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 For the fiscal year ended December 31, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to ________ .
Commission File No. 0-22587
SFB Bancorp, Inc.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Tennessee 62-1683732
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
Organization) Identification No.)
632 East Elk Avenue, Elizabethton, Tennessee 37643
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(423) 543-1000
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
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: $4,157,000
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, 1999 was $6.8 million.
As of March 16, 1999, there were issued and outstanding 692,417 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, 1998. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 1998. (Part III)
<PAGE>
PART I
Forward Looking Statements
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 and 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. 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 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
2
<PAGE>
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.
The following table sets forth certain financial ratios for the Company
for the dates indicated.
At December 31,
---------------------
1997 1998
---------------------
Return on average assets 1.18% .94%
Return on average equity 6.99% 4.24%
Average equity to average assets 17.38% 22.24%
Dividend payout --% 27.85%
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.
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:
3
<PAGE>
December 31,
------------------------------------
1997 1998
----------------- -----------------
Amount Percent Amount Percent
Type of Loans:
Real Estate Loans:
One- to four-family...................$31,382 75.63 $30,054 72.41
Construction.......................... 1,600 3.86 1,216 2.93
Commercial............................ 1,433 3.45 1,566 3.77
Multi-family residential.............. 687 1.65 1,011 2.44
Land.................................. 2,982 7.19 3,997 9.63
Commercial business loans............... 425 1.02 573 1.38
Consumer Loans:
Automobile loans...................... 2,119 5.10 2,294 5.53
Share loans........................... 517 1.25 322 .78
Other................................. 351 .85 470 1.13
------- ------- ------- -------
Total loans........................ 41,496 100.00 41,503 100.00
====== ======
Less:
Loans in process...................... 429 619
Deferred loan origination fees
and costs............................. 118 109
Allowance for loan losses............. 301 326
------- -------
Total loans, net...................$40,648 $40,449
====== ======
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, 1999. The table
does not include prepayments or scheduled principal repayments. All mortgage
loans are shown as maturing based on contractual maturities.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
-------- --------- --------- ------
(In Thousands)
One- to four-family residential.. $ 140 $ 1,163 $ 28,751 $ 30,054
Construction..................... 373 - 843 1,216
Commercial real estate........... - 686 880 1,566
Multi-family residential......... - 154 857 1,011
Land............................. 671 2,622 704 3,997
Commercial business loans........ 479 78 16 573
Consumer......................... 1,129 1,957 - 3,086
-------- -------- -------- --------
Total ......................$ 2,792 $ 6,660 $ 32,051 $ 41,503
======== ======== ======== ========
4
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
-------- ------------- -------
(In Thousands)
One- to four-family residential....$ 28,349 $ 1,565 $ 29,914
Construction....................... 843 - 843
Commercial real estate............. 1,480 86 1,566
Multi-family residential........... 902 109 1,011
Land............................... 2,812 514 3,326
Commercial business loans and
consumer......................... 2,025 26 2,051
-------- ------- -------
Total..........................$ 36,411 $ 2,300 $ 38,711
======== ======= =======
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 is limited to 85% and 90% with private mortgage insurance.
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.
5
<PAGE>
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 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.
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 $500,000 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 limits this type of lending to its 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.
6
<PAGE>
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
Consumer Loans. 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 a member
of the Bank's Board of Directors and/or outside independent fee appraisers.
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, 1998, commitments to
cover originations of mortgage loans and undisbursed funds for loans-in-process
were $1,440,000 and $619,000, respectively.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15.
7
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------
1997 1998
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential.................................$ 150 $ 409
Construction.................................................... - -
Commercial...................................................... - -
Multi-family residential........................................ - -
Land............................................................ - 18
Commercial business and consumers................................. 59 10
--------- ---------
Total nonaccrual loans........................................ 209 437
Accruing loans which are contractually past due 90 days or more... - -
--------- ----------
Total nonperforming loans..................................... 209 437
Real estate owned................................................. - -
--------- ----------
Total nonperforming assets........................................$ 209 $ 437
======== ========
Nonaccrual and 90 days past due as a percentage of net loans...... 0.51% 1.08%
Nonaccrual and 90 days past due as a percentage of total assets... 0.39% 0.84%
Total nonperforming assets as a percentage of total assets........ 0.39% 0.84%
</TABLE>
At December 31, 1998, 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.
8
<PAGE>
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, 1998, the Bank had
classified approximately $456,000 of assets as substandard, and $1,000 of assets
as special mention. The Bank did not have any assets classified as doubtful or
loss.
Foreclosed Real Estate. Real estate acquired by the Bank 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, 1998,
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 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,
---------------------
1997 1998
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding............................................. $41,496 $41,503
====== ======
Average loans outstanding........................................... $39,881 $40,608
====== ======
Allowance at beginning of period.................................... $304 $301
Provision .......................................................... 10 31
Recoveries.......................................................... - -
Charge-offs ........................................................ (13) (6)
--- ---
Allowance at end of period.......................................... $301 $326
=== ===
Allowance for loan losses as a percent of total loans outstanding... 0.73% 0.79%
Net loans charged off as percent of average loans outstanding....... 0.03% 0.01%
Ratio of allowance to nonperforming loans........................... 144.0% 0.75%
</TABLE>
9
<PAGE>
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.
At December 31,
----------------------------------------
1997 1998
-------------------- -------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential...... $136 75.63% $147 72.41%
Construction......................... 25 3.86 27 2.93
Commercial........................... 40 3.45 43 3.77
Multi-family residential............. 20 1.65 22 2.44
Land................................. 30 7.19 33 9.63
Commercial business and consumer....... 50 8.22 54 8.82
---- ------ --- ------
Total allowance for loan losses... $301 100.00% $326 100.00%
==== ====== === ======
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
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, 1998, 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, 1998 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
10
<PAGE>
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
Corporation ("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.
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 1998
------ -------
(Dollars in Thousands)
U.S. government and agency securities available for sale...$1,148 $2,327
U.S. government securities................................. 418 440
Political subdivision notes................................ 159 718
Mortgage-backed securities available for sale.............. 5,030 3,502
FHLB Stock................................................. 423 454
----- -----
Total....................................................$7,178 $7,441
===== =====
11
<PAGE>
The following table sets forth information regarding the scheduled maturities,
carrying values, market value and weighted average yields for the Bank's
investment securities portfolio at December 31, 1998. The following table does
not take into consideration the effects of scheduled repayments or the effects
of possible prepayments.
