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 June 30, 2003
|_| 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 incorporation (I.R.S. Employer
or organization) Identification Number)
632 East Elk Avenue, Elizabethton, Tennessee 37643
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 543-1000
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 August 8, 2003, there were 570,522 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, 2002 and June 30, 2003 ................. 3
Consolidated Statements of Comprehensive Income - (Unaudited) for the three and six month periods
ended June 30, 2002 and 2003 .................................................................... 4
Consolidated Statements of Stockholders' Equity - (Unaudited) ...................................... 5
Consolidated Statements of Cash Flows - (Unaudited) for the six months
ended June 30, 2002 and 2003 ..................................................................... 6
Notes to (Unaudited) Consolidated Financial Statements ............................................. 7-9
Item 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................................ 10-14
Item 3
Controls and Procedures ............................................................................ 15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................... 16
Item 2. Changes in Securities ...................................................................... 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 ........................................................... 17
Item 7. Signatures ................................................................................. 18
2
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share data)
December 31, June 30,
------------ --------
Assets 2002 2003
-------- --------
Cash on hand $ 654 $ 453
Interest earning deposits 4,309 4,012
-------- --------
Cash and cash equivalents 4,963 4,465
Investment securities:
Held to maturity (market value of $612 in 2002 and $1,857 in 2003) 592 1,814
Available for sale 2,954 4,132
Loans receivable, net 43,880 42,477
Mortgage-backed securities:
Available for sale 2,396 2,197
Premises and equipment, net 850 843
Federal Home Loan Bank stock, at cost 586 597
Accrued interest receivable 266 258
Other assets 125 151
-------- --------
Total assets $ 56,612 $ 56,934
======== ========
Liabilities and Stockholders' Equity
Deposits:
Non-interest-bearing $ 1,341 $ 1,151
Interest-bearing 42,271 42,440
-------- --------
Total deposits 43,612 43,591
Advance payments by borrowers for taxes and insurance 184 406
Accrued expenses and other liabilities 73 101
Income taxes:
Current 203 41
Deferred 216 210
-------- --------
Total liabilities 44,288 44,349
-------- --------
Stockholders' equity:
Common stock ($.10 par value, 4,000,000 shares authorized; 767,000 shares
issued; 578,247 and 570,522 outstanding at
December 31, 2002 and June 30, 2003, respectively) 58 57
Paid-in capital 5,074 4,970
Retained income, substantially restricted 7,388 7,711
Treasury stock at cost (1,300 shares at December 31, 2002) (21) --
Accumulated other comprehensive income 32 22
Unearned compensation:
Employee stock ownership plan (207) (175)
-------- --------
Total stockholders' equity 12,324 12,585
-------- --------
Total liabilities and stockholders' equity $ 56,612 $ 56,934
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands, except per share data)
For Three Months Ended For Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2003 2002 2003
------- ------- ------- -------
Interest income:
Loans $ 864 $ 804 $ 1,735 $ 1,629
Mortgage-backed securities 34 16 67 37
Investments 33 45 60 82
Interest earning deposits 18 11 38 23
------- ------- ------- -------
Total interest income 949 876 1,900 1,771
------- ------- ------- -------
Interest expense:
Deposits 339 251 719 521
FHLB Advances -- -- -- --
------- ------- ------- -------
Total interest expense 339 251 719 521
------- ------- ------- -------
Net interest income 610 625 1,181 1,250
Provision for loan losses 9 9 18 18
------- ------- ------- -------
Net interest income after provision
For loan losses 601 616 1,163 1,232
Non-interest income:
Loan fees and service charges 46 46 101 91
Other 1 2 3 4
------- ------- ------- -------
Total non-interest income 47 48 104 95
------- ------- ------- -------
Non-interest expenses:
Compensation 180 165 336 334
Employee benefits 41 44 76 86
Net occupancy expense 32 34 63 71
Deposit insurance premiums 2 2 4 4
Data processing 32 32 66 66
Other 74 73 140 150
------- ------- ------- -------
Total non-interest expenses 361 350 685 711
------- ------- ------- -------
Income before income taxes 287 314 582 616
Income tax expense 111 121 225 238
------- ------- ------- -------
Net income $ 176 $ 193 $ 357 $ 378
Other comprehensive income (loss) 56 -- 40 (10)
------- ------- ------- -------
Comprehensive income $ 232 $ 193 $ 397 $ 368
======= ======= ======= =======
Earnings per share
Basic $ .32 $ .36 $ .65 $ .70
Diluted $ .32 $ .36 $ .65 $ .70
The accompanying notes are an integral part of these consolidated financial
statements.
