U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22587
SFB BANCORP, INC.
----------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Tennessee 62-1683732
- -------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
632 East Elk Avenue, Elizabethton, Tennessee 37643
- ---------------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 543-3518
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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
-------- --------
As of May 1, 1998, there were 767,000 shares of the Registrant's common stock,
par value $0.10 per share, outstanding. The Registrant has no other classes of
common equity outstanding.
Transitional small business disclosure format:
Yes X No
-------- --------
1
SFB BANCORP, INC.
AND SUBSIDIARY
Elizabethton, Tennessee
Index
PART I. Page(s)
- ------- -------
FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets-(Unaudited) as of December 31, 1997 and March 31, 1998......................................3
Consolidated Statements of Comprehensive Income - (Unaudited) for the three month periods
ended March 31, 1997 and 1998.........................................................................................4
Consolidated Statements of Cash Flows - (Unaudited) for the three months
ended March 31, 1997 and 1998.........................................................................................5
Notes to (Unaudited) Consolidated Financial Statements................................................................6-7
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................................8-10
PART II.
- --------
OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................................11
Item 2. Changes in Securities.........................................................................................11
Item 3. Defaults Upon Senior Securities...............................................................................11
Item 4. Submission of Matters to a Vote of Security Holders...........................................................11
Item 5. Other Information.............................................................................................11
Item 6. Exhibits and Reports on Form 8-K..............................................................................11
Signatures.............................................................................................................12
2
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
(in thousands except share data)
December 31, March 31,
------------ -----------
Assets 1997 1998
------ -------- --------
Cash on hand $ 453 $ 585
Interest earning deposits 4,139 4,386
Investment securities:
Held to maturity (market value of $526
in 1997 and $531 in 1998) 577 583
Available for sale (amortized cost of $1,149
in 1997 and $1,300 in 1998) 1,148 1,295
Loans receivable, net 40,648 40,082
Mortgage-backed securities:
Available for sale (amortized cost of $5,117 in
1997 and $4,877 in 1998) 5,030 4,806
Premises and equipment, net 575 567
Federal Home Loan Bank stock 423 431
Accrued interest receivable 316 308
Prepaid expenses and other assets 28 60
-------- --------
Total assets $ 53,337 $ 53,103
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 40,587 $ 40,069
Federal Home Loan Bank advances -- --
Advance payments by borrowers for taxes and insurance 199 341
Accrued expenses and other liabilities 144 164
Income taxes payable:
Current 164 102
Deferred 62 54
-------- --------
Total liabilities 41,156 40,730
-------- --------
Stockholders' equity:
Preferred stock ($.10 par value, 1,000,000 shares authorized;
none outstanding) -- --
Common stock ($.10 par value, 4,000,000 shares authorized;
767,000 shares issued and outstanding ) 77 77
Paid-in capital 7,336 7,345
Retained earnings, substantially restricted 5,373 5,533
Accumulated other comprehensive income (53) (45)
Unearned compensation:
Employee stock ownership plan (552) (537)
-------- --------
Total stockholders' equity 12,181 12,373
-------- --------
Total liabilities and stockholders' equity $ 53,337 $ 53,103
======== ========
The accompanying notes are an integral part
of these consolidated inancial statements.
3
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands, except per share data)
For Three Months Ended
March 31,
---------------------------
1997 1998
------------ -----------
Interest income:
Loans $ 779 $ 834
Mortgage-backed securities 83 69
Investments 24 31
Interest earning deposits 9 53
----------- -----------
Total interest income 895 987
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Interest expense:
Deposits 491 481
Federal Home Loan Bank advances 3 --
----------- -----------
Total interest expense 494 481
----------- -----------
Net interest income 401 506
Provision for loan losses -- 8
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Net interest income after provision
for loan losses 401 498
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Non-interest income:
Loan fees and service charges 35 37
Other 5 3
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Total non-interest income 40 40
------------ -----------
Non-interest expenses:
Compensation 118 117
Employee benefits 16 32
Net occupancy expense 16 19
Deposit insurance premiums 2 6
Data processing 19 20
Other 46 90
----------- -----------
Total non-interest expenses 217 284
----------- -----------
Income before income taxes 224 254
Income tax expense 79 94
----------- -----------
Net income 145 160
Other comprehensive income:
Net unrealized gains (losses) on securities available
for sale net of income taxes of $10 and $5,
respectively (10) 8
----------- -----------
Comprehensive Income $ 135 $ 168
=========== ===========
Weighted average common shares outstanding: N/A 712
Basis net income per share N/A $ .22
The accompanying notes are an integral part
of these consolidated financial statements.
