U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934
For the quarterly period ended June 30, 1999 .
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Transition report under Section 13 or 15(d) of the Exchange Act
- ---
For the transition period from ________________ to ____________________
Commission file number 0-22553
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SECURITY BANCORP, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Tennessee 62-1682697
- -------------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
306 West Main Street, McMinnville TN 37110
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(Address of Principal Executive Offices)
(931) 473-4483
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
X Yes No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
436,425 shares outstanding on July 31, 1999
Transitional Small Business Disclosure Format (check one):
Yes X No
--- ---
1
SECURITY BANCORP, INC. AND SUBSIDIARY
MCMINNVILLE, TENNESSEE
INDEX
PART I PAGE(S)
______
FINANCIAL INFORMATION
ITEM 1.
Financial Statements
Consolidated Balance Sheets - (Unaudited)
as of December 31, 1998 and June 30, 1999...............................3
Consolidated Statements of Income (Unaudited)
for the three and six month periods
ended June 30, 1998 and 1999............................................4
Consolidated Statements of Stockholders' Equity (Unaudited)...............5
for the six month period ended June 30, 1999
Consolidated Statements of Cash Flows - (Unaudited)
for the three and six months ended June 30, 1998 and 1999...............6
Notes to (Unaudited) Consolidated Financial Statements..................7-9
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................9-15
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings................................................16
Item 2. Changes in Securities and Use of Proceeds........................16
Item 3. Defaults Upon Senior Securities..................................16
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................16
Signatures...............................................................17
2
ITEM 1. FINANCIAL STATEMENTS
SECURITY BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
(in thousands except share information)
ASSETS December 31, June 30,
1998 1999
Cash & noninterest earning deposits $ 2,581 $ 5,334
Investment Securities: held to maturity 1,151 276
Available for sale 3,376 5,526
Loans receivable, net 53,473 54,863
Premises and equipment, net 1,582 1,567
Federal Home Loan Bank stock 591 611
Accrued interest receivable 469 541
Repossessed assets -- 213
Prepaid expenses and other assets 202 258
--------- --------
Total Assets $ 63,425 $ 69,189
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $50,142 $ 55,579
FHLB borrowings 5,500 5,500
Advances from borrowers for property taxes & insurance 72 336
Accrued interest payable 41 29
Accrued expenses and other liabilities 319 308
Federal income taxes payable 362 176
-------- --------
Total Liabilities 56,436 61,928
STOCKHOLDERS' EQUITY
Common stock (436,425 shares, $.01 par value,
issued and outstanding) 4 4
Paid-in capital 4,110 4,126
Treasury stock, at cost (295) (295)
Retained earnings 3,257 3,596
Unrealized gain on securities available for sale,
net of income taxes 218 121
Employee Stock Ownership Plan (ESOP) borrowing (305) (291)
--------- ---------
Total stockholders' equity 6,989 7,261
-------- --------
Total Liabilities and Stockholders' Equity $ 63,425 $ 69,189
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SECURITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share information)
For Three Months For Six Months
Ended June 30, Ended June 30,
1998 1999 1998 1999
INTEREST INCOME:
Loans $1,007 $1,179 $ 1,999 $2,333
Investments 58 65 117 127
Interest earning deposits 8 28 13 38
----- ------ ------- ------
Total interest income 1,073 1,272 2,129 2,498
INTEREST EXPENSE:
Deposits 453 549 888 1,095
FHLB borrowings 104 78 216 156
--- --- ----- ----
Interest expense 557 627 1,104 1,251
Provision for loan losses 15 30 30 64
--- --- ----- -----
Net interest income after
provision for loan losses 501 615 995 1,183
NON-INTEREST INCOME:
Other 129 244 257 525
--- --- ---- ----
Total non-interest income 129 244 257 525
NON-INTEREST EXPENSES
Compensation 146 245 285 473
Other employee benefits 46 80 97 161
Net occupancy expense 72 87 157 171
Deposit insurance premiums 6 7 11 13
Data processing 39 48 79 91
Other 89 128 143 245
--- --- --- ---
Total non-interest expenses 398 595 772 1,154
Income before income taxes 232 264 480 554
Income tax expense 91 103 188 215
--- --- --- ---
Net income 141 161 292 339
Other comprehensive income,
net of tax: (See Note 4)
Unrealized gains (losses)
on securities:
Unrealized holding gains
(losses) arising for the
three month period,
before tax $(2) for 1998
and $(101) for 1999, and
for the six month period,
before tax $51 for 1998
and $(156) for 1999. (1) (63) 32 (97)
--- ---- --- ----
Comprehensive income $140 $98 $324 $242
==== ==== ==== ====
Weighted average shares
outstanding: 403,257 408,495 403,257 408,495
Basic earnings
per share $.35 $.40 $.72 $.82
The accompanying notes are an integral part of these consolidated financial
statements.