4
SFB BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Accumulated
Other Unearned Compensation
Common Paid-In Retained Treasury Comprehensive ---------------------
Stock Capital Income Stock Income for ESOP for RSP Total
----- ------- ------ ----- ------ -------- ------- -----
Balance at December 31, 2001 58 5,112 6,781 -- (20) (278) (46) 11,607
Net income -- -- 718 -- -- -- -- 718
Other comprehensive income -- -- -- -- 52 -- -- 52
Cash dividends declared ($.20 per share) -- -- (111) -- -- -- -- (111)
Treasury stock purchased (6,048 shares) -- -- -- (96) -- -- -- (96)
Retirement of treasury stock (4,748 shares) -- (75) -- 75 -- -- -- --
Compensation earned -- 37 -- -- -- 71 46 154
---- ------- ------- ----- ---- ----- ---- --------
Balance at December 31, 2002 $ 58 $ 5,074 $ 7,388 $ (21) $ 32 $(207) $ -- $ 12,324
Net income -- -- 378 -- -- -- -- 378
Other comprehensive income -- -- -- -- (10) -- -- (10)
Cash dividends declared ($.10 per share) -- -- (55) -- -- -- -- (55)
Treasury stock purchased (6,425 shares) -- -- -- (107) -- -- -- (107)
Retirement of treasury stock (7,725 shares) (1) (128) -- 128 -- -- -- (1)
Compensation earned -- 24 -- -- -- 32 -- 56
---- ------- ------- ----- ---- ----- ---- --------
Balance at June 30, 2003 $ 57 $ 4,970 $ 7,711 $ -- $ 22 $(175) $ -- $ 12,585
==== ======= ======= ===== ==== ===== ==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
SFB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended
June 30,
--------------------
2002 2003
------- -------
Operating activities:
Net income $ 357 $ 378
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 47 53
Provision for loan losses 18 18
(Decrease) increase in reserve for uncollected interest (2) 6
Net increase in deferred loan fees 6 7
Accretion of discounts on investment securities, net (14) (15)
Amortization of premiums on mortgage-backed securities 2 20
Amortization of unearned compensation 98 56
FHLB stock dividends (12) (11)
Change in operating assets and liabilities:
Other assets 35 (26)
Accrued interest receivable 12 2
Accrued expenses and other liabilities 20 28
Current income taxes 61 (162)
------- -------
Net cash provided by operating activities 628 354
------- -------
Investing activities:
Maturities of investment securities held to maturity 75 53
Purchase of investment securities held to maturity -- (1,260)
Maturities of investment securities available for sale 300 1,225
Purchase of investment securities available for sale (1,438) (2,421)
Purchase of mortgage-backed securities available for sale -- (997)
Principal payments on mortgage-backed securities
Available for sale 441 1,176
Net decrease in loans 397 1,379
Purchase of premises and equipment (96) (46)
------- -------
Net cash used by investing activities (321) (891)
------- -------
Financing activities:
Net decrease in deposits (614) (21)
Increase in advance payments by borrowers for taxes
and insurance 230 222
Stock repurchased (43) (107)
Payment of cash dividend (56) (55)
------- -------
Net cash (used) provided by financing activities (483) 39
------- -------
Decrease in cash and cash equivalents (176) (498)
Cash and cash equivalents at beginning of period 6,786 4,963
------- -------
Cash and cash equivalents at end of period $ 6,610 $ 4,465
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 708 $ 509
Income taxes 196 408
======= =======
Noncash transactions:
Unrealized gains (losses) on securities and mortgage-backed
securities available for sale, net of deferred taxes $ 40 $ (10)
Loan charge off's 32 4
The accompanying notes are an integral part of these consolidated financial
statements.
