U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22587
-------
SFB BANCORP, INC.
------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Tennessee 62-1683732
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
632 East Elk Avenue, Elizabethton, Tennessee 37643
- -------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 543-1000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
----- -----
As of November 1, 1999, there were 679,417 shares of the Registrant's common
stock, par value $0.10 per share, outstanding. The Registrant has no other
classes of common equity outstanding.
Transitional small business disclosure format:
Yes X No
----- -----
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Elizabethton, Tennessee
Index
<TABLE>
<CAPTION>
PART I. Page(s)
- ------- -------
FINANCIAL INFORMATION
Item 1.
Financial Statements
<S> <C>
Consolidated Balance Sheets-(Unaudited) as of December 31, 1998 and September 30, 1999..........3
Consolidated Statements of Income-(Unaudited) for the three and nine month
periods ended September 30, 1998 and 1999.......................................................4
Consolidated Statements of Stockholders' Equity - (Unaudited)...................................5
Consolidated Statements of Cash Flows - (Unaudited) for the nine months
ended September 30, 1998 and 1999.............................................................6
Notes to (Unaudited) Consolidated Financial Statements........................................7-8
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................9-14
PART II.
- -------
OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................15
Item 2. Changes in Securities.................................................................15
Item 3. Defaults Upon Senior Securities.......................................................15
Item 4. Submission of Matters to a Vote of Security Holders...................................15
Item 5. Other Information.....................................................................15
Item 6. Exhibits and Reports on Form 8-K......................................................15
Signatures.....................................................................................16
</TABLE>
2
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data )
<TABLE>
<CAPTION>
December 31, September 30,
----------------- -----------------
Assets 1998 1999
------ ---- ----
<S> <C> <C>
Cash on hand $ 467 $ 1,694
Interest-earning deposits in other banks 2,372 964
Investment securities:
Held to maturity (market value of $1,147
in 1998 and $958 in 1999) 1,158 1,045
Available for sale (amortized cost of $2,325
in 1998 and $2,124 in 1999) 2,327 2,099
Loans receivable, net 40,449 42,430
Mortgage-backed securities:
Available for sale (amortized cost of $3,544
in 1998 and $2,458 in 1999) 3,502 2,416
Premises and equipment, net 849 1,021
Federal Home Loan Bank stock 454 479
Accrued interest receivable 265 271
Prepaid expenses and other assets 23 62
--------------- ---------------
Total assets $ 51,866 $ 52,481
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 40,106 $ 40,014
Advance payments by borrowers for taxes and insurance 188 559
Accrued expenses and other liabilities 221 244
Income taxes payable:
Current - -
Deferred 81 70
--------------- ---------------
Total liabilities 40,596 40,887
--------------- ---------------
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; 694,150 and 679,417 outstanding at 77 77
December 31, 1998 and September 30, 1999)
Paid-in capital 7,368 7,379
Retained earnings, substantially restricted 5,732 6,091
Treasury stock, at cost (72,850 and 87,583 at December 31,
1998 and September 30, 1999, respectively) (1,034) (1,208)
Accumulated other comprehensive income (loss) (24) (40)
Unearned compensation:
Employee stock ownership plan (491) (437)
Restricted stock plan (358) (268)
--------------- ---------------
Total stockholders' equity 11,270 11,594
--------------- ---------------
Total liabilities and stockholders' equity $ 51,866 $ 52,481
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $ 864 $ 842 $ 2,541 $ 2,485
Mortgage-backed securities 56 34 188 115
Investments 56 51 132 160
Interest earning deposits 35 23 131 99
------------ ----------- ------------ ------------
Total interest income 1,011 950 2,992 2,859
------------ ----------- ------------ ------------
Interest expense:
Deposits 502 442 1,470 1,360
------------ ----------- ------------ ------------
Total interest expense 502 442 1,470 1,360
------------ ----------- ------------ ------------
Net interest income 509 508 1,522 1,499
Provision for loan losses 8 9 23 27
------------ ----------- ------------ ------------
Net interest income after provision
for loan losses 501 499 1,499 1,472
Non-interest income:
Loan fees and service charges 40 45 115 130
Other 4 3 9 8
------------ ----------- ------------ ------------
Total non-interest income 44 48 124 138
