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, 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 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: $3,997,000
---------
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 15, 2000 was $5.4 million.
As of March 15, 2000, there were issued and outstanding 639,417 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, 1999. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 1999. (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. (the "Company") is a Tennessee corporation organized
in March 1997 at the direction of Security Federal Bank (the "Bank" or "Security
Federal") to acquire all of the capital stock that the Bank issued in its
conversion from the mutual to stock form of ownership (the "Conversion"). On May
29, 1997, the Bank completed the Conversion and became a wholly owned subsidiary
of the Company. The Company is a unitary savings and loan holding company which,
under existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Bank 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.
<PAGE>
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,
-----------------------
1998 1999
---------- ----------
Return on average assets........................ 0.94% 1.06%
Return on average equity........................ 4.24% 4.97%
Average equity to average assets................ 22.24% 21.29%
Dividend payout................................. 27.85% 22.54%
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:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1999
------------------ -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Type of Loans:
Real Estate Loans:
One- to four-family............................. $30,054 72.41 $29,815 66.75
Construction.................................... 1,216 2.93 1,397 3.13
Commercial...................................... 1,566 3.77 1,499 3.36
Multi-family residential........................ 1,011 2.44 2,571 5.76
Land............................................ 3,997 9.63 4,280 9.58
Commercial business loans......................... 573 1.38 420 0.94
Consumer Loans:
Automobile loans................................ 2,294 5.53 3,608 8.08
Share loans..................................... 322 0.78 433 0.97
Other........................................... 470 1.13 640 1.43
------ ------ ------ ------
Total loans.................................. 41,503 100.00 44,663 100.00
====== ======
Less:
Loans in process................................ 619 469
Deferred loan origination fees and costs........ 109 53
Allowance for loan losses....................... 326 352
------- -------
Total loans, net............................. $40,449 $43,789
====== ======
</TABLE>
2
<PAGE>
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.
<TABLE>
<CAPTION>
Due Due after
within 1 through Due after
1 year 5 years 5 years Total
------------ ------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
One- to four-family residential................ $ 42 $ 1,278 $ 28,495 $ 29,815
Construction................................... - 36 1,361 1,397
Commercial real estate......................... - 760 739 1,499
Multi-family residential....................... - 191 2,380 2,571
Land........................................... 1,036 2,221 1,023 4,280
Commercial business loans...................... 358 50 12 420
Consumer....................................... 1,728 2,833 120 4,681
------------ ------------ ----------- -----------
Total Amount Due.......................... $ 3,164 $ 7,369 $ 34,130 $ 44,663
============ ============ =========== ===========
</TABLE>
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.
<TABLE>
<CAPTION>
Floating or
Adjustable
Fixed Rates Rates Total
------------- ----------- -------------
(In Thousands)
<S> <C> <C> <C>
One- to four-family residential.......... $ 29,751 $ 823 $ 30,574
Construction............................. 561 - 561
Commercial real estate................... 1,534 - 1,534
Multi-family residential................. 2,472 99 2,571
Land..................................... 2,638 606 3,244
Commercial business loans and
consumer............................... 3,001 14 3,015
------------- ----------- -------------
Total................................ $ 39,957 $ 1,542 $ 41,499
============= =========== =============
</TABLE>
One- to Four-Family Residential Loans. Security Federal's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans secured by property in the Bank's primary market area. The Bank
generally originates one- to four-family residential mortgage loans in amounts
up to 97% of the lesser of the appraised value or purchase price, with private
mortgage insurance required on loans with a loan-to-value ratio in excess of
85%. The maximum loan-to-value ratio on mortgage loans secured by nonowner
occupied properties 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
3
<PAGE>
rate adjustments upward or downward of up to 2% per adjustment. The interest
rate may not increase more than 5% over the life of the loan and may not
decrease below the initial interest rate. Adjustable rate mortgage loans
typically reprice every one, three or five years and provide for terms of up to
30 years.
Adjustable rate mortgage loans decrease the risk associated with
changes in interest rates by periodically repricing, but involve other risks
because as interest rates increase, the underlying payments by the borrower
increase, thus increasing the potential for default by the borrower. At the same
time, the marketability of the underlying collateral may be adversely affected
by higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the maximum periodic and lifetime interest rate adjustment
permitted by the loan documents, and, therefore is potentially limited in
effectiveness during periods of rapidly rising interest rates.
Mortgage loans originated and held by the Bank generally include a
due-on-sale clause, which gives the Bank the right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
securing the mortgage loan without the Bank's consent.
Residential Construction Loans. Security Federal offers residential
construction loans on one- to four-family residential property to the
individuals who will be the owners and occupants upon completion of
construction. These loans are made on a long-term basis and are classified as
construction/permanent loans. Usually no principal payments are required during
the first six to eight 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.
4
<PAGE>
Commercial Business Loans. Security Federal offers commercial business
loans to benefit from the higher fees and interest rates and the shorter term to
maturity. Commercial business loans consist of equipment, lines of credit and
other business purpose loans, which generally are secured by either the
underlying properties or by the personal guarantees of the borrower.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
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, 1999, commitments to
cover originations of mortgage loans and undisbursed funds for loans-in-process
were approximately $622,000 and $469,0000 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.
5
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential............................................... $ 409 $ 168
Construction.................................................................. - -
Commercial.................................................................... - -
Multi-family residential...................................................... - -
Land.......................................................................... 18 18
Commercial business and consumers............................................... 10 31
----- -----
Total nonaccrual loans...................................................... 437 217
Accruing loans which are contractually past due 90 days or more................. - -
----- -----
Total nonperforming loans................................................... 437 217
Real estate owned............................................................... - -
----- -----
Total nonperforming assets...................................................... $ 437 $ 217
===== =====
Nonaccrual and 90 days past due as a percentage of net loans.................... 1.08% 0.50%
Nonaccrual and 90 days past due as a percentage of total assets................. 0.84% 0.41%
Total nonperforming assets as a percentage of total assets...................... 0.84% 0.41%
</TABLE>
At December 31, 1999, 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.
6
<PAGE>
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loan
loss allowances. A portion of the general loan loss allowance established to
cover possible losses related to assets classified as substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
In accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at December 31, 1999, the Bank had
classified approximately $342,000 of assets as substandard, and $24,000 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, 1999,
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.
