U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22587
SFB BANCORP, INC.
------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Tennessee 62-1683732
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
632 East Elk Avenue, Elizabethton, Tennessee 37643
- --------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 543-1000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
---------- --------
As of August 1, 1999, there were 689,417 shares of the Registrant's common
stock, par value $0.10 per share, outstanding. The Registrant has no other
classes of common equity outstanding.
Transitional small business disclosure format:
Yes X No
---------- --------
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Elizabethton, Tennessee
Index
<TABLE>
<CAPTION>
PART I. Page(s)
- ------- -------
<S> <C>
FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets-(Unaudited) as of December 31, 1998 and June 30, 1999.......................................3
Consolidated Statements of Income - (Unaudited) for the three and six month
periods ended June 30, 1998 and 1999....................................................................................4
Consolidated Statements of Stockholders' Equity - (Unaudited)...........................................................5
Consolidated Statements of Cash Flows - (Unaudited) for the six months
ended June 30, 1998 and 1999..........................................................................................6
Notes to (Unaudited) Consolidated Financial Statements................................................................7-8
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................................9-14
PART II.
- --------
OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................................15
Item 2. Changes in Securities.........................................................................................15
Item 3. Defaults Upon Senior Securities...............................................................................15
Item 4. Submission of Matters to a Vote of Security Holders...........................................................15
Item 5. Other Information.............................................................................................15
Item 6. Exhibits and Reports on Form 8-K...........................................................................15-16
Signatures.............................................................................................................17
</TABLE>
2
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1998 1999
------
--------------------- --------------------
<S> <C> <C>
Cash on hand $ 467 $ 1,007
Interest earning deposits 2,372 2,601
Investment securities:
Held to maturity (market value of $1,147
in 1998 and $1,029 in 1999) 1,158 1,104
Available for sale (amortized cost of $2,325
in 1998 and $2,124 in 1999) 2,327 2,111
Loans receivable, net 40,449 40,782
Mortgage-backed securities:
Available for sale (amortized cost of $3,544 in
1998 and $2,764 in 1999) 3,502 2,725
Premises and equipment, net 849 939
Federal Home Loan Bank stock 454 470
Accrued interest receivable 265 263
Prepaid expenses and other assets 23 84
--------------- ---------------
Total assets $ 51,866 $ 52,086
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 40,106 $ 39,815
Advance payments by borrowers for taxes and insurance 188 444
Accrued expenses and other liabilities 221 221
Income taxes payable:
Current - -
Deferred 81 76
---------------- ----------------
Total liabilities 40,596 40,556
--------------- ---------------
Preferred stock ($.10 par value, 1,000,000 shares authorized;
None outstanding) - -
Common stock ($.10 par value, 4,000,000 shares authorized;
767,000 shares issued; 694,150 and 689,417 outstanding
at December 31, 1998 and June 30, 1999, respectively) 77 77
Paid-in capital 7,368 7,376
Retained earnings, substantially restricted 5,732 5,953
Treasury stock at cost (72,850 and 77,583 shares at December
31, 1998 and June 30, 1999, respectively) (1,034) (1,088)
Accumulated other comprehensive income (24) (32)
Unearned compensation:
Employee stock ownership plan (491) (455)
Restricted stock plan (358) (301)
--------------- ---------------
Total stockholders' equity 11,270 11,530
--------------- ---------------
Total liabilities and stockholders' equity $ 51,866 $ 52,086
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 843 $ 823 $ 1,677 $ 1,643
Mortgage-backed securities 63 38 132 81
Investments 45 54 76 109
Interest earning deposits 43 39 96 76
---------- ---------- ---------- ----------
Total interest income 994 954 1,981 1,909
---------- ---------- ---------- ----------
Interest expense:
Deposits 487 452 968 918
---------- ---------- ---------- ----------
Total interest expense 487 452 968 918
---------- ---------- ---------- ----------
Net interest income 507 502 1,013 991
Provision for loan losses 7 9 15 18
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 500 493 998 973
Non-interest income:
Loan fees and service charges 38 43 75 85