4
SECURITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Unaudited)
(in thousands, except share information)
Unrealized
Common Stock Paid-in Retained Gain on ESOP Treasury
Shares Amount Capital Earnings Securities Borrowing Stock Total
Balance
at
12/31/98 436,425 $4 $4,110 $3,257 $218 $ (305) $(295) $6,989
Treasury
Stock,
at cost -- -- -- -- -- -- --
Net Income -- -- 339 -- -- -- 339
Unrealized
gain On
securities
Available
for Sale,
net of
Income
taxes -- -- -- (97) -- -- (97)
Dividend -- -- -- -- -- -- --
ESOP
shares
Earned -- 16 -- -- 14 -- 30
-- -- -- -- -- -- --
Balance
at
6/30/99 436,425 $4 $4,126 $3,596 $121 $(291) $(295) $7,261
======= == ====== ====== ==== ===== ===== ======
The accompanying notes are an integral part of these consolidated financial statements.
5
SECURITY BANCORP. INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six months Ended June 30,
1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 292 $ 336
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 38 41
Dividend on FHLB stock (20) (20)
Provision for loan losses 30 64
(Increase) decrease in interest receivable (71) (72)
(Increase) decrease in other assets (34) (269)
Increase (decrease) in accrued
liabilities (98) (23)
Increase (decrease) in income taxes payable (3) (150)
Increase (decrease) in deferred taxes payable 48 (85)
Sale of mortgage loans held for sale 2,509 5,996
Originations of mortgage loans held for sale (2,616) (6,652)
------ -------
Total adjustments (217) (1,170)
------ -------
Net cash provided by operating activities 75 (834)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations net of principal payments (1,569) (703)
Purchase of:
Available for sale - investment securities -- (2,975)
Held to maturity - investment securities (1,643) --
Proceeds from maturities and repayments of:
Held to maturity - investment securities 1,000 650
Available for sale - investment securities -- 550
Held to maturity - mortgage-backed securities 360 227
Available for sale - mortgage-backed securities -- 162
Cash payments for the purchase of property (25) (25)
------ -------
Net cash provided (used) by investing activities (1,877) (2,114)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 2,883 5,437
Net increase (decrease) in escrow accounts 131 264
------ -------
Net cash provided (used) by financing activities 3,014 5,701
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,212 2,753
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,896 2,581
----- -----
CASH AND EQUIVALENTS, END OF PERIOD $3,108 $5,334
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $1,104 $ 1,251
Income taxes $ 206 $ 340
The accompanying notes are an integral part of these consolidated financial
statements.
6
SECURITY BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. SECURITY BANCORP, INC.
Security Bancorp, Inc. (the "Company"), a Tennessee corporation, is the
savings and loan holding company for Security Federal Savings Bank of
McMinnville, TN (the "Savings Bank"). The Savings Bank converted from a
federally chartered mutual savings bank to a federally chartered stock savings
bank effective June 30, 1997 (the "Conversion").
The consolidated financial statements included herein are for the Company and
the Savings Bank.
2. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not include
all disclosures necessary for a complete presentation of the consolidated
balance sheets, consolidated statements of income, consolidated statements of
stockholders' equity, and consolidated statements of cash flows in conformity
with generally accepted accounting principles. However, all adjustments,
which are, in the opinion of management, necessary for the fair presentation
of the interim financial statements have been included. All such adjustments
are of a normal recurring nature. The statements of income for the three and
six month period ended June 30, 1999 are not necessarily indicative of the
results which may be expected for the entire year.
The unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
Company for the year ended December 31, 1998.
