SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999 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.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1682697
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
306 West Main Street, McMinnville, Tennessee 37110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (931) 473-4483
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $0.01 per share
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(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
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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
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The registrant's revenues for the fiscal year ended December 31, 1999
were $6.3 million.
As of March 1, 2000, 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, 2000,
the aggregate value of the Common Stock outstanding held by nonaffiliates of
the registrant was $2.0 million (128,727 shares at $15.75 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, 1999 (Parts I and II)
2. Portions of Proxy Statement for the 2000 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
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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, 1999, the Corporation had total assets of $72.2 million, total
deposits of $57.5 million and stockholders' equity of $7.5 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 4 of the 1999
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
This information is incorporated by reference from page 10 of the Annual
Report.
Lending Activities
General. At December 31, 1999, the Savings Bank's total loans
receivable, net, was $60.2 million, or 83.4% 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 $37.6 million, or 60.9% of the total loans receivable
portfolio at December 31, 1999. 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,
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1999 1998
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Amount Percent Amount Percent
------ ------- ------ ------
(Dollars in thousands)
Real Estate Loans:
Residential.................... $37,572 60.87% $34,031 62.16%
Construction................. 2,478 4.01 3,705 6.77
Commercial................... 4,856 7.87 4,490 8.20
Acquisition and development.. 1,097 1.78 1,005 1.84
------- ------ ------- ------
Total real estate loans........ 46,003 74.53 43,231 78.96
Commercial business loans....... 6,969 11.29 6,062 11.07
Consumer loans:
Automobile..................... 3,261 5.28 1,992 3.64
Home equity, second mortgage
and other................... 3,441 5.57 1,868 3.41
Unsecured ..................... 2,054 3.33 1,598 2.92
------- ------ ------- ------
Total consumer loans......... 8,756 14.18 5,458 9.97
------- ------ ------- ------
Total loans.................. 61,728 100.00% 54,751 100.00%
====== ======
Less:
Loans in process............... 884 647
Unearned loan fees and
discounts.................... 6 11
Allowance for loan losses...... 649 620
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Total loans receivable, net... $60,189 $53,473
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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, 1999, $37.6 million, or 60.9% of the
Savings Bank's total loan portfolio consisted of such loans. The Savings Bank
originated $22.1 million and $23.9 million of one- to four-family residential
mortgage loans during the years ended December 31, 1999 and 1998,
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, 1999, such loans amounted to $15.2 million or 40.7% 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, 1999, $9.0 million, or 23.9%, 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, 1999, 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, 1999 and 1998, such loans amounted to
$189,000 and $205,000, respectively.
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Construction Lending. At December 31, 1999, construction loans amounted
to $2.5 million, or 4.0% 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, 1999, speculative construction loans amounted
to $354,000. At December 31, 1999, the largest amount outstanding to any
builder was $133,000.
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, 1999, commercial real
estate loans totaled $4.9 million, or 7.9% of total loans, compared to $4.5
million, or 8.2% of total loans, at December 31, 1998. Commercial real estate
loans are secured by nurseries, churches, professional offices and other
non-residential property. At December 31, 1999, the Savings Bank's largest
outstanding commercial real estate loan was a $349,000 loan secured by
commercial property located in the Savings Bank's primary market area. At
December 31, 1999, 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, 1999, the Savings Bank had
five 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, 1999, the largest acquisition and development loan had an
outstanding balance of $336,000 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 that 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, 1999, 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, 1999, commercial business
loans amounted to $7.0 million, or 11.3% of total loans, compared to $6.1
million, or 11.1% of total loans, at December 31, 1998.
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, 1999, the largest commercial business loan had an
outstanding balance of $325,000, 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, 1999, consumer loans totaled $8.8
million, or 14.2%, of the total loans, compared to $5.5 million, or 10.0% of
total loans, at December 31, 1998. 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.
One of the larger categories of the Savings Bank's consumer loan
portfolio are loans secured by new and used automobiles. At December 31,
1999, automobile loans totaled $3.3 million or 5.3% of the total loan
portfolio, compared to $2.0 million or 3.6% of the total loan portfolio at
December 31, 1998. Automobile loans are offered with maturities of up to 60
months. The Savings Bank does not engage in indirect automobile lending
through automobile dealers.
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
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terms of up to ten years requiring monthly payments of principal and interest.
At December 31, 1999, home equity and second mortgage loans totaled $1.1
million, or 1.8% of the total loan portfolio, compared to $1.4 million, or
3.0% of the total loan portfolio at December 31, 1998.
At December 31, 1999, unsecured consumer loans amounted to $2.1 million,
or 3.3% 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 limit 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, 1999, $58,000 of consumer loans were 90 days or
more past due.
Loan Maturity and Repricing. The following table sets forth certain
information at December 31, 1999 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.
<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................. $ 8,448 $13,041 $7,300 $4,082 $2,492 $3,306 $38,669
Construction................ 1,594 -- -- -- -- -- 1,594
Commercial.................. 1,946 1,928 813 127 42 -- 4,856
Consumer and other loans...... 4,159 3,731 801 65 -- -- 8,756
Commercial business loans..... 3,368 2,426 732 382 61 -- 6,969
------- ------- ------ ------ ------ ------ -------
Total gross loans........ $19,515 $21,126 $9,646 $4,656 $2,595 $3,306 $60,844
======= ======= ====== ====== ====== ====== =======
</TABLE>
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The following table sets forth the dollar amount of all loans due after
one year after December 31, 1999, which have fixed interest rates and have
floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Real Estate Loans:
Residential....................... $18,363 $11,858
Construction...................... -- --
Commercial........................ 2,561 349
Consumer and other loans........... 4,546 51
Commercial business loans.......... 3,068 533
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Total gross loans............. $28,538 $12,791
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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 $500,000 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 $500,000, and unsecured
loans in excess of $150,000, up to the Savings Bank's maximum legal lending
limit. At December 31, 1999, that general limit was $1.1 million. 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.
8
<PAGE>
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, 1999,
the Savings Bank's servicing portfolio was $26.4 million. For the year ended
December 31, 1999, loan servicing fees totaled $61,000. 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, 1999, such escrow balances totaled $86,000.
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, 1999, the Savings Bank had no purchased
interests in any loan participations.
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,
-----------------------
1999 1998
---- ----
(In thousands)
Loans originated:
Real Estate Loans:
Residential(1) ............... $22,098 $23,853
Construction ................. 4,412 4,714
Commercial.................... 4,178 650
Acquisition and development... 1,011 --
------- -------
Total real estate loans.... 31,699 29,217
Commercial business loans...... 13,496 12,708
Consumer loans:
Automobile.................... 3,376 1,932
Unsecured..................... 2,388 1,718
Second mortgage and other..... 8,926 6,500
------- -------
Total consumer loans....... 14,690 10,150
------- -------
Total loans originated... 59,885 52,075
(table continued on following page)
9
<PAGE>
Year Ended December 31,
-----------------------
1999 1998
---- ----
(In thousands)
Loans sold:
Whole loans..................... 10,191 14,438
------- -------
Participation loans............. 350 --
------- -------
Total loans sold............. 10,541 14,438
Mortgage loan principal
repayments.................... 16,999 14,943
Other loan prepayments and change
in unfunded loan commitments... 25,368 12,781
------- -------
Net loan activity................ 6,977 9,913
------- -------
Total gross loans at end
of period ..................... $61,728 $54,751
======= =======
- ------------
(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, 1999, the Savings Bank had $3.6 million of
outstanding net loan commitments, including unused portions on commercial
business lines of credit, and $590,000 of unexpired commercial and standby
letters of credit. See Note 14 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 $6,000 of net deferred mortgage loan fees at
December 31, 1999.
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.
10
<PAGE>
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,
--------------
1999 1998
---- ----
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Real estate loans:
Residential ................... $147 $377
Construction................... -- --
Commercial..................... -- --
Acquisition and development.... -- --
---- ----
Total real estate loans...... 147 377
Commercial business loans....... -- --
Consumer loans.................. -- --
---- ----
Total........................ 147 377
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....... 56 --
Consumer loans ................. 58 38
---- ----
Total ....................... 114 185
---- ----
Total of nonaccrual and 90 days past
due loans....................... 261 562
Foreclosed property............... 276 --
---- ----
Total nonperforming assets..... $537 $562
==== ====
Restructured loans................ -- --
Loans delinquent 90 days
or more to net loans............ 0.43% 1.05%
Total loans delinquent 90 days
or more to total assets......... 0.36% 0.89%
Total nonperforming assets to
total assets ................... 0.74% 0.89%
11
<PAGE>
Gross interest income that would have been recorded for the year ended
December 31, 1999 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, 1999, the Savings Bank had $276,000
of 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, 1999 and 1998, 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,
---------------
1999 1998
---- ----
(In thousands)
Classified assets:
Loss ................................ $ 49 $ --
Doubtful............................. 42 32
Substandard assets................... 768 632
Special mention.................... 1,228 452
------ ------
$2,087 $1,116
====== ======
Loan loss allowance:
General loss allowances............. $649 $620
Specific loss allowances............ -- --
At December 31, 1999, doubtful, substandard and special mention assets
consisted primarily of one- to four- family residential mortgage loans.
12
<PAGE>
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,
1999 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.
