SFB Bancorp, Inc. - Security Federal Bank

Transcription

SFB Bancorp, Inc.
632 East Elk Avenue, Elizabethton, Tennessee 37643
April 18, 2016
Dear Fellow Shareholder:
Since 1963, Security Federal Bank has been and continues to be a safe, sound and profitable financial
institution providing home mortgages, commercial and personal loans as well as related financial
services to the citizens and residents of Northeast Tennessee, Western North Carolina and Southwest
Virginia. Our mission continues to be to serve the financial needs of our customers as a progressive
small town community bank and to enhance long-term shareholder value.
Recently, two activist investors, Meixler Investment Management, Ltd. and Trondheim Capital
Partners, have purchased a block of SFB Bancorp, Inc.' s shares. The fund managers of these
investors, Mr. Colin Peterson and Mr. Michael Meixler, are each seeking a seat on our Board of
Directors to replace our current Directors, Mr. frank Newman and Mr. Barry Steven Sykes. The
Board of Directors of SFB Bancorp urges you to vote FOR our nominees for directors on our WHITE
proxy card, and to discard any other proxy materials you receive from these investors. Please also note
that our Board of Directors recently appointed Dr. Harriette L. Hampton to the Board. Dr. Hampton is
from our community, beneficially owns a significant number of shares of common stock of the
Company and continues to have ties to our community. Under our Bylaws, Dr. Hampton must stand
for election at our next Annual Meeting of Stockholders. So, in addition to voting FOR Mr. Newman
and Mr. Sykes, the Board of Directors urges you to FOR Dr. Harriette L. Hampton on our WHITE
proxy card.
The Board's opposition to these investors is based in part on the fol!owing factors: (l) These investors
have no connection, contact or knowledge of our community or customer base; (2) Our plans to
employ part of our capital to expand into neighboring counties as well as to renovate our main office
and build a new Branch have either been ignored or rejected; (3) We believe that these activist
investors are stock traders, seeking a quick, fire sale of our Company; (4) Mr. Frank Newman and Mr.
Barry Steven Sykes possess impeccable credentials and status in the community regardless of the
number of shares they own. Upon receipt of your proxy materials next week, we urge you to vote
FOR Mr. Frank Newman, Mr. Barry Steven Sykes and Dr. Harriette L. Hampton as Directors
of SFB Bancorp, Inc.
You will be receiving our proxy materials and WHITE proxy card in the mail in a few days. We
urge you to vote FOR the Company's nominees for director and to sign and return the WHITE
proxy card by mail in the postage-paid envelope that will be provided.
Since going public in 1997, Security Federal Bank has repurchased approximately 40% of the shares
issued in the initial public offering boosting current book value to $40.00 per share. We are committed
to operating the Bank in a safe, prudent and conservative manner for the benefit of our shareholders,
many of whom have been with us for decades and are loyal and appreciative investors. Our goal is to
grow the Bank so that we have One Hundred Million Dollars ($100,000,000.00) in total assets while
protecting your investment. Your vote for Mr. Frank Newman, Mr. Barry Steven Sykes and Dr.
Telephone (423) 543-1000
•
Facsimile (423) 543-5755
Harriette L. Hampton may be one of the most important in the history of Security Fedenl Bank.
Finally, we welcome any comments or concerns which you may have based upon materials or
information you may have received from these out-of-state activist investors.
--....
..
Sinc�yours:�==::,
--2>
SECURITY FEDERAL BANK
Dedicated to
our Community
Meet our Board of Director Candidates...
Frank D. Newman, Jr.
A native of Florida, Frank attended the University of Florida and received Bachelor of Science and
Doctor of Law degrees. Active in campus politics and ROTC, he was admitted to Florida Blue Key, an
honorary leadership society. After graduation and service in the military, he practiced law in Lake
Wales, Florida until 1967 when he volunteered in the U.S. Army Special Forces (Green Berets). He
served as an "A-Team" commander in Vietnam 1967 -1968 and was awarded the Bronze Star. Back
in the U. S. he returned to the practice of law, specializing in probate litigation and estate planning.