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------------------------------
Less than 1 to Over 5 to Over 10 Total
1 year 5 years 10 years years Securities
------------------ ----------------- ---------------- ---------------- ------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
Agencies securities
Available for sale....$ 250 5.50% $2,077 5.59% $ -% $ -% $ 2,327 5.58% $ 2,327
- -
U.S. government
Securities.............. - - - - - - 429 5.37 429 5.37 429
Political subdivision
Notes................... - - 718 4.56 - - - - 718 4.56 718
Mortgage-backed
Securities available
For sale:
GNMA.................. - - - - - - 521 6.94 521 6.93 521
FHLMC................. - - 2 7.00 - - 55 7.83 57 7.80 57
FHLMC Remic........... - - 63 5.60 638 5.47 174 5.40 875 5.47 875
FNMA.................. - - 4 11.00 - - 508 6.52 512 6.55 512
FNMA Remic............ - - - - 490 5.78 1,047 4.98 1,537 5.23 1,537
FHLB stock (1).......... - - - - - - 454 6.88 454 6.88 454
----- ----- ----- ----- ----- -----
Total................. $ 250 5.50% $2,864 5.34% $1,128 5.61% $3,188 5.94% $ 7,430 5.64% $ 7,430
===== ==== ===== ==== ===== ==== ===== ==== ===== ==== =====
</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, 1998, 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, 1998.
Maturity Period Time Deposits
--------------- -------------
(Dollars in Thousands)
--------------------
Within three months.................... $1,615
More than three through six months..... 1,918
More than six through nine months...... 950
Over nine months....................... 2,988
-----
Total......................... $7,471
=====
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.
Employees
At December 31, 1998 the Bank had 16 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.
13
<PAGE>
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 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 Savings Association Insurance Fund (the "SAIF") to a maximum of $100,000
for each insured member (as defined
14
<PAGE>
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.
As a member of the SAIF, the Bank is required to pay insurance premiums
to the FDIC ranging from 0 to 27 basis points of its total assessable deposits.
The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. Assessment rates for BIF
members also range from 0 to 27 basis points. A separate levy is imposed on all
FDIC insured institutions for repayment of bonds sold by the Financing
Corporation ("FICO") from 1987 to 1989 in support of the Savings and Loan
Insurance Corporation. However, BIF members rates for FICO are one-fifth the
rate paid by SAIF members until January 1, 2000. FICO rates are subject to
quarterly adjustments. The lower premium for BIF members places SAIF members at
a competitive disadvantage to BIF members.
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 per $100 of SAIF deposits held on March 31, 1995. Beginning January 1,
1997, the deposit insurance assessment for most SAIF members was reduced to
.064% of deposits on an annual basis through the end of 1999. During this same
period, BIF members will be assessed approximately .013% of deposits. After
1999, assessments for BIF and SAIF members should be the same. 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 declined annually by approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to maintain minimum capital amounts and ratios. The Bank is
required to meet three capital standards: (1) tier I capital to adjusted total
assets of 4%, (2) tier I capital to risk weighted assets of 4%, and (3) total
capital to risk weighted assets of 8%. Management believes, as of December 31,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
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, 1998, 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
15
<PAGE>
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.
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 in compliance with the QTL test on a
monthly basis in nine out of every 12 months. As of December 31, 1998, the Bank
was in compliance with its QTL requirement with 80.13% of its assets invested in
QTIs.
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. At
December 31, 1998, the Bank's required liquidity ratio was 4.00%, and its actual
ratio was 10.48%.
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.
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, 1998, the Bank was in compliance with these Federal Reserve Board
requirements.
16
<PAGE>
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
On June 30, 1998, the Bank purchased for $135,000 land and an existing
building for the branch office which is to be located in nearby Mountain City,
Tennessee. Management estimates that costs incidental to renovating and
equipping the building to be approximately $200,000. As of December 31, 1998,
the Bank had invested approximately $96,000 toward the renovation and equipping
of this branch facility. The branch has not opened as of December 31, 1998.
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.
(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.
17
<PAGE>
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 information contained under the section captioned "Stock Market
Information" of the Company's Annual Report to stockholders for the fiscal year
ended December 31, 1998 (the "Annual Report") is incorporated herein by
reference.
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.
18
<PAGE>
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.
(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) Changes in Control
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, 1997 and 1998 and the related
consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows for each of
the years in the two year period ended December 31, 1998,
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(ii) Bylaws of SFB Bancorp, Inc.*
4 Specimen Stock Certificate*
10 Employment Agreement between the Bank and Peter W. Hampton*
10.1 1998 Stock Option Plan**
10.2 Restricted Stock Plan and Trust Agreement**
13 Portions of the 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See "Item 1- Description of
Business)
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.
(footnotes continued on next page)
19
<PAGE>
** Incorporated by reference to the proxy statement for the annual meeting of
stockholders on June 1, 1998 and filed with the SEC on April 17, 1998.
(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, 1999.
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, 1999.
/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/ Michael L. McKinney
- ----------------------------------- ----------------------------------------
Julian T. Caudill, Jr. Michael L. McKinney
Director Director
/s/ Bobby Hyatt
- -----------------------------------
Bobby Hyatt
Assistant Vice President
(Principal Accounting Officer)
<PAGE>
Corporate Profile
- -----------------
SFB Bancorp, Inc. (the "Company") is a Tennessee corporation organized
in March 1997 at the direction of Security Federal Bank (the "Bank") 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 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 primarily in Carter County, Tennessee and
the adjacent Tennessee counties of Johnson, Unicoi, Washington and Sullivan.
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, 1998. 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 $ -
July 1, 1997 - September 30, 1997 $15.50 $14.00 $ -
October 1, 1997 - December 31, 199 $15.63 $14.00 $ -
January 1, 1998 - March 31, 1998 $16.50 $15.50 $ -
April 1, 1998 - June 30, 1998 $17.25 $16.61 $ 0.10
July 1, 1998 - September 30, 1998 $17.25 $13.75 $ -
October 1, 1998 - December 31, 1998 $13.00 $11.50 $ 0.10
The number of shareholders of record as of March 15, 1999, was
approximately 165. This does not reflect the number of persons or entities who
held stock in "street" name through various brokerage firms. At March 15, 1999,
there were 692,217 shares outstanding.
2
<PAGE>
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.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Private Securities Litigation Reform Act to 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.
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 the Bank as appropriate.
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 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 77% of the loan portfolio at December 31, 1998. 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, 1998, the estimated average weighted term to maturity of the Bank's mortgage
loan portfolio was slightly over 11 years and the estimated 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, 1998.
