FORM 10-KSB
[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 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22553
Tennessee 62-1682697
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
306 West Main Street, McMinnville, Tennessee 37110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (931) 473-4483
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Securities registered pursuant
to Section 12(b) of the Act: None
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The registrant's revenues for the fiscal year ended December 31, 2001 were $7.8 million.
As of March 1, 2002, there were issued and outstanding 424,919 shares of the registrant's Common Stock, which are traded on the over-the-counter market through the OTC "Electronic Bulletin Board" under the symbol "SCYT." Based on the average of the bid and asked prices for the Common Stock on March 1, 2002, the aggregate value of the Common Stock outstanding held by nonaffiliates of the registrant was $2.7 million (141,047 shares at $19.35 per share). For purposes of this calculation, officers and directors of the registrant and the Security Federal Savings Bank of McMinnville, TN Employee Stock Ownership Plan are considered nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 2002 Annual Meeting of Stockholders
(Part III)
Transitional Small Business Disclosure Format (check one) Yes No X
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PART I
General
Security Bancorp, Inc. ("Corporation"), a Tennessee corporation, was organized on March 18, 1997 for the purpose of becoming the holding company for Security Federal Savings Bank of McMinnville, TN ("Savings Bank") upon the Savings Bank's conversion from a federal mutual to a federal stock savings bank ("Conversion"). The Conversion was completed on June 30, 1997. At December 31, 2001, the Corporation had total assets of $88.5 million, total deposits of $75.8 million and stockholders' equity of $9.3 million. The Corporation has not engaged in any significant activity other than holding the stock of the Savings Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Savings Bank.
The Savings Bank was founded in 1960 as a federally chartered mutual savings and loan association under the name "Security Federal Savings and Loan Association." In January 1995, the Savings Bank adopted a federal mutual savings bank charter and changed its name to its current title. The Savings Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Savings Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF"). The Savings Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1960.
The Savings Bank is a community-oriented financial institution engaged primarily in the business of attracting deposits from the general public and using those funds to originate one- to four-family mortgage loans within its primary market area. To a lesser but growing extent, the Savings Bank also originates construction loans, commercial real estate loans, acquisition and development loans, commercial business loans and consumer loans.
Market Area
The Savings Bank considers Warren County to be its primary market area. McMinnville, Tennessee, located in Warren County and known as the "Plant Nursery Capital of the World" is located in the middle of Tennessee on the Highland Rim of the Cumberland Mountains midway between Chattanooga and Nashville. In addition to the numerous plant nurseries located in Warren County, over 50 industries located in Warren County produce products ranging from truck parts, electric motors, valves, and air conditioners to hardwood flooring, furniture, power woodworking tools and fire proof clothing. Large employers include Carrier Corporation, Bridgestone Tire and Rubber Company, Calasonic Yorozu Corporation and A. O. Smith Company.
Selected Financial Data
The following table sets forth certain information concerning the consolidated financial position and results of operations of the Company at and for the dates indicated. The consolidated data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its Subsidiary presented herein.
SELECTED FINANCIAL CONDITIONAL DATA:
At December 31,
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2001 2000 1999 1998 1997
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(In thousands)
Total assets $88,528 $81,361 $72,204 $63,425 $50,920
Loans receivable, net 66,056 66,730 60,189 53,473 43,093
Cash and cash equivalents 12,061 5,069 3,051 2,581 1,896
Investment securities
available for sale 4,446 4,385 4,138 1,420 1,379
Investment securities
held-to-maturity -- -- -- 650 1,248
Mortgage-backed securities
available for sale 2,103 1,386 1,604 1,956 --
Mortgage-backed securities
held-to-maturity 98 165 236 501 1,206
Deposits 75,845 64,776 57,455 50,142 37,061
FHLB advances 3,000 7,500 6,800 5,500 6,500
Stockholders equity,
substantially restricted 9,257 8,511 7,507 6,989 6,735
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SELECTED OPERATING DATA:
Year Ended December 31,
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2001 2000 1999 1998 1997
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(In thousands)
Interest income $6,475 $6,242 $5,365 $4,592 $3,926
Interest expense 3,278 3,115 2,596 2,326 2,105
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Net interest income 3,197 3,127 2,769 2,266 1,821
Provision for loan losses 171 180 159 285 60
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Net interest income after
provisions for loan losses 3,026 2,947 2,610 1,981 1,761
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Non interest income 1,289 987 891 811 278
Other expenses(1) 2,929 2,637 2,373 1,819 1,314
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Income before income tax
expense 1,386 1,297 1,128 973 725
Income tax expense 529 493 427 371 267
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Net income $ 857 $ 804 $ 701 $ 602 $ 458
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KEY OPERATING RATIOS:
At December 31,
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2001 2000 1999 1998 1997
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Performance Ratios:
Return on average assets
(net income divided by
average assets) 1.01% 1.05% 1.03% 1.05% 0.95%
Return on average equity
(net income divided by
average equity) 9.65 10.04 9.67 8.64 8.27
Interest rate spread
(difference between
average yield on interest-
earning assets and average
cost of interest-bearing
liabilities) 3.67 3.76 3.88 3.48 3.43
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 4.18 4.07 4.08 4.19 3.99
Noninterest expense as a
percent of average assets 3.45 3.36 3.50 3.18 2.72
Average interest-earning
assets to interest-bearing
liabilities 111.86 115.08 112.08 116.34 112.14
Efficiency ratio (other
expenses divided by the
sum of net interest income
and non-interest income) 65.28 63.61 64.82 59.12 62.60
Capital Ratios:
Average equity to average
assets 10.46 10.43 10.69 12.20 11.46
Tangible capital to assets 9.75 9.81 9.81 9.99 12.01
Core capital to assets 9.75 9.81 9.81 9.99 12.01
Risk-based capital to risk
adjusted assets 16.54 15.66 15.19 15.68 20.30
Asset Quality Ratios:
Allowance for loan losses
to total loans at end of
period 1.29 1.11 1.08 1.13 0.76
Net charge offs to average
outstanding loans during
the period 0.10 0.11 0.23 0.01 0.01
Ratio of nonperforming
assets to total assets(1) 0.53 0.43 0.74 0.89 0.11
Ratio of allowance for loan
losses to nonperforming
assets(1) 184.15 215.39 120.86 110.32 616.36
SELECTED OTHER DATA:
Number of:
Real estate loans
outstanding 1,410 1,346 1,258 877 707
Deposit accounts 8,778 8,013 6,775 5,385 3,459
Full service offices 2 2 2 2 2
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Yields Earned and Rates Paid
This information is incorporated by reference from Item 6, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Average Balances, Interest and Average Yield/Cost, included in this Form 10- KSB.
Lending Activities
General. At December 31, 2001, the Savings Bank's total loans receivable, net, was $66.1 million, or 74.6% of total assets. The Savings Bank has traditionally concentrated its lending activities on conventional first mortgage loans secured by one- to four-family properties, with such loans amounting to $40.1 million, or 59.5% of the total loans receivable portfolio at December 31, 2001. In recent periods, the Savings Bank increased its origination of construction and non-residential mortgage loans. A substantial portion of the Savings Bank's loan portfolio is secured by real estate, either as primary or secondary collateral, located in its primary market area.
Loan Portfolio Analysis. The following table sets forth the composition of the Savings Bank's loan portfolio as of the dates indicated.
At December 31,
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2001 2000
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Amount Percent Amount Percent
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(Dollars in thousands)
Real Estate Loans:
Residential..................... $40,058 59.46% $40,411 59.38%
Construction.................... 1,694 2.51 1,684 2.48
Commercial...................... 7,498 11.13 7,453 10.95
Acquisition and development..... 618 0.92 1,119 1.64
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Total real estate loans......... 49,868 74.02 50,667 74.45
Commercial business loans........ 8,347 12.39 8,050 11.83
Consumer loans:
Automobile...................... 3,794 5.63 3,697 5.43
Home equity, second mortgage
and other..................... 3,388 5.03 3,664 5.39
Unsecured....................... 1,970 2.93 1,973 2.90
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Total consumer loans.......... 9,152 13.59 9,334 13.72
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Total loans................... 67,367 100.00% 68,051 100.00%
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Less:
Loans in process................ 430 551
Unearned loan fees and
discounts..................... 21 14
Allowance for loan losses....... 860 756
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Total loans receivable, net... $66,056 $66,730
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One- to Four-Family Real Estate Lending. Historically, the Savings Bank has concentrated its lending activities on the origination of loans secured by first mortgage loans on existing one- to four-family residences located in its primary market area. At December 31, 2001, $40.1 million, or 59.5% of the Savings Bank's total loan portfolio
consisted of such loans. The Savings Bank originated $20.0 million and $13.7 million of one- to four-family residential mortgage loans during the years ended December 31, 2001 and 2000, respectively.
The Savings Bank offers fixed-rate one- to four-family mortgage balloon loans with maturities ranging from three to five years and amortization schedules of up to 30 years. At the expiration of the balloon term, the Savings Bank has the option of calling the loan due and payable or adjusting the interest rate and rewriting the loan on similar maturity terms. At December 31, 2001, such loans amounted to $18.1 million or 45.1% of the one- to four- family mortgage loan portfolio. The Savings Bank generally sells its fixed-rate loans, servicing retained, to the Federal Home Loan Mortgage Corporation ("FHLMC"). See "-- Loan Originations, Sales and Purchases." Fixed-rate loans customarily include "due on sale" clauses, which give the Savings Bank the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not paid.
The Savings Bank offers ARM loans at rates and terms competitive with market conditions. At December 31, 2001, $6.0 million, or 15.0%, of the Savings Bank's one- to four-family residential loan portfolio consisted of ARM loans. Substantially all ARM loan originations do not meet the underwriting standards of the FHLMC and the Federal National Mortgage Association ("FNMA"). Such loans are retained primarily for the Savings Bank's portfolio. The Savings Bank currently originates ARM loans that adjust annually based on the one-year U.S. Treasury security constant maturity index, plus 3%, with annual and life time interest rate adjustment limits of 1% to 2% and 4% to 6%, respectively. At December 31, 2001, however, the majority of the portfolio consisted of ARM loans that adjust annually based on the one-year U.S. Treasury security constant maturity index, plus 3%, with annual and life time interest rate adjustment limits of 2% and 6%, respectively. The Savings Bank also offers a one year ARM loan at an initial below market "teaser" rate with annual and lifetime interest rate adjustment limits of 2% and 6%, respectively. Borrowers, however, are qualified at the fully indexed rate. The Savings Bank's ARMs are typically based on an amortization schedule of up to 30 years. The Savings Bank qualifies the borrowers on its ARM loans based on the initial rate. The Savings Bank's ARM loans do not provide for negative amortization.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment.
The retention of ARM loans in the Savings Bank's loan portfolio helps reduce the Savings Bank's exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs due to changed rates to be paid by the customer. It is possible that during periods of rising interest rates, the risk of default on ARM loans may increase as a result of repricing and the increased payments required by the borrower. In addition, although ARM loans allow the Savings Bank to increase the sensitivity of its asset base to changes in the interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits. Because of these considerations, the Savings Bank has no assurance that yields on ARM loans will be sufficient to offset increases in the Savings Bank's cost of funds. The Savings Bank believes these risks, which have not had a material adverse effect on the Savings Bank to date, generally are less than the risks associated with holding fixed-rate loans in portfolio during an increasing interest rate environment.
The Savings Bank also originates one- to- four family mortgage loans under Federal Housing Administration ("FHA") and Veterans Administration ("VA") programs and the Tennessee Housing and Development Agency, an affordable housing program. These loans are generally sold to private investors, servicing released (i.e., the right to collect principal and interest payments and forward it to the purchaser of the loan, maintain escrow accounts for payment of taxes and insurance and perform other loan administration functions is sold with the loan). See " -- Loan Originations, Sales and Purchases."
The Savings Bank generally requires title insurance insuring the status of its lien or an acceptable attorney's opinion on all loans where real estate is the primary source of security. The Savings Bank also requires that fire and
casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least equal to the outstanding loan balance.
One- to- four family residential mortgage loans typically do not exceed 80% of the appraised value of the security property. Pursuant to underwriting guidelines adopted by the Board of Directors, the Savings Bank can lend up to 95% of the appraised value of the property securing a one- to four-family residential loan; however, the Savings Bank generally obtains private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the security property.
The Savings Bank also originates loans secured by first mortgages on residential building lots on which the borrower proposes to construct a primary residence. These loans are generally short-term, fixed-rate, fully amortizing loans. At December 31, 2001and 2000, such loans amounted to $94,000 and $245,000, respectively.
Construction Lending. At December 31, 2001, construction loans amounted to $1.7 million, or 2.5% of total loans, substantially all of which were secured by one- to- four family residences located in the Savings Bank's primary market area.
Construction loans are made for a term of up to 12 months. Construction loans are made at variable rates based on the prime lending rate with interest payable monthly. The Savings Bank originates construction loans to individuals who have a contract with a builder for the construction of their residence. The Savings Bank typically requires that permanent financing with the Savings Bank or some other lender be in place prior to closing any construction loan to an individual. To a lesser extent, the Savings Bank originates residential construction loans to local home builders, generally with whom it has an established relationship.
Construction loans to builders are typically made with a maximum loan-to-value ratio of 80%. Construction loans to individuals are typically made in connection with the granting of the permanent financing on the property. Such loans, which generally convert to a fully amortizing adjustable- or fixed-rate loan at the end of the construction term, are generally underwritten according to the underwriting standards for a permanent loan.
The Savings Bank's construction loans to builders are made on a pre-sold basis or a speculative basis, meaning that at the time the loan was originated, there was no sale contract or permanent loan in place for the finished home. The Savings Bank generally limits its speculative lending to a few select local builders with whom it has an established relationship. The Savings Bank generally limits each builder to financing for no more than two speculative homes at any one time. The Savings Bank generally has no more than $250,000 outstanding at any one time to one builder for speculative construction. At December 31, 2001, speculative construction loans amounted to $150,000. At December 31, 2001, the largest amount outstanding to any builder was $150,000.
Prior to making a commitment to fund a construction loan, the Savings Bank requires an appraisal of the property by an independent state-licensed and qualified appraiser approved by the Board of Directors. The Savings Bank's staff also reviews and inspects projects prior to disbursement of funds during the term of the construction loan. Loan proceeds are generally disbursed after inspection of the project.
Although construction lending affords the Savings Bank the opportunity to achieve higher interest rates and fees with shorter terms to maturity than one- to four-family mortgage lending, construction lending is generally considered to involve a higher degree of risk than one- to four-family mortgage lending. Construction loans are more difficult to evaluate than permanent loans. At the time the loan is made, the value of the collateral securing the loan must be estimated based on the projected selling price at the time the residence is completed, typically six to 12 months later, and on estimated building and other costs (including interest costs). Changes in the demand for new housing in the area and higher-than-anticipated building costs may cause actual results to vary significantly from those estimated. Accordingly, the Savings Bank may be confronted, at the time the residence is completed, with a loan balance exceeding the value of the collateral. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of
interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for new housing. Additionally, working out of problem construction loans is complicated by the fact that in-process homes are difficult to sell and typically must be completed in order to be successfully sold. This may require the Savings Bank to advance additional funds and/or contract with another builder to complete the residence. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished home.
The Savings Bank has attempted to minimize the foregoing risks by, among other things, limiting its construction lending to primarily residential properties, and limiting its speculative loans to a small number of well-known local builders. If the borrower is a corporation, the Savings Bank generally obtains personal guarantees from the principals.