Other 2 2 5 5
---------- ---------- ---------- ----------
Total non-interest income 40 45 80 90
---------- ---------- ---------- ----------
Non-interest expenses:
Compensation 249 157 366 297
Employee benefits 34 31 66 63
Net occupancy expense 20 21 39 44
Deposit insurance premiums 6 6 12 12
Data processing 22 21 42 46
Other 79 73 169 144
---------- ---------- ---------- ----------
Total non-interest expenses 410 309 694 606
---------- ---------- ---------- ----------
Income before income taxes 130 229 384 457
Income tax expense 49 86 143 172
---------- ---------- ---------- ----------
Net income $ 81 $ 143 $ 241 $ 285
========== ========== ========== ==========
Earnings per share
Basic $ .11 $ .22 $ .34 $ .44
Diluted $ .11 $ .22 $ .34 $ .44
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
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, 1997 77 7,336 5,373 - (53) (552) - 12,181
Comprehensive income:
Net income - - 497 - - - - 497
Other Comprehensive income
- - - - 29 - - 29
Common stock purchased for RSP (30,680 shares) - - - - - - (524) (524)
Cash dividends declared ($.20 share) - - (138) - - - - (138)
Treasury stock purchased (72,850 shares) - - - (1,034) - - - (1,034)
Compensation earned - 32 - - - 61 166 259
------ ------ ------ ------ --------- ------- ------- ------
Balance at December 31, 1998 77 7,368 5,732 (1,034) (24) (491) (358) 11,270
Comprehensive income:
Net income - - 285 - - - - 285
Other Comprehensive income - - - - (8) - - (8)
Cash dividends declared ($.10 share) - - (64) - - - - (64)
Treasury stock purchased (4,733 shares) - - - (54) - - - (54)
Compensation earned - 8 - - - 36 57 101
------ ------ ------ ------ --------- ------- ------- ------
Balance at June 30, 1999 $ 77 $ 7,376 $ 5,953 $(1,088) $ (32) $ (455) $ (301) $11,530
====== ====== ====== ====== ========= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1998 1999
---- ----
<S> <C> <C>
Operating activities:
Net income $ 241 $ 285
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation 27 33
Provision for loan losses 15 18
Increase (decrease) in reserve for uncollected interest 9 (1)
Deferred income taxes (benefit) (30) -
Net increase (decrease) in deferred loan fees 5 (35)
Accretion of discounts on investment securities, net (11) (13)
Amortization of premiums on mortgage-backed securities 7 5
Amortization of unearned compensation 50 101
Repurchase of shares - RSP (117) -
FHLB stock dividends (16) (16)
(Increase) decrease in other assets (30) (61)
(Increase) decrease in accrued interest receivable 20 2
Increase (decrease) in accrued expenses and other liabilities 31 -
Increase (decrease) in current income taxes (164) -
------------ ------------
Net cash provided (used) by operating activities 37 318
------------ ------------
Investing activities:
Purchase of investment securities held to maturity (710) -
Maturities of investment securities held to maturity 21 66
Purchase of investment securities available for sale (2,150) (1,298)
Maturities of investment securities available for sale 900 1,500
Principal payments on mortgage-backed securities
available for sale 663 775
Net (increase) decrease in loans 286 (316)
Purchase of premises and equipment (159) (123)
------------ ------------
Net cash provided (used) by investing activities (1,149) 604
------------ ------------
Financing activities:
Net increase (decrease) in deposits (314) (291)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 253 256
Treasury stock purchased - (54)
Payment of cash dividend (72) (64)
------------ ------------
Net cash provided (used) by financing activities (133) (153)
------------ ------------
Increase (decrease) in cash and cash equivalents (1,245) 769
Cash and cash equivalents at beginning of period 4,592 2,839
------------ ------------
Cash and cash equivalents at end of period $ 3,347 $ 3,608
============ ============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 972 $ 916
Income taxes 326 206
============ ============
Noncash transactions:
Unrealized gains (losses) on securities and mortgage-backed
securities available for sale, net of deferred taxes $ 14 $ (8)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
SFB BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Preparation
--------------------
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated balance sheets, consolidated statements of income,
consolidated statements of stockholders' equity, and consolidated
statements of cash flows in conformity with generally accepted accounting
principles. However, all adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. All such adjustments are of a normal
recurring nature. The statements of income for the three and six month
periods ending June 30, 1999 are not necessarily indicative of the results
which may be expected for the entire year or any other interim period.
It is suggested that these consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto for the Company for the year ended December 31, 1998 which are
included in the Form 10-KSB by reference (file no. 0-22587).