He was elected to the Board of Governors of The Florida Bar. In 2002 he and his wife Gail moved
to Carter County, Tennessee, where he resumed the practice of law in Elizabethton, again limiting
his practice to probate matters and estate planning. A member of the Board of Directors of Security
Federal Bank since 2005, Frank serves as Secretary of the Bank. He also works closely with our
Trust Department.
Mr. Sykes is the Co-Principal and founder of Reedy & Sykes, Architecture and Design located
in downtown Elizabethton, Tn, primarily serving East Tennessee and Western North Carolina.
Since 1983 Reedy & Sykes has been providing awarding winning design services for residential,
commercial, governmental, and ecclesiastical projects.
Before forming Reedy & Sykes, while still in Architectural School, Mr. Sykes started Steven Sykes,
Design Build, designing and constructing residential renovations, additions, and new homes,
specializing in passive solar design, and energy efficient construction.
Mr. Sykes is a 1971 graduate of Elizabethton High School, and received a Bachelor of Architecture
Degree from the University ofTennessee in 1976. He is a Registered Architect in Tennessee, North
Carolina, South Carolina, Colorado, and Florida. He is past President of AIA Northeast Tennessee,
a Security Federal Bank Board Member, and serves on the Elizabethton Airport Commission.
Harriette L. Hampton, MD
Barry Steven Sykes
Harriette L. Hampton was born and raised in Elizabethton, Tennessee. She graduated from
Elizabethton High School in 1975. She earned a Bachelor of Science degree from ETSU summa cum
laude. She is an honor graduate of the ETSU College of Medicine. She completed her internship and
residency in Obstetrics and Gynecology at the University of Mississippi Medical Center and joined
the academic faculty in 1986. She is currently a professor and practitioner in Jackson, Mississippi.
During her career, she has received numerous awards and honors for teaching and clinical skills.
She is a member of the American College of Obstetricians and Gynecologists and the Mississippi
State Medical Association. Upon retirement, Harriette's future plans are to relocate to Northeast
Tennessee to pursue her interest in architecture/design and community development. Harriette is
the daughter of Peter W. Hampton, President of Security Federal Bank from 1963 until his death in
2012, and the sister of Bill Hampton, a Director and CEO of Security Federal Bank.
CALL OR VISIT US TODAYI
Main office
(adjacent to the covered bridge)
632 East Elk Avenue• Elizabethton, TN 37643
423-543-1000
West Elizabethton Branch
(adjacent to Post Office)
111 Charlie Robinson Dr.• Elizabethton, TN 37643
423-543-4333
www.secfed.com
Security Federal Flyer_2016-104-44-1_ES_[D]_J58_V1 b
8.5" X 11"
18 April 2016_Deep
SFB Bancorp, Inc
.
632 East Elk Avenue, Elizabethton, Tennessee 37643
(423) 543-1000
April 20, 2016
Dear Fellow Stockholder:
On behalf of the Board of Directors and management of SFB Bancorp, Inc. (the "Company"), I cordially
invite you to attend the Annual Meeting of Stockholders to be held at the offices of the Company, 632 East Elk
Avenue, Elizabethton, Tennessee, on May 19, 2016, at 2:00 p.m. The attached Notice of Annual Meeting and
Proxy Statement describe the formal business to be transacted at the Annual Meeting. During the Annual
Meeting, I will report on the operations of the Company. Directors and officers of the Company, as well as a
representative of Dixon Hughes Goodman LLP, certified public accountants, will be present to respond to
questions that you may have.
The Board of Directors has unanimously approved three nominees for election as directors of the
Company, all of whom are currently directors of the Company. The nominees approved by your Board of
Directors are: Frank D. Newman, a director of the Company since 2005 and currently Vice Chairman of the
Board, Barry Steven Sykes, a director of the Company since 2007, and Dr. Harriette L. Hampton, who was
appointed to the Board of Directors in 2016 (the “Nominees”). The Board of Directors has unanimously
approved the Nominees and recommends that you vote FOR such Nominees on the enclosed WHITE voting
proxy form.