------------ ----------- ------------ ------------
Non-interest expenses:
Compensation 154 166 520 463
Employee benefits 32 32 98 95
Net occupancy expense 21 28 60 72
Deposit insurance premiums 7 6 19 18
Data processing 22 28 64 74
Other 74 64 243 208
------------ ----------- ------------ ------------
Total non-interest expenses 310 324 1,004 930
------------ ----------- ------------ ------------
Income before income taxes 235 223 619 680
Income tax expense 86 85 229 257
------------ ----------- ------------ ------------
Net income $ 149 $ 138 $ 390 $ 423
============ =========== ============ ============
Earnings per share
Basic $ .21 $ .21 $ .55 $ .66
Diluted $ .21 $ .21 $ .55 $ .66
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Unearned
Other Compensation
Common Paid-In Retained Treasury Comprehensive -----------------
Stock Capital Income Stock Income for ESOP for RSP Total
----- ------- ------ ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 77 $ 7,336 $ 5,373 $ - $ (53) $ (552) $ - $ 12,181
Comprehensive income:
Net income - - 497 - - - - 497
Other Comprehensive income - - - - 29 - - 29
Common stock purchased for RSP (30,680 shares) - - - - - - (524) (524)
Cash dividends declared ($.20 share) - - (138) - - - - (138)
Treasury stock purchased (72,850 shares) - - - (1,034) - - - (1,034)
Compensation earned - 32 - - - 61 166 259
----- ------ ------ ------- ----- ----- ----- -------
Balance at December 31, 1998 77 7,368 5,732 (1,034) (24) (491) (358) 11,270
Comprehensive income:
Net income - - 423 - - - - 423
Other Comprehensive income - - - - (16) - - (16)
Cash dividends declared ($.10 share) - - (64) - - - - (64)
Treasury stock purchased (14,733 shares) - - - (174) - - - (174)
Compensation earned - 11 - - - 54 90 155
----- ------ ------ ------- ----- ----- ----- -------
Balance at September 30, 1999 $ 77 $ 7,379 $ 6,091 $ (1,208) $ (40) $ (437) $ (268) $ 11,594
===== ====== ====== ======= ===== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1998 1999
---- ----
<S> <C> <C>
Operating activities:
Net income $ 390 $ 423
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 41 53
Provision for loan losses 23 27
Increase (decrease) in reserve for uncollected interest 15 (1)
Deferred income taxes (benefit) (15) -
Net increase (decrease) in deferred loan fees 1 (54)
Accretion of discounts on investment securities, net (15) (18)
Amortization of premiums on mortgage-backed securities 10 7
Amortization of unearned compensation 216 155
Repurchase of shares - RSP (525) -
FHLB stock dividends (23) (25)
(Increase) decrease in other assets (34) (39)
(Increase) decrease in accrued interest receivable 31 (6)
Increase (decrease) in accrued expenses and other liabilities 84 23
Increase (decrease) in current income taxes (164) -
------------ ------------
Net cash provided by operating activities 35 545
------------ ------------
Investing activities:
Purchase of investment securities held to maturity (710) -
Maturities of investment securities held to maturity 84 130
Purchase of investment securities available for sale (2,475) (1,299)
Maturities of investment securities available for sale 1,200 1,500
Principal payments on mortgage-backed securities
available for sale 1,135 1,080
Net decrease in loans (389) (1,953)
Purchase of premises and equipment (208) (225)
------------ ------------
Net cash used by investing activities (1,363) (767)
------------ -------------
Financing activities:
Net (decrease) in deposits (299) (92)
Increase in advance payments by borrowers for taxes
and insurance 245 371
Treasury stock purchased (596) (174)
Payment of cash dividend (72) (64)
------------ ------------
Net cash provided (used) by financing activities (722) 41
------------ ------------
Decrease in cash and cash equivalents (2,050) (181)
Cash and cash equivalents at beginning of period 4,592 2,839
------------ ------------
Cash and cash equivalents at end of period $ 2,542 $ 2,658
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,452 $ 1,348
Income taxes 426 289
============ ============
Noncash transactions:
Unrealized gains (losses) on securities and mortgage-backed
securities available for sale, net of deferred taxes 35 (16)
Loan charge off's 6 2
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
SFB BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands)
1. Basis of Preparation
--------------------
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated balance sheets, consolidated statements of income,
consolidated statements of stockholders' equity, and consolidated
statements of cash flows in conformity with generally accepted accounting
principles. However, all adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. All such adjustments are of a normal
recurring nature. The statements of income for the three and nine month
periods ending September 30, 1999 are not necessarily indicative of the
results which may be expected for the entire year or any other interim
period.