Commercial Real Estate Lending. At December 31, 2001, commercial real estate loans totaled $7.5 million, or 11.1% of total loans, compared to $7.5 million, or 11.0% of total loans, at December 31, 2000. Commercial real estate loans are secured by nurseries, churches, professional offices and other non-residential property. At December 31, 2001, the Savings Bank's largest outstanding commercial real estate loan was a $382,000 loan secured by commercial property located in the Savings Bank's primary market area. At December 31, 2001, this loan was performing according to its terms. Substantially all of the Savings Bank's commercial real estate loans are secured by property located within the Savings Bank's primary market area.
The average size of the commercial real estate loan in the Savings Bank's loan portfolio is approximately $100,000. Commercial real estate loans generally are generally structured as balloon loans with a term of one to five years based on an amortization schedule of up to 20 years, with variable rates of interest based on the prime rate. Loan-to-value ratios may not exceed 80% of the appraised value of the underlying property. It is the Savings Bank's policy to obtain personal guarantees from all principals of corporate borrowers. In assessing the value of such guarantees, the Savings Bank reviews the individuals' personal financial statements, credit reports, tax returns and other financial information, including rent rolls. The Savings Bank generally requires annual financial statements from its commercial business borrowers and, if the borrower is a corporation, personal guarantees from the principals.
Commercial 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 payment experience on such loans typically is dependent on the successful operation of the real estate project. These risks can be significantly affected by supply and demand conditions in the market for office and retail space, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Savings Bank generally limits this type of lending to its market area and to borrowers with which it has substantial experience or who are otherwise well known to management.
Acquisition and Development Lending. The Savings Bank originates acquisition and development loans for the purpose of developing the land (i.e., installing roads, sewers, water and other utilities) for sale for residential housing construction. At December 31, 2001, the Savings Bank had two acquisition and development loans with aggregate approved commitments of $674,000, of which an aggregate of $618,000 million was outstanding. At December 31, 2001, the largest acquisition and development loan had an outstanding balance of $324,000 and was performing according to its terms. All of the acquisition and development loans are secured by properties located in the Savings Bank's primary market area.
Acquisition and development loans are usually repaid through the sale of the developed land to a home builder. However, the Savings Bank believes that its acquisition and development loans are made to individuals with, or to corporations the principals of which possess, sufficient personal financial resources out of which the loans could be repaid, if necessary.
Acquisition and development loans are secured by a lien on the property, made for a one year term, and with an interest rate that adjusts with the prime rate. The Savings Bank requires monthly interest payments during the term
of the acquisition and development loan. After the expiration of the one year term, the loan is converted to a five year term loan and the Savings Bank requires a 20% reduction in principal during the first year. In addition, the Savings Bank obtains personal guarantees from the principals of its corporate borrowers. At December 31, 2001, the Savings Bank did not have any nonaccruing acquisition and development loans.
Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because such loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default and foreclosure, the Savings Bank may be confronted with a property value of which is insufficient to assure full repayment. Furthermore, if the borrower defaults, the Savings Bank may have to expend its own funds to complete development and also incur costs associated with marketing and holding the building lots pending sale. The Savings Bank attempts to minimize this risk by limiting the maximum loan-to-value ratio on acquisition and development loans to 75%.
Commercial Business Lending. At December 31, 2001, commercial business loans amounted to $8.3 million, or 12.4% of total loans, compared to $8.1 million, or 11.8% of total loans, at December 31, 2000.
Commercial business loans generally include equipment loans (i.e., trucks, tractors, etc.) with terms ranging up to 15 years and working capital lines of credit secured by inventory and accounts receivable. Commercial business loans are generally made in amounts up to $300,000. Unsecured lines of credit are made for amounts up to $100,000. Working capital lines of credit are generally renewable and made for a one-year term with the requirement that the borrower extinguish any outstanding balance for 30 consecutive days during the year. Interest rate loans are generally indexed to the prime rate. As with commercial real estate loans, the Savings Bank generally requires annual financial statements from its commercial business borrowers and, if the borrower is a corporation, personal guarantees from the principals.
At December 31, 2001, the largest commercial business loan had an outstanding balance of $477,000 and was performing according to its terms.
Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential, commercial and multi-family real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often not a sufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
As part of its commercial business lending activities, the Savings Bank issues commercial and standby letters of credit as an accommodation to its borrowers. See "-- Loan Commitments and Letters of Credit."
Consumer Lending. At December 31, 2001, consumer loans totaled $9.2 million, or 13.6%, of the total loans, compared to $9.3 million, or 13.7% of total loans, at December 31, 2000. The majority of such loans originated by the Savings Bank have been made to its existing customers. The Savings Bank, however, subject to market conditions, intends to actively market consumer loans beyond its existing customer base to prospective borrowers within its primary market area.
Consumer loans generally have shorter terms to maturity or repricing and higher interest rates than the long-term, fixed-rate mortgage loans. The Savings Bank's consumer loans consist of loans secured by automobiles, boats and recreational vehicles, second mortgages on residences and savings accounts, and unsecured loans for personal or household purposes.
One of the larger categories of the Savings Bank's consumer loan portfolio are loans secured by new and used automobiles. At December 31, 2001, automobile loans totaled $3.8 million or 5.6% of the total loan portfolio, compared to $3.7 million or 5.4% of the total loan portfolio at December 31, 2000. Automobile loans are offered with maturities of up to 60 months. The Savings Bank does not engage in indirect automobile lending through automobile dealers.
The Savings Bank offers home equity loans that are made on the security of residences. These loans normally do not exceed 95% of the appraised value of the residence, less the outstanding principal of the first mortgage and have terms of up to ten years requiring monthly payments of principal and interest. At December 31, 2001, home equity and second mortgage loans totaled $1.4 million, or 2.1% of the total loan portfolio, compared to $1.3 million, or 1.9% of the total loan portfolio at December 31, 2000.
At December 31, 2001, unsecured consumer loans amounted to $2.0 million, or 2.9% of total loans. These loans are normally made for a maximum of 24 months or less with fixed rates of interest and are offered primarily to existing customers of the Savings Bank.
Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles, particularly used automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as the Savings Bank, and a borrower may be able to assert against such assignee claims and defenses that it has against the seller of the underlying collateral. At December 31, 2001, $10,008 of consumer loans were 90 days or more past due.
Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2001 regarding the dollar amount of loans maturing in the Savings Bank's portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.
Real Estate Loans:
Residential.....$16,961 $14,979 $4,087 $1,938 $1,294 $1,417 $40,676
Construction.... 1,264 -- -- -- -- -- 1,264
Commercial...... 4,660 2,248 491 99 -- -- 7,498
Consumer and
other loans..... 6,337 2,369 436 10 -- -- 9,152
Commercial busi-
ness loans...... 6,871 1,433 34 9 -- -- 8,347
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Total gross
loans.........$36,093 $21,029 $5,048 $2,056 $1,294 $1,417 $66,937
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The following table sets forth the dollar amount of all loans due after one year after December 31, 2001, which have fixed interest rates and have floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
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(In thousands)
Real Estate Loans:
Residential $21,889 $1,826
Construction -- --
Commercial 2,838 --
Consumer and
other loans 2,815 --
Commercial
business loans 1,476 --
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Total gross
loans $29,018 $1,826
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Loan Solicitation and Processing. Local realtors and home builders refer a significant number of loan applicants to the Savings Bank. Loan applicants also come through direct solicitation by Savings Bank personnel and walk-ins. Applications for one- to four-family mortgage loans are underwritten and closed based on FNMA and FHLMC standards, and other loan applications are underwritten and closed based on the Savings Bank's own guidelines. Title insurance is required on all loans originated for sale in the secondary market and for loans to be retained in the Savings Bank's portfolio if management determines the existence of a possible title risk to the Savings Bank. All mortgage loans require fire and extended coverage on appurtenant structures.
Lending approval authorities, both individual and group, are based on whether or not the loan is secured or unsecured. Individual lending authorities range from $25,000 to $100,000 for secured loans and $2,500 to $25,000 for unsecured loans. The Management Loan Committee, consisting of the President, Executive Vice President, Senior Vice President of Secondary Marketing, and Senior Vice President of Consumer Lending must approve secured loans in excess of $100,000 and up to $200,000 and unsecured loans in excess of $25,000 and up to $50,000. The Loan Committee of the Board of Directors must approve secured loans in excess of $200,000 and up to $500,000 and unsecured loans in excess of $50,000 and up to $150,000. The full Board of Directors must approve secured loans in excess of $500,000, and unsecured loans in excess of $150,000, up to the Savings Bank's maximum legal lending limit. At December 31, 2001, that general limit was $1.3 million. See "REGULATION -- Federal Regulation of Savings Associations -- Loans to One Borrower." All of the above loan approval authorities relate to a borrower's total aggregate indebtedness excluding any loan made to finance the borrower's primary residence.
Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicant's employment, income and credit standing. An appraisal of the real estate offered as collateral is undertaken by an independent fee appraiser approved by the Savings Bank and licensed or certified by the State of Tennessee. Applicants are promptly notified of the decision of the Savings Bank. Interest rates are subject to change if the approved loan is not closed within the time of the commitment.
Loan Originations, Sales and Purchases. The Savings Bank's primary lending activity has been the origination of one- to four-family residential mortgage loans. In recent periods, however, the Savings Bank has increased substantially its origination of construction and non-residential mortgage loans.
The Savings Bank generally sells all residential real estate loans originated under FHA and VA programs and the Tennessee Housing Development Agency to private investors, servicing released. Such loans are sold on a "best efforts" basis generally against forward commitments, resulting in minimal pipeline risk to the Savings Bank. Pipeline risk is the risk that the value of the loan will decline during the period between the time the loan is originated and the time of sale because of changes in market interest rates.
The Savings Bank generally sells all loans without recourse. The Savings Bank generally sells all conventional fixed-rate one- to four-family residential mortgage loans to the FHLMC, servicing retained. Such sales are generally without forward commitments, exposing the Savings Bank to pipeline risk generally for a period of 60 days. The Savings Bank's aggregate pipeline risk exposure typically amounts to $1.0 million or less at any one time. By retaining the servicing, the Savings Bank receives fees for performing the traditional services of processing payments, accounting for loan funds, and collecting and paying real estate taxes, hazard insurance and other loan-related items, such as private mortgage insurance. At December 31, 2001, the Savings Bank's servicing portfolio was $32.1 million. For the year ended December 31, 2001, loan servicing fees totaled $73,000. In addition, the Savings Bank retains certain amounts in escrow for the benefit of investors. The Savings Bank is able to invest these funds but is not required to pay interest on them. At December 31, 2001, such escrow balances totaled $86,000.
SFAS No. 125 requires a mortgage banking enterprise, which sells or securitizes loans and retains the related servicing rights, to allocate the total cost of the mortgage loans to the servicing rights and the loans (without the servicing rights) based on their relative fair values. Accordingly, future changes in the fair value of capitalized mortgage servicing rights may require the enterprise to reduce the carrying value of these rights by taking a charge against earnings. See Note 1 of Notes to Consolidated Financial Statements contained in Item 7 herein.
Periodically, the Savings Bank purchases interests in loan participations. At December 31, 2001, the Savings Bank had no purchased interests in any loan participations.
The following table sets forth total loans originated, sold and repaid during the periods indicated. No loans were purchased during the periods indicated.
Year Ended December 31,
-----------------------
2001 2000
------- -------
(In thousands)
Loans originated:
Real Estate Loans:
Residential(1)................... $19,995 $13,656
Construction .................... 689 1,681
Commercial....................... 5,746 4,256
Acquisition and development...... -- 511
------- -------
Total real estate loans........ 26,430 20,104
Commercial business loans.......... 3,587 8,454
Consumer loans:
Automobile........................ 3,081 1,901
Unsecured......................... 1,873 1,846
Second mortgage and other......... 4,852 3,648
------- -------
Total consumer loans........... 9,806 7,395
------- -------
Total loans originated....... 39,823 35,953
Loans sold:
Whole loans....................... 14,467 3,036
Participation loans............... -- --
------- -------
Total loans sold............... 14,467 3,036
Mortgage loan principal repayments. 12,762 8,455
Other loan prepayments and change
in unfunded loan commitments...... 13,157 18,690
------- -------
Net loan activity.................. (563) 5,772
------- -------
Total gross loans at end of period. $66,937 $67,500
======= =======
------------
(1) Includes loans originated for sale.
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Loan Commitments and Letters of Credit. The Savings Bank issues, without charge, commitments for fixed-and adjustable-rate single-family residential mortgage loans conditioned upon the occurrence of certain events. Such commitments are made in writing on specified terms and conditions and are honored for up to 60 days from application. As part of its commercial business lending activities, the Savings Bank issues commercial and standby letters of credit and receives annual fees averaging approximately 0.5% of the amount of the letter of credit. Letters of credit are an off-balance sheet contingency. At December 31, 2001, the Savings Bank had $5.0 million of outstanding net loan commitments, including unused portions on commercial business lines of credit, and $554,000 of unexpired commercial and standby letters of credit. See Note 14 of Notes to Consolidated Financial Statements contained in Item 7 herein.
Loan Origination and Other Fees. The Savings Bank, in most instances, receives loan origination fees and discount "points." Loan fees and points are a percentage of the principal amount of the mortgage loan which are charged to the borrower for funding the loan. The amount of points charged by the Savings Bank varies, though the range generally is between 1 and 2 points. Current accounting standards require fees received (net of certain loan origination costs) for originating loans to be deferred and amortized into interest income over the contractual life of the loan. Net deferred fees associated with loans that are prepaid are recognized as income at the time of prepayment. The Savings Bank had $21,000 of net deferred mortgage loan fees at December 31, 2001.
Nonperforming Assets and Delinquencies. When a borrower fails to make a required payment when due, the Savings Bank institutes collection procedures. The first notice is mailed to the borrower seven days after the payment due date and, if necessary, a second written notice follows after 16 days. Attempts to contact the borrower by telephone generally begin approximately 30 days after the payment due date. If a satisfactory response is not obtained, continuous follow-up contacts are attempted until the loan has been brought current. In most cases, delinquencies are cured promptly; however, if by the 90th day of delinquency, or sooner if the borrower is chronically delinquent and all reasonable means of obtaining payment on time have been exhausted, foreclosure, according to the terms of the security instrument and applicable law, is initiated. If management determines on the 90th day of delinquency that all remedies to cure the delinquency have been exhausted, the loan is placed on nonaccrual status and all previously recorded interest income is reversed. Consumer loans are charged off on the 120th day of delinquency.
The Savings Bank's Board of Directors is informed monthly as to the status of all mortgage and consumer loans that are delinquent 30 days or more, the status on all loans currently in foreclosure, and the status of all foreclosed and repossessed property owned by the Savings Bank.
The following table sets forth information with respect to the Savings Bank's nonperforming assets and restructured loans within the meaning of SFAS No. 15 at the dates indicated.
At December 31,
-----------------------
2001 2000
------- -------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential................................ $ 90 $ 25
Construction............................... -- --
Commercial................................. -- --
Acquisition and development................ -- --
---- ----
Total real estate loans.................. 90 25
Commercial business loans.................... -- --
Consumer loans............................... -- 60
---- ----
Total.................................... 90 85
Accruing loans which are contractually
past due 90 days or more:
Real estate loans:
Residential................................ 13 --
Construction............................... -- --
Commercial................................. -- --
Acquisition and development................ -- --
---- ----
Total real estate loans.................. 13 --
Commercial business loans................... 167 128
Consumer loans.............................. 10 --
---- ----
Total.................................... 190 128
---- ----
Total of nonaccrual and 90 days past
due loans................................... 280 213
Foreclosed property.......................... 187 138
---- ----
Total nonperforming assets............... $467 $351
==== ====
Restructured loans........................... -- --
Loans delinquent 90 days or more
to net loans................................ 0.42% 0.32%
Total loans delinquent 90 days
or more to total assets..................... 0.32% 0.26%
Total nonperforming assets to total assets... 0.53% 0.43%
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Gross interest income that would have been recorded for the year ended December 31, 2001 if nonaccrual loans had been current according to their original terms and had been outstanding throughout the year, and the amount of interest income on such loans that was included in net income for the year, were, in both cases, immaterial.
