,805)
Purchase of premises and equipment (34) (95)
------- -------
Net cash used by investing activities (2,552) (3,467)
------- -------
(continued)
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(in thousands)
Years Ended December 31,
------------------------
1996 1997
---- ----
Financing activities:
Net increase (decrease) in deposits $ 128 $ (178)
Decrease in advance payments by borrowers
for taxes and insurance (29) (3)
Proceeds from FHLB advances 1,100 400
Repayment of FHLB advances (300) (1,200)
Net proceeds from issuance of common stock -- 6,770
------- -------
Net cash provided by financing activities 899 5,789
------- -------
Increase (decrease) in cash and cash
equivalents (1,315) 3,178
Cash and cash equivalents at beginning of year 2,729 1,414
------- -------
Cash and cash equivalents at end of year $ 1,414 $ 4,592
======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 2,005 $ 1,975
Income taxes 112 189
======= =======
Noncash transactions:
Real estate acquired in satisfaction of
mortgage loans $ 60 $ --
Unrealized gain (loss) on securities and
mortgage-backed securities available for
sale, net of deferred tax liability (12) 55
Loan to facilitate sale of real estate owned -- 41
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
(Tabular amounts in thousands)
1. Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of SFB Bancorp, Inc. ("Bancorp") and
its subsidiary, Security Federal Bank (the "Bank"), conform, in all material
respects, to generally accepted accounting principles and to general
practices within the savings bank industry. The following summarize the more
significant of these policies and practices.
Nature of Operations - Bancorp was incorporated under the laws of the state
of Tennessee for the purpose of becoming the holding company of the Bank in
connection with the Bank's conversion from a federally chartered mutual
savings bank to a federally chartered stock savings bank, pursuant to its
Plan of Conversion. A Subscription Offering of its shares in connection with
the conversion of the Savings Bank (the "Conversion") was completed on May
29, 1997 (see Note 11). The transaction was accounted for using the "pooling
of interests" method.
Bancorp's only line of business is investing in its bank subsidiary. The
Bank's principal line of business is originating single-family mortgage,
consumer, and commercial loans.
Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that effect 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 during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Bancorp, the Bank, and the Bank's wholly-owned
subsidiary, SFS, Inc. (SFS), herein collectively referred to as the Company.
The impact of SFS on the consolidated financial statements is insignificant.
SFS has no operating activity other than to own stock in a third-party
service bureau. Intercompany balances and transactions have been eliminated.
Comprehensive Income - The Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) in 1997. All
periods presented are in accordance with SFAS 130. SFAS 130 established
standards for reporting and displaying comprehensive income and its
components. Comprehensive income consists of net
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
income and other changes in stockholders' equity from nonowner sources.
These nonowner sources consist of unrealized gains and losses on certain
investments in debt and equity securities.
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.
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 Company 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.
Investment securities and mortgage-backed securities available for sale are
carried at fair value. The Company 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
reported, net of related income tax effects, as a separate component of
stockholders' equity until realized. Changes in unrealized holding gains or
losses are included as a component of other comprehensive income 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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 a straight-line method over the estimated useful lives of the
assets ranging from 5 to 40 years. The cost of maintenance and repairs is
charged to expense as incurred while expenditures which materially increase
property lives are capitalized.
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 and
subsidiary as though separate returns are being filed. Bancorp files
separate income tax returns.
The Company 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 bases. 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 Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents.
Earnings Per Share - Basic and dilutive earnings per share amounts are
computed in accordance with the Statement of Financial Accounting Standards
No 128, "Earnings per Share" (SFAS 128). However, since the initial public
offering was on May 29, 1997 and no common stock had been issued prior to
that time, management believes that presentation of earnings per share
information would not be meaningful for 1997.
