SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2001
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[X] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File No. 0-22587
SFB Bancorp, Inc.
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(Name of Small Business Issuer in Its Charter)
Tennessee 62-1683732
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
Organization) Identification No.)
632 East Elk Avenue, Elizabethton, Tennessee 37643
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(Address of Principal Executive Offices) (Zip Code)
(423) 543-1000
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(Issuer's Telephone Number, Including Area Code)
Securities registered under to Section 12(b) of the Exchange Act: None
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Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) has 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.
YES X NO .
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $4,362,000
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The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the average bid and asked price of the registrant's
Common Stock on March 1, 2002 was $6.5 million.
As of March 29, 2002, there were issued and outstanding 582,995 shares
of the registrant's Common Stock.
Transition Small Business Disclosure Format (check one): YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 2001. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 2001. (Part III)
PART I
Forward Looking Statements
SFB Bancorp, Inc. (the "Company") may from time to time make written or
oral "Forward-Looking Statements", including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
Annual Report on Form 10-KSB and the Exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and savings habits; and the success of the Company at managing the risks
involved in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Description of Business
--------------------------------
General
SFB Bancorp, Inc. is a Tennessee corporation organized in March 1997 at
the direction of Security Federal Bank (the "Bank" or "Security Federal") to
acquire all of the capital stock that the Bank issued in its conversion from the
mutual to stock form of ownership (the "Conversion"). On May 29, 1997, the Bank
completed the Conversion and became a wholly owned subsidiary of the Company.
The Company is a unitary savings and loan holding company, which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Bank and investing the Company's portion of the net proceeds obtained in the
Conversion. All reference to the Bank and or Security Federal refers
collectively to the Company and the Bank, unless the context indicates
otherwise.
The Bank, chartered in 1963 under the name Security Federal Savings and
Loan Association, is a federally chartered stock savings bank headquartered in
Elizabethton, Tennessee. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS") and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of and
owns capital stock in the FHLB of Cincinnati, which is one of the 12 regional
banks in the FHLB System.
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate.
The following table sets forth certain financial ratios for the Company
for the dates indicated.
At December 31,
---------------------
2000 2001
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Return on average assets........................ 0.91% 0.86%
Return on average equity........................ 4.42% 4.35%
Average equity to average assets................ 20.57% 19.76%
Dividend payout................................. 22.88% 50.51%
Competition
Security Federal is one of many financial institutions serving its
market area, which consists of Carter County, Tennessee and the adjacent
Tennessee counties of Johnson, Unicoi, Washington, and Sullivan. The competition
for deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, and multi-state regional
banks in the Bank's market area. Deposit competition also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
varies depending upon market conditions and comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
2
Lending Activities
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Bank's loan portfolio by type of loan and type of
security on the dates indicated:
December 31,
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2000 2001
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Amount Percent Amount Percent
-------- --------- -------- ---------
Type of Loans:
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Real Estate Loans:
One- to four-family............................. $30,174 63.25 $28,678 63.46
Construction.................................... 1,784 3.74 995 2.20
Commercial...................................... 1,707 3.58 2,286 5.06
Multi-family residential........................ 3,217 6.74 3,679 8.14
Land............................................ 4,363 9.15 3,378 7.47
Commercial business loans......................... 2,009 4.21 2,630 5.82
Consumer Loans:
Automobile loans................................ 3,488 7.31 2,715 6.01
Share loans..................................... 217 0.45 289 .64
Other........................................... 747 1.57 543 1.20
------ ------ ------ ------
Total loans.................................. 47,706 100.00% 45,193 100.00%
====== ======
Less:
Loans in process................................ 515 423
Deferred loan origination fees and costs........ 30 13
Allowance for loan losses....................... 347 373
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Total loans, net............................. $46,814 $44,384
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Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's