Foreclosed Property. At December 31, 2001, the Savings Bank had $187,000 of foreclosed property. See Note 1 of Notes to Consolidated Financial Statements contained in Item 7 herein for a discussion of the accounting methodology for foreclosed property.
Asset Classification. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a special mention category, described as assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. If an asset or portion thereof is classified loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified loss. A portion of general loan loss allowances established to cover possible losses related to assets classified 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.
The Savings Bank's senior officers meet monthly to review all classified assets, to approve action plans developed to resolve the problems associated with the assets and to review recommendations for new classifications, any changes in classifications and recommendations for reserves.
At December 31, 2001 and 2000, the aggregate amounts of the Savings Bank's classified assets (as determined by the Savings Bank), and of the Savings Bank's general and specific loss allowances for the period then ended, were as follows:
At December 31,
-----------------------
2001 2000
------- -------
(In thousands)
Classified assets:
Loss............................ $ 12 $ 13
Doubtful ....................... 56 30
Substandard assets ............. 1,291 726
Special mention................. 1,545 1,139
------ ------
$2,904 $1,908
====== ======
Loan loss allowance:
General loss allowances......... $ 860 $ 756
Specific loss allowances........ -- --
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At December 31, 2001, doubtful, substandard and special mention assets consisted primarily of one- to four-family residential mortgage loans.
Allowance for Loan Losses. The Savings Bank has established a systematic methodology for the determination of provisions for loan losses. The methodology is set forth in a formal policy and takes into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual loans. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Savings Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay the estimated value of any underlying collateral, and current economic conditions. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued and unpaid, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status.
General valuation allowances are maintained to cover probable but unidentified losses in the loan portfolio. Management reviews the adequacy of the allowance at least quarterly based on its knowledge of the portfolio including current asset classifications, the Savings Bank's write-off history, economic conditions affecting the real estate markets and industry standards.
Specific valuation allowances are established to absorb losses on loans for which full collectibility may not be reasonably assured. The amount of the allowance is based on the estimated value of the collateral securing the loan and other analyses pertinent to each situation.
Management believes that the allowance for loan losses at December 31, 2001 was adequate at that date. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.
The Savings Bank's market area consists of Warren County and surrounding counties. Real estate values have been stable in recent periods. There can be no assurance as to the future performance of real estate market, including those in which the Savings Bank primarily operates. A downturn in the middle Tennessee real estate market could have a material adverse effect on the Savings Bank's operations. For example, depressed real estate values may result in increases in nonperforming assets, hamper disposition of such nonperforming assets and result in losses upon such disposition. In addition, a downturn in the general economic conditions of the Savings Bank's primary market area could be expected to have a material adverse effect on the Savings Bank's financial condition and results of operations.
While the Savings Bank believes it has established its existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the Savings Bank's loan portfolio, will not request the Savings Bank to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Savings Bank's financial condition and results of operations.
The following table sets forth an analysis of the Savings Bank's gross allowance for possible loan losses for the periods indicated. Where specific loan loss reserves have been established, any difference between the loss reserve and the amount of loss realized has been charged or credited to current income.
Year Ended December 31,
-----------------------
2001 2000
------- -------
(Dollars in thousands)
Allowance at beginning of period............... $756 $649
---- ----
Provision for loan losses...................... 171 180
Recoveries:
Real estate loans:
Residential................................ 11 1
Construction............................... -- --
Commercial................................. -- --
Acquisition and development................ -- --
---- ----
Total real estate loans................. 11 1
Consumer loans............................... 27 17
---- ----
Total recoveries........................ 38 18
Charge-offs:
Real estate loans:
Residential................................ 55 41
Construction............................... -- --
Commercial................................. -- --
Acquisition and development................ -- --
---- ----
Total real estate loans................. 55 41
Commercial business loans.................... -- --
Consumer loans............................... 50 50
---- ----
Total charge-offs....................... 105 91
Net charge-offs......................... 67 73
---- ----
Balance at end of period................ $860 $756
==== ====
Ratio of allowance to total loans
outstanding at end of the period............. 1.28% 1.11%
Ratio of net charge-offs to average loans
outstanding during the period................ 0.10% 0.11%
Ratio of allowance for loan losses to
nonperforming assets......................... 184.15% 215.39%
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The following table sets forth the breakdown of the allowance for loan losses by loan category for the dates indicated.
At December 31,
------------------------------------------------------
2001 2000
-------------------------- --------------------------
As a % % of As a % % of
of Out- Loans in of Out- Loans in
standing Category standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
Real estate loans:
Residential........... $443 1.11% 59.46% $405 1.00% 59.38%
Construction.......... 25 1.50 2.51 21 1.25 2.48
Commercial............ 94 1.25 11.13 75 1.00 10.95
Acquisition and
development......... 9 1.50 0.92 14 1.25 1.64
Commercial business
loans................ 129 1.55 12.39 101 1.25 11.83
Consumer and
other loans.......... 160 1.75 13.59 140 1.50 13.72
---- ------ ---- ------
Total allowance
for loan losses.... $860 100.00% $756 100.00%
==== ====== ==== ======
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Investment Activities
The Savings Bank is permitted under federal law to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the FHLB-Cincinnati, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, the Savings Bank may also invest a portion of its assets in commercial paper and corporate debt securities. The Savings Bank is also required to maintain an investment in FHLB stock as a condition of membership in the FHLB-Cincinnati.
The Savings Bank is required under federal regulations to maintain a minimum amount of liquid assets. At December 31, 2001, the Savings Bank's regulatory liquidity of 17.40% exceeded the 4% required by OTS regulations. Investment securities provide liquidity for funding loan originations and enables the Savings Bank to improve the match between the maturities and repricing of its interest-rate sensitive assets and liabilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources" contained in Item 6 herein and "REGULATION."
The Savings Bank's President and Chief Executive Officer determines appropriate investments in accordance with the Board of Directors' approved investment policies and procedures. The Savings Bank's policies generally limit investments to U.S. Government and agency securities and mortgage-backed securities issued and guaranteed by FHLMC, FNMA and Government National Mortgage Association ("GNMA"). The Savings Bank's policies provide that investment purchases be ratified at monthly Board of Directors meetings. Investments are made based on certain considerations, which include the interest rate, yield, settlement date and maturity of the investment, the Savings Bank's liquidity position, and anticipated cash needs and sources (which in turn include outstanding commitments, upcoming maturities, estimated deposits and anticipated loan amortization and repayments). The effect that the proposed investment would have on the Savings Bank's credit and interest rate risk, and risk-based capital is also considered. From time to time, investment 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 the level of yield that will be available in the future, as well as management's projections as to the short-term demand for funds to be used in the Savings Bank's loan origination and other activities.
The following table sets forth the composition of the Savings Bank's securities portfolio at the dates indicated.
At December 31,
--------------------------------------------
2001 2000
-------------------- ---------------------
Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
----- --------- ----- ---------
(Dollars in thousands)
Available for sale:
FHLMC stock....................... $ 6 0.09% $ 6 0.10%
U.S. Government and
agency obligations.............. 4,000 57.91 3,992 64.00
Mortgage-backed securities........ 2,075 30.04 1,394 22.35
------ ------ ------ ------
Total available for sale...... 6,081 88.04 5,392 86.45
Held to maturity:
FHLB stock........................ 728 10.54 681 10.92
U.S. Government and
agency obligations.............. -- -- -- --
Mortgage-backed securities........ 98 1.42 164 2.63
------ ------ ------ ------
Total held to maturity........ 826 11.96 845 13.55
------ ------ ------ ------
Total............................. $6,907 100.00% $6,237 100.00%
====== ====== ====== ======
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At December 31, 2001, the FHLMC stock had an estimated fair value of $377,000, the portfolio of U.S. Government and agency securities (both available-for-sale and held-to-maturity) had an aggregate estimated fair value of $4.1 million and the portfolio of mortgage-backed securities (both available-for-sale and held-to-maturity) had an estimated fair value of $2.2 million.
At December 31, 2001, mortgage-backed securities consisted of FHLMC, FNMA and GNMA issues. At December 31, 2001, their amortized cost was $2.2 million and all had fixed-rates of interest. The mortgage-backed securities portfolio had coupon rates ranging from 6.0% to 8.5% and had a weighted average yield of 6.1% during the year ended December 31, 2001.
Mortgage-backed securities (which also are known as mortgage participation certificates or pass-through certificates) typically represent interests in pools of single-family or multi-family mortgages in which payments of both principal and interest on the securities are generally made monthly. The principal and interest payments on these mortgages are passed from the mortgage originators, through intermediaries (generally U.S. Government agencies and government sponsored enterprises) that pool and resell the participation interests in the form of securities, to investors such as the Savings Bank. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the FHLMC, FNMA and the GNMA. 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 fall within a specific range and have varying maturities. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. In addition, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize certain liabilities and obligations of the Savings Bank. These types of securities also permit the Savings Bank to optimize its regulatory capital because they have low risk weighting.
The actual maturity of a mortgage-backed security may be less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and may result in a loss of any premiums paid and thereby reduce the net yield on such securities. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Savings Bank may be subject to reinvestment risk because, to the extent that the Savings Bank's mortgage-backed securities amortize or prepay faster than anticipated, the Savings Bank may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate.
The following table sets forth the maturities and weighted average yields of the debt securities in the Savings Bank's investment and mortgage-backed securities portfolio at December 31, 2001.
Less Than Over One to Over Five to Over Ten
One Year Five Years Ten Years Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Available for Sale:
FHLMC Stock................. $ 6 58.16% $ -- --% $ -- --% $ -- --%
U.S. Government and
agency obligations........ -- -- 3,000 5.50 500 7.00 500 8.00
Mortgage-backed
securities................ -- -- -- -- 1,028 6.25 1,047 6.50
Held to Maturity:
FHLB Stock.................. 728 6.81 -- -- -- -- -- --
U.S. Government and
agency obligations........ -- -- -- -- -- -- -- --
Mortgage-backed
securities................. -- -- 98 7.23 -- -- -- --
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The Savings Bank's investment policy does not permit investment in such "off balance sheet" derivative instruments such as "forwards," "futures," "options" or "swaps.
At December 31, 2001, the Savings Bank did not hold any "high risk mortgage securities" subject to OTS Thrift Bulletin Number 52. The Savings Bank also evaluates its mortgage-backed securities portfolio annually for compliance with applicable regulatory requirements, including testing for identification of high risk investments pursuant to Federal Financial Institutions Examination Council standards.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the Savings Bank's funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within the Savings Bank's primary market area through the offering of a broad selection of deposits as set forth in the following table. In determining the terms of its deposit accounts, the Savings Bank considers current market interest rates, profitability to the Savings Bank, matching deposit and loan products and its customer preferences and concerns. The Savings Bank's deposit mix and pricing is generally reviewed weekly. The Savings Bank does not accept brokered deposits but does accept deposits from municipalities and other public entities. At December 31, 2001, such public deposits amounted to $1.7 million. Substantially all of the Savings Bank's depositors are residents of the State of Tennessee.
The following table sets forth information concerning the Savings Bank's time deposits and other interest-bearing deposits at December 31, 2001.
Weighted
Average Percentage
Interest of Total
Rate Term Checking and Savings Deposits Amount Minimum Deposits
---- ---- ----------------------------- ------ ------- --------
1.80% -- NOW accounts $ 8,023 $ 500 11.83%
1.94 -- Savings accounts 8,352 10 12.32
2.09 -- Money market deposit 2,093 1,000 3.09
Certificates of Deposit
-----------------------
2.18 3 month Fixed-term, fixed-rate 677 1,000 1.00
3.23 6 month Fixed-term, fixed-rate 7,315 1,000 10.79
4.47 12 month Fixed-term, fixed-rate 21,515 500 31.73
6.24 18 month Fixed-term, fixed rate 5,177 500 7.63
5.70 2 year Fixed-term, fixed-rate 4,188 500 6.17
5.28 3 year Fixed-term, fixed-rate 3,008 500 4.43
5.68 4 year Fixed-term, fixed-rate 1,830 500 2.70
5.61 5 year Fixed-term, fixed-rate 2,696 500 3.98
5.46 18 month Fixed-term, fixed-rate IRA 2,413 10 3.56
2.45 18 month Fixed-term, variable-rate IRA 526 10 0.77
------- ------
Total $67,813 100.00%
======= ======
|
The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity at December 31, 2001. Jumbo certificates of deposit require minimum deposits of $100,000.
Maturity Period Certificates of Deposit
--------------- -----------------------
(In thousands)
Three months or less.............. $ 2,859
Over three through six months..... 4,674
Over six through twelve months.... 3,562
Over twelve months................ 2,079
-------
Total.......................... $13,174
=======
20
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The following table sets forth the balances and changes in dollar amounts of deposits in the various types of accounts offered by the Savings Bank at the dates indicated.
At December 31,
------------------------------------------------
2001 2000
----------------------------- ----------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
------ ----- ---------- ------ -----
(Dollars in thousands)
Non-interest bearing
demand accounts........... $8,032 10.59% $2,035 $5,997 9.26%
NOW accounts................ 8,023 10.58 1,589 6,434 9.93
Savings accounts............ 8,352 11.01 1,937 6,415 9.90
Money market deposit
accounts.................. 2,093 2.76 149 1,944 3.00
Fixed-rate certificates
which mature:
Within 1 year............. 40,277 53.10 7,784 32,493 50.16
After 1 year, but
within 2 years.......... 5,102 6.73 (3,898) 9,000 13.90
After 2 years, but
within 3 years.......... 2,141 2.82 756 1,385 2.14
After 3 years but
within 4 years.......... 786 1.04 17 769 1.19
After 4 years but
within 5 years.......... 1,039 1.37 700 339 0.52
------- ------ ------- ------- ------
Total................$75,845 100.00% $11,069 $64,776 100.00%
======= ====== ======= ======= ======
|
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank classified by rates at the dates indicated.
At December 31,
---------------------
2001 2000
---- ----
(In thousands)
1.01 - 2.00%............ $ 185 $ --
2.01 - 3.00%............ 6,408 --
3.01 - 4.00%............ 6,897 --
4.01 - 5.00%............ 16,837 2,830
5.01 - 6.00%............ 8,625 9,561
6.01 - 7.00%............ 10,388 31,590
7.01 - 8.00%............ 5 5
------- -------
Total................... $49,345 $43,986
======= =======
|
Time Deposits by Maturities
The following table sets forth the amount and maturities of time deposits at December 31, 2001.
Amount Due
------------------------------------------------
Percent
Less of Total
Than Certi-
One 1-2 2-3 3-4 After 4 ficate
Year Years Years Years Years Total Accounts
---- ----- ----- ----- ----- ----- --------
(Dollars in thousands)
1.01 - 2.00%..... $ 185 $ -- $ -- $ -- $ -- $ 185 0.37%
2.01 - 3.00%..... 5,977 431 -- -- -- 6,408 12.99
3.01 - 4.00%..... 5,315 1,004 377 122 79 6,897 13.98
4.01 - 5.00%..... 13,950 1,634 447 53 753 16,837 34.12
5.01 - 6.00%..... 5,936 1,154 1,013 321 201 8,625 17.48
6.01 - 7.00%..... 8,913 879 305 285 6 10,388 21.05
7.01 - 8.00%..... -- -- -- 5 -- 5 0.01
------- ------ ------ ---- ------ ------- ------
Total............ $40,276 $5,102 $2,142 $786 $1,039 $49,345 100.00%
======= ====== ====== ==== ====== ======= ======
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Savings Activities
The following table sets forth the savings activities of the Savings Bank for the periods indicated.