Changes in Rates NPV Ratio %(1) Change(2)
----------------- -------------- ---------
+400 bp 13.97 -502 bp
+300 bp 15.46 -352 bp
+200 bp 16.90 -208 bp
+100 bp 18.13 - 85 bp
0 bp 18.98 0 bp
-100 bp 19.50 + 51 bp
-200 bp 19.99 +101 bp
-300 bp 20.64 +166 bp
-400 bp 21.22 +224 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,
---------------------------------------------------
1997 1998
------------------------- -------------------------
Average Average Average Average
Balance Interest Yield/ Balance Interest Yield/
Cost Cost
-------- ------- -------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)......................$38,701 $3,253 8.41% $40,608 $3,409 8.39%
Investment securities ................... 1,293 81 6.26 2,971 154 5.18
Interest-earning deposits................ 3,426 175 5.11 3,053 158 5.18
Federal Home Loan Bank stock............. 407 29 7.13 437 31 7.14
Mortgage-backed securities............... 5,392 312 5.79 4,287 237 5.53
----- ----- ----- -----
Total interest-earning assets.............. 49,219 3,850 7.82 51,356 3,989 7.77
----- -----
Non-interest-earning assets................ 1,701 1,549
----- -----
Total assets $50,920 $52,905
====== ======
Interest-bearing liabilities:
Interest-bearing demand deposits.........$10,245 262 2.56 $9,667 249 2.58
Certificates of deposit.................. 30,869 1,722 5.58 30,427 1,710 5.62
Short-term borrowings.................... 50 3 6.00 - - -
------ ------ ------ ------
Total interest-bearing liabilities......... 41,164 1,987 4.83 40,094 1,959 4.89
----- -----
Non-interest-bearing liabilities........... 906 1,046
------ -----
Total liabilities.......................... 42,070 41,140
------ ------
Total stockholders' equity................. 8,850 11,765
----- ------
Total liabilities and stockholders'
equity. $50,920 $52,905
====== =======
Net interest income........................ $1,863 $2,030
===== =====
Interest rate spread (2)................... 3.00% 2.88%
Net yield on interest-earning assets(3).... 3.79% 3.95%
Ratio of average interest-earning assets to
average interest-bearing liabilities..... 119.57% 128.09%
</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,
----------------------------- -----------------------------
1997 vs. 1996 1998 vs. 1997
----------------------------- -----------------------------
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............... $311 $ 4 $(2) $313 $160 $ (8) $ 4 $ 156
Mortgage-backed securities..... (67) 1 (1) (67) 105 (14) (18) (75)
Investment securities.......... (2) 22 - 20 (64) (14) 3 73
Other interest-earning assets.. 111 - (1) 110 (18) 4 (1) (15)
----- ---- ---- ---- ---- ---- ---- -----
Total interest income.........$ 353 $ 27 $ (4) $376 $ 183 $ (32) $ (12) $ 139
===== ==== ==== ==== ===== ===== ===== =====
Interest expense:
Savings accounts............... $29 $ (16) $ (4) $ 9 $ (49) $ 16 $ 8 $ (25)
Other liabilities.............. 1 - - 1 (3) - - (3)
----- ---- ----- ---- ---- ----- ----- -----
Total interest expense.......$ 30 $ (16) $ (4) $ 10 $ (52) $ (16) $ 8 $ (28)
===== ==== ===== ==== ==== ===== ===== ====
Net change in interest income...$ 323 $ 43 $ - $366 $ 235 $ (48) $ (20) $ 167
===== ==== ===== ==== ==== ===== ===== ====
</TABLE>
Comparison of Financial Condition
The Company's total consolidated assets decreased by approximately $1.5 million
or 2.8% from $53.3 million at December 31, 1997 to $51.9 million at December 31,
1998. The decrease in assets for the year was primarily due to funds used for
the stock repurchase programs, net deposit withdrawals, and stock purchased in
the open market for the restricted stock plan. Total cash and interest-earning
deposits decreased approximately $1.8 million to $2.8 million at December 31,
1998, as funds were shifted to investment securities which increased by
approximately $1.7 million to $3.5 million at December 31, 1998. Mortgage backed
securities decreased approximately $1.5 million to $3.5 million at December 31,
1998, as the portfolio continues to mature.
Stockholders' equity decreased $911,000 to approximately $11.3 million at
December 31, 1998 from $12.2 million at December 31, 1997. The decrease was
attributable to the
7
<PAGE>
repurchase of approximately $1.0 million of the Company's outstanding capital
stock, payment of cash dividends in the amount of $138,000, and the recognition
of $524,000 in unearned compensation for the Bank's Restricted Stock Plan,
offset by comprehensive income of $526,000.
Comparison of the Results of Operations for the Years Ended December 31, 1998
and 1997
Net Income. Net income decreased $92,000, or 15.6%, in 1998 as compared to 1997.
The decrease was primarily the result of an increase of $271,000 in non-interest
expenses and an increase in provision for loan losses of $21,000, offset by an
increase of $167,000 in net interest income and a decrease in income tax expense
of $24,000.
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 $167,000, or 9.0%, to approximately $2.0 million
in 1998, compared to approximately $1.9 million in 1997. The increase was
primarily due to the growth in average interest-earning assets and a decrease in
interest bearing liabilities. Average interest-earning assets increased to
approximately $51.4 million in 1998 from approximately $49.3 million in 1997,
while average interest bearing liabilities decreased $1.1 million. This net
growth offset the 12 basis points decrease in the interest rate spread. The
interest rate spread declined to 2.88% in 1998 from 3.00% in 1997. The net
interest margin increased 16 basis points to 3.95% in 1998 from 3.79% in 1997.
The 12 basis point decline in the interest rate spread in 1998 compared to 1997
was primarily due to the combination of a decrease in the yield on average
interest-earning assets of 5 basis points from 7.82% in 1997 to 7.77% in 1998,
and a 6 basis point increase in the average cost of interest-bearing liabilities
from 4.83% in 1997 to 4.89% in 1998.
Interest income. Interest income increased $139,000, or 3.6%, from approximately
$3.9 million in 1997, to approximately $4.0 million for 1998. This overall
increase in interest income was primarily the result of an increase in average
interest-earning assets of approximately $2.0 million for 1998, as compared to
1997. Interest income on loans increased by $156,000, as average loans
outstanding increased by $1.9 million in 1998. Loans receivable are the largest
earning asset held in the Company's portfolio. For 1998, the average yield on
loans receivable was 8.39% compared to 8.41% for 1997.
Interest income on investment securities increased by $73,000, as the average
balance invested increased by $1.7 million in 1998. Interest income on
interest-earning deposits and mortgage-backed securities decreased by $92,000.
Funds invested in these interest-earning
8
<PAGE>
assets were used to fund the stock repurchases, benefit plans and dividend
payments.
Interest Expense. Interest expense decreased $28,000 from approximately $1.97
million for the year ended December 31, 1997 to approximately $1.96 million for
the year ended December 31, 1998. The decrease for 1998 was the result of an
approximate $1.1 million decrease in average interest-bearing liabilities,
partially offset by a 6 basis point increase in the average cost of funds. The
Bank reflected an increase in both the average cost of funds for
interest-bearing demand deposits and certificates of deposits of 2 basis points
and 4 basis points, respectively.
Provision for Loan Losses. The provision for loan losses was $10,000 for year
ended December 31, 1997 and $31,000 for the year ended December 31, 1998. The
increase in the provision for loan losses in 1998 was mainly attributable to the
increase in the Bank's nonperforming loan portfolio. Nonperforming assets were
$437,000 at December 31, 1998, compared to $209,000 at December 31, 1997. The
ratio of the allowance for loan losses to non-performing loans at December 31,
1998 was 75.0% compared to 144.0% at December 31, 1997. The allowance for loan
losses as a percent of total loans outstanding was .79% and .72% at December 31,
1998 and 1997, respectively.