13
<PAGE>
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,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
Allowance at beginning of period.... $620 $339
---- ----
Provision for loan losses........... 159 285
Recoveries:
Real estate loans:
Residential...................... 14 --
Construction..................... -- --
Commercial....................... -- --
Acquisition and development...... -- --
---- ----
Total real estate loans........ 14 --
Consumer loans.................... 12 12
---- ----
Total recoveries............... 26 12
Charge-offs:
Real estate loans:
Residential...................... 83 --
Construction..................... -- --
Commercial....................... -- --
Acquisition and development...... -- --
---- ----
Total real estate loans........ 83 --
Commercial business loans......... -- --
Consumer loans.................... 73 16
---- ----
Total charge-offs.............. 156 16
Net charge-offs................ 130 4
---- ----
Balance at end of period....... $649 $620
==== ====
Ratio of allowance to total
loans outstanding
at end of the period............... 1.08% 1.13%
Ratio of net charge-offs to
average loans outstanding
during the period.................. 0.23% 0.01%
Ratio of allowance for loan losses to
nonperforming assets...............120.86% 110.32%
14
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
At December 31,
----------------------------------------------------
1999 1998
------------------------- --------------------------
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............ $376 1.00% 60.87% $340 1.00% 62.16%
Construction........... 31 1.25 4.01 51 1.38 6.77
Commercial............. 49 1.00 7.87 56 1.25 8.20
Acquisition and
development.......... 14 1.25 1.78 15 1.50 1.84
Commercial business
loans.................. 70 1.00 11.29 76 1.25 11.07
Consumer and other loans. 109 1.25 14.18 82 1.50 9.97
---- ------ ---- ------
Total allowance for
loan losses.......... $649 100.00% $620 100.00%
==== ====== ==== ======
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, 1999, the Savings Bank's
regulatory liquidity of 11.4% 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.
15
<PAGE>
The following table sets forth the composition of the Savings Bank's
securities portfolio at the dates indicated.
At December 31,
--------------------------------------------
1999 1998
--------------------- ---------------------
Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
----- --------- ----- ---------
(Dollars in thousands)
Available for sale:
FHLMC stock..................... $ 6 0.09% $ 6 0.13%
U.S. Government and
agency obligations.......... 3,990 61.23 1,050 22.03
Mortgage-backed securities...... 1,652 25.35 1,968 41.29
------ ------ ------ ------
Total available for sale..... 5,648 86.67 3,024 63.45
Held to maturity:
FHLB stock...................... 633 9.71 591 12.40
U.S. Government and
agency obligations.......... -- -- 650 13.64
Mortgage-backed securities...... 236 3.62 501 10.51
------ ------ ------ ------
Total held to maturity...... 869 13.33 1,742 36.55
------ ------ ------ ------
Total........................... $6,517 100.00% $4,766 100.00%
====== ====== ====== ======
At December 31, 1999, the FHLMC stock had an estimated fair value of
$271,000, the portfolio of U.S. Government and agency securities (both
available-for-sale and held-to-maturity) had an aggregate estimated fair value
of $3.9 million and the portfolio of mortgage-backed securities (both
available-for-sale and held-to-maturity) had an estimated fair value of $1.8
million.
At December 31, 1999, mortgage-backed securities consisted of FHLMC, FNMA
and GNMA issues. At December 31, 1999, their amortized cost was $1.9 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
6.6% during the year ended December 31, 1999.
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
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,
16
<PAGE>
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, 1999.
Less Than Over One to Over 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 50.15% $ -- --% $ -- --% $ -- --%
U.S. Government and
agency obligations... 1,998 6.05 1,992 6.75 -- -- -- --
Mortgage-backed
securities........... -- -- 841 6.50 811 7.00 -- --
Held to Maturity:
FHLB Stock............. 633 7.06 -- -- -- -- -- --
U.S. Government and
agency obligations... -- -- -- -- -- -- -- --
Mortgage-backed
securities........... -- -- 236 7.02 -- -- -- --
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, 1999, 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 and other public
entities. At December 31, 1999, such public deposits amounted to $953,000.
Substantially all of the Savings Bank's depositors are residents of the State
of Tennessee.
17
<PAGE>
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at December 31, 1999.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Checking and Savings Deposits Amount Balance Deposits
- ---- ---- ----------------------------- ------ ------- --------
(In thousands)
2.87% -- NOW accounts $ 500 $ 6,352 12.09%
3.01 -- Savings accounts 10 5,715 10.88
3.28 -- Money market deposit 1,000 1,525 2.90
Certificates of Deposit
-----------------------
4.67 3 month Fixed-term, fixed-rate 1,000 674 1.28
5.21 6 month Fixed-term, fixed-rate 1,000 8,823 16.79
5.46 12 month Fixed-term, fixed-rate 500 9,677 18.41
5.17 18 month Fixed-term, fixed rate 500 2,812 5.35
5.78 18 month Step up 500 401 0.76
5.38 2 year Fixed-term, fixed-rate 500 6,121 11.65
5.53 3 year Fixed-term, fixed-rate 500 3,734 7.11
5.72 4 year Fixed-term, fixed-rate 500 1,719 3.27
5.90 5 year Fixed-term, fixed-rate 500 2,044 3.89
5.18 18 month Fixed-term, fixed-rate IRA 10 2,481 4.72
5.21 18 month Fixed-term, variable-rate IRA 10 472 0.90
------- ------
Total $52,550 100.00%
======= ======
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at December 31, 1999. Jumbo certificates of
deposit require minimum deposits of $100,000.
Maturity Period Certificates of Deposit
- --------------- -----------------------
(In thousands)
Three months or less............ $ 201
Over three through six months... 1,947
Over six through twelve months.. 3,260
Over twelve months.............. 2,969
------
Total...................... $8,377
======
18
<PAGE>
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,
--------------------------------------------
1999 1998
--------------------------- --------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
------ ----- ---------- ------ -----
(Dollars in thousands)
Non-interest bearing demand
accounts................... $ 4,905 8.54% $ 699 $ 4,206 8.39%
NOW accounts................. 6,352 11.06 1,734 4,618 9.21
Passbook accounts............ 5,715 9.95 715 5,000 9.97
Money market deposit
accounts................... 1,525 2.65 580 945 1.88
Fixed-rate certificates
which mature:
Within 1 year.............. 28,261 49.19 3,787 24,475 48.81
After 1 year, but within
2 years ................. 6,302 10.96 (828) 7,129 14.22
After 2 years, but within
3 years.................. 2,895 5.04 1,211 1,684 3.36
After 3 years but within
4 years.................. 830 1.44 (635) 1,465 2.92
After 4 years but within
5 years.................. 670 1.17 50 620 1.24
------- ------ ------ ------- ------
Total................... $57,455 100.00% $7,313 $50,142 100.00%
======= ====== ====== ======= ======
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,
----------------------
1999 1998
---- ----
(In thousands)
3.01 - 4.00% .................. $ 11 $ 381
4.01 - 5.00% .................. 17,908 6,777
5.01 - 6.00%................... 20,680 26,764
6.01 - 7.00%................... 359 1,451
7.01 - 8.00% .................. -- --
------- -------
Total.......................... $38,958 $35,373
======= =======
Time Deposits by Maturities
The following table sets forth the amount and maturities of time deposits
at December 31, 1999.
Amount Due
---------------------------------------
Percent
of
Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
-------- ----- ----- ----- ------- ----- --------
(Dollars in thousands)
3.01 - 4.00%...........$ -- $ -- $ -- $ -- $ 11 $ 11 0.03%
4.01 - 5.00% .......... 14,620 2,145 731 276 136 17,908 45.97
5.01 - 6.00% .......... 13,517 3,978 2,113 554 518 20,680 53.08
6.01 - 7.00%........... 124 179 51 -- 5 359 0.92
------- ------ ------ ---- ---- ------- ------
Total..................$28,261 $6,302 $2,895 $830 $670 $38,958 100.00%
======= ====== ====== ==== ==== ======= ======
19
<PAGE>
Savings Activities
The following table sets forth the savings activities of the Savings Bank
for the periods indicated.
Year Ended December 31,
-----------------------
1999 1998
---- ----
(In thousands)
Beginning balance................................. $50,142 $37,061
------- -------
Net increase (decrease) before interest credited.. 5,607 11,686
Interest credited................................. 1,706 1,395
------- -------
Net increase in savings deposits.................. 7,313 13,081
------- -------
Ending balance.................................... $57,455 $50,142
======= =======
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, 1999, the Savings
Bank had $6.8 million of borrowings from the FHLB-Cincinnati at a weighted
average rate of 5.4%. Such borrowings have contractual maturities through the
year ending December 31, 2003 and are secured by a blanket lien on $10.2
million of one- to four-family residential real estate loans and by
FHLB-Cincinnati stock with a carrying value of $633,000 at December 31, 1999.
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,
----------------
1999 1998
---- ----
(Dollars in thousands)
FHLB-Cincinnati advances outstanding...$6,800 $5,500
Weighted average rate paid
on FHLB-Cincinnati advances........... 5.38% 5.23%
(table continued on following page)
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At December 31,
----------------
1999 1998
---- ----
(Dollars in thousands)
Maximum amount of FHLB-Cincinnati
advances at any month end........... $6,900 $9,500
Approximate average FHLB-Cincinnati
advances outstanding............... 5,875 7,050
Approximate weighted average rate
paid on FHLB-Cincinnati advances... 5.26% 6.27%
- --------------
(1) Computed using the weighted rates of each individual transaction.