3. EARNINGS PER SHARE
Earnings per share has been computed for the three and six months ended June
30, 1998 and June 30, 1999 based upon weighted average common shares
outstanding of 403,257 and 408,495, respectively.
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
established new standards for computing and presenting earnings per share.
The standard is effective for annual and interim periods ending after December
15, 1997. This standard had no impact on the computation of the Company's
earnings per share upon adoption.
4. COMPREHENSIVE INCOME
The Company has adopted FASB Statement No. 130, Reporting Comprehensive
Income. Statement No. 130 requires the reporting of comprehensive income in
addition to net income from operations. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income.
7
5. STOCKHOLDERS' EQUITY
In connection with the Conversion, the Company issued and sold 436,425 shares
of common stock at a price of $10.00 per share for total net proceeds of
approximately $4.1 million after conversion expenses of approximately
$300,000. The Company retained $406,000 of the net proceeds and used the
remaining net proceeds to purchase the newly issued capital stock of the
Savings Bank.
The ability of the Company to pay dividends depends primarily on the ability
of the Savings Bank to pay dividends to the Company. The Savings Bank may not
declare or pay a cash dividend if the effect thereof would cause its net worth
to be reduced below either the amounts required for the liquidation account
discussed below or the regulatory capital requirements imposed by federal and
state regulations. An annual cash dividend of 25 cents per share was declared
for shareholders of record as of the close of business on May 31, 1999. The
cash dividend was paid on July 1, 1999 and represented the second dividend
since becoming a public company.
As required by the regulations of the Office of Thrift Supervision (OTS), at
the time of Conversion, the Savings Bank established a liquidation account in
an amount equal to its retained earnings as reflected in the latest balance
sheet used in the final conversion prospectus. The liquidation account is
maintained for the benefit of eligible account holders who continue to
maintain their deposit accounts in the Savings Bank after conversion. In the
event of a complete liquidation of the Savings Bank (and only in such an
event), eligible depositors who continue to maintain accounts shall be
entitled to receive a distribution from the liquidation account before any
liquidation may be made with respect to the Company's common stock.
6. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
As part of the Conversion discussed in Note 5, the Savings Bank established an
Employee Stock Ownership Plan (ESOP) for the benefit of all employees who have
attained the age of 21 and have been credited with at least 1000 hours of
service during a 12-month period. The ESOP borrowed approximately $349,000
from the Company and used the funds to purchase 34,914 shares of common stock
of the Company issued in the Conversion. The loan will be repaid principally
from the Company's discretionary contributions to the ESOP over a period of 10
years. On June 30, 1999, the loan had an outstanding balance of approximately
$291,000 and an interest rate of 8.50%. The loan obligation of the ESOP is
considered unearned compensation and, as such, recorded as a reduction of the
Company's stockholders' equity. Both the loan obligation and the unearned
compensation are reduced by an amount of the loan repayments made by the ESOP.
Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are allocated among
participants on the basis of compensation in the year of allocation. Benefits
become fully vested at the end of six years of service under the terms of the
ESOP Plan. Benefits may be payable upon retirement, death, disability, or
separation from service.
Since the Savings Bank's annual contributions are discretionary, benefits
payable under the ESOP cannot be estimated. Compensation expenses are
recognized to the extent of the fair value of shares committed to be
released. For the three and six months ending June 30, 1999, compensation
expense was approximately $16,000 and $31,000, respectively. Compensation is
recognized at the average fair value of the ratably released shares during the
accounting
8
period as the employees performed services. At June 30, 1999, the ESOP had
5,237 allocated shares and 29,677 unallocated shares.
The ESOP administrators have determined dividends on unallocated shares will
be used for debt service. For the purpose of computing earnings per share, all
ESOP shares committed to be released have been considered outstanding.
7. MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN
The Company's stockholders approved the Company's 1998 Stock Option Plan and
the Savings Bank's Management Recognition and Development Plan (the "MRP"),
effective July 1, 1998. The Stock Option Plan reserves for issuance up to
43,642 stock options to certain officers, directors, and employees either in
the form of incentive stock options or nonincentive stock options. The
exercise price of the stock options may not be less than the fair value of the
Company's stock options at date of grant. The options granted in 1998 vest at
the rate of 20% annually beginning at date of grant and will expire in 2008.
