SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22553
SECURITY BANCORP, INC.
_____________________________________________________________________________
(Exact name of registrant as specified in its charter)
Tennessee 62-1682697
_________________________________ ___________________
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
306 West Main Street, McMinnville, Tennessee 37110
____________________________________________ ___________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (931) 473-4483
___________________
Securities registered pursuant to Section 12(b)
of the Act: None
___________________
Common Stock,
Securities registered pursuant to Section 12(g) par value $0.01
of the Act: per share
___________________
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendments to this Form 10-KSB. X
___
The registrant's revenues for the fiscal year ended December 31, 1998
were $5.4 million.
As of March 1, 1999, there were issued and outstanding 436,425 shares
of the registrant's Common Stock, which are traded on the over-the-counter
market through the OTC "Electronic Bulletin Board" under the symbol "SCYT."
Based on the average of the bid and asked prices for the Common Stock on March
1, 1999, the aggregate value of the Common Stock outstanding held by
nonaffiliates of the registrant was $2.4 million (132,925 shares at $17.75 per
share). For purposes of this calculation, officers and directors of the
registrant and the Security Federal Savings Bank of McMinnville, TN Employee
Stock Ownership Plan are considered nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 (Parts I and II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders
(Part III)
Transitional Small Business Disclosure Format (check one) Yes No X
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PART I
Item 1. Description of Business
________________________________
General
Security Bancorp, Inc. ("Corporation"), a Tennessee corporation, was
organized on March 18, 1997 for the purpose of becoming the holding company
for Security Federal Savings Bank of McMinnville, TN ("Savings Bank") upon the
Savings Bank's conversion from a federal mutual to a federal stock savings
bank ("Conversion"). The Conversion was completed on June 30, 1997. At
December 31, 1998, the Corporation had total assets of $63.4 million, total
deposits of $50.1 million and stockholders' equity of $7.0 million. The
Corporation has not engaged in any significant activity other than holding the
stock of the Savings Bank. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
the Savings Bank.
The Savings Bank was founded in 1960 as a federally chartered mutual
savings and loan association under the name "Security Federal Savings and Loan
Association." In January 1995, the Savings Bank adopted a federal mutual
savings bank charter and changed its name to its current title. The Savings
Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary
federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the
insurer of its deposits. The Savings Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF"). The Savings Bank has been a
member of the Federal Home Loan Bank ("FHLB") System since 1960.
The Savings Bank is a community-oriented financial institution engaged
primarily in the business of attracting deposits from the general public and
using those funds to originate one- to four-family mortgage loans within its
primary market area. To a lesser but growing extent, the Savings Bank also
originates construction loans, commercial real estate loans, acquisition and
development loans, commercial business loans and consumer loans.
Market Area
The Savings Bank considers Warren County to be its primary market area.
McMinnville, Tennessee, located in Warren County and known as the "Plant
Nursery Capital of the World" is located in the middle of Tennessee on the
Highland Rim of the Cumberland Mountains midway between Chattanooga and
Nashville. In addition to the numerous plant nurseries located in Warren
County, over 50 industries located in Warren County produce products ranging
from truck parts, electric motors, valves, and air conditioners to hardwood
flooring, furniture, power woodworking tools and fire proof clothing. Large
employers include Carrier Corporation, Bridgestone Tire and Rubber Company,
Calasonic Yorozu Corporation, Magnetek/Century Electric and Findlay
Industries.
Selected Financial Data
This information is incorporated by reference from page 8 of the 1999
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
This information is incorporated by reference from page 3 of the Annual
Report.
Lending Activities
General. At December 31, 1998, the Savings Bank's total loans
receivable, net, was $53.5 million, or 84.3% of total assets. The Savings
Bank has traditionally concentrated its lending activities on conventional
first mortgage loans secured by one- to four-family properties, with such
loans amounting to $34.0 million, or 62.2% of the total loans receivable
portfolio at December 31, 1998. In recent periods, the Savings Bank increased
its origination of construction
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and non-residential mortgage loans. A substantial portion of the Savings
Bank's loan portfolio is secured by real estate, either as primary or
secondary collateral, located in its primary market area.
Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio as of the dates indicated.
At December 31,
__________________________________________
1998 1997
_________________ ___________________
Amount Percent Amount Percent
______ _______ ______ _______
(Dollars in thousands)
Real Estate Loans:
Residential..................... $34,031 62.16% $26,765 59.69%
Construction.................. 3,705 6.77 3,726 8.31
Commercial.................... 4,490 8.20 4,869 10.86
Acquisition and development... 1,005 1.84 761 1.70
_______ ______ _______ ______
Total real estate loans......... 43,231 78.96 36,121 80.56
Commercial business loans........ 6,062 11.07 3,816 8.51
Consumer loans:
Automobile...................... 1,992 3.64 1,364 3.04
Home equity, second mortgage
and other..................... 1,868 3.41 2,634 5.87
Unsecured....................... 1,598 2.92 903 2.02
________ ______ ________ ______
Total consumer loans.......... 5,458 9.97 4,901 10.93
________ ______ ________ ______
Total loans................... 54,751 100.00% 44,838 100.00%
====== ======
Less:
Loans in process................ 647 1,397
Unearned loan fees and
discounts..................... 11 9
Allowance for loan losses....... 620 339
_______ _______
Total loans receivable, net.... $53,473 $43,093
======= =======
One- to Four-Family Real Estate Lending. Historically, the Savings Bank
has concentrated its lending activities on the origination of loans secured by
first mortgage loans on existing one- to four-family residences located in its
primary market area. At December 31, 1998, $34.0 million, or 62.6% of the
Savings Bank's total loan portfolio consisted of such loans. The Savings Bank
originated $23.9 million and $16.5 million of one- to four-family residential
mortgage loans during the years ended December 31, 1998 and 1997,
respectively.
The Savings Bank offers fixed-rate one- to four-family mortgage balloon
loans with maturities ranging from three to five years and amortization
schedules of up to 30 years. At the expiration of the balloon term, the
Savings Bank has the option of calling the loan due and payable or adjusting
the interest rate and rewriting the loan on similar maturity terms. At
December 31, 1998, such loans amounted to $8.9 million or 26.1% of the one- to
four- family mortgage loan portfolio. The Savings Bank generally sells its
fixed-rate loans, servicing retained, to the FHLMC. See "-- Loan
Originations, Sales and Purchases." Fixed-rate loans customarily include "due
on sale" clauses, which give the Savings Bank the right to declare a loan
immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
paid.
The Savings Bank offers ARM loans at rates and terms competitive with
market conditions. At December 31, 1998, $12.1 million, or 35.7%, of the
Savings Bank's one- to four-family residential loan portfolio consisted of ARM
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loans. Substantially all ARM loan originations do not meet the underwriting
standards of the FHLMC and the Federal National Mortgage Association ("FNMA").
Such loans are retained primarily for the Savings Bank's portfolio. The
Savings Bank currently originates ARM loans that adjust annually based on the
one-year U.S. Treasury security constant maturity index, plus 3%, with annual
and life time interest rate adjustment limits of 1% to 2% and 4% to 6%,
respectively. At December 31, 1998, however, the majority of the portfolio
consisted of ARM loans that adjust annually based on the one-year U.S.
Treasury security constant maturity index, plus 3%, with annual and life time
interest rate adjustment limits of 2% and 6%, respectively. The Savings Bank
also offers a one year ARM loan at an initial below market "teaser" rate with
annual and lifetime interest rate adjustment limits of 2% and 6%,
respectively. Borrowers, however, are qualified at the fully indexed rate.
The Savings Bank's ARMs are typically based on a 30-year amortization
schedule. The Savings Bank qualifies the borrowers on its ARM loans based on
the initial rate. The Savings Bank's ARM loans do not provide for negative
amortization.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce the Savings Bank's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to changed rates to be paid by the customer. It is possible that
during periods of rising interest rates, the risk of default on ARM loans may
increase as a result of repricing and the increased payments required by the
borrower. In addition, although ARM loans allow the Savings Bank to increase
the sensitivity of its asset base to changes in the interest rates, the extent
of this interest sensitivity is limited by the annual and lifetime interest
rate adjustment limits. Because of these considerations, the Savings Bank has
no assurance that yields on ARM loans will be sufficient to offset increases
in the Savings Bank's cost of funds. The Savings Bank believes these risks,
which have not had a material adverse effect on the Savings Bank to date,
generally are less than the risks associated with holding fixed-rate loans in
portfolio during an increasing interest rate environment.
The Savings Bank also originates one- to four-family mortgage loans under
Federal Housing Administration ("FHA") and Veterans Administration ("VA")
programs and the Tennessee Housing and Development Agency, an affordable
housing program. These loans are generally sold to private investors,
servicing released (i.e., the right to collect principal and interest payments
and forward it to the purchaser of the loan, maintain escrow accounts for
payment of taxes and insurance and perform other loan administration functions
is sold with the loan). See " -- Loan Originations, Sales and Purchases."
The Savings Bank generally requires title insurance insuring the status
of its lien or an acceptable attorney's opinion on all loans where real estate
is the primary source of security. The Savings Bank also requires that fire
and casualty insurance (and, if appropriate, flood insurance) be maintained in
an amount at least equal to the outstanding loan balance.
One- to- four family residential mortgage loans typically do not exceed
80% of the appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Savings Bank can lend up to
95% of the appraised value of the property securing a one- to four-family
residential loan; however, the Savings Bank generally obtains private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the security property.
The Savings Bank also originates loans secured by first mortgages on
residential building lots on which the borrower proposes to construct a
primary residence. These loans are generally short-term, fixed-rate, fully
amortizing loans. At December 31, 1998 and 1997, such loans amounted to
$205,000 and $241,000, respectively.
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Construction Lending. At December 31, 1998, construction loans amounted
to $3.7 million, or 6.8% of total loans, substantially all of which were
secured by one- to four-family residences located in the Savings Bank's
primary market area.
Construction loans are made for a term of up to 12 months. Construction
loans are made at variable rates based on the prime lending rate with interest
payable monthly. The Savings Bank originates construction loans to
individuals who have a contract with a builder for the construction of their
residence. The Savings Bank typically requires that permanent financing with
the Savings Bank or some other lender be in place prior to closing any
construction loan to an individual. To a lesser extent, the Savings Bank
originates residential construction loans to local home builders, generally
with whom it has an established relationship.
Construction loans to builders are typically made with a maximum
loan-to-value ratio of 80%. Construction loans to individuals are typically
made in connection with the granting of the permanent financing on the
property. Such loans, which generally convert to a fully amortizing
adjustable- or fixed-rate loan at the end of the construction term, are
generally underwritten according to the underwriting standards for a permanent
loan.
The Savings Bank's construction loans to builders are made on a pre-sold
basis or a speculative basis, meaning that at the time the loan was
originated, there was no sale contract or permanent loan in place for the
finished home. The Savings Bank generally limits its speculative lending to a
few select local builders with whom it has an established relationship. The
Savings Bank generally limits each builder to financing for no more than two
speculative homes at any one time. The Savings Bank generally has no more
than $300,000 outstanding at any one time to one builder for speculative
construction. At December 31, 1998, speculative construction loans amounted
to $883,000. At December 31, 1998, the largest amount outstanding to any
builder was $229,000.
Prior to making a commitment to fund a construction loan, the Savings
Bank requires an appraisal of the property by an independent state-licensed
and qualified appraiser approved by the Board of Directors. The Savings
Bank's staff also reviews and inspects projects prior to disbursement of funds
during the term of the construction loan. Loan proceeds are generally
disbursed after inspection of the project.
Although construction lending affords the Savings Bank the opportunity to
achieve higher interest rates and fees with shorter terms to maturity than
one- to four-family mortgage lending, construction lending is generally
considered to involve a higher degree of risk than one- to four-family
mortgage lending. Construction loans are more difficult to evaluate than
permanent loans. At the time the loan is made, the value of the collateral
securing the loan must be estimated based on the projected selling price at
the time the residence is completed, typically six to 12 months later, and on
estimated building and other costs (including interest costs). Changes in the
demand for new housing in the area and higher-than-anticipated building costs
may cause actual results to vary significantly from those estimated.
Accordingly, the Savings Bank may be confronted, at the time the residence is
completed, with a loan balance exceeding the value of the collateral. Because
construction loans require active monitoring of the building process,
including cost comparisons and on-site inspections, these loans are more
difficult and costly to monitor. Increases in market rates of interest may
have a more pronounced effect on construction loans by rapidly increasing the
end-purchasers' borrowing costs, thereby reducing the overall demand for new
housing. Additionally, working out of problem construction loans is
complicated by the fact that in-process homes are difficult to sell and
typically must be completed in order to be successfully sold. This may
require the Savings Bank to advance additional funds and/or contract with
another builder to complete the residence. Furthermore, in the case of
speculative construction loans, there is the added risk associated with
identifying an end-purchaser for the finished home.
The Savings Bank has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending to primarily residential
properties, and limiting its speculative loans to a small number of well-known
local builders. If the borrower is a corporation, the Savings Bank generally
obtains personal guarantees from the principals.
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Commercial Real Estate Lending. At December 31, 1998, commercial real
estate loans totaled $4.5 million, or 8.2% of total loans, compared to $4.9
million, or 10.9% of total loans, at December 31, 1997. Commercial real
estate loans are secured by nurseries, churches, professional offices and
other non-residential property. At December 31, 1998, the Savings Bank's
largest outstanding commercial real estate loan was a $347,000 loan secured by
commercial property located in the Savings Bank's primary market area. At
December 31, 1998, this loan was performing according to its terms.
Substantially all of the Savings Bank's commercial real estate loans are
secured by property located within the Savings Bank's primary market area.
The average size of the commercial real estate loan in the Savings Bank's
loan portfolio is approximately $150,000. Commercial real estate loans
generally are generally structured as balloon loans with a term of one to five
years based on an amortization schedule of up to 20 years, with variable rates
of interest based on the prime rate. Loan-to-value ratios may not exceed 80%
of the appraised value of the underlying property. It is the Savings Bank's
policy to obtain personal guarantees from all principals of corporate
borrowers. In assessing the value of such guarantees, the Savings Bank
reviews the individuals' personal financial statements, credit reports, tax
returns and other financial information, including rent rolls. The Savings
Bank generally requires annual financial statements from its commercial
business borrowers and, if the borrower is a corporation, personal guarantees
from the principals.
Commercial 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 payment
experience on such loans typically is dependent on the successful operation of
the real estate project. These risks can be significantly affected by supply
and demand conditions in the market for office and retail space, and, as such,
may be subject to a greater extent to adverse conditions in the economy
generally. To minimize these risks, the Savings Bank generally limits this
type of lending to its market area and to borrowers with which it has
substantial experience or who are otherwise well known to management.
Acquisition and Development Lending. The Savings Bank originates
acquisition and development loans for the purpose of developing the land
(i.e., installing roads, sewers, water and other utilities) for sale for
residential housing construction. At December 31, 1998, the Savings Bank had
three acquisition and development loans with aggregate approved commitments of
$1.1 million, of which an aggregate of $1.0 million was outstanding. At
December 31, 1998, the largest acquisition and development loan had an
outstanding balance of $523,000 and was performing according to its terms.
All of the acquisition and development loans are secured by properties located
in the Savings Bank's primary market area.
Acquisition and development loans are usually repaid through the sale of
the developed land to a home builder. However, the Savings Bank believes that
its acquisition and development loans are made to individuals with, or to
corporations the principals of which possess, sufficient personal financial
resources out of which the loans could be repaid, if necessary.
Acquisition and development loans are secured by a lien on the property,
made for a one year term, and with an interest rate hat adjusts with the prime
rate. The Savings Bank requires monthly interest payments during the term of
the acquisition and development loan. After the expiration of the one year
term, the loan is converted to a five year term loan and the Savings Bank
requires a 20% reduction in principal during the first year. In addition, the
Savings Bank obtains personal guarantees from the principals of its corporate
borrowers. At December 31, 1998, the Savings Bank did not have any
nonaccruing acquisition and development loans.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to four-family residential mortgage loans because such loans are
more difficult to evaluate. If the estimate of value proves to be inaccurate,
in the event of default and foreclosure, the Savings Bank may be confronted
with a property value of which is insufficient to assure full repayment.
Furthermore, if the borrower defaults, the Savings Bank may have to expend its
own funds to complete development and also incur costs associated with
marketing and holding the building lots pending sale.
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The Savings Bank attempts to minimize this risk by limiting the maximum
loan-to-value ratio on acquisition and development loans to 75%.
Commercial Business Lending. At December 31, 1998, commercial business
loans amounted to $6.1 million, or 11.1% of total loans, compared to $3.8
million, or 8.5% of total loans, at December 31, 1997. Prior to fiscal 1996,
the Savings Bank's commercial business lending constituted a relatively small
amount of its lending activities.
Commercial business loans generally include equipment loans (i.e.,
trucks, tractors, etc.) with terms ranging up to 15 years and working capital
lines of credit secured by inventory and accounts receivable. Commercial
business loans are generally made in amounts up to $300,000. Unsecured lines
of credit are made for amounts up to $100,000. Working capital lines of
credit are generally renewable and made for a one-year term with the
requirement that the borrower extinguish any outstanding balance for 30
consecutive days during the year. Interest rate loans are generally indexed
to the prime rate. As with commercial real estate loans, the Savings Bank
generally requires annual financial statements from its commercial business
borrowers and, if the borrower is a corporation, personal guarantees from the
principals.
At December 31, 1998, the largest commercial business loan had an
outstanding balance of $240,000, was secured by nursery and farm equipment,
and was performing according to its terms.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending
with loan amounts based on predetermined loan to collateral values and
liquidation of the underlying real estate collateral is viewed as the primary
source of repayment in the event of borrower default. Although commercial
business loans are often collateralized by equipment, inventory, accounts
receivable or other business assets, the liquidation of collateral in the
event of a borrower default is often not a sufficient source of repayment
because accounts receivable may be uncollectible and inventories and equipment
may be obsolete or of limited use, among other things. Accordingly, the
repayment of a commercial business loan depends primarily on the
creditworthiness of the borrower (and any guarantors), while liquidation of
collateral is a secondary and often insufficient source of repayment.
As part of its commercial business lending activities, the Savings Bank
issues commercial and standby letters of credit as an accommodation to its
borrowers. See "-- Loan Commitments and Letters of Credit."
Consumer Lending. At December 31, 1998, consumer loans totaled $5.5
million, or 10.0%, of the total loans, compared to $4.9 million, or 10.9% of
total loans, at December 31, 1997. The majority of such loans originated by
the Savings Bank have been made to its existing customers. The Savings Bank,
however, subject to market conditions, intends to actively market consumer
loans beyond its existing customer base to prospective borrowers within its
primary market area.
Consumer loans generally have shorter terms to maturity or repricing and
higher interest rates than the long-term, fixed- rate mortgage loans. The
Savings Bank's consumer loans consist of loans secured by automobiles, boats
and recreational vehicles, second mortgages on residences and savings
accounts, and unsecured loans for personal or household purposes.
The largest category of the Savings Bank's consumer loan portfolio is
loans secured by new and used automobiles. At December 31, 1998, automobile
loans totaled $2.0 million or 3.6% of the total loan portfolio, compared to
$1.4 million or 3.0% of the total loan portfolio at December 31, 1997.
Automobile loans are offered with maturities of up to 60 months. The Savings
Bank does not engage in indirect automobile lending through automobile
dealers.
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The Savings Bank offers home equity loans that are made on the security
of residences. These loans normally do not exceed 95% of the appraised value
of the residence, less the outstanding principal of the first mortgage and
have terms of up to ten years requiring monthly payments of principal and
interest. At December 31, 1998, home equity and second mortgage loans totaled
$1.4 million, or 3.0% of the total loan portfolio, compared to $1.5 million,
or 3.3% of the total loan portfolio at December 31, 1997.