6
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
SFB BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. 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 comprehensive income for the interim
periods ended June 30, 2003 are not necessarily indicative of the results,
which may be expected for the entire year or any other future interim
periods.
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, 2002 which are
included in the Form 10-KSB by reference (file no. 0-22587).
2. Earnings Per Share
Basic earnings per common share ("EPS") for all periods presented is
computed by dividing net income by the weighted average number of common
share outstanding. Diluted earnings per common share is computed by
dividing net income available to common stockholders by the weighted
average number of common shares outstanding and dilutive potential common
shares, which include stock options. Dilutive potential common shares are
calculated using the treasury stock method. Options to purchase 73,630
shares of the Company's common stock were outstanding during the three and
six months ended June 30, 2003.
7
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Three months ended,
----------------------------------------
June 30, 2002 June 30, 2003
------------------ -------------------
Income Shares Income Shares
------ ------ ------ ------
Net Income $176 $193
BASIC EPS
Income available to common stockholders $176 550 $193 538
Per share amount $.32 $.36
Effect of Dilutive Securities $.00 $.00
DILUTED EPS
Income available to common stockholders $176 550 $193 543
Per share amount $.32 $.36
Six months ended,
----------------------------------------
June 30, 2002 June 30, 2003
------------------ -------------------
Income Shares Income Shares
------ ------ ------ ------
Net Income $357 $378
BASIC EPS
Income available to common stockholders $357 550 $378 539
Per share amount $.65 $.70
Effect of Dilutive Securities $.00 $.00
DILUTED EPS
Income available to common stockholders $357 550 $378 541
Per share amount $.65 $.70
3. Asset Quality
The following table provides information regarding the Bank's
nonperforming loans (i.e., loans which are contractually past due 90 days
or more) at December 31, 2002 and June 30, 2003, respectively. As of the
dates indicated, the Bank had no loans categorized as troubled debt
restructuring within the meaning of SFAS 15.
December 31, June 30,
2002 2003
------------ --------
(Dollars in Thousands)
Nonaccrual loans $ 189 $ 278
Repossessed real estate -- --
------- -------
Total nonperforming assets $ 189 $ 278
======= =======
Nonperforming loans to net loans .43% .65%
Nonperforming assets to total assets .33% .49%
8
SFB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
4. Stock Based Compensation
On December 31, 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure. This
statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Finally, this Statement amends APB
Opinion No. 28, Interim Financial Reporting, to require disclosure about
those effects in interim financial statements. We intend to continue to
account for stock-based compensation based on the provisions of APB
Opinion No. 25.
The provisions of SFAS 148 are not applicable if the result of recording
stock-based compensation for the reporting periods is not material.
Accordingly, for the current reporting periods if the Company had recorded
stock-based compensation the effects would not have been material.
9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risk associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions.
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 the Bank as appropriate.
Comparison of Financial Condition
Net loans receivable decreased approximately $1.4 million for the period ended
June 30, 2003, as compared to December 31, 2002. The decrease in net loans
receivable primarily reflects the Company's inability to originate and retain
loans secured by single-family residential real estate and consumer loans given
the current rate environment.
The Company has been attempting to increase its yield on interest-earning assets
under the current rate environment by moving funds from cash and overnight
accounts to investments and mortgage-backed securities. Total net investment and
mortgage-backed securities increased $2.2 million, or 37.0% to $8.1 million at
June 30, 2003.
Comparison of Results of Operations for the Three and Six Months Ended June 30,
2002 and 2003
Net Income. Net income for the three months ended June 30, 2003 increased
$17,000, or 9.7%, from $176,000 in 2002, to $193,000 in 2003. Net income
increased $21,000, or 5.9%, to $378,000 for the six months ended June 30, 2003,
from $357,000 in 2002. The increase for the three months ended June 30, 2003,
compared to the same three month period in 2002, was primarily the result of an
increase in the net interest margin of $15,000, a $11,000 decrease in other
non-interest expenses, offset by an increase of $10,000 in income tax expense.
Diluted income per share increased $.04, from $.32 for the three month ended
June 30, 2002, to $.36 for the three months ended June 30, 2003. The increase
for the six months ended June 30, 2003, compared to the same six month period in
2002, was primarily the result of an increase in the net interest margin of
$69,000, offset by a $26,000 increase in other non-interest expenses and a
increase of $13,000 in income tax
10
expense. Diluted income per share increased $.05, from $.65 for the six months
ended June 30, 2002, to $.70 for the three months ended June 30, 2003.