7
<PAGE>
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,
--------------------
1998 1999
------- --------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding............................................... $41,503 $44,663
====== ======
Average loans outstanding............................................. $40,608 $41,566
====== ======
Allowance at beginning of period...................................... $301 $326
Provision............................................................. 31 36
Recoveries............................................................ - -
Charge-offs........................................................... (6) (10)
---- ----
Allowance at end of period............................................ $326 $352
==== ====
Allowance for loan losses as a percent of total loans outstanding..... 0.79% 0.79%
Net loans charged off as percent of average loans outstanding......... 0.01% 0.02%
Ratio of allowance to nonperforming loans............................. 74.60% 162.21%
</TABLE>
8
<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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1998 1999
---------------------------- -----------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
---------- ----------------- ----------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential............ $147 72.41% $139 66.75%
Construction............................... 27 2.93 30 3.13
Commercial................................. 43 3.77 45 3.36
Multi-family residential................... 22 2.44 36 5.76
Land....................................... 33 9.63 35 9.58
Commercial business and consumer............. 54 8.82 67 11.42
---- ------ ---- ------
Total allowance for loan losses......... $326 100.00% $352 100.00%
==== ====== ==== ======
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, 1999, 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.
9
<PAGE>
The Bank's investment securities available for sale and investment
securities held to maturity portfolios at December 31, 1999 did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's equity, excluding those issued by the United States Government or its
agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages, the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include Federal Home Loan Mortgage
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, 1999, the
approximate fair value of the Bank's securities available for sale was
$3,288,000 resulting in a net unrealized loss of $37,000.
At December 31,
------------------------
1998 1999
----------- ----------
(Dollars in Thousands)
<S> <C> <C>
U.S. government and agency securities available for sale...... $ 2,327 $ 2,091
U.S. government securities.................................... 440 464
Political subdivision notes................................... 718 553
Mortgage-backed securities available for sale................. 3,502 2,183
FHLB Stock.................................................... 454 487
----------- ----------
Total....................................................... $ 7,441 $ 5,778
=========== ==========
</TABLE>
10
<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, 1999. The following table does
not take into consideration the effects of scheduled repayments or the effects
of possible prepayments.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------------------------------------
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... $ 495 5.22% $ 1,596 5.43% $ - -% $ - -% $2,091 5.38% $2,091
U.S. government
Securities............. - - - - - - 463 5.91 464 5.91 358
Political subdivision
Notes.................. - - 553 4.56 - - - - 553 4.56 553
Mortgage-backed
Securities available
For sale:
GNMA................. - - - - - - 413 6.25 413 6.25 413
FHLMC................ - - 1 7.00 - - 42 6.33 43 6.34 43
FHLMC Remic.......... - - - - 198 5.45 38 5.75 236 5.50 236
FNMA................. - - 2 11.00 - - 395 6.14 397 6.16 397
FNMA Remic........... - - - - 493 5.51 601 5.52 1,094 5.51 1,094
FHLB stock (1)......... - - - - - - 487 6.76 487 6.76 487
-------- ------- ------ ------ ------ ------
Total................ $ 495 5.22% $ 2,152 5.21% $ 691 5.49% $2,439 6.08% $5,778 5.61% $5,672
======= ==== ======= ==== ====== ==== ====== ===== ====== ==== ======
</TABLE>
- -----------------------
(1) Recorded at cost.
11
<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, 1999, 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, 1999.
Maturity Period Time Deposits
--------------- -------------
(Dollars in Thousands)
Within three months......................... $2,268
More than three through six months.......... 1,419
More than six through nine months........... 1,427
Over nine months............................ 3,516
-----
Total.............................. $8,630
=====
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, 1999, the Bank had 19 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
Recent Regulation. On November 12, 1999, President Clinton signed into
law the Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000,
permit qualifying bank holding companies to become financial holding companies
and thereby affiliate with securities firms and insurance companies and engage
in other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank.
12
<PAGE>
The Act also prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or from affiliating with a nonfinancial
entity. As a grandfathered unitary thrift holding company, the Company will
retain its authority to engage in nonfinancial activities. However, the
Gramm-Leach-Bliley Act will have few direct effects on the operations or powers
of federal savings associations or of savings and loan holding companies.
The Gramm-Leach-Bliley Act imposes significant new financial privacy
obligations and reporting requirements on all financial institutions, including
federal savings associations. Specifically, the statute, among other things,
will require financial institutions (a) to establish privacy policies and
disclose them to customers both at the commencement of a customer relationship
and on an annual basis and (b) to permit customers to opt out of a financial
institution's disclosure of financial information to nonaffiliated third
parties. The Gramm-Leach-Bliley Act requires the federal financial regulators to
promulgate regulations implementing these provisions within six months of
enactment, and the statute's privacy requirements will take effect one year
after enactment.
Regulation of the Company
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.
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. The Act terminated the "unitary thrift holding
company exemption" for all companies that applied to acquire savings
associations after May 4, 1999. Since the Company is grandfathered under this
provision of the Act, its unitary holding company powers and authorities were
not affected. However, if the Company were to acquire control of an additional
savings association, its business activities would be subject to restriction
under the Home Owners' Loan Act. Furthermore, if the Company were in the future
to sell control of the Bank to any other company, such company would not succeed
to the Company's grandfathered status under the Act and would be subject to the
same business activity restrictions. See "- Regulation of the Bank - Qualified
Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. 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.
13
<PAGE>
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.
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
The Bank is required to pay insurance premiums based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the SAIF. The
FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. The FDIC has set the deposit
insurance assessment rates for SAIF-member institutions for the first six months
of 2000 at 0% to .027% of insured deposits on an annualized basis, with the
assessment rate for most savings institutions set at 0%.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payments on bonds issued by the Financing Corporation
("FICO"), an agency of the Federal government established to recapitalize the
predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statute, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real
14
<PAGE>
property, educational loans and investments in premises of the institution or
(ii) satisfy the statutory QTL test set forth in the Home Owner's Loan Act by
maintaining at least 65% of its "portfolio assets" in certain"Qualified Thrift
Investments" (defined to include residential mortgages and related equity
investments, certain mortgage-related securities, small business loans, student
loans and credit card loans, and 50% of certain community development loans).
For purposes of the statutory QTL test, portfolio assets are defined as total
assets minus intangible assets, property used by the institution in conducting
its business, and liquid assets equal to 10% of total assets. A savings
institution must maintain its status as a QTL on a monthly basis in at least
nine out of every 12 months. A failure to qualify as a QTL results in a number
of sanctions, including the imposition of certain operating restrictions and a
restriction on obtaining additional advances from its FHLB. At December 31,
1999, the Bank was in compliance with its QTL requirement, with 73.54% of its
assets invested in Qualified Thrift Investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1999, the Bank's required
liquid asset ratio was 4.00%, and its actual ratio was 9.53%.