loan portfolio, including loans held for sale, at December 31, 2001. The table
does not include prepayments or scheduled principal repayments. All mortgage
loans are shown as maturing based on contractual maturities.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
---------- --------- --------- --------
(In Thousands)
One- to four-family residential... $ 124 $ 887 $27,667 $28,678
Construction...................... 140 434 421 995
Commercial real estate............ 108 942 1,236 2,286
Multi-family residential.......... - 158 3,521 3,679
Land.............................. 1,140 1,374 864 3,378
Commercial business loans......... 1,111 1,055 464 2,630
Consumer.......................... 796 2,696 55 3,547
----- ----- ------ ------
Total Amount Due............. $3,419 $7,546 $34,228 $45,193
===== ===== ====== ======
3
The following table sets forth the dollar amount of all loans due after
December 31, 2001, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
------- ----------- -------
(In Thousands)
One- to four-family residential.... $28,065 $ 489 $28,554
Construction....................... 855 - 855
Commercial real estate............. 2,064 114 2,178
Multi-family residential........... 3,603 76 3,679
Land............................... 1,635 603 2,238
Commercial business loans and
consumer........................... 4,052 218 4,270
------ ----- ------
Total.......................... $40,274 $1,500 $41,774
====== ===== ======
One- to Four-Family Residential Loans. Security Federal's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans secured by property in the Bank's primary market area. The Bank
generally originates one- to four-family residential mortgage loans in amounts
up to 97% of the lesser of the appraised value or purchase price, with private
mortgage insurance required on loans with a loan-to-value ratio in excess of
85%. The maximum loan-to-value ratio on mortgage loans secured by nonowner
occupied properties is limited to 85% and 90% with private mortgage insurance.
The Bank primarily originates and retains fixed-rate balloon loans having terms
of up to 15 years, with principal and interest payments calculated using up to a
30-year amortization period.
Security Federal also offers adjustable rate mortgage loans. The
interest rate on adjustable rate mortgage loans is based on an index plus a
stated margin. The Bank may offer discounted initial interest rates on
adjustable rate mortgage loans but the Bank requires that the borrower qualify
for the adjustable rate mortgage loans at the fully indexed rate (the index rate
plus the margin). Adjustable rate mortgage loans provide for periodic interest
rate adjustments upward or downward of up to 2% per adjustment. The interest
rate may not increase more than 5% over the life of the loan and may not
decrease below the initial interest rate. Adjustable rate mortgage loans
typically reprice every one, three or five years and provide for terms of up to
30 years.
Adjustable rate mortgage loans decrease the risk associated with
changes in interest rates by periodically repricing, but involve other risks
because as interest rates increase, the underlying payments by the borrower
increase, thus increasing the potential for default by the borrower. At the same
time, the marketability of the underlying collateral may be adversely affected
by higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the maximum periodic and lifetime interest rate adjustment
permitted by the loan documents, and, therefore is potentially limited in
effectiveness during periods of rapidly rising interest rates.
Mortgage loans originated and held by the Bank generally include a
due-on-sale clause, which gives the Bank the right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
securing the mortgage loan without the Bank's consent.
Residential Construction Loans. Security Federal offers residential
construction loans on one- to four-family residential property to the
individuals who will be the owners and occupants upon completion of
construction. These loans are made on a long-term basis and are classified as
construction/permanent loans. Usually no principal payments are required during
the first six to eight months. After that time, the
4
payments are set at an amount that will pay off the amount of the loan over the
term of the loan. The maximum loan to value ratio is 97% with private mortgage
insurance.
On a limited basis, the Bank also originates speculative loans to
residential builders who have established business relationships with the Bank.
These speculative loans typically are made for a term of twelve months and may
not require principal payments during the term of the loan. In underwriting such
loans, the Bank considers the number of units that the builder has on a
speculative bid basis that remain unsold. The Bank's experience has been that
most speculative loans are repaid well within the twelve-month period.
Speculative loans are generally originated with a loan to value ratio that does
not exceed 80%.
Construction lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The Bank's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, the Bank may be compelled to advance additional funds to complete
the construction. Furthermore, if the final value of the completed property is
less than the estimated amount, the value of the property might not be
sufficient to assure the repayment of the loan. For speculative loans that the
Bank originates to builders, the ability of the builder to sell completed
dwelling units will depend, among other things, on demand, pricing and
availability of comparable properties, and general economic conditions.