2. Earnings Per Share
------------------
Basic earnings per common share ("EPS") for all periods presented is
computed by dividing net income by the weighted average number of common
share outstanding. Diluted earnings per common share is computed by
dividing net income available to common stockholders by the weighted
average number of common shares outstanding and dilutive potential common
shares, which include stock options. Dilutive potential common shares are
calculated using the treasury stock method. Options to purchase 73,630
shares of the Company's common stock were outstanding during the June 1999
quarter, but were not included in the computation of diluted EPS because
their effect would be anti-dilutive.
7
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended,
-------------------------------------------------------
June 30, 1998 June 30, 1999
--------------------------- ---------------------------
Income Shares Income Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $81 $143
BASIC EPS
Income available to common stockholders $81 713 $143 645
Per share amount $.11 $.22
Effect of Dilutive Securities $.00 $.00
DILUTIVE EPS
Income available to common stockholders $81 714 $143 645
Per share amount $.11 $.22
</TABLE>
<TABLE>
<CAPTION>
Six months ended,
-------------------------------------------------------
June 30, 1998 June 30, 1999
--------------------------- ---------------------------
Income Shares Income Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $241 $285
BASIC EPS
Income available to common stockholders $241 713 $285 645
Per share amount $.34 $.44
Effect of Dilutive Securities $.00 $.00
DILUTIVE EPS
Income available to common stockholders $241 713 $285 645
Per share amount $.34 $.44
</TABLE>
3. Asset Quality
-------------
The following table provides information regarding the Bank's nonperforming
loans (i.e., loans which are contractually past due 90 days or more) at
December 31, 1998 and June 30, 1999, respectively. As of the dates
indicated, the Bank had no loans categorized as troubled debt restructuring
within the meaning of SFAS 15.
December 31, June 30,
1998 1999
---- ----
(Dollars in Thousands)
Nonaccrual loans $ 437 $ 385
Repossessed real estate - -
----- -----
Total nonperforming assets $ 437 $ 385
==== ====
Nonperforming loans to net loans 1.08% 0.94%
Nonperforming assets to total assets .84% 0.74%
8
<PAGE>
Item 2.
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 Security Federal Bank as
appropriate.
As discussed herein, on July 29, 1999, the Bank opened its third branch office
in nearby Mountain City, Tennessee.
Comparison of Results of Operations for the Three and Six Months Ending June 30,
1998 and 1999
Net Income. Net income for the three months ending June 30, 1999, increased
$62,000, or 76.5%, from $81,000 in 1998, to $143,000 in 1999. Net income
increased $44,000, or 18.3%, to $285,000 for the six months ending June 30,
1999, from $241,000 in 1998. The increase for the three and six months ending
June 30, 1999, was primarily the result of an decrease in compensation and
employee benefits.
Net Interest Income. Net interest income decreased $5,000, from $507,000 for the
three months ending June 30, 1998, to $502,000 for the three months ending June
30, 1999. Net interest income decreased $22,000, from approximately $1.0 million
for the six months ending June 30, 1998, to $991,000 for the six months ending
June 30, 1999. The decrease in net interest income for the three month period in
1999, primarily reflects a net decrease in average interest-earning assets over
average interest-bearing liabilities of $1.5 million for the three months ending
June 30, 1999, as compared to the same period in 1998. The overall decrease in
net interest income for the six months ending June 30, 1999, primarily reflects
a $1.4 million net decrease in average interest-earning assets over average
interest-bearing liabilities, as compared to the same period in 1998. These
decreases were offset by a 24 basis point increase in the interest rate spread
from 2.82% for three months ending June 30, 1998, to 3.06% for the three months
ending June 30, 1999, and an increase of 15 basis points from 2.83% for six
months ending June 30, 1998, to 2.98% for the six
9
<PAGE>
months ending June 30, 1999. The net interest margin increased 2 basis points to
3.95% for the three months ending June 30, 1999, and decreased 4 basis points to
3.89% for the six months ending June 30, 1999.
Interest Income. Interest income decreased $40,000, from $994,000 for the three
months ending June 30, 1998, to $954,000 for the three months ending June 30,
1999. The decrease was attributable to a decrease in average interest-earning
assets of approximately $722,000, from $51.6 million at June 30, 1998, to $50.9
million at June 30, 1999, and a decrease in the average yield on
interest-earning assets of 20 basis points, from 7.70% for the three months
ending June 30, 1998, to 7.50% for the same period in 1999. Interest income
decreased $72,000, or 3.6%, from approximately $2.0 million for the six months
ending June 30, 1998, to approximately $1.9 million for the six months ending
June 30, 1999. The decrease was attributable to a decrease in average
interest-earning assets of approximately $593,000, from $51.6 million at June
30, 1998, to $51.0 million at June 30, 1999, and a decrease in the average yield
on interest-earning assets of 19 basis points, from 7.68% for the six months
ending June 30, 1998, to 7.49% for the same period in 1999.