Historically, management has emphasized loss experience over other factors in
establishing the provision for loan losses. Management reviews the allowance for
loan losses in relation to (i) 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. 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. At December
31, 1998, the allowance for loan losses was at a level deemed adequate by
management to provide for losses in the portfolio.
Non-Interest Expense. Non-interest expense increased by $271,000 from
approximately $1.0 million for the year ended December 31, 1997 to approximately
$1.3 million for the year ended December 31, 1998. The increase was primarily
the result of increased compensation expense of $179,000 and $70,000 of other
expense incurred during the period. The increase in compensation expense for the
year ended December 31, 1998, was primarily attributable to the recognition of
additional compensation expense associated with the stockholder approved
Restricted Stock Plan (RSP). On June 1, 1998, the plan's approval resulted in an
immediate recognition of 20% of the value of shares granted and for the
remainder of 1998 subsequent monthly accruals for the vesting benefits as
earned. The expenses recognized for the RSP the year ended December 31, 1998 was
approximately $166,000. The increase in other non-interest expense was mainly
attributable to professional fees and expenses incurred by the Company in
connection with its first annual meeting, SEC filings, and proxy material
preparation and mailing. Employee benefits, net occupancy, deposit insurance
premiums, and data processing expenses remained relatively stable during the
year ended December 31, 1998 as compared to 1997.
9
<PAGE>
As discussed herein, the Bank plans to open an additional branch office in
nearby Mountain City, Tennessee, during the first half of 1999. The Company
expects that non-interest expense will increase during 1999 due to the costs
associated with opening and maintaining this additional branch office. See
"Liquidity and Capital Resources".
Income Taxes. Income tax expense decreased $24,000 or 6.50%, to $345,000 for the
year ended December 31, 1998 from $369,000 for the year ended December 31, 1997.
The decrease was principally the result of $116,000 in lower pre-tax income for
1998 compared to 1997. The effective tax rate for both twelve months periods in
1998 and 1997 was approximately 39.0%.
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, 1998
totaled $187,000 as compared to $856,000 for the year ended December 31, 1997.
The decrease was primarily the result of the purchase of the restricted stock
plan shares for $524,000.
Net cash used by investing activities for the year ended December 31, 1998
totaled $276,000, a decrease of approximately $3.2 million as compared to 1997.
The decrease was primarily attributable to a net decrease in loans funded of
approximately $3.6 million, proceeds from maturities, sales, and repayments of
investment and mortgage-backed securities of approximately $1.6 million, offset
by an increase in net purchases of investment securities of approximately $2.2
million.
Net cash used by financing activities for 1998 totaled approximately $1.7
million. This was primarily the result of approximately $1.0 million of common
stock repurchases, $138,000 in dividends paid, and a decrease in deposits of
$481,000.
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.
The Bank during the quarter ended June 30, 1998, filed a notice with the OTS for
the
10
<PAGE>
establishment of a branch office. The Bank purchased for $135,000 land and an
existing building for the branch office which is to be located in nearby
Mountain City, Tennessee. Management estimates that costs incidental to
renovating and equipping the building to be approximately $200,000. As of
December 31, 1998, the Bank had invested approximately $96,000 toward the
renovation and equipping of this branch facility. The branch has not opened as
of December 31, 1998.
At December 31, 1998, management had no knowledge of any trends, events or
uncertainties that will have or are reasonably likely to have material effects
on the liquidity, capital resources or operations of the Company. Further at
December 31, 1998, management was not aware of any current recommendations by
the regulatory authorities which, if implemented, would have such an effect.
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. However, if the service bureau is unable to resolve
this potential problem in time, the Bank would likely experience significant
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on our financial condition and results
of operation.
The Bank has formulated a Year 2000 Compliance Plan and a Year 2000 Contingency
Plan. The Year 2000 Compliance Plan is structured in accordance with the Office
of Thrift Supervision's Year 2000 Examination Checklist, Version 2. It addresses
the identified phases of: Awareness, Assessment, Renovation, Validation and
Implementation. The purpose of the plan is to outline the procedures necessary
for assuring that the Bank is in readiness for the century date change.
Execution of the plan is currently on target. 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 Company has contacted other material vendors and supplier regarding their
Year 2000 state of readiness. The Company has obtained written assurance from
these third party vendors indicating that they expect to be Year 2000 compliant
prior to the Year 2000.
The Bank's third party service bureau during October 1998, converted the Bank to
its new state of the art core account processing platform. This new technology
was built with Year
11
<PAGE>
2000 compatible components. The service bureau during October 1998, conducted
Year 2000 proxy testing on this new platform. The Bank expects to commence
testing in May 1999. In addition, each application of the system has been
renovated to run on the new platform and date fields expanded to a four digit
year. Other service bureau products and services utilized by the Bank are
expected to be brought Year 2000 compliant by June 1999.
The Bank is planning to upgrade its teller operating system during the first
quarter of 1999. This upgrade will further ensure Year 2000 readiness by using
Year 2000 certified software and hardware. The Company's management estimates
costs incidental to the upgrade to be approximately $100,000. The Company's
management anticipates that substantially all of such costs will be capitalized.
These costs should not be material to the Company in any single year. As of
December 31, 1998, the Company capitalized approximately $30,000 in regard to
Year 2000 compliance.
The Company's successful and timely completion of the Year 2000 project is based
on estimates derived by management on assumptions of future events, which are
inherently uncertain, including the progress and results of the Company's third
party service provider, testing plans, and all vendors, suppliers and customer
readiness.
Impact of Inflation and Changing Prices
Unlike most industrial companies, substantially all the assets of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's 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 price for goods and services.