4
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
March 31,
------------------------------
1997 1998
---- ----
Operating activities:
Net income $ 145 $ 160
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 12 13
Provision for loan losses - 8
Increase in reserve for uncollected interest 2 7
Deferred income taxes (benefit) - (13)
Net increase (decrease) in deferred loan fees (17) 2
Accretion of discounts on investment securities, net (5) (6)
Amortization of premiums on mortgage-backed securities 4 3
Amortization of unearned compensation - 24
FHLB stock dividends (7) (8)
(Increase) decrease in other assets (22) (32)
(Increase) decrease in accrued interest receivable - 1
Increase (decrease) in accrued expenses and other liabilities 26 20
Increase (decrease) in current income taxes payable 71 (62)
-------- -------
Net cash provided by operating activities 209 117
-------- -------
Investing activities:
Purchase of investment securities available for sale - (1,050)
Maturities of investment securities available for sale - 900
Principal payments on mortgage-backed securities
available for sale 154 237
Net (increase) decrease in loans (358) 556
Purchase of premises and equipment (6) (5)
-------- -------
Net cash provided (used) by investing activities (210) 638
-------- -------
Financing activities:
Net increase (decrease) in deposits 926 (518)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 143 142
Repayment of FHLB advances (800) -
Payment of accrued conversion cost (81) -
-------- -------
Net cash provided (used) by financing activities 188 (376)
-------- -------
Increase (decrease) in cash and cash equivalents 187 379
Cash and cash equivalents at beginning of period 1,414 4,592
-------- -------
Cash and cash equivalents at end of period $ 1,601 $ 4,971
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 491 $ 478
Income taxes 7 168
Noncash investing transactions:
Unrealized gain (loss) on securities available for sale,
net of deferred tax liability (10) 8
The accompanying notes are an integral part
of these consolidated financial statements.
5
SFB BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. SFB Bancorp, Inc.
-----------------
SFB Bancorp, Inc. ("Bancorp") was incorporated under the laws of the State
of Tennessee for the purpose of becoming the holding company of Security
Federal Bank (the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock
savings bank, pursuant to its Plan of Conversion. Bancorp commenced on
April 14, 1997, a Subscription Offering of its shares in connection with
the conversion of the Savings Bank (the "Conversion"). On May 29, 1997 the
Conversion was completed. The financial statements of the Bank are
presented on a consolidated basis with those of the Bancorp.
The consolidated financial statements included herein are for the Bancorp,
the Bank and the Bank's wholly owned subsidiary, SFS, Inc. (SFS), herein
collectively know as the "Company." The impact of SFS on the consolidated
financial statements is insignificant. SFS has no operating activity other
than to own stock in a third-party service bureau.
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 comprehensive
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 statement of income for the three month period ended
March 31, 1998 is not necessarily indicative of the results which may be
expected for the entire year.
It is suggested that these consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto for the Company for the year ended December 31, 1997 which are
included in the Form 10-KSB by reference (file no. 0-22587).
3. Earnings Per Share
------------------
Basic earnings per share amount for the three month period ended March 31,
1998 are based on the average number of shares outstanding throughout the
period. No comparative amount has been presented for the three month period
ended March 31, 1997, because no shares were
6
outstanding during that period. Unallocated ESOP shares are not considered
as outstanding for purposes of this calculation. There is no dilutive
effect on earnings per share for the three month period ending March 31,
1998.
4. Employee Stock Ownership Plan (ESOP)
------------------------------------
For the three months ending March 31, 1998, compensation related to the
ESOP of approximately $24,000 was expensed. Compensation is recognized at
the average fair value of the ratably released shares during the accounting
period as the employees performed services. At March 31, 1998, the ESOP had
approximately 7,669 allocated shares and 53,691 unallocated shares.