At December 31, 1998, unsecured consumer loans amounted to $1.6 million,
or 2.9% of total loans. These loans are normally made for a maximum of 24
months or less with fixed rates of interest and are offered primarily to
existing customers of the Savings Bank.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles, particularly used
automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may imit the amount which
can be recovered on such loans. Such loans may also give rise to claims and
defenses by a consumer loan borrower against an assignee of such loans such as
the Savings Bank, and a borrower may be able to assert against such assignee
claims and defenses that it has against the seller of the underlying
collateral. At December 31, 1998, $38,000 of consumer loans were 90 days or
more past due.
Loan Maturity and Repricing. The following table sets forth certain
information at December 31, 1998 regarding the dollar amount of loans maturing
in the Savings Bank's portfolio based on their contractual terms to maturity,
but does not include scheduled payments or potential prepayments. Demand
loans, loans having no stated schedule of repayments and no stated maturity,
and overdrafts are reported as due in one year or less. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loan losses.
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<TABLE>
One Year 3 Years 5 Years 10 Years
Within Through Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total
________ _______ _______ ________ ________ ________ _______
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential.............. $ 6,695 $ 8,981 $4,456 $3,983 $4,612 $6,309 $35,036
Construction............. 3,058 -- -- -- -- -- 3,058
Commercial............... 1,924 1,408 628 443 83 4 4,490
Consumer and other loans... 2,743 2,062 555 98 -- -- 5,458
Commercial business loans.. 3,051 2,144 781 86 -- -- 6,062
_______ _______ ______ ______ ______ ______ _______
Total gross loans..... $17,471 $14,595 $6,420 $4,610 $4,695 $6,313 $54,104
======= ======= ====== ====== ====== ====== =======
</TABLE>
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The following table sets forth the dollar amount of all loans due after
one year after December 31, 1998, which have fixed interest rates and have
floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
_______ __________________
(In thousands)
Real Estate Loans:
Residential.......................... $13,653 $14,688
Construction......................... -- --
Commercial........................... 2,253 313
Consumer and other loans.............. 2,715 --
Commercial business loans............. 2,226 785
_______ _______
Total gross loans................ $20,847 $15,786
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Loan Solicitation and Processing. Local realtors and home builders refer
a significant number of loan applicants to the Savings Bank. Loan applicants
also come through direct solicitation by Savings Bank personnel and walk-ins.
Applications for one- to four-family mortgage loans are underwritten and
closed based on FNMA and FHLMC standards, and other loan applications are
underwritten and closed based on the Savings Bank's own guidelines. Title
insurance is required on all loans originated for sale in the secondary market
and for loans to be retained in the Savings Bank's portfolio if management
determines the existence of a possible title risk to the Savings Bank. All
mortgage loans require fire and extended coverage on appurtenant structures.
Lending approval authorities, both individual and group, are based on
whether or not the loan is secured or unsecured. Individual lending
authorities range from $25,000 to $100,000 for secured loans and $2,500 to
$25,000 for unsecured loans. The Management Loan Committee, consisting of the
President, Executive Vice President, Senior Vice President of Secondary
Marketing, and Senior Vice President of Consumer Lending must approve secured
loans in excess of $100,000 and up to $200,000 and unsecured loans in excess
of $25,000 and up to $50,000. The Loan Committee of the Board of Directors
must approve secured loans in excess of $200,000 and up to $350,000 and
unsecured loans in excess of $50,000 and up to $150,000. The full Board of
Directors must approve secured loans in excess of $350,000, and unsecured
loans in excess of $150,000, up to the Savings Bank's maximum legal lending
limit. At December 31, 1998, that general limit was $947,000. See
"REGULATION -- Federal Regulation of Savings Associations -- Loans to One
Borrower." All of the above loan approval authorities relate to a borrower's
total aggregate indebtedness excluding any loan made to finance the borrower's
primary residence.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral is undertaken by an independent fee
appraiser approved by the Savings Bank and licensed or certified by the State
of Tennessee. Applicants are promptly notified of the decision of the Savings
Bank. Interest rates are subject to change if the approved loan is not closed
within the time of the commitment.
Loan Originations, Sales and Purchases. The Savings Bank's primary
lending activity has been the origination of one- to four-family residential
mortgage loans. In recent periods, however, the Savings Bank has increased
substantially its origination of construction and non-residential mortgage
loans.
The Savings Bank generally sells all residential real estate loans
originated under FHA and VA programs and the Tennessee Housing Development
Agency to private investors, servicing released. Such loans are sold on a
"best efforts" basis generally against forward commitments, resulting in
minimal pipeline risk to the Savings Bank. Pipeline risk is the risk that the
value of the loan will decline during the period between the time the loan is
originated and the time of sale because of changes in market interest rates.
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The Savings Bank generally sells all loans without recourse. The Savings
Bank generally sells all conventional fixed-rate one- to four- family
residential mortgage loans to the FHLMC, servicing retained. Such sales are
generally without forward commitments, exposing the Savings Bank to pipeline
risk generally for a period of 60 days. The Savings Bank's aggregate pipeline
risk exposure typically amounts to $1.0 million or less at any one time. By
retaining the servicing, the Savings Bank receives fees for performing the
traditional services of processing payments, accounting for loan funds, and
collecting and paying real estate taxes, hazard insurance and other
loan-related items, such as private mortgage insurance. At December 31, 1998,
the Savings Bank's servicing portfolio was $20.1 million. For the year ended
December 31, 1998, loan servicing fees totaled $43,000. In addition, the
Savings Bank retains certain amounts in escrow for the benefit of investors.
The Savings Bank is able to invest these funds but is not required to pay
interest on them. At December 31, 1998, such escrow balances totaled $61,000.
SFAS No. 125 requires a mortgage banking enterprise, which sells or
securitizes loans and retains the related servicing rights, to allocate the
total cost of the mortgage loans to the servicing rights and the loans
(without the servicing rights) based on their relative fair values.
Accordingly, future changes in the fair value of capitalized mortgage
servicing rights may require the enterprise to reduce the carrying value of
these rights by taking a charge against earnings. See Note 1 to Notes to
Consolidated Financial Statements.
Periodically, the Savings Bank purchases interests in loan
participations. At December 31, 1998, the outstanding balance of such
interests was $147,000 and were secured by one- to four-family residential
properties located in Millersville, Tennessee.
The following table sets forth total loans originated, sold and repaid
during the periods indicated. No loans were purchased during the periods
indicated.
Year Ended December 31,
_______________________
1998 1997
____ ____
(In thousands)
Loans originated:
Real Estate Loans:
Residential(1)....................... $23,853 $16,516
Construction......................... 4,714 5,316
Commercial........................... 650 1,360
Acquisition and development.......... -- 1,100
_______ _______
Total real estate loans........... 29,217 24,292
Commercial business loans............. 12,708 3,760
Consumer loans:
Automobile........................... 1,932 1,141
Unsecured............................ 1,718 1,109
Second mortgage and other............ 6,500 4,491
_______ _______
Total consumer loans.............. 10,150 6,741
_______ _______
Total loans originated.......... 52,075 34,793
(table continued on following page)
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Year Ended December 31,
________________________
1998 1997
____ ____
(In thousands)
Loans sold:
Whole loans............................. 14,438 6,931
Participation loans..................... -- 30
_______ _______
Total loans sold..................... 14,438 6,961
Mortgage loan principal repayments....... 14,943 11,736
Other loan prepayments and change
in unfunded loan commitments........... 12,781 9,220
_______ _______
Net loan activity........................ 9,913 6,876
_______ _______
Total gross loans at end of period.......$54,751 $44,838
======= =======
____________
(1) Includes loans originated for sale.
Loan Commitments and Letters of Credit. The Savings Bank issues, without
charge, commitments for fixed- and adjustable-rate single-family residential
mortgage loans conditioned upon the occurrence of certain events. Such
commitments are made in writing on specified terms and conditions and are
honored for up to 60 days from application. As part of its commercial
business lending activities, the Savings Bank issues commercial and standby
letters of credit and receives annual fees averaging approximately 0.5% of the
amount of the letter of credit. Letters of credit are an off-balance sheet
contingency. At December 31, 1998, the Savings Bank had $2.6 million of
outstanding net loan commitments, including unused portions on commercial
business lines of credit, and $646,000 of unexpired commercial and standby
letters of credit. See Note 15 to Notes to Consolidated Financial Statements.
Loan Origination and Other Fees. The Savings Bank, in most instances,
receives loan origination fees and discount "points." Loan fees and points
are a percentage of the principal amount of the mortgage loan which are
charged to the borrower for funding the loan. The amount of points charged by
the Savings Bank varies, though the range generally is between 1 and 2 points.
Current accounting standards require fees received (net of certain loan
origination costs) for originating loans to be deferred and amortized into
interest income over the contractual life of the loan. Net deferred fees
associated with loans that are prepaid are recognized as income at the time of
prepayment. The Savings Bank had $11,000 of net deferred mortgage loan fees
at December 31, 1998.
Nonperforming Assets and Delinquencies. When a borrower fails to make a
required payment when due, the Savings Bank institutes collection procedures.
The first notice is mailed to the borrower seven days after the payment due
date and, if necessary, a second written notice follows after 16 days.
Attempts to contact the borrower by telephone generally begin approximately 30
days after the payment due date. If a satisfactory response is not obtained,
continuous follow-up contacts are attempted until the loan has been brought
current. In most cases, delinquencies are cured promptly; however, if by the
90th day of delinquency, or sooner if the borrower is chronically delinquent
and all reasonable means of obtaining payment on time have been exhausted,
foreclosure, according to the terms of the security instrument and applicable
law, is initiated. If management determines on the 90th day of delinquency
that all remedies to cure the delinquency have been exhausted, the loan is
placed on nonaccrual status and all previously recorded interest income is
reversed. Consumer loans are charged off on the 120th day of delinquency.
The Savings Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent 30 days or more,
the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Savings Bank.
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The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans within the meaning of SFAS
No. 15 at the dates indicated.
At December 31,
___________________
1998 1997
____ ____
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Real estate loans:
Residential........................... $377 $ 50
Construction.......................... -- --
Commercial............................ -- --
Acquisition and development........... -- --
____ ____
Total real estate loans............. 377 50
Commercial business loans.............. -- --
Consumer loans......................... -- --
____ ____
Total............................... 377 50
Accruing loans which are contractually
past due 90 days or more:
Real estate loans:
Residential........................... 147 --
Construction.......................... -- --
Commercial............................ -- --
Acquisition and development........... -- --
____ ____
Total real estate loans ............ 147 --
Commercial business loans.............. -- --
Consumer loans......................... 38 --
____ ____
Total............................... 185 --
____ ____
Total of nonaccrual and 90 days past
due loans.............................. 562 50
Foreclosed property...................... -- 5
____ ____
Total nonperforming assets............ $562 $ 55
==== ====
Restructured loans....................... -- --
Loans delinquent 90 days
or more to net loans................... 1.05% 0.12%
Total loans delinquent 90 days
or more to total assets................ 0.89% 0.10%
Total nonperforming assets to
total assets........................... 0.89% 0.11%
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Gross interest income that would have been recorded for the year ended
December 31, 1998 if nonaccrual loans had been current according to their
original terms and had been outstanding throughout the year, and the amount of
interest income on such loans that was included in net income for the year,
were, in both cases, immaterial.
Foreclosed Property. At December 31, 1998, the Savings Bank did not have
any foreclosed property. See Note 1 to Notes to Consolidated Financial
Statements for a discussion of the accounting methodology for foreclosed
property.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets must have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. The regulations also provide
for a special mention category, described as assets which do not currently
expose an insured institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. If an asset or portion thereof is
classified loss, the insured institution establishes specific allowances for
loan losses for the full amount of the portion of the asset classified loss.
A portion of general loan loss allowances established to cover possible losses
related to assets classified 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.
The Savings Bank's senior officers meet monthly to review all classified
assets, to approve action plans developed to resolve the problems associated
with the assets and to review recommendations for new classifications, any
changes in classifications and recommendations for reserves.
At December 31, 1998 and 1997, the aggregate amounts of the Savings
Bank's classified assets (as determined by the Savings Bank), and of the
Savings Bank's general and specific loss allowances for the period then ended,
were as follows:
At December 31,
________________
1998 1997
____ ____
(In thousands)
Classified assets:
Loss................................ $ -- $ --
Doubtful............................ 32 --
Substandard assets.................. 632 205
Special mention..................... 452 63
______ ______
$1,116 $ 268
====== ======
Loan loss allowance:
General loss allowances............. $620 $339
Specific loss allowances............ -- --
At December 31, 1998, doubtful, substandard and special mention assets
consisted primarily of one- to four- family residential mortgage loans.
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Allowance for Loan Losses. The Savings Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans. The allowance for loan losses is increased
by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Savings Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
the estimated value of any underlying collateral, and current economic
conditions. Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued and unpaid, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
General valuation allowances are maintained to cover probable but
unidentified losses in the loan portfolio. Management reviews the adequacy of
the allowance at least quarterly based on its knowledge of the portfolio
including current asset classifications, the Savings Bank's write-off history,
economic conditions affecting the real estate markets and industry standards.
Specific valuation allowances are established to absorb losses on loans
for which full collectibility may not be reasonably assured. The amount of
the allowance is based on the estimated value of the collateral securing the
loan and other analyses pertinent to each situation.
Management believes that the allowance for loan losses at December 31,
1998 was adequate at that date. Although management believes that it uses the
best information available to make such determinations, future adjustments to
the allowance for loan losses may be necessary and results of operations could
be significantly and adversely affected if circumstances differ substantially
from the assumptions used in making the determinations.
The Savings Bank's market area consists of Warren County and surrounding
counties. Real estate values have been stable in recent periods. There can
be no assurance as to the future performance of real estate market, including
those in which the Savings Bank primarily operates. A downturn in the middle
Tennessee real estate market could have a material adverse effect on the
Savings Bank's operations. For example, depressed real estate values may
result in increases in nonperforming assets, hamper disposition of such
nonperforming assets and result in losses upon such disposition. In addition,
a downturn in the general economic conditions of the Savings Bank's primary
market area could be expected to have a material adverse effect on the Savings
Bank's financial condition and results of operations.
While the Savings Bank believes it has established its existing allowance
for loan losses in accordance with generally accepted accounting principles,
there can be no assurance that regulators, in reviewing the Savings Bank's
loan portfolio, will not request the Savings Bank to increase significantly
its allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect the Savings Bank's
financial condition and results of operations.
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The following table sets forth an analysis of the Savings Bank's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to
current income.
Year Ended December 31,
________________________
1998 1997
____ ____
(Dollars in thousands)
Allowance at beginning of period............ $339 $284
____ ____
Provision for loan losses................... 285 60
Recoveries:
Real estate loans:
Residential.............................. -- --
Construction............................. -- --
Commercial............................... -- --
Acquisition and development.............. -- --
____ ____
Total real estate loans................ -- --
Consumer loans............................ 12 10
____ ____
Total recoveries....................... 12 10
Charge-offs:
Real estate loans:
Residential.............................. -- --
Construction............................. -- --
Commercial............................... -- --
Acquisition and development.............. -- --
Total real estate loans................ -- --
____ ____
Commercial business loans................. -- --
Consumer loans............................ 16 15
____ ____
Total charge-offs...................... 16 15
____ ____
Net charge-offs........................ 4 5
____ ____
Balance at end of period............... $620 $339
==== ====
Ratio of allowance to total loans
outstanding at end of the period........... 1.13% 0.76%
Ratio of net charge-offs to average loans
outstanding during the period.............. 0.01% 0.01%
Ratio of allowance for loan losses to
nonperforming assets....................... 110.32% 616.36%
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The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
At December 31,
________________________________________________________
1998 1997
____________________________ ___________________________
As a % % of As a % % of
of Out- Loans in of Out- Loans in
standing Category standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans
______ ________ _______ ______ ________ ________
(Dollars in thousands)
Real estate loans:
Residential......... $340 1.00% 54.84% $152 0.57% 44.84%
Construction ....... 51 1.38 8.23 38 1.02% 11.21
Commercial.......... 56 1.25 9.03 51 1.05 15.04
Acquisition and
development........ 15 1.50 2.42 10 1.31 2.95
Commercial
business loans ...... 76 1.25 12.26 38 1.00 11.21
Consumer and
other loans.......... 82 1.50 13.23 50 1.02 14.75
____ ______ ____ ______
Total allowance
for loan losses.... $620 100.00% $339 100.00%
==== ====== ==== ======
Investment Activities
The Savings Bank is permitted under federal law to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at
the FHLB-Cincinnati, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, the Savings Bank may also invest a portion of its assets
in commercial paper and corporate debt securities. The Savings Bank is also
required to maintain an investment in FHLB stock as a condition of membership
in the FHLB-Cincinnati.
The Savings Bank is required under federal regulations to maintain a
minimum amount of liquid assets. At December 31, 1998, the Savings Bank's
regulatory liquidity of 8.5% exceeded the 4% required by OTS regulations.
Investment securities provide liquidity for funding loan originations and
enables the Savings Bank to improve the match between the maturities and
repricing of its interest-rate sensitive assets and liabilities. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources" contained in the Annual Report
and "REGULATION."
The Savings Bank's President and Chief Executive Officer determines
appropriate investments in accordance with the Board of Directors' approved
investment policies and procedures. The Savings Bank's policies generally
limit investments to U.S. Government and agency securities and mortgage-backed
securities issued and guaranteed by FHLMC, FNMA and Government National
Mortgage Association ("GNMA"). The Savings Bank's policies provide that
investment purchases be ratified at monthly Board of Directors meetings.
Investments are made based on certain considerations, which include the
interest rate, yield, settlement date and maturity of the investment, the
Savings Bank's liquidity position, and anticipated cash needs and sources
(which in turn include outstanding commitments, upcoming maturities, estimated
deposits and anticipated loan amortization and repayments). The effect that
the proposed investment would have on the Savings Bank's credit and interest
rate risk, and risk-based capital is also considered. From time to time,
investment 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 the level of yield that will be available in the
future, as well as management's projections as to the short-term demand for
funds to be used in the Savings Bank's loan origination and other activities.
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The following table sets forth the composition of the Savings Bank's
securities portfolio at the dates indicated.
At December 31,
____________________________________________
1998 1997
_____________________ _____________________
Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
________ __________ ________ __________
(Dollars in thousands)
Available for sale:
FHLMC stock...................... $ 6 0.13% $ 9 0.22%
U.S. Government and
agency obligations ............ 1,050 22.03 1,000 24.92
Mortgage-backed securities....... 1,968 41.29 -- --
______ ______ ______ ______
Total available for sale... 3,024 63.45 1,009 25.14
Held to maturity:
Certificates of deposit.......... -- -- -- --
FHLB stock....................... 591 12.40 550 13.71
U.S. Government and
agency obligations............. 650 13.64 1,248 31.10
Mortgage-backed securities....... 501 10.51 1,206 30.05
______ ______ ______ ______
Total held to maturity....... 1,742 36.55 3,004 74.86
______ ______ ______ ______
Total............................ $4,766 100.00% $4,013 100.00%
====== ====== ====== ======
At December 31, 1998, the FHLMC stock had an estimated fair value of
$371,000, the portfolio of U.S. Government and agency securities (both
available-for-sale and held-to-maturity) had an aggregate estimated fair value
of $1.7 million and the portfolio of mortgage-backed securities (both
available-for-sale and held-to-maturity) had an estimated fair value of $2.5
million.
At December 31, 1998, mortgage-backed securities consisted of FHLMC, FNMA
and GNMA issues, all of which were classified as held-to-maturity. At
December 31, 1998, their amortized cost was $2.5 million and all had
fixed-rates of interest. The mortgage-backed securities portfolio had coupon
rates ranging from 6.0% to 8.5% and had a weighted average yield of 6.9%
during the year ended December 31, 1998.