12
<PAGE>
[LOGO] Crisp
Hughes
Evans
LLP Certified Public Accountants & Consultants
- --------------------------------------------------------------------------------
Affiliated worldwide through AGN International
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, 1997 and 1998, and the
related consolidated statements of income, 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, 1997 and 1998, 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 22, 1999
32 Orange Street 704 254 2254
PO Box 3049 Fax 704 254 6859
Asheville, NC 28802 www.che-llp.com
13
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------------
Assets 1997 1998
------ ----------- ----------
<S> <C> <C>
Cash on hand $ 453 $ 467
Interest earning deposits 4,139 2,372
Investment securities:
Held to maturity (market value of $526 in 1997 and $1,147 in 1998) 577 1,158
Available for sale (amortized cost of $1,149 in 1997 and $2,325 in 1998) 1,148 2,327
Loans receivable, net 40,648 40,449
Mortgage-backed securities:
Available for sale (amortized cost of $5,117 in 1997 and $3,544 in 1998) 5,030 3,502
Premises and equipment, net 575 849
Federal Home Loan Bank stock 423 454
Accrued interest receivable 316 265
Prepaid expenses and other assets 28 23
--------- ---------
Total assets $ 53,337 $ 51,866
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 40,587 $ 40,106
Advance payments by borrowers for taxes and insurance 199 188
Accrued expenses and other liabilities 144 221
Income taxes payable:
Current 164 -
Deferred 62 81
--------- ---------
Total liabilities 41,156 40,596
--------- ---------
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; 767,000 and 694,150 outstanding at 77 77
December 31, 1997 and 1998, respectively)
Paid-in capital 7,336 7,368
Retained income, substantially restricted 5,373 5,732
Treasury stock at cost (72,850 shares) - (1,034)
Accumulated other comprehensive income (53) (24)
Unearned compensation:
Employee stock ownership plan (552) (491)
Restricted stock plan - (358)
--------- ---------
Total stockholders' equity 12,181 11,270
--------- ---------
Total liabilities and stockholders' equity $ 53,337 $ 51,866
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Interest income:
Loans $ 3,253 $ 3,409
Mortgage-backed securities 312 237
Investments 110 185
Interest earning deposits 175 158
-------- ---------
Total interest income 3,850 3,989
-------- ---------
Interest expense:
Deposits 1,984 1,959
Federal Home Loan Bank advances 3 -
-------- ---------
Total interest expense 1,987 1,959
-------- ---------
Net interest income 1,863 2,030
Provision for loan losses 10 31
-------- ---------
Net interest income after provision
for loan losses 1,853 1,999
-------- ---------
Noninterest income:
Loan fees and service charges 149 157
Other 10 11
-------- ---------
Total noninterest income 159 168
-------- ---------
Noninterest expenses:
Compensation 498 677
Employee benefits 122 125
Net occupancy expense 75 82
Deposit insurance premiums 21 24
Data processing 74 83
Other 264 334
-------- ---------
Total noninterest expenses 1,054 1,325
-------- ---------
Income before income taxes 958 842
Income tax expense 369 345
-------- ---------
Net income $ 589 $ 497
========= ==========
Net income per common share:
Basic See Note 1 $ .71
Diluted .71
=========
Weighted-average shares:
Basic 699
Diluted 699
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998
---- ----
<S> <C> <C>
Net income $ 589 $ 497
Other comprehensive income:
Net unrealized gains on securities available for sale,
net of tax expense of $32 and $19, respectively 55 29
----- ----
Comprehensive income $ 644 $ 526
==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Other Unearned 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, 1996 $ - $ - $ 4,784 $ - $ (108) $ - $ - $ 4,676
Comprehensive income:
Net income - - 589 - - - - 589
Unrealized gain on securities available for sale,
net of income tax expense - - - - 55 - - 55
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
Comprehensive income:
Net income - - 497 - - - - 497
Unrealized gain on securities available for sale,
net of income tax expense - - - - 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
==== ===== ===== ====== ===== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998
-------------- -----------
<S> <C> <C>
Operating activities:
Net income $ 589 $ 497
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 53 56
Provision for loan losses 10 31
Loss on sale of real estate owned 9 -
Deferred income taxes (benefit) 29 -
Net decrease in deferred loan fees (4) (9)
Accretion of discounts on investment securities, net (21) (23)
Amortization of premiums on mortgage-backed securities 10 14
Amortization of unearned compensation 91 259
Purchase of RSP shares - (524)
FHLB stock dividends (29) (31)
(Increase) decrease in other assets 5 5
(Increase) decrease in accrued interest receivable (59) 51
Increase in accrued expenses and other liabilities 22 25
Increase (decrease) in current income taxes 151 (164)
------------ ----------
Net cash provided by operating activities 856 187
------------ ----------
Investing activities:
Purchase of investment securities held to maturity - (710)
Maturities of investment securities held to maturity 159 151
Purchase of investment securities available for sale (1,350) (2,875)
Maturities of investment securities available for sale 800 1,700
Principal payments on mortgage-backed securities
available for sale 814 1,559
Proceeds from sale of real estate 10 -
Net (increase) decrease in loans (3,805) 177
Purchase of premises and equipment (95) (278)
------------ ----------
Net cash used by investing activities (3,467) (276)
------------ ----------
</TABLE>
(continued)
18
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1998
----------------- --------------
<S> <C> <C>
Financing activities:
Net decrease in deposits $ (178) $ (481)
Decrease in advance payments by borrowers
for taxes and insurance (3) (11)
Proceeds from FHLB advances 400 -
Repayment of FHLB advances (1,200) -
Treasury stock purchased - (1,034)
Dividends paid - (138)
Net proceeds from issuance of common stock 6,770 -
------------ ------------
Net cash provided (used) by financing activities 5,789 (1,664)
------------ ------------
Increase (decrease) in cash and cash equivalents 3,178 (1,753)
Cash and cash equivalents at beginning of year 1,414 4,592
------------ ------------
Cash and cash equivalents at end of year $ 4,592 $ 2,839
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,975 $ 1,946
Income taxes 189 517
============ ============
Noncash transactions:
Unrealized gains on securities and mortgage-backed
securities available for sale, net of deferred taxes $ 55 $ 29
Non-cash acquisition of premises and equipment - 52
Loan to facilitate sale of real estate owned 41 -
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(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 10). 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, and accepting deposits from the general
public.
Estimates - The preparation of 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 Financial Accounting Standards
Board No. 130, "Reporting Comprehensive Income" (SFAS 130), effective
December 31, 1997. SFAS No. 130 establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains and
losses). Components of comprehensive income are net income and all other
non-owner changes in equity. The statement requires that an enterprise (a)
classify items of other comprehensive income by their nature in a
financial statement and (b)
20
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
display the accumulated balance of other comprehensive income separately
from common stock or retained income in the equity section of a balance
sheet. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
The Company has chosen to disclose comprehensive income in a separate
statement.
The only component of other comprehensive income consists of unrealized
holding gains on 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 accumulated other
comprehensive income. 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
21
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
value. Costs relating to development and improvement of properties are
capitalized, whereas costs relating to the holding of property are
expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to income if the carrying value of a
property exceeds its estimated net realizable value.
Premises and Equipment - Land is carried at cost. Office properties and
equipment are carried at cost less accumulated depreciation. Depreciation
is computed on 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 for 1998
are computed in accordance with the Statement of Financial Accounting
Standards No 128, "Earnings per Share" (SFAS 128). Unallocated ESOP shares
are not considered as outstanding for purposes of this calculation. Diluted
income per share includes the effect of dilution for stock options and
stock awards. 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.
22
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the year ended December 31, 1998, net income available to the common
stockholders in both the basic and diluted computations was equal to net
income. For purposes of the diluted income per share calculation,
additional common stock equivalents for the stock option plan of 153 were
included as weighted average common shares outstanding for the year ended
December 31, 1998.