Commercial and Multi-Family Loans. Commercial real estate loans are
secured by churches, office buildings, and other commercial properties.
Multi-family loans are secured by apartment and condominium buildings. These
loans generally have not exceeded $500,000 or had terms greater than 10 years.
Commercial and multi-family real estate lending entails significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, the Bank generally limits this type of lending to its market area
and to borrowers who are otherwise well known to the Bank.
Commercial Business Loans. Security Federal offers commercial business
loans to benefit from the higher fees and interest rates and the shorter term to
maturity. Commercial business loans consist of equipment, lines of credit and
other business purpose loans, which generally are secured by either the
underlying properties or by the personal guarantees of the borrower.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
Consumer Loans. Consumer loans consist of home equity, automobile,
farm, mobile home, and demand loans secured by savings deposit accounts. These
type loans may entail greater risk than residential mortgage loans, particularly
in the case of consumer loans that are unsecured or secured by assets that
depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not
be sufficient for repayment of the outstanding loan, and the remaining
deficiency may not be collectible.
5
Loan Approval Authority and Underwriting. The Bank's President has
unlimited loan approval authority. The loan committee generally approves all
residential mortgage loans of $25,000 or more, and the Bank's Board of Directors
ratifies all mortgage loans and consumer loans at its regular monthly meeting.
Commercial real estate loans and commercial business loans generally are
approved in advance by the loan committee.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are processed by a member
of the Bank's Board of Directors and/or outside independent fee appraisers.
Construction/permanent loans are made on individual properties. Funds
advanced during the construction phase are held in a loans-in-process account
and disbursed at various stages of completion, following physical inspection of
the construction by a loan officer or appraiser.
Either title insurance or a title opinion is generally required on all
real estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property, which is located in a
flood zone.
Loan Commitments. Verbal commitments are given to prospective borrowers
on all approved real estate loans. Generally, the commitment requires acceptance
within 30 days of the date of issuance. At December 31, 2001, commitments to
cover originations of mortgage loans and undisbursed funds for loans-in-process
were approximately $1,137,000 and $423,000 respectively.
6
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15 and there were no
impaired loans within the meaning of SFAS 114, as amended by SFAS 118.
At December 31,
-----------------
2000 2001
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Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential................ $142 $218
Construction................................... - -
Commercial..................................... - -
Multi-family residential....................... - -
Land........................................... 43 -
Commercial business and consumers................ 29 23
--- ---
Total nonaccrual loans....................... 214 241
Accruing loans which are contractually
past due 90 days or more....................... - -
--- ---
Total nonperforming loans.................... 214 241
Real estate owned................................ - -
--- ---
Total nonperforming assets....................... $214 $241
=== ===
Nonaccrual and 90 days past due as a
percentage of net loans........................ 0.46% 0.53%
==== ====
Nonaccrual and 90 days past due as a
percentage of total assets..................... 0.39% 0.42%
==== ====
Total nonperforming assets as a
percentage of total assets..................... 0.39% 0.42%
==== ====
At December 31, 2001, interest income that would have been recorded on
loans accounted for on a nonaccrual basis under the original terms of such loans
was immaterial.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if the current net
worth inadequately protects it and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make "collection or
7
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as loss are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weakness that
does not currently warrant classification in one of the aforementioned
categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loan
loss allowances. A portion of the general loan loss allowance established to
cover possible losses related to assets classified as substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
In accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at December 31, 2001, the Bank had
classified approximately $421,000 of assets as substandard. The Bank did not
have any assets classified as special mention or doubtful.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure is recorded as "real estate owned" until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less disposal costs. Any
write-down of real estate owned is charged to operations. At December 31, 2001,
the Bank had no foreclosed real estate.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in the loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the loan portfolio. The evaluation, including a
review of all loans on which full collectibility of interest and principal may
not be reasonably assured, considers: (i) the Bank's past loan loss experience,
(ii) known and inherent risks in the portfolio, (iii) adverse situations that
may affect the borrower's ability to repay, (iv) the estimated value of any
underlying collateral, and (v) current economic conditions.