Year Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands)
Beginning balance...........$64,776 $57,455
Net increase (decrease)
before interest credited... 8,820 5,218
Interest credited .......... 2,249 2,103
Net increase in savings
deposits................... 11,069 7,321
------- -------
Ending balance..............$75,845 $64,776
======= =======
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Borrowings. Savings deposits are the primary source of funds for the Savings Bank's lending and investment activities and for its general business purposes. The Savings Bank may rely upon advances from the FHLB-Cincinnati to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB-Cincinnati has served as the Savings Bank's primary borrowing source. Advances from the FHLB-Cincinnati are typically secured by the Savings Bank's first mortgage loans. At December 31, 2001, the Savings Bank had $3.0 million of borrowings from the FHLB-Cincinnati at a weighted average rate of 5.63%. Such borrowings have contractual maturities through the year ending December 31, 2010 and are secured by a blanket lien on $3.8 million of one- to four-family residential real estate loans and by FHLB-Cincinnati stock with a carrying value of $727,500 at December 31, 2001. See Note 8 of Notes to Consolidated Financial Statements contained in Item 7 herein.
The FHLB-Cincinnati functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Savings Bank is required to own capital stock in the FHLB-Cincinnati and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. government) provided certain creditworthiness standards have been met. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit.
The following tables set forth certain information regarding borrowings by the Savings Bank at the end of and during the periods indicated.
At December 31,
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2001 2000
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(Dollars in thousands)
FHLB-Cincinnati advances outstanding....... $3,000 $7,500
Weighted average rate paid on
FHLB-Cincinnati advances ................ 5.63% 6.07%
Maximum amount of FHLB-Cincinnati
advances at any month end ............... 6,500 7,500
Approximate average FHLB-Cincinnati
advances outstanding .................... 4,800 5,850
Approximate weighted average rate paid on
FHLB-Cincinnati advances................. 5.50% 5.30%
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(1) Computed using the weighted rates of each individual transaction.
Trust Department
The OTS granted trust powers to the Savings Bank on July 14, 1998. The Savings Bank is one of the few banks in its primary market area providing a broad range of trust services. These services include acting as trustee under a living trust, a Standby Trust or Testamentary Trust; acting as personal representative; agency services, including custody accounts, agent for the trustee, and agent for the personal representative; and trustee and agent services for accounts subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). In addition to providing fiduciary and investment advisory services, the Savings Bank provides employee benefit services, such as Self-Directed Individual Retirement Accounts ("IRAs"). At December 31, 2001, trust assets under management totalled approximately $69.5 million.
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and supervision by the OTS as its chartering agency, and the FDIC, as the insurer of its deposits. The activities of federal savings institutions are governed by the Home Owners Loan Act and, in certain respects, the Federal Deposit Insurance Act, and the regulations issued by the OTS and the FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various statutory and regulatory capital requirements. In addition, the Savings Bank's relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Savings Bank's mortgage documents. The Savings Bank is required to file reports with the OTS and the FDIC 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 financial institutions. There are periodic examinations by the OTS and the FDIC to review the Savings Bank's compliance with various regulatory requirements. 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. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Corporation, the Savings Bank and their operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of the Treasury subject to the general oversight of the Secretary of the Treasury. The OTS has extensive authority over the operations of savings associations. Among other functions, the OTS issues and enforces regulations affecting federally insured savings associations and regularly examines these institutions.
All savings associations are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi-annual basis, are determined based on the savings association's total assets, including consolidated subsidiaries. The Savings Bank's OTS assessment for the fiscal year ended December 31, 2001 was $26,974.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB-Cincinnati,, which is one of 12 regional FHLBs that administers the home financing credit function of savings institutions. 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. The Savings Bank, as a member of the FHLB-Cincinnati is required to acquire and hold shares of capital stock in the FHLB-Cincinnati in an amount equal to the greater of (i) 1.0% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Cincinnati. The Savings Bank is in compliance with this requirement with an investment in FHLB-Cincinnati stock of $727,500 at December 31, 2001.
The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid in the past and could do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future.
Federal Deposit Insurance Corporation. The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry. The FDIC maintains two separate insurance funds: the Bank Insurance Fund ("BIF") and the SAIF. The Savings Bank's deposit accounts are insured by the FDIC under the SAIF to the maximum extent permitted by law. As insurer of the Savings Bank's deposits, the FDIC has examination, supervisory and enforcement authority over all savings associations.
The FDIC has adopted a risk-based system for assessing deposit insurance premiums. The FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period, and one of three supervisory subcategories within each capital group. The three capital categories are well capitalized, adequately capitalized and undercapitalized. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points. However, SAIF insured institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. This amount is currently equal to about 2.1 basis points for each $100 in domestic deposits for both BIF and SAIF members. These assessments, which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature in the year 2015.
The FDIC is authorized to raise the assessment rates in certain circumstances. The FDIC has exercised this authority several times in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Savings Bank.
Under the FDIA, 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 OTS. Management of the Savings Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable accounts deposit plus short-term borrowings. This liquidity requirement is currently 4%, but may be changed from time to time by the OTS to any amount within the range of 4% to 10%. Monetary penalties may be imposed for failure to meet liquidity requirements. The Savings Bank has never been subject to monetary penalties for failure to meet its liquidity requirements.
Prompt Corrective Action. The OTS is required to take certain supervisory actions against undercapitalized savings associations, the severity of which depends upon the institution's degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." An institution that has a total risk-based capital ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the OTS is required to appoint a receiver or conservator for a savings institution that is "critically undercapitalized." OTS regulations also require that a capital restoration plan be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company in an amount of up to the lesser of 5% of the institution's assets or the amount which would bring the institution into compliance with all capital standards. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS also could take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At December 31, 2001, the Savings Bank was categorized as "well capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard.
Qualified Thrift Lender Test. All savings associations, including the
Savings Bank, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (total assets less:
(i) specified liquid assets up to 20% of total
assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test, such assets primarily consist of residential housing related loans and investments. At December 31, 2001, the Savings Bank met the test and its QTL percentage was 84.3%.
Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "-- Savings and Loan Holding Company Regulations."
Capital Requirements. Federally insured savings associations, such as the Savings Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). At December 31, 2001, the Savings Bank had tangible capital of $8.6 million, or 9.8% of adjusted total assets, which is approximately $7.3 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% to 4% of adjusted total assets, depending on an institution's supervisory rating. Core capital generally consists of tangible capital. At December 31, 2001, the Savings Bank had core capital equal to $8.6 million, or 9.8% of adjusted total assets, which is $6.0 million above the minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to- four family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by FNMA or FHLMC.
On December 31, 2001, the Savings Bank had total risk-based capital of approximately $9.6 million, including $8.6 million in core capital and $1.0 million in qualifying supplementary capital, and risk-weighted assets of $58.1 million, or total capital of 16.5% of risk-weighted assets. This amount was $2.6 million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Corporation or the Savings Bank may have a substantial adverse effect on their operations and profitability.
Limitations on Capital Distributions. The OTS imposes various restrictions on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. The OTS also prohibits a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result of such action, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with the association's mutual to stock conversion.
The Savings Bank may make a capital distribution without OTS approval provided that the Savings Bank notify the OTS 30 days before it declares the capital distribution and that the following requirements are met: (i) the Savings Bank has a regulatory rating in one of the two top examination categories, (ii) the Savings Bank is not of supervisory concern, and will remain adequately or well capitalized, as defined in the OTS prompt corrective action regulations, following the proposed distribution, and (iii) the distribution does not exceed the Savings Bank's net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid). If the Savings Bank does not meet these stated requirements, it must obtain the prior approval of the OTS before declaring any proposed distributions.
In the event the Savings Bank's capital falls below its regulatory requirements or the OTS notifies it that it is in need of more than normal supervision, the Savings Bank's ability to make capital distributions will be restricted. In addition, no distribution will be made if the Savings Bank is notified by the OTS that a proposed capital distribution would constitute an unsafe and unsound practice, which would otherwise be permitted by the regulation.
Loans to One Borrower. Federal law provides that savings institutions are generally subject to the national bank limit on loans to one borrower. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. At December 31, 2001, the Savings Bank's limit on loans to one borrower was $1.3 million. At December 31, 2001, the Savings Bank's largest single loan to one borrower was $600,000, which was performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of the Savings Bank include the Corporation and any company which is under common control with the Savings Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment Act ("CRA"), all federally-insured financial institutions have a continuing and affirmative obligation consistent with safe and sound operations to help meet all the credit needs of its delineated community. The CRA does not establish specific lending requirements or programs nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to meet all the credit needs of its delineated community. The CRA requires the federal banking agencies, in connection with regulatory examinations, to assess an institution's record of meeting the credit needs of its delineated community and to take such record into account in evaluating regulatory applications to establish a new branch office that will accept deposits, relocate an existing office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution, among others. The CRA requires public disclosure of an institution's CRA rating. The Savings Bank received a "satisfactory" rating as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1.1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Savings and Loan Holding Company Regulations
The Corporation is a unitary savings and loan holding company subject to regulatory oversight of the OTS. Accordingly, the Corporation 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 Corporation and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings association.
Acquisitions. Federal law and OTS regulations issued thereunder generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring more than 5% of the voting stock of any other savings association or savings and loan holding company or controlling the assets thereof. They also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the
Corporation generally is not subject to activity restrictions. If the
Corporation acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company and the activities of the Savings Bank and
any other subsidiaries (other than the Savings Bank or any other SAIF insured
savings association) would generally become subject to additional
restrictions. There generally are more restrictions on the activities of a
multiple savings and loan holding company than on those of a unitary savings
and loan holding company. Federal law provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not
an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above also must be
approved by the OTS prior to being engaged in by a multiple savings and loan
holding company.
Qualified Thrift Lender Test. If the Savings Bank fails the qualified thrift lender test, within one year the Corporation must register as, and will become subject to, the significant activity restrictions applicable to bank holding companies. See "-- Federal Regulation of Savings Associations Qualified Thrift Lender Test" for information regarding the Savings Bank's qualified thrift lender test.
TAXATION
Federal Taxation
General. The Company and the Savings Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Savings Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Savings Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings Bank which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrift") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Savings Bank's deductions with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Savings Bank's actual loss experience, or a percentage equal to 8% of the Savings Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the non-qualifying reserve. Due to the Savings Bank's loss experience, the Savings Bank generally recognized a bad debt deduction equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules eliminated the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also required that all institutions recapture all or a portion of their bad debt reserves added since the
base year (last taxable year beginning before January 1, 1988). The Savings Bank has no post-1987 reserves subject to recapture. For taxable years beginning after December 31, 1995, the Savings Bank's bad debt deduction will be determined under the experience method using a formula based on actual bad debt experience over a period of years. The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend distributions" to the Company, such distributions will be considered to result in distributions from the balance of its bad debt reserve as of December 31, 1987 (or a lesser amount if the Savings Bank's loan portfolio decreased since December 31, 1987) and then from the supplemental reserve for losses on loans ("Excess Distributions"), and an amount based on the Excess Distributions will be included in the Savings Bank's taxable income. Nondividend distributions include distributions in excess of the Savings Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Savings Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Savings Bank's bad debt reserve. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, after the Conversion, the Savings Bank makes a "nondividend distribution," then approximately one and one-half times the Excess Distribution would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). See "Regulation" for limits on the payment of dividends by the Savings Bank. The Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Savings Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Savings Bank, whether or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Savings Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Savings Bank will not file a consolidated tax return, except that if the Company or the Savings Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.
State Taxation
The Tennessee franchise tax rate applicable to the Savings Bank is 0.25% of the total base (capital stock and retained earnings). Under Tennessee regulations, bad debt deductions are deductible from the excise tax. There have not been any audits of the Savings Bank's state tax returns during the past five years.
Audits
The Company's income tax returns have not been audited by federal or state authorities within the last five years. For additional information regarding income taxes, see Note 9 of Notes to Consolidated Financial Statements contained in Item 7 herein.
Personnel
As of December 31, 2001, the Savings Bank had 34 full-time and 10 part-time employees, none of whom are represented by a collective bargaining unit. The Savings Bank believes its relationship with its employees is good.
At December 31, 2001, the net book value of the Savings Bank's premises and equipment totaled $1.9 million.
The Savings Bank's main office consists of two buildings which are located at 306 West Main Street, McMinnville, Tennessee. The Savings Bank's operations are conducted at one of the buildings, which opened in 1969, and consists of 7,140 square feet. An ATM is installed at this building. The other building houses the Savings Bank's Trust and Operations Center, which opened in fiscal 2000 and consists of 8,960 square feet. The Savings Bank owns the buildings and real estate.
On March 10, 1997, the Savings Bank opened a 1,560 square foot branch office at 1017 New Smithville Highway, McMinnville, Tennessee. The Savings Bank owns the building and real estate. An ATM also is installed at this location.
At December 31, 2001, the Savings Bank also operated two proprietary ATM's at the Country Club Market and Power's Four Lane Market near McMinnville, Tennessee. In March 2002, the ATM at the County Club Market was closed.
Periodically, there have been various claims and lawsuits involving the Savings Bank, mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Savings Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Savings Bank's business. The Savings Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Savings Bank.
No matters were submitted to a vote of security holders during the quarter ended December 31, 2001.
PART II
The Company's common stock is traded on the over-the-counter market through the OTC "Electronic Bulletin Board" under the symbol of "SCYT". As of December 31, 2001, there were approximately 237 stockholders of record and 426,534 shares of common stock outstanding (including unreleased Employee Stock Ownership Plan ("ESOP") shares of 19,204 and treasury stock of 18,104). Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the OTS regulations. However, institutions that have converted to the stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in accordance with the OTS regulations. To date, the Company has not established a policy of paying regular cash dividends.
The following table sets forth market price range of the Company's common stock for the four quarters of fiscal 1999, 2000, and 2001.
High Low Dividends
Fiscal 1999 ---- --- ---------
First Quarter 18.000 16.250 N/A
Second Quarter 16.875 15.000 N/A
Third Quarter 15.750 15.500 .25/share
Fourth Quarter 15.750 15.500 N/A
Fiscal 2000
First Quarter 16.000 15.500 N/A
Second Quarter 15.500 15.250 .275/share
Third Quarter 15.250 13.000 N/A
Fourth Quarter 15.500 13.500 N/A
Fiscal 2001
First Quarter 13.875 13.875 N/A
Second Quarter 16.500 13.750 .30/share
Third Quarter 17.950 16.500 N/A
Fourth Quarter 17.620 16.650 N/A
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of the financial condition and results of operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto contained in Item 7 herein.
Operating Strategy
The business of the Bank consists principally of attracting deposits from the general public and using such deposits to originate mortgage loans secured primarily by one- to four-family residences. The Bank also originates construction, consumer, commercial business, acquisition and development, and commercial real estate loans. The Bank invests in investment grade federal agency securities and mortgage-backed securities. The Bank intends to continue to fund its assets primarily with deposits, although FHLB advances may be used as a supplemental source of funds.
Operating results are dependent primarily on net interest income, which is the difference between the income earned on its interest-earning assets, such as loans and investments, and the cost of its interest-bearing liabilities, consisting of deposits and FHLB advances. Operating results are also significantly affected by general economic and competitive conditions, primarily changes in market interest rates, governmental legislation and policies concerning monetary and fiscal affairs and housing, as well as financial institutions and the attendant actions of the regulatory authorities.