Trust Department
The OTS granted trust powers to the Savings Bank on July 14, 1998. The
Savings Bank is one of the few banks in its primary market area providing a
broad range of trust services. These services include acting as trustee under
a living trust, a Standby Trust or Testamentary Trust; acting as personal
representative; agency services, including custody accounts, agent for the
trustee, and agent for the personal representative; and trustee and agent
services for accounts subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). In addition to providing
fiduciary and investment advisory services, the Savings Bank provides employee
benefit services, such as Self-Directed Individual Retirement Accounts
("IRAs"). At December 31, 1999, trust assets under management totalled
approximately $59.9 million.
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 Home Owners Loan Act and, in certain respects, the Federal Deposit
Insurance Act, 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 is
required to 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 has extensive authority over the operations of savings
associations.
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Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
All savings associations are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets,
including consolidated subsidiaries. The Savings Bank's OTS assessment for
the fiscal year ended December 31, 1999 was $23,000.
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 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 $633,000 at
December 31, 1999.
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.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s. This amount is currently equal to about
six basis points for each $100 in domestic deposits for SAIF members while BIF
insured institutions pay an assessment equal to about 1.50 basis points for
each $100 in domestic deposits. These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the bonds mature
in the year 2015.
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.
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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 specified liquid assets
equal to a monthly average of not less than a specified percentage of its net
withdrawable accounts deposit plus short-term borrowings. This liquidity
requirement is currently 4%, but may be changed from time to time by the OTS
to any amount within the range of 4% to 10%. Monetary penalties may be
imposed for failure to meet liquidity requirements. The Savings Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be "significantly undercapitalized" and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is "critically undercapitalized." OTS regulations
also require that a capital restoration plan be filed with the OTS within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company in an amount of up to the lesser of 5% of the institution's
assets or the amount which would bring the institution into compliance with
all capital standards. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including,
but not limited to, increased monitoring by regulators and restrictions on
growth, capital distributions and expansion. The OTS also could take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
At December 31, 1999, 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 assets (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, 1999, the Savings Bank met the test and its QTL
percentage was 69.8%.
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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 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. See "-- Savings and Loan Holding Company
Regulations."
Capital Requirements. Federally insured savings associations, such as the
Savings Bank, are required to maintain a minimum level of regulatory capital.
The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At December 31, 1999, the
Savings Bank had tangible capital of $7.1 million, or 9.8% of adjusted total
assets, which is approximately $6.0 million above the minimum requirement of
1.5% of adjusted total assets in effect on that date. At December 31, 1999,
the Savings Bank did not have any intangible assets.
The capital standards also require core capital equal to at least 3% to
4% of adjusted total assets, depending on an institution's supervisory rating.
Core capital generally consists of tangible capital. At December 31, 1999, the
Savings Bank had core capital equal to $7.1 million, or 9.8% of adjusted total
assets, which is $4.2 million above the minimum leverage ratio requirement of
3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.
On December 31, 1999, the Savings Bank had total risk-based capital of
approximately $7.7 million, including $7.0 million in core capital and
$662,000 in qualifying supplementary capital, and risk-weighted assets of
$51.0 million, or total capital of 15.2% of risk-weighted assets. This amount
was $3.7 million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. The OTS and the
FDIC are authorized and, under certain circumstances required, to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS
may not increase its
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assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Corporation or the Savings Bank may have a substantial adverse effect on their
operations and profitability.
Limitations on Capital Distributions. The OTS imposes various
restrictions on savings associations with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. The OTS also prohibits a savings association from declaring or paying
any dividends or from repurchasing any of its stock if, as a result of such
action, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
The Savings Bank may make a capital distribution without OTS approval
provided that the Savings Bank notify the OTS 30 days before it declares the
capital distribution and that the following requirements are met: (i) the
Savings Bank has a regulatory rating in one of the two top examination
categories, (ii) the Savings Bank is not of supervisory concern, and will
remain adequately or well capitalized, as defined in the OTS prompt corrective
action regulations, following the proposed distribution, and (iii) the
distribution does not exceed the Savings Bank's net income for the calendar
year-to-date plus retained net income for the previous two calendar years
(less any dividends previously paid). If the Savings Bank does not meet these
stated requirements, it must obtain the prior approval of the OTS before
declaring any proposed distributions.
In the event the Savings Bank's capital falls below its regulatory
requirements or the OTS notifies it that it is in need of more than normal
supervision, the Savings Bank's ability to make capital distributions will be
restricted. In addition, no distribution will be made if the Savings Bank is
notified by the OTS that a proposed capital distribution would constitute an
unsafe and unsound practice, which would otherwise be permitted by the
regulation.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At
December 31, 1999, the Savings Bank's limit on loans to one borrower was $1.1
million. At December 31, 1999, the Savings Bank's largest single loan to one
borrower was $500,000, 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.
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Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act 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. Generally, transactions
between a savings association or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to
an affiliate, are restricted to a percentage of the association's capital.
Affiliates of the Savings Bank include the Corporation and any company which
is under common control with the Savings Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
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
The Corporation is a unitary savings and loan company subject to
regulatory oversight of the OTS. Accordingly, the Corporation is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Corporation and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to a
serious risk to the subsidiary savings association.
Acquisitions. Federal law 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
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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.
Activities. As a unitary savings and loan holding company, the
Corporation generally is not subject to activity restrictions. 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 and the activities of the Savings Bank and
any other subsidiaries (other than the Savings Bank or any other SAIF insured
savings association) would generally become subject to additional
restrictions. 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. Federal law 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 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. If the Savings Bank fails the qualified
thrift lender test, within one year the Corporation must register as, and will
become subject to, the significant activity restrictions applicable to bank
holding companies. See "-- Federal Regulation of Savings Associations
Qualified Thrift Lender Test" for information regarding the Savings Bank's
qualified thrift lender test.
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
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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 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, 1999, the Savings Bank had 28 full-time and five
part-time employees, none of whom are represented by a collective bargaining
unit. The Savings Bank believes its relationship with its employees is good.
28
<PAGE>
Item 2. Description of Properties
- ----------------------------------
At December 31, 1999, the net book value of the Savings Bank's premises
and equipment totaled $1.3 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.
The Savings Bank also operates two proprietary ATM's at the Country Club
Market and Power's Four Lane Market near McMinnville, Tennessee.
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, 1999.
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,
1999 and 1998
(b) Consolidated Statements of Income for the Years Ended December 31,
1999 and 1998
(c) Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1999 and 1998
(d) Consolidated Statements of Cash Flows For the Years Ended December
31, 1999 and 1998
(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.
29
<PAGE>
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 1999 Position
- ---- ---- --------
Donald R. Collette 63 Chairman of the Board
Joe H. Pugh 43 President and Chief Executive Officer
Dr. R. Neil Schultz 63 Treasurer and Secretary
Ray Talbert 53 Executive Vice President, Commercial Loan
Officer and Branch Manager
John W. Duncan 34 Vice President and Chief Financial Officer
Nita M. Baggett 59 Senior Vice President of Secondary Marketing
Kenneth D. Martin 49 Senior Vice President of Consumer Lending
Kenneth W. Smith 50 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:
Donald R. Collette is a retired General Manager of McMinnville Electric
System in McMinnville, Tennessee. He is past president of the McMinnville
Chamber of Commerce and a member of the McMinnville Economic Development
Committee and the McMinnville Rotary Club.
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 past
President 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 board member of
the Alliance for Community Outreach.
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 Breakfast Rotary
Club.
30
<PAGE>
Nita M. Baggett has been employed by the Savings Bank since 1992. She is
a member of the Warren County Home Builders Association and serves on the
Family Selection Committee for Habitat for Humanity of Warren County.
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 is a member of the McMinnville Noon
Rotary 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.
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."
31
<PAGE>
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 (incorporated by
reference to Exhibit 10.4 to the registrants Annual Report on
Form 10-KSB for the year ended December 31, 1998)
10.5 Severance Agreement with Shannon L. Haston (incorporated by
reference to Exhibit 10.5 to the registrants Annual Report on
Form 10-KSB for the year ended December 31, 1998)
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) Reports on Form 8-K
No Forms 8-K were filed during the quarter ended December 31, 1999.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SECURITY BANCORP, INC.
Date: March 30, 2000 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 30, 2000
---------------------------------
Joe H. Pugh
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/John W. Duncan March 30, 2000
---------------------------------
John W. Duncan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By:/s/Donald R. Collette March 30, 2000
---------------------------------
Donald R. Collette
Chairman of the Board
By:/s/Dr. Franklin J. Noblin March 30, 2000
---------------------------------
Dr. Franklin J. Noblin
Director
By:/s/Dr. Raymond Neil Schultz March 30, 2000
---------------------------------
Dr. Raymond Neil Schultz
Treasurer, Secretary and Director
By:/s/Earl H. Barr March 30, 2000
---------------------------------
Earl H. Barr
Director
By:/s/Robert W. Newman March 30, 2000
---------------------------------
Robert W. Newman
Director
By: March , 2000
--------------------------------- --
Dr. John T. Mason, III
Director
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
[Logo] SECURITY BANCORP, INC.
1999 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
Page
----
President's Letter to Stockholders ...........................1
Business of the Company ......................................2
Forward-Looking Statements....................................2
Common Stock Information......................................3
Selected Consolidated Financial Information...................4
Management's Discussion and Analysis of
Financial Condition and Results of Operations..............6
Independent Auditor's Report.................................13
Consolidated Financial Statements............................14
Notes to Consolidated Financial Statements...................18
Directors and Officers of Security Bancorp, Inc..............39
Directors and Officers of Security Federal Savings Bank of
McMinnville, TN...........................................40
Corporate Information........................................41
Annual Meeting...............................................41
<PAGE>
[Logo] SECURITY BANCORP, INC.