Management monitors the allowance for loan losses and makes additions
to the allowance as economic conditions dictate. There can be no assurance that
the allowance for losses will be adequate to cover losses, which may in fact be
realized in the future, and that additional provisions for losses will not be
required.
8
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At December 31,
----------------------
2000 2001
--------- --------
(Dollars in Thousands)
Total loans outstanding........................... $47,706 $45,193
====== ======
Average loans outstanding......................... $45,519 $46,343
====== ======
Allowance at beginning of period.................. $ 352 $ 347
Provision......................................... 36 36
Recoveries........................................ - -
Charge-offs....................................... (41) (10)
---- ----
Allowance at end of period........................ $ 347 $ 373
==== ====
Allowance for loan losses as a percent
of total loans outstanding...................... 0.73% 0.83%
==== ====
Net loans charged off as percent of
average loans outstanding....................... 0.09% 0.02%
==== ====
Ratio of allowance to nonperforming loans......... 162.15% 154.86%
====== ======
9
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
At December 31,
------------------------------------------------
2000 2001
---------------------- -----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------- ------------- -------- -------------
(Dollars in Thousands)
One- to four-family residential........ $131 63.25% $145 63.46%
Construction........................... 31 3.74 33 2.20
Commercial............................. 45 3.58 49 5.06
Multi-family residential............... 35 6.74 38 8.14
Land................................... 35 9.15 37 7.47
Commercial business and consumer......... 70 13.54 71 13.67
--- ------ --- ------
Total allowance for loan losses..... $347 100.00% $373 100.00%
=== ====== === ======
Investment Activities
General. The Bank is required under federal regulations to maintain a
sufficient level of liquid assets, (including specified short-term securities
and certain other investments), as determined by management and defined and
reviewed for adequacy by the OTS during its regular examinations. The Bank has
maintained a liquidity portfolio in excess of regulatory requirements. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
future yield levels, as well as management's projections as to the short term
demand for funds to be used in the Bank's loan origination and other activities.
The Bank classifies its investments as securities available for sale or
investment securities held to maturity in accordance with SFAS No. 115. At
December 31, 2001, the Bank's investment portfolio policy allowed investments in
instruments such as U.S. Treasury obligations, U.S. federal agency or federally
sponsored agency obligations, municipal obligations, mortgage-backed securities,
banker's acceptances, certificates of deposit, federal funds, including FHLB
overnight and term deposits, as well as investment grade corporate bonds,
commercial paper and the mortgage derivative products described below. The Board
of Directors may authorize additional investments.
The Bank's investment securities available for sale and investment
securities held to maturity portfolios at December 31, 2001 did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's equity, excluding those issued by the United States Government or its
agencies.
10
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages, the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include Federal Home Loan Mortgage
Corporation (Freddie Mac), Government National Mortgage Association (Ginnie
Mae), Federal National Mortgage Association (Fannie Mae), and Small Business
Administration ("SBA").
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Expected maturities
will differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
Real Estate Mortgage Investment Conduits ("REMIC") are typically issued
by a special purpose entity, which may be organized in a variety of legal forms,
such as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities or mortgage loans, which are used to collateralize the
mortgage related securities. Once combined, the cash flows can be divided into
"tranches" or "classes" of individual securities, thereby creating more
predictable average lives for each security than the underlying pass-through
pools of mortgage loans. Accordingly, under this security structure, all
principal pay downs from the various mortgage pools or mortgage loans are
allocated to a mortgage-related securities' class or classes structured to have
priority until it has been paid off. These securities generally have fixed
interest rates, and as a result, changes in interest rates generally would
affect the market value and possibly the prepayment rates of such securities.
The characterization of a mortgage-related security as a REMIC relates solely to
the tax treatment of the mortgage related security under the Internal Revenue
Code.