The Bank's strategy is to operate as a conservative, well-capitalized, profitable community-oriented financial institution dedicated to financing home ownership and other consumer and local business needs and to provide quality service to all customers. The Bank believes that it has successfully implemented its strategy by (i) maintaining strong capital levels, (ii) maintaining effective control over operating expenses to attempt to achieve profitability under differing interest rate scenarios, (iii) limiting interest rate risk, (iv) emphasizing local loan originations, and (v) emphasizing high-quality customer service with a competitive fee structure.
Interest Rate Risk Management
The Bank's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating interest rates. The Bank has sought to reduce exposure of its earnings to changes in market interest rates by managing the mismatch between asset and liability maturities and interest rates. The principal element in achieving the objective is to increase the interest-rate sensitivity of the Bank's assets by originating loans with interest rates subject to periodic adjustment to market conditions. The Bank relies on retail deposits as its primary external source of funds. Management believes retail deposits, compared to brokered deposits and long-term borrowings, reduce the effects of interest rate fluctuations because these deposits generally represent a more stable source of funds.
Interest Rate Sensitivity of Net Portfolio Value
The following table is provided to the Bank by the OTS and illustrates the percent change in net portfolio value ("NPV") as of December 31, 2001, based on OTS assumptions, that would occur in the event of an immediate change in interest rates, with no effect given to any steps that management of the Bank may take to counter the effect of the interest rate movements.
Net Portfolio as % of
Basis Net Portfolio Value Portfolio Value of Assets
Point ("bp") --------------------------------- --------------------------
Change $ Amount $ Change(1) % Change NPV Ratio(2) Change(3)
------ -------- ----------- -------- ------------ ---------
(Dollars in thousands)
+300 bp $ 13,573 $ 262 2% 14.77% 52 bp
+200 bp 13,587 276 2% 14.70% 44 bp
+100 bp 13,500 189 1% 14.52% 27 bp
0 bp 13,311 14.25%
-100 bp 13,025 -286 -2% 13.89% -36 bp
-200 bp See (4)
-300 bp See (4)
|
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from principal and interest payments on loans. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank's primary investing activity is loan originations. The Bank maintains liquidity levels adequate to fund loan commitments, investment opportunities, deposit withdrawals and other financial commitments. At December 31, 2001, the Bank's liquidity ratio was 17.40%, which was in excess of the OTS required ratio of 4.0%. At December 31, 2001, there were no material commitments for capital expenditures and the Bank had unfunded loan commitments of approximately $5.0 million and outstanding commercial letters of credit of $554,000. At December 31, 2001, management had no knowledge of any trends, events or uncertainties that will have or are likely to have material effects on the liquidity, capital esources or operations of the Bank. Further, at December 31, 2001, management was not aware of any current recommendations by the regulatory authorities, which, if implemented, would have such an effect.
Comparison of Financial Condition at December 31, 2001 and 2000
Total assets increased $7.1 million to $88.5 million at December 31, 2001 from $81.4 million at December 31, 2000. Loans receivable, net, decreased $700,000 from $66.7 million at December 31, 2000 to $66.0 million at December 31, 2001 as a result of a decrease in mortgage loans of $800,000, an increase in commercial business loans of $300,000 and a decrease in consumer loans of $200,000. Deposits increased $11.0 million from $64.8 million at December 31, 2000 to $75.8 million at December 31, 2001. The increase is primarily attributable to an increase in personal checking accounts and certificates of deposit. Stockholders' equity increased $800,000 to $9.3 million at December 31, 2001 from $8.5 million at December 31, 2000.
Comparison of Operating Results for the Years Ended December 31, 2001 and 2000
Net Income. Net income for the year ended December 31, 2001 was $857,000 compared to $804,000 for the year ended December 31, 2000. This $53,000 increase was primarily a result of the increase in net interest income from loans receivable and non-interest income offset to a lesser degree by an increase in other expenses.
Net Interest Income. Net interest income after provision for loan losses for the year ended December 31, 2001 increased $78,000, or 2.7%, to $3.0 million from $2.9 million for the year ended December 31, 2000 as a result of an increase in total interest income that more than offset an increase in total interest expense. Total interest income increased $233,000, or 3.7%, to $6.5 million for the year ended December 31, 2001 from $6.2 million a year earlier primarily as a result of an increase in the average balance of loans receivable, net. Interest expense increased $163,000, or 5.2%, to $3.3 million for the year ended December 31, 2001 from $3.1 million a year earlier primarily as a result of an increase in the average balance of deposits which were used to fund loan demand and investments.
Provision for Loan Losses. Provision for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for estimated loan losses based on management's evaluation of the collectibility of the loan portfolio, including past loan loss experience, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. The provision for loan losses decreased $9,000, or 5.0%, to $171,000 for the year ended December 31, 2001 from $180,000 a year earlier. Management deemed the allowance for loan losses adequate at December 31, 2001.
Non Interest Income. Non interest income increased $303,000, or 30.8%, to $1.3 million for the year ended December 31, 2001 from $987,000 for the year ended December 31, 2000. Service charges, commissions, and fees increased $45,000 to $382,000 in fiscal 2001 from $337,000 in fiscal 2000 primarily as a result of an increase in service charges on checking accounts. Gain on sale of loans increased $252,000 to $339,000 in fiscal 2001 from $87,000 in fiscal 2000 as a result of an increase in loan originations caused by the low interest rate environment. Trust service fees decreased $22,000 to $441,000 in fiscal 2001 from $463,000 in fiscal 2000 as a result of a decline in market value of assets caused by a decline in the stock market.
Other Expenses. Other expenses increased $293,000, or 11.1%, to $2.9 million for the year ended December 31, 2001 from $2.6 million for the year ended December 31, 2000. Compensation and benefits increased $105,000 to $1.4 million in fiscal 2001 from $1.3 million in fiscal 2000 as a result of hiring additional personnel and annual salary increases. Occupancy and equipment expense increased $31,000 to $322,000 in fiscal 2001 from $291,000 in fiscal 2000 as a result of increased depreciation expense. Data processing and trust service fees increased $34,000 to $393,000 in fiscal 2001 from $359,000 in fiscal 2000 as a result of offering additional services. Other expenses increased $97,000 to $609,000 in fiscal 2001 from $512,000 in fiscal 2000 primarily as a result of increased office and stationary expenses, expenses related to other real estate owned, and other increased costs resulting from an increase in assets.
Income Tax Expense. Income tax expense increased $36,000, or 7.3%, to $529,000 for the year ended December 31, 2001 compared to $493,000 a year earlier, which was a result of higher earnings without a corresponding increase in expenses.
Average Balances, Interest and Average Yield/Cost. The earnings of the Bank depend largely on the spread between the yield on interest-earning assets (primarily loans and investments) and the cost of interest-bearing liabilities (primarily deposit accounts and borrowings), as well as the relative size of the Bank's interest-earning assets and interest-bearing liabilities.
The following table sets forth, for the periods indicated, information regarding average balances of
assets and liabilities as well as the total dollar amounts of interest income from average interest-earning
assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities.
Average balances for a period have been calculated using the average of quarter-end balances during such
period.
At Year Ended December 31,
December 31, ------------------------------------------------------------
2001 2001 2000
---- ----------------------------- ---------------------------
Interest Interest
Yield/ Average and Yield/ Average and Yield/
Cost Balance Dividends Cost Balance Dividends Cost
---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable 7.92% $68,603 $6,005 8.75% $63,581 $5,770 9.08%
Mortgage-backed securities 6.08 1,577 98 6.21 1,723 115 6.79
Investment securities 5.67 5,643 324 5.74 4,828 309 6.40
FHLB stock 5.55 705 48 6.81 657 48 7.31
----- ------- ------ ----- ------- ------ -----
Total interest
earning assets 7.72 76,528 6,475 8.46 70,789 6,242 8.82
Noninterest-earning assets 8,380 5,984
------- -------
Total assets 84,908 76,773
======= =======
Interest-bearing liabilites:
Passbook, NOW and Money
Market Accounts 1.83 16,407 405 2.47 14,193 423 2.98
Certificates of deposit 4.66 47,207 2,609 5.53 41,472 2,382 5.74
----- ------- ------ ----- ------- ------ -----
Total deposits 4.17 63,614 3,014 4.74 55,665 2,805 5.04
FHLB advances 5.63 4,800 264 5.50 5,850 310 5.30
----- ------- ------ ----- ------- ------ -----
Total interest-
bearing liabilities 4.24 68,414 3,278 4.79 61,515 3,115 5.06
------- ------ ------- ------
Noninterest-bearing
liabilities 7,610 7,249
------- -------
Total liabilities 76,024 68,764
Equity 8,884 8,009
------- -------
Total liabilities
and equity $84,908 $76,773
======= =======
Net interest income $3,197 $3,127
====== ======
Interest rate spread 3.48% 3.67% 3.76%
===== ===== =====
Net interest margin 4.18% 4.07%
===== =====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 111.86% 115.08%
====== ======
|
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on the net interest income of
the Bank. Information is provided with respect to (i) effects on net interest income attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume); (iii) changes in rate/volume
(changes in rate multiplied by change in volume); and (iv) the net change (the sum of the prior columns).
Year Ended December 31, Year Ended December 31,
2001 Compared to Year 2000 Compared to Year
Ended December 31, 2000 Ended December 31, 1999
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------- -------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In thousands)
Interest-earning assets:
Loans receivable (1) $(210) $450 $(17) $223 $151 $672 $21 $844
Mortgage-backed and
related securities (10) (10) 1 (19) 4 (28) (1) (25)
Investment securities (32) 52 (5) 15 1 51 1 53
Other interest-earning
assets (3) 4 - 1 2 3 - 5
----- ---- ---- ---- ---- ---- ---- ----
Total net change in
income on interest-
earning assets (255) 496 (21) 220 158 698 21 877
----- ---- ---- ---- ---- ---- ---- ----
Interest-bearing liabilities:
Passbook, NOW and
money market
accounts (72) 66 (11) (17) - 63 - 63
Certificates of deposits (88) 330 (12) 230 208 223 24 455
FHLB advances 12 (56) (2) (46) 17 (15) (1) 1
----- ---- ---- ---- ---- ---- ---- ----
Total net change in
expense on
interest-bearing
liabilities (148) 340 (25) 167 225 271 23 519
----- ---- ---- ---- ---- ---- ---- ----
Net increase (decrease)
in net interest income $(107) $156 $ 4 $ 53 $(67) $427 $ (2) $358
===== ==== ==== ==== ==== ==== ==== ====
====================================================================================================
(1) Does not include interest on loans 90 days or more past due.
|
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Impact of Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management adopted SFAS No. 140 effective April 1, 2001, as required, without material impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations," which requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. The pooling-of-interests method of accounting is prohibited except for combinations initiated before June 30, 2001. The remaining provisions of SFAS No. 141 relating to business combinations accounted for by the purchase method, including identification of intangible assets, accounting for negative goodwill, financial statement presentation disclosure, are effective for combinations completed after June 30, 2001. Management adopted SFAS no. 141 effective July 1, 2001, as required, without material effect on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Intangible Assets," which prescribes accounting for all purchased goodwill and intangible assets. Pursuant to SFAS No. 142, acquired goodwill is not amortized, but is tested for impairment at the reporting unit level annually and whenever an impairment indicator arises. All goodwill should be assigned to reporting units that are expected to benefit from the goodwill. Goodwill impairment should be tested with a two-step approach. First, the fair value of the reporting unit should be compared to its carrying value, including goodwill. If the reporting unit's carrying value exceeds its fair value, then any goodwill impairment should be measured as the excess of the goodwill's carrying value over its implied fair value. The implied value of goodwill should be calculated in the same manner as goodwill is calculated for a business combination, using the reporting unit's fair value as the "purchase price." Therefore, the goodwill's implied fair value will be the excess of the "purchase price" over the amounts allocated to assets, including unrecognized intangible assets, and liabilities of the reporting unit. Goodwill impairment losses should be reported in the income statement as a separate line item within operations, except for such losses included in the calculation of a gain or loss from discontinued operations.
An acquired intangible asset, other than goodwill, should be amortized over its useful economic life. The useful life of an intangible asset is indefinite if it extends beyond the foreseeable horizon. If an asset's life is indefinite, the asset should not be amortized until the life is determined to be finite. Intangible assets being amortized should be tested for impairment in accordance with SFAS No. 121. Intangible assets not being amortized should be tested for impairment annually and whenever there are indicators of impairment, by comparing the asset's fair value to its carrying amount.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early adoption is permitted for companies with fiscal years beginning after March 15, 2001, but only if the first quarter financial statements have not previously been issued. SFAS No. 142 is not expected to have a material effect on the Company's financial position or results of operations.
Item 7. Financial Statements
-----------------------------
Page
----
Independent Auditors Report*.................................... 40
Consolidated Statements of Financial Condition as
of December 31, 2001 and 2000.............................. 41
Consolidated Statements of Income for the Years Ended
December 31, 2001 and 2000................................. 42
Consolidated Statements of Cash Flows For the Years
Ended December 31, 2001 and 2000........................... 43
Consolidated Statements of Stockholders' Equity For
the Years Ended December 31, 2001 and 2000................. 44
Notes to Consolidated Financial Statements...................... 45
|
* All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained herein.
[Housholder, Artman and Associates, P.C. Letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors of
Security Bancorp, Inc.
and Subsidiary
We have audited the accompanying consolidated statements of financial condition of Security Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000, and the results of their operations, changes in stockholders' equity and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/Housholder, Artman and Associates, P.C. Letterhead January 24, 2002 |
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2001 AND 2000
2001 2000
------------- -------------
ASSETS
Cash and cash equivalents $ 12,060,908 $ 5,068,907
Investment securities:
Available-for-sale, at fair value 4,445,632 4,385,060
Mortgage-backed securities:
Available-for-sale, at fair value 2,102,759 1,386,074
Held-to-maturity, at amortized cost -
fair value of $101,312 (2001) and
$164,701 (2000) 98,167 164,633
Loans receivable, net 66,056,394 66,729,917
Interest receivable, net 622,812 682,882
Premises and equipment, net 1,917,499 1,805,717
Real estate owned, net 186,721 138,100
Federal Home Loan Bank stock, at cost 727,500 680,600
Other assets 309,382 319,100
------------- -------------
Total assets $ 88,527,774 $ 81,360,990
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 75,845,436 $ 64,776,331
Federal Home Loan Bank advances 3,000,000 7,500,000
Advances from borrowers for property
taxes and insurance 46,882 52,650
Federal income taxes deferred and payable 182,233 207,705
Accrued expenses and other liabilities 196,476 313,249
------------- -------------
Total liabilities 79,271,027 72,849,935
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized and unissued 250,000 shares
Common stock, $.01 par value, 3,000,000
shares authorized ; 436,425 shares
issued and outstanding 4,364 4,364
Additional paid-in capital 4,173,389 4,161,780
Unallocated ESOP shares (191,629) (232,257)
Retained earnings 5,272,716 4,541,195
Accumulated other comprehensive income 286,040 230,392
Treasury stock, at cost (18,096 and
11,521 shares) (288,133) (194,419)
------------- -------------
Total stockholders' equity 9,256,747 8,511,055
------------- -------------
Total liabilities and stockholders' equity $ 88,527,774 $ 81,360,990
============= =============
|
The accompanying notes are an integral part of these statements.
