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 September 30, 1999 .
-------------------------------
- --- Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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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
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(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 October 31, 1999
Transitional Small Business Disclosure Format (check one):
Yes X No
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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 September 30, 1999...................... 3
Consolidated Statements of Income (Unaudited)
for the three and nine month periods
ended September 30, 1998 and 1999................................... 4
Consolidated Statements of Stockholders' Equity (Unaudited)........... 5
for the nine month period ended September 30, 1999
Consolidated Statements of Cash Flows - (Unaudited)
for the three and nine months ended September 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, September 30,
1998 1999
Cash & noninterest earning deposits $ 2,581 $ 3,283
Investment Securities: held to maturity 1,151 251
Available for sale 3,376 7,393
Loans receivable, net 53,473 57,594
Premises and equipment, net 1,582 1,553
Federal Home Loan Bank stock 591 622
Accrued interest receivable 469 548
Repossessed assets -- 219
Prepaid expenses and other assets 202 259
-------- --------
Total Assets $ 63,425 $ 71,722
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $50,142 $ 56,554
FHLB borrowings 5,500 6,900
Advances from borrowers for property taxes
& insurance 72 416
Accrued interest payable 41 43
Accrued expenses and other liabilities 319 363
Federal income taxes payable 362 148
-------- --------
Total Liabilities 56,436 64,424
STOCKHOLDERS' EQUITY
Common stock (436,425 shares, $.01 par value,
issued and outstanding) 4 4
Paid-in capital 4,110 4,135
Treasury stock, at cost (295) (295)
Retained earnings 3,257 3,639
Unrealized gain on securities available for sale,
net of income taxes 218 92
Employee Stock Ownership Plan (ESOP) borrowing (305) (277)
-------- --------
Total stockholders' equity 6,989 7,298
-------- --------
Total Liabilities and Stockholders' Equity $ 63,425 $ 71,722
======== ========
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 Nine Months
Ended September 30, Ended September 30,
1998 1999 1998 1999
INTEREST INCOME:
Loans $1,058 $1,199 $3,064 $3,538
Investments 66 97 183 223
Interest earning deposits 9 22 23 54
------ ------ ------ ------
Total interest income 1,133 1,318 3,270 3,815
INTEREST EXPENSE:
Deposits 478 593 1,366 1,690
FHLB borrowings 107 80 323 237
------ ------ ------ ------
Interest expense 585 673 1,689 1,927
Provision for loan losses 15 62 45 126
------ ------ ------ ------
Net interest income after
provision for loan losses 533 583 1,536 1,762
NON-INTEREST INCOME:
Other 203 277 460 802
------ ------ ------ ------
Total non-interest income 203 277 460 802
NON-INTEREST EXPENSES
Compensation 187 251 472 724
Other employee benefits 69 81 166 242
Net occupancy expense 66 68 223 239
Deposit insurance premiums 6 7 17 20
Data processing 38 54 117 145
Other 135 146 286 391
------ ------ ------ ------
Total non-interest expenses 501 607 1,281 1,761
Income before income taxes 235 253 715 803
Income tax expense 92 97 280 312
------ ------ ------ ------
Net income 143 156 435 491
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 $27 for 1998 and $(46)
for 1999, and for the nine
month period, before tax $77
for 1998 and $(160) for 1999. 17 (29) 48 (99)
------ ------ ------ ------
Comprehensive income $ 160 $ 127 $ 483 $ 392
====== ====== ====== ======
Weighted average shares
outstanding: 406,618 410,110 406,618 410,110
Basic earnings per share $.36 $.38 $1.07 $1.20
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 -- -- 491 -- -- -- 491
Unrealized gain
On securities
Available for
Sale, net of
Income taxes -- -- -- (126) -- -- (126)
Dividend -- -- (109) -- -- -- (109)
ESOP shares
Earned -- 25 -- -- 28 -- 53
---- ------ ------ ----- ----- ----- ------
Balance at 9/30/99 436,425 $ 4 $4,135 $3,639 $ 92 $(277) $(295) $7,298
======= ==== ====== ====== ===== ===== ===== ======
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)
Nine months Ended September 30,
1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 435 $ 491
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 57 62
Dividend on FHLB stock (30) (32)
Provision for loan losses 45 126
(Increase) decrease in interest receivable (160) (79)
(Increase) decrease in other assets (106) (276)
Increase (decrease) in accrued liabilities 47 90
Increase (decrease) in income taxes payable (25) (159)
Increase (decrease) in deferred taxes payable 58 (103)
Sale of mortgage loans held for sale 8,864 7,733
Originations of mortgage loans held for sale (9,348) (8,776)
------ ------
Total adjustments (598) (1,414)
------ ------
Net cash provided by operating activities (163) (923)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations net of principal payments (5,177) (3,527)
Purchase of:
Available for sale - investment securities - (4,461)
Held to maturity - investment securities (3,134) -
Proceeds from maturities and repayments of:
Held to maturity investment securities 2,500 650
Available for sale - investment securities 450 550
Held to maturity - mortgage-backed securities 532 249
Available for sale - mortgage-backed securities - 241
Cash payments for the purchase of property (541) (33)
------ ------
Net cash provided (used) by investing activities (5,370) (6,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 6,575 6,525
Net increase (decrease) in escrow accounts 329 140
Proceeds from FHLB advances - 1,400
Treasury stock purchased (295) -
Payment of cash dividend (109) (109)
------ ------
Net cash provided (used) by financing activities 6,500 7,956
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 967 702
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,896 2,581
------ ------
CASH AND EQUIVALENTS, END OF PERIOD $2,863 $3,283
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $1,689 $1,924
Income taxes $ 273 $ 430
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
nine month period ended September 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 Company's audited consolidated financial statements and notes thereto
for the year ended December 31, 1998.