5. Asset Quality
-------------
The following table sets forth information regarding the Bank's
nonperforming loans (i.e., loans which are contractually past due 90 days
or more) at December 31, 1997 and March 31, 1998, respectively. As of the
dates indicated, the Bank had no loans categorized as troubled debt
restructuring within the meaning of SFAS 15.
December 31, March 31,
1997 1998
---- ----
(Dollars in Thousands)
Nonaccrual loans $ 209 $ 242
Repossessed real estate - -
-------- -------
Total nonperforming assets $ 209 $ 242
======== =======
Nonperforming loans to net loans .51% .60%
Nonperforming assets to total assets .39% .46%
7
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
financial condition and the results of operations of the Company. References to
the "Company" include SFB Bancorp, Inc. and/or Security Federal Bank as
appropriate.
Comparison of Financial Condition at December 31, 1997 and March 31, 1998
The Company's total consolidated assets decreased by approximately $234,000 or
.44% from $53.3 million at December 31, 1997 to $53.1 million at March 31, 1998.
The decrease in assets for the period was primarily attributable to a decrease
in net loans outstanding as repayments exceeded new loan originations, offset by
an increase in cash and interest-earning assets and operating profits.
The composition of the Company's balance sheet has not been materially affected
by market conditions between December 31, 1997 and March 31, 1998. Net loans
decreased $566,000 or 1.4%. The decrease was mainly attributable to normal loan
attrition, and decreased demand for the Company's loan products during the
period. Interest-earning deposits increased by approximately $247,000 primarily
as a result of loan repayments, and subsequent investment of excess funds in
overnight accounts and short-term certificates of deposits at the Federal Home
Loan Bank of Cincinnati.
Deposits decreased approximately $518,000 or 1.3% from $40.6 million at December
31, 1997 to $40.1 million at March 31, 1998. The overall decrease in deposits
was primarily attributable to customer withdrawals exceeding new deposits and
estate withdrawals. The Company's management regularly monitors deposit rates
within its market and competes with other institutions for the attraction and
retention of deposits based primarily on its need for funds. The Company's
primary market is very competitive and the Company's ability to attract and
retain deposits is predominantly dependent upon the general rate environment
with its market.
Comparison of Results of Operations for the Three Months Ended March 31, 1997
and 1998
Net Income. Net income increased $15,000 or 10.3% for the for the three months
ended March 31, 1998 to $160,000 compared to $145,000 for the three months ended
March 31, 1997. The increase was primarily the result of an increase in net
interest income, offset by an increase in non-interest expense and additional
income taxes. The return on average assets was 1.21% for the three months ended
March 31, 1998.
Net Interest Income. Net interest income increased $105,000 or 26.2% from
$401,000 for the three months ended March 31, 1997 to $506,000 for the three
months ended March 31, 1998. The improvement in net interest income primarily
reflects an increase in average interest-earning assets
8
over average interest-bearing liabilities for the Company of $7.4 million or
175% for the three months ended March 31, 1998 as compared to 1997 primarily as
a result of the proceeds from the stock offering. The interest rate spread
however decreased from 3.09% for three months ending March 31, 1997 to 2.85% for
the three months ending March 31, 1998.
Interest Income. Total interest income increased $92,000 from $895,000 for the
three months ended March 31, 1997 to $987,000 for the three months ended March
31, 1998, as average interest-earnings assets increased approximately $6 million
from $46 million at March 31, 1997 to $52 million at March 31, 1998, which was
offset by a 17 basis point decrease in the average yield on average
interest-earning assets. Interest on loans increased $55,000 or 7.1% and
interest on interest-earning deposits increased by $44,000. Interest on
investments and mortgage-backed securities declined in aggregate by $7,000 as
the portfolio continues to mature and principal payments are received. The
Company has utilized the principal payments received on its mortgage-backed
securities to fund loan demand, to purchase investment securities and to fund
deposit withdrawals.
Interest Expense. Interest expense decreased $13,000 from $494,000 for the three
months ended March 31, 1997 to $481,000 for the three months ended March 31,
1998. The decrease for the three months ending March 31, 1998 was primarily the
result of a decrease of $1.6 million in the average balance of deposits
outstanding for the three month period in 1998, compared to 1997, and the
repayment of FHLB advances, offset by a 8 basis point increase in the average
cost of funds.