The number and weighted average fair value of the options on the grant date
was 37,095 stock options at $17.25 per share. As permitted under the
generally accepted accounting principles, grants under the plan will be
accounted for following the provisions of APB Opinion No. 25 and its related
interpretations. Accordingly, no compensation cost has been recognized for
grants made to date.
At June 30, 1999, all options that had been granted had an exercise price of
$17.25, of which 37,095 options are currently unexercisable and all options
granted are outstanding at June 30, 1999.
The Company purchased 17,457 common shares in the open market to fund the MRP
on September 9, 1998. The restricted common stock under the MRP vests at the
rate of 20% annually beginning at the date of grant. The expense related to
the vesting of the MRP were $14,000 and $28,000, respectively, for the three
and six months ended June 30, 1999.
8. ASSET QUALITY
At June 30, 1999, the Company had total nonperforming loans (i.e., loans which
are contractually past due 90 days or more) of approximately $398,000. As
apercentage of net loans receivable at June 30, 1999, nonperforming loans were
.7%. Total nonperforming assets as a percentage of total assets at June 30,
1999 were .9%.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
The following discussion and analysis is intended to assist in understanding
the consolidated financial condition and the consolidated results of
operations of the Company. References to the "Company" include Security
Bancorp, Inc. and/or Security Federal Savings Bank of McMinnville, TN, as
appropriate.
9
Comparison of Financial Condition at December 31, 1998 and June 30, 1999
The Company's total consolidated assets increased by approximately $5.8
million or 9.1%, from $63.4 million at December 31, 1998 to $69.2 million at
June 30, 1999. The increase in assets for the period was primarily
attributable to an increase in loans receivable and investment securities.
Loans receivable, net, were $54.9 million at June 30, 1999 compared to $53.5
million at December 31, 1998, a 2.6% increase. This increase was attributable
to an increase in first mortgage residential loans of $200,000, an increase in
commercial business and real estate loans of $400,000, and an increase in
consumer loans of $800,000. The largest loan originated during this period
was a commercial line of credit loan for $500,000 at a fixed rate of 7.75% for
one year.
Deposits increased $5.4 million or 10.8%, from $50.1 million at December 31,
1998 to $55.6 million at June 30, 1999. The increase in deposits was
primarily attributable to an increase in certificates of deposit and personal
checking accounts and reflects the Company's successful focus on offering full
service banking.
Comparison of Results of Operations for the Three months Ended June 30, 1998
and 1999
NET INCOME. Net income for the three months ended June 30, 1999 was $161,000
compared to $141,000 for the same quarter last year. The increase resulted
from an increase in net interest income and non-interest income, offset to a
lesser degree by an increase in other expenses. The return on average assets
was .95% for the three months ended June 30, 1999.
NET INTEREST INCOME. Net interest income increased $114,000 or 22.8% from
$501,000 for the three months ended June 30, 1998 to $615,000 for the three
months ended June 30, 1999. The interest rate spread increased from 3.78% for
three months ending June 30, 1998 to 4.08% for the three months ending June
30, 1999 as a result of the weighted average yield on the loan portfolio
increasing while the weighted average rate of deposits and borrowings
declined from the period a year ago.
Total interest income increased $199,000 from $1.1 million for the three
months ended June 30, 1998 to $1.3 million for the three months ended June
30, 1999. Interest on loans increased $172,000 or 17.1% from $1.0 million for
the three months ended June 30, 1998 to $1.2 million for the three months
ended June 30, 1999 as a result of a $10.2 million increase in loans
outstanding substantially in residential mortgage loans, commercial business
loans, and consumer loans.
Interest expense increased $70,000 from $557,000 for the three months ended
June 30, 1998 to $627,000 for the three months ended June 30, 1999. The
increase for the three months ending June 30, 1999 was the result of an
increase in the average balance of deposits, which were used to fund loan
demand and investment securities.
PROVISION FOR LOAN LOSSES. Provisions 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 collectability of the loan portfolio, including past loan
loss experience, adverse situations that may affect the borrower's
10
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. The provision for loan losses was $30,000 for
the three months ended June 30, 1999 compared to $15,000 for the same period a
year earlier. The higher provision for the three months ended June 30, 1999
was due to the corresponding increase in loans outstanding. Management
deemed the allowance for loan losses adequate at June 30, 1999.