3. EARNINGS PER SHARE
Earnings per share has been computed for the three and nine months ended
September 30, 1998 and September 30, 1999 based upon weighted average common
shares outstanding of 406,618 and 410,110, respectively.
4. COMPREHENSIVE INCOME
The Company has adopted FASB Statement No. 130, Reporting Comprehensive
Income, which 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 paid to
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 September 30, 1999, the loan had an outstanding balance of
approximately $277,000 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 nine months ending September 30, 1999, compensation expense
was approximately $16,000 and $47,000, respectively. Compensation is
recognized at the average fair value of the ratably released shares during the
8
accounting period as the employees performed services. At September 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 September 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 September 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 $42,000, respectively, for the three
and nine months ended September 30, 1999.
8. ASSET QUALITY
At September 30, 1999, the Company had total nonperforming loans (i.e., loans
which are contractually past due 90 days or more) of approximately $337,000.
As a percentage of net loans receivable at September 30, 1999, nonperforming
loans were .6%. Total nonperforming assets as a percentage of total assets at
September 30, 1999 were .8%.
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 September 30, 1999
The Company's total consolidated assets increased by approximately $8.3
million or 13.1%, from $63.4 million at December 31, 1998 to $71.7 million at
September 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 $57.6 million at September 30, 1999 compared to
$53.5 million at December 31, 1998, a 7.7% increase. This increase was
attributable to an increase in first mortgage residential loans of $1.9
million, an increase in commercial business and real estate loans of $600,000,
and an increase in consumer loans of $1.6 million. 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 $6.5 million or 12.8%, from $50.1 million at December 31,
1998 to $56.6 million at September 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 September 30,
1998 and 1999
Net Income. Net income for the three months ended September 30, 1999 was
$156,000 compared to $143,000 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 .89% for the three months ended September 30, 1999.
Net Interest Income. Net interest income increased $50,000 or 9.4% from
$533,000 for the three months ended September 30, 1998 to $583,000 for the
three months ended September 30, 1999. The interest rate spread increased
from 3.91% for three months ending September 30, 1998 to 4.07% for the three
months ending September 30, 1999 as a result of the weighted average rate of
deposits and borrowings declining from the period a year ago.
Total interest income increased $185,000 from $1.1 million for the three
months ended September 30, 1998 to $1.3 million for the three months ended
September 30, 1999. Interest on loans increased $141,000 or 13.3% from $1.0
million for the three months ended September 30, 1998 to $1.2 million for the
three months ended September 30, 1999 as a result of a $8.9 million increase
in loans outstanding substantially in residential mortgage loans, commercial
business loans, and consumer loans.
Interest expense increased $88,000 from $585,000 for the three months ended
September 30, 1998 to $673,000 for the three months ended September 30, 1999.
The increase for the three months ending September 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 ability to
repay, the estimated value of any underlying collateral, and current economic
10
conditions. The provision for loan losses was $62,000 for the three months
ended September 30, 1999 compared to $15,000 for the same period a year
earlier. The higher provision for the three months ended September 30, 1999
was due to the corresponding increase in loans outstanding. Management deemed
the allowance for loan losses adequate at September 30, 1999.
Noninterest Income. Noninterest income increased 36.5% to $277,000 for the
three months ended September 30, 1999 from $203,000 for the three months ended
September 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 $81,000 for the three
months ended September 30, 1999. Additionally, noninterest income also
increased as a result of increased mortgage servicing income on loans sold and
increased service charges on deposit accounts.