It is suggested that these consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto for the Company for the year ended December 31, 1998 which are
included in the Form 10-KSB by reference (file no. 0-22587).
2. Earnings Per Share
------------------
Basic earnings per common share ("EPS") for all periods presented is
computed by dividing net income by the weighted average number of common
share outstanding. Diluted earnings per common share is computed by
dividing net income available to common stockholders by the weighted
average number of common shares outstanding and dilutive potential common
shares, which include stock options. Dilutive potential common shares are
calculated using the treasury stock method. Options to purchase 73,630
shares of the Company's common stock were outstanding during the three and
nine months period ended September 1999, but were not included in the
computation of diluted EPS because their effect would be anti-dilutive.
7
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended,
-------------------------------------------------------
September 30, 1998 September 30, 1999
--------------------------- ---------------------------
Income Shares Income Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $149 $138
BASIC EPS
Income available to common stockholders $149 702 $138 643
Per share amount $.21 $.21
Effect of Dilutive Securities $.00 $.00
DILUTIVE EPS
Income available to common stockholders $149 702 $138 643
Per share amount $.21 $.21
</TABLE>
<TABLE>
<CAPTION>
Nine months ended,
-------------------------------------------------------
September 30, 1998 September 30, 1999
--------------------------- ---------------------------
Income Shares Income Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $390 $423
BASIC EPS
Income available to common stockholders $390 709 $423 644
Per share amount $.55 $.66
Effect of Dilutive Securities $.00 $.00
DILUTIVE EPS
Income available to common stockholders $390 710 $423 644
Per share amount $.55 $.66
</TABLE>
3. Asset Quality
-------------
The following table provides information regarding the Bank's nonperforming
loans (i.e., loans which are contractually past due 90 days or more) at
December 31, 1998 and September 30, 1999, respectively. As of the dates
indicated, the Bank had no loans categorized as troubled debt restructuring
within the meaning of SFAS 15.
December 31, September 30,
1998 1999
---- ----
(Dollars in Thousands)
Nonaccrual loans $ 437 $ 349
Repossessed real estate - -
-------- --------
Total nonperforming assets $ 437 $ 349
======== ========
Nonperforming loans to net loans 1.08% 0.82%
Nonperforming assets to total assets 0.84% 0.66%
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following discussion and analysis is intended to assist in understanding the
financial condition and the results of operations of the Company. References to
the "Company" include SFB Bancorp, Inc. and/or Security Federal Bank as
appropriate.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates" "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risk associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions. The Company undertakes no obligation to publicly release the results
of any revisions to those forward looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
As discussed herein, on July 29, 1999, the Bank opened its third branch office
in nearby Mountain City, Tennessee.
Comparison of Results of Operations for the Three and Nine Months Ending
September 30, 1998 and 1999
Net Income. Net income for the three months ending September 30, 1999, decreased
$11,000, or 7.4%, from $149,000 in 1998, to $138,000 in 1999. Net income
increased $33,000, or 8.5%, to $423,000 for the nine months ending September 30,
1999, from $390,000 in 1998. The decrease for the three months ending September
30, 1999, was primarily the result of an increase in non-interest expense. The
increase for the nine months ending September 30, 1999, was primarily the result
of a decrease in non-interest expense, offset by a decrease in net interest
income.