To Our Stockholders
We are pleased to report that net income for the year ended December 31, 1999
was $701,000. This amount represents a 15.5% increase over the $602,000
earned during the year ended December 31, 1998. Basic earnings per share was
$1.78 for the year ended December 31, 1999 compared to $1.50 for the prior
year, or an increase of 18.7%.
The Company remains financially strong. Total assets at December 31, 1999
were $72.2 million, an increase of 13.8% from total assets of $63.4 million at
December 31, 1998. Deposits increased $7.3 million, or 14.6%, and net loans
increased $6.7 million, or 12.6%, from December 31, 1998. The loan growth is
attributable to internally generated expansion of the Company's consumer and
commercial loan portfolios. This expansion into higher yielding loans
originated in our local market was funded by our deposit growth.
The Company is becoming a community bank rather than a traditional thrift
organization as evidenced by the following changes which have occurred over
the last three years:
. Consumer and commercial loans represent 33.8% of the total loan portfolio
at December 31, 1999 but as of December 31, 1996 represented only 24.1% of
total loans.
. Three years ago certificates of deposit represented 77.3% of all deposits.
As of December 31, 1999 they represent 67.8% of our deposits. Non-interest
bearing deposits have grown from $1.7 million at December 31, 1996 to $4.9
million at December 31, 1999.
. The Company has paid two annual dividends to shareholders of $.25 per
share in 1998 and 1999.
This year the Company began construction on an expanded banking facility at
our main office, which includes three additional drive-thru lanes to improve
customer service and a trust and operations center. We anticipate that this
expansion will be fully operational by June 2000.
The Board of Directors, Management, and Staff appreciate the support of our
stockholders. We are very optimistic about fiscal 2000 and look forward to
continued success.
Sincerely,
/s/Joe H. Pugh
Joe H. Pugh
President and Chief Executive Officer
1
<PAGE>
BUSINESS OF THE COMPANY
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, 1999, the Company had total consolidated assets of $72.2 million and
consolidated stockholders' equity of $7.5 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.
FORWARD-LOOKING STATEMENTS
This document, including information included or incorporated by reference,
contains, and future filings by the Company on Form 10-KSB, Form 10-QSB, and
Form 8-K and future oral and written statements by the Company and its
management may contain, forward-looking statements about Security Bancorp,
Inc. and its subsidiary which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, statements with respect to anticipated future
operating and financial performance, growth opportunities, interest rates
acquisition and divestiture opportunities, and synergies, efficiencies, cost
savings and funding advantages expected to be realized from prior
acquisitions. Words such as "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan," and similar expressions
are intended to identify these forward-looking statements. Forward-looking
statements by the Company and its management are based on beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions of
management and are not guarantees of future performance. The Company
disclaims any obligation to update or revise any forward-looking statements
based on the occurrence of future events, the receipt of new information, or
otherwise. The important factors we discuss below and elsewhere in this
document, as well as other factors discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this document and identified in our filings with the Securities and Exchange
Commission ("SEC") and those presented by our management from time to time,
could cause actual results to differ materially from those indicated by the
forward-looking statements made in this document.
2
<PAGE>
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, 1999, there were approximately 215 stockholders of record and
436,425 shares of common stock outstanding (including unreleased Employee
Stock Ownership Plan ("ESOP") shares of 26,186 and restricted treasury stock
of 14,489). 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.
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 four quarters of fiscal 1998 and 1999.
Fiscal 1998 High Low Dividends
---- --- ---------
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
Fiscal 1999
First Quarter 18.000 16.250 N/A
Second Quarter 16.875 15.000 N/A
Third Quarter 15.750 15.500 .25/share
Fourth Quarter 15.750 15.500 N/A
3
<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,
----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
SELECTED FINANCIAL CONDITIONAL DATA:
Total assets $72,204 $63,425 $50,920 $44,121 $36,065
Loans receivable, net 60,189 53,473 43,093 36,667 26,984
Cash and cash equivalents 3,051 2,581 1,896 1,098 288
Investment securities
available for sale 4,138 1,420 1,379 1,743 1,191
Investment securities
held-to-maturity -- 650 1,248 1,250 3,950
Mortgage-backed securities
available for sale 1,604 1,956 -- -- 645
Mortgage-backed securities
held-to-maturity 236 501 1,206 1,580 1,734
Deposits 57,455 50,142 37,061 35,790 32,398
FHLB Advances 6,800 5,500 6,500 5,500 1,000
Stockholders equity,
substantially restricted 7,507 6,989 6,735 2,450 2,284
Year Ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
SELECTED OPERATING DATA:
Interest income $5,365 $4,592 $3,926 $3,294 $2,696
Interest expense 2,596 2,326 2,105 1,840 1,513
------ ------ ------ ------ ------
Net interest income 2,769 2,266 1,821 1,454 1,183
Provision for loan losses 159 285 60 116 30
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 2,610 1,981 1,761 1,338 1,153
------ ------ ------ ------ ------
Non interest income 891 811 278 158 125
Other expenses(1) 2,373 1,819 1,314 1,275 829
------ ------ ------ ------ ------
Income before income tax
expense 1,128 973 725 221 449
Income tax expense 427 371 267 83 148
------ ------ ------ ------ ------
Net income $ 701 $ 602 $ 458 $ 138 $ 301
====== ====== ====== ====== ======
4
<PAGE>
At December 31,
----------------------------------------------
1999 1998 1997 1996(1) 1995
---- ---- ---- ------ ----
(Dollars In thousands)
KEY OPERATING RATIOS
Performance Ratios:
Return on average assets
(net income divided by
average assets) 1.03% 1.05% 0.95% 0.34% 0.90%
Return on average equity
(net income divided by
average equity) 9.67 8.64 8.27 6.17 15.71
Interest rate spread
(difference between
average yield on interest
earning assets and average
cost of interest-bearing
liabilities) 3.88 3.48 3.43 3.50 3.35
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 4.08 4.19 3.99 3.79 3.64
Noninterest expense as a
percent of average assets 3.50 3.18 2.72 3.18 2.48
Average interest-earning
assets to interest-bearing
liabilities 112.08 116.34 112.14 106.03 106.08
Efficiency ratio (other
expenses divided by the
sum of net interest income
and non-interest income) 64.82 59.12 62.60 79.09 50.61
Capital Ratios:
Average equity to average
assets 10.69 12.20 11.46 5.90 6.28
Tangible capital to assets 9.81 9.99 12.01 5.24 6.03
Core capital to assets 9.81 9.99 12.01 5.24 6.03
Risk-based capital to risk
adjusted assets 15.19 15.68 20.30 9.87 12.04
Asset Quality Ratios:
Allowance for loan losses
to total loans at end of
period 1.08 1.13 0.76 0.75 0.69
Net charge offs to average
outstanding loans during
the period 0.23 0.01 0.01 0.06 0.04
Ratio of nonperforming
assets to total assets(2) 0.74 0.89 0.11 0.11 0.14
Ratio of allowance for loan
losses to nonperforming
assets(2) 120.86 110.32 616.36 631.11 376.00
SELECTED OTHER DATA:
Number of:
Real estate loans
outstanding 1,258 877 707 610 579
Deposit accounts 6,775 5,385 3,459 3,036 2,604
Full service offices(3) 2 2 2 1 1
- -----------------------------------------------------------------------------
(1) Includes one time special SAIF assessment of $193,000 in 1996.
(2) Nonperforming 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.
5
<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 invest 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.
6
<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, 1999, 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
------------------- -------------------------
(Dollars in thousands)
Basis
Point ("bp")
Change $ Amount $ Change(1) % Change NPV Ratio(2) Change(3)
------ -------- ----------- -------- ----------- ---------
+300 bp $ 8,679 $ -617 -7% 12.10% -50 bp
+200 bp 8,963 -333 -4% 12.36% -23 bp
+100 bp 9,184 -112 -1% 12.54% -5 bp
0 bp 9,296 12.59%
-100 bp 9,269 -27 0% 12.48% -12 bp
-200 bp 9,286 -10 0% 12.41% -18 bp
-300 bp 9,463 167 2% 12.53% -7 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.
7
<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, 1999, the Bank's liquidity ratio was 11.39%,
which was in excess of the OTS required ratio of 4%. At December 31, 1999,
there were no material commitments for capital expenditures and the Bank had
unfunded loan commitments of approximately $3.6 million and outstanding
commercial letters of credit of $590,000. At December 31, 1999, management
had no knowledge of any trends, events or uncertainties that will have or are
reasonably likely to have material effects on the liquidity, capital resources
or operations of the Bank. Further, at December 31, 1999, management was not
aware of any current recommendations by the regulatory authorities, which, if
implemented, would have such an effect.
Comparison of Financial Condition at December 31, 1999 and 1998
Total assets increased to $72.2 million at December 31, 1999 from $63.4
million at December 31, 1998. Loans receivable, net, increased $6.7 million
as a result of an increase in mortgage loans of $2.5 million, commercial
business loans of $900,000, and consumer loans of $3.3 million. Deposits
increased $7.3 million from $50.1 million at December 31, 1998 to $57.4
million at December 31, 1999. The increase is primarily attributable to an
increase in personal checking accounts and certificates of deposit.