Provision for Loan Losses. The provision for loan losses for three month periods
ended March 31, 1998 was $8,000 and none for the period ending March 31, 1997.
Management regularly performs an analysis to quantify the inherent risk of loss
in its portfolio. At March 31, 1998 the ratio of the allowance for loan loss was
at a level deemed adequate by management to provide for losses in the loan
portfolio. The ratio of allowance for loan loss to non-performing loans at March
31, 1998 was 127.69% and nonperforming loans represented only .46% of total
consolidated assets.
Non-Interest Income. Non-interest income continues to be an insignificant source
of income for the Company. The income is produced by fees on new loan production
and service fees on other products and services. Total non-interest income was
$40,000 for the three months ending March 31, 1998 and 1997.
Non-Interest Expense. Non-interest expense increased by $67,000 from $217,000
for the three months ending March 31, 1997 to $284,000 for 1998. The increase
was primarily the result of increased employee benefit expenses of $16,000 and
$44,000 of other expenses. The $16,000 increase in employee benefit expenses was
attributable to the recognition of ESOP compensation expense. For financial
reporting purposes, ESOP shares are recorded at their fair market value as the
shares are allocated. The increase in other expenses was mainly attributable to
an increase of $35,000 in legal and accounting fees and other expenses paid by
the Company for costs incidental to the preparation and filing of year end
regulatory reports and documents related to the Company's annual meeting of
shareholders. Compensation, net occupancy, deposit insurance premiums, and data
processing expenses remained relatively stable during both three month periods.
9
Income Taxes. Income tax expense for the three months ending March 31, 1998
increased $15,000 to $94,000 compared to the same period in 1996. The increase
was the result of pre-tax income increasing by $30,000 and additional
nondeductible expenses associated with the ESOP. The effective tax rate for the
three months ended March 31, 1998 was 37% compared to 35.3% for the same period
in 1997.
Liquidity and Capital Resources. The Company's primary sources of funds are new
deposits, proceeds from principal and interest payments on loans, and repayments
on mortgage-backed securities. 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 March 31,
1998 there were no material commitments for capital expenditures. Obligations to
fund outstanding loan commitments at March 31, 1998 were approximately $651,000.
At March 31, 1998 management had no knowledge of any trends, events or
uncertainties that will have or are reasonably likely to have material effects
on the liquidity, capital resources or operations of the Company. Further at
March 31, 1998, management was not aware of any current recommendations by the
regulatory authorities which, if implemented, would have such an effect.
The Bank exceeded all of its capital requirements at March 31, 1998. The Bank
had the following capital ratios at March 31, 1998:
For Capital Categorized as
Actual Adequacy Purposes "Well Capitalized"(1)
------------------------ ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ----------- ------------ -----------
As of March 31, 1998:
Total Capital
(To risk weighted assets) $ 8,957 31.7% $ 2,262 8.00% $ 2,828 10.0%
Tier I Capital
(To risk weighted assets) $ 8,648 30.6% $ 1,131 4.00% $ 1,697 6.0%
Tier I Capital
(To total assets) $ 8,648 17.3% $ 848 3.00% $ 1,414 5.0%
Tangible Capital
(To total assets) $ 8,648 17.3% $ 424 1.50% $ 1,414 5.0%
(1) As categorized under the Prompt Corrective Action Provisions.
10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time, the Company and its subsidiaries may be a party
to various legal proceedings incident to its or their business. At
March 31, 1998, 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 by management to result in a
material loss.
Item 2. Changes in Securities
---------------------
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
--------------------------------
(a) 3(i) Charter of SFB Bancorp, Inc.*
3(ii) Bylaws of SFB Bancorp, Inc. *
4 Specimen of Stock Certificate *
10 Employment Agreement with Peter W. Hampton *
27 Financial Data Schedule ( Electronic filing only)
* Incorporated by reference to the Registration Statement on
Form SB-2, File No. 333-23505
(b) Reports on Form 8-K
None.
11
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.
SFB Bancorp, Inc.
Date: May 11, 1998 By /s/ Peter W. Hampton
-------------------------- ----------------------------------
Peter W. Hampton
(President and Chief Executive
Officer)
Date: May 11, 1998 By /s/ Bobby Hyatt
-------------------------- ----------------------------------
Bobby Hyatt
(Principal Accounting Officer)