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
Interest income:
Loans receivable $ 6,005,138 $ 5,770,255
Investment securities 379,691 414,133
Interest on overnight funds sold 90,590 58,072
------------ ------------
Total interest income 6,475,419 6,242,460
Interest expense:
Deposits 3,014,076 2,805,371
Federal Home Loan Bank advances 264,174 309,772
------------ ------------
Total interest expense 3,278,250 3,115,143
------------ ------------
Net interest income 3,197,169 3,127,317
Provision for loan losses 171,445 180,000
------------ ------------
Net interest income after provision
for loan losses 3,025,724 2,947,317
------------ ------------
Other income:
Deposit service charges and fees 382,124 337,409
Trust service fees 440,996 462,587
Gain on sale of loans 338,736 86,531
Loan servicing fees 72,888 68,069
Other 55,250 31,916
------------ ------------
Total other income 1,289,994 986,512
Other expenses:
Compensation and benefits 1,371,647 1,266,904
Occupancy and equipment expenses 321,885 291,128
Data processing and trust service expenses 392,873 358,510
Federal and other insurance premiums 42,159 40,172
Advertising 61,182 54,595
Legal and professional fees 130,088 113,214
Other expenses 609,441 512,015
------------ ------------
Total other expenses 2,929,275 2,636,538
------------ ------------
Income before income tax expense 1,386,443 1,297,291
Income tax expense 528,961 493,109
------------ ------------
Net income 857,482 804,182
Other comprehensive income:
Net changes in unrealized appreciation
of available for sale securities and
loans net of tax of $34,108 in 2001
and $125,966 in 200 55,648 205,523
------------ ------------
Comprehensive income $ 913,130 $ 1,009,705
============ ============
Basic earnings per share $ 2.13 $ 2.01
Diluted earnings per share $ 2.13 $ 2.01
|
The accompanying notes are an integral part of these statements.
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
Cash flows from operating activities:
Net Income $ 857,482 $ 804,182
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 117,539 95,529
Dividend on FHLB stock (46,900) (47,600)
Provision for loan losses 171,445 180,000
(Increase) decrease in interest
receivable 60,070 (159,819)
(Increase) decrease in other assets 9,718 (71,833)
Increase (decrease) in accrued
liabilities (116,773) 17,457
Increase (decrease) in income
taxes payable (59,000) 44,705
Increase (decrease) in deferred
taxes payable 33,528 80,966
Sale of mortgage loans held for sale 14,766,000 3,036,227
Originations of mortgage loans
held for sale (14,467,000) (2,817,549)
Amortization of premiums on
investments (6,989) (6,469)
Release of ESOP shares 40,628 37,735
Compensation earned under MRP 56,270 50,085
------------ ------------
Total adjustments 558,536 439,434
------------ ------------
Net cash provided by operating
activities 1,416,018 1,243,616
Cash flows from investing activities:
Loan originations (42,115,000) (32,754,000)
Loan principal repayments 42,131,357 25,814,323
Purchase of available for sale
investments securities (4,000,000) -
Proceeds from available for sale
investment securities 4,000,000 -
Purchases of available for sale
mortgage-backed securities (1,053,251) -
Proceeds from available for sale
mortgage-backed securities 338,632 182,362
Proceeds from maturities and
repayments of:
Held to maturity mortgage-backed
securities 66,466 70,952
Cash payments for the purchase of
property (229,321) (593,426)
Proceeds from sale of foreclosed
real estate 138,100 137,773
------------ ------------
Net cash provided (used) by
investing activities (723,017) (7,142,016)
Cash flows from financing activities:
Net increase (decrease) in deposit
accounts 11,069,105 7,321,489
Proceeds (repayment) of FHLB advances (4,500,000) 700,000
Net increase (decrease) in escrow
accounts (5,770) (11,874)
Paid-in capital increase ESOP and
MRP shares earned 11,609 18,192
Dividends paid (125,960) (111,647)
Treasury stock purchased (149,984) -
------------ ------------
Net cash provided by financing
activities 6,299,000 7,916,160
------------ ------------
Net increase in cash and equivalents 6,992,001 2,017,760
Cash and equivalents, beginning of year 5,068,907 3,051,147
------------ ------------
Cash and equivalents, end of year $12,060,908 $ 5,068,907
============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest expense $ 3,293,489 $ 3,111,935
Income Tax 558,900 416,000
|
The accompanying notes are an integral part of these statements.
SECURITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Accumu-
lated
Unallo- Other Total
Common Stock Additional cated Compre- Stock-
----------------- Paid-in ESOP Retained hensive Treasury holder's
Shares Amount Capital Shares Earnings Income Stock Equity
------- -------- ---------- --------- ---------- -------- --------- ----------
Balances, December
31, 1999 436,425 $ 4,364 $4,143,588 $(269,992) $3,848,660 $ 24,869 $(244,504) $7,506,985
ESOP shares earned - - 22,274 37,735 - - - 60,009
Allocation of earned
MRP stock - - (4,082) - - - 50,085 46,003
Cash dividends
declared ($0.275
per share) - - - - (111,647) - - (111,647)
Comprehensive income:
Net income - - - - 804,181 - - 804,181
Other comprehensive
income:
Net change in
unrealized
gains on
securities
available-
for-sale, net
of taxes - - - - - 205,523 - 205,523
------- -------- ---------- --------- ---------- -------- --------- ----------
Balances, December 31,
2000 436,425 4,364 4,161,780 (232,257) 4,541,194 230,392 (194,419) 8,511,054
ESOP shares earned - - 19,879 40,628 - - - 60,507
Allocation of earned
MRP stock - - (8,270) - - - 56,271 48,001
Cash dividends
declared ($0.30
per share) - - - - (125,960) - - (125,960)
Treasury stock
purchased - - - - - - (149,985) (149,985)
Comprehensive income:
Net income - - - - 857,482 - - 857,482
Other comprehensive
income:
Net change in
unrealized
gains/(losses)
on securities
available-for-
sale, net
of tax - - - - - 55,648 - 55,648
------- -------- ---------- --------- ---------- -------- --------- ----------
Balances, December 31,
2001 436,425 $ 4,364 $4,173,389 $(191,629) $5,272,716 $286,040 $(288,133) $9,256,747
======= ======== ========== ========= ========== ======== ========= ==========
The accompanying notes are an integral part of these statements.
|
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation -
The consolidated financial statements as of December 31, 2001 and 2000 and the years then ended, include the accounts of Security Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Security Federal Savings Bank of McMinnville, Tennessee (the "Bank"). All significant intercompany balances and transactions have been eliminated in the consolidation.
On June 30, 1997, pursuant to a Plan of Conversion which was approved by its members and regulators, the Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank and became a wholly-owned subsidiary of the Company (the "Conversion"). The Company was formed under Tennessee Law in March 1997 to acquire all of the common stock of the Bank upon its conversion to stock form. The Company has no other operations and conducts no business of its own other than owning the Bank, and lending funds to the Bank's Employee Stock Ownership Plan (the "ESOP") which was formed in connection with the Conversion.
The Bank's business is that of a financial intermediary and consists primarily of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to make mortgage loans secured by residential real estate and other loans located primarily in Warren County, Tennessee. At December 31, 2001, the Bank operated two retail-banking offices in McMinnville, Tennessee. The Bank is subject to competition from other financial institutions, and is also subject to regulation by certain federal agencies and undergoes periodic examinations by those regulatory authorities.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the date of the consolidated statements of financial condition and income and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowance based on their judgements about information available to them at the time of their examination.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Outlined below are the accounting and reporting policies considered significant by the Company:
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less and money market funds to be cash equivalents. Cash and cash equivalents include interest-bearing deposits of $3,289,000 and $1,320,000 at December 31, 2001, and 2000, respectively.
The Company classifies its investments, including marketable equity securities, mortgage-backed securities, and mortgage-related securities, in one of three categories:
Trading Account Securities -
Securities held principally for resale in the near term are classified as trading account securities and recorded at their fair values. Unrealized gains and losses on trading account securities are included in other income. The Company did not hold any trading securities at December 31, 2001 or 2000.
Securities Held-to-Maturity -
Debt securities which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Unrealized losses on held-to-maturity securities reflecting a decline in value judged to be other than temporary are charged to income.
Securities Available-for-Sale -
Available-for-sale securities consist of equity securities and certain debt securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses, net of income taxes, on available-for-sale securities are reported as a net amount in a separate component of stockholders' equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Any decision to sell available-for-sale securities would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity demands, regulatory capital considerations, and other similar factors. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Unrealized losses on available-for-sale securities reflecting a decline in value judged to be other than temporary are charged to income.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized gains (losses) are reported as a separate component of stockholders' equity until realized.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal adjusted by any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Discounts and premiums on purchased real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using the level yield method.
The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such an increase is reported as a component of the provision for loan losses.
Uncollectible interest on loans that are contractually past due for three months is charged off or an allowance is established, based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments returns to normal, in which case the loan is returned to accrual status.
Loan origination fees and certain direct origination costs are capitalized with the net fee or cost recognized as an adjustment to interest income using the interest method.
Foreclosed property owned is carried at the lower of cost or estimated fair value less estimated selling costs. Costs directly related to improvement of real estate are capitalized. Expenses of holding such real estate are charged to operations as incurred.
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line and declining balance methods based on the estimated useful lives of the related assets that range from three to forty years.
Expenditures for major renewals and betterments of premises and equipment are capitalized, and those for maintenance and repairs are charged to expense as incurred.
The Bank, as a member of the Federal Home Loan Bank System, is required to maintain an investment in capital stock of the Federal Home Loan Bank of Cincinnati ("FHLB") in varying amounts based on balances of outstanding home loans and on amounts borrowed from the FHLB. Because no ready market exists for this stock, and it has no quoted market value, the Bank's investment in this stock is carried at cost.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company expenses all advertising costs as incurred.
Mortgage servicing rights ("MSR") are the rights to service mortgage loans for others which are capitalized and included in "other assets" on the consolidated balance sheets at the lower of their carrying value or fair value. The carrying value of mortgage loans originated or purchased is allocated between the carrying value of the loans and the MSR. Capitalization of the allocated carrying value of MSR occurs when the underlying loans are sold or securitized. MSR's are amortized over the estimated period of and in proportion to net servicing revenues.
The Company periodically evaluates MSR for impairment by estimating the fair value based on a discounted cash flow methodology. This analysis incorporates current market assumptions, including discount, prepayment and delinquency rates with net cash flows. The predominant characteristics used as the basis for stratifying MSR are investor type, product type and interest rate. If the carrying value of the MSR's exceed the estimated fair value, a valuation allowance is established. Changes to the valuation allowance are charged against or credited to mortgage servicing income and fees up to the original carrying value of the MSR.
The Bank originates mortgage loans for portfolio investment or for sale in the secondary market. During the loan origination period, loans are designated as held-for-sale or portfolio investment. Loans held-for-sale are carried at the lower of cost or market, determined on an individual loan basis.
Income taxes are provided based on the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of allowance for loan losses, accumulated depreciation, and FHLB stock dividends for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Pension costs are charged to employee benefits expense and are funded as accrued.
Basic income per share amounts are computed by dividing the net income by the weighted average number of common shares outstanding during the year. Diluted income per share amounts were computed by dividing net income, adjusted for the effect of assumed conversions, by the weighted average number of common shares outstanding plus dilutive potential common shares calculated for stock options outstanding using the treasury stock method.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents -
The carrying values of cash and cash equivalents approximate fair value.
Investment securities (including mortgage-backed securities) -
Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans -
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amount of accrued interest receivable approximates its fair value. The estimated fair value of loans held-for-sale is based on quoted market prices of similar instruments trading in the secondary market.
Originated Mortgage Servicing Rights -
The carrying amounts of originated mortgage servicing rights approximate fair values.
Deposits -
The fair value of demand deposits, savings accounts, and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows using rates offered on the reporting date for deposits of similar remaining maturities.
Federal Home Loan Bank Advances -
The fair value is estimated by discounting future cash flows using rates currently available to the Company for advances of similar maturities.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commitments -
The commitments to originate and purchase loans have terms that are consistent with current market conditions. Accordingly, the Bank estimated that the face amounts of these commitments approximate carrying value.
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as follows:
Years Ended December 31,
2001 2000
---- ----
Unrealized holding gains (losses)
on loans available-for-sale $ 1,524 $ 45,521
Unrealized holding gains (losses)
on available-for-sale securities 88,232 285,968
------- --------
Net unrealized gains (losses) 89,756 331,489
Tax effect (34,108) (125,966)
------- --------
Net of tax amount $55,648 $205,523
======= ========
|
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public businesses report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company adopted SFAS No. 131 without any impact on their consolidated financial statements as the chief operating decision maker reviews the results of operations of the Company and its subsidiary as a single enterprise.
Assets under management of the Bank's trust department are not included in these financial statements. The market value of assets under management by the trust department as of December 31, 2001 and 2000 were $69,522,000 and $70,553,000, respectively.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investment securities have been classified according to management intent. The amortized cost of securities and their approximate fair values are as follows:
Securities available-for-sale:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
----------------- ---- ----- ------ -----
U. S. Government and
Federal agencies $4,000,000 $ 68,600 $ - $4,068,600
FHLMC stock 5,650 371,382 - 377,032
---------- -------- --------- ----------
4,005,650 439,982 - 4,445,632
Mortgage-backed securities 2,075,071 27,688 - 2,102,759
---------- -------- --------- ----------
$6,080,721 $467,670 $ - $6,548,391
========== ======== ========= ==========
December 31, 2000
-----------------
U. S. Government and
Federal agencies $3,992,138 $ - $ 4,143 $3,987,995
FHLMC stock 5,650 391,414 - 397,064
---------- -------- --------- ----------
3,997,788 391,414 4,143 4,385,059
Mortgage-backed securities 1,393,909 - 7,835 1,386,074
---------- -------- --------- ----------
$5,391,697 $391,414 $ 11,978 $5,771,133
========== ======== ========= ==========
Securities held-to-maturity:
December 31, 2001
-----------------
Mortgage-backed securities $ 98,167 $ 3,145 $ - $ 101,312
---------- -------- --------- ----------
$ 98,167 $ 3,145 $ - $ 101,312
========== ======== ========= ==========
December 31, 2000
-----------------
Mortgage-backed securities $ 164,633 $ 68 $ - $ 164,701
---------- -------- --------- ----------
$ 164,633 $ 68 $ - $ 164,701
========== ======== ========= ==========
|
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The fair value of investment securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because security issuers have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2001 December 31, 2000
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Available-for-sale:
FHLMC stock $ 5,650 $ 377,032 $ 5,650 $ 397,064
Due in one year or less - - - -
Due after one year through
five years 3,000,000 3,022,821 2,992,138 2,976,585
Due after five years
through ten years 1,527,632 1,569,332 1,194,170 1,193,886
Due after ten years 1,547,439 1,579,206 1,199,739 1,203,598
---------- ---------- ---------- ----------
$6,080,721 $6,548,391 $5,391,697 $5,771,133
========== ========== ========== ==========
Held-to-maturity:
Due in one year or less $ - $ - $ - $ -
Due after one year
through five years 98,167 101,312 98,865 98,031
Due after ten years - - 65,768 66,670
---------- ---------- ---------- ----------
$ 98,167 $ 101,312 $ 164,633 $ 164,701
========== ========== ========== ==========
|
At December 31, 2001 and 2000, $2,586,000 and $2,600,000 of securities were pledged as collateral for deposits.
There were no investment securities sales in 2001 or 2000 and therefore, no resulting financial gains or losses.