Net Interest Income. Net interest income increased $15,000, from $610,000 for
the three months ended June 30, 2002, to $625,000 for the three months ended
June 30, 2003. Net interest income increased $69,000, to approximately $1.2
million for the six months ended June 30, 2003. The increase in net interest
income for the three months ended June 30, 2003, compared to the three months
ended June 30, 2002, primarily reflects an increase of approximately $546,000 in
average interest-earning assets over average interest-bearing liabilities,
combined with an increase in the interest rate spread of 27 basis points to
4.06% at June 30, 2003. The net interest margin increased 14 basis points to
4.54% for the three months ended June 30, 2003, compared to 2002. The increase
in net interest income for the six months ended June 30, 2003, compared to the
six months ended June 30, 2002, primarily reflects an increase of approximately
$682,000 in average interest-earning assets over average interest-bearing
liabilities, combined with an increase in the interest rate spread of 39 basis
points to 4.03% at June 30, 2003. The net interest margin increased 26 basis
points to 4.53% for the six months ended June 30, 2003, compared to 2002.
Interest Income. Interest income decreased $73,000, from approximately $949,000
for the three months ended June 30, 2002, to $876,000 for the three months ended
June 30, 2003. Interest income decreased $129,000, to approximately $1.8 million
for the six months ended June 30, 2003, as compared to $1.9 million for the six
months ended June 30, 2002. The decrease for the three months ended June 30,
2003, was attributable to a decrease in the average yield on interest-earning
assets of 49 basis points, from 6.85% for the three months ended June 30, 2002,
to 6.36% for the three months ended June 30, 2003, combined with a decrease in
average interest-earning assets of approximately $338,000, from $55.4 million at
June 30, 2002, to $55.1 million at June 30, 2003. The decrease for the six
months ended June 30, 2003, was primarily attributable to a decrease in the
average yield on interest-earning assets of 45 basis points, from 6.86% for the
six months ended June 30, 2002, to 6.41% for the six months ended June 30, 2003,
combined with a decrease in average interest-earning assets of approximately
$178,000, from $55.4 million at June 30, 2002, to $55.2 million at June 30,
2003.
Interest on loans decreased $60,000 for the three months ended June 30, 2003, as
compared to the same period in 2002, and $106,000 for the six months ended June
30, 2003, as compared to the same period in 2002. The decrease in interest on
loans for the three months ended June 30, 2003, primarily reflects an decrease
of approximately $1.2 million in the average loans outstanding balance for 2003,
compared to 2002, combined with a 33 basis point decrease in the average yield
on loans from 7.84% in 2002, to 7.51% in 2003. The decrease in interest on loans
for the six months ended June 30, 2003, primarily reflects an decrease of
approximately $1.1 million in the average loans outstanding balance for 2003,
compared to 2002, combined with a 30 basis point decrease in the average yield
on loans from 7.86% in 2002, to 7.56% in 2003.
Interest on mortgage-backed securities decreased approximately $18,000 for the
three months ended June 30, 2003, compared to the three-month period in 2002,
and approximately $30,000 for the six months ended June 30, 2003, as compared to
the same period in 2002. The decrease in
11
interest on mortgage-backed securities for the three months ended June 30, 2003,
was primarily the result of a decrease of approximately $953,000 in the average
invested balance of mortgage-backed securities, compared to the three-month
period in 2002, combined with a 135 basis point decrease in the average yield on
mortgage-backed securities to 3.28% for the three months ended June 30, 2003.
The decrease in interest on mortgage-backed securities for the six months ended
June 30, 2003, was primarily the result of a decrease of approximately $876,000
in the average invested balance of mortgage-backed securities, compared to the
six month period in 2002, combined with a 90 basis point decrease in the average
yield on mortgage-backed securities to 3.79% for the six months ended June 30,
2003.