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, 1999, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Description of Property
- -------------------------------
Year Leased
Location Leased or Owned or Acquired
- -------- --------------- -----------
MAIN OFFICE:
632 East Elk Avenue Owned 1980
Elizabethton, Tennessee
BRANCH OFFICES:
510 Wallace Avenue Owned 1989
Elizabethton, Tennessee
588 South Shady Street Owned 1998
Mountain City, Tennessee
15
<PAGE>
The Bank also 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.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank
(collectively, the "Company") are periodically involved, such as claims to
enforce liens, condemnation proceedings on properties in which the Company holds
security interests, claims involving the making and servicing of real property
loans, and other issues incident to the Company'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, 1999 (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.
16
<PAGE>
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 - Election of
Directors" and " - Biographical Information" in the "Proxy Statement" is
incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
(b) Security Ownership of Management
The information required by items (a) and (b) is incorporated
herein by reference to the Proxy Statement contained under the
sections captioned "Principal Holders" and "Proposal I -
Election of Directors."
(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.
17
<PAGE>
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, 1999 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, 1999, 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 1999 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See "Item 1- Description
of Business)
23 Consent of Crisp Hughes Evans LLP
27 Financial Data Schedule (electronic filing only)
(b) Not applicable.
- --------------------
* Incorporated by reference to the registration statement on Form SB-2 (File
No. 333-23505) declared effective by the SEC on April 14, 1997.
** 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.
18
<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 24, 2000.
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 24, 2000.
/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, Treasurer and Director Director
/s/Michael L. McKinney
- ----------------------------------------- -------------------------------
Julian T. Caudill, Jr. Michael L. McKinney
Vice President and Director Director
/s/Bobby Hyatt
- -----------------------------------------
Bobby Hyatt
Principal Accounting Officer
EXHIBIT 13
<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, 1999. 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
- ----------------------------------------- -------- ------- --------
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
January 1, 1999 - March 31, 1999 $ 12.25 $ 10.50 $ -
April 1, 1999 - June 30, 1999 $ 12.00 $ 10.88 $ 0.10
July 1, 1999 - September 30, 1999 $ 12.13 $ 11.75 $ -
October 1, 1999 - December 31, 1999 $ 12.08 $ 11.00 $ 0.10
The number of shareholders of record as of March 15, 2000, was
approximately 161. This does not reflect the number of persons or entities who
held stock in "street" name through various brokerage firms. At March 15, 2000,
there were 639,417 shares outstanding.
<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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates" "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risk associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions. The Company undertakes no obligation to publicly release the results
of any revisions to those forward looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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, 1999. To manage the
interest rate risk of this type of loan portfolio, the Bank generally 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, 1999, 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.
<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 3% (100 to 300 basis points) increases and
decreases in market interest rates. Based upon OTS assumptions, the following
table presents the Bank's NPV at December 31, 1999.
Changes in Rates NPV Ratio %(1) Change(2)
----------------- -------------- ---------
+300 bp 13.86 -466 bp
+200 bp 15.51 -301 bp
+100 bp 17.10 -142 bp
0 bp 18.53 0 bp
-100 bp 19.58 +106 bp
-200 bp 20.30 +177 bp
-300 bp 20.94 +241 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.
<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,
---------------------------------- --------------------------------
1998 1999
---------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ----------- ---------- ----------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)...................... $40,608 $3,409 8.39% $41,566 $3,348 8.05%
Investment securities ................... 2,971 154 5.18 3,341 176 5.27
Interest-earning deposits................ 3,053 158 5.18 2,321 109 4.70
Federal Home Loan Bank stock............. 437 31 7.14 469 33 7.04
Mortgage-backed securities............... 4,287 237 5.53 2,707 147 4.43
------ ----- ------ -----
Total interest-earning assets.............. 51,356 3,989 7.77 50,404 3,813 7.56
----- -----
Non-interest-earning assets................ 1,549 2,450
------ ------
Total assets $52,905 $52,854
====== ======
Interest-bearing liabilities:
Interest-bearing demand deposits......... $9,667 249 2.58 $10,010 248 2.48
Certificates of deposit.................. 30,427 1,710 5.62 30,475 1,570 5.15
Short-term borrowings.................... - - - - - -
------- ------ ------- -----
Total interest-bearing liabilities......... 40,094 1,959 4.89 40,485 1,818 4.49
------ ----- ------ -----
Non-interest-bearing liabilities........... 1,046 1,119
------ ------
Total liabilities.......................... 41,140 41,604
------ ------
Total stockholders' equity................. 11,765 11,250
------ ------
Total liabilities and stockholders' equity. $ 52,905 $ 52,854
====== ======
Net interest income........................ $2,030 $1,995
===== =====
Interest rate spread (2)................... 2.88% 3.07%
Net yield on interest-earning assets(3).... 3.95% 3.96%
Ratio of average interest-earning assets to
average interest-bearing liabilities..... 128.09% 124.50%
</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.
<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,
------------------------------ ----------------------------------------
1998 vs. 1997 1999 vs. 1998
------------------------------ ----------------------------------------
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 ............................... $ 160 $ (8) $ 4 $ 156 $ 80 $(138) $ (3) $ (61)
Mortgage-backed securities ..................... 105 (14) (18) 73 (87) (4) 1 (90)
Investment securities .......................... (64) (14) 3 (75) 19 3 -- 22
Other interest-earning assets .................. (18) 4 (1) (15) (38) (11) 2 (47)
----- ----- ----- ----- ----- ----- ----- -----
Total interest income ......................... $ 183 $ (32) $ (12) $ 139 $ (26) $(150) $ -- $(176)
===== ===== ===== ===== ===== ===== ===== =====
Interest expense:
Savings accounts ............................... $ (49) $ 16 $ 8 $ (25) $ 19 $(160) $ -- $(141)
Other liabilities .............................. (3) -- -- (3) -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total interest expense ....................... $ (52) $ 16 $ 8 $ (28) $ 19 $(160) $ -- $(141)
===== ===== ===== ===== ===== ===== ===== =====
Net change in interest income ................... $ 235 $ (48) $ (20) $ 167 $ (45) $ 10 $ -- $ (35)
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Comparison of Financial Condition
The Company's total consolidated assets increased by approximately $1.3 million,
or 2.5% from $51.9 million at December 31, 1998, to $53.2 million at December
31, 1999. The increase in assets for 1999 was primarily due to the $3.3 million
increase in net loans receivable, offset by an approximate $1.7 million decrease
in investment securities and mortgage-backed securities.
Total cash and interest-earning deposits decreased approximately $677,000 to
$2.2 million at December 31, 1999, while investment securities decreased by
approximately $377,000 million to $3.1 million at December 31, 1999. Mortgage
backed securities decreased approximately $1.3 million to $2.2 million at
December 31, 1999, as the portfolio continues to mature.