Net Interest Income. Net interest income decreased $1,000, from approximately
$509,000 for the three months ending September 30, 1998, to $508,000 for the
three months ending September 30, 1999. Net interest income decreased $23,000 to
$1.5 million for the nine months ending September 30, 1999. The decrease in net
interest income for the three month period in 1999, primarily reflects a net
decrease in average interest-earning assets over average interest-bearing
liabilities of $1.5 million for the three months ending September 30, 1999, as
compared to the same period in 1998. The decreases for the three month period
ending September 30, 1999, was offset by a 36 basis point increase in the
interest rate spread from 2.87% for the three months ending September 30, 1998,
to 3.23% in 1999. The net interest margin increased 13 basis points to 4.08% for
the three months ending September 30, 1999, from 3.95% for the three months
ending September 30, 1998. The overall decrease in net interest income for the
nine months ending
9
<PAGE>
September 30, 1999, primarily reflects a $1.5 million net decrease in average
interest-earning assets over average interest-bearing liabilities, as compared
to the same period in 1998. The decreases for the nine month period ending
September 30, 1999, was offset by a 22 basis point increase in the interest rate
spread from 2.84% for the nine months ending September 30, 1998, to 3.06% in
1999. The net interest margin increased 2 basis points to 3.95% for the nine
months ending September 30, 1999, from 3.93% for the nine months ending
September 30, 1998.
Interest Income. Interest income decreased $61,000, from approximately $1.0
million for the three months ending September 30, 1998, to $950,000 for the
three months ending September 30, 1999. The decrease was attributable to a
decrease in average interest-earning assets of approximately $1.9 million from
$51.6 million at September 30, 1998, to $49.7 million at September 30, 1999,
combined with a decrease in the average yield on interest-earning assets of 19
basis points, from 7.84% for the three months ending September 30, 1998, to
7.65% for the same period in 1999. Interest income decreased $133,000, or 4.4%,
from approximately $3.0 million for the nine months ending September 30, 1998,
to approximately $2.9 million for the nine months ending September 30, 1999. The
decrease was attributable to a decrease in average interest-earning assets of
approximately $1.0 million, from $51.5 million at September 30, 1998, to $50.5
million at September 30, 1999, and a decrease in the average yield on
interest-earning assets of 19 basis points, from 7.74% for the nine months
ending September 30, 1998, to 7.54% for the same period in 1999.
Interest on loans decreased $22,000 for the three months ending September 30,
1999, as compared to the same period in 1998, and $56,000 for the nine months
ending September 30, 1999, as compared to the same period in 1998. These
decreases primarily reflect a 43 basis point decrease in the average yield on
loans for the three months ending September 30, 1999, from 8.44% in 1998, and
for the nine months ending September 30, 1999, a decrease of 26 basis points
from 8.35% in 1998.
Interest on investment securities decreased $5,000 for the three months ending
September 30, 1999, as compared to the same period in 1998, and increased
$28,000 for the nine months ending September 30, 1999, as compared to the same
period in 1998. The decrease in interest on investments for the three months
ending September 30, 1999, primarily reflects an decrease of approximately
$386,000 in the average investment balance for 1999, compared to 1998, and a
decrease in the average yield on investments on 11 basis points from 5.37% in
1998, to 5.26%. The increase in interest on investments for the nine months
ending September 30, 1999, primarily reflects an increase of approximately
$619,000 in the average investment balance for 1999, compared to 1998, and an
increase in the average yield on investments of 10 basis points from 5.18% in
1998, to 5.28% in 1999.
Interest on interest-earning deposits decreased $12,000 for the three months
ending September 30, 1999, as compared to the same period in 1998, and decreased
$32,000 for the nine months ending September 30, 1999, as compared to the same
period in 1998. These decreases in interest on interest-earning deposits for
three and nine months ending September 30, 1999, compared to 1998, primarily
reflects a decrease of approximately $1.0 million and $406,000, respectively, in
the
10
<PAGE>
average balance of interest-earning deposits. Beginning in the September 30,
1999 quarter, the Bank began to implement its Year 2000 Cash Contingency Plan.