<PAGE>
2. Investment Securities
---------------------
The amortized cost 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, 1996:
U.S. government security $ 398 $ -- $ 102 $ 296
Municipal securities 317 -- -- $ 317
------ --------- ------ ------
$ 715 $ -- $ 102 $ 613
====== ========= ====== ======
December 31, 1997:
U.S. government security $ 418 $ -- $ 51 $ 367
Municipal securities 159 -- -- $ 159
------ --------- ------ ------
$ 577 $ -- $ 51 $ 526
====== ========= ====== ======
Securities available for sale:
December 31, 1996:
U.S. government and
agency securities $ 599 $ -- $ 2 $ 597
====== ========= ====== ======
December 31, 1997:
U.S. government and
agency securities $1,149 $ -- $ 1 $1,148
====== ========= ====== ======
</TABLE>
The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
----------------- ----------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Securities to be held to maturity:
Due in one year $ 127 $ 34 $ 127 $ 34
Due after one year through five
years 190 125 190 125
Due after ten years 398 418 296 367
------ ------ ------ ------
$ 715 $ 577 $ 613 $ 526
====== ====== ====== ======
Securities available for sale:
Due in one year -- 900 -- 899
Due after one year through five
years 599 249 597 249
------ ------ ------ ------
$ 599 $1,149 $ 597 $1,148
====== ====== ====== ======
</TABLE>
The Bank had investment securities with an amortized cost of approximately
$997,000 and $1,068,000 pledged against deposits at December 31, 1996 and
1997, respectively.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Bank had no sales of investment securities to be held to maturity or
available for sale for the years ended December 31, 1996 and 1997.
The net unrealized losses on investment securities available for sale, net
of related income tax benefits, are approximately $1,100 and $600 at
December 31, 1996 and 1997, respectively, and are reported as a separate
component of stockholders' equity.
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
December 31,
---------------------------
1996 1997
---- ----
Real estate first mortgage loans:
One-to-four-family $ 29,653 $ 31,382
Construction 1,125 1,600
Commercial real estate 1,288 1,433
Multi-family residential 912 687
Land 1,732 2,982
------------ ------------
Total real estate loans 34,710 38,084
------------ ------------
Consumer and commercial loans:
Commercial business 558 425
Auto loans 1,949 2,119
Share loans 435 351
Other 524 517
------------ ------------
Total consumer and commercial loans 3,466 3,412
------------ ------------
Total loans 38,176 41,496
------------ ------------
Less:
Undisbursed portion of loans in process 942 429
Net deferred loan fees 122 118
Allowance for loan losses 304 301
------------ ------------
1,368 848
------------ ------------
$ 36,808 $ 40,648
============ ============
The Bank's primary lending area for the origination of mortgage loans
includes Carter County and adjoining counties. 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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1997. 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 $295,000 at December 31, 1996 and $210,000 at December
31, 1997. 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, 1997, the Bank had loans pledged against public deposits of
approximately $1.3 million.
The changes in the allowance for loan losses are summarized as follows:
Years Ended December 31,
-------------------------
1996 1997
---- ----
Beginning balance $ 279 $ 304
Provision charged to income 30 10
Recoveries - -
Charge-offs (5) (13)
----------- -----------
Ending balance $ 304 $ 301
=========== ===========
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. Mortgage-Backed Securities
--------------------------
Mortgage-backed securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Securities available
for sale:
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
========= ========= ========= =========
December 31, 1997:
GNMA $ 685 $ 5 $ 2 $ 688
FHLMC 67 2 - 69
FHLMC REMIC's 1,765 - 28 1,737
FNMA 624 2 12 614
FNMA REMIC's 1,976 - 54 1,922
--------- --------- --------- ---------
$ 5,117 $ 9 $ 96 $ 5,030
========= ========= ========= =========
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.
The Bank had mortgage-backed securities with an amortized cost of
approximately $2,480,000 and $2,232,000 pledged against deposits and FHLB
advances at December 31, 1996 and 1997, respectively.
For the year ended December 31, 1996, proceeds from sales of mortgage-backed
securities were $372,000, with realized losses of $2,000. There were no
sales of mortgage-backed securities for the year ended December 31, 1997.