Stockholders' equity increased $446,000 to approximately $11.7 million at
December 31, 1999 from $11.3 million at December 31, 1998. The increase was
attributable to comprehensive income of $538,000 and the amortization of
$194,000 of unearned compensation, offset by the
<PAGE>
repurchase of approximately $174,000 of the Company's outstanding capital stock
and payment of cash dividends in the amount of $126,000.
Comparison of the Results of Operations for the Years Ended December 31, 1999
and 1998
Net Income. Net income increased $62,000, or 12.6%, in 1999 as compared to 1998.
The increase was primarily the result of a $65,000 decrease in non-interest
expenses, and a $16,000 increase in other non-interest income, offset by a
$35,000 decrease in net interest income. Basic income per share increased $.16,
from $.71 for the year ended December 31, 1998, to $.87 for the year ended
December 31, 1999.
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 decreased $35,000, or 1.7%. The decrease was primarily due
to a decline in average interest-earning assets and an increase in average
interest-bearing liabilities. Average interest-earning assets decreased to
approximately $50.4 million in 1999, from $51.4 million in 1998, while average
interest-bearing liabilities increased approximately $391,000. The decline in
average-interest earning assets was offset by a 19 basis points increase in the
interest rate spread. The Company's interest rate spread increased to 3.07% in
1999, from 2.88% in 1998. The net interest margin increased 1 basis point to
3.96% in 1999.
The 19 basis point increase in the interest rate spread in 1999, compared to
1998, was primarily due to a 40 basis point decrease in the average cost of
interest-bearing liabilities from 4.89% in 1998 to 4.49% in 1999, offset by a 21
basis point decrease in the yield on average interest-earning assets from 7.77%
in 1998 to 7.56% in 1999.
Interest income. Interest income decreased $176,000, or 4.4%, from approximately
$4.0 million in 1998, to approximately $3.8 million for 1999. This overall
decrease in interest income was primarily the result of a decrease in average
interest-earning assets of approximately $1.0 million for 1999, as compared to
1998. Interest income on loans decreased by $61,000, as the yield on average
loans outstanding decreased 34 basis points. For 1999, the average yield on
loans receivable was 8.05%, compared to 8.39% for 1998. Loans receivable are the
largest interest-earning asset held in the Company's portfolio.
Interest income on investment securities increased by $24,000, as the average
balance invested increased by approximately $370,000 in 1999. Interest income on
interest-earning deposits and mortgage-backed securities decreased by $139,000.
The decrease was primarily due to funds invested in these interest-earning
assets being used to fund the Bank's Year 2000 Cash Contingency Plan, stock
repurchases and cash dividend payments.
<PAGE>
Interest Expense. Interest expense decreased approximately $141,000 from
approximately $2.0 million for the year ended December 31, 1998, to
approximately $1.8 million for the year ended December 31, 1999. The decrease
for 1999 was the result of a 40 basis point decrease in the average cost of
funds, partially offset by an approximate $391,000 increase in average
interest-bearing liabilities. The Bank reflected a decrease in both the average
cost of funds for interest-bearing demand deposits and certificates of deposits
of 10 basis points and 47 basis points, respectively. The decrease in the
average costs of funds for both interest-bearing demand deposits and certificate
of deposits for 1999, as compared to 1998, was principally due to an overall
reduction in deposit rates within the Bank's primary market area.
Provision for Loan Losses. The provision for loan losses was $31,000 for year
ended December 31, 1998 and $36,000 for the year ended December 31, 1999.
Nonperforming assets were $217,000 at December 31, 1999, compared to $437,000 at
December 31, 1998. The ratio of the allowance for loan losses to non-performing
loans at December 31, 1999 was approximately 162.21%, compared to 74.60% at
December 31, 1998. The allowance for loan losses as a percent of total loans
outstanding was .79% at December 31, 1999 and 1998, 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, 1999, 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 decreased $65,000. The decrease was
primarily the result of decreased compensation expense of $47,000 and $62,000 of
other expenses, offset by a $20,000 increase in net occupancy expenses and
$21,000 data processing expenses during the period. The decrease in compensation
expense for the year ended December 31, 1999, 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 twelve months in
1998 for the RSP awards was approximately $177,000, compared to $136,000 for the
twelve months in 1999. The decrease in other non-interest expense was mainly
attributable to management's attempt to control general operating expenses and
those expenses associated with being a public company. The increase in net
occupancy expense was mainly attributable to expenses associated with the Bank's
recently opened branch office in Mountain City, Tennessee. The increase in data
processing was mainly attributable to expenses associated with ATM service and
year 2000 costs. Employee benefits and deposit insurance premiums remained
relatively stable for 1999, as compared to 1998.
<PAGE>
Income Taxes. Income tax expense decreased $21,000, or 6.120%, to $324,000 for
the year ended December 31, 1999, from $345,000 for the year ended December 31,
1998. The effective tax rate for 1999 and 1998 was approximately 36.7% and
40.9%, respectively.
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, 1999
totaled $648,000, as compared to $187,000 for the year ended December 31, 1998.
The increase was primarily the result of the $524,000 purchase of restricted
stock plan shares 1998, compared to none in 1999.
Net cash used by investing activities for the year ended December 31, 1999
totaled approximately $1.9 million, an increase of approximately $1.6 million,
as compared to 1998. The increase was primarily attributable to a increase in
loans funded of approximately $3.3 million, purchases of investment securities
of approximately $1.8 million, offset by proceeds from maturities, sales, and
repayments of investment and mortgage-backed securities in 1999 of approximately
$3.4 million.
Net cash provided by financing activities for 1999 totaled approximately
$561,000. This was primarily the result of an increase in deposits in 1999 of
$329,000, proceeds of Federal Home Loan Bank advances of $500,000, offset by
approximately $174,000 of common stock repurchases and $126,000 in cash
dividends paid.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on the Bank's
commitments to make loans and management's assessment of the Bank's ability to
generate funds.
At December 31, 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. Further at
December 31, 1999, management was not aware of any current recommendations by
the regulatory authorities which, if implemented, would have such an effect.
Year 2000 Compliance. Like many financial institutions, we rely on computers to
conduct our business and information systems processing. Industry experts were
concerned that on January 1, 2000, some computers might not be able to interpret
the new year properly, causing
<PAGE>
computer malfunctions. Some banking industry experts remain concerned that some
computers may not be able to interpret additional dates in the year 2000
properly. We have operated and evaluated our computer operating systems
following January 1, 2000 and have not identified any errors or experienced any
computer system malfunctions. We will continue to monitor our information
systems to assess whether our systems are at risk of misinterpreting any future
dates and will develop, if needed, appropriate contingency plans to prevent any
potential system malfunction or correct any system failures. We have not been
informed of any such problem experienced by our vendors or our customers.