Stockholders' equity increased to $7.5 million at December 31, 1999 from $7.0
million at the end of 1998.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
Net Income. Net income for the year ended December 31, 1999 was $701,000
compared to $602,000 for the year ended December 31, 1998. 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, 1999 increased 31.8% to $2.6 million compared to
$2.0 million for the year ended December 31, 1998 as a result of an increase
in total interest income that more than offset an increase in total interest
expense and a lower 1999 provision for loan losses. Total interest income
increased 16.8% to $5.4 million for the year ended December 31, 1999 from $4.6
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 16.6% to $55.9 million for the year ended December 31, 1999
from $48.7 million for the year ended December 31, 1998. Interest expense
increased 11.6% to $2.6 million for the year ended December 31, 1999 from $2.3
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 $159,000 for the year ended
December 31, 1999 compared to $285,000 a year earlier. The higher
8
<PAGE>
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, 1999.
Non Interest Income. Non interest income increased 9.86% to $891,000 for the
year ended December 31, 1999 from $811,000 for the year ended December 31,
1998. Service charges, commissions, and fees increased to $611,000 in fiscal
1999 from $239,000 in fiscal 1998 primarily as a result of an increase in
commissions from the trust department and, to a lesser extent, from service
charges on checking accounts. Gain on sale of loans decreased to $204,000 in
fiscal 1999 from $321,000 in fiscal 1998 as a result of a decrease in loan
originations. 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 30.4% to $2.4 million for the year
ended December 31, 1999 from $1.8 million for the year ended December 31,
1998. Compensation and benefits increased to $1.2 million in fiscal 1999 from
$814,000 in fiscal 1998 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 Management
Recognition Program. Occupancy and equipment expense increased to $262,000 in
fiscal 1999 from $248,000 in fiscal 1998 as a result of increased depreciation
expense. Other expenses increased to $729,000 in fiscal 1999 from $516,000 in
fiscal 1998 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 $427,000 for the year ended
December 31, 1999 compared to $370,000 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.
9
<PAGE>
<TABLE>
Year Ended December 31,
At ----------------------------------------------------------------
December 31, 1999 1998
1999 ------------------------------ ----------------------------
---- 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 8.68% $55,907 $4,923 8.81% $48,716 $4,245 8.71%
Mortgage-backed securities 6.79 2,148 142 6.61 1,261 87 6.90
Investment securities 6.38 4,028 257 6.38 3,570 219 6.13
FHLB stock 7.06 612 43 7.03 575 41 7.13
---- ------- ------ ----- ------- ------ -----
Total interest-earning assets 8.47 62,695 5,365 8.56 54,122 4,592 8.48
Noninterest-earning assets 5,120 3,007
------- -------
Total assets 67,815 57,129
======= ======
Interest-bearing liabilites:
Passbook, NOW and Money
Market Accounts 2.98 12,078 360 2.98 8,206 235 2.86
Certificates of deposit 5.23 37,166 1,927 5.18 31,740 1,649 5.20
------- ----- ---- ------ ----- ----
Total deposits 49,244 2,287 4.64 39,946 1,884 4.72
FHLB advances 5.38 6,150 309 5.02 6,575 442 6.72
---- ------- ----- ---- ------ ----- ----
Total interest-bearing
liabilities 4.32 55,394 2,596 4.68 46,521 2,326 5.00
------- ----- ------ -----
Noninterest-bearing
liabilities 5,171 4,070
------- ------
Total liabilities 60,565 50,591
Equity 7,250 6,538
------- ------
Total liabilities and equity $67,815 $57,129
======= =======
Net interest income $2,769 $2,266
====== ======
Interest rate spread 4.15% 3.88% 3.48%
==== ==== ====
Net interest margin 4.08% 4.19%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 112.08% 116.34%
====== ======
</TABLE>
10
<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).
<TABLE>
Year Ended December 31, Year Ended December 31,
1999 Compared to Year 1998 Compared to Year
Ended December 31, 1998 Ended December 31, 1997
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------- -------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $49 $623 $ 7 $679 ($37) $674 ($7) $630
Mortgage-backed and
related securities (4) 62 (3) 55 (6) (14) (1) (21)
Investment securities 9 29 1 39 (6) 60 (2) 52
Other interest-earning
assets (1) 3 - 2 1 3 1 5
--- ---- ---- ---- --- ---- ---- ----
Total net change in - - - - - - - -
income on interest-
earning assets 53 717 5 775 (48) 723 (9) 666
Interest-bearing liabilities: --- ---- ---- ---- --- ---- ---- ----
Passbook, NOW and
money market accounts 10 111 5 126 4 6 1 11
Certificates of deposits (6) 284 (1) 277 (43) 182 9 148
FHLB advances (97) (29) (7) (133) 40 20 2 62
--- ---- ---- ---- --- ---- ---- ----
Total net change in
expense on
interest-bearing
liabilities (93) 366 (3) 270 1 208 12 221
--- ---- ---- ---- --- ---- ---- ----
Net increase (decrease)
in net interest income $146 $351 $ 8 $505 ($49) $515 ($21) $445
==== ==== ==== ==== ==== ==== ==== ====
- -----------------------------------------------------------------------------------------------------------
(1) Does not include interest on loans 90 days or more past due.
</TABLE>
11
<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.
12
<PAGE>
[HOUSHOLDER, ARTMAN AND ASSOCIATES, P.C. LETTERHEAD]
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, 1999 and 1998, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Security
Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the results
of their operations, changes in stockholders' equity and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/Housholder, Artman and Associates, P.C.
January 29, 2000
13
<PAGE>
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
1999 1998
------------ -----------
ASSETS
Cash and cash equivalents $ 3,051,147 $ 2,581,175
Investment securities:
Available-for-sale, at fair value 4,137,746 1,420,248
Held-to-maturity, at amortized cost -
fair value of $651,950 (1998) - 649,673
Mortgage-backed securities:
Available-for-sale, at fair value 1,603,757 1,955,990
Held-to-maturity, at amortized cost -
fair value of $234,360 (1999) and
$507,196 (1998) 235,585 501,290
Loans receivable, net 60,188,919 53,472,898
Interest receivable, net 523,063 468,826
Premises and equipment, net 1,307,820 1,582,428
Real estate owned, net 275,873 -
Federal Home Loan Bank stock, at cost 633,000 590,500
Other assets 247,267 202,317
------------ ------------
Total assets $ 72,204,177 $ 63,425,345
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 57,454,842 $ 50,141,580
Federal Home Loan Bank advances 6,800,000 5,500,000
Advances from borrowers for property taxes
and insurance 64,524 71,956
Federal income taxes payable 82,034 362,431
Accrued expenses and other liabilities 295,792 360,403
------------ ------------
Total liabilities 64,697,192 56,436,370
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 4,143,588 4,109,388
Unallocated ESOP shares (269,992) (304,985)
Retained earnings 3,848,660 3,256,549
Accumulated other comprehensive income 24,869 218,248
Restricted treasury stock at cost
(14,489 and 17,457) shares (244,504) (294,589)
------------ ------------
Total stockholders' equity 7,506,985 6,988,975
------------ ------------
Total liabilities and stockholders' equity $ 72,204,177 $ 63,425,345
============ ============
The accompanying notes are an integral part of these statements.
14
<PAGE>
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
Interest income:
Loans receivable $ 4,923,468 $ 4,245,336
Investment securities 386,494 303,343
Interest on overnight funds sold 55,344 43,151
----------- -----------
Total interest income 5,365,306 4,591,830
Interest expense:
Deposits 2,287,350 1,884,050
Federal Home Loan Bank advances 309,061 442,085
----------- -----------
Total interest expense 2,596,411 2,326,135
----------- -----------
Net interest income 2,768,895 2,265,695
Provision for loan losses 159,484 285,123
----------- -----------
Net interest income after provision
for loan losses 2,609,411 1,980,572
----------- -----------
Other income:
Service charges, commissions and fees 611,151 238,981
Gain on sale of loans 204,312 321,383
Loan servicing income 10,591 14,037
Gain on sale of investment securities 313 215,123
Other 65,061 21,890
----------- -----------
Total other income 891,428 811,414
Other expenses:
Compensation and benefits 1,154,892 814,301
Occupancy and equipment expenses 262,394 247,996
Federal and other insurance premiums 57,808 45,482
Advertising 55,713 60,666
Legal and professional fees 112,610 134,407
Other expenses 729,119 516,265
----------- -----------
Total other expenses 2,372,536 1,819,117
----------- -----------
Income before income tax expense 1,128,303 972,869
Income tax expense 427,083 370,413
----------- -----------
Net income 701,220 602,456
Other comprehensive income:
Net changes in unrealized appreciation of
available for sale securities and loans
net of tax of $118,558 in 1999 and $6,979 in 1998 (193,379) (11,444)
----------- -----------
Comprehensive income $ 507,841 $ 591,012
=========== ===========
Basic earning per share $ 1.78 $ 1.50
Diluted earnings per share $ 1.78 $ 1.50
The accompanying notes are an integral part of these statements.
15
<PAGE>
<TABLE>
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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,
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 - - - - 602,456 - - 602,456
Other comprehensive
income:
Net change
in unrealized
gains on
securities
available-
for-sale,
net of taxes - - - - - (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
ESOP shares
earned - - 30,034 34,993 - - - 65,027
Allocation of
earned
MRP stock - - 4,166 - - - 50,085 54,251
Cash dividends
declared ($0.25
per share) - - - - (109,105) - - (109,105)
Comprehensive
income:
Net income - - - - 701,216 - - 701,216
Other compre-
hensive income:
Net change in
unrealized
gains/(losses)
on securities
available-for-
sale, net of
tax - - - - - (193,379) - (193,379)
Balances,
December 31, ------- ------ ---------- --------- ---------- ------- --------- ----------
1999 436,425 $4,364 $4,143,588 $(269,992) $3,848,660 $24,869 $(244,504) $7,506,985
======= ====== ========== ========= ========== ======= ========= ==========
The accompanying notes are an integral part of these statements.