NOTE 3 - LOANS RECEIVABLE
Loans receivable at December 31, 2001 and 2000 are summarized as follows:
December 31,
2001 2000
---- ----
First mortgage loans:
Secured by one-to-four family residences $39,728,331 $39,783,997
Held for sale, at fair value 329,445 626,577
Secured by commercial real estate 7,497,861 7,453,428
Real estate development loans 617,777 1,119,089
Construction loans 1,694,592 1,683,746
----------- -----------
49,868,006 $50,666,837
Less:
Undisbursed portion of construction
loans (430,230) (550,779)
----------- -----------
Total first mortgage loans $49,437,776 $50,116,058
|
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 3 - LOANS RECEIVABLE (continued)
December 31,
2001 2000
---- ----
Commercial business loans 8,347,775 8,049,851
Consumer and other loans:
Automobile 3,793,815 3,697,208
Second mortgage and other 3,387,747 3,664,121
Unsecured
1,970,602 1,972,920
----------- -----------
9,152,164 9,334,249
----------- -----------
Subtotal all loans 66,937,715 67,500,158
Less: deferred loan fees (20,892) (14,008)
allowance for loan losses (860,429) (756,233)
----------- -----------
$66,056,394 $66,729,917
=========== ===========
|
Activity in the allowance for loan losses is as follows:
December 31,
2001 2000
---- ----
Balance - beginning $ 756,233 $ 649,385
Provision charged to operations 171,445 180,000
Loans charged off (105,286) (90,695)
Recoveries 38,037 17,543
---------- ----------
Balance - ending $ 860,429 $ 756,233
========== ==========
|
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures", requires that the Bank establish a specific allowance on impaired loans and disclosure of the Bank's method of accounting for interest income on impaired loans. The Bank assesses loans delinquent more than 90 days for impairment. Such loans amounted to approximately $280,000 and $213,000 at December 31, 2001 and 2000, respectively, and had an average outstanding balance of approximately $300,000 and $131,000 for the years ended December 31, 2001 and 2000, respectively. These loans are primarily collateral dependent and management has determined that the underlying collateral value is in excess of the carrying amounts. As a result, the Bank has determined that specific allowances on these loans are not required.
Nonperforming loans for which interest has been reduced totaled approximately $90,000 and $85,000 at December 31, 2001 and 2000, respectively. The differences between interest income that would have been recorded under the original terms of such loans and the interest income actually recognized totaled $9,000 and $5,000 for the years ended December 31, 2001 and 2000, respectively.
Commercial business loans consist primarily of unsecured business loans and loans secured by equipment and inventory. Other consumer loans include loans secured by deposit accounts.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 3 - LOANS RECEIVABLE (continued)
In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with its officers, directors, and their affiliates. In the opinion of management, such transactions were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectibility or present any other unfavorable features to the Bank. Loans to such borrowers at December 31, 2001 and 2000 totaled $853,000 and $1,055,000, respectively.
The Bank's lending activity is concentrated with customers located in the city of McMinnville and Warren County, Tennessee area.
Loans held for sale totaled $335,760 and $634,416 at December 31, 2001 and 2000, respectively. The fair value of such loans were $329,445 and $626,577, respectively.
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for Federal Home Loan Mortgage Corporation ("FHLMC") are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans were $32,072,462 and $25,978,765 at December 31, 2001 and 2000, respectively.
Custodial escrow balances maintained in connection with the foregoing loan servicing were $86,346 and $81,141 December 31, 2001 and 2000, respectively.
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
December 31,
2001 2000
---- ----
Investment securities $ 54,551 $ 67,156
Mortgage-backed securities 11,492 8,706
Loans receivable 556,769 607,020
--------- ---------
$ 622,812 $ 682,882
========= =========
|
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized by major classification as follows:
December 31,
2001 2000
---- ----
Land $ 675,500 $ 515,500
Building 1,236,733 1,236,734
Furniture and equipment 682,521 613,400
---------- ----------
2,594,754 2,365,634
Less: accumulated depreciation (677,255) (559,917)
---------- ----------
$1,917,499 $1,805,717
========== ==========
|
Depreciation expense was $117,539 and $95,529 in 2001 and 2000, respectively.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 7 - DEPOSITS
Deposit accounts at December 31, 2001 and 2000 are summarized as follows:
December 31,
2001 2000
---- ----
Demand deposits, noninterest-bearing $ 8,032,561 $ 5,997,577
NOW and money market accounts -
1.86% (2001) and 2.98% (2000) 10,116,193 8,377,903
Passbook accounts -
1.94% (2001) and 2.98% (2000) 8,351,922 6,414,946
----------- -----------
Total Demand, NOW and Passbook Accounts 26,500,676 20,790,426
Certificates of deposit:
1.01% to 2.00% 184,792 -
2.01% to 3.00% 6,408,436 -
3.01% to 4.00% 6,896,640 -
4.01% to 5.00% 16,837,406 2,830,124
5.01% to 6.00% 8,625,039 9,561,255
6.01% to 7.00% 10,387,378 31,589,457
7.01% to 8.00% 5,069 5,069
----------- -----------
Total certificates of deposit 49,344,760 43,985,905
----------- -----------
$75,845,436 $64,776,331
=========== ===========
December 31,
Interest expense on deposits is as follows: 2001 2000
---- ----
NOW and money market accounts $ 223,779 $ 240,574
Passbook accounts 181,632 181,342
Certificates of deposit 2,608,665 2,383,455
----------- -----------
$ 3,014,076 $ 2,805,371
=========== ===========
|
Certificate of deposit maturities are summarized below:
Average Average
Years Ending December 31, Rate 2001 Rate 2000
------------------------- ---- ---- ---- ----
2002 4.67% $40,276,784 6.22% $32,492,786
2003 4.75 5,102,339 6.44 8,999,675
2004 5.30 2,141,304 5.82 1,384,867
2005 5.65 785,965 5.91 769,394
2006 and thereafter 4.94 1,038,368 6.29 339,183
---- ----------- ---- -----------
4.73% $49,344,760 6.25% $43,985,905
==== =========== ==== ===========
|
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $13,174,000 and $9,821,000 at December 31, 2001 and 2000,
respectively. Deposit accounts in excess of $100,000 are not federally
insured.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31 are summarized as follows:
2001 2000
---- ----
Short-term advances $ - $2,500,000
Long-term advances 3,000,000 5,000,000
---------- ----------
$3,000,000 $7,500,000
========== ==========
|
The short-term advances are due ninety days from issuance. Long-term advances at December 31, 2001 mature as follows:
Weighted
Year Ending Average Rate at
December 31, December 31, 2001 Amount
------------ ----------------- ------
2010 5.63% $ 3,000,000
===========
|
At December 31, 2001, the Bank's FHLB stock with a carrying value of $727,500 and residential real estate loans with outstanding balances totaling $3,750,000 were pledged under a blanket agreement as collateral for FHLB advances. At December 31, 2001, the total available borrowing capacity from the FHLB was $25,800,000.
NOTE 9 - INCOME TAX MATTERS
The Company files a consolidated federal income tax return. The Company and its subsidiary entered into a tax sharing agreement that provides for the allocation and payment of federal and state income taxes. The provision for income taxes of each corporation is computed on a separate company basis, subject to certain adjustments. Income tax expense (benefit) is summarized as follows:
2001 2000
---- ----
Federal:
Current $438,192 $442,048
Deferred 6,777 (27,278)
State:
Current 82,796 82,772
Deferred 1,196 (4,433)
-------- --------
$528,961 $493,109
======== ========
|
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 9 - INCOME TAX MATTERS (continued)
A reconciliation of the actual income tax expense to the "expected" tax expense (computed by applying the federal statutory tax rate to earnings before income tax expense) is as follows:
2001 2000
------------------- -------------------
Effective Effective
Amount Tax Rate Amount Tax Rate
------ -------- ------ --------
Computed "expected" tax
expense $471,374 34.0% $441,079 34.0%
Increases (reductions) in tax
resulting from:
State income taxes, net of
Federal income tax benefit 55,456 4.0 52,030 4.0
Other items, net 2,131 .1 - -
-------- ---- -------- ----
Income tax expense $528,961 38.1% $493,109 38.0%
======== ==== ======== ====
|
Deferred income taxes reflect the impact of "temporary differences" between amounts of liabilities and assets for financial reporting purposes and such amounts as measured by tax laws. Temporary differences which give rise to a significant portion of deferred tax liabilities and assets are as follows:
December 31,
2001 2000
---- ----
Deferred tax liabilities:
Depreciation $ 65,292 $ 58,133
Federal Home Loan Bank of
Cincinnati stock dividend 169,376 151,553
Unrealized gain on available-
for-sale securities and loans 175,315 141,208
Mortgage servicing rights 65,379 43,194
Deferred tax assets:
Allowance for loan losses (259,931) (212,764)
--------- ---------
Net deferred tax liability $ 215,431 $ 181,324
========= =========
|
At December 31, 2001 and 2000, retained earnings contain certain historical additions to bad debt reserves for income tax purposes of approximately $504,000, for which no deferred taxes have been provided because the Bank does not intend to use these reserves for purposes other than to absorb losses. If amounts which qualified as bad debt deductions are used for purposes other than to absorb losses or adjustments arising from the carryback of net operating losses, income taxes may be imposed at the then existing rates. The unrecorded deferred income tax liability on the above amount was approximately $191,000 as of December 31, 2001. In the future, if the Bank does not meet the income tax requirements necessary to permit the deduction of an allowance for bad debts, the Bank's effective tax rate would increase to the maximum percent under existing law.
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS
The Company is not subject to any regulatory capital requirements. The Bank, however, is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial position and results of operations.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS (continued)
The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as set forth in the following tables of tangible, core and total risk-based capital. Prompt Corrective Action provisions contained in the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) require specific supervisory actions as capital levels decrease. To be considered well-capitalized under the regulatory framework for Prompt Corrective Action provisions under FDICIA, the OTS, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios as set forth in the following tables. On December 31, 2001, the Bank exceeded the minimum requirements for the well-capitalized category.
The following presents the Bank's regulatory capital levels and ratios relative to its minimum capital levels and ratios relative to its minimum capital requirements:
As of December 31, 2001
-----------------------
Actual Capital Required Capital
---------------- ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
OTS capital adequacy
Tangible capital $8,597,000 9.75% $1,323,000 1.50%
Core capital 8,597,000 9.75 2,647,000 3.00
Risk-based capital 9,612,000 16.54 7,057,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 8,597,000 9.75 4,411,000 5.00
Tier 1 risk-based capital 8,597,000 14.79 3,487,000 6.00
Total risk-based capital 9,612,000 16.54 5,812,000 10.00
As of December 31, 2000
-----------------------
Actual Capital Required Capital
---------------- ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
OTS capital adequacy
Tangible capital $7,951,000 9.81% $ 1,216,000 1.50%
Core capital 7,951,000 9.81 2,432,000 3.00
Risk-based capital 8,891,000 15.66 6,485,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 7,951,000 9.81 4,053,000 5.00
Tier 1 risk-based capital 7,951,000 14.00 3,407,000 6.00
Total risk-based capital 8,891,000 15.66 5,678,000 10.00
|
NOTE 11 - STOCKHOLDERS' EQUITY
On June 30, 1997, the Company completed its initial stock offering in connection with the Conversion. Gross proceeds from the sale of 401,511 shares (excluding the 34,914 shares purchased by the ESOP) amounted to $4,015,110 and were reduced by conversion costs of $299,006. The Company paid $3,658,819 for all common stock of the Bank and retained the remaining net proceeds.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 11 - STOCKHOLDERS' EQUITY (continued)
Concurrently with the Conversion, the Bank established a liquidation account in an amount equal to its net worth as reflected in its latest statement of financial condition used in its final offering circular. The liquidation account will be maintained for the benefit of eligible deposit account holders and supplemental eligible deposit account holders who continue to maintain their deposit accounts in the Bank after the Conversion. Only in the event of a complete liquidation will eligible deposit account holders and supplemental eligible deposit account holders be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted sub-account balance for deposit accounts then held before any liquidation distribution may be made with respect to common stockholders.
Subject to applicable law, the Board of Directors of the Bank and the Company may each provide for the payment of dividends. Future declaration of cash dividends, if any, by the Company may depend upon dividend payments by the Bank to the Company. Subject to regulations promulgated by the OTS, the Bank will not be permitted to pay dividends on its common stock if its stockholders' equity would be reduced below the amount required for the liquidation account or its capital requirement.
In addition, as a Tier I institution, or an institution that meets all of its fully phased-in capital requirements, the Bank may pay a cash dividend to the Company with prior notification to the OTS during a calendar year an amount not to exceed the greater of 100% of the Bank's net income to date during the calendar year plus the amount that would reduce by one-half its surplus capital ratio at the beginning of the calendar year, or 75% of its net income over the most recent four quarter period. The Company paid cash dividends of $.30 and $.275 per share during the years ended December 31, 2001 and 2000, respectively.
During 2001, the company repurchased 9,861 shares of stock for a total cost of $149,985 for undesignated treasury stock. Treasury stock also includes stock repurchased for the Management Recognition Plan ("MRP") - See Note 13.
NOTE 12 - RETIREMENT PLAN AND OTHER BENEFITS
Employee Stock Ownership Plan - ("ESOP")
Effective June 30, 1997, the Bank adopted an ESOP in connection with the Conversion. The ESOP is designed to provide retirement benefits for eligible employees of the Bank. Because the Plan invests primarily in the stock of the Company, it also gives eligible employees an opportunity to acquire an ownership interest in the Company. Employees are eligible to participate in the Plan after reaching age twenty-one, completing one year of service and working at least one thousand hours of consecutive service during the previous year. Contributions are allocated to eligible participants on the basis of compensation.
During June 1997, the Company issued a total of 34,914 shares to the ESOP at a total purchase price of $349,140. The purchase was made from the proceeds of a $349,140 loan from the Company, bearing interest at 8.50%. The loan will be repaid by contributions the Bank makes to the ESOP. In 2001 and 2000 the Bank recorded a charge to compensation and employee benefits expense of $53,699 and $52,582, respectively, related to the ESOP, including $19,879 and $14,847, respectively, related to the appreciation in the fair value of allocated ESOP shares. The loan will be repaid over a period of approximately six years, principally with funds from the Bank's future contributions to ESOP, subject to Internal Revenue Service limitations.
Shares used as collateral to secure the loan are released and available for allocation to eligible employees evenly over a ten-year period as the principal and interest on the loan is paid. Employees vest in their ESOP account at a rate of 20% annually commencing after the completion of one year of credited service or immediately if service was terminated due to death, retirement, disability, or change in control. Any dividends on released shares are credited to the participants' ESOP accounts or paid out proportionally or applied towards payment of the loan. Any dividends on unreleased shares will generally be applied towards payment of the loan.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 12 - RETIREMENT PLAN AND OTHER BENEFITS (continued)
At December 31, 2001, shares held in suspense to be released annually as the loan is paid down amounted to 19,204 shares. The fair value of unallocated ESOP shares was $326,468 at December 31, 2001. Any dividends on allocated ESOP shares are held in escrow for the participant, dividends on unallocated ESOP shares are used to repay the loan and ESOP shares committed-to-be released are considered outstanding in determining earnings per share.
Profit Sharing Plan -
The Bank's pension expense and contributions for 2001 and 2000 were $43,113 and $40,527, respectively, related to its 401(K) profit sharing plan. Employees are eligible to participate in the Plan after reaching age twenty-one, completing one year of service and working at least one thousand hours of consecutive service during the previous year. Employer and employee contributions to the plan are discretionary. Any employer contributions vest on a graduated schedule from two to six years of service.
NOTE 13 - STOCK OPTION PLAN AND MANAGEMENT RECOGNITION PLAN
Stock Option Plan -
The Company's stockholders and Board of Directors approved the Company's 1998 Stock Option Plan and the Bank's Management Recognition and Development Plan (the "MRP"), effective on July 1, 1998.
The Stock Option Plan makes available options to purchase 43,642 shares, or 10% of the shares issued in the conversion to employees and directors. Options granted under the Stock Option Plan have a vesting schedule which provides that 20% of the options granted vest in the first year, and 20% will vest on each subsequent anniversary date, so that options would be completely vested within five years from the date of grant. Options become 100% vested upon death or disability, if earlier. Unexercised options expire within ten years from the date of grant.