See "Liquidity and Capital Resources."
Interest on mortgage-backed securities decreased $22,000 for the three months
ending September 30, 1999, as compared to the same period in 1998, and $73,000
for the nine months ending September 30, 1999, as compared to the same period in
1998, as the portfolio continued to pay down principal and those funds being
invested in other earning assets.
Interest Expense. Interest expense decreased $60,000 from $502,000 for the three
months ending September 30, 1998, to $442,000 for the three months ending
September 30, 1999. Interest expense decreased $110,000 from approximately $1.5
million for the nine months ending September 30, 1998, to $1.4 million for the
nine months ending September 30, 1999. The decrease for the three months ending
September 30, 1999, was primarily the result of a 55 basis point decrease in the
average cost of funds, and an approximately $376,000 decrease in the average
balance of deposits for the three months ending September 30, 1999, compared to
1998. The decrease for the nine months ending September 30, 1999, was primarily
the result of a 41 basis point decrease in the average cost of funds, offset by
an approximately $437,000 increase in the average balance of deposits for the
nine months ending September 30, 1999, compared to 1998.
Provision for Loan Losses. The provision for loan losses was $8,000 and $9,000
for the three month period ending September 30, 1998 and 1999, respectively. The
provision for loan losses was $23,000 and $27,000 for the nine month period
ending September 30, 1998 and 1999, respectively. The Company's management
routinely performs an analysis to quantify the inherent risk of loss in its
portfolio. At September 30, 1999, the ratio of the allowance for loan loss was
at a level deemed adequate by management to provide for losses in the loan
portfolio. The ratio of allowance for loan loss to non-performing loans at
September 30, 1999, was 100.64%, and nonperforming assets represented 0.66% of
total consolidated assets. Nonperforming assets decreased $62,000 to $349,000 at
September 30, 1999, from $411,000 at September 30, 1998. Management is not aware
of any trends or events inherent to its loan portfolio that have not been
provided for in its loan loss allowance. However, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods.
Non-Interest Income. Non-interest income continues to be an additional source of
income for the Company. The income is produced by fees on new loan production
and service fees on other products and services. Total non-interest income
amounted to $48,000 and $138,000 for the three and nine months ending September
30, 1999, respectively, and $44,000 and $124,000 for the three and nine months
ending September 30, 1998, respectively.
Non-Interest Expense. Non-interest expense increased $14,000, from $310,000 for
the three months ending September 30, 1998, to $324,000 for 1999. The increase
for the three month period was primarily the result of increased compensation
expenses of $12,000. Net occupancy, deposit insurance premiums, and data
processing expenses remained relatively stable during the three month periods.
Non-interest expense decreased $74,000, from approximately $1.0 million for the
nine months ending September 30, 1998, to $930,000 for 1999. The decrease was
primarily the
11
<PAGE>
result of decreased compensation expense of $57,000 and $35,000 of other
expenses, offset by a $12,000 increase in net occupancy expenses during the
period. The decrease in compensation expense for the nine months periods ending
September 30, 1999, as compared to 1998, was primarily attributable to the
compensation expense associated with the Bank's Restricted Stock Plan ("RSP"),
which was approved by the Company's shareholders on June 1, 1998. The RSP vests
over a four year period with 20% vesting on the date of grant and 20% annually
thereafter. Accordingly, the Company immediately expensed 20% of the value of
the awards on the grant date and the remaining value is being amortized to
compensation expense on a monthly basis over the remaining four year vesting
term. Compensation expense recognized for the nine month periods ending
September 30, 1998 for the RSP awards was $151,000, compared to $103,000 for the
nine months ending September 30, 1999. The decrease in other non-interest
expense was mainly attributable to management's attempt to control general
operating expenses and those expenses associated with being a public company.
The increase in net occupancy expense was mainly attributable to expenses
associated with the Bank's recently opened third branch office in Mountain City,
Tennessee. Deposit insurance premiums, and data processing expenses remained
relatively stable during the nine month periods.