Operating Segments - The Company adopted Financial Accounting Standards
Board Statement No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (SFAS No. 131), effective December 31, 1997. This
statement establishes standards for reporting information about segments in
annual and interim financial statements. SFAS No. 131 introduces a new
model for segment reporting called the "management approach." The
management approach is based on the way the chief operation decision-maker
organizes segments within the Company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure and any other in
which management disaggregates a company. Based on the "management
approach" model, the Company has determined that its business is comprised
of a single operating segment and that SFAS No. 131, therefore, has no
impact on its financial statements.
2. Investment Securities
---------------------
The amortized cost and estimated market values of investment securities are
summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Securities to be held to maturity:
December 31, 1997:
U.S. government security $ 418 $ - $ 51 $ 367
Municipal securities 159 - - $ 159
-------- ------- -------- --------
$ 577 $ - $ 51 $ 526
======== ======= ======== ========
December 31, 1998:
U.S. government security $ 440 $ - $ 11 $ 429
Municipal securities 718 - - $ 718
-------- ------- -------- --------
$ 1,158 $ - $ 11 $ 1,147
======== ======= ======== ========
Securities available for sale:
December 31, 1997:
U.S. government and
agency securities $ 1,149 $ - $ 1 $ 1,148
======== ======= ======== ========
December 31, 1998:
U.S. government and
agency securities $ 2,325 $ 2 $ - $ 2,327
======== ======= ======== ========
23
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:
Amortized Estimated
Cost Market Value
----------------- ----------------
1997 1998 1997 1998
---- ---- ---- ----
Securities to be held to maturity:
Due in one year $ 34 $ - $ 34 $ -
Due after one year through five 125 718 125 718
years
Due after ten years 418 440 367 429
------ ------ ------- ------
$ 577 $ 1,158 $ 526 $ 1,147
====== ====== ======= ======
Securities available for sale:
Due in one year 900 250 899 250
Due after one year through five 249 2,075 249 2,077
years ------ ------ ------- ------
$ 1,149 $ 2,325 $ 1,148 $ 2,327
====== ====== ======= ======
The Bank had investment securities with an amortized cost of approximately
$1,068,000 and $1,265,000 pledged against deposits at December 31, 1997 and
1998, respectively.
The Bank had no sales of investment securities to be held to maturity or
available for sale for the years ended December 31, 1997 and 1998.
The net unrealized gains (losses) on investment securities available for
sale, net of related income tax expense (benefit), are approximately
$(600) and $1,200 at December 31, 1997 and 1998, respectively, and are
reported as accumulated other comprehensive income.
3. Loans Receivable
-----------------
Loans receivable are summarized as follows:
December 31,
------------------------------------
1997 1998
---- ----
Real estate first mortgage loans:
One-to-four-family $ 31,382 $ 30,054
Construction 1,600 1,216
Commercial real estate 1,433 1,566
Multi-family residential 687 1,011
Land 2,982 3,997
--------------- ---------------
Total real estate loans 38,084 37,844
--------------- ---------------
(continued)
24
<PAGE>
December 31,
--------------------------------------
1997 1998
---- ----
Consumer and commercial loans:
Commercial business $ 425 $ 573
Auto loans 2,119 2,294
Share loans 351 322
Other 517 470
--------------- ---------------
Total consumer and commercial loans 3,412 3,659
--------------- ---------------
Total loans 41,496 41,503
--------------- ---------------
Less:
Undisbursed portion of loans in process 429 619
Net deferred loan fees 118 109
Allowance for loan losses 301 326
--------------- ---------------
848 1,054
--------------- ---------------
$ 40,648 $ 40,449
=============== ===============
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 97% of the appraised value of the property securing the loan.
The general policy is to limit loans on commercial real estate to 80% of
the lesser of appraised value or construction cost of the property securing
the loan.
The Bank's policy requires that consumer and other installment loans be
supported primarily by the borrower's ability to repay the loan and
secondarily by the value of the collateral securing the loan, if any.
Management of the Bank believes that its allowances for losses on its loan
portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In
addition, various regulatory agencies periodically review the Bank's
allowance for losses as an integral part of their examination processes.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments of information available to them at the time of
their examinations.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan", no loans in non-homogenous groups were determined to be impaired
for the year ended or as of
25
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31, 1998. 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 $209,000 at December 31, 1997 and $437,000 at December
31, 1998. 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, 1998, the Bank had loans pledged against public deposits of
approximately $904,000.
The changes in the allowance for loan losses are summarized as follows:
Years Ended December 31,
1997 1998
---- ----
Beginning balance $ 304 $ 301
Provision charged to income 10 31
Charge-offs, net of recoveries (13) (6)
-------------- --------------
Ending balance $ 301 $ 326
============== ==============
4. Mortgage-Backed Securities
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for sale:
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
=========== =========== =========== ===========
</TABLE>
(continued)
26
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Securities available for sale:
December 31, 1998:
GNMA $ 525 $ 2 $ 5 $ 521
FHLMC 56 1 - 57
FHLMC REMIC's 880 - 5 875
FNMA 519 1 9 512
FNMA REMIC's 1,564 - 27 1,537
----------- ----------- ----------- -----------
$ 3,544 $ 4 $ 46 $ 3,502
=========== ========== =========== ===========
</TABLE>
Although mortgage-backed securities are initially issued with a stated
maturity date, the underlying mortgage collateral may be prepaid by the
mortgagee and, therefore, such securities may not reach their maturity
date.
The Bank had mortgage-backed securities with an amortized cost of
approximately $2,232,000 and $1,148,000 pledged against deposits and
available FHLB advances at December 31, 1997 and 1998, respectively.
There were no sales of mortgage-backed securities for the years ended
December 31, 1997 and 1998.
The net unrealized losses, net of related income tax benefits, are
approximately $52,000 and $25,000, respectively at December 31, 1997 and
1998, and are reported as accumulated other comprehensive income.
5. Premises and Equipment
----------------------
Premises and equipment are summarized as follows:
December 31,
-----------------------------------
1997 1998
---------------- ---------------
Land and improvements $ 202 $ 237
Buildings 840 875
Vehicles 17 17
Furniture, fixtures and equipment 586 650
Construction in progress - 196
-------------- --------------
1,645 1,975
Less accumulated depreciation 1,070 1,126
-------------- --------------
$ 575 $ 849
============== ==============
27
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Interest Receivable
-------------------
Interest receivable consists of the following:
December 31,
---------------------------------
1997 1998
---------------- ---------------
Loans receivable $ 258 $ 239
Investments 21 31
Mortgage-backed securities 25 17
Interest earning deposits 22 3
-------------- --------------
326 290
Less allowance for uncollectible interest 10 25
-------------- --------------
$ 316 $ 265
============== ==============
7. Deposits
--------
Deposit account balances are summarized as follows:
Weighted Average
Interest Rates
----------------
December 31, December 31,
------------------ ----------------
1997 1998 1997 1998
---- ---- ---- ----
Noninterest bearing
accounts $ 1,969 705 -% -%
NOW accounts 2,669 2,770 2.03% 1.27%
Money Market accounts 1,983 1,598 4.28% 3.69%
Passbook accounts 4,351 4,548 3.05% 2.97%
Certificates of deposit 29,615 30,485 5.69% 5.47%
------- ------
$ 40,587 $ 40,106 4.80% 4.72%
======= ======= ==== ====
Contractual maturities of certificate accounts are summarized as follows:
December 31,
------------------------------------
1997 1998
---------------- ---------------
12 months or less $ 25,223 $ 24,925
After 1 but within 3 years 4,150 5,055
After 3 years 242 505
-------------- --------------
$ 29,615 $ 30,485
=============== ==============
28
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Bank had deposit accounts in amounts of $100,000 or more of
approximately $10.1 million and $9.7 million at December 31, 1997 and 1998,
respectively.