The net unrealized losses, net of related income tax benefits, are
approximately $107,000 and $52,000, respectively at December 31, 1996 and
1997, and are reported as a separate component of stockholders' equity.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. Real Estate
-----------
Real estate is summarized as follows:
December 31,
-------------------------
1996 1997
---- ----
Real estate acquired in settlement of loans $ 60 $ -
=========== ===========
6. Premises and Equipment
----------------------
Premises and equipment are summarized as follows:
December 31,
-------------------------
1996 1997
---- ----
Land and improvements $ 202 $ 202
Buildings 790 840
Vehicles 17 17
Furniture, fixtures and equipment 541 586
----------- -----------
1,550 1,645
Less accumulated depreciation 1,017 1,070
----------- -----------
$ 533 $ 575
=========== ===========
7. Interest Receivable
-------------------
Interest receivable consists of the following:
December 31,
-------------------------
1996 1997
---- ----
Loans receivable $ 220 $ 258
Investments 10 21
Mortgage-backed securities 33 25
Interest earning deposits - 22
----------- -----------
263 326
Less allowance for uncollectible interest 6 10
----------- -----------
$ 257 $ 316
=========== ===========
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. Deposits
--------
Deposit account balances are summarized as follows:
Weighted Average
Interest Rates
--------------------
December 31, December 31,
---------------------- --------------------
1996 1997 1996 1997
---- ---- ---- ----
Noninterest bearing
accounts $ 793 $ 1,969 -% -%
NOW accounts 2,194 2,669 1.99% 2.03%
Money Market accounts 1,622 1,983 3.03% 4.28%
Passbook accounts 4,502 4,351 3.04% 3.05%
Certificates of deposit 31,654 29,615 5.55% 5.69%
---------- ----------
$ 40,765 $ 40,587 4.87% 4.80%
========== ========== ==== ====
Contractual maturities of certificate accounts are summarized as follows:
December 31,
----------------------------
1996 1997
---- ----
12 months or less $ 25,851 $ 25,223
After 1 but within 3 years 4,786 4,150
After 3 years 1,017 242
----------- -----------
$ 31,654 $ 29,615
=========== ===========
The Bank had deposit accounts in amounts of $100,000 or more of
approximately $10.1 million at December 31, 1996 and 1997, respectively.
Interest expense on deposits consisted of the following:
Years Ended December 31,
-------------------------
1996 1997
---- ----
NOW, money market, and passbook accounts $ 232 $ 262
Certificate accounts 1,747 1,726
----------- -----------
1,979 1,988
Less: penalties for early withdrawal 4 4
----------- -----------
Total interest on deposits $ 1,975 $ 1,984
=========== ===========
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. Federal Home Loan Bank Advances
-------------------------------
Advances from the Federal Home Loan Bank (FHLB) are summarized as follows:
December 31,
--------------------------
Contractual Maturity 1996 1997
-------------------- ---- ----
Within one year:
Variable rate $ 800 $ -
=========== ========
Weighted average rate 5.85% -%
=========== ========
The Bank pledges as collateral for these borrowings its FHLB stock, selected
qualifying mortgage loans (as defined) and certain mortgage-backed
securities (see Note 4) under an agreement with the FHLB. Loans pledged at
December 31, 1997, were approximately $1 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:
Years Ended December 31,
---------------------------------------------------------------
1996 1997
------------------------------- ------------------------------
Federal State Total Federal State Total
------- ----- ----- ------- ----- -----
Current $ 136 $ 27 $ 163 $ 303 $ 37 $ 340
Deferred (5) (1) (6) (2) 31 29
-------- -------- -------- -------- -------- --------
Total $ 131 $ 26 $ 157 $ 301 $ 68 $ 369
======== ======== ======== ======== ======== ========
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:
Years Ended December 31,
----------------------------
1996 1997
---- ----
Computed income tax expense $ 142 $ 326
Increase (decrease) resulting from:
State income tax, net of federal
tax benefit 17 45
Other (2) (2)
----------- -----------
Actual income tax expense $ 157 $ 369
=========== ===========
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The components of net deferred tax liabilities are as follows:
December 31,
----------------------------
1996 1997
---- ----
Deferred tax liabilities:
Section 481(a) adjustment--bad debts $ 84 $ 84
Excess tax depreciation 14 13
FHLB stock dividends 32 43
Purchased discounts on mortgage-backed
securities 8 9
------------ ------------
138 149
------------ ------------
Deferred tax assets:
Bad debt reserves 62 43
Accrued sick leave 5 5
Unrealized losses on securities available
for sale 67 35
Other 3 4
Valuation allowance - -
------------ ------------
137 87
------------ ------------
Net deferred tax liability $ 1 $ 62
============ ============
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 SFAS No. 109. Therefore, retained
earnings at December 31, 1996 and 1997, 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 years 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 qualifying 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 material impact on its
results of operations when the excess reserves are recaptured.