However, it is too early to conclude that there will not be any problems arising
from the Year 2000 issue, particularly with some of our vendors or customers. We
will continue to monitor our significant vendors of goods and services and
customers with respect to any Year 2000 problems they may encounter, as those
issues may effect our ability to continue operations, or might adversely affect
the our financial position, results of operations and cash flows. At this time,
we do not believe that these potential problems will materially impact the
ability to continue our operations. However, no assurance can be given that this
will be the case.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
Assets 1998 1999
------ ---- ----
<S> <C> <C>
Cash on hand $ 467 $ 1,424
Interest earning deposits 2,372 738
Investment securities:
Held to maturity (market value of $1,147 in 1998 and $911 in 1999) 1,158 1,017
Available for sale 2,327 2,091
Loans receivable, net 40,449 43,789
Mortgage-backed securities:
Available for sale 3,502 2,183
Premises and equipment, net 849 1,011
Federal Home Loan Bank stock, at cost 454 487
Accrued interest receivable 265 280
Other assets 23 109
--------------- ---------------
Total assets $ 51,866 $ 53,129
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Non-interest-bearing $ 705 $ 606
Interest-bearing 39,401 39,829
--------------- ---------------
40,106 40,435
Federal Home Loan Bank advances - 500
Advance payments by borrowers for taxes and insurance 188 220
Accrued expenses and other liabilities 221 157
Deferred income taxes 81 101
--------------- ---------------
Total liabilities 40,596 41,413
--------------- ---------------
Stockholders' equity:
Preferred stock ($.10 par value, 1,000,000 shares authorized;
none outstanding) - -
Common stock ($.10 par value, 4,000,000 shares authorized;
767,000 shares issued; 694,150 and 679,417 outstanding at 77 77
December 31, 1998 and 1999, respectively)
Paid-in capital 7,368 7,382
Retained income, substantially restricted 5,732 6,165
Treasury stock at cost (72,850 and 87,583 shares at December 31,
1998 and 1999, respectively) (1,034) (1,208)
Accumulated other comprehensive income (24) (45)
Unearned compensation:
Employee stock ownership plan (491) (419)
Restricted stock plan (358) (236)
--------------- ---------------
Total stockholders' equity 11,270 11,716
--------------- ---------------
Total liabilities and stockholders' equity $ 51,866 $ 53,129
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1999
---- ----
<S> <C> <C>
Interest income:
Loans $ 3,409 $ 3,348
Mortgage-backed securities 237 147
Investments 185 209
Interest earning deposits 158 109
--------------- ---------------
Total interest income 3,989 3,813
--------------- ---------------
Interest expense:
Deposits 1,959 1,818
--------------- ---------------
Net interest income 2,030 1,995
Provision for loan losses 31 36
--------------- ---------------
Net interest income after provision
for loan losses 1,999 1,959
--------------- ---------------
Non-interest income:
Loan fees and service charges 157 173
Other 11 11
--------------- ---------------
Total non-interest income 168 184
--------------- ---------------
Non-interest expenses:
Compensation 677 630
Employee benefits 125 128
Net occupancy expense 82 102
Deposit insurance premiums 24 24
Data processing 83 104
Other 334 272
--------------- ---------------
Total non-interest expenses 1,325 1,260
--------------- ---------------
Income before income taxes 842 883
Income tax expense 345 324
--------------- ---------------
Net income $ 497 $ 559
================ ================
Net income per common share:
Basic $ .71 $ .87
Diluted .71 .87
=============== ===============
Weighted-average shares:
Basic 699 642
Diluted 699 642
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1999
----- -----
<S> <C> <C>
Net income $ 497 $ 559
Other comprehensive income:
Net unrealized gains (losses) on securities available for
sale, net of tax expense (benefit) of $19 and $(14),
respectively 29 (21)
----- -----
Comprehensive income $ 526 $ 538
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Other Unearned 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) $ - $12,181
Net income - - 497 - - - - 497
Unrealized gain on securities
available for sale,
net of income tax expense - - - - 29 - - 29
Common stock purchased
for RSP (30,680 shares) - - - - - - (524) (524)
Cash dividends declared ($.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
Net income - - 559 - - - - 559
Unrealized loss on securities
available for sale,
net of income tax benefit - - - - (21) - - (21)
Cash dividends declared ($.20 share) - - (126) - - - - (126)
Treasury stock purchased
(14,733 shares) - - - (174) - - - (174)
Compensation earned - 14 - - - 72 122 208
----- ------ ------- ------ --------- ------- ------ ------
Balance at December 31, 1999 $ 77 $ 7,382 $ 6,165 $(1,208) $ (45) $ (419) $ (236) $11,716
===== ====== ======= ====== ========= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1999
------- -------
<S> <C> <C>
Operating activities:
Net income $ 497 $ 559
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 56 79
Provision for loan losses 31 36
Deferred income taxes -- 34
Net decrease in deferred loan fees (9) (55)
Accretion of discounts on investment securities, net (23) (24)
Amortization of premiums on mortgage-backed securities 14 9
Amortization of unearned compensation 259 208
Purchase of RSP shares (524) --
FHLB stock dividends (31) (33)
Net change in operating assets and liabilities:
Other assets 5 (30)
Accrued interest receivable 51 (15)
Accrued expenses and other liabilities 25 (64)
Income taxes--current (164) (56)
------- -------
Net cash provided by operating activities 187 648
------- -------
Investing activities:
Purchase of investment securities held to maturity (710) --
Maturities of investment securities held to maturity 151 165
Purchase of investment securities available for sale (2,875) (1,799)
Maturities of investment securities available for sale 1,700 2,000
Principal payments on mortgage-backed securities
available for sale 1,559 1,310
Net (increase) decrease in loans 177 (3,321)
Purchase of premises and equipment (278) (241)
------- -------
Net cash used by investing activities (276) (1,886)
------- -------
</TABLE>
(continued)
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1999
------- -------
<S> <C> <C>
Financing activities:
Net increase (decrease) in deposits $ (481) $ 329
Increase (decrease) in advance payments by borrowers
for taxes and insurance (11) 32
Proceeds from FHLB advances -- 500
Treasury stock purchased (1,034) (174)
Dividends paid (138) (126)
------- -------
Net cash provided (used) by financing activities (1,664) 561
------- -------
Decrease in cash and cash equivalents (1,753) (677)
Cash and cash equivalents at beginning of year 4,592 2,839
------- -------
Cash and cash equivalents at end of year $ 2,839 $ 2,162
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,946 $ 1,823
Income taxes 517 346
======= =======
Non-cash transactions:
Unrealized gains (losses) on securities and mortgage-backed
securities available for sale, net of deferred taxes $ 29 $ (21)
Non-cash acquisition of premises and equipment 52 --
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SFB BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Tabular amounts in thousands)
1. Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of SFB Bancorp, Inc. (the "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 banking industry. The following summarize the
more significant of these policies and practices.