It is extremely important that you vote this year. You may have recently received mailings or phone
calls from one or two very small investment advisory firms or hedge funds located in Scottsdale and Show Low,
Arizona. Two individuals affiliated with these small pooled funds may be attempting to “run for the Bank’s
board of directors.” We encourage you to discard their mailings, ignore their phone calls and do nothing in
support of them. We have included more information in our enclosed Proxy Statement about these Arizona
hedge funds and the other individuals working in concert with them in an attempt to take over your Company for
their personal enrichment and the enrichment of their clients.
Your vote is important, regardless of the number of shares you own and regardless of whether you plan
to attend the Annual Meeting. I encourage you to read the enclosed proxy statement carefully and sign and
return the enclosed WHITE proxy card as promptly as possible because a failure to do so could cause a delay in
the Annual Meeting and additional expense to the Company. A postage-paid return envelope is provided for
your convenience. This will not prevent you from voting in person, but it will assure that your vote will be
counted if you are unable to attend the Annual Meeting. If you do decide to attend the Annual Meeting and feel
for whatever reason that you want to change your vote at that time, you will be able to do so. However, if you
are a stockholder whose shares are not registered in your own name, you will need additional documentation
from your record holder to vote personally at the meeting. If you are planning to attend the Annual Meeting,
please let us know by marking the appropriate box on the proxy card.
Sincerely,
Peter W. Hampton, Jr.
President and CEO
SFB BANCORP, INC.
632 EAST ELK AVENUE
ELIZABETHTON, TENNESSEE 37643
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 19, 2016
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Meeting") of SFB Bancorp, Inc.
(the "Company"), will be held at the offices of the Company, 632 East Elk Avenue, Elizabethton, Tennessee, on
May 19, 2016, at 2:00 p.m. for the following purposes:
1.
To elect three directors of the Company.
all as set forth in this Proxy Statement accompanying this Notice, and to transact such other business as may
properly come before the Meeting and any adjournments. The Board of Directors is not aware of any other
business to come before the Meeting, other than as set forth herein. Execution of a proxy, however, confers on
the designated proxy holder the discretionary authority to vote the shares represented by such proxy in
accordance with their best judgment on such business, if any, which may properly come before the Meeting or
any adjournment thereof. Stockholders of record at the close of business on April 11, 2016, are the stockholders
entitled to vote at the Meeting and any adjournments thereof.
A copy of the Company’s Annual Report for the fiscal year ended December 31, 2015 is enclosed.
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU
OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE ENCOURAGE YOU TO
SIGN, DATE AND RETURN THE ENCLOSED WHITE PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. ALL STOCKHOLDERS OF RECORD CAN VOTE BY THE WHITE
PROXY CARD. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE NOT
REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM
YOUR RECORD HOLDER TO VOTE PERSONALLY AT THE MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
Frank D. Newman
Secretary
Elizabethton, Tennessee
April 20, 2016
IMPORTANT: THE PROMPT RETURN OF THE WHITE PROXY CARD WILL SAVE THE
COMPANY THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE
A QUORUM AT THE MEETING. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR
YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
PROXY STATEMENT
OF
SFB BANCORP, INC.
632 EAST ELK AVENUE
ELIZABETHTON, TENNESSEE 37643
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 19, 2016
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors
of SFB Bancorp, Inc. (the "Company") to be used at the Annual Meeting of Stockholders of the Company which
will be held at the offices of the Company, 632 East Elk Avenue, Elizabethton, Tennessee, on May 19, 2016,
2:00 p.m. local time (the "Meeting").
All properly executed written WHITE proxies that are delivered pursuant to this Proxy Statement will be
voted on all matters that properly come before the Meeting for a vote. If your signed WHITE proxy specifies
instructions with respect to matters being voted upon, your shares will be voted in accordance with your
instructions. If no instructions are specified in your signed WHITE proxy card, your shares will be voted (a)
FOR the election of directors named in Proposal 1, and (b) in the discretion of the proxy holders, as to any other
matters that may properly come before the Meeting (including any adjournment). Your proxy may be revoked at
any time prior to being voted by: (i) filing with the Secretary of the Company (Frank D. Newman, at 628 East
Elk Avenue, Elizabethton, Tennessee 37643) written notice of such revocation, (ii) submitting a duly executed
proxy card bearing a later date, or (iii) attending the Meeting and giving the Secretary notice of your intention to
vote in person.