The following summarizes the activity in the Plan for the two years ended December 31, 2001:
Shares available Options Shares Weighted Average
for Grant Outstanding Exercise Price
-------------- ----------- --------------
December 31, 1999 6,547 37,095 $17.25
Granted (4,364) 4,364 15.50
Exercised - - -
Cancelled - - -
-------------- ----------- --------------
December 31, 2000 2,183 41,459 17.06
Granted - - -
Exercised - - -
Cancelled - - -
-------------- ----------- --------------
December 31, 2001 2,183 41,459 $17.06
============== =========== ==============
|
The following table summarizes information about stock options outstanding at December 31, 2001.
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------
Weighted Average
Exercise Number remaining contractual
Price Outstanding life in years Price Number
-------- ----------- ------------------- ------- --------
$17.25 37,095 6.5 $17.25 22,257
15.50 4,364 8.5 15.50 -
------ ------
41,459 22,257
====== ======
|
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 13 - STOCK OPTION PLAN AND MANAGEMENT RECOGNITION PLAN (continued)
The Company elected to follow APB 25 and related interpretations in accounting for its employee stock options. The exercise price of the employee stock options equals the market price of the underlying stock on the date of the grant and, therefore; no compensation expense is recognized under APB 25. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock option under the fair value method of that statement. Pro forma net income and earnings per share follows:
2001 2000
---- ----
Net income:
As reported $857,482 $804,182
Pro forma 834,023 770,183
Earnings per share
As reported:
Basic $ 2.13 $ 2.01
Diluted 2.13 2.01
Pro forma:
Basic 2.07 1.92
Diluted 2.07 1.92
|
The above disclosed pro forma effects of applying SFAS No. 123 to compensation costs may not be representative of the effects on the reported pro forma net income for future years.
The fair value for each option grant is estimated on the date of the grant using the Black Scholes Model. The Model incorporated the following assumptions for the grants issued in 2000.
2000
----
Risk free interest rate 6.00%
Expected life 8 years
Expected volatility 8.15%
Expected dividends $ .275
|
Management Recognition Plan ("MRP") -
The MRP serves as a means of providing existing directors and employees of the Bank with an ownership interest in the Company. Shares of the Company's common stock awarded under the MRP vest equally over a five year period. Compensation expense related to those shares is recognized on a straight-line basis corresponding with the vesting period. Prior to vesting, each participant granted shares under the MRP may direct the voting of the shares allocated to the participant and will be entitled to receive any dividends or other distributions paid on such shares. On July 1, 1998, 14,839 shares were awarded but unearned to participants under the MRP. On September 9, 1998, the Company purchased 17,457 common shares in the open market to fund the MRP. These shares are held as part of treasury stock. On July 1, 2000, 1,746 shares were additionally awarded but unearned to participants under the MRP. During 2001 and 2000, 3,308 and 2,968 shares vested to participants in the MRP, and no shares were forfeited under the MRP. Total compensation expense associated with the MRP for the years ended December 31, 2001 and 2000 was $48,000 and $48,054, respectively.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET AND SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contract or notional amount of those instruments. The Bank uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial Instruments with Off-Balance-Sheet Risk at December 31, 2001: Contractual commitments to extend credit $4,996,790 Commercial letters of credit 554,000 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held varies but may include property, plant and equipment and real estate.
Most of the Bank's business activity is with customers located within the State of Tennessee. A majority of the loans are secured by residential or commercial real estate or other personal property. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers.
NOTE 15 - EARNINGS PER SHARE (EPS)
Basic net income per share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period.
Earnings per share has been calculated in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings Per Share", and Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans". For purposes of this computation, the number of shares of common stock purchased by the Bank's employee stock ownership plan, which have not been allocated to participant accounts are not assumed to be outstanding. Vested "out-of-the-money" stock options (22,257 shares as of December 31, 2001) have not been included in the diluted earnings per share since they are antidilutive. Vested "in-the-money" stock options (873 shares) have been included in diluted earnings per share for the current year - see Note 13.
The following are summaries of the amounts used in the per share calculations:
For the Year Ended December 31, 2001
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Earnings per share (EPS):
Basic $857,482 402,051 $2.13
Diluted $857,482 402,924 $2.13
|
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 15 - EARNINGS PER SHARE (EPS) (continued)
For the Year Ended December 31, 2000
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic and Diluted
Earnings per share (EPS) $804,182 400,466 $2.01
|
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, as described in Note 1, are as follows:
December 31, 2001
--------------------------
Carrying Fair
Amount Value
----------- -----------
Financial assets:
Cash and cash equivalents $12,056,649 $12,056,649
Investment securities 4,445,631 4,445,631
Mortgage-backed securities 2,200,926 2,204,071
Loans receivable, net 66,056,394 67,755,215
Financial liabilities:
Deposits 75,845,436 76,882,397
Federal Home Loan Bank advances 3,000,000 3,118,125
December 31, 2000
--------------------------
Carrying Fair
Amount Value
----------- -----------
Financial assets:
Cash and cash equivalents $5,068,907 $5,068,907
Investment securities 4,385,059 4,385,059
Mortgage-backed securities 1,550,707 1,550,775
Loans receivable, net 66,729,917 66,762,835
Financial liabilities:
Deposits 64,776,331 62,833,041
Federal Home Loan Bank advances 7,500,000 7,334,250
|
The carrying amounts in the preceding tables are included in the statement of financial condition under the applicable captions.
The fair value estimates presented herein are based on information available to management as of December 31, 2001 and 2000. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amount presented herein.
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 17 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet and condensed statements of income and cash flows for Security Bancorp, Inc. should be read in conjunction with the consolidated financial statements and the notes thereto.
December 31,
2001 2000
---- ----
CONDENSED BALANCE SHEET
ASSETS
Cash and cash equivalents $ 135,221 $ 54,467
ESOP note receivable 191,629 232,257
Investment in subsidiary 8,882,547 8,143,446
Other assets 71,350 68,350
---------- ----------
Total Assets $9,280,747 $8,498,520
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accrued liabilities $ 24,000 $ 24,000
Accrued income taxes - 1,200
Stockholders' equity 9,256,747 8,473,320
---------- ----------
Total liabilities and
stockholders' equity $9,280,747 $8,498,520
========== ==========
Years Ended December 31,
2001 2000
---- ----
CONDENSED STATEMENT OF INCOME
Interest and dividend income $ 24,276 $ 24,203
Expenses 36,203 30,504
---------- ----------
Income (loss) before equity
in undistributed earnings
of subsidiary and income taxes (11,927) (6,301)
Equity in earnings of subsidiary 585,209 807,533
Dividend income from subsidiary 280,000 -
---------- ----------
INCOME BEFORE INCOME TAXES 853,282 801,232
Income tax expense (credit) (4,200) (2,950)
---------- ----------
NET INCOME $ 857,482 $ 804,182
========== ==========
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating
activities:
Net income $857,482 $ 804,182
Adjustments to reconcile net
income to net cash provided
from operating activities:
Equity earnings from subsidiary (585,209) (807,533)
(Increase) decrease in accounts
receivable - 67,299
(Increase) decrease in prepaid
expenses (4,199) -
Increase (decrease) in income
taxes payable - (20,950)
Increase (decrease) in accrued
liabilities - 19,641
---------- ----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (268,074) 62,639
|
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 17 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (continued)
December 31,
2001 2000
---- ----
Cash flows from investing activities:
Investment in insurance stock - (47,500)
--------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES - (47,500)
Cash flows from financing activities:
Acquisition of Treasury (149,984) -
Proceeds from MRP treasury stock
from subsidiary 48,000 46,000
Dividend paid (125,964) (111,647)
Principal collected on ESOP note
receivable 40,628 37,735
--------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (187,320) (27,912)
--------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 80,754 (12,773)
Cash and cash equivalents at
beginning of year 54,467 67,240
--------- ----------
Cash and cash equivalents
at end of year $ 135,221 $ 54,467
========= ==========
|
No disagreement with the Corporation's independent accountants on accounting and financial disclosure has occurred during the two most recent fiscal years.
PART III
The information contained under the section captioned "Proposal I -- Election of Directors" in the Proxy Statement is incorporated herein by reference.
The following table sets forth certain information with respect to the executive officers of the Corporation and the Savings Bank.
Age at
December 31,
Name 2001 Position
---- ---- --------
Dr. R. Neil Schultz 65 Chairman of the Board
Joe H. Pugh 45 President and Chief Executive Officer
Earl H. Barr 64 Treasurer and Secretary
Ray Talbert 55 Executive Vice President, Commercial
Loan Officer and Branch Manager
John W. Duncan 36 Vice President and Chief Financial
Officer
Nita M. Baggett 61 Senior Vice President of Secondary
Marketing
Kenneth D. Martin 51 Senior Vice President of Consumer
Lending
Kenneth W. Smith 52 Senior Vice President of Trust/
Investment Management
|
The following is a description of the principal occupation and employment of the executive officers of the Corporation and the Savings Bank during at least the past five years:
Dr. R. Neil Schultz, a retired orthodontist, is a member of the McMinnville Noon Rotary Club and past president of the Tennessee Association of Orthodontists. Dr. Schultz serves as the Chairman of the Board of the Directors of the Corporation and the Savings Bank.
Joe H. Pugh has been employed by the Savings Bank since 1978. Mr. Pugh has served as President and Chief Executive Officer of the Savings Bank since 1993 and President and Chief Executive Officer of the Corporation since its inception in 1997. He is a past member of the McMinnville Chamber of Commerce Board, and a member of the McMinnville Noon Rotary Club and the Community Advisory Board of Bridgestone/Firestone. Mr. Pugh also serves as a trustee of the Motlow State Community College.
Earl H. Barr is the owner and manager of Barr's Inc., a retail furniture store, in McMinnville, Tennessee. He is the past Chairman of, and currently serves as a director of, the Board of the McMinnville Chamber of Commerce, and is a member of the Board of the McMinnville Housing Authority. Mr. Barr is a past director of the American Heart Association Board, and a member of the McMinnville Noon Rotary Club, the Warren County Homebuilders Association and the Community Advisory Board of Bridgestone/Firestone.
Ray Talbert has been employed by the Savings Bank since February 1996. Before joining the Savings Bank, he was employed as a Senior Vice President by Bank of McMinnville, McMinnville, Tennessee.
John W. Duncan has been employed by the Savings Bank since 1993. Prior to that, Mr. Duncan was a Bank Examiner for the Tennessee Department of Financial Institutions. He is the treasurer of the McMinnville Breakfast Rotary Club.
Nita M. Baggett has been employed by the Savings Bank since 1992. She is a member of the Warren County Home Builders Association and serves on the Family Selection Committee for Habitat for Humanity of Warren County.
Kenneth D. Martin has been employed by the Savings Bank since July 1998. Before joining the Savings Bank, he was employed as a Vice President by Union Planters Bank, McMinnville, Tennessee. He is a member of the McMinnville Noon Rotary Club.
Kenneth W. Smith has been employed by the Savings Bank since July 1998. Before joining the Savings Bank, he was employed as a Senior Vice President of Union Planters Bank, McMinnville, Tennessee. Mr. Smith is a member of the McMinnville Breakfast Rotary Club and serves as a board of director for the McMinnville Chamber of Commerce.
Reference is made to the cover page of this Annual Report on Form 10-KSB, and the information under the section captioned "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement is incorporated herein by reference, with regard to compliance with Section 16(a) of the Exchange Act.
The information contained under the section captioned "Proposal I -- Election of Directors" in the Proxy Statement is incorporated herein by reference.
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the sections captioned and "Security Ownership of Certain Beneficial Owners and Management" and "Proposal I - Election of Directors" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the Corporation.
The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors -- Transactions with Management."
(a) Exhibits
3.1 Charter of Security Bancorp, Inc. (incorporated by reference
to Exhibit 3.1 to the registrant's Registration Statement on
Form SB-2 (333-6670))
3.2 Bylaws of Security Bancorp, Inc. (incorporated by reference
to Exhibit 3.2 to the registrant's Registration Statement on
Form SB-2 (333-6670))
10.1 Employment Agreement with Joe H. Pugh (incorporated by
reference to Exhibit 10(a) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30,
1997)
10.2 Severance Agreement with John W. Duncan (incorporated by
reference to Exhibit 10(b) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30,
1997)
10.3 Severance Agreement with Ray Talbert (incorporated by
reference to Exhibit 10(c) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30,
1997)
10.4 Severance Agreement with Kenneth W. Smith (incorporated by
reference to Exhibit 10.4 to the registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1998)
10.5 Severance Agreement with Shannon L. Haston (incorporated by
reference to Exhibit 10.5 to the registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1998)
10.6 Security Federal Savings Bank of McMinnville, TN 401(k) Plan
(incorporated by reference to Exhibit 10.4 to the
registrant's Registration Statement on Form SB-2 (333-6670))
10.7 Security Federal Savings Bank of McMinnville, TN Employee
Stock Ownership Plan (incorporated by reference to Exhibit
10.5 to the registrants Annual Report on Form 10-KSB
for the year ended December 31, 1997)
10.8 Security Bancorp, Inc. Management Recognition and Development
Plan (incorporated by reference to Exhibit A to the
registrant's Annual Meeting Proxy Statement dated March 16,
1998)
10.9 Security Bancorp, Inc. 1998 Stock Option Plan (incorporated
by reference to Exhibit B to the registrant's Annual Meeting
Proxy Statement dated March 16, 1998)
21 Subsidiaries of the Registrant
23 Consent of Auditors
(b) Reports on Form 8-K
No Forms 8-K were filed during the quarter ended December 31, 2001.
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.
SECURITY BANCORP, INC.
Date: March 25, 2002 By: /s/Joe H. Pugh
--------------------------------------
Joe H. Pugh
President and Chief Executive Officer
(Duly Authorized Representative)
|
Pursuant to the requirements 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 and on the dates indicated.
By:/s/Joe H. Pugh March 25, 2002 --------------------------------------------- Joe H. Pugh President and Chief Executive Officer (Principal Executive Officer) By:/s/John W. Duncan March 25, 2002 --------------------------------------------- John W. Duncan Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) By:/s/Dr. Raymond Neil Schultz March 25, 2002 --------------------------------------------- Dr. Raymond Neil Schultz Chairman of the Board and Treasurer By:/s/Earl H. Barr March 25, 2002 --------------------------------------------- Earl H. Barr Secretary and Director By:/s/Donald R. Collette March 25, 2002 --------------------------------------------- Donald R. Collette Director By:/s/Dr. Franklin J. Noblin March 25, 2002 --------------------------------------------- Dr. Franklin J. Noblin Director By:/s/Robert W. Newman March 25, 2002 --------------------------------------------- Robert W. Newman Director |
Exhibit 21
Subsidiaries of the Registrant
Parent
------
Security Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
---------------- ------------ ----------------------
Security Federal Savings Bank of
McMinnville, TN 100% United States
-----------
|
(a) The operation of the Corporation's wholly owned subsidiary is included in the Corporation's Consolidated Financial Statements contained in the Annual Report attached hereto as Exhibit 13.
Exhibit 23
Consent of Auditors
[Housholder, Artman and Associates, P.C. Letterhead]
The Board of Directors and Stockholders
Security Bancorp, Inc.
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-69573) of Security Bancorp, Inc. of our report dated January 24, 2002 appearing on page 40, which report appears in the December 31, 2001 annual report on Form 10-KSB of Security Bancorp, Inc.
/s/Housholder, Artman and Associates, P.C. Tullahoma, Tennessee March 29, 2002 |