Mortgage-backed securities (which also are known as mortgage
participation certificates or pass-through certificates) typically represent
interests in pools of single-family or multi-family mortgages in which
payments of both principal and interest on the securities are generally made
monthly. The principal and interest payments on these mortgages are passed
from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and resell
the participation interests in the form of securities, to investors such as
the Savings Bank. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, FNMA and the GNMA. 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 fall within a specific range and have varying maturities.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Savings Bank. These types of securities
also permit the Savings Bank to optimize its regulatory capital because they
have low risk weighting.
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments
that are faster than anticipated may shorten the life of the security and may
16
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result in a loss of any premiums paid and thereby reduce the net yield on such
securities. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of declining mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Savings Bank may be
subject to reinvestment risk because, to the extent that the Savings Bank's
mortgage-backed securities amortize or prepay faster than anticipated, the
Savings Bank may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate.
The following table sets forth the maturities and weighted average yields
of the debt securities in the Savings Bank's investment and mortgage-backed
securities portfolio at December 31, 1998.
Over
Less Than Over One to Five to Over Ten
One Year Five Years Ten Years Years
_____________ _____________ _____________ _____________
Amount Yield Amount Yield Amount Yield Amount Yield
______ _____ ______ _____ ______ _____ ______ _____
(Dollars in thousands)
Available
for Sale:
FHLMC Stock....... $ 6 50.10% $ -- --% $ -- --% $ -- --%
U.S. Government
and agency
obligations...... 1,050 6.02 -- -- -- -- -- --
Mortgage-backed
securities....... -- -- -- -- 995 6.50 973 7.00
Held to Maturity:
FHLB Stock........ 591 7.13 -- -- -- -- -- --
U.S. Government
and agency
obligations...... -- -- -- -- 650 6.00 -- --
Mortgage-backed
securities....... -- -- 207 6.00 293 7.81 -- --
The Savings Bank's investment policy does not permit investment in such
"off balance sheet" derivative instruments such as "forwards," "futures,"
"options" or "swaps.
At December 31, 1998, the Savings Bank did not hold any "high risk
mortgage securities" subject to OTS Thrift Bulletin Number 52. The Savings
Bank also evaluates its mortgage-backed securities portfolio annually for
compliance with applicable regulatory requirements, including testing for
identification of high risk investments pursuant to Federal Financial
Institutions Examination Council standards.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Savings Bank's funds for lending and other investment purposes. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and loan prepayments are influenced significantly by general
interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds
from other sources. They may also be used on a longer-term basis for general
business purposes.
Deposit Accounts. Deposits are attracted from within the Savings Bank's
primary market area through the offering of a broad selection of deposits as
set forth in the following table. In determining the terms of its deposit
accounts, the Savings Bank considers current market interest rates,
profitability to the Savings Bank, matching deposit and loan products and its
customer preferences and concerns. The Savings Bank's deposit mix and pricing
is generally reviewed weekly. The Savings Bank does not accept brokered
deposits but does accept deposits from municipalities
17
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and other public entities. At December 31, 1998, such public deposits
amounted to $1.2 million. Substantially all of the Savings Bank's depositors
are residents of the State of Tennessee.
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at December 31, 1998.
Weighted
Average Percentage
Interest Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
________ ____ ________________ ______ _______ _________
(In
thousands)
2.88% -- NOW accounts $ 500 $4 618 10.05%
2.96 -- Savings accounts 10 5,000 10.88
3.72 -- Money market deposit 1,000 945 2.06
Certificates of Deposit
_______________________
3.98 3 month Fixed-term, fixed-rate 1,000 440 0.96
4.89 6 month Fixed-term, fixed-rate 1,000 7,428 16.17
5.25 12 month Fixed-term, fixed-rate 500 8,809 19.18
5.36 18 month Fixed-term, fixed rate 500 1,803 3.92
5.40 18 month Step up 500 389 0.85
5.68 2 year Fixed-term, fixed-rate 500 6,501 14.15
5.69 3 year Fixed-term, fixed-rate 500 3,780 8.23
5.90 4 year Fixed-term, fixed-rate 500 1,737 3.78
6.07 5 year Fixed-term, fixed-rate 500 2,010 4.38
5.39 18 month Fixed-term, fixed-rate IRA 10 1,894 4.12
4.88 18 month Fixed-term, fixed-rate 10 582 1.27
_______ ______
Total $45,936 100.00%
======= ======
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at December 31, 1998. Jumbo certificates of
deposit require minimum deposits of $100,000.
Maturity Period Certificates of Deposit
_______________ _______________________
(In thousands)
Three months or less..................... $1,551
Over three through six months............ 1,120
Over six through twelve months........... 2,383
Over twelve months....................... 2,567
______
Total............................... $7,621
======
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The following table sets forth the balances and changes in dollar amounts
of deposits in the various types of accounts offered by the Savings Bank at
the dates indicated.
At December 31,
____________________________________________________
1998 1997
_____________________________ ___________________
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
______ _____ ________ ______ _____
(Dollars in
thousands)
Non-interest bearing
demand accounts........ $ 4,206 8.39% $ 2,251 $1,955 5.28%
NOW accounts............ 4,618 9.21 2,290 2,328 6.28
Passbook accounts....... 5,000 9.97 1,157 3,843 10.37
Money market
deposit accounts....... 945 1.88 657 288 0.78
Fixed-rate certificates
which mature:
Within 1 year......... 24,475 48.81 5,090 19,385 52.30
After 1 year,
but within 2 years... 7,129 14.22 484 6,645 17.93
After 2 years,
but within 3 years... 1,684 3.36 (102) 1,786 4.82
After 3 years
but within 4 years... 1,465 2.92 1,057 408 1.10
After 4 years
but within 5 years... 620 1.24 197 423 1.14
_______ ______ _______ _______ ______
Total.............. $50,142 100.00% $13,081 $37,061 100.00%
======= ====== ======= ======= ======
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank
classified by rates at the dates indicated.
At December 31,
________________________
1998 1997
____ ____
(In thousands)
3.01 - 4.00% ................ $ 381 $ --
4.01 - 5.00% ................ 6,777 419
5.01 - 6.00% ................ 26,764 25,837
6.01 - 7.00% ................ 1,451 2,381
7.01 - 8.00% ................ -- 10
_______ _______
Total........................ $35,373 $28,647
======= =======
Time Deposits by Maturities
The following table sets forth the amount and maturities of time deposits
at December 31, 1998.
Amount Due
___________________________________________
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
________ _____ ______ _____ _______ _____ ________
(Dollars in thousands)
3.01 - 4.00%...$ 381 $ -- $ -- $ -- $ -- $ 381 1.08%
4.01 - 5.00%... 6,198 459 -- -- 120 6,777 19.16
5.01 - 6.00%... 16,760 6,540 1,547 1,417 500 26,764 75.66
6.01 - 7.00%... 1,136 130 137 48 -- 1,451 4.10
_______ ______ ______ ______ _____ _______ ______
Total..........$24,475 $7,129 $1,684 $1,465 $620 $35,373 100.00%
======= ====== ====== ====== ===== ======= ======
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Savings Activities
The following table sets forth the savings activities of the Savings Bank
for the periods indicated.
Year Ended December 31,
_______________________
1998 1997
____ ____
(In thousands)
Beginning balance................................... $37,061 $35,790
_______ _______
Net increase (decrease) before interest credited.... 11,686 (2)
Interest credited................................... 1,395 1,273
_______ _______
Net increase in savings deposits.................... 13,081 1,271
_______ _______
Ending balance ..................................... $50,142 $37,061
======= =======
Borrowings. Savings deposits are the primary source of funds for the
Savings Bank's lending and investment activities and for its general business
purposes. The Savings Bank may rely upon advances from the FHLB-Cincinnati to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Cincinnati has served as the Savings Bank's primary
borrowing source. Advances from the FHLB-Cincinnati are typically secured by
the Savings Bank's first mortgage loans. At December 31, 1998, the Savings
Bank had $5.5 million of borrowings from the FHLB-Cincinnati at a weighted
average rate of 5.2%. Such borrowings have contractual maturities through the
year ending December 31, 2001 and are secured by a blanket lien on $8.3
million of one- to four-family residential real estate loans and by
FHLB-Cincinnati stock with a carrying value of $591,000 at December 31, 1998.
See Note 8 of Notes to Consolidated Financial Statements.
The FHLB-Cincinnati functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Savings Bank is required to own capital stock
in the FHLB-Cincinnati and is authorized to apply for advances on the security
of such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the U.S. government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit programs. Each credit program has its
own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit.
The following tables set forth certain information regarding short-term
borrowings by the Savings Bank at the end of and during the periods indicated.
At December 31,
______________
1998 1997
_____ ____
(Dollars in thousands)
FHLB-Cincinnati advances outstanding............. $5,500 $4,500
Weighted average rate paid
on FHLB-Cincinnati advances..................... 5.23% 6.51%
(table continued on following page)<PAGE>
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Year Ended December 31,
_______________________
1998 1997
____ ____
(Dollars in thousands)
Maximum amount of FHLB-Cincinnati
advances at any month end........................... $9,500 $8,300
Approximate average FHLB-Cincinnati
advances outstanding............................... 7,050 6,250
Approximate weighted average rate paid on
FHLB-Cincinnati advances............................ 6.27% 6.08%
____________________
(1) Computed using the weighted rates of each individual transaction.
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDIA"), and the regulations issued by the OTS and the FDIC to implement
these statutes. These laws and regulations delineate the nature and extent of
the activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Savings Bank's relationship
with its depositors and borrowers is also regulated to a great extent,
especially in such matters as the ownership of deposit accounts and the form
and content of the Savings Bank's mortgage documents. The Savings 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 financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Savings Bank's compliance with various regulatory requirements.
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. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Corporation, the Savings
Bank and their operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Savings Bank, as a member of the FHLB-Cincinnati, is required to
acquire and hold shares of capital stock in the FHLB-Cincinnati in an amount
equal to the greater of (i) 1.0% of the aggregate outstanding principal amount
of residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each year, or (ii) 1/20
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of its advances (i.e., borrowings) from the FHLB-Cincinnati. The Savings Bank
is in compliance with this requirement with an investment in FHLB-Cincinnati
stock of $591,000 at December 31, 1998.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Cincinnati.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Savings Bank's
deposit accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Savings Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period.
The capital categories are: (i) well-capitalized, (ii) adequately capitalized,
or (iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act ("DIF Act") was
enacted, which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Savings Bank, to recapitalize the
SAIF. As a result of the DIF Act and the special one-time assessment, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the Savings
Bank, paying 0%. This assessment schedule is the same as that for the BIF,
which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980s to help fund the
thrift industry cleanup. BIF-assessable deposits are charged an assessment to
help pay interest on the FICO bonds at a rate of approximately .013%. Full
pro rata sharing of the FICO payments between BIF and SAIF members will occur
until the earlier of December 31, 1999, or the date the BIF and SAIF are
merged.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Savings
Bank.
Under the FDIA, 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 OTS. Management of the Savings Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations,
mortgage-backed securities and certain other investments) equal to a monthly
average of not less than a specified percentage (currently 4.0%) of its net
withdrawable accounts plus short-term borrowings. Monetary penalties may be
imposed for failure to meet liquidity requirements.
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Prompt Corrective Action. The FDIA requires each federal banking agency
is required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to
be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a
Tier I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0%
or more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that
is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
The FDIA also provides that a federal banking agency may, after notice
and an opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution
or an undercapitalized institution to comply with supervisory actions as if it
were in the next lower category if the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At December 31, 1998, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Savings Bank fails to meet any standard prescribed by the Guidelines, the
agency may require the Savings Bank to submit to the agency an acceptable plan
to achieve compliance with the standard. Management is aware of no conditions
relating to these safety and soundness standards which would require
submission of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Savings Bank, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At December 31, 1998, the Savings Bank met the test and its QTL
percentage was 76.3%.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains
a QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both
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a savings association and a national bank, and it is limited to national bank
branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Corporation is not subject
to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS' prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Savings Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets
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or assets more than 90 days past due. Qualifying residential mortgage loans
(including multi-family mortgage loans) are assigned a 50% risk weight.
Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do
not exceed an 80% loan-to-value ratio. The book value of assets in each
category is multiplied by the weighing factor (from 0% to 100%) assigned to
that category. These products are then totalled to arrive at total
risk-weighted assets. Off-balance sheet items are included in risk-weighted
assets by converting them to an approximate balance sheet "credit equivalent
amount" based on a conversion schedule. These credit equivalent amounts are
then assigned to risk categories in the same manner as balance sheet assets
and included as risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to calculate
their interest rate risk component in lieu of the OTS-calculated amount. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital.
At December 31, 1998, the Savings Bank's core capital of approximately
$6.3 million, or 10.0% of adjusted total assets, was $4.4 million in excess of
the OTS requirement of $1.9 million, or 3% of adjusted total assets. As of
such date, the Savings Bank's tangible capital of approximately $6.3 million,
or 10.0% of adjusted total assets, was $5.4 million in excess of the OTS
requirement of $948,000, or 1.5% of adjusted total assets. Finally, at
December 31, 1998, the Savings Bank had risk-based capital of approximately
$6.9 million or 15.7% of total risk-weighted assets, which was $3.4 million in
excess of the OTS risk-based capital requirement of $3.5 million or 8% of
risk-weighted assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the
OTS 30 days' advance notice of any propose declaration of dividends, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal
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to or in excess of its minimum capital requirement but below its fully
phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting
its fully phased-in capital requirement. Capital distributions exceeding this
amount require prior OTS approval. A Tier 3 savings association has capital
below the minimum capital requirement (either before or after the proposed
capital distribution). A Tier 3 savings association may not make any capital
distributions without prior approval from the OTS.
The Savings Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily- marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At December 31, 1998, the
Savings Bank's limit on loans to one borrower was $947,000. At December 31,
1998, the Savings Bank's largest single loan to one borrower was $523,000,
which was performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guaranty and
similar types of transactions. Any loan or extension of credit by the Savings
Bank to an affiliate must be secured by collateral in accordance with Section
23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities
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of a subsidiary); and (iii) the OTS may, for reasons of safety and soundness,
impose more stringent restrictions on savings associations but may not exempt
transactions from or otherwise abridge Section 23A or 23B. Exemptions from
Section 23A or 23B may be granted only by the Federal Reserve Board, as is
currently the case with respect to all FDIC-insured banks. The Savings Bank
has not been significantly affected by the rules regarding transactions with
affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require
that such loans be made on terms and conditions substantially the same as
those offered to unaffiliated individuals and not involve more than the normal
risk of repayment. Regulation O also places individual and aggregate limits
on the amount of loans the Savings Bank may make to such persons based, in
part, on the Savings Bank's capital position, and requires certain board
approval procedures to be followed. The OTS regulations, with certain minor
variances, apply Regulation O to savings institutions.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated
financial institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Savings Bank received a "satisfactory" rating
as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions
under the HOLA. If the Corporation acquires control of another savings
association as a separate subsidiary other than in a supervisory acquisition,
it would become a multiple savings and loan holding company. There generally
are more restrictions on the activities of a multiple savings and loan holding
company than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue
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for more than two years after becoming a multiple savings and loan association
holding company or subsidiary thereof, any business activity other than: (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, (iv) holding or managing properties used or
occupied by a subsidiary insured institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which
the association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Company and the Savings Bank report their income on a
fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Savings Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings
Bank which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Savings
Bank's deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on the Savings Bank's actual loss experience, or a
percentage equal to 8% of the Savings Bank's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the non-qualifying reserve. Due to the Savings Bank's loss experience, the
Savings Bank generally recognized a bad debt deduction equal to 8% of taxable
income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Savings Bank has no
post-1987 reserves subject to recapture. For taxable years beginning after
December 31, 1995, the Savings Bank's bad debt deduction will be determined
under the experience method using a formula based on actual bad debt
experience over a period of years. The unrecaptured base year reserves will
not be subject to recapture as long as the institution continues to carry on
the business of banking. In addition, the balance of the pre-1988 bad debt
reserves continue to be subject to provisions of present law referred to below
that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Savings Bank's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank's current and accumulated
earnings and profits, distributions in redemption of stock and distributions
in partial or complete liquidation. However, dividends paid out of the
Savings Bank's current or accumulated earnings
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and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Savings Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Savings Bank makes a "nondividend distribution," then
approximately one and one-half times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state and local taxes). See
"Regulation" for limits on the payment of dividends by the Savings Bank. The
Savings Bank does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Savings Bank,
whether or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Savings Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Savings Bank will not file a
consolidated tax return, except that if the Company or the Savings Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80%
of any dividends received may be deducted.
State Taxation
The Tennessee franchise tax rate applicable to the Savings Bank is 0.25%
of the total base (capital stock and retained earnings). Under Tennessee
regulations, bad debt deductions are deductible from the excise tax. There
have not been any audits of the Savings Bank's state tax returns during the
past five years.
Audits
The Company's income tax returns have not been audited by federal or
state authorities within the last five years. For additional information
regarding income taxes, see Note 9 of the Notes to Consolidated Financial
Statements.
Personnel
As of December 31, 1998, the Savings Bank had 24 full-time and six
part-time employees, none of whom are represented by a collective bargaining
unit. The Savings Bank believes its relationship with its employees is good.
Item 2. Description of Properties
__________________________________
At December 31, 1998, the net book value of the Savings Bank's premises
and equipment totaled $1.6 million.
The Savings Bank's 7,140 square foot main office is located at 306 West
Main Street, McMinnville, Tennessee, which opened in 1969. The Savings Bank
owns the building and real estate. An ATM is installed at this location.
On March 10, 1997, the Savings Bank opened a 1,560 square foot branch
office at 1017 New Smithville Highway, McMinnville, Tennessee. The Savings
Bank owns the building and real estate. An ATM also is installed at this
location.
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The Savings Bank also operates a proprietary ATM at the Country Club
Market near McMinnville, Tennessee.
The Savings Bank uses an outside data processor to post transactions to
its loan and deposit accounts. As the Year 2000 approaches, a significant
undertaking for all financial institutions exists in addressing the impact
this event will have on information systems and overall operations as the
consequences for noncompliance would be significant. The Savings Bank has
developed a plan to analyze how the Year 2000 will impact its operations and
related vendors given the service bureau environment that the Savings Bank
operates. The Savings Bank will continued to monitor its status as well as
its service providers' status in their efforts to become Year 2000 compliant.
Given the service bureau environment under which the Savings Bank operates,
management does not believe the internal costs to address the Year 2000 issue
will have a material impact on future operations other than the impact such
event will have on the cost of services provided by its vendors which is
unknown at this time.
Item 3. Legal Proceedings
__________________________
Periodically, there have been various claims and lawsuits involving the
Savings Bank, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Savings Bank holds
security interests, claims involving the making and servicing of real property
loans and other issues incident to the Savings Bank's business. The Savings
Bank is not a party to any pending legal proceedings that it believes would
have a material adverse effect on the financial condition or operations of the
Savings Bank.
Item 4. Submission of Matters to a Vote of Security Holders
____________________________________________________________
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1998.
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters
_____________________________________________________________________
The information contained in the section captioned "Common Stock
Information" in 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
_____________________________
Independent Auditors Report*
(a) Consolidated Statements of Financial Condition as of December 31, 1998
and 1997
(b) Consolidated Statements of Income for the Years Ended December 31, 1998
and 1997
(c) Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1998 and 1997
(d) Consolidated Statements of Cash Flows For the Years Ended December 31,
1998 and 1997
(e) Notes to Consolidated Financial Statements
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or contained in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
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Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
________________________________________________________________________
No disagreement with the Corporation's independent accountants on
accounting and financial disclosure has occurred during the two most recent
fiscal years.
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 section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
The following table sets forth certain information with respect to the
executive officers of the Corporation and the Savings Bank.