Other than as set forth herein, the Board of Directors knows of no additional matters that will be
presented for consideration at the Meeting. Execution of a proxy, however, confers on the designated proxy
holder the discretionary authority to vote the shares represented by such proxy in accordance with their best
judgment on such other business, if any, which may properly come before the Meeting or any adjournment
thereof.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Stockholders of record as of the close of business on April 11, 2016 (the "Record Date"), are entitled to
one vote for each share of common stock of the Company (the "Common Stock") then held. As of the Record
Date, the Company had 365,158 shares of Common Stock issued and outstanding.
The charter of the Company ("Charter") provides that without the prior approval by two-thirds vote of
the Continuing Directors, any record owner of any outstanding Common Stock which is beneficially owned,
directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of
Common Stock (the "Limit") shall only be entitled or permitted to cast 1/100th of a vote with respect to any
shares held in excess of the Limit. Beneficial ownership is determined pursuant to the definition in the Charter
and includes shares beneficially owned by such person or any of his or her affiliates (as such terms are defined in
the Charter), or which such person or any of his or her affiliates has the right to acquire upon the exercise of
conversion rights or options and shares as to which such person or any of his or her affiliates or associates have
or share investment or voting power, but neither any employee stock ownership or similar plan of the Company
or any subsidiary, nor any trustee with respect thereto or any affiliate of such trustee (solely by reason of such
capacity of such trustee), shall be deemed, for purposes of the Charter, to beneficially own any Common Stock
held under any such plan.
The presence in person or by proxy of at least a majority of the outstanding shares of Common Stock
entitled to vote (after subtracting any shares held in excess of the Limit) is necessary to constitute a quorum at the
Meeting. Under Tennessee law, a share represented for any purpose at a meeting of stockholders is deemed
present for quorum purposes for the remainder of the Meeting and any adjournments unless a new record date is
set. The Company will treat broker non-votes as present for purposes of a quorum. In the event there are not
sufficient shares present for a quorum, at the time of the Meeting, the Meeting may be adjourned in order to
permit the further solicitation of proxies. In addition, the Meeting may be adjourned in order to solicit additional
proxies, if necessary, even if there are sufficient shares present for a quorum.
As to the election of directors, as set forth in Proposal 1, the WHITE proxy being provided by the Board
enables a stockholder to vote for the election of the Nominees proposed by the Board, or to withhold authority to
vote for the Nominees being proposed. Directors are elected by a plurality of votes cast by the shares entitled to
vote at a meeting in which a quorum is present.
PRINCIPAL HOLDERS
The following table sets forth, as of the Record Date, persons or groups who are known to own more
than 5% of the Common Stock.
Name and Address of Beneficial Owner
Amount and Nature of
Beneficial Ownership
Percent of Shares of
Common Stock
Outstanding (%)
Security Federal Bank
Employee Stock Ownership Plan ("ESOP")
632 East Elk Avenue
Elizabethton, Tennessee 37643
38,680(1)
10.6
Peter W. Hampton Trust
Harriette L. Hampton Trustee
500 Northlake Ave.
Ridgeland, Mississippi 39157
48,306
13.2
630 East Elk Avenue
Elizabethton, Tennessee 37643
28,292
7.8
Trondheim Capital Partners LP
2224 S. Buckaroo Trail
Gilbert, AZ 85295-3521
32,600
8.9
Jack Reuben
6598 Grande Orchid Way
Delray Beach, FL 33446-4333
28,057
7.7
_________________________
(1) The ESOP previously purchased such shares for the exclusive benefit of plan participants. The Board
of Directors has appointed a committee consisting of non-employee directors Frank D. Newman,
Michael L. McKinney and Barry Steven Sykes to serve as the ESOP administrative committee ("ESOP
Committee") and to serve as the ESOP trustees ("ESOP Trustee"). The ESOP Committee or the Board
instructs the ESOP Trustee regarding investment of ESOP plan assets. The ESOP Trustee will vote all
shares allocated to participant accounts under the ESOP as directed by participants. Shares for which no
timely voting direction is received by the ESOP Trustee will be voted by the ESOP Trustee in the same
proportion as the aggregate voting directions received from all ESOP participants to vote for or against
a matter. As of the Record Date, 38,680 shares have been allocated under the ESOP to participant
accounts.