11. Stockholders' Equity
--------------------
Bancorp was incorporated under Tennessee law in March 1997 to acquire and
hold all the outstanding common stock of the Bank, as part of the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank. In connection with the conversion, which was
consummated on May 29, 1997, Bancorp issued and sold 767,000
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
shares of common stock at a price of $10.00 per share for total net proceeds
of approximately $6.8 million after conversion expenses of approximately
$286,000 and excluding the shares purchased by the ESOP. Bancorp retained
approximately $3.1 million of the proceeds and used the remaining proceeds
to purchase the newly issued capital stock of the Bank in the amount of $3.7
million and to make a loan to the ESOP of approximately $614,000.
At the time of conversion, the Bank established a liquidation account 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 is 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.
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 above or the regulatory capital requirements
imposed by federal and state regulations.
12. 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.
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, 1997, that the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1997, 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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables reconciles the Bank's capital under generally accepted
accounting principles (GAAP) to regulatory capital:
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
At December 31, 1996:
Total stockholder's equity $ 4,676 $ 4,676 $ 4,676
Unrealized losses on
securities, net 108 108 108
Additional capital:
General valuation allowance - - 304
----------- ----------- -----------
Regulatory capital $ 4,784 $ 4,784 $ 5,088
=========== =========== ===========
At December 31, 1997:
Total stockholder's equity $ 8,418 $ 8,418 $ 8,418
Unrealized losses on
securities, net 53 53 53
Additional capital:
General valuation allowance - - 301
----------- ----------- -----------
Regulatory capital $ 8,471 $ 8,471 $ 8,772
=========== =========== ===========
The Bank's actual capital amounts (in thousands) and ratios are also
presented in the following table. No deduction from capital for
interest-rate risk was required.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------ ------------------ --------------------
Amount Ratio Amount Ratio(1) Amount Ratio(1)
------ ------ -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
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%
As of December 31, 1997:
Tangible Capital (to
adjusted total assets) $8,471 16.9% $ 754 1.5% $2,513 5%
Core Capital (to adjusted
total assets) $8,471 16.9% $1,508 3.0% $2,513 5%
Risk-Based (to risk-
weighted assets $8,772 30.9% $2,271 8.0% $2,839 10%
</TABLE>
- ---------------
(1) Compliance with the requirement results from a value that must be greater
than or equal to the ratio shown.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. Pension Plan
------------
The Bank's non-contributory defined contribution pension plan was amended as
of January 1, 1997 to convert it to a 401(k) employee savings plan. Total
pension expense was $29,000 for the year ended December 31, 1996. No
contributions were made to the plan for the year ended December 31, 1997.
14. Employee Stock Ownership Plan (ESOP)
------------------------------------
As part of the conversion discussed in Note 11, an Employee Stock Ownership
Plan (ESOP) was established for all employees who have attained the age of
21 and have been credited with at least 1,000 hours of service during a
12-month period. The ESOP borrowed approximately $614,000 from Bancorp and
used the funds to purchase 61,360 shares of common stock of Bancorp issued
in the offering. The loan will be repaid principally from the Bank's
discretionary contributions to the ESOP over a period of 10 years. On
December 31, 1997, the loan had an outstanding balance of approximately
$552,000 and an interest rate of 8.5%. The loan obligation of the ESOP is
considered unearned compensation and, as such, recorded as a reduction of
the Company's stockholders' equity. Both the loan obligation and the
unearned compensation are reduced by an amount of the loan repayments made
by the ESOP. Shares purchased with the loan proceeds are held in a suspense
account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account are
allocated among participants on the basis of compensation in the year of
allocation. Benefits become fully vested at the end of seven years of
service under the terms of the ESOP Plan. Benefits may be payable upon
retirement, death, disability, or separation from service. Since the Bank's
annual contributions are discretionary, benefits payable under the ESOP
cannot be estimated. Compensation expense is recognized to the extent of the
fair value of shares committed to be released.