NONINTEREST INCOME. Noninterest income increased 89.1% to $244,000 for the
three months ended June 30, 1999 from $129,000 for the three months ended June
30, 1998. Noninterest income increased as a result of management establishing
a trust department that began operations in the third quarter of fiscal 1998.
Revenues from the trust operations was $77,000 for the three months ended June
30, 1999. Additionally, noninterest income also increased as a result of
increased mortgage servicing income on loans sold, gains from the sale of
residential loans, and increased service charges on deposit accounts.
NONINTEREST EXPENSE. Noninterest expense increased 49.5% to $595,000 for the
three months ended June 30, 1999 from $398,000 for the three months ended
June 30, 1998. Compensation and benefits increased to $325,000 for the three
months ended June 30, 1999 from $192,000 for the three months ended June 30,
1998 as a result of hiring additional personnel for the trust department and
hiring a Senior Consumer Lending Officer. Compensation and benefits also
increased as a result of the costs associated with the ESOP and MRP. Data
Processing and other expenses increased to $176,000 for the three months ended
June 30, 1999 from $128,000 for the three months ended June 30, 1998
primarily as a result of increased service bureau expense and the cost
associated with the formation and the operation of the trust department.
INCOME TAXES. Income tax expense for the three months ending June 30, 1999
was $103,000 compared to $91,000 for the three months ending June 30, 1998.
This increase was the result of pre-tax income increasing for the three months
ending June 30, 1999.
Comparison of Results of Operations for the Six Months Ended June 30, 1998 and
1999.
NET INCOME. Net income for the six months ended June 30, 1999 was $339,000
compared to $292,000 for the six months ended June 30, 1998, a 15.1%
increase. The increase resulted from an increase in net interest income and
noninterest income, offset to a lesser degree by an increase in other
expenses. The return on average assets was 1.01% for the six months ended
June 30, 1999 compared to 1.11% for the six months ended June 30, 1998.
NET INTEREST INCOME. Net interest income increased 18.6% to $1.2 million for
the six months ended June 30, 1999 from $995,000 for the six months ended
June 30, 1998 as a result of an increase in total interest income that more
than offset an increase in total interest expense.
Total interest income increased 17.3% to $2.5 million for the six months ended
June 30, 1999 from $2.1 million for the same period a year ago as a result of
an increase in the average balance of, and average yield on, loans receivable.
The average balance on loans receivable increased to $54.2 million from $44.0
million. The increases was attributable to the substantial increase in first
mortgage residential loans, commercial business, and consumer loans.
Interest expense increased 13.3% to $1.2 million for the six months ended June
30, 1999 from $1.1 million for the same period a year ago, primarily as a
result of an increase in average balances of interest-bearing deposits which
were used to fund loan demand and investment securities.
11
PROVISION FOR LOAN LOSSES. The provision for loan losses for the six month
periods ended June 30, 1999 and 1998 was $64,000 and $30,000, respectively.
Historically, management has emphasized the company's loss expense over other
factors in establishing provisions for loan losses. The higher provision for
the six months ended June 30, 1999 was due to the corresponding increase in
loans outstanding. Management deemed the allowance for loan losses adequate
at June 30, 1999.
NONINTEREST INCOME. Noninterest income increased 104.3% to $525,000 for the
six months ended June 30, 1999 from $257,000 for the same period a year ago.
This increase is primarily due to gains from the sale of residential loans of
$112,000 and revenues from trust operations of $153,000 for the six months
ended June 30, 1999. Additionally, Noninterest income increased as a result
of increase mortgage servicing income on loans sold and increased service
charges on deposit accounts.
NONINTEREST EXPENSE. Noninterest expenses increased 49.5% to $1.2 million for
the six months ended June 30, 1999 from $772,000 for the six months ended June
30, 1998. Compensation and benefits increased to $634,000 for the six months
ended June 30, 1999 from $382,000 for the six months ended June 30, 1998
primarily as a result of hiring additional personnel for the trust department
and hiring a Senior Consumer Lending Officer. Compensation and benefits also
increased as a result of costs associated with the ESOP and MRP. Data
Processing and other expenses increased to $336,000 for the six months ended
June 30, 1999 from $222,000 for the six months ended June 30, 1998 primarily
as a result of increased service bureau expense and the cost associated with
the formation and the operation of the trust department.