Age at
December 31,
Name 1998 Position
____ ___________ ________
Dr. Franklin J. Noblin 60 Chairman of the Board
Joe H. Pugh 42 President and Chief
Executive Officer
Dr. R. Neil Schultz 62 Treasurer and Secretary
Ray Talbert 54 Executive Vice President,
Commercial Loan Officer
and Branch Manager
John W. Duncan 33 Vice President and Chief
Financial Officer
Nita M. Baggett 58 Senior Vice President of
Secondary Marketing
Kenneth D. Martin 48 Senior Vice President of
Consumer Lending
Kenneth W. Smith 49 Senior Vice President of
Trust/Investment Management
The following is a description of the principal occupation and employment
of the executive officers of the Corporation and the Savings Bank during at
least the past five years:
Dr. Franklin J. Noblin is a semi-retired general dentist, and a retired
Colonel in the United States Army Reserve-Chief of Professional Services and
Brigade Dental Surgeon. He is also a member of the Reserve Officers'
Association.
Joe H. Pugh has been employed by the Savings Bank since 1978 and has
served as President and Chief Executive Officer since 1993. He is a member of
the McMinnville Chamber of Commerce Board and the McMinnville Noon Rotary
Club.
Dr. R. Neil Schultz, a retired orthodontist, is a member and President
elect of the McMinnville Noon Rotary Club and past president of the Tennessee
Association of Orthodontists.
Ray Talbert has been employed by the Savings Bank since February 1996.
Before joining the Savings Bank, he was employed as a Senior Vice President by
Bank of McMinnville, McMinnville, Tennessee. Mr. Talbert is a member of the
Warren County Chamber of Commerce, the Warren County Home Builders Association
and the Merchants Retail Credit Bureau.
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John W. Duncan has been employed by the Savings Bank since 1993. Prior
to that, Mr. Duncan was a Bank Examiner for the Tennessee Department of
Financial Institutions. He is a member of the McMinnville Noon Exchange Club
and past treasurer for Leadership McMinnville.
Nita M. Baggett has been employed by the Savings Bank since 1992. She is
a member of the Warren County Home Builders Association, a Board of Director
for Habitat for Humanity of Warren County and serves on the Board of the
American Heart Association.
Kenneth D. Martin has been employed by the Savings Bank since July 1998.
Before joining the Savings Bank, he was employed as a Vice President by Union
Planters Bank, McMinnville, Tennessee. He was a past member of the Evening
Exchange Club.
Kenneth W. Smith has been employed by the Savings Bank since July 1998.
Before joining the Savings Bank, he was employed as a Senior Vice President of
Union Planters Bank, McMinnville, Tennessee. Mr. Smith is a member of the
McMinnville Breakfast Rotary Club, and serves on the LBJ&C Policy Council and
Board of Directors.
Reference is made to the cover page of this Annual Report on Form
10-KSB, and the information under the section captioned "Compliance with
Section 16(a) of the Exchange Act" in the Proxy Statement is incorporated
herein by reference, with regard to compliance with Section 16(a) of the
Exchange Act.
Item 10. Executive Compensation
________________________________
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
_______________________________________________________________________
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of
Certain Beneficial Owners and Management" of the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned and "Security Ownership of
Certain Beneficial Owners and Management" and "Proposal I -
Election of Directors" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any
pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change
in control of the Corporation.
Item 12. Certain Relationships and Related Transactions
________________________________________________________
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Transactions with Management."
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Item 13. Exhibits, List and Reports on Form 8-K
________________________________________________
(a) Exhibits
3.1 Charter of Security Bancorp, Inc. (incorporated by
reference to Exhibit 3.1 to the registrant's Registration
Statement on Form SB-2 (333-6670))
3.2 Bylaws of Security Bancorp, Inc. (incorporated by reference
to Exhibit 3.2 to the registrant's Registration Statement
on Form SB-2 (333-6670))
10.1 Employment Agreement with Joe H. Pugh (incorporated by
reference to Exhibit 10(a) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended
June 30,1997)
10.2 Severance Agreement with John W. Duncan (incorporated by
reference to Exhibit 10(b) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended
June 30,1997)
10.3 Severance Agreement with Ray Talbert (incorporated by
reference to Exhibit 10(c) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended
June 30,1997)
10.4 Severance Agreement with Kenneth W. Smith
10.5 Severance Agreement with Shannon L. Haston
10.6 Security Federal Savings Bank of McMinnville, TN 401(k)
Plan (incorporated by reference to Exhibit 10.4 to the
registrant's Registration Statement on Form SB-2
(333-6670))
10.7 Security Federal Savings Bank of McMinnville, TN Employee
Stock Ownership Plan (incorporated by reference to Exhibit
10.5 to the registrants Annual Report on Form 10-KSB for
the year ended December 31, 1997)
10.8 Security Bancorp, Inc. Management Recognition and
Development Plan (incorporated by reference to Exhibit A
to the registrant's Annual Meeting Proxy Statement dated
March 16, 1998)
10.9 Security Bancorp, Inc. 1998 Stock Option Plan (incorporated
by reference to Exhibit B to the registrant's Annual
Meeting Proxy Statement dated March 16, 1998)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Auditors
27 Financial Data Schedule
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended
December 31, 1998.
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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.
SECURITY BANCORP, INC.
Date: March 29, 1999 By: /s/Joe H. Pugh
______________________________________
Joe H. Pugh
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements 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 and on the dates indicated.
By: /s/Joe H. Pugh March 29, 1999
____________________________________________
Joe H. Pugh
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/John W. Duncan March 29, 1999
____________________________________________
John W. Duncan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/Dr. Franklin J. Noblin March 29, 1999
____________________________________________
Dr. Franklin J. Noblin
Chairman of the Board and Director
By: /s/Dr. Raymond Neil Schultz March 29, 1999
____________________________________________
Dr. Raymond Neil Schultz
Treasurer, Secretary and Director
By: /s/Dr. John T. Mason, III March 29, 1999
____________________________________________
Dr. John T. Mason, III
Director
By: /s/Robert W. Newman March 29, 1999
____________________________________________
Robert W. Newman
Director
By: /s/Donald R. Collette March 29, 1999
____________________________________________
Donald R. Collette
Director
By: /s/Earl H. Barr March 29, 1999
____________________________________________
Earl H. Barr
Director
<PAGE>
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Exhibit 10.4
Severance Agreement with Kenneth W. Smith
<PAGE>
<PAGE>
AGREEMENT
THIS AGREEMENT is made effective as of December 15, 1998 by and between
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN (the "Savings Bank");
SECURITY BANCORP, INC. (the "Company"), a Tennessee corporation; and KENNETH
W. SMITH ("Executive").
WHEREAS, Executive serves in the position of Senior Vice President
(Investment/Trust) of the Savings Bank, with responsibility for managing the
investment and trust department of the Bank.
NOW, THEREFORE, in consideration of the foregoing and upon the other
terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. Term Of Agreement
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twenty-four (24)
full calendar months thereafter. Commencing on the first anniversary date of
this Agreement and continuing at each anniversary date thereafter, the Board
of Directors of the Savings Bank ("Board") may extend the Agreement for an
additional year. The Chief Executive Officer of the Savings Bank will conduct
a performance evaluation of Executive for purposes of determining whether to
extend the Agreement.
2. Payments To Executive Upon Change In Control.
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Savings Bank followed within twelve (12) months of the effective date of a
Change in Control by the voluntary or involuntary termination of Executive's
employment, other than Termination for Cause, as defined in Section 2(c)
hereof, the provisions of Section 3 shall apply. For purposes of this
Agreement, "voluntary termination" shall be limited to the circumstances in
which, during the term of this Agreement, Executive elects to voluntarily
terminate his employment within twelve (12) months of the effective date of a
Change in Control following any material demotion, loss of title, office or
authority, material reduction in his annual compensation or benefits (other
than a reduction affecting the Savings Bank's personnel generally), or
relocation of his principal place of employment by more than 35 miles from its
location immediately prior to the Change in Control.
(b) A "Change in Control" of the Company or the Savings Bank shall be
deemed to occur if and when (a) an offeror other than the Company purchases
shares of the common stock of the Company or the Savings Bank pursuant to a
tender or exchange offer for such shares, (b) any person (as such term is used
in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Savings Bank representing 25% or more of the combined voting
power of the Company's then outstanding securities, (c) the membership of the
board of directors of
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the Company or the Savings Bank changes as the result of a contested election,
such that individuals who were directors at the beginning of any twenty-four
month period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such
period, or (d) shareholders of the Company or the Savings Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of Executive's
intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order, or
any material breach of any material provision of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards generally prevailing in the savings institution industry.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct
justifying Termination for Cause and specifying the particulars thereof in
detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control, followed within twelve
(12) months of the effective date of a Change in Control by the voluntary or
involuntary termination of Executive's employment other than for Termination
for Cause, the Savings Bank shall be obligated to pay Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, as severance pay, a sum equal to two (2) times
Executive's taxable compensation, including salary, bonuses and commissions,
for the twelve (12) month period ending on the last day of the month preceding
his date of termination. Such amount shall be paid to Executive in a lump sum
no later than thirty (30) days after the date of his termination.
(b) Upon the occurrence of a Change in Control of the Savings Bank
followed within twelve (12) months of the effective date of a Change in
Control by Executive's voluntary or involuntary termination of employment,
other than for Termination for Cause, the Savings Bank shall cause to be
continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Savings Bank for Executive prior
to his severance. Such coverage and payments shall cease upon expiration of
twenty-four (24) months from the date of Executive's termination.
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(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Code, then, at the election of Executive, (i)
such payments or benefits shall be payable or provided to Executive over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
Executive's "base amount" under Section 280G(b)(3) of the Code or (ii) Executive
shall receive the amount payable under Section 3(a) as the sole benefit
payable under this Section 3.
(d) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
4. Effect On Prior Agreements And Existing Benefit Plans
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Savings Bank and
Executive, except that this Agreement shall not affect or operate to reduce
any benefit or compensation inuring to Executive of a kind elsewhere provided.
No provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, the Savings Bank and their respective successors and
assigns.
6. Modification And Waiver
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there by an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
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<PAGE>
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
7. Required Provisions
(a) The Savings Bank may terminate Executive's employment at any time,
but any termination by the Savings Bank, other than Termination for Cause,
shall not prejudice Executive's right to compensation or other benefits under
this Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in
Section 2(c) herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank may, in its discretion, (i) pay Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this paragraph shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Savings Bank under the authority contained in Section
13(c) of the FDIA and (ii) by the Director, or his or her designee at the time
the Director or such designee approves a supervisory merger to resolve
problems related to operation of the Savings Bank or when the Savings Bank is
determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
-4-
<PAGE>
<PAGE>
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
9. Headings For Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Tennessee, unless
preempted by Federal law as now or hereafter in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided
by the Savings Bank, such amounts and benefits shall be paid or provided by
the Company.
12. Noncompetition.
(a) Upon any termination of Executive's employment during the term of
this Agreement, other than following a Change in Control or in the event of
death or disability, Executive agrees not to compete with the Savings Bank
and/or the Company for a period of twelve (12) months following such
termination within a radius of fifty (50) miles of any city, town or county
in which the Savings Bank and/or the Company has an office or has filed an
application for regulatory approval to establish an office, determined as of
the effective date of such termination. Executive agrees that during such
period and within said cities, towns and counties, Executive shall not work
for or advise, consult or otherwise serve with, directly or indirectly, any
entity whose business materially competes with the depository, lending or
other business activities of the Savings Bank and/or the Company. The parties
hereto, recognizing that irreparable injury will result to the Savings Bank
and/or the Company, its business and property in the event of Executive's
breach of this Subsection 12(a) agree that in the event of any such breach by
Executive, the Savings Bank and/or the Company will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain
-5-
<PAGE>
<PAGE>
the violation hereof by Executive, Executive's partners, agents, servants,
employers, employees and all persons acting for or with Executive. Executive
represents and admits that in the event of the termination of his employment
in the circumstances covered by this Section 11, Executive's experience and
capabilities are such that Executive can obtain employment in a business
engaged in other lines and/or of a different nature than the Savings Bank
and/or the Company, and that the enforcement of a remedy by way of injunction
will not prevent Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Savings Bank and/or the Company from pursuing any
other remedies available to the Savings Bank and/or the Company for such
breach or threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Savings Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Savings Bank. Executive will not,
during or after the term of his employment, disclose any knowledge of the
past, present, planned or considered business activities of the Savings Bank
or affiliates thereof to any person, firm, corporation, or other entity for
any reason or purpose whatsoever. Notwithstanding the foregoing, Executive
may disclose any knowledge of banking, financial and/or economic principles,
concepts or ideas which are not solely and exclusively derived from the
business plans and activities of the Savings Bank. In the event of a breach
or threatened breach by Executive of the provisions of this Section, the
Savings Bank will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned
or considered business activities of the Savings Bank or affiliates thereof,
or from rendering any services to any person, firm, corporation, other entity
to whom such knowledge, in whole or in part, has been disclosed or is
threatened to be disclosed. Nothing herein will be construed as prohibiting
the Savings Bank from pursuing any other remedies available to the Savings
Bank for such breach or threatened breach, including the recovery of damages
from Executive.
13. Successor To The Savings Bank or the Company
The Savings Bank and the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all the business or assets of the Savings Bank or the
Company, expressly and unconditionally to assume and agree to perform the
Savings Bank's or the Company's obligations under this Agreement, in the same
manner and to the same extent that the Savings Bank or the Company would be
required to perform if no such succession or assignment had taken place.
-6-
<PAGE>
<PAGE>
14. Signatures
IN WITNESS WHEREOF, the Savings Bank and the Company have caused this
Agreement to be executed by a duly authorized officer, and Executive has
signed this Agreement, all on the day and date first above written.
ATTEST: SECURITY FEDERAL SAVINGS BANK
OF MCMINNVILLE, TN
/s/John Duncan By:/s/ Joe H. Pugh
______________________ __________________________
John Duncan Joe H. Pugh
ATTEST: SECURITY BANCORP, INC.
/s/John Duncan By:/s/ Joe H. Pugh
______________________ __________________________
John Duncan Joe H. Pugh
WITNESS:
/s/John Duncan By:/s/ Kenneth W. Smith
______________________ __________________________
John Duncan Kenneth W. Smith
-7-
<PAGE>
<PAGE>
Exhibit 10.5
Severance Agreement with Shannon L. Haston
<PAGE>
<PAGE>
AGREEMENT
THIS AGREEMENT is made effective as of December 15, 1998 by and between
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN (the "Savings Bank");
SECURITY BANCORP, INC. (the "Company"), a Tennessee corporation; and SHANNON
L. HASTON ("Executive").
WHEREAS, Executive serves in the position of Vice President
(Investment/Trust) of the Savings Bank, with responsibility for investment and
trust operations;
NOW, THEREFORE, in consideration of the foregoing and upon the other
terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. Term Of Agreement
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twelve (12) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Savings Bank ("Board") may extend the Agreement for an
additional year. The Chief Executive Officer of the Savings Bank will conduct
a performance evaluation of Executive for purposes of determining whether to
extend the Agreement.
2. Payments To Executive Upon Change In Control.
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Savings Bank followed within twelve (12) months of the effective date of a
Change in Control by the voluntary or involuntary termination of Executive's
employment, other than Termination for Cause, as defined in Section 2(c)
hereof, the provisions of Section 3 shall apply. For purposes of this
Agreement, "voluntary termination" shall be limited to the circumstances in
which, during the term of this Agreement, Executive elects to voluntarily
terminate his employment within twelve (12) months of the effective date of a
Change in Control following any material demotion, loss of title, office or
authority, material reduction in his annual compensation or benefits (other
than a reduction affecting the Savings Bank's personnel generally), or
relocation of his principal place of employment by more than 35 miles from its
location immediately prior to the Change in Control.
(b) A "Change in Control" of the Company or the Savings Bank shall be
deemed to occur if and when (a) an offeror other than the Company purchases
shares of the common stock of the Company or the Savings Bank pursuant to a
tender or exchange offer for such shares, (b) any person (as such term is used
in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Savings Bank representing 25% or more of the combined voting
power of the Company's then outstanding securities, (c) the membership of the
board of directors of the Company or the Savings Bank changes as the result of
a contested election, such that
<PAGE>
<PAGE>
individuals who were directors at the beginning of any twenty-four month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such
period, or (d) shareholders of the Company or the Savings Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.
(c) Executive shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of Executive's
intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order, or
any material breach of any material provision of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards generally prevailing in the savings institution industry.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct
justifying Termination for Cause and specifying the particulars thereof in
detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control, followed within twelve
(12) months of the effective date of a Change in Control by the voluntary or
involuntary termination of Executive's employment other than for Termination
for Cause, the Savings Bank shall be obligated to pay Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, as severance pay, a sum equal to two (2) times
Executive's taxable compensation for the twelve (12) month period ending on
the last day of the month preceding his date of termination. Such amount
shall be paid to Executive in a lump sum no later than thirty (30) days after
the date of his termination.
(b) Upon the occurrence of a Change in Control of the Savings Bank
followed within twelve (12) months of the effective date of a Change in
Control by Executive's voluntary or involuntary termination of employment,
other than for Termination for Cause, the Savings Bank shall cause to be
continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Savings Bank for Executive prior
to his severance. Such coverage and payments shall cease upon expiration of
twelve (12) months from the date of Executive's termination.
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<PAGE>
<PAGE>
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Code, then, at the election of Executive, (i)
such payments or benefits shall be payable or provided to Executive over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
Executive's "base amount" under Section 280G(b)(3) of the Code or (ii) Executive
shall receive the amount payable under Section 3(a) as the sole benefit
payable under this Section 3.
(d) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
4. Effect On Prior Agreements And Existing Benefit Plans
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Savings Bank and
Executive, except that this Agreement shall not affect or operate to reduce
any benefit or compensation inuring to Executive of a kind elsewhere provided.
No provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, the Savings Bank and their respective successors and
assigns.
6. Modification And Waiver
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
-3-
PAGE
<PAGE>
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
7. Required Provisions
(a) The Savings Bank may terminate Executive's employment at any time,
but any termination by the Savings Bank, other than Termination for Cause,
shall not prejudice Executive's right to compensation or other benefits under
this Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in
Section 2(c) herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank may, in its discretion, (i) pay Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this paragraph shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Savings Bank under the authority contained in Section
13(c) of the FDIA and (ii) by the Director, or his or her designee at the time
the Director or such designee approves a supervisory merger to resolve
problems related to operation of the Savings Bank or when the Savings Bank is
determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
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<PAGE>
<PAGE>
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
9. Headings For Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Tennessee, unless
preempted by Federal law as now or hereafter in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided
by the Savings Bank, such amounts and benefits shall be paid or provided by
the Company.