11
Investment Activities
Investment Portfolio. The following table sets forth the carrying value
of the Company's securities at the dates indicated. At December 31, 2001, the
approximate fair value of the Company's securities available for sale was
$3,721,000 resulting in a net unrealized loss of $34,000.
At December 31,
---------------------
2000 2001
--------- --------
(Dollars in Thousands)
U.S. government and agency securities
available for sale.......................... $1,621 $ 597
U.S. government securities.................... 487 513
Political subdivision notes................... 383 205
Mortgage-backed securities available
for sale.................................... 1,659 2,932
Certificate of Deposits....................... - 192
FHLB Stock.................................... 524 560
----- -----
Total....................................... $4,674 $4,999
===== =====
12
The following table sets forth information regarding the scheduled
maturities, carrying values, market value and weighted average yields for the
Bank's investment securities portfolio at December 31, 2001. The following table
does not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
December 31, 2001
-----------------------------------------------------------------------------------------------------
Less than Over 5 to Over 10 Total
1 year 1 to 5 years 10 years Years Securities
----------------- ------------------ ----------------- ------------------ ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- -------- ------- -------- ------- -------- ------- -------- ----- ------
(Dollars in Thousands)
U.S. government and
Agencies securities
Available for sale... $ - -% $597 4.23% $ - -% $ - -% $ 597 4.23% $ 597
U.S. government
Securities............. - - - - - - 513 5.06 513 5.06 467
Political subdivision
Notes.................. - - 205 4.57 - - - - 205 4.57 205
Mortgage-backed
Securities available
For sale:
GNMA................. - - - - - - 248 6.96 248 6.96 248
FHLMC................ - - - - 1 16.25 26 8.00 27 8.00 27
FHLMC Remic.......... - - - - - - 970 5.50 970 5.50 970
FNMA................. - - - - - - 296 6.14 296 6.14 296
FNMA Remic........... - - - - 895 4.42 496 4.16 1,391 4.33 1,391
Certificate of
Deposits............... - - 192 3.73 - - - - 192 3.73 192
FHLB stock (1)......... - - - - - - 560 6.47 560 6.47 560
--- --- --- ----- ----- -----
Total................ $ - -% $994 4.20% $896 4.43% $3,109 5.59% $4,999 5.10% $4,953
--- --- --- ---- --- ---- ----- ---- ----- ---- -----
----------------------------
(1) Recorded at cost.
13
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. The Bank derives funds from amortization
and prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a selection
of deposit instruments including regular savings accounts, money market
accounts, and term certificate accounts. Deposit account terms vary according to
the minimum balance required, the time period the funds must remain on deposit,
and the interest rate, among other factors. At December 31, 2001, the Bank had
no brokered accounts.
Time Deposits. The following table indicates the amount of the Bank's
time deposits of $100,000 or more by time remaining until maturity as of
December 31, 2001.
Time Deposits
Maturity Period (Dollars in Thousands)
--------------- ----------------------
Within three months.......................... $ 3,418
More than three through six months........... 2,615
More than six through nine months............ 2,422
Over nine months............................. 2,265
-----
Total............................... $10,720
======
Borrowings
The Bank may obtain advances from the FHLB of Cincinnati to supplement
its supply of lendable funds. Advances from the FHLB of Cincinnati are typically
secured by a pledge of the Bank's stock in the FHLB of Cincinnati and a portion
of the Bank's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Bank, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements.
Employees
At December 31, 2001 the Bank had 18 full-time and 4 part-time
employees. A collective bargaining group represents none of the Bank's
employees. The Bank believes that its relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws, which relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
14
Regulation of the Company
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which authority also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Company.