INCOME TAX EXPENSE. Income tax expense for the six months ended June 30,
1999 was $215,000 compared to $188,000 for the same period a year ago. The
increase was the result of pre-tax income increasing by $71,000 for the six
months ending June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES. The Company'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 Company's
primary investing activity is loan originations. The Company maintains
liquidity levels adequate to fund loan commitments, investment opportunities,
deposit withdrawals and other financial commitments. At June 30, 1999, the
Savings Bank's liquidity ratio was 17.00% (required atio at that date was 4%
pursuant to OTS regulations). At June 30, 1999, there were no material
commitments for capital expenditures and the Company had unfunded loan
commitments of approximately $3.7 million and unfunded letters of credit of
$541,000. At June 30, 1999, management had no knowledge of any trends, events
or uncertainties that will have or are reasonably likely to have material
effects on the liquidity, capital resources or operations of the Company.
Further at June 30, 1999, management was not aware of any current
recommendations by the regulatory authorities, which, if implemented, would
have such an effect.
The Company is not subject to any separate regulatory capital requirements.
The Savings Bank exceeded all of its regulatory capital requirements at June
30, 1999. The Savings Bank had the following regulatory capital ratios at June
30, 1999:
12
SECURITY FEDERAL SAVINGS BANK
(Unaudited)
AS OF JUNE 30, 1999 ACTUAL FOR CAPITAL CATEGORIZED AS
ADEQUACY PURPOSES "WELL CAPITALIZED"(1)
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total Capital
(to risk weighted assets) $ 7,397 15.70% $ 3,770 8.00% $ 4,712 10.00%
Tier I Capital
(to risk weighted assets) 6,686 14.19% 1,885 4.00% 2,827 6.00%
Tier 1 Capital
(to adjusted total assets) 6,686 9.68% 2,072 3.00% 3,453 5.00%
Tangible Capital
(to tangible assets) 6,686 9.68% 1,036 1.50% N/A ---
(1)As categorized under the OTS Prompt Corrective Action Provisions.
13
THE YEAR 2000 ISSUE. As the Year 2000 approaches, a significant undertaking
for all financial institutions exists in addressing the impact this event will
have on information systems and overall operations as the consequences for
noncompliance would be significant. The following discussion of the
implications of the Year 2000 problem for the Savings Bank contains numerous
forward-looking statements based on inherently uncertain information. The
cost of the project and the date on which the Savings Bank plans to complete
the internal Year 2000 modifications are based on management's best estimates,
which are derived utilizing a number of assumptions of future events including
the continued availability of internal and external resources, third party
modifications and other factors.
The Savings Bank places a high degree of reliance on computer systems of third
parties, such as customers, suppliers, and other financial and governmental
institutions. Although the Savings Bank is assessing the readiness of these
third parties and preparing contingency plans, there can be no guarantee that
the failure of these third parties to modify their systems in advance of
December 31, 1999 would not have a material adverse affect on the Savings
Bank.
During fiscal 1998, the Savings Bank adopted a Year 2000 Compliance Plan (the
"Plan") and established a Year 2000 Compliance Committee (the "Committee").
The objectives of the Plan and the Committee are to prepare the Savings Bank
for the new millennium. As recommended by OTS, the Plan encompasses the
following phases:
1. Awareness-Educational initiatives on Year 2000 issues and concerns.
This phase is complete.
2. Assessment-Develop a plan, identify and evaluate all vital systems
of the Bank. This phase was completed as of June 30, 1998.
3. Renovation-Upgrade or replace any critical system that is non-Year
2000 compliant. This phase was completed as of December 31, 1998.
4. Validation-Testing all critical systems and third-party vendors for
Year 2000 compliance. The Savings Bank has completed this phase of
its plan and has replaced all in-house equipment with Year 2000
compliant equipment. A third-party service bureau processes all
customer transactions and has completed upgrades to its systems to
be Year 2000 compliant. The Savings Bank is relying on the results
of proxy testing by its third-party service bureau for certain date
sensitive testing. The validation phase was completed as of April
30, 1999.