Interest on loans decreased $20,000 for the three months ending June 30, 1999,
as compared to the same period in 1998, and $34,000 for the six months ending
June 30, 1999, as compared to the same period in 1998. These decreases primarily
reflect a 23 basis point decrease in the average yield on loans for the three
months ending June 30, 1999, from 8.34% in 1998, and for the six months ending
June 30, 1999, a decrease of 17 basis points from 8.30% in 1998. Interest on
investment securities increased $9,000 for the three months ending June 30,
1999, as compared to the same period in 1998, and $33,000 for the six months
ending June 30, 1999, as compared to the same period in 1998. The increase in
interest on investments for the three months ending June 30, 1999, primarily
reflects an increase of approximately $311,000 in the average investment balance
for 1999, compared to 1998, and a 54 basis point increase in the average yield
on investments from 4.88% in 1998, to 5.42% in 1999. The increase in interest on
investments for the six months ending June 30, 1999, primarily reflects an
increase of approximately $1.1 million in the average investment balance for
1999, compared to 1998, and an increase in the average yield on investments of
26 basis points from 5.03% in 1998, to 5.29% in 1999.
Interest on interest-earning deposits decreased $4,000 for the three months
ending June 30, 1999, as compared to the same period in 1998, and $20,000 for
the six months ending June 30, 1999, as compared to the same period in 1998.
These decreases primarily reflect a decrease in the average yield on
interest-earning deposits for both the three and six months periods in 1999. The
yield on interest-earning deposits declined to 4.28% for the three months ending
June 30,1999, and 4.27% for the six months ending June 30, 1999. Interest on
mortgage-backed securities decreased $25,000 for the three months ending June
30, 1999, as compared to the same period in 1998, and $51,000 for the six months
ending June 30, 1999, as compared to the same period in 1998, as the portfolio
continued to pay down principal and those funds were invested in other earning
assets.
Interest Expense. Interest expense decreased $35,000 from $487,000 for the three
months ending June 30, 1998, to $452,000 for the three months ending June 30,
1999. Interest expense decreased $50,000 from $968,000 for the six months ending
June 30, 1998, to $918,000 for the six months ending June 30, 1999. The decrease
for the three months ending June 30, 1999, was primarily the
10
<PAGE>
result of a 45 basis point decrease in the average cost of funds, offset by an
approximately $746,000 increase in the average balance of deposits for the three
months ending June 30, 1999, compared to 1998. The decrease for the six months
ending June 30, 1999, was primarily the result of a 34 basis point decrease in
the average cost of funds, offset by an approximately $844,000 increase in the
average balance of deposits for the six months ending June 30, 1999, compared to
1998.
Provision for Loan Losses. The provision for loan losses was $7,000 and $9,000
for the three .month period ending June 30, 1998 and 1999, respectively. The
provision for loan losses was $15,000 and $18,000 for the six month period
ending June 30, 1998 and 1999, respectively. The Company's management routinely
performs an analysis to quantify the inherent risk of loss in its portfolio. At
June 30, 1999, the ratio of the allowance for loan loss was at a level deemed
adequate by management to provide for losses in the loan portfolio. The ratio of
allowance for loan loss to non-performing loans at June 30, 1999, was 112%, and
nonperforming assets represented 0.74% of total consolidated assets.
Nonperforming assets were $385,000 at June 30, 1999, compared to $386,000 at
June 30, 1998. Management is not aware of any trends or events inherent to its
loan portfolio that have not been provided for in its loan loss allowance.
However, there can be no assurance that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.
Non-Interest Income. Non-interest income continues to be an additional source of
income for the Company. The income is produced by fees on new loan production
and service fees on other products and services. Total non-interest income
amounted to $45,000 and $90,000 for the three and six months ending June 30,
1999, respectively, and $40,000 and $80,000 for the three and six months ending
June 30, 1998, respectively.