12. Noncompetition.
(a) Upon any termination of Executive's employment during the term of
this Agreement, other than following a Change in Control or in the event of
death or disability, Executive agrees not to compete with the Savings Bank
and/or the Company for a period of twelve (12) months following such
termination within a radius of fifty (50) miles of any city, town or county
in which the Savings Bank and/or the Company has an office or has filed an
application for regulatory approval to establish an office, determined as of
the effective date of such termination. Executive agrees that during such
period and within said cities, towns and counties, Executive shall not work
for or advise, consult or otherwise serve with, directly or indirectly, any
entity whose business materially competes with the depository, lending or
other business activities of the Savings Bank and/or the Company. The parties
hereto, recognizing that irreparable injury will result to the Savings Bank
and/or the Company, its business and property in the event of Executive's
breach of this Subsection 12(a) agree that in the event of any such breach by
Executive, the Savings Bank and/or the Company will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain
-5-
<PAGE>
<PAGE>
the violation hereof by Executive, Executive's partners, agents, servants,
employers, employees and all persons acting for or with Executive. Executive
represents and admits that in the event of the termination of his employment
in the circumstances covered by this Section 11, Executive's experience and
capabilities are such that Executive can obtain employment in a business
engaged in other lines and/or of a different nature than the Savings Bank
and/or the Company, and that the enforcement of a remedy by way of injunction
will not prevent Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Savings Bank and/or the Company from pursuing any
other remedies available to the Savings Bank and/or the Company for such
breach or threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Savings Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Savings Bank. Executive will not,
during or after the term of his employment, disclose any knowledge of the
past, present, planned or considered business activities of the Savings Bank
or affiliates thereof to any person, firm, corporation, or other entity for
any reason or purpose whatsoever. Notwithstanding the foregoing, Executive
may disclose any knowledge of banking, financial and/or economic principles,
concepts or ideas which are not solely and exclusively derived from the
business plans and activities of the Savings Bank. In the event of a breach
or threatened breach by Executive of the provisions of this Section, the
Savings Bank will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned
or considered business activities of the Savings Bank or affiliates thereof,
or from rendering any services to any person, firm, corporation, other entity
to whom such knowledge, in whole or in part, has been disclosed or is
threatened to be disclosed. Nothing herein will be construed as prohibiting
the Savings Bank from pursuing any other remedies available to the Savings
Bank for such breach or threatened breach, including the recovery of damages
from Executive.
13. Successor To The Savings Bank or the Company
The Savings Bank and the Company shall require any successor or
assignee, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to all or substantially all the business or assets of the Savings
Bank or the Company, expressly and unconditionally to assume and agree to
perform the Savings Bank's or the Company's obligations under this Agreement,
in the same manner and to the same extent that the Savings Bank or the Company
would be required to perform if no such succession or assignment had taken
place.
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<PAGE>
<PAGE>
14. Signatures
IN WITNESS WHEREOF, the Savings Bank and the Company have caused this
Agreement to be executed by a duly authorized officer, and Executive has
signed this Agreement, all on the day and date first above written.
ATTEST: SECURITY FEDERAL SAVINGS BANK
OF MCMINNVILLE, TN
/s/John Duncan By:/s/ Joe H. Pugh
______________________ __________________________
John Duncan Joe H. Pugh
ATTEST: SECURITY BANCORP, INC.
/s/John Duncan By:/s/ Joe H. Pugh
______________________ __________________________
John Duncan Joe H. Pugh
WITNESS:
/s/John Duncan By:/s/ Shannon L. Haston
______________________ __________________________
John Duncan Shannon L. Haston
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<PAGE>
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
<PAGE>
Security Bancorp, Inc.
1998 Annual Report
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
-----
President's Message.............................................. 1
Business of the Corporation ..................................... 2
Common Stock Information ....................... ................ 2
Selected Consolidated Financial Information...................... 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 5
Independent Auditor's Report..................................... 13
Consolidated Financial Statements................................ 14
Notes to Consolidated Financial Statements....................... 18
Directors and Officers of Security Bancorp, Inc.................. 43
Directors and Officers of Security Federal Savings Bank of
McMinnville, TN............................................... 44
Corporate Information............................................ 45
Annual Meeting................................................... 45
<PAGE>
<PAGE>
[Security Bancorp Letterhead]
President's Message
To Our Stockholders:
On behalf of the Board of Directors, Officers and Employees of Security
Bancorp, Inc. and its wholly owned subsidiary, Security Federal Savings Bank,
we are pleased to present our second Annual Report as a public company.
Net income for the year ended December 31, 1998 was $602,000, or $1.50 per
share, compared to $458,000 in 1997. The Company's consolidated assets
totaled $63.4 million at December 31, 1998 compared to $50.9 million a year
earlier, representing a 24.6% increase. The increase in assets was mainly due
to strong local loan originations. We were able to fund this asset growth
through increased deposits provided from our community. Total stockholders'
equity amounted to $7.0 million at December 31, 1998, and the Company paid its
first dividend of $.25 per share during 1998.
Income diversification was a major focus during 1998 and should continue to
enhance performance in the future. The Bank established a Trust/Investment
Management Department in fiscal 1998 and was managing $44.0 million in assets
at December 31, 1998.
Security Bancorp is positioned to meet tomorrow's challenges and
opportunities. Quality financial services and products, along with dedicated
staff, management, and directors who recognize the importance of customer and
stockholder satisfaction, will be the key ingredients to our growth and
profitability.
On behalf of the Board of Directors, management and staff, we would like to
thank you for your loyalty and confidence as demonstrated by your investment.
Sincerely,
/s/Joe H. Pugh
Joe H. Pugh
President & CEO
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<PAGE>
<PAGE>
BUSINESS OF THE CORPORATION
Security Bancorp, Inc. ("Company"), a Tennessee corporation, was organized on
March 18, 1997 for the purpose of becoming the holding company for Security
Federal Savings Bank of McMinnville, TN ("Bank") upon its conversion from a
federal mutual savings bank to a federal stock savings bank ("Conversion").
The Conversion was completed on June 30, 1997, through the issuance, by the
Company, of 436,425 shares of common stock at $10.00 per share. At December
31, 1998, the Company had total consolidated assets of $63.4 million and
consolidated stockholders' equity of $7.0 million. The Company is not engaged
in any significant business activity other than holding the stock of the Bank.
Accordingly, the information set forth in the report, including financial
statements and related data, applies primarily to the Bank.
The Bank is a federal stock savings bank originally organized in 1960. The
Bank is regulated by the Office of Thrift Supervision ("OTS"). Its deposits
are insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Bank also
is a member of the Federal Home Loan Bank ("FHLB") System.
The Bank operates as a community-oriented financial institution devoted to
serving the needs of its customers in its primary market area of Warren
County, Tennessee and contiguous counties. The Bank's business consists
primarily of attracting deposits from the general public and using those funds
to originate residential real estate loans, acquisition and development loans,
commercial business loans, and consumer loans.
COMMON STOCK INFORMATION
The Company's common stock is traded on the over-the-counter market through
the OTC "Electronic Bulletin Board" under the symbol of "SCYT". As of
December 31, 1998, there were approximately 207 stockholders of record and
436,425 shares of common stock outstanding (including unreleased Employee
Stock Ownership Plan ("ESOP") shares of 29,676). Generally, if the Bank
satisfies its regulatory capital requirements, it may make dividend payments
up to the limits prescribed in the OTS regulations. However, institutions
that have converted to the stock form of ownership may not declare or pay a
dividend on, or repurchase any of, its common stock if the effect thereof
would cause the regulatory capital of the institution to be reduced below the
amount required for the liquidation account which was established in
accordance with the OTS regulations. To date, the Company has not established
a policy of paying regular cash dividends. However, the Company paid its
first dividend during fiscal 1998.
The Company completed its initial stock offering on June 30, 1997. The
following table sets forth market price range of the Company's common stock
for the last two quarters of fiscal 1997 and for the four quarters of fiscal
1998.
High Low Dividends
Fiscal 1997 ____ _____ _________
Third Quarter $ 15.500 $ 14.375 N/A
Fourth Quarter 16.500 15.500 N/A
Fiscal 1998
First Quarter 16.375 16.250 N/A
Second Quarter 17.250 16.500 N/A
Third Quarter 17.375 16.875 .25/share
Fourth Quarter 17.875 17.625 N/A
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain information concerning the
consolidated financial position and results of operations of the Company at
and for the dates indicated. Since the Company had not commenced operations
prior to the mutual to stock conversion of the Bank in June 1997, the
financial information presented for the periods prior to 1997 is that of the
Bank only. The consolidated data is derived in part from, and should be read
in conjunction with, the Consolidated Financial Statements of the Company and
its Subsidiary presented herein.
At December 31,
________________________________________
1998 1997 1996 1995 1994
____ ____ ____ ____ ____
(In thousands)
SELECTED FINANCIAL CONDITIONAL DATA:
Total assets $63,425 $50,920 $44,121 $36,065 $30,885
Loans receivable, net 53,473 43,093 36,667 26,984 21,888
Cash and cash equivalents 2,581 1,896 1,098 288 451
Investment securities
available for sale 1,420 1,379 1,743 1,191 --
Investment securities
held-to-maturity 650 1,248 1,250 3,950 5,071
Mortgage-backed securities
available for sale 1,956 -- -- 645 --
Mortgage-backed securities
held-to-maturity 501 1,206 1,580 1,734 2,645
Deposits 50,142 37,061 35,790 32,398 28,112
FHLB Advances 5,500 6,500 5,500 1,000 500
Stockholders equity,
substantially restricted 6,989 6,735 2,450 2,284 1,922
(Retained earnings, substantially
restricted, before December 31, 1997)
At December 31,
_______________________________________
1998 1997 1996 1995 1994
____ ____ ____ ____ ____
(In thousands)
SELECTED OPERATING DATA:
Interest income $4,592 $3,926 $3,294 $2,696 $2,175
Interest expense 2,326 2,105 1,840 1,513 1,178
_____ _____ _____ _____ _____
Net interest income 2,266 1,821 1,454 1,183 997
Provision for loan losses 285 60 116 30 30
_____ _____ _____ _____ _____
Net interest income after
provision for loan losses 1,981 1,761 1,338 1,153 967
_____ _____ _____ _____ _____
Non interest income 811 278 158 125 73
Other expense(1) 1,819 1,314 1,275 829 731
_____ _____ _____ _____ _____
Income before income tax expense 973 725 221 449 309
Income tax expense 371 267 83 148 108
_____ _____ _____ _____ _____
Net income $ 602 $ 458 $ 138 $ 301 $ 201
===== ===== ===== ===== =====
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<PAGE>
<PAGE>
At December 31,
_______________________________________
1998 1997 1996 1995 1994
____ ____ ____ ____ ____
(In thousands)
KEY OPERATING RATIOS
Performance Ratios:
Return on average assets (net
income divided by
average assets) 1.05% 0.95% 0.34% 0.90% 0.66%
Return on average equity
(net income divided by
average equity) 8.64 8.27 6.17 15.71 12.64
Interest rate spread (difference
between average yield on interest
earning assets and average cost
of interest-bearing liabilities) 3.48 3.43 3.50 3.35 3.31
Net interest margin (net interest
income as a percentage of
average interest-earning assets) 4.19 3.99 3.79 3.64 3.41
Noninterest expense as a
percent of average assets 3.18 2.72 3.18 2.48 2.40
Average interest-earning assets
to interest-bearing liabilities 116.34 112.14 106.03 106.08 102.95
Efficiency ratio (other expenses
divided by the sum of net interest
income and non-interest income) 59.12 62.60 79.09 50.61 68.32
Capital Ratios:
Average equity to average assets 12.20 11.46 5.90 6.28 5.89
Tangible capital to assets 9.99 12.01 5.24 6.03 6.22
Core capital to assets 9.99 12.01 5.24 6.03 6.22
Risk-based capital to risk
adjusted assets 15.68 20.30 9.87 12.04 13.44
Asset Quality Ratios:
Allowance for loan losses to
total loans at end of period 1.13 0.76 0.75 0.69 0.76
Net charge offs to average
outstanding loans during
the period 0.01 0.01 0.06 0.04 0.04
Ratio of nonperforming
assets to total assets(2) 0.89 0.11 0.11 0.14 0.47
Ratio of allowance for loan
losses to nonperforming
assets(2) 110.32 616.36 631.11 376.00 138.84
SELECTED OTHER DATA:
Number of:
Real estate loans outstanding 877 707 610 579 587
Deposit accounts 5,385 3,459 3,036 2,604 2,344
Full service offices(3) 2 2 1 1 1
- ----------------------------------------------------------------------------
(1) Includes one time special SAIF assessment of $193,000 in 1996.
(2) Non-performing assets consist of non-accrual loans, accruing loans
contractually past due 90 days or more, and foreclosed property.
(3) A branch office in McMinnville, Tennessee was opened on March 10,
1997.
-4-
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of the financial condition and results of
operations is intended to assist in understanding the consolidated financial
condition and results of operations of the Company. The information contained
in this section should be read in conjunction with the Consolidated Financial
Statements and accompanying notes thereto included herein.
Operating Strategy
The business of the Bank consists principally of attracting deposits from the
general public and using such deposits to originate mortgage loans secured
primarily by one- to four-family residences. The Bank also originates
construction, consumer, commercial business, acquisition and development, and
commercial real estate loans. The Bank invests in certificates of deposit,
investment grade federal agency securities, and mortgage-backed securities.
The Bank intends to continue to fund its assets primarily with deposits,
although FHLB advances may be used as a supplemental source of funds.
Operating results are dependent primarily on net interest income, which is the
difference between the income earned on its interest-earning assets, such as
loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits and FHLB advances. Operating results are also
significantly affected by general economic and competitive conditions,
primarily changes in market interest rates, governmental legislation and
policies concerning monetary and fiscal affairs and housing, as well as
financial institutions and the attendant actions of the regulatory
authorities.
The Bank's strategy is to operate as a conservative, well-capitalized,
profitable community-oriented financial institution dedicated to financing
home ownership and other consumer and local business needs and to provide
quality service to all customers. The Bank believes that it has successfully
implemented its strategy by (i) maintaining strong capital levels, (ii)
maintaining effective control over operating expenses to attempt to achieve
profitability under differing interest rate scenarios, (iii) limiting interest
rate risk, (iv) emphasizing local loan originations, and (v) emphasizing
high-quality customer service with a competitive fee structure.
Interest Rate Risk Management
The Bank's principal financial objective is to achieve long-term profitability
while reducing its exposure to fluctuating interest rates. The Bank has
sought to reduce exposure of its earnings to changes in market interest rates
by managing the mismatch between asset and liability maturities and interest
rates. The principal element in achieving the objective is to increase the
interest-rate sensitivity of the Bank's assets by originating loans with
interest rates subject to periodic adjustment to market conditions. The Bank
relies on retail deposits as its primary external source of funds. Management
believes retail deposits, compared to brokered deposits and long-term
borrowings, reduce the effects of interest rate fluctuations because these
deposits generally represent a more stable source of funds.
-5-
<PAGE>
<PAGE>
Interest Rate Sensitivity of Net Portfolio Value
The following table is provided to the Bank by the OTS and illustrates the
percent change in net portfolio value ("NPV"), as of December 31, 1998, based
on OTS assumptions, that would occur in the event of an immediate change in
interest rates, with no effect given to any steps that management of the Bank
may take to counter the effect of the interest rate movements.
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
___________________ _________________________
Basis (Dollars in thousands)
Point ("bp")
Change $ Amount $ Change(1) % Change NPV Ratio(2) Change(3)
______ ________ ___________ ________ ____________ _________
+400 bp $8,219 $258 3% 13.05% +78 bp
+300 bp 8,307 346 4 13.06 +79 bp
+200 bp 8,307 346 4 12.96 +69 bp
+100 bp 8,186 225 3 12.68 +41 bp
0 bp 7,961 12.27
-100 bp 7,766 -195 -2 11.90 -37 bp
-200 bp 7,638 -323 -4 11.62 -65 bp
-300 bp 7,567 -393 -5 11.42 -85 bp
-400 bp 7,375 -586 -7 11.06 -121 bp
_____________________________________________________________________________
(1) Represents the increase (decrease) of the estimated NPV at the
indicated change in interest rates compared to the NPV assuming no
change in interest rates.
(2) Calculated as the estimated NPV divided by the portfolio value of
total assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
_____________________________________________________________________________
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest
rates, expected rates of prepayments on loans and early withdrawals from
certificates could deviate significantly from those assumed in calculating the
table.
-6-
<PAGE>
<PAGE>
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from principal
and interest payments on loans. While maturities and scheduled amortization
of loans are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank's primary investing activity is loan
originations. The Bank maintains liquidity levels adequate to fund loan
commitments, investment opportunities, deposit withdrawals and other financial
commitments. At December 31, 1998, the Bank's liquidity ratio was 8.53%,
which was in excess of the OTS required ratio of 4%. At December 31, 1998,
there were no material commitments for capital expenditures and the Bank had
unfunded loan commitments of approximately $2.6 million and outstanding
commerical letters of credit of $646,000. At December 31, 1998, management
had no knowledge of any trends, events or uncertainties that will have or are
reasonably likely to have material effects on the liquidity, capital resources
or operations of the Bank. Further, at December 31, 1998, management was not
aware of any current recommendations by the regulatory authorities, which, if
implemented, would have such an effect.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets increased to $63.4 at December 31, 1998 from $50.9 million at
December 31, 1997. Loans receivable, net, increased $10.4 million as a result
of an increase in first mortgage residential loans of $7.7 million, commercial
loans of $2.1 million, and consumer loans of $600,000. Deposits increased
$13.0 million from $37.1 million at December 31, 1997 to $50.1 million at
December 31, 1998. The increase is primarily attributable to an increase in
personal checking accounts and certificates of deposit. Equity increased to
$7.0 million at December 31, 1998 from $6.7 million in 1997.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income for the year ended December 31, 1998 was $602,000
compared to $458,000 for the year ended December 31, 1997. This increase was
primarily due to the increase in net interest income from loans receivable and
non-interest income offset to a lesser degree by an increase in other
expenses.
Net Interest Income. Net interest income after provision for loan losses for
the year ended December 31, 1998 increased 12.5% to $2.0 million compared to
$1.8 million for the year ended December 31, 1997 as a result of an increase
in total interest income that more than offset an increase in total interest
expense. Total interest income increased 17.0% to $4.6 million for the year
ended December 31, 1998 from $3.9 million a year earlier primarily as a result
of an increase in the average balance of loans receivable, net. The average
balance of loans receivable, net, increased 18.5% to $48.7 million from $41.1
million for the year ended December 31, 1997. Interest expense increased
10.5% to $2.3 million for the year ended December 31, 1998 from $2.1 million a
year earlier primarily as a result of an increase in the average balance of
deposits which were used to fund loan demand.
Provision for Loan Losses. Provision for loan losses are charges to earnings
to bring the total allowance for loan losses to a level considered adequate by
management to provide for estimated loan losses based on management's
evaluation of the collectibility of the loan portfolio, including past loan
loss experience, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions. The provision for loan losses was $285,000 for the year ended
December 31, 1998 compared to $60,000 a year
-7-
<PAGE>
<PAGE>
earlier. The higher provision for loan losses for fiscal 1998 was due to the
corresponding large volume of loan originations during the year. Management
deemed the allowance for loan losses adequate at December 31, 1998.
Non Interest Income. Non interest income increased 192.3% to $811,000 for the
year ended December 31, 1998 from $278,000 for the year ended December 31,
1997. Service charges, commissions, and fees increased to $239,000 in fiscal
1998 from $73,000 in fiscal 1997 as a result of an increase in personal
checking accounts and commissions from the trust department. Gain on sale of
loans increased to $321,000 in fiscal 1998 from $167,000 in fiscal 1997 as a
result of increases in loan originations and service fees associated with
higher loan volume. A net gain of $215,000 was recognized in fiscal 1998 from
the sale of 3,435 shares of Federal Home Loan Mortgage Corporation stock.
Other Expenses. Other expenses increased 38.5% to $1.8 million for the year
ended December 31, 1998 from $1.3 million for the year ended December 31,
1997. Compensation and benefits increased to $814,000 in fiscal 1998 from
$608,000 in fiscal 1997 as a result of hiring additional personnel for the
Trust Department and hiring a Senior Consumer Loan Officer. Compensation and
benefits also increased as a result of costs associated with the Employee
Stock Ownership Plan and Management Recognition Program. Occupancy and
equipment expense increased to $248,000 in fiscal 1998 from $179,000 in fiscal
1997 as a result of increased depreciation expense. Other expenses increased
to $516,000 in fiscal 1998 from $361,000 in fiscal 1997 primarily as a result
of increased service bureau expense and the cost associated with the formation
and the operating of the Trust Department.