Interest expense on deposits consisted of the following:
Years Ended December 31,
--------------------------------
1997 1998
---- ----
NOW, money market, and passbook accounts $ 262 $ 249
Certificate accounts 1,726 1,713
------------ ------------
1,988 1,962
Less: penalties for early withdrawal 4 3
------------ ------------
Total interest on deposits $ 1,984 $ 1,959
============ ============
8. Federal Home Loan Bank Advances
-------------------------------
The Bank had no advances from the Federal Home Loan Bank (FHLB) outstanding
at December 31, 1997 or 1998.
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, 1998, were approximately $500,000.
The Bank has total credit availability with the FHLB of up to $2.5 million.
9. Income Taxes
------------
Income tax expense (benefit) is summarized as follows:
Years Ended December 31,
------------------------------------------------
1997 1998
---------------------- -----------------------
Federal State Total Federal State Total
Current $ 303 $ 37 $ 340 $ 309 $ 36 $ 345
Deferred (2) 31 29 (20) 20 -
---- ---- ---- ---- ---- ----
Total $ 301 $ 68 $ 369 $ 289 $ 56 $ 345
==== === ==== ==== === ====
29
<PAGE>
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,
-----------------------------
1997 1998
---- ----
Computed income tax expense $ 326 $ 286
Increase (decrease) resulting from:
State income tax, net of federal tax benefit 45 37
Non-taxable income - (11)
Non-deductible expenses - 37
Other (2) (4)
----------- ---------
Actual income tax expense $ 369 $ 345
=========== ========
The components of net deferred tax liabilities are as follows:
December 31,
-----------------------
1997 1998
---------- ---------
Deferred tax liabilities:
Tax bad debts $ 145 $ 143
Excess tax depreciation 13 14
FHLB stock dividends 43 54
Purchased discounts on mortgage-backed securities 9 9
-------- --------
210 220
-------- --------
Deferred tax assets:
Financial statement bad debt reserves 104 111
Accrued sick leave 5 6
Unrealized losses on securities available for sale 35 16
Other 4 6
Valuation allowance - -
-------- --------
148 139
-------- --------
Net deferred tax liability $ 62 $ 81
========= =======
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
30
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
SFAS No. 109. Therefore, retained income at December 31, 1997 and 1998,
includes approximately $825,000, representing such bad debt deductions for
which no deferred income taxes have been provided.
Beginning in 1998, the Bank began to recapture into taxable income
post-1987 excess reserves over a six-year period. The remaining amount of
the post-1987 excess is approximately $205,000. 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
remaining excess reserves are recaptured.
10. 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 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. Bancorp issued $614,000 of common stock to the ESOP for a
note receivable.
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.
11. 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 possible 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
31
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 Tier I capital (as defined in the regulations) to adjusted
total assets (as defined), and of Tier I and risk-based capital (as
defined) to risk-weighted assets (as defined). Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998, 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 (Tier I leverage, Tier I risk-based, total risk-based
capital) ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The 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.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- -------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Tier I Capital (to
adjusted total assets) $ 8,471 16.9% $ 2,011 >4.0% $ 2,513 >5.0%
- -
Tier I Capital (to risk
weighted assets) $ 8,471 29.9% $ 1,135 >4.0% $ 1,702 >6.0%
- -
Total Capital (to risk-
weighted assets) $ 8,772 30.9% $ 2,271 >8.0% $ 2,839 >10.0%
- -
As of December 31, 1998:
Tier I Capital (to
adjusted total assets) $ 8,639 17.2% $ 2,004 >4.0% $ 2,505 >5.0%
- -
Tier I Capital (to risk
weighted assets) $ 8,639 29.2% $ 1,185 >4.0% $ 1,778 >6.0%
- -
Total Capital (to risk-
weighted assets) $ 8,965 30.3% $ 2,370 >8.0% $ 2,963 >10.0%
- -
12. Employee Stock Ownership Plan (ESOP)
-----------------------------------
As part of the conversion discussed in Note 10, 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, 1998, the
32
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
loan had an outstanding balance of approximately $480,000 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 years ending December 31, 1997 and 1998, compensation related to
the ESOP of approximately $91,000 and $93,000, respectively, 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, 1998, the ESOP had approximately 12,000 allocated
shares and 49,000 unallocated shares. The fair value of unallocated ESOP
shares at December 31, 1998 was approximately $601,000.
The ESOP administrators determine whether dividends on allocated and
unallocated shares are 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 are
considered outstanding.
13. Restricted Stock Plan
---------------------
In June 1998, the Company adopted a restricted stock plan ("RSP") which
approved 30,680 shares of common stock for granting. The shares can be
granted to certain employees, officers, and directors of the Company. The
initial grants began vesting on June 1, 1998, and will be fully vested by
December 31, 2004. The Company purchased 30,680 shares of common stock in
the open market to fund the RSP. Compensation expense in the amount of the
fair value of the common stock at the date of grant will be recognized
during the periods the participants become vested. The unamortized balance
of unearned compensation is reflected as a reduction of stockholders'
equity. For the year ended December 31, 1998, approximately $166,000 has
been recognized as compensation expense.
14. Stock Incentive Plans
---------------------
In June 1998, the Company adopted stock incentive plans. The Plans permit
the grant of qualified incentive stock options and non-qualified options
to certain employees and directors. The Stock Option Committee of the
Board of Directors determines which individuals are eligible to receive
awards.
33
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The option price for each grant of a stock option will not be less than the
fair market value on the date the option is granted. The Committee may
determine the restrictions and conditions under which options may be
exercised. Options must be exercised within ten years of the date granted.
Vesting is in accordance with the terms of each particular grant.
Options Granted - On June 1, 1998, the Board of Directors granted 73,630
options having an exercise price of $16.69 per share, the estimated fair
market value of the Company's common stock on the date granted. The
weighted average contractual life of the options is 113 months and no
options were exercisable as of December 31, 1998.