Nature of Operations - 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 from its offices in northeastern
Tennessee.
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, 1998. 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) display the accumulated balance of other
comprehensive income separately from common stock or retained income in
the equity section of a balance sheet.
The Company has chosen to disclose comprehensive income in a separate
statement.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The only component of other comprehensive income consists of unrealized
holding gains (losses) 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 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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 a
separate federal income tax return.
The Company utilizes the liability method of computing income taxes. 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.
Earnings Per Share - Basic income per share represents income available to
------------------
common shareholders divided by the weighted average number of common shares
outstanding during the period. Unallocated ESOP shares are not considered
as outstanding for purposes of this calculation. Diluted earnings per share
reflects additional common shares that would have been outstanding if
dilutive potential common shares had been issued, as well as any adjustment
to income that would result from the assumed issuance. Potential common
shares that may be issued by the corporation relate solely to outstanding
stock options, and are determined using the treasury stock method. Diluted
income per share includes the effect of dilution for stock options.
For the years ended December 31, 1998 and 1999, 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, there was no dilutive effect for the stock options for the
years ended December 31, 1998 and 1999.
Recent Accounting Pronouncements - In June 1998, the FASB issued Statement
--------------------------------
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective for fiscal years beginning after June 15, 1999. This statement
establishes accounting and reporting standards
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
for derivative instruments and hedging activities, including certain
derivative instruments embedded in other contracts, and requires that an
entity recognize all derivatives as assets or liabilities in the balance
sheet and measure them at fair value. If certain conditions are met, an
entity may elect to designate a derivative as follows: (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment; (b) a hedge of the exposure to variable
cash flows of a forecasted transaction; or (c) a hedge of the foreign
currency exposure of an unrecognized firm commitment, an available-for-sale
security, a foreign currency denominated forecasted transaction, or a net
investment in a foreign operation. The statement generally provides for
matching the timing of the recognition of the gain or loss on derivatives
designated as hedging instruments with the recognition of the changes in
the fair value of the item being hedged. Depending on the type of hedge,
such recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument, changes in
fair value will be recognized in net income in the period of change.
Management is currently evaluating the impact of adopting this statement on
the consolidated financial statements, but does not anticipate that it will
have a material impact.
2. Investment Securities
---------------------
The amortized cost and estimated market values of investment securities
are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities to be held to maturity:
December 31, 1998:
U.S. government security $ 440 $ - $ 11 $ 429
Municipal securities 718 - - $ 718
------------ ------------ ------------ ------------
$ 1,158 $ - $ 11 $ 1,147
============ ============ ============ ============
December 31, 1999:
U.S. government security $ 464 $ - $ 106 $ 358
Municipal securities 553 - - 553
------------ ------------ ------------ ------------
$ 1,017 $ - $ 106 $ 911
============ ============ ============ ============
Securities available for sale:
December 31, 1998:
U.S. government and
agency securities $ 2,325 $ 2 $ - $ 2,327
============ ============ ============ ============
December 31, 1999:
U.S. government and
agency securities $ 2,124 $ - $ 33 $ 2,091
============ ============ ============ ============
</TABLE>
<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:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
-------------------------------- --------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Securities to be held to maturity:
Due after one year through five years $ 718 $ 553 $ 718 $ 553
Due after ten years 440 464 429 358
------------ ------------ ------------ ------------
$ 1,158 $ 1,017 $ 1,147 $ 911
============ ============ ============ ============
Securities available for sale:
Due in one year $ 250 $ 500 $ 250 $ 495
Due after one year through five years 2,075 1,624 2,077 1,596
------------ ------------ ------------ ------------
$ 2,325 $ 2,124 $ 2,327 $ 2,091
============ ============ ============ ============
</TABLE>
The Bank had investment securities with an amortized cost of approximately
$1,265,000 and $1,088,000 pledged against deposits at December 31, 1998
and 1999, respectively.
The Bank had no sales of investment securities to be held to maturity or
available for sale for the years ended December 31, 1998 and 1999.
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1999
---- ----
<S> <C> <C>
Real estate first mortgage loans:
One-to-four-family $ 30,054 $ 29,815
Construction 1,216 1,397
Commercial real estate 1,566 1,499
Multi-family residential 1,011 2,571
Land 3,997 4,280
--------------- ---------------
Total real estate loans 37,844 39,562
--------------- ---------------
Consumer and commercial loans:
Commercial business 573 420
Auto loans 2,294 3,608
Share loans 322 433
Other 470 640
--------------- ---------------
Total consumer and commercial loans 3,659 5,101
--------------- ---------------
Total loans 41,503 44,663
--------------- ---------------
</TABLE>
(continued)
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1999
---- ----
<S> <C> <C>
Less:
Undisbursed portion of loans in process $ 619 $ 469
Net deferred loan fees 109 53
Allowance for loan losses 326 352
--------------- ---------------
1,054 874
--------------- ---------------
$ 40,449 $ 43,789
=============== ===============
</TABLE>
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.
The changes in the allowance for loan losses are summarized as follows:
Years Ended December 31,
------------------------
1998 1999
----- -----
Beginning balance $ 301 $ 326
Provision charged to income 31 36
Charge-offs, net of recoveries (6) (10)
----- -----
Ending balance $ 326 $ 352
===== =====
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Mortgage-Backed Securities
--------------------------
Mortgage-backed securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale:
December 31, 1998:
GNMA $ 525 $ 2 $ 5 $ 522
FHLMC 56 1 -- 57
FHLMC REMIC's 880 -- 5 875
FNMA 519 1 9 511
FNMA REMIC's 1,564 -- 27 1,537
------ ------ ------ ------
$3,544 $ 4 $ 46 $3,502
====== ====== ====== ======
Securities available for sale:
December 31, 1999:
GNMA $ 416 $ 1 $ 4 $ 413
FHLMC 42 -- -- 42
FHLMC REMIC's 239 -- 2 237
FNMA 414 -- 17 397
FNMA REMIC's 1,114 -- 20 1,094
------ ------ ------ ------
$2,225 $ 1 $ 43 $2,183
====== ====== ====== ======
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 $1,148,000 and $339,000 pledged against deposits and
available FHLB advances at December 31, 1998 and 1999, respectively.