Income Tax Expense. Income tax expense was $370,000 for the year ended
December 31, 1998 compared to $267,000 a year earlier, which was due to higher
earnings without a corresponding increase in expenses.
Average Balances, Interest and Average Yield/Cost. The earnings of the Bank
depend largely on the spread between the yield on interest-earning assets
(primarily loans and investments) and the cost of interest-bearing liabilities
(primarily deposit accounts and borrowings), as well as the relative size of
the Bank's interest-earning assets and interest-bearing liabilities.
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, net interest margin, and ratio of average
interest-earning assets to average interest-bearing liabilities. Average
balances for a period have been calculated using the average of quarter-end
balances during such period.
-8-
<PAGE>
<PAGE>
<TABLE>
Year Ended December 31,
At ___________________________________________________________
December 31,
1998 1998 1997
____ Interest Interest
Yield/ Average and Yield/ Average and Yield/
Cost Balance Dividends Cost Balance Dividends Cost
____ _______ _________ ____ _______ _________ ____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 8.64% $48,716 $4,245 8.71 $41,064 $3,615 8.80%
Mortgage-backed securities 6.82 1,261 87 6.90 1,450 106 7.31
Investment securities 6.02 3,570 219 6.13 2,624 167 6.36
FHLB stock 7.06 575 41 7.13 536 38 7.09
____ _______ ______ ____ _______ _____ ____
Total interest earning assets 8.44 54,122 4,592 8.48 45,674 3,926 8.60
Noninterest-earning assets 3,007 2,625
_______ _______
Total assets 57,129 48,299
====== ======
Interest-bearing liabilites:
Passbook, NOW and Money
Market Accounts 2.98 8,206 235 2.86 6,066 168 2.79
Certificates of deposit 5.37 31,740 1,649 5.20 28,414 1,557 5.48
____ _______ ______ ____ _______ _____ ____
Total deposits 39,946 1,884 4.72 34,480 1,725 5.04
FHLB advances 5.41 6,575 442 6.72 6,250 380 6.08
____ _______ ______ _______ _____
Total interest-bearing
liabilities 4.84 46,521 2,326 5.00 40,730 2,105 5.17
_______ ______ _______ _____
Noninterest-bearing liabilities 4,070 2,032
_______ _______
Total liabilities 50,591 42,762
Equity 6,538 5,537
_______ _______
Total liabilities and equity $57,129 $48,299
======= =======
Net interest income $2,266 $1,821
====== ======
Interest rate spread 3.60% 3.48% 3.43%
===== ===== =====
Net interest margin 4.19% 3.99%
===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 116.34% 112.14%
======= =======
-9-
</TABLE>
<PAGE>
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank. Information is provided with respect to (i)
effects on net interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
(iii) changes in rate/volume (changes in rate multiplied by change in volume);
and (iv) the net change (the sum of the prior columns).
<PAGE>
<TABLE>
Year Ended December 31, Year Ended December 31,
1998 Compared to Year 1997 Compared to Year
Ended December 31,1997 Ended December 31, 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
_____________________________ ________________________________
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
____ ______ ______ ___ ____ ______ ______ ___
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest-earning assets:
Loans receivable (1) ($37) $674 ($7) $630 $101 $604 $22 $727
Mortgage-backed and
related securities (6) (14) (1) (21) (1) (29) (2) (32)
Investment securities (6) 60 (2) 52 5 (64) (7) (66)
Other interest-earning
assets 1 3 1 5 1 2 -- 3
_____ _____ ____ ____ ____ ____ ____ ____
Total net change in
income on interest-
earning assets (48) 723 (9) 666 106 513 13 632
_____ _____ ____ ____ ____ ____ ____ ____
Interest-bearing liabilities:
Passbook, NOW and
money market
accounts 4 6 1 11 (20) 16 (2) (6)
Certificates of deposits (43) 182 9 148 27 51 6 84
FHLB advances 40 20 2 62 3 172 12 187
_____ _____ ____ ____ ____ ____ ____ ____
Total net change in
expense on
interest-bearing
liabilities 1 208 12 221 10 239 16 265
_____ _____ ____ ____ ____ ____ ____ ____
Net increase (decrease)
in net interest income ($49) $515 ($21) $445 $96 $274 $(3) $367
===== ===== ==== ==== ==== ==== ==== ====
_________________________________________________________________________________________________________
(1) Does not include interest on loans 90 days or more past due.
-10-
</TABLE>
<PAGE>
<PAGE>
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Year 2000
As the Year 2000 approaches, a significant undertaking for all financial
institutions exists in addressing the impact this event will have on
information systems and overall operations as the consequences for
noncompliance would be significant. The following discussion of the
implications of the Year 2000 problem for the Bank contains numerous
forward-looking statements based on inherently uncertain information. The
cost of the project and the date on which the Bank plans to complete the
internal Year 2000 modifications are based on management's best estimates,
which are derived utilizing a number of assumptions of future events including
the continued availability of internal and external resources, third party
modifications and other factors.
The Bank places a high degree of reliance on computer systems of third
parties, such as customers, suppliers, and other financial and governmental
institutions. Although the Bank is assessing the readiness of these third
parties and preparing contingency plans, there can be no guarantee that the
failure of these third parties to modify their systems in advance of December
31, 1999 would not have a material adverse affect on the Bank.
During fiscal 1998, the Bank adopted a Year 2000 Compliance Plan (the "Plan")
and established a Year 2000 Compliance Committee (the "Committee"). The
objectives of the Plan and the Committee are to prepare the Bank for the new
millenium. As recommended by OTS, the Plan encompasses the following phases:
1. Awareness - Educational initiatives on Year 2000 issues and
concerns. This phase is complete.
2. Assessment - Develop a plan, identify and evaluate all vital systems
of the Bank. This phase was completed as of June 30, 1998.
3. Renovation Upgrade or replace any critical system that is non-Year
2000 compliant. This phase was completed as of December 31, 1998.
4. Validation Testing all critical systems and third-party vendors
for Year 2000 compliance. The Bank is nearly complete with this
phase of its plan. The Bank has replaced all in-house equipment
with Year 2000 compliant equipment. A third-party service bureau
processes all customer transactions and has completed upgrades to
its systems to be Year 2000 compliant. The Bank is relying on the
-11-
<PAGE>
<PAGE>
results of proxy testing by its third-party service bureau for
certain date sensitive testing. The validation phase is targeted
for completion by April 30, 1999.
5. Implementation - Placement of renovated systems on-line. As the
Bank completes the validation phase, the Bank expects to determine
any necessary remaining remedial actions and provide for their
implementation. The Bank has already implemented a new Year 2000
compliant computerized teller system and has verified the Year 2000
compliance of its computer hardware and other equipment containing
embedded microprocessors. The Implementation phase is targeted for
completion by June 30, 1999.
Monitoring and managing the Year 2000 project will result in additional direct
and indirect costs to the Bank. Direct costs include potential charges by
third party software vendors for product enhancements, costs involved in
testing software products for Year 2000 compliance, and any resulting costs
for developing and implementing contingency plans for critical software
products which are not enhanced. Indirect costs will principally consist of
the time devoted by existing employees in managing software vendor progress,
testing enhanced software products and implementing any necessary contingency
plans. Total direct costs are estimated not to exceed $15,000, of which
$12,000 has been incurred as of December 31, 1998.
The Bank is developing remediation contingency plans and business resumption
contingency plans specific to the Year 2000. Remediation contingency plans
address the actions to be taken if the current approach to remediating a
system is falling behind schedule or otherwise appears to be in jeopardy of
failing to deliver a Year 2000 ready system when needed. Business resumption
contingency plans address the actions that would be taken if critical business
functions can not be carried out in the normal manner upon entering the next
century due to system or supplier failure.
Despite the best efforts of management to address this issue, the vast number
of external entities that have direct and indirect business relationships with
the Bank, such as customers, vendors, payment system providers and other
financial institutions makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have material adverse
impact on the operations of the Bank.
12
<PAGE>
<PAGE>
[Letterhead of Housholder, Artman and Associates, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors of
Security Bancorp, Inc.
and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Security Bancorp, Inc. and Subsidiary (the Company) as of
December 31, 1998 and 1997, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Bancorp, Inc. and
Subsidiary as of December 31, 1998 and 1997, and the results of its
operations, changes in stockholders' equity and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/Housholder, Artman and Associates, P.C.
__________________________________________
February 8, 1999
13
<PAGE>
<PAGE>
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
1998 1997
____________ ____________
ASSETS
Cash and cash equivalents $ 2,581,175 $ 1,895,686
Investment securities:
Available-for-sale, at fair value 1,408,249 1,379,405
Held-to-maturity, at amortized cost -
fair value of $651,950 (1998) and
$1,252,295 (1997) 649,673 1,248,223
Mortgage-backed securities:
Available-for-sale, at fair value 1,967,989 -
Held-to-maturity, at amortized cost -
fair value of $507,196 (1998) and
$1,214,436 (1997) 501,290 1,206,202
Loans receivable, net 53,472,898 43,093,404
Interest receivable, net 468,826 363,125
Premises and equipment, net 1,582,428 1,103,322
Real estate owned, net - 5,215
Federal Home Loan Bank stock, at cost 590,500 550,000
Other assets 202,317 74,989
____________ ____________
Total assets $ 63,425,345 $ 50,919,571
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 50,141,580 $ 37,061,101
Federal Home Loan Bank advances 5,500,000 6,500,000
Advances from borrowers for property
taxes and insurance 71,956 59,178
Federal income taxes payable 362,431 369,454
Accrued expenses and other liabilities 360,403 194,655
____________ ____________
Total liabilities 56,436,370 44,184,388
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized and unissued 250,000 shares
Common stock, $.01 par value, 3,000,000
shares authorized; 436,425 shares issued
and outstanding 4,364 4,364
Additional paid-in capital 4,109,388 4,075,813
Unallocated ESOP shares (304,985) (337,883)
Retained earnings 3,256,549 2,763,197
Accumulated other comprehensive income 218,248 229,692
Restricted treasury stock (294,589) -
____________ ____________
Total stockholders' equity 6,988,975 6,735,183
____________ ____________
Total liabilities and stockholders' equity $ 63,425,345 $ 50,919,571
============ ============
The accompanying notes are an integral part of these statements.
14
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
___________ ___________
Interest income:
Loans receivable $ 4,245,336 $ 3,615,219
Investment securities 303,343 304,547
Interest on overnight funds sold 43,151 6,296
___________ ___________
Total interest income 4,591,830 3,926,062
Interest expense:
Deposits 1,884,050 1,724,834
Federal Home Loan Bank advances 442,085 380,101
___________ ___________
Total interest expense 2,326,135 2,104,935
___________ ___________
Net interest income 2,265,695 1,821,127
Provision for loan losses 285,123 60,000
___________ ___________
Net interest income after provision
for loan losses 1,980,572 1,761,127
___________ ___________
Other income:
Service charges, commissions and fees 238,981 73,134
Gain on sale of loans 321,383 167,300
Loan servicing income 14,037 26,616
Gain on sale of investment securities 215,123 -
Other 21,890 10,500
___________ ___________
Total other income 811,414 277,550
Other expenses:
Compensation and benefits 814,301 608,012
Occupancy and equipment expenses 247,996 179,118
Federal and other insurance premiums 45,482 39,680
Advertising 60,666 45,506
Legal and professional fees 134,407 80,565
Other expenses 516,265 360,683
___________ ___________
Total other expenses 1,819,117 1,313,564
___________ ___________
Income before income tax expense 972,869 725,113
Income tax expense 370,413 267,121
___________ ___________
Net income $ 602,456 $ 457,992
Other comprehensive income:
Net changes in unrealized appreciation of
available for sale securities and loans
net of tax of $6,979 in 1998 and
$51,831 in 1997 (11,444) 84,567
___________ ___________
Comprehensive income $ 591,012 $ 542,559
=========== ===========
Basic earnings per share $ 1.50 N/A
Diluted earnings per share $ 1.50 N/A
The accompanying notes are an integral part of these statements.
15
<PAGE>
<PAGE>
<TABLE>
SECURITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Accumulated
Additional Unallocated Other Total
Common Stock ______________________ Compre- Restricted Stock-
______________ Paid-in ESOP Retained hensive Treasury holders'
Shares Amount Capital Shares Earnings Income Stock Equity
______ ______ _______ ______ ________ ______ ________ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1996 $2,305,207 $145,125 $2,450,332
Stock issued
pursuant to
initial com-
mon stock
offering 436,425 $4,364 $4,060,880 $ (349,140) 3,716,104
ESOP shares
earned 14,933 11,257 26,190
Comprehensive
income:
Net income
for 1997 457,900 457,900
Other com-
prehensive
income:
Net change
in unreal-
ized gains
on securities
available-for-
sale, net of
taxes 84,567 84,567
________ _______ ___________ ___________ ___________ __________ __________ __________
Balances,
December 31,
1997 436,425 $4,364 $4,075,813 $($337,883) $2,763,197 $229,692 $6,735,183
ESOP shares
earned 33,575 32,898 66,473
Purchase of
restricted
treasury stock
(17,457 shares) $(294,589) (294,589)
Cash dividends
declared
($0.25 per
share) (109,104) (109,104)
Comprehensive
income:
Net income
Other compre-
hensive income:
Net change in
unrealized
gains/(losses)
on securities
available-for-
sale, net of
tax (11,444) (11,444)
________ _______ ___________ ___________ ___________ _________ __________ __________
Balances,
December 31,
1998 436,425 $4,364 $4,109,388 ($304,985) $3,256,549 $218,248 $(294,589) $6,988,975
======== ======= =========== =========== =========== ========= ========== ==========
The accompanying notes are an integral part of these statements.
16
</TABLE>
<PAGE>
<PAGE>
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,1998 AND 1997
1998 1997
___________ ___________
Cash flows from operating activities:
Net Income $ 602,457 $ 457,990
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 78,959 58,829
Dividend on FHLB stock (40,500) (37,600)
(Gain) loss on sale of investments (215,123) -
Provision for loan losses 285,123 60,000
(Increase) decrease in interest receivable (105,701) (84,790)
(Increase) decrease in other assets (127,328) (35,586)
Increase (decrease) in accrued liabilities 165,748 45,990
Increase (decrease) in income taxes payable 49,061 130,988
Increase (decrease) in deferred taxes payable (49,657) 28,661
Sale of mortgage loans held for sale 8,115,393 6,930,759
Originations of mortgage loans held for sale (8,115,393) (6,930,759)
Amortization of premiums on investments (16,201) -
Gain on sale of property (257) -
Release of ESOP shares 32,898 -
___________ ___________
Total adjustments 57,022 166,492
___________ ___________
Net cash provided by operating activities 659,479 624,482
Cash flows from investing activities:
Loan originations, net of principal payments (10,664,617) (6,500,567)
Purchase of available for sale-investment
securities (500,000) -
Proceeds from available for sale investment
securites 668,479 500,000
Proceeds from maturities and repayments of:
Held to maturity investment securities 1,999,950 1,000,000
Held to maturity mortgage-backed securities 703,677 373,708
Cash payments for the purchase of property (558,065) (208,389)
Purchase of held to maturity securities (1,384,035) (998,223)
Purchases of mortgage-backed securities (1,967,989) -
Proceeds from sale of foreclosed real estate 5,472 -
___________ ___________
Net cash provided (used) by investing activities (11,697,128) (5,833,471)
Cash flows from financing activities:
Net increase (decrease) in deposit accounts 13,080,479 1,271,490
Proceeds from FHLB advances (1,000,000) 1,000,000
Net increase (decrease) in escrow accounts 12,778 (7,006)
Proceeds from issuance of common stock 33,575 3,742,294
Dividends paid (109,105) -
Restricted Treasury stock purchased (294,589) -
___________ ___________
Net cash provided by financing activities 11,723,138 6,006,778
___________ ___________
Net increase in cash and equivalents 685,489 797,789
Cash and equivalents, beginning of year 1,895,686 1,097,897
___________ ___________
Cash and equivalents, end of year $ 2,581,175 $ 1,895,686
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense $ 2,316,869 $ 2,103,785
Income tax 383,388 95,574
The accompanying notes are an integral part of these statements.
17
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation -
The consolidated financial statements as of December 31, 1998 and 1997 and the
years then ended, include the accounts of Security Bancorp, Inc. (the
"Company") and its wholly-owned subsidiary, Security Federal Savings Bank of
McMinnville, Tennessee (the "Bank"). All significant intercompany balances
and transactions have been eliminated in the consolidation.
Conversion and Organization of Holding Company
______________________________________________
On June 30, 1997, pursuant to a Plan of Conversion which was approved by its
members and regulators, the Bank converted from a federally chartered mutual
savings bank to a federally chartered stock savings bank and became a
wholly-owned subsidiary of the Company (the "Conversion"). The Company was
formed under Tennessee Law in March 1997 to acquire all of the common stock of
the Bank upon its conversion to stock form. The Company has no other
operations and conducts no business of its own other than owning the Bank,
investing its portion of the net proceeds received in the Conversion, and
lending funds to the Bank's Employee Stock Ownership Plan (the "ESOP") which
was formed in connection with the Conversion.
Nature of Business
__________________
The Bank's business is that of a financial intermediary and consists primarily
of attracting deposits from the general public and using such deposits,
together with borrowings and other funds, to make mortgage loans secured by
residential real estate and other loans located primarily in Warren County,
Tennessee. At December 31, 1998, the Bank operated two retail-banking offices
in McMinnville, Tennessee. The Bank is subject to competition from other
financial institutions, and is also subject to regulation by certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
_________________________________________
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within the financial
services industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
condition and revenues and expenses for the period. Actual results could
differ from those estimates. Estimates most susceptible to change in the near
term include allowance for loan losses and the fair value of securities.
18
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Outlined below are the accounting and reporting policies considered
significant by the Company:
Cash and Cash Equivalents
_________________________
For purposes of reporting cash flows, the Company has defined cash and cash
equivalents to include all cash, amounts due from depository institutions, and
overnight funds sold to the Federal Home Loan Bank.
Investment Securities
_____________________
The Company classifies its investments, including marketable equity
securities, mortgage-backed securities, and mortgage-related securities, in
one of three categories:
Trading Account Securities -
Securities held principally for resale in the near term are classified as
trading account securities and recorded at their fair values. Unrealized gains
and losses on trading account securities are included in other income. The
Company did not hold any trading securities at December 31, 1998 or 1997.
Securities Held-to-Maturity -
Debt securities which the Company has the positive intent and ability to hold
to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Unrealized losses on held-to-maturity securities reflecting a
decline in value judged to be other than temporary are charged to income.
Securities Available-for-Sale -
Available-for-sale securities consist of equity securities and certain debt
securities not classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses, net of income taxes, on
available-for-sale securities are reported as a net amount in a separate
component of stockholders' equity until realized. Gains and losses on the
sale of available-for-sale securities are determined using the specific
identification method. Any decision to sell available-for-sale securities
would be based on various factors, including movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
demands, regulatory capital considerations, and other similar factors.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity. Unrealized losses on available-for-sale
securities reflecting a decline in value judged to be other than temporary are
charged to income.
19
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment Securities (continued)
_____________________
Loans Held-for-Sale -
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized gains (losses) are reported as a separate component of
stockholders' equityuntil realized.
Loans Receivable
________________
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal adjusted by any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans. Discounts and premiums on purchased
real estate loans are amortized to income using the interest method over the
remaining period to contractual maturity, adjusted for anticipated
prepayments. Discounts and premiums on purchased consumer loans are
recognized over the expected lives of the loans using the level yield method.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral,
and current economic conditions. Loans are considered impaired if full
principal or interest payments are not anticipated in accordance with the
contractual loan terms. Impaired loans are carried at the present value of
expected future cash flows discounted at the loan's effective interest rate or
at the fair value of the collateral if the loan is collateral dependent. A
portion of the allowance for loan losses is allocated to impaired loans if the
value of such loans is deemed to be less than the unpaid balance. If these
allocations cause the allowance for loan losses to require an increase, such
an increase is reported as a component of the provision for loan losses.