As previously discussed, on July 29, 1999, the Bank opened its third branch
office in nearby Mountain City, Tennessee. The Company expects that non-interest
expense will continue to increase for costs associated with opening and
maintaining this additional branch office. It is anticipated that ultimately the
new branch will produce sufficient income to cover these additional operating
expense.
Income Taxes. Income tax expense for the three months ending September 30, 1999,
was $85,000, compared to $86,000 for the same period in 1998. Income tax expense
for the nine months ending September 30, 1999, was $257,000, compared to
$229,000 for the same period in 1998. The decrease for the three month period
ending September 30, 1999, compared to 1998 was principally due to lower pre-tax
income. The increase for the nine month period ending September 30, 1999,
compared to 1998, was principally the result of higher pre-tax income. The
effective tax rate for both the three and nine months in 1998 and 1999 was
approximately 38%.
Liquidity and Capital Resources. The Company's primary sources of funds are new
deposits, proceeds from principal and interest payments on loans, and repayments
on mortgage-backed securities. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition. The Company's primary investing activity is loan originations. The
Company maintains liquidity levels adequate to fund loan commitments, investment
opportunities, deposit withdrawals and other financial commitments. Obligations
to fund outstanding loan commitments at September 30, 1999 were approximately
$885,000.
Due to the year 2000, the Company has instituted a cash contingency plan in
order to meet the possible larger cash withdrawals of customers in December
1999. Such plan may decrease the Company's investment in interest earning assets
and may increase its investment in interest bearing liabilities, which may cause
the Company's net income to slightly decrease in the 1999 fourth quarter.
12
<PAGE>
The Bank exceeded all of its capital requirements at September 30, 1999. The
Bank had the following capital ratios at September 30, 1999:
<TABLE>
<CAPTION>
For Capital Categorized as
Actual Adequacy Purposes "Well Capitalized"(1)
------------------------ ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total Capital
(to risk weighted assets) $ 9,519 30.5% $ 2,494 8.0% $ 3,118 10.0%
Tier I Capital
(to risk weighted assets) $ 9,176 29.4% $ 1,247 4.0% $ 1,871 6.0%
Tier I Capital
(to total assets) $ 9,176 17.9% $ 935 3.0% $ 1,559 5.0%
Tangible Capital
(to total assets) $ 9,176 17.9% $ 468 1.50% $ 1,559 5.0%
</TABLE>
(1) As categorized under the Prompt Corrective Action Provisions.
Year 2000 Compliance. A great deal of information has been disseminated about
the Year 2000 as it relates to computer systems. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the Year 2000 as the
Year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the Bank's operations. Data
processing is also essential to most other financial institutions and many other
companies. Substantially all of the Bank's material data processing that could
be affected by this problem is provided by a third party service bureau. The
service bureau has informed the Bank that it will not be assessing special
charges for the renovation and testing of its hardware and software in
preparation for Year 2000.
The Bank has formulated a Year 2000 Compliance Plan, a Year 2000 Contingency
Plan and a Year 2000 Testing Plan. The Year 2000 Compliance Plan is structured
in accordance with the Office of Thrift Supervision's Year 2000 Examination
Checklist, Version 2. It addresses the identified phases of: Awareness,
Assessment, Renovation, Validation and Implementation. The purpose of the plan
is to outline the procedures necessary for assuring that the Bank is in
readiness for the century date change. The Company is in the implementation
phase of the plan. The Bank's Year 2000 Contingency Plan is designed to prepare
the institution for returning to operation in the event that systems do not
perform as planned either before or after the century date change. The plan
addresses vital mission critical applications and states both the plans in the
event of noncompliance and dates for when the plan will be put into effect. The
Bank's Year 2000 Testing Plan is designed to outline the methodology to be used
in testing and certifying Year 2000 compliance of the Bank's vital mission
critical systems and applications.