Interest on investment securities increased approximately $12,000 for the three
months ended June 30, 2003, as compared to the same period in 2002, and
approximately $22,000 for the six months ended June 30, 2003, as compared to the
same period in 2002. The increase in interest on investments for the three
months ended June 30, 2003, primarily reflects a increase of approximately $2.8
million in the average investment balance for 2003, compared to 2002, offset by
a 133 basis point decrease in the average yield on investments from 4.43% in
2002, to 3.10% in 2003. The increase in interest on investments for the six
months ended June 30, 2003, primarily reflects a increase of approximately $2.1
million in the average investment balance for 2003, compared to 2002, offset by
a 99 basis point decrease in the average yield on investments from 4.33% in
2002, to 3.34% in 2003.
Interest on interest-earning deposits decreased approximately $7,000 for the
three months ended June 30, 2003, as compared to the same period in 2002, and
approximately $15,000 for the six months ended June 30, 2003, as compared to the
same period in 2002. The decrease in interest on interest-earning deposits for
the three months ended June 30, 2003, primarily reflects a decrease of
approximately $1.0 million in the average interest-earning deposits balance for
2003, compared to 2002, combined with a 27 basis point decrease in the average
yield on interest-earning deposits from 1.32% in 2002, to 1.05% in 2003. The
decrease in interest on interest-earning deposits for the six months ended June
30, 2003, primarily reflects a decrease of approximately $326,000 in the average
interest-earning deposits balance for 2003, compared to 2002, combined with a 48
basis point decrease in the average yield on interest-earning deposits from
1.37% in 2002, to 0.89% in 2003. The Company anticipates utilizing its cash and
interest-earning deposit balances to fund future loan demand or other
investments.
Interest Expense. Interest expense decreased $88,000, from $339,000 for the
three months ended June 30, 2002, to $251,000 for the three months ended June
30, 2003. Interest expense decreased $198,000, from approximately $719,000 for
the six months ended June 30, 2002, to $521,000 for the six months ended June
30, 2003. The decrease for the three months ended June 30, 2003, compared to the
three months ended June 30, 2002, was primarily the result of an 74 basis point
decrease in the average cost of funds, combined with an approximate $884,000
decrease in average interest-bearing liabilities. The decrease for the six
months ended June 30, 2003, compared to the six months ended June 30, 2002, was
primarily the result of an 84 basis point decrease in the average cost of funds,
combined with an approximate $861,000 decrease in average interest-bearing
liabilities. For the three months ended June 30, 2003 the cost of funds was
2.31% and for the six months the cost of funds was 2.38%.
12
Under the current rate environment the Company has experienced above normal net
interest margins. This is mainly attributable to the Company's liabilities being
more sensitive to short-term re-pricing than its assets. If the rate environment
were to increase our interest expense could rise faster than our interest income
potentially resulting in lower net interest margins.
Provision for Loan Losses. The provision for loan losses for three and six month
period ended June 30, 2002 and 2003 was $9,000 and $18,000, respectively. The
Company's management routinely performs an analysis to quantify the inherent
risk of loss in its portfolio. At June 30, 2003, 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 June 30, 2003, was 136%, and nonperforming assets represented .49% of total
consolidated assets. Nonperforming assets were approximately $278,000 at June
30, 2003, compared to $189,000 at December 31, 2002. Management is not aware of
any trends or events inherent to its loan portfolio that has not been provided
for in its loan loss allowance. There, however, can be no assurance that future
losses will not exceed estimated amounts or that additional provisions for loan
losses will not be required in future periods.
Non-Interest Income. Non-interest income continues to be an additional source of
income for the Company. Fees on new loan production and service fees on other
products and services produce the income. Total non-interest income amounted to
$48,000 and $95,000 for the three and six months ended June 30, 2003,
respectively, and $47,000 and $104,000 for the three and six months ended June
30, 2002, respectively.