</TABLE>
16
<PAGE>
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---------- ----------
Cash flows from operating activities:
Net Income $ 701,220 $ 602,456
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 86,074 78,959
Dividend on FHLB stock (42,500) (40,500)
(Gain) loss on sale of investments (313) (215,123)
Provision for loan losses 159,484 285,123
(Increase) decrease in interest receivable (54,237) (105,701)
(Increase) decrease in other assets (44,950) (127,328)
Increase (decrease) in accrued liabilities (64,611) 165,748
Increase (decrease) in income taxes payable (133,999) 49,061
Increase (decrease) in deferred taxes payable (146,398) (49,657)
Sale of mortgage loans held for sale 8,821,972 8,115,393
Originations of mortgage loans held for sale (8,990,750) (8,115,393)
Amortization of premiums on investments (11,246) (16,201)
Gain on sale of property - (257)
Release of ESOP shares 34,993 32,898
Compensation earned under MRP 50,085 -
---------- ----------
Total adjustments (336,396) 57,022
---------- ----------
Net cash provided by operating activities 364,824 659,478
Cash flows from investing activities:
Loan originations, net of principal payments (6,982,600) (10,664,617)
Purchase of available for
sale-investment securities (5,462,335) (500,000)
Proceeds from available for
sale investment securities 2,550,000 668,479
Proceeds from available for
sale mortgage-backed securities 364,919 -
Proceeds from maturities and repayments of:
Held to maturity investment securities 650,000 1,999,950
Held to maturity mortgage-backed securities 265,705 703,677
Cash payments for the purchase of property (41,466) (558,065)
Purchase of held to maturity securities - (1,384,034)
Purchases of mortgage-backed securities - (1,967,989)
Proceeds from sale of foreclosed real estate - 5,472
Proceeds from sale of property 230,000 -
---------- ----------
Net cash provided (used) by investing activities (8,425,777) (11,697,127)
Cash flows from financing activities:
Net increase (decrease) in deposit accounts 7,313,262 13,080,479
Proceeds (repayment) of FHLB advances 1,300,000 (1,000,000)
Net increase (decrease) in escrow accounts (7,432) 12,778
Proceeds from issuance of ESOP shares 34,200 33,575
Dividends paid (109,105) (109,105)
Restricted Treasury stock purchased - (294,589)
---------- ----------
Net cash provided by financing activities 8,530,925 11,723,138
---------- ----------
Net increase in cash and equivalents 469,972 685,489
Cash and equivalents, beginning of year 2,581,175 1,895,686
---------- ----------
Cash and equivalents, end of year $3,051,147 $2,581,175
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense $2,596,519 $2,316,869
Income Tax 388,000 383,388
The accompanying notes are an integral part of these statements.
17
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL SATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation -
The consolidated financial statements as of December 31, 1999 and 1998 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.
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, 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, 1999, 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.
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.
18
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 1999 or 1998.
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.
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' equity until 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.
19
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans Receivable (continued)
- ----------------
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.
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.
20
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Mortgage Servicing Rights
- -------------------------
Mortgage servicing rights ("MSR") are the rights to service mortgage loans for
others which are capitalized and included in "other assets" on the
Consolidated Balance Sheets at the lower of their carrying value or fair
value. The carrying value of mortgage loans originated or purchased is
allocated between the carrying value of the loans and the MSR. Capitalization
of the allocated carrying value of MSR occurs when the underlying loans are
sold or securitized. MSR's are amortized over the estimated period of and in
proportion to net servicing revenues. MSR for loans originated by the Bank
prior to 1997 were not capitalized in accordance with the then current
accounting standards.
The Company periodically evaluates MSR for impairment by estimating the fair
value based on a discounted cash flow methodology. This analysis incorporates
current market assumptions, including discount, prepayment and delinquency
rates with net cash flows. The predominant characteristics used as the basis
for stratifying MSR are investor type, product type and interest rate. If the
carrying value of the MSR's exceed the estimated fair value, a valuation
allowance is established. Changes to the valuation allowance are charged
against or credited to mortgage servicing income and fees up to the original
carrying value of the MSR.
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". 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.
21
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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.
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.
22
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
certain 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.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
1999 1998
---- ----
Unrealized holding gains (losses)
on loans available-for-sale $ (52,806) $ (552)
Unrealized holding gains (losses)
on available-for-sale securities (259,129) (17,871)
--------- ---------
Net unrealized gains (losses) (311,935) (18,423)
Tax effect 118,556 6,979
--------- ---------
Net of tax amount $(193,379) $ (11,444)
========= =========
Disclosures Regarding Segments
- ------------------------------
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1999. SFAS No. 131 establishes standards for the
way that public businesses report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Company adopted SFAS No. 131 without any impact on their consolidated
financial statements as the chief operating decision maker reviews the results
of operations of the Company and its subsidiaries as a single enterprise.
Trust Department
- ----------------
Assets under management of the Bank's trust department are not included in
these financial statements.
23
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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, 1999 Cost Gains Losses Value
- ----------------- ---------- ---------- ----------- ----------
U. S. Government and
Federal agencies $3,989,716 $ - $ 123,285 $3,866,431
FHLMC stock 5,650 265,665 - 271,315
---------- ---------- ---------- ----------
3,995,366 265,665 123,285 4,137,746
Mortgage-backed securities 1,652,665 - 48,908 1,603,757
---------- ---------- ---------- ----------
$5,648,031 $ 265,665 $ 172,193 $5,741,503
========== ========== ========== ==========
December 31, 1998
- -----------------
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
========== ========== ========== ==========
Securities held-to-maturity:
December 31, 1999
- -----------------
Mortgage-backed securitieS $ 235,585 $ - $ 1,225 $ 234,360
---------- ---------- ---------- ----------
$ 235,585 $ - $ 1,225 $ 234,360
========== ========== ========== ==========
December 31, 1998
- -----------------
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
========== ========== ========== ==========
24
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
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, 1999 December 31, 1998
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- ---------- -----
Available-for-sale:
FHLMC stock $ 5,650 $ 271,315 $ 5,650 $ 371,482
Due in one year or less 1,998,641 1,930,210 1,050,000 1,048,766
Due after one year
through five years
Due after five years
through ten years 2,832,965 2,751,180 994,700 984,234
Due after ten years 810,775 788,798 973,289 971,756
---------- ---------- ---------- ----------
$5,648,031 $5,741,503 $3,023,639 $3,376,238
========== ========== ========== ==========
Held-to-maturity:
Due in one year or less $ - $ - $ - $ -
Due after one year
through five years 235,585 234,360 207,140 207,129
Due after ten years - - 943,823 952,017
---------- ---------- ---------- ----------
$ 235,585 $ 234,360 $1,150,963 $1,159,146
========== ========== ========== ==========
At December 31, 1999 and 1998, $1,900,000 and $1,600,000 of securities were
pledged as collateral for deposits.
Activities related to the sales of securities are summarized as follows:
1999 1998
--------- --------
Proceeds from sales $2,550,000 $668,479
Gross gains on sales 313 215,123
NOTE 3 - LOANS RECEIVABLE
Loans receivable at December 31, 1999 and 1998 are summarized as follows:
December 31,
1999 1998
---- ----
First mortgage loans:
Secured by one-to-four family residences
$37,571,518 $34,031,475
Secured by commercial real estate 4,856,477 4,489,573
Real estate development loans 1,097,005 1,005,436
Construction loans 2,478,399 3,704,973
----------- -----------
46,003,399 43,231,457
25
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - LOANS RECEIVABLE (continued)
December 31,
1999 1998
Less:
Undisbursed portion of construction loans
(884,099) (647,118)
---------- ----------
Total first mortgage loans 45,119,300 42,584,339
Commercial business loans 6,969,446 6,062,376
Consumer and other loans:
Automobile 3,260,392 1,991,746
Second mortgage and other 3,441,242 1,867,859
Unsecured 2,054,392 1,597,470
----------- -----------
8,756,026 5,457,075
Less: deferred loan fees (6,468) (10,985)
allowance for loan losses (649,385) (619,907)
----------- -----------
$60,188,919 $53,472,898
=========== ===========
Activity in the allowance for loan losses is as follows:
December 31,
1999 1998
---- ----
Balance - beginning $ 619,907 $ 339,041
Provision charged to operations 159,484 285,123
Loans charged off (155,572) (15,799)
Recoveries 25,566 11,542
----------- ----------
Balance - ending $ 649,385 $ 619,907
=========== ==========
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
$261,000 and $562,000 at December 31, 1999 and 1998, respectively, and had an
average outstanding balance of approximately $477,000 and $306,000 for the
years ended December 31, 1999 and 1998, 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
$147,000 and $377,000 at December 31, 1999 and 1998 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 $13,000 and $32,000 for the years ended December 31, 1999 and 1998,
respectively.
26
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - LOANS RECEIVABLE (continued)
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,
1999 and 1998 totalled $818,000 and $630,000, respectively.
The Bank's lending activity is concentrated with customers located in the
McMinnville and Warren County, Tennessee area.
Loans held for sale totalled $853,000 at December 31, 1999. The fair value of
such loans was $800,000.
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 $26,054,381 and $20,111,630 at
December 31, 1999 and 1998, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $85,708 and $60,599 December 31, 1999 and 1998, respectively.