Uncollectible interest on loans that are contractually past due for three
months is charged off or an allowance is established, based on management's
periodic evaluation. The allowance is established by a charge to interest
income equal to all interest previously accrued, and income is subsequently
recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments returns to normal, in which case the loan is returned to
accrual status.
20
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans Receivable (continued)
________________
Loan origination fees and certain direct origination costs are capitalized
with the net fee or cost recognized as an adjustment to interest income using
the interest method.
Foreclosed Property
___________________
Foreclosed property owned is carried at the lower of cost or estimated fair
value less estimated selling costs. Costs directly related to improvement of
real estate are capitalized. Expenses of holding such real estate are charged
to operations as incurred.
Premises and Equipment
______________________
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed by the straight-line and declining balance methods
based on the estimated useful lives of the related assets that range from
three to forty years.
Expenditures for major renewals and betterments of premises and equipment are
capitalized, and those for maintenance and repairs are charged to expense as
incurred.
Federal Home Loan Bank Stock
____________________________
The Bank, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the Federal Home Loan Bank of
Cincinnati ("FHLB") in varying amounts based on balances of outstanding home
loans and on amounts borrowed from the FHLB. Because no ready market exists
for this stock, and it has no quoted market value, the Bank's investment in
this stock is carried at cost.
Mortgage Loan-Servicing Rights
______________________________
The Company adopted SFAS 122, "Accounting for Mortgage Servicing Rights"
(MSRs), on April 1, 1996. SFAS 122 requires that the Company recognize as
separate assets rights to service mortgage loans for others that have been
acquired through either the purchase or origination of a loan. Additionally,
SFAS 122 requires that MSRs be reported on the consolidated statement of
financial condition at the lower of cost or fair value. These servicing costs
are initially capitalized and subsequently amortized in proportion to, and
over the period of estimated net loan servicing income.
21
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Mortgage Loan-Servicing Rights (continued)
______________________________
The Bank originates loans for portfolio investment or for sale in the
secondary market. During the loan origination period, loans are designated as
held-for-sale or portfolio investment. Loans held-for-sale are carried at the
lower of cost or market, determined on an individual loan basis.
Income Taxes
____________
Income taxes are provided based on the tax effects of the transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of allowance
for loan losses, accumulated depreciation, and FHLB stock dividends for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered
or settled.
Pension Costs
_____________
Pension costs are charged to employee benefits expense and are funded as
accrued.
Earnings Per Share
__________________
In 1998, the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 128, "Earnings Per Share". Accordingly, all prior period
earnings per share amounts have been restated in accordance with this
standard.
Basic income per share amounts are computed by dividing the net income by the
weighted average number of common shares outstanding. Diluted income per share
amounts were computed by dividing net income, adjusted for the effect of
assumed conversions, by the weighted average number of common shares
outstanding plus dilutive potential common shares calculated for stock options
outstanding using the treasury stock method.
22
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Values of Financial Instruments
____________________________________
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instruments. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents -
The carrying values of cash and cash equivalents approximate fair value.
Investment securities (including mortgage-backed securities) -
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans -
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying amounts. The fair values
for other loans (for example, fixed rate commercial real estate and rental
property mortgage loans and commercial and industrial loans) are estimated
using discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Loan fair value estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of accrued interest
receivable approximates its fair value. The estimated fair value of loans
held-for-sale is based on quoted market prices of similar instruments trading
in the secondary market.
23
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Originated Mortgage Servicing Rights -
The carrying amounts of originated mortgage servicing rights approximate fair
values.
Deposits -
The fair value of demand deposits, savings accounts, and money market deposit
accounts is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting future
cash flows using rates offered on the reporting date for deposits of similar
remaining maturities.
Federal Home Loan Bank Advances -
The fair value is estimated by discounting future cash flows using rates
currently available to the Company for advances of similar maturities.
Commitments -
The commitments to originate and purchase loans have terms that are consistent
with current market conditions. Accordingly, the Bank estimated that the face
amounts of these commitments approximate carrying value.
Comprehensive Income
____________________
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
ertain changes in assets and liabilities, such as unrealized gains and losses
on available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no
effect on the Company's net income or shareholders' equity.
24
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income (continued)
____________________
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
1998 1997
____ ____
Unrealized holding loss on
loans available-for-sale $ (552) $ 0
Unrealized holding gains (losses)
on available-for-sale securities (17,871) 136,398
________ ________
Net unrealized gains (losses) (18,423) 136,398
Tax effect 6,979 51,831
________ ________
Net of tax amount $(11,444) $ 84,567
======== ========
Effects of New Financial Accounting Standards
_____________________________________________
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held-for-Sale by a Mortgage Banking
Enterprise" - issued October 1998, revises the accounting and reporting
standard for certain activities of mortgage banking enterprises and other
enterprises that conduct operations that are substantially similar to the
primary operations of a mortgage banking enterprise. It requires that after
the securitization of a mortgage loan held-for-sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed security as
a trading security. It also requires that after the securitization of
mortgage loans held, an entity engaged in mortgage banking activities classify
the resulting mortgage-backed securities or other retained interests based on
its ability and intent to sell or hold those investments. This statement is
effective for the fiscal quarter beginning January 1, 1999.
Management believes adoption of the above-described Statements will not have a
material effect on financial positions and the results of operations, nor will
adoption require additional capital resources.
25
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Effects of New Financial Accounting Standards (continued)
_____________________________________________
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" -
issued June 1998, established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the fiscal years
after beginning June 15, 1999. On the date of adoption, the Company may
transfer any held-to-maturity security into the available-for-sale category
and then be able to designate the transferred security as a hedge item. Any
unrealized holding gain or loss on transferred securities will be reported in
net income or accumulated other comprehensive income. Management has not
determined its strategy for the adoption of SFAS No. 133 or its effect on the
financial statements. If the Company elects to apply hedge accounting, it is
required to establish, at the inception of the hedge, the method it will use
for assessing the effectiveness of the hedging activities and the measurement
approach for determining the ineffective aspect of the hedge.
Trust Department
________________
Assets under management of the Bank's trust department are not included in
these financial statements.
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investment securities have been classified according to management intent.
The amortized cost of securities and their approximate fair values are as
follows:
Securities available-for-sale:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
_________________ _________ __________ __________ _____
U. S. Government and
Federal agencies $1,050,000 $ - $ 1,234 $1,048,766
FHLMC stock 5,650 365,832 - 371,482
__________ ________ ________ __________
1,055,650 365,832 1,234 1,420,248
Mortgage-backed
securities 1,967,989 - 11,999 1,955,990
__________ ________ _________ __________
$3,023,639 $365,832 $ 13,233 $3,376,238
========== ======== ========= ==========
December 31, 1997
_________________
U. S. Government and
Federal agencies $ 999,929 $ - $ 6,354 $ 993,575
FHLMC stock 9,006 376,824 - 385,830
__________ ________ ________ __________
1,008,935 376,824 6,354 1,379,405
Mortgage-backed
securities - - - -
__________ ________ ________ __________
$1,008,935 $376,824 $ 6,354 $1,379,405
========== ======== ======== ==========
26
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
Securities held-to-maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
_________________ _________ __________ __________ _____
U. S. Government and
Federal agencies $ 649,673 $ 2,277 $ - $ 651,950
Mortgage-backed
securities 501,290 5,906 - 507,196
__________ ________ __________ __________
$1,150,963 $ 8,183 $ - $1,159,146
========== ======== ========== ==========
December 31, 1997
_________________
U. S. Government and
Federal agencies $1,248,223 $ 4,072 $ - $1,252,295
Mortgage-backed
securities 1,206,202 8,234 - 1,214,436
__________ ________ __________ __________
$2,454,425 $ 12,306 $ - $2,466,731
========== ======== ========== ==========
The fair value of investment securities by contractual maturity are shown
below. Expected maturities will differ from contractual maturities because
security issuers have the right to call or prepay obligations with or without
call or prepayment penalties.
December 31, 1998 December 31, 1997
______________________ _____________________
Amortized Fair Amortized Fair
Cost Value Cost Value
_________ __________ ___________ ________
Available-for-sale:
FHLMC stock $ 5,650 $ 371,482 $ 9,006 $ 385,830
Due in one year
or less 1,050,000 1,048,766
Due after one year
through five years 999,929 993,575
Due after five years
through ten years 994,700 984,234
Due after ten years 973,289 971,756
__________ __________ __________ __________
$3,023,639 $3,376,238 $1,008,935 $1,379,405
========== ========== ========== ==========
Held-to-maturity:
Due in one year
or less $ 250,000 $ 250,433
Due after one year
through five years $ 207,140 $ 207,129 998,223 1,001,862
Due after ten years 943,823 952,017 1,206,202 1,214,436
__________ __________ __________ __________
$1,150,963 $1,159,146 $2,454,425 $2,466,731
========== ========== ========== ==========
At December 31, 1998 and 1997, $1,600,000 and $850,000 of securities were
pledged as collateral for deposits.
27
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
Activities related to the sales of securities are summarized as follows:
1998 1997
____ ____
Proceeds from sales $218,489 $500,000
Gross gains on sales 215,123 -
NOTE 3 - LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 are summarized as follows:
December 31,
1998 1997
____ ____
First mortgage loans:
Secured by one-to-four family
residences $34,031,475 $26,765,072
Secured by commercial real estate 4,489,573 4,869,200
Real estate development loans 1,005,436 761,000
Construction loans 3,704,973 3,725,878
___________ ___________
43,231,457 36,121,150
Less:
Undisbursed portion of
construction loans (647,118) (1,397,330)
___________ ___________
Total first mortgage loans 42,584,339 34,723,820
Commercial business loans 6,062,376 3,815,773
Consumer and other loans:
Automobile 1,991,746 1,364,215
Second mortgage and other 1,867,859 2,634,117
Unsecured 1,597,470 903,124
___________ ___________
5,457,075 4,901,456
Less: deferred loan fees (10,985) (8,604)
allowance for loan losses (619,907) (339,041)
___________ ___________
$53,472,898 $43,093,404
=========== ===========
Activity in the allowance for loan losses is as follows:
December 31,
1998 1997
____ ____
Balance - beginning $ 339,041 $ 284,153
Provision charged to operations 285,123 60,000
Loans charged off (15,799) (15,390)
Recoveries 11,542 10,278
___________ ___________
Balance - ending $ 619,907 $ 339,041
=========== ===========
28
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - LOANS RECEIVABLE (continued)
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures", requires that the Bank establish a specific
allowance on impaired loans and disclosure of the Bank's method of accounting
for interest income on impaired loans. The Bank assesses loans delinquent
more than 90 days for impairment. Such loans amounted to approximately
$562,000 and $50,000 at December 31, 1998 and 1997, respectively, and had an
average outstanding balance of approximately $306,000 and $50,000 for the
years ended December 31, 1998 and 1997, respectively. These loans are
primarily collateral dependent and management has determined that the
underlying collateral value is in excess of the carrying amounts. As a
result, the Bank has determined that specific allowances on these loans is not
required.
Nonperforming loans for which interest has been reduced totalled approximately
$377,000 and $50,000 at December 31, 1998 and 1997, respectively. The
differences between interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized
totalled $32,000 and $5,000 for the years ended December 31, 1998 and 1997,
respectively.
Commercial loans consist primarily of unsecured business loans and loans
secured by equipment and inventory. Other consumer loans consist primarily of
unsecured consumer loans and loans secured by deposit accounts.
In the ordinary course of business, the Bank has and expects to continue to
have transactions, including borrowings, with its officers, directors, and
their affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time of comparable transactions with other persons and
did not involve more than a normal risk of collectibility or present any other
unfavorable features to the Bank. Loans to such borrowers at December 31,
1998 and 1997 totalled $630,000 and $694,000, respectively.
The Bank's lending activity is concentrated with customers located in the
McMinnville and Warren County, Tennessee area.
Loans held for sale totalled $684,316 at December 31, 1998. The fair value of
such loans was $683,764.
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for Federal Home Loan Mortgage Corporation ("FHLMC")
are not included in the accompanying statements of financial condition. The
unpaid principal balances of these loans were $20,111,630 and $11,996,237 at
December 31, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $60,599 and $43,363 at December 31, 1998 and 1997,
respectively.
29
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
December 31,
1998 1997
____ ____
Investment securities $ 26,698 $ 19,369
Mortgage-backed securities 9,650 25,504
Loans receivable 432,478 318,252
________ ________
$468,826 $363,125
======== ========
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized by major classification as follows:
December 31,
1998 1997
____ ____
Land $ 800,500 $ 315,500
Building 717,363 712,126
Furniture and equipment 442,879 375,075
___________ ___________
1,960,742 1,402,701
Less: accumulated depreciation (378,314) (299,379)
___________ ___________
$ 1,582,428 $ 1,103,322
=========== ===========
Depreciation expense was $78,959 and $58,829 in 1998 and 1997, respectively.
NOTE 7 - DEPOSITS
Deposit accounts at December 31, 1998 and 1997 are summarized as follows:
1998 1997
____ ____
Demand deposits, noninterest-bearing $ 4,205,524 $ 1,955,485
NOW and money market accounts -
3.02% (1998) and 2.54% (1997) 5,562,461 2,615,510
Passbook accounts -
2.96% (1998) and 3.18% (1997) 5,000,245 3,843,003
___________ ___________
Total Demand, N.O.W.
and Passbook Accounts 14,768,230 8,413,998
Certificates of deposit:
3.01% to 4.00% 380,683 -
4.01% to 5.00% 6,777,332 418,907
5.01% to 6.00% 26,764,078 25,837,383
6.01% to 7.00% 1,451,257 2,380,813
7.01% to 8.00% - 10,000
___________ ___________
Total certificates of deposit 35,373,350 28,647,103
___________ ___________
$50,141,580 $37,061,101
=========== ===========
30
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7 - DEPOSITS (continued)
Interest expense on deposits is as follows:
Years Ended December 31,
________________________
1998 1997
____ ____
NOW and money market accounts $ 94,442 $ 56,154
Passbook accounts 140,608 108,443
Certificates of deposit 1,649,000 1,560,237
__________ __________
$1,884,050 $1,724,834
========== ==========
Certificate of deposit maturities are summarized below:
Average Average
Rate 1998 Rate 1997
_______ ____ _______ ____
Within 1 year 5.27% $24,475,094 5.41% $19,384,492
After 1 year but within
2 years 5.51 7,128,927 5.76 6,645,182
After 2 years but within
3 years 5.80 1,684,168 5.90 1,786,272
After 3 years but within
4 years 5.90 1,465,179 5.87 408,118
After 4 years but within
5 years 5.67 619,982 5.95 423,039
____ ___________ ____ ___________
5.37% $35,373,350 5.54% $28,647,103
==== =========== ==== ===========
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $7,621,000 and $4,935,000 at December 31, 1998 and 1997,
respectively. Deposit accounts in excess of $100,000 are not federally
insured.
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31 are summarized as follows:
1998 1997
____ ____
Short-term advances $ - $2,500,000
Other advances 5,500,000 4,000,000
__________ __________
$5,500,000 $6,500,000
========== ==========
The short-term advances are due ninety days from issuance. Advances at
December 31, 1998 mature as follows:
Weighted
Year Ending Average Rate at
December 31, December 31, 1998 Amount
___________ _________________ ______
2000 5.87% $2,500,000
2001 4.70% 3,000,000
____ __________
5.23% $5,500,000
==== ==========
31
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES (continued)
At December 31, 1998, the Bank's FHLB stock with a carrying value of $590,500
and residential real estate loans with outstanding balances totalling
$26,887,230 were pledged under a blanket agreement as collateral for FHLB
advances. At December 31, 1998, the total available borrowing capacity from
the FHLB was $20,000,000.
NOTE 9 - INCOME TAX MATTERS
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purposes of absorbing losses. Through 1996, the provisions of the Code
permitted the Bank to deduct from taxable income an allowance for bad debts
based on 8% of taxable income before such deduction or actual loss experience.
In addition, legislation passed in 1996 eliminates the percentage of taxable
income method as an option for computing bad debt deductions in all future
years. The Bank will still be permitted to take deductions for bad debts, but
will be required to compute such deductions using an experience method.
Deferred taxes have been provided for certain increases in the Bank's tax bad
debt reserves subsequent to 1987, which are in excess of recorded book loan
loss allowances. At December 31, 1998, retained earnings contain certain
historical additions to bad debt reserves for income tax purposes of
approximately $504,000, for which no deferred taxes have been provided because
the Bank does not intend to use these reserves for purposes other than to
absorb losses. If amounts which qualified as bad debt deductions are used for
purposes other than to absorb losses or adjustments arising from the carryback
of net operating losses, income taxes may be imposed at the then existing
rates. The unrecorded deferred income tax liability on the above amount was
approximately $191,000 as of December 31, 1998. In the future, if the Bank
does not meet the income tax requirements necessary to permit the deduction of
an allowance for bad debts, the Bank's effective tax rate would increase to
the maximum percent under existing law.
In August 1996, the "Small Business Job Protection Act of 1996," was passed
into law. One provision of the Act repeals the special bad debt reserve
method for thrift institutions currently provided for in Section 593 of the
IRC. The provision requires thrifts to recapture any reserve accumulated
after 1987 but forgives taxes owed on reserves accumulated prior to 1988.
Thrift institutions will be given six years to account for the recaptured
excess reserves, beginning with the first taxable year after 1995, and will be
permitted to delay the timing of this recapture for one or two years, subject
to whether they meet certain residential loan test requirements.
32
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 - INCOME TAX MATTERS (continued)
Income tax expense for 1998 and 1997 is comprised of the following:
1998 1997
____ ____
Federal:
Current $361,188 $196,185
Deferred (44,431) 27,152
State:
Current 58,883 37,517
Deferred (5,227) 6,267
________ ________
$370,413 $267,121
======== ========
A reconciliation of the actual income tax expense to the "expected" tax
expense (computed by applying the federal statutory tax rate to earnings
before income tax expense) is as follows:
1998 1997
________________ ________________
Effective Effective
Amount Tax Rate Amount Tax Rate
______ ________ ______ ________
Computed "expected" tax
expense $330,775 34.0% $246,538 34.0%
Increases (reductions) in tax
resulting from:
State income taxes, net of
Federal income tax benefit 39,638 4.0 28,897 4.0
Benefit of lower tax rates - - - -
Other items, net - - (8,314) (1.1)
________ ____ ________ ____
Income tax expense $370,413 38.0% $267,121 37.7%
======== ==== ======== ====
Deferred income taxes reflect the impact of "temporary differences" between
amounts of liabilities and assets for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax liabilities and assets are as follows:
December 31,
1998 1997
____ ____
Deferred tax liabilities:
Depreciation $ 46,845 $ 32,214
Federal Home Loan Bank of
Cincinnati stock dividend 117,316 101,926
Unrealized gain on available-
for-sale securities 133,988 140,779
Mortgage servicing rights 43,239 14,761
Deferred tax assets:
Allowance for loan losses (146,357) (38,011)
________ ________
Net deferred tax liability $195,031 $251,669
======== ========
33
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS
The Company is not subject to any regulatory capital requirements. The Bank,
however, is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial position and results of operations.
The regulations require the Bank to meet specific capital adequacy 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 classification is 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 as set forth in the
following tables of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under
the regulatory ramework for Prompt Corrective Action provisions under FDICIA,
the OTS, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based,
and total risk-based capital ratios as set forth in the following tables. On
December 31, 1997, the Bank exceeded the minimum requirements for the
well-capitalized category.
The following presents the Bank's regulatory capital levels and ratios
relative to its minimum capital levels and ratios relative to its minimum
capital requirements.