Noninterest Expense. Noninterest expense increased 21.2% to $607,000 for the
three months ended September 30, 1999 from $501,000 for the three months ended
September 30, 1998. Compensation and benefits increased to $332,000 for the
three months ended September 30, 1999 from $256,000 for the three months ended
September 30, 1998 as a result of hiring additional personnel for the trust
department and hiring a Senior Consumer Lending Officer. Data Processing and
other expenses increased to $200,000 for the three months ended September 30,
1999 from $173,000 for the three months ended September 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 September 30,
1999 was $97,000 compared to $92,000 for the three months ending September 30,
1998. This increase was the result of pre-tax income increasing for the three
months ending September 30, 1999.
Comparison of Results of Operations for the Nine Months Ended September 30,
1998 and 1999.
Net Income. Net income for the nine months ended September 30, 1999 was
$491,000 compared to $435,000 for the nine months ended September 30, 1998, a
12.9% 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 .96% for the nine months ended
September 30, 1999 compared to 1.09% for the nine months ended September 30,
1998.
Net Interest Income. Net interest income increased 14.7% to $1.8 million for
the nine months ended September 30, 1999 from $1.5 million for the nine months
ended September 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 16.7% to $3.8 million for the nine months
ended September 30, 1999 from $3.3 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 $55.5
million from $45.9 million. The increases was attributable to the substantial
increase in first mortgage residential loans, commercial business, and
consumer loans.
Interest expense increased 14.1% to $1.9 million for the nine months ended
September 30, 1999 from $1.7 million for the same period a year ago, primarily
as a result of an increase in
11
average balances of interest-bearing deposits which were used to fund loan
demand and investment securities.
Provision for Loan Losses. The provision for loan losses for the nine month
periods ended September 30, 1999 and 1998 was $126,000 and $45,000,
respectively. Historically, management has emphasized the Company's loss
expense over other factors in establishing provisions for loan losses. The
higher provision for the nine months ended September 30, 1999 was due to the
corresponding increase in loans outstanding. Management deemed the allowance
for loan losses adequate at September 30, 1999.
Noninterest Income. Noninterest income increased 74.4% to $802,000 for the
nine months ended September 30, 1999 from $460,000 for the same period a year
ago. This increase is primarily due to gains from the sale of residential
loans of $172,000 and revenues from trust operations of $234,000 for the nine
months ended September 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 37.5% to $1.8 million for
the nine months ended September 30, 1999 from $1.3 million for the ni ne
months ended September 30, 1998. Compensation and benefits increased to
$966,000 for the nine months ended September 30, 1999 from $638,000 for the
nine months ended September 30, 1998 primarily as a result of hiring
additional personnel for the trust department and hiring a Senior Consumer
Lending Officer. Data Processing and other expenses increased to $536,000 for
the nine months ended September 30, 1999 from $403,000 for the nine months
ended September 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 nine months ended September
30, 1999 was $312,000 compared to $280,000 for the same period a year ago.
The increase was the result of pre-tax income increasing by $88,000 for the
nine months ending September 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 September 30, 1999,
the Savings Bank's liquidity ratio was 14.28% (required ratio at that date was
4% pursuant to OTS regulations). At September 30, 1999, there were no material
commitments for capital expenditures and the Company had unfunded loan
commitments of approximately $4.8 million and unfunded letters of credit of
$327,000. At September 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 September 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
September 30, 1999. The Savings Bank had the following regulatory capital
ratios at September 30, 1999:
12
Security Federal Savings Bank
(Unaudited)
As of September 30, 1999 Actual For Capital Categorized as
Adequacy Purposes "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
Total Capital
(to risk weighted assets) $ 7,569 15.43% $ 3,926 8.00% $ 4,907 10.00%
Tier I Capital
(to risk weighted assets) 6,863 13.99% 1,963 4.00% 2,944 6.00%
Tier 1 Capital
(to adjusted total assets) 6,863 9.58% 2,149 3.00% 3,581 5.00%
Tangible Capital
(to tangible assets) 6,863 9.58% 1,074 1.50% N/A ---
* 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 has resulted in additional
direct and indirect costs to the Savings Bank. Direct costs include 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 consist of the time devoted
by 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 $29,000 has been incurred as of
September 30, 1999.
The Savings Bank has developed remediation contingency plans and business
resumption contingency plans spec ific 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 may be a party to various
legal proceedings incident to its or their business. At September 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
---------------------------------------------------
None
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 September
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
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: November 12, 1999 By /s/ Joe H. Pugh
-------------------
Joe H. Pugh
President and Chief Executive Officer
Security Bancorp, Inc.
Date: November 12, 1999 By /s/ John W. Duncan
----------------------
John W. Duncan
Chief Financial Officer
17