For the year ending December 31, 1997, compensation related to the ESOP of
approximately $91,000 was expensed. Compensation is recognized at the
average fair value of the ratably released shares during the accounting
period as the employees performed services. At December 31, 1997, the ESOP
had approximately 6,130 allocated shares and 55,230 unallocated shares. The
fair value of unallocated ESOP shares at December 31, 1997 was approximately
$800,000.
The ESOP administrators will determine whether dividends on allocated and
unallocated shares will be used for debt service. Any allocated dividends
used will be replaced with common stock of equal value. For the purpose of
computing earnings per share, all ESOP shares committed to be released will
be considered outstanding.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
16. 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.
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, 1997, were approximately as follows (in
thousands):
Financial Balance Available
Instruments Outstanding For Use
----------- ----------- -------
Consumer and other lines $ 1,312 $ 1,003 $ 309
Letters of credit 163 1 162
------------ ------------ ------------
$ 1,475 $ 1,004 $ 471
============ ============ ============
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
The Bank had outstanding commitments to originate mortgage and consumer
loans of approximately $400,000 and $490,000 at December 31, 1996 and 1997,
respectively. The commitments to originate mortgage loans at December 31,
1996, were composed of fixed rate loans that had interest rates ranging from
7.625 % to 8.00 % and terms ranging from 1 to 15 years. The commitments to
originate mortgage loans at December 31, 1997, were composed of fixed rate
loans of $390,000 and a variable rate loan of $100,000. The fixed rate loans
had interest rates ranging from 7.5% to 9.25% and terms ranging from 7 to 15
years.
17. 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.
18. Financial Instruments
---------------------
The approximate stated and estimated fair value of financial instruments are
summarized below (in thousands of dollars):
December 31,
----------------------------------------------
1996 1997
---------------------- ----------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Cash and cash equivalents $ 1,414 $ 1,414 $ 4,592 $ 4,592
Investment securities 715 613 577 526
Loans receivable, net 36,808 39,042 40,648 41,502
Federal Home Loan Bank
stock 394 394 423 423
Other assets 257 257 294 294
------- ------- ------- -------
$39,588 $41,720 $46,534 $47,337
======= ======= ======= =======
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31
----------------------------------------------
1996 1997
---------------------- ----------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
-------- ---------- --------- ----------
Financial liabilities:
Deposits:
Demand accounts $ 9,111 $ 9,111 $ 10,972 $ 10,972
Certificate accounts 31,654 31,761 29,615 29,674
Advances from Federal
Home Loan Bank 800 800 - -
Other liabilities 256 256 263 263
-------- -------- --------- --------
$ 41,821 $ 41,928 $ 40,850 $ 40,909
======== ======== ========= ========
The Bank had off-balance sheet financial commitments at December 31, 1997,
which include approximately $961,000 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:
Cash and Cash Equivalents - 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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
calculated as of December 31, 1996 and 1997. 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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
19. Condensed Parent Company Only Financial Statements
--------------------------------------------------
The following condensed balance sheet as of December 31, 1997, and condensed
statements of income and cash flows for the period from May 29, 1997 to
December 31, 1997, for SFB Bancorp, Inc. should be read in conjunction with
the consolidated financial statements and the notes thereto.