5. Implementation-Placement of renovated systems on-line. The Savings
Bank has already implemented a new Year 2000 compliant computerized
teller system and has verified the Year 2000 compliance of its
computer hardware and other equipment containing embedded
microprocessors. The Implementation-Placement phase was completed
as of June 30, 1999.
Monitoring and managing the Year 2000 project will result in additional direct
and indirect costs to the Savings Bank. Direct costs include potential
charges by third party software vendors for product enhancements, costs
involved in testing software products for Year 2000 compliance, and any
resulting costs for developing and implementing contingency plans for critical
software products which are not enhanced. Indirect costs will principally
consist of the time devoted by existing employees in managing software vendor
progress, testing enhanced software products
14
and implementing any necessary contingency plans. Total direct costs are
estimated not to exceed $30,000, of which $26,000 has been incurred as of June
30, 1999.
The Savings ank has developed remediation contingency plans and business
resumption contingency plans specific to the Year 2000. Remediation
contingency plans address the actions to be taken if the current approach to
remediating a system is falling behind schedule or otherwise appears to be in
jeopardy of failing to deliver a Year 2000 ready system when needed. Business
resumption contingency plans address the actions that would be taken if
critical business functions can not be carried out in the normal manner upon
entering the next century due to system or supplier failure.
Despite the best efforts of management to address this issue, the vast number
of external entities that have direct and indirect business relationships with
the Savings Bank, such as customers, vendors, payment system providers and
other financial institutions makes it possible to assure that a failure to
achieve compliance by one or more of these entities would not have material
adverse impact on the operations of the Savings Bank.
15
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
From time to time, the Company and any subsidiaries ay be a party to various
legal proceedings incident to its or their business. At June 30, 1999, there
were no legal proceedings to which the Company or any subsidiary was a party,
or to which of any of their property was subject, which were expected my
management to result in a material loss.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Insert A
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
EXHIBITS
3.1 Charter of Security Bancorp, Inc.*
3.2 Bylaws of Security Bancorp, Inc.*
10.1 Employment Agreement with Joe H. Pugh**
10.2 Severance Agreement with John W. Duncan**
10.3 Severance Agreement with Ray Talbert**
10.4 Severance Agreement with Kenneth W. Smith*****
10.5 Severance Agreement with Shannon L. Haston*****
10.6 Security Federal Savings Bank of McMinnville, TN
401(k) Plan*
10.7 Security Federal Savings Bank of McMinnville, TN
Employee Stock Ownership Plan***
10.8 Security Bancorp, Inc. Management Recognition and
Development Plan****
10.9 Security Bancorp, Inc. 1998 Stock Option Plan****
27 Financial Data Schedule
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
---------------------
* Incorporated by reference to Registrant's Registration
Statement on Form SB-2, as amended (File No. 333-6670)
** Incorporated by reference to Registrant's Form 10-QSB for the quarter
ended September 30, 1997.
*** Incorporated by reference to Registrant's Form 10-KSB for the year
ended December 31, 1997.
**** Incorporated by reference to Registrant's Annual Meeting Proxy
Statement dated March 16, 1998.
***** Incorporated by reference to Registrant's Form 10-KSB for the year
ended December 31, 1998.
16
Insert A
The Annual Meeting of Stockholders of Security Bancorp, Inc. was held on April
21, 1999. The results of the vote on the election of directors, the only
matter presented at the meeting, is a follows:
The following individuals were elected as directors, each to serve for a
three-year term:
For Withheld
______________________ ______________________
No. of No. of
Votes Percentage Votes Percentage
_______ __________ ______ __________
Robert W. Newman 320,681 99.8 500 .2
Donald R. Collette 320,681 99.8 500 .2
Franklin J. Noblin 320,681 99.8 500 .2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY BANCORP, INC.
Date: August 12, 1999 By /s/ Joe H. Pugh
Joe H. Pugh
President and Chief Executive Officer
SECURITY BANCORP, INC.
Date: August 12, 1999 By /s/ John W. Duncan
John W. Duncan
Chief Financial Officer
17