Non-Interest Expense. Non-interest expense decreased $101,000, from $410,000 for
the three months ending June 30, 1998, to $309,000 for 1999. The decrease for
the three month period was primarily the result of decreased compensation
expenses of $92,000. Non-interest expense decreased $88,000, from $694,000 for
the six months ending June 30, 1998, to $606,000 for 1999. The decrease was
primarily the result of decreased compensation expense of $69,000 and $25,000 of
other expenses during the period. The decrease in compensation expense for the
three and six months periods ending June 30, 1999, as compared to 1998, was
primarily attributable to the compensation expense associated with the Bank's
Restricted Stock Plan ("RSP"), which was approved by the Company's shareholders
on June 1, 1998. The RSP vests over a four year period with 20% vesting on the
date of grant and 20% annually thereafter. Accordingly, the Company immediately
expensed 20% of the value of the awards on the grant date and the remaining
value is being amortized to compensation expense on a monthly basis over the
remaining four year vesting term. Compensation expense recognized for the three
and six month pe-riods ending June 30, 1998 for the RSP awards was $114,000.
Compensation expense for the RSP for the three months ended June 30, 1999 was
$31,000 and $65,000 for the six months ending June 30, 1999. The decrease in
other non-interest expense was mainly attributable to management's attempt to
control general operating expenses and those expenses associated with being a
public company. Net occupancy, deposit insurance premiums, and data processing
expenses remained relatively stable during both three and six month periods.
11
<PAGE>
As previously discussed, on July 29, 1999, the Bank opened its third branch
office in nearby Mountain City, Tennessee. The Company expects that non-interest
expense will increase during 1999 due to the costs associated with opening and
maintaining this additional branch office. It is anticipated that ultimately the
new branch will produce sufficient income to cover these additional operating
expense. See "Liquidity and Capital Resources".
Income Taxes. Income tax expense for the three months ending June 30, 1999, was
$86,000, compared to $49,000 for the same period in 1998. Income tax expense for
the six months ending June 30, 1999, was $172,000, compared to $143,000 for the
same period in 1998. The increase for the three and six month periods was
principally the result of higher pre-tax income. The effective tax rate for both
the three and six months in 1997 and 1998 was approximately 38%.
Liquidity and Capital Resources. The Company's primary sources of funds are new
deposits, proceeds from principal and interest payments on loans, and repayments
on mortgage-backed securities. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition. The Company's primary investing activity is loan originations. The
Company maintains liquidity levels adequate to fund loan commitments, investment
opportunities, deposit withdrawals and other financial commitments. Obligations
to fund outstanding loan commitments at June 30, 1999 were approximately
$430,000.
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 June 30, 1999, the Bank had capitalized
approximately $177,000 of the estimated $200,000 of costs associated with
equipping this branch facility. The branch office was opened on July 29, 1999.
At June 30, 1999, management had no knowledge of any trends, events or
uncertainties that will have or are reasonably likely to have material effects
on the liquidity, capital resources or operations of the Company. Furthermore,
at June 30, 1999, management was not aware of any current recommendations by the
regulatory authorities which, if implemented, would have such an effect.
The Bank exceeded all of its capital requirements at June 30, 1999. The Bank had
the following capital ratios at June 30, 1999:
12
<PAGE>
<TABLE>
<CAPTION>
For Capital Categorized as
Actual Adequacy Purposes "Well Capitalized"(1)
------------------------ ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital
(To risk weighted assets) $ 9,350 31.1% $ 2,406 8.0% $ 3,007 10.0%
Tier I Capital
(To risk weighted assets) $ 9,007 30.0% $ 1,203 4.0% $ 1,804 6.0%
Tier I Capital
(To total assets) $ 9,007 17.8% $ 902 3.0% $ 1,504 5.0%
Tangible Capital
(To total assets) $ 9,007 17.8% $ 451 1.50% $ 1,504 5.0%
</TABLE>
(1) As categorized under the Prompt Corrective Action Provisions.
Year 2000 Compliance. A great deal of information has been disseminated about
the Year 2000 as it relates to computer systems. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the Year 2000 as the
Year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the Bank's operations. Data
processing is also essential to most other financial institutions and many other
companies. Substantially all of the Bank's material data processing that could
be affected by this problem is provided by a third party service bureau. The
service bureau has informed the Bank that it will not be assessing special
charges for the renovation and testing of its hardware and software in
preparation for Year 2000.