2
PROPOSAL 1 - ELECTION OF DIRECTORS
Election of Directors
The Charter requires that directors be divided into three classes, as nearly equal in number as possible,
each class to serve for a three year period, with approximately one-third of the directors elected each year. The
Board of Directors currently consists of six members, each of whom also serves as a director of Security Federal
Bank (the "Bank"). Two directors will be elected at the Meeting to serve for a three year term and one director
will be elected to serve a two year term, and in all cases until his or her successor has been elected and qualified.
Frank D. Newman and Barry Steven Sykes have been nominated by the Board of Directors to serve a
term of three years. As stated above, because the Charter requires that directors be divided into three classes, as
nearly equal in number as possible, Dr. Harriette L. Hampton has been nominated by the Board of Directors to
serve a term of two years. All Nominees are currently members of the Board of Directors. The persons named as
proxies in the enclosed WHITE proxy card intend to vote for the election of the Nominees, unless the proxy card
is marked to indicate that such authorization is expressly withheld. Should any of the Nominees withdraw or be
unable to serve (which the Board of Directors does not expect) or should any other vacancy occur in the Board of
Directors, it is the intention of the persons named in the enclosed WHITE proxy card to vote for the election of
such persons as may be recommended to the Board of Directors by the Nominating Committee of the Board. If
there is no substitute nominee, the size of the Board of Directors may be reduced but to a number no less than
five.
The following table sets forth information with respect to the Nominees, their names, title, age, and the
year they first became a director of the Company or the Bank, the expiration date of their current terms as
directors, and the number and percentage of shares of the Common Stock beneficially owned. Beneficial
ownership of executive officers and directors of the Company, as a group, is also set forth under this caption.
3
Name and Title
Age (1)
Year First
Elected or
Appointed (2)
Current Term
to Expire
Shares of
Common Stock
Beneficially
Owned as of
Record Date
Percent
Owned %
BOARD NOMINEE FOR TERM TO EXPIRE IN 2019
Frank D. Newman
Director, Vice Chairman
82
2005
2016
200 (3)
*
Barry Steven Sykes
Director
62
2007
2016
725 (3)
*
2016
2016
62,731
17.2
BOARD NOMINEE FOR TERM TO EXPIRE IN 2018
Dr. Harriette L. Hampton (4)
58
DIRECTORS CONTINUING IN OFFICE
Chairman, President/CEO and
Director
65
1994
2018
28,292
7.8
Michael L. McKinney
Director
56
1999
2017
1,350 (3)
*
Carmella F. Price
Director, President of
63
2013
2017
14,738
4.0
All directors and executive officers
of the Company as a group
(7 persons)
108,036
__________________________
*
Less than 1.0% of Common Stock outstanding.
(1) At December 31, 2015.
(2) Refers to the year the individual first became a director of the Company or the Bank.
(3) Excludes 38,680 shares of Common Stock under the ESOP for which Messrs. Newman, McKinney and Sykes
serve as a member of the ESOP Committee and ESOP trustees. The individuals either serving as members of
the ESOP Committee or ESOP trustees, disclaim beneficial ownership as to such shares. The ESOP Trustees
will vote all shares allocated to participant accounts under the ESOP as directed by participants. Shares for
which no timely voting direction is received by the ESOP Trustees will be voted by the ESOP Trustees in the
same proportion as the aggregate voting directions received from all ESOP participants to vote for or against a
matter.
(4) Dr. Harriette L. Hampton is the sister of Peter W. Hampton, Jr., Chairman, President and CEO of the Company.