There were no sales of mortgage-backed securities for the years ended
December 31, 1998 and 1999.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Premises and Equipment
----------------------
Premises and equipment are summarized as follows:
December 31,
------------
1998 1999
------ ------
Land and improvements $ 237 $ 237
Buildings 875 1,227
Vehicles 17 17
Furniture, fixtures and equipment 650 557
Construction in progress 196 --
------ ------
1,975 2,038
Less accumulated depreciation 1,126 1,027
------ ------
$ 849 $1,011
====== ======
6. Interest Receivable
-------------------
Interest receivable consists of the following:
December 31,
------------
1998 1999
---- ----
Loans receivable $239 $250
Investments 31 42
Mortgage-backed securities 17 13
Interest earning deposits 3 --
---- ----
290 305
Less allowance for uncollectible interest 25 25
---- ----
$265 $280
==== ====
7. Deposits
--------
The Bank had deposit accounts in amounts of $100,000 or more of
approximately $10.1 million at December 31, 1998 and 1999. Contractual
maturities of time deposits are summarized as follows:
December 31,
------------
1998 1999
------- -------
12 months or less $24,925 $26,479
After 1 but within 3 years 5,055 4,339
After 3 years 505 152
------- -------
$30,485 $30,970
======= =======
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Federal Home Loan Bank Advances
-------------------------------
The Bank had no advances from the Federal Home Loan Bank (FHLB)
outstanding at December 31, 1998 and $500,000 in advances from the FHLB
outstanding at December 31, 1999. The advances have an interest rate of
5.90% and mature in January 2000.
The Bank pledges as collateral for these borrowings its FHLB stock,
certain mortgage-backed securities, and its entire loan portfolio of
qualifying mortgages (as defined) under a blanket collateral agreement
with the FHLB.
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,
----------------------------------------------
1998 1999
---------------------- ----------------------
Federal State Total Federal State Total
Current $ 309 $ 36 $ 345 $ 256 $ 34 $ 290
Deferred (20) 20 -- 13 21 34
----- ----- ----- ----- ----- -----
Total $ 289 $ 56 $ 345 $ 269 $ 55 $ 324
===== ===== ===== ===== ===== =====
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,
------------------------
1998 1999
----- -----
Computed income tax expense $ 286 $ 300
Increase (decrease) resulting from:
State income tax, net of federal tax benefit 37 35
Non-taxable income (11) (12)
Non-deductible expenses 37 14
Other (4) (13)
----- -----
Actual income tax expense $ 345 $ 324
===== =====
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The components of net deferred tax liabilities are as follows:
December 31,
-----------------
1998 1999
---- ----
Deferred tax liabilities:
Tax bad debts $ 32 $ 16
Excess tax depreciation 14 21
FHLB stock dividends 54 67
Deferred fees -- 52
Purchased discounts on mortgage-backed securities 9 10
---- ----
109 166
---- ----
Deferred tax assets:
Accrued expenses 6 25
Unrealized losses on securities available for sale 16 30
Other 6 10
---- ----
28 65
---- ----
Net deferred tax liability $ 81 $101
==== ====
The Bank's annual addition to its reserve for bad debts allowed under the
Internal Revenue Code may differ significantly from the bad debt
experience used for financial statement purposes. Such bad debt deductions
for income tax purposes are included in taxable income of later years only
if the bad debt reserves are used for purposes other than to absorb bad
debt losses. Since the Bank does not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes have been
provided on the amount of bad debt reserves for tax purposes that arose in
tax years beginning before December 31, 1987, in accordance with SFAS No.
109. Therefore, retained income at December 31, 1998 and 1999, includes
approximately $825,000, representing such bad debt deductions for which no
deferred income taxes have been provided.
10. Stockholders' Equity
--------------------
The Bank established a liquidation account at the time it converted to a
federally chartered stock savings bank 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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 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, 1999, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1999, 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.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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%
- -
</TABLE>
(continued)
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Tier I Capital (to
adjusted total assets) $ 9,345 17.9% $ 2,095 >4.0% $ 2,619 >5.0%
- -
Tier I Capital (to risk
weighted assets) $ 9,345 29.1% $ 1,289 >4.0% $ 1,933 >6.0%
- -
Total Capital (to risk-
weighted assets) $ 9,697 30.0% $ 2,578 >8.0% $ 3,222 >10.0%
- -
</TABLE>
12. Employee Stock Ownership Plan (ESOP)
------------------------------------
The Bank has an Employee Stock Ownership Plan (ESOP) 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. The loan will be repaid principally from the
Bank's discretionary contributions to the ESOP over a period of 10 years.
On December 31, 1999, the loan had an outstanding balance of approximately
$409,000 and bore an interest rate of 8.5%. The cost of unallocated shares
is considered unearned compensation and, as such, recorded as a reduction
of the Company's stockholders' equity. 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.
For the years ending December 31, 1998 and 1999, compensation related to
the ESOP of approximately $93,000 and $86,000, 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, 1999, the ESOP had approximately 19,000 allocated
shares and 42,000 unallocated shares. The fair value of unallocated ESOP
shares at December 31, 1999 was approximately $461,000.
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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. Restricted Stock Plan
---------------------
The Company has 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 years ended December 31, 1998 and 1999, approximately $166,000 and
$122,000, respectively, have been recognized as compensation expense.
14. Stock Option Plans
------------------
The Company maintains stock option 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. The
stock option plans authorize the granting of stock options up to a maximum
of 76,700 shares of common stock.
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.
Activity under Bank's plans during the years ended December 31, 1998 and
1999, is summarized below:
<TABLE>
<CAPTION>
1998 1999
---------------------------------- ----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Shares under options:
Outstanding, January 1 - $ - 73,630 $ 16.69
Granted 73,630 16.69 - -
Exercised - - - -
Forfeited - - - -
------------- ------------- ------------- -------------
Outstanding, December 31 73,630 $ 16.69 73,630 $ 16.69
============= ============= ============= =============
Exercisable, December 31 - $ - 14,726 $ 16.69
============= ============= ============= =============
</TABLE>
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Outstanding Price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$16.69 73,630 8.42 years $ 16.69 14,726 $ 16.69
========== ========== =========== ========== ===========
</TABLE>
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 periods ended December 31, 1998 and 1999:
1998 1999
---- ----
Risk-free interest rate 4.52% N/A
Dividend yield 1.19% N/A
Expected volatility 13.00% N/A
Average expected life in years 5 N/A
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 years ended December 31, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------- -------------------------------------
As Reported Proforma As Reported Proforma
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net income $ 497 $ 492 $ 559 $ 545
============== ============== ============== ==============
Diluted earnings
per share $ .71 $ .70 $ .87 $ .85
============== ============== ============== ==============
</TABLE>
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,
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
subsequent to a change in control, the officer is assigned duties
inconsistent with his 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. Commitments and Contingencies
-----------------------------
The Bank makes commitments to lend funds to customers. 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 following summarizes the approximate balances outstanding and amounts
available in thousands for use at December 31, 1999:
Committed Balance Available
Lines of Credit Outstanding For Use
Consumer and other lines $ 1,994 $ 1,066 $ 928
====== ====== ====
The Bank had outstanding commitments to originate mortgage and consumer
loans of approximately $1,440,000 and $622,000 at December 31, 1998 and
1999, respectively. 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. The commitments to originate mortgage and
consumer loans at December 31, 1999, were composed of fixed rate loans. The
fixed rate loans had interest rates ranging from 7.5% to 8.75% and terms
ranging from 12 months to 15 years.