Non-Interest Expense. Non-interest expense decreased $11,000, from $361,000 for
the three months ended June 30, 2002, to $350,000 for the three months ended
June 30, 2003. Non-interest expense increased $26,000, from approximately
$685,000 for the six months ended June 30, 2002, to $711,000 for the six months
ended June 30, 2003. The decrease for the three months ended June 30, 2003,
compared to the three months ended June 30, 2002, was primarily the result of
$15,000 decrease in compensation expense offset by $3,000 increase in employee
benefits. The decrease in compensation expense was mainly attributable to the
payment of dividend equivalency rights in the first quarter 2003 for the cash
dividend paid in December 2002. Similar payments of such rights were paid in the
three months ended June 30, 2002. For the six months ended June 30, 2003, the
increase was primarily the result of a $10,000 increase in employee benefit
expense, $8,000 in net occupancy expense and $10,000 in other expenses. The
increase in employee benefit expense for the three and six month periods in
2003, compared to 2002, was primarily due to expensing the monthly allocation of
the Employee Stock Ownership Plan shares at a higher average fair value in 2003,
as compared to 2002. The increase in net occupancy expense for the six months in
2003, compared to 2002, was mainly attributable to additional depreciation
associated with the new ATM at the Mountain City branch office and the upgrade
of the ATM at the Wallace Street branch in Elizabethton, combined with general
office machine maintenance. The increase in other expenses for the six months in
2003, compared to 2002, was mainly attributable to additional general operating
expenses.
13
Income Taxes. Income tax expense for the three months ended June 30, 2003, was
$121,000, compared to $111,000 for the same period in 2002. Income tax expense
for the six months ended June 30, 2003, was $238,000, compared to $225,000 for
the same period in 2002. The increase for the three and six month periods was
principally the result of higher pre-tax income. The effective tax rate for both
the three and six months in 2003 was approximately 38.6%.
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. Obligations
to fund outstanding loan commitments at June 30, 2003 were approximately
$374,000.
At June 30, 2003, 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. Furthermore,
at June 30, 2003, 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 June 30, 2003. The Bank had
the following capital ratios at June 30, 2003:
For Capital Categorized as
Actual Adequacy Purposes "Well Capitalized"(1)
------------------ ----------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 2003:
Total Capital
(To risk weighted assets) $12,325 38.7% $2,548 8.0% $3,185 10.0%
Tier I Capital
(To risk weighted assets) $11,947 37.5% $1,274 4.0% $1,911 6.0%
Tier I Capital
(To total assets) $11,947 21.1% $1,695 3.0% $2,825 5.0%
Tangible Capital
(To total assets) $11,947 21.1% $ 847 1.5% $2,825 5.0%
(1) As categorized under the Prompt Corrective Action Provisions.
14
Item 3.
CONTROLS AND PROCEDURES
An evaluation as of the end of the period covered by this report was carried out
under the supervision and with the participation of the Company's management,
including the Company's President and Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Company's President and Chief Executive Officer and Chief
Financial Officer concluded that those disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported as specified in the SEC's rules and forms.
15
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 June 30,
2003, 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
The Annual Meeting of Stockholders of the Company ("Meeting") was held on
May 15, 2003. The results of the vote on the matters presented at the
Meeting were as follows:
1. The following individuals were elected as directors, each for a
three-year term:
Vote For Vote Withheld
-------- -------------
Donald W. Tetrick 487,900 -0-
Peter W. Hampton, Jr 487,900 -0-
2. Ratification of the appointment of Crisp Hughes Evans LLP as the
Company's independent audit firm was approved by stockholders by the
following vote
For 487,900; Against -0-; Abstain -0-
Item 5. Other Information
None
16
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 Stock Certificate *
10 Employment Agreement with Peter W. Hampton *
10.1 SFB Bancorp, Inc. 1998 Stock Option Plan **
10.2 Security Federal Bank Restricted Stock Plan **
31.1 Certification of Chief Executive Officer under Section 302(a) of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302(a) of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
under Section 906 of the Sarbanes-Oxley Act of 2002
* Incorporated by reference to the Registration Statement on Form
SB-2, File No. 333-23505.
** Incorporated by reference to the proxy statement for the annual
meeting of stockholders on June 1, 1998, and filed with the SEC on
April 17, 1998 (File No. 0-22587).
(b) Reports on Form 8-K
None.
17
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.
Date: August 8, 2003 By: /s/ Peter W. Hampton
-------------------------------------
Peter W. Hampton
(President and Chief Executive Officer)
Date: August 8, 2003 By: /s/ Bobby Hyatt
-------------------------------------
Bobby Hyatt
(Vice President and Finance Officer)
18