The Company has contacted other material vendors and suppliers regarding their
Year 2000 state of readiness. The Company has requested written assurance from
these third party vendors indicating that they expect to be Year 2000 compliant
prior to the Year 2000. Substantially all third party
13
<PAGE>
vendors have provided written assurance. Follow up requests have been sent to
any vendor not providing assurance or a replacement vendor is contacted.
The Bank's third party service bureau during October 1998, converted the Bank to
its new state of the art core account processing platform. This new technology
was built with Year 2000 compatible components with each application of the
system renovated to run on the new platform and date fields expanded to a four
digit year. The service bureau during October 1998, conducted Year 2000 proxy
testing on this new platform. The Bank conducted Year 2000 testing during
September and October 1999. The tests involved all aspects of the on-line
account processing platform utilizing its new teller operating system (as
discussed further below) and frame relay. This system and other internal systems
used by the Company were tested in accordance with Company's Year 2000 Testing
Plan. The results of the test were satisfactory.
The Bank upgraded its teller operating system during the first quarter of 1999.
The upgrade will further ensure Year 2000 readiness by using Year 2000 certified
software and hardware. The costs incidental to the upgrade totaled approximately
$100,000. Substantially all of such costs associated with the upgrade were
capitalized. These costs should not be material to the Company in any single
year.
No assurance can be given that the Year 2000 Compliance Plan will be completed
successfully by the Year 2000, in which event the Company could incur
significant cots. However, if the third party service bureau is unable to
resolve the potential problem in time, the Company would likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the financial statements
of the Company.
The Company's successful and timely completion of the Year 2000 project is based
on estimates derived by management on assumptions of future events, which are
inherently uncertain, including the progress and results of the Company's third
party service provider, testing plans, and all vendors, suppliers and customer
readiness.
14
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time, the Company and its subsidiaries may be a party
to various legal proceedings incident to its or their business. At
September 30, 1999, there were no legal proceedings to which the
Company or any subsidiary was a party, or to which of any of their
property was subject, which were expected by management to result in
a material loss.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) 3(i) Charter of SFB Bancorp, Inc.*
3(ii) Bylaws of SFB Bancorp, Inc. *
4 Specimen Stock Certificate *
10 Employment Agreement with Peter W. Hampton *
10.1 SFB Bancorp, Inc. 1998 Stock Option Plan **
10.2 Security Federal Bank Restricted Stock Plan **
27 Financial Data Schedule (Electronic filing only)
* Incorporated by reference to the Registration Statement on
Form SB-2, File No. 333-23505.
** Incorporated by reference to the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders, filed with the SEC on
March 31, 1999 (File No. 0-22587)
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SFB Bancorp, Inc.
Date: November 5, 1999 By /s/ Peter W. Hampton
------------------ ---------------------------------------
Peter W. Hampton
(President and Chief Executive Officer)
Date: November 5, 1999 By /s/ Bobby Hyatt
------------------ ---------------------------------------
Bobby Hyatt
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,694
<INT-BEARING-DEPOSITS> 964
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,515
<INVESTMENTS-CARRYING> 1,045
<INVESTMENTS-MARKET> 958
<LOANS> 43,219
<ALLOWANCE> 351
<TOTAL-ASSETS> 52,481
<DEPOSITS> 40,014
<SHORT-TERM> 0
<LIABILITIES-OTHER> 873
<LONG-TERM> 0
0
0
<COMMON> 77
<OTHER-SE> 11,517
<TOTAL-LIABILITIES-AND-EQUITY> 52,481
<INTEREST-LOAN> 2,485
<INTEREST-INVEST> 275
<INTEREST-OTHER> 99
<INTEREST-TOTAL> 2,859
<INTEREST-DEPOSIT> 1,360
<INTEREST-EXPENSE> 1,360
<INTEREST-INCOME-NET> 1,499
<LOAN-LOSSES> 27
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 930
<INCOME-PRETAX> 680
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 423
<EPS-BASIC> .66
<EPS-DILUTED> .66
<YIELD-ACTUAL> 3.95
<LOANS-NON> 349
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 326
<CHARGE-OFFS> 2
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 351
<ALLOWANCE-DOMESTIC> 351
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