As a unitary savings and loan holding company, the Company generally is
not subject to any restrictions on its business activities. Where the
Gramm-Leach-Bliley Act (the "GLB Act") terminated the "unitary thrift holding
company" exemption from activity restrictions on a prospective basis, the
Company enjoys grandfathered status under this provision of the GLB Act because
it acquired the Bank prior to May 4, 1999. As a result, the Company's freedom
from activity restrictions as a unitary savings and loan holding company were
not affected by the GLB Act. However, if the Company were to acquire control of
an additional savings association, its business activities would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if the Company were in
the future to sell control of the Bank to any other company, such company would
not succeed to the Company's grand fathered status under the GLB Act and would
be subject to the same activity restrictions. The continuation of the Company's
exemption from restrictions on business activities as a unitary savings and loan
holding company is also subject to the Company's continued compliance with the
Qualified Thrift Lender ("QTL") test. See "- Regulation of the Bank - Qualified
Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that are
found in the Bank's operations. The Bank's relationship with its depositors and
borrowers is also regulated to a great extent by federal and state law,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.
15
The Bank must file reports with the OTS concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
savings institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
The Bank is required to pay insurance premiums based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the SAIF. The
FDIC has set the deposit insurance assessment rates for SAIF-member institutions
for the first six months of 2001 at 0% to .027% of insured deposits on an
annualized basis, with the assessment rate for most savings institutions set at
0%. In addition, all FDIC-insured institutions are required to pay assessments
to the FDIC at an annual rate of approximately .0212% of insured deposits to
fund interest payments on bonds issued by the Financing Corporation ("FICO"), an
agency of the Federal government established to recapitalize the predecessor to
the SAIF. These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets for savings institutions that receive the highest supervisory
rating for safety and soundness and 4% of total adjusted assets for all other
thrifts, and (3) risk-based capital equal to 8% of total risk-weighted assets.
At December 31, 2001, the Bank was in compliance with its regulatory capital
requirements.
For purposes of the OTS capital regulations, tangible capital is
defined as core capital less all intangible assets, less certain mortgage
servicing rights and less certain investments. Core, or Tier 1, capital is
defined as common stockholders' equity, noncumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits of mutual savings
associations and qualifying supervisory goodwill, less nonqualifying intangible
assets, certain mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital equals the sum of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, the portion of the
allowance for loan losses not designated for specific loan losses, and up to 45%
of unrealized gains on equity securities. The portion of the allowance for loan
and lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100%
of core capital. A savings association must calculate its risk-weighted assets
by
16
multiplying each asset and off-balance sheet item by various risk factors as
determined by the OTS, which range from 0% for cash to 100% for delinquent
loans, property acquired through foreclosure, commercial loans, and other
assets.
In addition to the above regulatory capital requirements, the OTS's
prompt corrective action regulation classifies savings associations by capital
levels and provides that the OTS will take various corrective actions, including
imposing significant operational restrictions, against any thrift that fails to
meet the regulation's capital standards. Under this regulation, a "well
capitalized" savings association is one that has a total risk-based capital
ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a
leverage capital ratio of 5%, and is not subject to any capital order or
directive. A thrift is deemed "adequately capitalized" category if it has a
total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio
of at least 4%, and a leverage capital ratio of at least 4%. Institutions with
lower capital levels are deemed to be "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," depending on their capital
levels. A thrift that falls within any of the three undercapitalized categories
is subject to severe regulatory sanctions under the prompt corrective action
regulation. At December 31, 2001, the Bank was classified as "well capitalized."
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association, such as the Bank, that is a subsidiary of a
savings and loan holding company, must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL
17
test set forth in the Home Owner's Loan Act by maintaining at least 65% of its
"portfolio assets" in certain "Qualified Thrift Investments" (defined to include
residential mortgages and related equity investments, certain mortgage-related
securities, small business loans, student loans and credit card loans, and 50%
of certain community development loans). For purposes of the statutory QTL test,
portfolio assets are defined as total assets minus intangible assets, property
used by the institution in conducting its business, and liquid assets equal to
10% of total assets. A savings institution must maintain its status as a QTL on
a monthly basis in at least nine out of every 12 months. A failure to qualify as
a QTL would result in a number of sanctions, including certain operating
restrictions. At December 31, 2001, the Bank was in compliance with its QTL
requirement, with 71.68% of its assets invested in Qualified Thrift Investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to the greater of 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of the Bank's advances from the
FHLB. At December 31, 2001, the Bank was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board might be
used to satisfy the liquidity requirements that are imposed by the OTS. At
December 31, 2001, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Description of Property
--------------------------------
Year Leased
Location Leased or Owned or Acquired
-------- --------------- -----------
MAIN OFFICE:
632 East Elk Avenue Owned 1980
Elizabethton, Tennessee
BRANCH OFFICES:
510 Wallace Avenue Owned 1989
Elizabethton, Tennessee
588 South Shady Street Owned 1999
Mountain City, Tennessee
The Bank also owns property at the intersection of Riverside Drive and
Hattie Avenue, Elizabethton, Tennessee, which consists of a single-family
dwelling and a paved parking area for the Bank's customers and employees.