Activity under Bank's plans during the year ended December 31, 1998, is
summarized below:
Qualified Plan Non-Qualified Plan
----------------------- ------------------------
Available Available
For Grant Granted For Grant Granted
----------- ----------- ----------- -----------
Adoption of plan,
June 1, 1998 53,692 - 23,008 -
Granted (50,622) 50,622 (23,008) 23,008
Exercised - - - -
Forfeited - - - -
----------- ----------- ----------- -----------
Balance, December 31, 1998 3,070 50,622 - 23,008
=========== =========== =========== ===========
Proforma information regarding the net income and net income per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of
the grant using the Black-Scholes option-pricing model with the following
assumptions for the period ended December 31, 1998:
Risk-free interest rate 4.52%
Dividend yield 1.19%
Average expected life in years 5
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions. Because the
Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of stock options.
34
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's proforma net income (in thousands) and net income per share for
the year ended December 31, 1998, is as follows:
As Reported Proforma
Net income $ 497 $ 492
============== ==============
Net income per share $ .71 $ .70
============== ==============
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.
35
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 1998, were approximately as follows (in
thousands):
Financial Balance Available
Instruments Outstanding For Use
----------- ----------- -------
Consumer and other lines $ 1,574 $ 967 $ 607
Letters of credit 142 - 142
------ ---- ----
$ 1,716 $ 967 $ 749
====== ==== ====
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 $490,000 and $1,440,000 at December 31, 1997 and
1998, respectively. The commitments to originate mortgage and consumer
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. The
commitments to originate mortgage and consumer loans at December 31, 1998,
were composed of fixed rate loans. The fixed rate loans had interest rates
ranging from 6.9% to 9.0% and terms ranging from 30 days to 15 years.
36
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
17. Financial Instruments
----------------------
The approximate stated and estimated fair value of financial instruments
are summarized below (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1998
------------------------- ------------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,592 $ 4,592 $ 2,839 $ 2,839
Investment and mortgage-
backed securities 6,755 6,704 6,987 6,976
Loans receivable, net 40,648 41,502 40,449 41,553
Federal Home Loan Bank stock 423 423 454 454
Other assets 294 294 265 265
---------- ---------- ---------- ----------
$ 52,712 $ 53,515 $ 50,994 $ 52,087
========== =========== ========== ===========
Financial liabilities:
Deposits:
Demand accounts $ 10,972 $ 10,972 $ 9,621 $ 9,621
Certificate accounts 29,615 29,674 30,485 30,683
Other liabilities 263 263 265 265
---------- ---------- ---------- ----------
$ 40,850 $ 40,909 $ 40,371 $ 40,569
========== ========== ========== ==========
</TABLE>
The Bank had off-balance sheet financial commitments at December 31, 1998,
which include approximately $2,189,000 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
37
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
prepayment assumption is used as an estimate of the portion of loans that
will be repaid prior to their scheduled maturity.
Federal Home Loan Bank Stock - No ready market exists for this stock and it
has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is deemed
to be a reasonable estimate of fair value.
Deposits - The fair values disclosed for demand deposits are, as required
by SFAS 107, equal to the amounts payable on demand at the reporting date
(i.e., their stated amounts). The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates using
the rates currently offered for deposits of similar remaining maturities.
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, 1997 and 1998. 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.
38
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
18. Condensed Parent Company Only Financial Statements
--------------------------------------------------
The following condensed balance sheets as of December 31, 1997 and 1998,
and condensed statements of income and cash flows for the period ended
December 31, 1997 and for the year ended December 31, 1998, for SFB
Bancorp, Inc. should be read in conjunction with the consolidated
financial statements and the notes thereto.
Parent Company Only
Condensed Balance Sheets December 31, December 31,
(in thousands) 1997 1998
------------ ------------
Assets:
Cash and cash equivalents $ 2,673 $ 668
Investment securities available for sale 500 1,501
ESOP loan receivable 552 480
Equity in net assets of bank subsidiary 8,418 8,614
Other assets 46 17
------ ------
Total assets $ 12,189 $ 11,280
====== =======
Liabilities
Accrued liabilities $ 8 $ 10
------- -------
Stockholders' equity:
Common stockholders' equity 12,181 11,270
------- -------
Total liabilities and stockholders' equity $ 12,189 $ 11,280
======= =======
Parent Company Only Period Ended Year Ended
Condensed Statements of Income December 31, December 31,
(in thousands) 1997 1998
------------ -----------
Interest income $ 122 $ 195
Noninterest expense 26 92
------- -------
Income before taxes 96 103
Income tax expense 25 40
------- -------
Income before equity earnings 71 63
Equity earnings of bank subsidiary 357 434
------- -------
Net income $ 428 $ 497
======= =======
39
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Parent Company Only Period Ended Year Ended
Condensed Statements of Cash Flows December 31, December 31,
(in thousands) 1997 1998
-------------- ------------
<S> <C> <C>
Operating activities:
Net income $ 428 $ 497
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed equity earnings of bank subsidiary (357) (434)
(Increase) decrease in other assets (46) 30
Increase in accrued liabilities 8 2
-------- -------
Net cash provided by operating activities 33 95
-------- -------
Investing activities:
Loan to ESOP (614) -
Purchase of treasury stock - (1,034)
Principal repayment by ESOP 62 72
Purchase of investment securities (500) (2,000)
Maturities of investment securities - 1,000
Purchase of capital stock of bank subsidiary (3,078) -
-------- -------
Net cash used by investing activities (4,130) (1,962)
-------- -------
Financing activities:
Net proceeds from issuance of common stock 6,770 -
Payment of cash dividends - (138)
-------- -------
Net cash provided by financing activities 6,770 (138)
-------- -------
Net increase in cash and cash equivalents 2,673 (2,005)
Cash and cash equivalents at beginning of period - 2,673
-------- -------
Cash and cash equivalents at end of period $ 2,673 $ 668
======== =======
</TABLE>
40
<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> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 467
<INT-BEARING-DEPOSITS> 2,372
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,829
<INVESTMENTS-CARRYING> 1,158
<INVESTMENTS-MARKET> 1,147
<LOANS> 41,503
<ALLOWANCE> 326
<TOTAL-ASSETS> 51,866
<DEPOSITS> 40,106
<SHORT-TERM> 0
<LIABILITIES-OTHER> 490
<LONG-TERM> 0
0
0
<COMMON> 77
<OTHER-SE> 11,193
<TOTAL-LIABILITIES-AND-EQUITY> 51,866
<INTEREST-LOAN> 3,409
<INTEREST-INVEST> 422
<INTEREST-OTHER> 158
<INTEREST-TOTAL> 3,989
<INTEREST-DEPOSIT> 1,959
<INTEREST-EXPENSE> 1,959
<INTEREST-INCOME-NET> 2,030
<LOAN-LOSSES> 31
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,325
<INCOME-PRETAX> 842
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 497
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 3.95
<LOANS-NON> 437
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 301
<CHARGE-OFFS> 6
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 326
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