Parent Company Only
Condensed Balance Sheet December 31,
(in thousands) 1997
--------------
Assets:
Cash and cash equivalents $ 2,673
Investment securities available for sale 500
ESOP loan receivable 552
Equity in net assets of bank subsidiary 8,418
Other assets 46
------------
Total assets $ 12,189
============
Liabilities
Accrued liabilities $ 8
------------
Stockholders' equity:
Common stockholders' equity 12,181
------------
Total liabilities and stockholders' equity $ 12,189
============
Parent Company Only Period Ended
Condensed Statement of Income December 31,
(in thousands) 1997
--------------
Interest income $ 122
Noninterest expense 26
------------
Income before taxes 96
Income tax expense 25
------------
Income before equity earnings 71
Equity earnings of bank subsidiary 357
------------
Net income $ 428
============
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Parent Company Only Period Ended
Condensed Statement of Cash Flows December 31,
(in thousands) 1997
--------------
Operating activities:
Net income $ 428
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed equity earnings of bank subsidiary (357)
Increase in other assets (46)
Increase in accrued liabilities 8
------------
Net cash provided by operating activities 33
------------
Investing activities:
Loan to ESOP $ (614)
Principal repayment by ESOP 62
Purchase of investment securities (500)
Purchase of capital stock of bank subsidiary (3,078)
------------
Net cash used by investing activities (4,130)
------------
Financing activities:
Net proceeds from issuance of common stock 6,770
------------
Net cash provided by financing activities 6,770
------------
Net increase in cash and cash equivalents 2,673
Cash at beginning of period -
------------
Cash at end of period $ 2,673
============
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 34
============
Noncash investing and financing activities:
Pooling of bank subsidiary's equity $ 4,983
============
<PAGE>
CORPORATE INFOMATION
EXECUTIVE OFFICERS:
------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Peter W. Hampton John R. Crockett, Jr. Peter W. Hampton, Jr.
President/Chief Executive Officer Treasurer Secretary
</TABLE>
DIRECTORS:
---------
Donald W. Tetrick, Chairman Peter W. Hampton, Jr., Vice Chairman
Retired Funeral Home Director Attorney, Hampton & Street
Peter W. Hampton John R. Crockett, Jr.
Executive Officer Retired Realtor
Estill L. Caudill, Jr. Julian T. Caudill
Retired Physician Retired Pharmacist
Stock Transfer Agent Special Legal Counsel
Registrar and Transfer Company Malizia, Spidi, Sloane & Fisch, P.C.
10 Commerce Drive 1301 K. Street, N.W.
Cranford, NJ 07016-3572 Washington, D.C. 20005
Local Counsel Independent Auditors
Hampton & Street Crisp Hughes Evans LLP
630 East Elk Avenue 32 Orange Street
Elizabethton, TN 37643 Asheville, NC 28801
Annual Meeting
The 1998 annual meeting of stockholders of SFB Bancorp, Inc. will be held at
2:00 p.m. on June 1, 1998 at the Company's corporate office at 632 East Elk
Avenue, Elizabethton, TN.
Form 10-KSB
A copy of Form 10-KSB as filed with the Securities and Exchange Commission will
be furnished without charge to the Company's stockholders upon written request
to SFB Bancorp, Inc., 632 East Elk Avenue, Elizabethton, TN 37643.
Corporate Office
SFB Bancorp, Inc.
632 East Elk Avenue
Elizabethton, TN 37643
38
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We have issued our reports dated January 21, 1998, accompanying the consolidated
financial statements and schedules appearing in the 1997 Annual Report of SFB
Bancorp, Inc. and Subsidiary and incorporated by reference in the Form 10-KSB.
We consent to the incorporation by reference of the aforementioned reports.
/s/ Crisp Hughes Evans LLP
--------------------------
CRISP HUGHES EVANS LLP
Asheville, North Carolina
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 453
<INT-BEARING-DEPOSITS> 4,139
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,148
<INVESTMENTS-CARRYING> 577
<INVESTMENTS-MARKET> 526
<LOANS> 40,949
<ALLOWANCE> 301
<TOTAL-ASSETS> 53,337
<DEPOSITS> 40,587
<SHORT-TERM> 0
<LIABILITIES-OTHER> 569
<LONG-TERM> 0
0
0
<COMMON> 77
<OTHER-SE> 12,104
<TOTAL-LIABILITIES-AND-EQUITY> 53,337
<INTEREST-LOAN> 3,253
<INTEREST-INVEST> 422
<INTEREST-OTHER> 175
<INTEREST-TOTAL> 3,850
<INTEREST-DEPOSIT> 1,984
<INTEREST-EXPENSE> 1,987
<INTEREST-INCOME-NET> 1,863
<LOAN-LOSSES> 10
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,054
<INCOME-PRETAX> 958
<INCOME-PRE-EXTRAORDINARY> 589
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 589
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.79
<LOANS-NON> 210
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 304
<CHARGE-OFFS> 13
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 301
<ALLOWANCE-DOMESTIC> 301
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