18
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities and - Regulation of the Bank," and "Item
2. Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending
Activities and Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
--------------------------
There are various claims and lawsuits in which the Company or the Bank
(collectively, the "Company") are periodically involved, such as claims to
enforce liens, condemnation proceedings on properties in which the Company holds
security interests, claims involving the making and servicing of real property
loans, and other issues incident to the Company's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" of the Company's Annual Report to stockholders for the fiscal year
ended December 31, 2001 (the "Annual Report") is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
-----------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants On
---------------------------------------------------------
Accounting and Financial Disclosure.
------------------------------------
Not applicable.
19
PART III
Item 9. Directors, Executive Officers, Promoters and
----------------------------------------------------
Control Persons: Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I - Election of
Directors" and " - Biographical Information" in the "Proxy Statement" is
incorporated herein by reference.
Item 10. Executive Compensation
--------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
(b) Security Ownership of Management
The information required by items (a) and (b) is incorporated
herein by reference to the Proxy Statement contained under the
sections captioned "Principal Holders" and "Proposal I - Election
of Directors."
(c) Changes in Control
Management of the Registrant knows of no arrangements, including
any pledge by any person of securities of the Registrant, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
20
Item 13. Exhibits, List and Reports on Form 8-K
------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report.
(1) The consolidated balance sheets of SFB Bancorp, Inc. and
subsidiary as of December 31, 2001 and 2000 and the related
consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows for each of
the years in the two year period ended December 31, 2001,
together with the related notes and the independent
auditors' report of Crisp Hughes Evans LLP, independent
certified public accountants.
(2) Schedules omitted, as they are not applicable.
(3) The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Charter of SFB Bancorp, Inc.*
3(ii) Bylaws of SFB Bancorp, Inc.*
4 Specimen Stock Certificate*
10 Employment Agreement between the Bank and Peter W. Hampton*
10.1 1999 Stock Option Plan**
10.2 Restricted Stock Plan and Trust Agreement **
13 Portions of the 2001 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See "Item 1- Description of
Business)
23 Consent of Crisp Hughes Evans LLP
(b) Not applicable.
--------------------
* Incorporated by reference to the registration statement on Form SB-2 (File
No. 333-23505) declared effective by the SEC on April 14, 1997.
** Incorporated by reference to the proxy statement for the annual meeting of
stockholders on June 1, 1999 and filed with the SEC on April 17, 1999.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 28, 2002.
SFB BANCORP, INC.
By: /s/ Peter W. Hampton
--------------------------------
Peter W. Hampton
President, C.E.O. and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 28, 2002.
/s/ Peter W. Hampton /s/ Donald W. Tetrick
---------------------------------- ----------------------------
Peter W. Hampton Donald W. Tetrick
President and Director Director
(Principal Executive Officer)
/s/ Peter W. Hampton, Jr. /s/ John R. Crockett, Jr.
---------------------------------- ----------------------------
Peter W. Hampton, Jr. John R. Crockett, Jr.
Secretary, Treasurer and Director Director
/s/ Julian T. Caudill /s/ Michael L. McKinney
---------------------------------- ----------------------------
Julian T. Caudill Michael L. McKinney
Vice President and Director Director
/s/ Bobby Hyatt
----------------------------------
Bobby Hyatt
Vice President and Finance Officer
(Principal Accounting Officer)