<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,
------------------------------------------------------------------
1998 1999
------------------------------- -------------------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,839 $ 2,839 $ 2,162 $ 2,162
Investment and mortgage-
backed securities 6,987 6,976 5,291 5,185
Loans receivable, net 40,449 41,553 43,789 43,886
Federal Home Loan Bank stock 454 454 487 487
Other assets 265 265 280 280
Financial liabilities:
Deposits:
Demand accounts 9,621 9,621 9,465 9,465
Certificate accounts 30,485 30,683 30,970 30,883
Federal Home Loan Bank
advances - - 500 500
Other liabilities 265 265 293 293
</TABLE>
The Bank had off-balance sheet financial commitments at December 31, 1999,
which include approximately $1,550,000 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.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Investments - Fair values for investment securities are based on quoted
-----------
market prices.
Loans - Fair values for loans held for investment are estimated by
-----
segregating the portfolio by type of loan and discounting scheduled cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio.
A prepayment assumption is used as an estimate of the portion of loans
that will be repaid prior to their scheduled maturity.
Federal Home Loan Bank Stock - No ready market exists for this stock and
----------------------------
it has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is deemed
to be a reasonable estimate of fair value.
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.
Federal Home Loan Bank Advances - The fair value is equal to book value
---------------------------------
due to the short-term maturity of the debt.
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, 1998
and 1999. Changes in market interest rates and prepayment assumptions
could change significantly the estimated fair value.
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
18. Condensed Parent Company Financial Information
----------------------------------------------
The following condensed financial information for SFB Bancorp, Inc.
(Parent Company Only) should be read in conjunction with the consolidated
financial statements and the notes thereto.
Parent Company Only
Condensed Balance Sheets December 31,
-----------------
(in thousands) 1998 1999
------- -------
Assets:
Cash and cash equivalents $ 668 $ 94
Investment securities available for sale 1,501 986
ESOP loan receivable 480 409
Due from subsidiary -- 885
Equity in net assets of bank subsidiary 8,614 9,308
Other assets 17 40
------- -------
Total assets $11,280 $11,722
======= =======
Liabilities
Accrued liabilities $ 10 $ 6
------- -------
Stockholders' equity:
Common stockholders' equity 11,270 11,716
------- -------
Total liabilities and stockholders' equity $11,280 $11,722
======= =======
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Parent Company Only
Condensed Statements of Income For the Years Ended
--------------------
(in thousands) 1998 1999
------- -------
Interest income $ 195 $ 140
Non-interest expense 92 38
------- -------
Income before taxes 103 102
Income tax expense 40 41
------- -------
Income before equity earnings 63 61
Equity earnings of bank subsidiary 434 498
------- -------
Net income $ 497 $ 559
======= =======
Parent Company Only
Condensed Statements of Cash Flows For the Years Ended
-------------------
(in thousands) 1998 1999
------- -------
Operating activities:
Net income $ 497 $ 559
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed equity earnings of bank subsidiary (434) (498)
Amortization of premiums on securities -- 1
(Increase) decrease in other assets 30 (18)
Increase (decrease) in accrued liabilities 2 (5)
------- -------
Net cash provided by operating activities 95 39
------- -------
Investing activities:
Loan to Bank subsidiary -- (885)
Principal repayment by ESOP 72 71
Purchase of investment securities (2,000) (499)
Maturities of investment securities 1,000 1,000
------- -------
Net cash used by investing activities (928) (313)
------- -------
Financing activities:
Purchase of treasury stock (1,034) (174)
Payment of cash dividends (138) (126)
------- -------
Net cash used by financing activities (1,172) (300)
------- -------
(continued)
<PAGE>
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Parent Company Only
Condensed Statements of Cash Flows For the Years Ended
-------------------
(in thousands) 1998 1999
------- -------
Net decrease in cash and cash equivalents $(2,005) $ (574)
Cash and cash equivalents at beginning of year 2,673 668
------- -------
Cash and cash equivalents at end of year $ 668 $ 94
======= =======
EXHIBIT 23
<PAGE>
[LOGO] Crisp
Hughes
Evans Certified Public Accountants & Consultants
LLP
----------------------------------------------------------------------
Affiliated worldwide through AGN International
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report, dated January 21, 2000, incorporated by reference in this annual report
of SFB Bancorp, Inc. on Form 10-KSB for the year ended December 31, 1999, into
the Company's previously filed Form S-8 Registration Statement File No.
333-76337.
/s/Crisp Hughes Evans LLP
-------------------------
Asheville, North Carolina
March 24, 2000
32 Orange Street 828 254 2254
PO Box 3049 Fax 828 254 6859
Asheville, NC 28802 www.che-llp.com
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,424
<INT-BEARING-DEPOSITS> 738
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,274
<INVESTMENTS-CARRYING> 1,017
<INVESTMENTS-MARKET> 911
<LOANS> 44,663
<ALLOWANCE> 352
<TOTAL-ASSETS> 53,129
<DEPOSITS> 40,435
<SHORT-TERM> 500
<LIABILITIES-OTHER> 478
<LONG-TERM> 0
0
0
<COMMON> 77
<OTHER-SE> 11,639
<TOTAL-LIABILITIES-AND-EQUITY> 53,129
<INTEREST-LOAN> 3,348
<INTEREST-INVEST> 356
<INTEREST-OTHER> 109
<INTEREST-TOTAL> 3,813
<INTEREST-DEPOSIT> 1,818
<INTEREST-EXPENSE> 1,818
<INTEREST-INCOME-NET> 1,995
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,260
<INCOME-PRETAX> 883
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 559
<EPS-BASIC> .87
<EPS-DILUTED> .87
<YIELD-ACTUAL> 3.96
<LOANS-NON> 217
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 326
<CHARGE-OFFS> 10
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 352
<ALLOWANCE-DOMESTIC> 352
<ALLOWANCE-FOREIGN> 0
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</TABLE>