The Bank has formulated a Year 2000 Compliance Plan, a Year 2000 Contingency
Plan and a Year 2000 Testing Plan. The Year 2000 Compliance Plan is structured
in accordance with the Office of Thrift Supervision's Year 2000 Examination
Checklist, Version 2. It addresses the identified phases of: Awareness,
Assessment, Renovation, Validation and Implementation. The purpose of the plan
is to outline the procedures necessary for assuring that the Bank is in
readiness for the century date change. The Company is in the implementation
phase of the plan. The Bank's Year 2000 Contingency Plan is designed to prepare
the institution for returning to operation in the event that systems do not
perform as planned either before or after the century date change. The plan
addresses vital mission critical applications and states both the plans in the
event of noncompliance and dates for when the plan will be put into effect. The
Bank's Year 2000 Testing Plan is designed to outline the methodology to be used
in testing and certifying Year 2000 compliance of the Bank's vital mission
critical systems and applications.
The Company has contacted other material vendors and supplier regarding their
Year 2000 state of readiness. The Company has requested written assurance from
these third party vendors indicating that they expect to be Year 2000 compliant
prior to the Year 2000. Substantially all third party vendors have provided
written assurance. Follow up requests are sent to any vendor not providing
assurance or a replacement vendor is contacted.
13
<PAGE>
The Bank's third party service bureau during October 1998, converted the Bank to
its new state of the art core account processing platform. This new technology
was built with Year 2000 compatible components with each application of the
system renovated to run on the new platform and date fields expanded to a four
digit year. The service bureau during October 1998, conducted Year 2000 proxy
testing on this new platform. The Bank conducted Year 2000 testing during June
1999. The test involved all aspects of the on-line account processing platform
utilizing its new teller operating system (as discussed further below). This
system and other internal systems used by the Company were tested in accordance
with Company's Year 2000 Testing Plan. The results of the test were
satisfactory.
The Bank upgraded its teller operating system during the first quarter of 1999.
The upgrade will further ensure Year 2000 readiness by using Year 2000 certified
software and hardware. The costs incidental to the upgrade totaled $100,000.
Substantially all of such costs associated with the upgrade were capitalized.
These costs should not be material to the Company in any single year.
No assurance can be given that the Year 2000 Compliance Plan will be completed
successfully by the Year 2000, in which event the Company could incur
significant cots. However, if the third party service bureau is unable to
resolve the potential problem in time, the Company would likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the financial statements
of the Company.
The Company's successful and timely completion of the Year 2000 project is based
on estimates derived by management on assumptions of future events, which are
inherently uncertain, including the progress and results of the Company's third
party service provider, testing plans, and all vendors, suppliers and customer
readiness.
14
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time, the Company and its subsidiaries may be a party
to various legal proceedings incident to its or their business. At
June 30, 1999, there were no legal proceedings to which the Company
or any subsidiary was a party, or to which of any of their property
was subject, which were expected by management to result in a
material loss.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Stockholders of the Company ("Meeting") was held
on April 29, 1999. The results of the vote on the matters presented at
the Meeting were as follows:
1. The following individuals were elected as directors, each for a
three-year term:
Vote For Vote Withheld
-------- -------------
Peter W. Hampton 603,029 5,630
Michael L. McKinney 534,059 74,600
2. Ratification of the appointment of Crisp Hughes Evans LLP as the
Company's independent audit firm was approved by stockholders by
the following vote
For 608,434; Against -0-; Abstain 225
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) 3(i) Charter of SFB Bancorp, Inc.*
3(ii) Bylaws of SFB Bancorp, Inc. *
4 Specimen Stock Certificate *
15
<PAGE>
10 Employment Agreement with Peter W. Hampton *
10.1 SFB Bancorp, Inc. 1998 Stock Option Plan * *
10.2 Security Federal Bank Restricted Stock Plan * *
27 Financial Data Schedule ( Electronic filing only)
* Incorporated by reference to the Registration Statement on
Form SB-2, File No. 333-23505.
** Incorporated by reference to the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders, filed with the
SEC on March 31, 1998 (File No. 0-22587)
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 1999 By: /s/Peter W. Hampton
--------------- ---------------------------------------
Peter W. Hampton
(President and Chief Executive Officer)
Date: August 10, 1999 By: /s/Bobby Hyatt
--------------- ---------------------------------------
Bobby Hyatt
(Principal Accounting Officer)
17
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