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
December 31,
1999 1998
---- ----
Investment securities $ 67,157 $ 26,698
Mortgage-backed securities 10,513 9,650
Loans receivable 445,393 432,478
---------- ----------
$ 523,063 $ 468,826
========== ==========
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized by major classification as follows:
December 31,
1999 1998
---- ----
Land $ 515,500 $ 800,500
Building 788,293 717,363
Furniture and equipment 468,415 442,879
---------- ---------
1,772,208 1,960,742
Less: accumulated depreciation (464,388) (378,314)
---------- ---------
$1,307,820 $1,582,428
========== ==========
Depreciation expense was $86,074 and $78,959 in 1999 and 1998, respectively.
27
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - DEPOSITS
Deposit accounts at December 31, 1999 and 1998 are summarized as follows:
December 31,
1999 1998
----- ----
Demand deposits, noninterest-bearing $ 4,904,500 $ 4,205,524
NOW and money market accounts -
2.95% (1999) and 3.02% (1998) 7,877,524 5,562,461
Passbook accounts -
3.01% (1999) and 2.96% (1998) 5,714,962 5,000,245
----------- -----------
Total Demand, NOW and Passbook Accounts 18,496,986 14,768,230
Certificates of deposit:
3.01% to 4.00% 11,566 380,683
4.01% to 5.00% 17,907,657 6,777,332
5.01% to 6.00% 20,679,891 26,764,078
6.01% to 7.00% 358,742 1,451,257
----------- -----------
Total certificates of deposit 38,957,856 35,373,350
----------- -----------
$57,454,842 $50,141,580
=========== ===========
Interest expense on deposits is as follows:
December 31,
1999 1998
---- ----
NOW and money market accounts $ 200,256 $ 94,442
Passbook accounts 159,657 140,608
Certificates of deposit 1,927,437 1,649,000
----------- -----------
$ 2,287,350 $ 1,884,050
=========== ===========
Certificate of deposit maturities are summarized below:
Average Average
Rate 1999 Rate 1998
---- ---- ----- ----
Within 1 year 5.15% $28,261,580 5.27% $24,475,094
After 1 year but within 2 years 5.39 6,301,339 5.51 7,128,927
After 2 years but within 3 years 5.55 2,894,761 5.80 1,684,168
After 3 years but within 4 years 5.48 830,000 5.90 1,465,179
After 4 years but within 5 years 5.57 670,176 5.67 619,982
---- ----------- ---- -----------
5.23% $38,957,856 5.37% $35,373,350
==== =========== ==== ===========
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $8,377,000 and $7,621,000 at December 31, 1999 and 1998,
respectively. Deposit accounts in excess of $100,000 are not federally
insured.
28
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31 are summarized as follows:
1999 1998
---- ----
Short-term advances $ 1,300,000 $ -
Long-term advances 5,500,000 5,500,000
------------ ------------
$ 6,800,000 $ 5,500,000
============ ============
The short-term advances are due ninety days from issuance. Long-term advances
at December 31, 1999 mature as follows:
Weighted
Year Ending Average Rate at
December 31, December 31, 1999 Amount
------------- ----------------- -------
2000 - $ -
2001 5.87% 2,500,000
2002 - -
2003 4.70% 3,000,000
----------
$5,500,000
==========
At December 31, 1999, the Bank's FHLB stock with a carrying value of $633,000
and residential real estate loans with outstanding balances totalling
$10,200,000 were pledged under a blanket agreement as collateral for FHLB
advances. At December 31, 1999, the total available borrowing capacity from
the FHLB was $12,660,000.
NOTE 9 - INCOME TAX MATTERS
Under the Internal Revenue Code, the Bank was 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.
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.
At December 31, 1999, 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, 1999. 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.
29
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - INCOME TAX MATTERS (continued)
Income tax expense for 1999 and 1998 is comprised of the following:
1999 1998
---- ----
Federal:
Current $385,064 $361,188
Deferred (25,845) (44,431)
State:
Current 72,260 58,883
Deferred (4,396) (5,227)
-------- --------
$427,083 $370,413
======== ========
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:
1999 1998
------------------- -------------------
Effective Effective
Amount Tax Rate Amount Tax Rate
------ --------- ------ ----------
Computed "expected" tax
expense $383,623 34.0% $330,775 34.0%
Increases (reductions)
in tax resulting from:
State income taxes,
net of Federal income
tax benefit 45,132 4.0 39,638 4.0
Other items, net (1,672) (.2) - -
-------- ----- -------- ----
Income tax expense $427,083 37.8% $370,413 38.0%
======== ===== ======== ====
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,
1999 1998
---- ----
Deferred tax liabilities:
Depreciation $ 51,911 $ 46,845
Federal Home Loan Bank of
Cincinnati stock dividend 133,466 117,316
Unrealized gain on available-
for-sale securities and loans 15,242 133,988
Mortgage servicing rights 54,975 43,239
Deferred tax assets:
Allowance for loan losses (206,961) (146,357)
-------- --------
Net deferred tax liability $ 48,633 $195,031
======== ========
30
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 framework 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, 1999, 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 requirement:
As of December 31, 1999
-----------------------
Actual Capital Required Capital
-------------- ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
OTS capital adequacy
Tangible capital $7,083,000 9.81% $1,083,000 1.50%
Core capital 7,083,000 9.81 2,887,000 3.00
Risk-based capital 7,745,000 15.19 4,079,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 7,083,000 9.81 3,610,000 5.00
Tier 1 risk-based capital 7,083,000 13.89 3,059,000 6.00
Total risk-based capital 7,745,000 15.19 5,098,000 10.00
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
31
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - STOCKHOLDERS' EQUITY
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.
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 years ended December 31, 1999 and 1998.
NOTE 12 - RETIREMENT PLAN AND OTHER BENEFITS
Employee Stock Ownership Plan - ("ESOP")
Effective June 30, 1997, the Bank adopted an ESOP in connection with the
Conversion. The ESOP is designed to provide retirement benefits for eligible
employees of the Bank. 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 Bank makes to the ESOP. In 1999 and 1998 the Bank
recorded a charge to compensation and employee benefits expense of $55,158 and
$26,190, respectively, related to the ESOP, including $20,244 and $14,933,
respectively, related to the appreciation in the fair value of allocated ESOP
shares. The loan will be repaid over a period of approximately eight years,
principally with funds from the Bank's future contributions to ESOP, subject
to Internal Revenue Service limitations.
32
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 12 - RETIREMENT PLAN AND OTHER BENEFITS (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, 1999, shares held in suspense to be released annually as the
loan is paid down amounted to 26,186 shares. The fair value of unallocated
ESOP shares was $418,976 at December 31, 1999. Any dividends on allocated ESOP
shares are held in escrow for the participant, dividends on unallocated ESOP
shares are used to repay the loan 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 1999 and 1998 were $24,902
and $26,018, 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 13 - STOCK OPTION PLAN AND MANAGEMENT RECOGNITION PLAN
Stock Option Plan -
The Company's stockholders and Board of Directors 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 makes available options to purchase 43,642 shares, or
10% of the shares issued in the conversion to employees and directors.
Options granted under the Stock Option Plan have a vesting schedule which
provides that 20% of the options granted vest in the first year, and 20% will
vest on each subsequent anniversary date, so that options would be completely
vested within five years from the date of grant. Options become 100% vested
upon death or disability, if earlier. Unexercised options expire within ten
years from the date of grant.
The Company has elected to follow APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
its stock options as permitted under SFAS No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation". In accordance with APB 25, no compensation
cost is recognized by the Company when stock options are granted because the
exercise price of the Company's stock options equals the market price of the
underlying common stock on the date of grant. As required by SFAS 123,
disclosures are presented below for the effect on the net income and net
income per share that would result from the use of the fair value based method
to measure compensation cost related to stock option grants. The effects of
applying the provisions of SFAS 123 are not necessarily indicative of future
effects.
33
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 13 STOCK OPTION PLAN AND MANAGEMENT RECOGNITION PLAN (continued)
1999 1998
---- ----
Net income:
As reported $701,220 $602,456
Pro forma 676,567 582,411
Earnings per share
As reported:
Basic $ 1.78 $ 1.50
Diluted 1.78 1.50
Pro forma:
Basic 1.72 1.45
Diluted 1.72 1.45
At December 31, 1999, 37,095 options have been granted at an exercise price of
$17.25, of which 29,676 options are currently unexercisable, and all options
granted are outstanding at December 31, 1999.
Management Recognition Plan ("MRP") -
The MRP serves as a means of providing existing directors and employees of the
Bank with an ownership interest in the Company. Shares of the Company's
common stock awarded under the MRP vest equally over a five year period.
Compensation expense related to those shares is recognized on a straight-line
basis corresponding with the vesting period. Prior to vesting, each
participant granted shares under the MRP may direct the voting of the shares
allocated to the participant and will be entitled to receive any dividends or
other distributions paid on such shares. On July 1, 1998, 14,839 shares were
awarded but unearned to participants under the MRP. On September 9, 1998, the
Company purchased 17,457 common shares in the open market to fund the MRP.
These shares are held as restricted treasury stock. During 1999, 2,968 shares
vested to participants in the MRP, and no shares were forfeited under the MRP.
Total compensation expense associated with the MRP for the years ended
December 31, 1999 and 1998 was $50,450 and $25,750, respectively.