As of December 31, 1998
_______________________
Actual Capital Required Capital
______________ ________________
Amount Ratio Amount Ratio
______ _____ ______ _____
OTS capital adequacy
Tangible capital $6,316,000 9.99% $ 948,000 1.50%
Core capital 6,316,000 9.99 1,896,000 3.00
Risk-based capital 6,936,000 15.68 3,539,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 6,316,000 9.99 3,160,000 5.00
Tier 1 risk-based capital 6,316,000 14.28 2,654,000 6.00
Total risk-based capital 6,936,000 15.68 4,423,500 10.00
34
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS (continued)
As of December 31, 1997
_______________________
Actual Capital Required Capital
______________ ________________
Amount Ratio Amount Ratio
______ _____ ______ _____
OTS capital adequacy
Tangible capital $6,092,000 12.01% $ 761,000 1.50%
Core capital 6,092,000 12.01 1,522,000 3.00
Risk-based capital 6,431,000 20.30 2,534,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 6,092,000 12.01 2,537,000 5.00
Tier 1 risk-based capital 6,092,000 19.23 1,904,000 6.00
Total risk-based capital 6,431,000 20.30 3,167,000 10.00
NOTE 11 - STOCKHOLDERS' EQUITY/STOCK CONVERSION
On June 30, 1997, the Company completed its initial stock offering in
connection with the Conversion. Gross proceeds from the sale of 401,511
shares (excluding the 34,914 shares purchased by the ESOP) amounted to
$4,015,110 and were reduced by conversion costs of $299,006. The Company paid
$3,658,819 for all common stock of the Bank and retained the remaining net
proceeds.
Concurrently with the Conversion, the Bank established a liquidation account
in an amount equal to its net worth as reflected in its latest statement of
financial condition used in its final offering circular. The liquidation
account will be maintained for the benefit of eligible deposit account holders
and supplemental eligible deposit account holders who continue to maintain
their deposit accounts in the Bank after the Conversion. Only in the event of
a complete liquidation will eligible deposit account holders and supplemental
eligible deposit account holders be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted sub-account balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stockholders.
Subject to applicable law, the Boards of Directors of the Bank and the Company
may each provide for the payment of dividends. Future declaration of cash
dividends, if any, by the Company may depend upon dividend payments by the
Bank to the Company. Subject to regulations promulgated by the OTS, the Bank
will not be permitted to pay dividends on its common stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account or its capital requirement.
35
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - STOCKHOLDERS' EQUITY/STOCK CONVERSION (continued)
In addition, as a Tier I institution, or an institution that meets all of its
fully phased-in capital requirements, the Bank may pay a cash dividend to the
Company with notification, but without prior OTS approval, during a calendar
year an amount not to exceed the greater of 100% of the Bank's net income to
date during the calendar year plus the amount that would reduce by one-half
its surplus capital ratio at the beginning of the calendar year, or 75% of its
net income over the most recent four quarter period. The Company paid cash
dividends of $.25 per share during the year ended December 31, 1998. No
dividend was declared or paid during the period June 30, 1997 to December 31,
1997.
NOTE 12 - SPECIAL FEDERAL INSURANCE ASSESSMENT
On September 30, 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund (SAIF). The effect of this legislation was to
require a one-time assessment on all federally insured savings institution's
deposits, payable by November 29, 1996. The assessment was levied by the
Federal Deposit Insurance Corporation (FDIC) at .657% of insured deposits at
March 31, 1995. The amount of the Bank's assessment was $192,573. The
assessment was paid and charged to earnings in 1996. After the
recapitalization of the SAIF, the FDIC approved new rules regarding deposit
insurance premiums. The Bank's deposit insurance premiums were reduced from
23 basis points, effective for 1996, to 6.5 basis points, effective January 1,
1997.
NOTE 13 - RETIREMENT PLAN AND OTHER BENEFITS
Employee Stock Ownership Plan -
Effective June 30, 1997, the Bank adopted the ESOP in connection with the
Conversion. The ESOP is designed to provide retirement benefits for eligible
employees of the Company. Because the Plan invests primarily in the stock of
the Company, it also gives eligible employees an opportunity to acquire an
ownership interest in the Company. Employees are eligible to participate in
the Plan after reaching age twenty-one, completing one year of service and
working at least one thousand hours of consecutive service during the previous
year. Contributions are allocated to eligible participants on the basis of
compensation.
During June 1997, the Company issued a total of 34,914 shares to the ESOP at a
total purchase price of $349,140. The purchase was made from the proceeds of
a $349,140 loan from the Company, bearing interest at 8.50%. The loan will be
repaid by contributions the Company makes to the ESOP. The Company recorded a
charge to compensation and employee benefits expense of $26,190 related to the
ESOP, including $14,933 related to the appreciation in the fair value of
allocated ESOP shares. The loan will be repaid over a period of approximately
nine years, principally with funds from the Company's future contributions to
ESOP, subject to Internal Revenue Service limitations.
36
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 13 - RETIREMENT PLAN AND OTHER BENEFITS (continued)
Employee Stock Ownership Plan - (continued)
Shares used as collateral to secure the loan are released and available for
allocation to eligible employees evenly over a ten-year period as the
principal and interest on the loan is paid. Employees vest in their ESOP
account at a rate of 20% annually commencing after the completion of one year
of credited service or immediately if service was terminated due to death,
retirement, disability, or change in control. Any dividends on released
shares are credited to the participants' ESOP accounts or paid out
proportionally or applied towards payment of the loan. Any dividends on
unreleased shares will generally be applied towards payment of the loan.
At December 31, 1998, shares held in suspense to be released annually as the
loan is paid down amounted to 29,676 shares. The fair value of unallocated
ESOP shares was $526,749 at December 31, 1998. Any dividends on allocated ESOP
shares are charged to retained earnings, dividends on unallocated ESOP shares
are charged to compensation and employee benefits expense and ESOP shares
committed-to-be released are considered outstanding in determining earnings
per share.
Profit Sharing Plan -
The Bank's pension expense and contributions for 1998 and 1997 were $26,018
and $23,232, respectively, related to their 401(K) profit sharing plan.
Employees are eligible to participate in the Plan after reaching age
twenty-one, completing one year of service and working at least one thousand
hours of consecutive service during the previous year. Employer and employee
contributions to the plan are discretionary. Any employer contributions vest
on a graduated schedule from two to six years of service.
NOTE 14 - MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN
The Company's stockholders approved the Company's 1998 Stock Option Plan and
the Bank's Management Recognition and Development Plan (the "MRP"), effective
on July 1, 1998. The Stock Option Plan reserves for issuance up to 43,642
stock options to certain officers, directors, and employees either in the form
of incentive stock options or nonincentive stock options. The exercise price
of the stock options may not be less than the fair value of the Company's
common stock at date of grant. The options granted vest at the rate of 20%
annually beginning at the date of grant were all granted in 1998 and
expire in 2008. The number and weighted
37
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 14 - MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN
(continued)
average fair value of the options on the grant date was 37,095 stock options
and $17.25 per share. As permitted under the generally accepted accounting
principles, grants under the plan will be accounted for following the
provisions of APB Opinion No. 25 and its related interpretations.
Accordingly, no compensation cost has been recognized for grants made to date.
Had compensation cost been determined based on the fair value method
prescribed in FASB Statement No. 123, the pro forma effect on reported net
income for the year ended December 31, 1998 would be as follows:
Net income:
As reported $602,456
Pro forma 582,411
Earnings per share
As reported:
Basic $ 1.50
Diluted 1.50
Pro forma:
Basic 1.45
Diluted 1.45
In determining the fair value of the option grant as prescribed in Statement
No. 123, the Black-Scholes option pricing model was used with the following
assumptions: a risk-free interest rate of 5.00%, expected lives of 10 years,
expected volatility of 30.09%, and expected dividends of $.25 per year.
At December 31, 1998, all options have been granted at an exercise price of
$17.25, of which 37,095 options are currently unexercisable, and all options
granted are outstanding at December 31, 1998.
The Company purchased 17,457 common shares in the open market to fund the MRP
on September 9, 1998. The restricted common stock under the MRP vests at the
rate of 20% annually beginning at the date of grant. The expense related to
the vesting of the MRP totalled $25,750 for the year ended December 31, 1998.
38
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET AND
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
balance sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contract or notional amount of those
instruments. The Bank uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Financial Instruments with Off-Balance-Sheet Risk
at December 31, 1998:
Contractual commitments to extend credit $2,567,000
Commercial letters of credit 646,000
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. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Bank, upon extension of credit is based on
management's credit evaluation of the counter-party. Collateral held varies
but may include property, plant and equipment and real estate.
Most of the Bank's business activity is with customers located within the
State of Tennessee. A majority of the loans are secured by residential or
commercial real estate or other personal property. The loans are expected to
be repaid from cash flow or proceeds from the sale of selected assets of the
borrowers.
NOTE 16 - EARNINGS PER SHARE
Earnings per share has been calculated in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share", and Statement of
Position 93-6, "Employers' Accounting for Employee Stock
39
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 16 - EARNINGS PER SHARE (continued)
Ownership Plans". For purposes of this computation, the number of shares of
common stock purchased by the Bank's employee stock ownership plan, which have
not been allocated to participant accounts are not assumed to be outstanding.
Stock-based compensation grants have not been included in the diluted earnings
per share since they are antidilutive. Earnings per share information for the
year ended December 31, 1997 was not presented since the Company was not a
public company prior to June 30, 1997, therefore, no shares of stock were
outstanding. The following are reconciliations of the amounts used in the per
share calculations:
For the Year Ended December 31, 1998
____________________________________
Income Shares Per Share
(Numerator) (Denominator) Amount
___________ _____________ _________
Basic and Diluted
Earnings per share (EPS) $602,456 401,297 $1.50
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, as described
in Note 1, are as follows:
December 31, 1998
___________________________
Carrying Fair
Amount Value
___________ ___________
Financial assets:
Cash and cash equivalents $ 2,581,175 $ 2,581,175
Investment securities 2,069,921 2,072,198
Mortgage-backed securities 2,457,280 2,463,186
Loans receivable, net 53,472,898 54,014,755
Financial liabilities:
Deposits 50,141,580 50,642,996
Federal Home Loan Bank advances 5,500,000 5,627,600
December 31, 1997
___________________________
Carrying Fair
Amount Value
___________ ___________
Financial assets:
Cash and cash equivalents $ 1,895,686 $ 1,895,686
Investment securities 2,627,628 2,628,457
Mortgage-backed securities 1,206,202 1,214,436
Loans receivable, net 43,093,404 44,308,978
Financial liabilities:
Deposits 37,061,101 37,028,612
Federal Home Loan Bank advances 6,500,000 6,540,300
40
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The carrying amounts in the preceding tables are included in the statement of
financial condition under the applicable captions.
The fair value estimates presented herein are based on information available
to management as of December 31, 1998 and 1997. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these consolidated financial statements since that date, and therefore,
current estimates of fair value may differ significantly from the amount
presented herein.
NOTE 18 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet and condensed statements of income and
cash flows for Security Bancorp, Inc. should be read in conjunction with the
consolidated financial statements and the notes thereto.
December 31,
1998 1997
____ ____
CONDENSED BALANCE SHEET
ASSETS
Cash and cash equivalents $ 152,291 $ 81,090
ESOP note receivable 304,985 337,883
Investment in subsidiary 6,533,497 6,321,211
__________ __________
Total Assets $6,990,773 $6,740,184
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accrued income taxes $ 1,800 $ 5,000
Stockholders' equity 6,988,973 6,735,184
__________ __________
Total liabilities and
stockholders' equity $6,990,773 $6,740,184
========== ==========
Period from
Year Ended June 30, to
December 31, 1998 December 31, 1997
_________________ _________________
CONDENSED STATEMENT OF INCOME
Interest income $ 30,510 $ 16,597
Expenses 38,512 4,049
__________ __________
Income (loss) before equity
in undistributed earnings
of subsidiary and income taxes (8,002) 12,548
Equity in earnings of
subsidiary 607,257 352,183
__________ __________
INCOME BEFORE INCOME TAXES 599,255 364,731
Income tax expense (credit) 3,200 5,000
__________ __________
NET INCOME $ 602,455 $ 359,731
========== ==========
41
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 18 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
(continued)
Period from
Year Ended June 30, to
December 31, 1998 December 31, 1997
_________________ _________________
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating
activities:
Net income $ 602,455 $ 359,731
Adjustments to reconcile net
income to net cash provided
from operating activities:
Equity earnings from
subsidiary (607,257) (352,183)
Increase (decrease) in
income taxes payable (3,200) 5,000
__________ __________
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (8,002) 12,548
Cash flows from investing activities:
Upstream dividend from
subsidiary 450,000 -
Purchase of MRP restricted
shares (294,589) -
Investment in subsidiary - (3,658,819)
__________ __________
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 155,411 (3,658,819)
Cash flows from financing activities:
Dividend paid (109,106) -
Net proceeds from sale of
common stock - 4,065,244
Loan to ESOP of subsidiary - (349,140)
Principal collected on ESOP
note receivable 32,898 11,257
__________ __________
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 76,208 3,727,361
__________ __________
NET INCREASE IN CASH AND CASH
EQUIVALENTS 71,201 81,090
Cash and cash equivalents at
beginning of period 81,090 -
__________ ___________
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 152,291 $ 81,090
========== ==========
42
<PAGE>
<PAGE>
DIRECTORS AND OFFICERS
of
SECURITY BANCORP, INC.
Directors Officers
- --------- --------
Joe H. Pugh Joe H. Pugh
President and Chief Executive Officer President and Chief Executive Officer
Dr. Franklin J. Noblin, Chairman Dr. R. Neil Schultz
of the Board, Semi-Retired Dentist Secretary
Don Collette, Vice Chairman of the John Duncan
General Manager and Chief Executive Chief Financial Officer
Officer of McMinnville Electric
System
Robert Newman
Attorney
Dr. R. Neil Schultz
Retired Orthodontist
Dr. John T. Mason, III
Retired Professor of Chemical Engineering at
Tennessee Technological University
Earl Barr
Owner and Manager of Barr's, Inc.
43
<PAGE>
<PAGE>
DIRECTORS AND OFFICERS
OF
SECURITY FEDERAL SAVINGS BANK OF
MCMINNVILLE, TN
Directors Officers
- --------- --------
Joe H. Pugh Joe H. Pugh
President and Chief Executive Officer President and Chief Executive Officer
Dr. Franklin J. Noblin, Chairman of Ray Talbert
the Board, Semi-Retired Dentist Executive Vice President
Don Collette, Vice Chairman of the Dr. R. Neil Schultz
Board, General Manager and Chief Secretary
Executive Officer of McMinnville
Electric System John Duncan
Vice President & Chief Financial
Robert Newman Officer
Attorney
Nita Baggett
Dr. R. Neil Schultz Vice President
Retired Orthodontist
Kenneth Martin
Dr. John T. Mason, III Senior Vice President
Retired Professor of Chemical
Engineering At Tennessee Kenneth W. Smith
Technological University Senior Vice President
Earl Barr Johnnie Hughes
Owner and Manager of Barr's, Inc. Vice-President
Shannon L. Haston
Vice President
44
<PAGE>
<PAGE>
CORPORATE INFORMATION
Corporate Headquarters Common Stock
306 West Main Street Traded over-the-counter on
McMinnville, Tennessee the OTC Electronic Bulletin
Board under the symbol: SCYT
Independent Auditors 10-KSB Information
Housholder, Artman,& Associates, P.C. A copy of the Form 10-KSB will
Tullahoma, Tennessee be furnished without charge to
Stockholders of record upon
written request to the Secretary,
General Counsel Security Bancorp, Inc., P.O.
Box 7027, McMinnville,
Stanley & Bratcher Tennessee 37111
McMinnville, TN
Special Securities Counsel
Breyer & Associates PC
Washington, D.C.
Transfer Agent
Registrar and Transfer Company
Cranford, New Jersey
ANNUAL MEETING
The annual meeting of the stockholders will be held Wednesday, April 21, 1999
at 2:00 p.m., Central Time, at the Bank's main office at 306 West Main Street,
McMinnville, Tennessee.
45
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
______
Security Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
________________ ____________ ______________________
Security Federal Savings Bank
of McMinnville, TN 100% United States
- -----------------
(a) The operation of the Corporation's wholly owned subsidiary is included
in the Corporation's Consolidated Financial Statements contained in the Annual
Report attached hereto as Exhibit 13.
<PAGE>
<PAGE>
Exhibit 23
Consent of Auditors<PAGE>
[Housholder, Artman and Associates, P.C. Letterhead]
Independent Accountant's Consent
________________________________
The Board of Directors and Stockholders
Security Bancorp, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-69573) of Security Bancorp, Inc. of our report
dated February 8, 1999 appearing on page 13 of the 1998 Annual Report which
report appears in the December 31, 1998 annual report on Form 10-KSB of
Security Bancorp, Inc.
/s/Housholder, Artman and Associates, P.C.
Tullahoma, Tennessee
March 25, 1999
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the
consolidated financial statements of Security Bancorp, Inc. for the year ended
December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
Financial Data
as of or for the year
Item Number ended December 31, 1998 Item Description
___________ _______________________ ________________
9-03 (1) 2,581 Cash and due from Banks
9-03 (2) 0 Interest-bearing deposits
9-03 (3) 0 Federal funds sold - purchased
securities for resale
9-03 (4) 0 Trading account assets
9-03 (6) 3,376 Investment and mortgage backed
securities held for sale
9-03 (6) 1,151 Investment and mortgage backed
securities held to maturity -
carrying value
9-03 (6) 1,159 Investment and mortgage backed
securities held to maturity - market
value
9-03 (7) 53,473 Loans
9-03 (7)(2) 620 Allowance for losses
9-03 (11) 63,425 Total assets
9-03 (12) 50,142 Deposits
9-03 (13) 0 Short-term borrowings
9-03 (15) 795 Other liabilities
9-03 (16) 5,500 Long-term debt
9-03 (19) 0 Preferred stock - mandatory
redemption
9-03 (20) 0 Preferred stock - no mandatory
redemption
9-03 (21) 4 Common stocks
9-03 (22) 6,985 Other stockholders' equity
9-03 (23) 63,425 Total liabilities and stockholders'
equity
9-04 (1) 4,246 Interest and fees on loans
9-04 (2) 303 Interest and dividends on investments
9-04 (4) 43 Other interest income
9-04 (5) 4,592 Total interest income
9-04 (6) 1,884 Interest on deposits
9-04 (9) 2,326 Total interest expense
9-04 (10) 2,266 Net interest income
9-04 (11) 285 Provision for loan losses
9-04 (13)(h) 215 Investment securities gains/(losses)
9-04 (14) 1,819 Other expenses
9-04 (15) 973 Income/loss before income tax
9-04 (17) 973 Income/loss before extraordinary
items
9-04 (18) 0 Extraordinary items, less tax
9-04 (19) 0 Cumulative change in accounting
principles
9-04 (20) 602 Net income or loss
9-04 (21) 1.50 Earnings per share - primary
9-04 (21) 1.50 Earnings per share - fully diluted
I.B. 5 8.44 Net yield - interest earning assets -
actual
III.C.1. (a) 377 Loans on non-accrual
III.C.1. (b) 185 Accruing loans past due 90 days or
more
III.C.2. (c) 0 Troubled debt restructuring
III.C.2 0 0 Potential problem loans
IV.A.1 339 Allowance for loan loss - beginning
of period
IV.A.2 16 Total chargeoffs
IV.A.3 12 Total recoveries
IV.A.4 620 Allowance for loan loss - end of
period
IV.B.1 0 Loan loss allowance allocated to
domestic loans
IV.B.2 0 Loan loss allowance allocated to
foreign loans
IV.B.3 620 Loan loss allowance - unallocated
<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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<NET-INCOME> 602
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<LOANS-NON> 377
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