NOTE 14 - 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, 1999:
Contractual commitments to extend credit $3,551,684
Commercial letters of credit 590,000
34
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET AND
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK (continued)
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 15 - EARNINGS PER SHARE (EPS)
Basic net income per share, or basic EPS, is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
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 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. The following are reconciliations of
the amounts used in the per share calculations:
For the Year Ended December 31, 1999
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Basic and Diluted
Earnings per share (EPS) $701,220 394,003 $1.78
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
35
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 16 - 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, 1999
---------------------------------
Carrying Fair
Amount Value
----------- -----------
Financial assets:
Cash and cash equivalents $ 3,051,147 $ 3,051,147
Investment securities 3,995,366 4,137,746
Mortgage-backed securities 1,888,250 1,838,117
Loans receivable, net 60,188,919 60,503,510
Financial liabilities:
Deposits 57,454,842 57,199,112
Federal Home Loan Bank advances 6,800,000 6,789,000
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
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, 1999 and 1998. 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.
36
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR DECEMBER 31, 1999 AND 1998
NOTE 17 - 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,
1999 1998
---- ----
CONDENSED BALANCE SHEET
ASSETS
Cash and cash equivalents $ 67,240 $ 152,291
ESOP note receivable 269,992 304,985
Investment in subsidiary 7,108,118 6,533,497
Other assets 67,799 -
---------- ----------
Total Assets $7,513,149 $6,990,773
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accrued liabilities $ 4,364 $ -
Accrued income taxes 1,800 1,800
Stockholders' equity 7,506,985 6,988,973
Total liabilities and ---------- ----------
stockholders' equity $7,513,149 $6,990,773
========== ==========
Years Ended December 31,
1999 1998
---- ----
CONDENSED STATEMENT OF INCOME
Interest and dividend income$ 33,570 $ 30,510
Expenses 35,322 38,512
---------- ----------
Income (loss) before equity
in undistributed earnings
of subsidiary and income taxes (1,752) (8,002)
Equity in earnings of subsidiary 702,972 607,257
---------- ----------
INCOME BEFORE INCOME TAXES 701,220 599,255
Income tax expense (credit) - (3,200)
---------- ----------
NET INCOME $ 701,220 $ 602,455
========== ==========
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating
activities:
Net income $ 701,220 $ 602,455
Adjustments to reconcile net
income to net cash provided
from operating activities:
Equity earnings from subsidiary (702,972) (607,257)
(Increase) decrease in accounts
receivable (13,051) -
Increase (decrease) in income
taxes payable - (3,200)
Increase (decrease) in accrued
liabilities 4,364 -
---------- ----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (10,439) (8,002)
37
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 17 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (continued)
Years Ended December 31,
1999 1998
---- ----
Cash flows from investing activities:
Upstream dividend from subsidiary - 450,000
Investment in insurance stock (500) -
Purchase of MRP restricted shares - (294,589)
---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (500) 155,411
Cash flows from financing activities:
Dividend paid (109,105) (109,106)
Principal collected on ESOP note
receivable 34,993 32,898
---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (74,112) 76,208
---------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS (85,051) 71,201
Cash and cash equivalents at
beginning of year 152,291 81,090
---------- ----------
Cash and cash equivalents
at end of year $ 67,240 $ 152,291
========== ==========
NOTE 18 FUTURE REPORTING REQUIREMENT
The FASB has issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which the Company has not been required to adopt as of
December 31, 1999. This Statement, which is effective for fiscal years
beginning after June 15, 2000, establishes 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. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available for sale security, or a foreign currency denominated forecasted
transaction. This Statement is not expected to have a significant impact on
the Company.
38
<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
Don Collette Dr. R. Neil Schultz
Chairman of the Board Secretary
Retired General Manager of
McMinnville Electric System John Duncan
Chief Financial Officer
Dr. John T. Mason, III
Vice Chairman of the Board
Retired Professor of Chemical Engineering
At Tennessee Technological University
Robert Newman
Attorney
Dr. R. Neil Schultz
Retired Orthodontist
Dr. Franklin J. Noblin
Retired Dentist
Earl Barr
Owner and Manager of Barr's, Inc., a
retail furniture store
39
<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
Don Collette Ray Talbert
Chairman of the Board, Retired General Executive Vice President
Manager of McMinnville Electric System
Dr. R. Neil Schultz
Dr. John T. Mason, III Secretary
Vice Chairman of the Board, Retired
Professor of Chemical Engineering at John Duncan
Tennessee Technological University Vice President & Chief Financial
Officer
Robert Newman
Attorney Nita Baggett
Senior Vice President
Dr. R. Neil Schultz Ken Martin
Retired Orthodontist Senior Vice President
Dr. Franklin J. Noblin Kenneth W. Smith
Retired Dentist Senior Vice President
Earl Barr Johnnie Hughes
Owner and Manager of Barr's, Inc. Vice President
Shannon L. Haston
Vice President
Maxine Bates
Assistant Vice President
Barbara Page
Assistant Vice President
40
<PAGE>
CORPORATE INFORMATION
Corporate Headquarters Common Stock
306 West Main Street Traded over-the-counter on
McMinnville, Tennessee 37110 the OTC Electronic Bulletin
Board under the symbol: SCYT
Independent Auditors 10-KSB Information
Housholder, Artman & Associates, PC 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, Tennessee 37111
Stanley & Bratcher & Stanley
McMinnville, Tennessee
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 19, 2000
at 2:00 p.m., Central Time, at the Bank's main office at 306 West Main Street,
McMinnville, Tennessee.
41
<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>
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 January 29, 2000 appearing on page 13 of the 1999 Annual Report which
report appears in the December 31, 1999 annual report on Form 10-KSB of
Security Bancorp, Inc.
/s/Housholder, Artman and Associates, P.C.
Tullahoma, Tennessee
March 20, 2000
<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, 1999 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, 1999 Item Description
- ----------- ----------------------- ----------------
9-03 (1) $3,051 Cash and due from Banks
9-03 (2) -- Interest-bearing deposits
9-03 (3) -- Federal funds sold - purchased
securities for resale
9-03 (4) -- Trading account assets
9-03 (6) 5,742 Investment and mortgage backed
securities held for sale
9-03 (6) 236 Investment and mortgage backed
securities held to
maturity - carrying value
9-03 (6) 234 Investment and mortgage backed
securities held to
maturity - market value
9-03 (7) 60,189 Loans
9-03 (7)(2) 649 Allowance for losses
9-03 (11) 72,204 Total assets
9-03 (12) 57,455 Deposits
9-03 (13) 1,300 Short-term borrowings
9-03 (15) 442 Other liabilities
9-03 (16) 5,500 Long-term debt
9-03 (19) -- Preferred stock - mandatory redemption
9-03 (20) -- Preferred stock - no mandatory
redemption
9-03 (21) 4 Common stocks
9-03 (22) 7,503 Other stockholders' equity
9-03 (23) 72,204 Total liabilities and stockholders'
equity
9-04 (1) 4,923 Interest and fees on loans
9-04 (2) 387 Interest and dividends on investments
9-04 (4) 55 Other interest income
9-04 (5) 5,365 Total interest income
9-04 (6) 2,287 Interest on deposits
9-04 (9) 2,596 Total interest expense
9-04 (10) 2,769 Net interest income
9-04 (11) 159 Provision for loan losses
9-04 (13)(h) -- Investment securities gains/(losses)
9-04 (14) 2,373 Other expenses
9-04 (15) 1,128 Income/loss before income tax
9-04 (17) 1,128 Income/loss before extraordinary items
9-04 (18) -- Extraordinary items, less tax
9-04 (19) -- Cumulative change in accounting
principles
9-04 (20) 701 Net income or loss
9-04 (21) 1.78 Earnings per share - primary
9-04 (21) 1.78 Earnings per share - fully diluted
I.B. 5 8.47 Net yield - interest earning assets -
actual
III.C.1. (a) 147 Loans on non-accrual
III.C.1. (b) 114 Accruing loans past due 90 days or
more
III.C.2. (c) -- Troubled debt restructuring
III.C.2 -- Potential problem loans
IV.A.1 620 Allowance for loan loss - beginning of
period
IV.A.2 156 Total chargeoffs
IV.A.3 26 Total recoveries
IV.A.4 649 Allowance for loan loss - end of
period
IV.B.1 -- Loan loss allowance allocated to
domestic loans
IV.B.2 -- Loan loss allowance allocated to
foreign loans
IV.B.3 649 Loan loss allowance - unallocated
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3051
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5742
<INVESTMENTS-CARRYING> 236
<INVESTMENTS-MARKET> 234
<LOANS> 60189
<ALLOWANCE> 649
<TOTAL-ASSETS> 72204
<DEPOSITS> 57455
<SHORT-TERM> 1300
<LIABILITIES-OTHER> 442
<LONG-TERM> 5500
0
0
<COMMON> 4
<OTHER-SE> 7503
<TOTAL-LIABILITIES-AND-EQUITY> 72204
<INTEREST-LOAN> 4923
<INTEREST-INVEST> 387
<INTEREST-OTHER> 55
<INTEREST-TOTAL> 5365
<INTEREST-DEPOSIT> 2287
<INTEREST-EXPENSE> 2596
<INTEREST-INCOME-NET> 2769
<LOAN-LOSSES> 159
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2373
<INCOME-PRETAX> 1128
<INCOME-PRE-EXTRAORDINARY> 1128
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 701
<EPS-BASIC> 1.78
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 8.47
<LOANS-NON> 147
<LOANS-PAST> 114
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 620
<CHARGE-OFFS> 156
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 649
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 649
</TABLE>