Includes 48,306 shares held by the Peter W. Hampton Trust, of which she is the sole Trustee. Also includes
13,603 shares held by the Margaret Hampton Revocable Trust and IRA, of which she is the sole Trustee.
4
29.6
Biographical Information
Set forth below is certain information with respect to the directors, including director Nominees
and executive officers of the Company. Except as noted, all directors of the Bank in March 1997 became
directors of the Company at that time. Executive Officers receive compensation from the Bank. All
directors and executive officers have held their present positions for five years unless otherwise stated.
Frank D. Newman was appointed to the Boards of the Directors of the Bank and the Company in 2005
and elected Vice Chairman of the Board of the Bank and the Company in February 2010. Mr. Newman is a
practicing attorney specializing in probate-related matters and estate planning. Mr. Newman is a member of the
Elizabethton Kiwanis Club, a director of the Tri-Cities Estate Planning Council, and a member of St. Thomas
Episcopal Church in Elizabethton.
Barry Steven Sykes was appointed to the Boards of the Directors of the Bank and the Company in 2007.
Mr. Sykes is a principal in the architectural and design firm of Reedy and Sykes. Mr. Sykes has formerly served
as President of the Northeast Tennessee Chapter of the American Institute of Architects. Mr. Sykes is registered
to practice in Tennessee, North Carolina, Colorado, South Carolina, and Florida.
Dr. Harriette L. Hampton was appointed to the Board of Directors of the Company and the Bank in
2016. Dr. Hampton has been a Professor, School of Medicine, Department of Obstetrics and Gynecology,
University of Mississippi Medical Center, since 2008. Dr. Hampton is a licensed physician, a member of the
American College of Obstetricians and Gynecologists, and the Mississippi State Medical Association. Dr.
Hampton has received numerous honors, awards and recognitions in her field of her expertise. Dr. Hampton
owns property in East Tennessee and plans to retire there. Dr. Hampton is the sister of Peter W. Hampton, Jr.
and the Trustee of the Peter W. Hampton Trust.
Michael L. McKinney was appointed to the Boards of the Directors of the Bank and the Company in
1999. Since 1983, Mr. McKinney has been a self-employed general contractor in Elizabethton, Tennessee.
Carmella F. Price was appointed to the Boards of the Directors of the Bank and the Company in 2013.
Mrs. Price has been employed by Security Federal Bank since 1973 and has supervised lending for the bank for
30 years. In January 2011 she was promoted to President of Security Federal Bank. She currently serves on the
Board of the Elizabethton/Carter County Chamber of Commerce, the Carter County Community Board for
Mountain States Health Alliance, and is member of the Elizabethton Rotary Club having served as President in
2004-2005.
Peter W. Hampton, Jr. has been a member of the Boards of Directors of the Bank and the Company
since 1994. In February 2010 he was elected Chairman of the Board of the Bank and the Company. In January
2011, Mr. Hampton was appointed interim President and CEO of the Company then elected these positions in
May of the same year. In 2011 Mr. Hampton was also appointed as CEO of the Bank. Mr. Hampton practices
law in Elizabethton, Tennessee and has been employed as our General Counsel since 1994. Mr. Hampton is the
brother of Dr. Harriette L. Hampton.
Bank Executive Officer Who Is Not A Director
David LeVeau, 49, is Chief Financial Officer and Executive Vice President of the Company and the
Bank. He received Bachelor Science degree in Business Administration from the University of North Carolina –
Chapel Hill in 1989 and Masters of Accountancy at East Tennessee State University in 2005. Mr. LeVeau is
currently serving as President Elect of the Elizabethton Kiwanis Club. He has served as Treasurer and Director
on the Board of Directors of the Elizabethton/Carter County Chamber of Commerce from 2009-2015. Mr.
LeVeau also has served on the Board of Directors of the Elizabethton Soccer Association from 2000-2011 having
served as President in 2008-2011.
5
Meetings and Committees of the Board of Directors
The Board of Directors conducts its business through meetings of the Board and through its committees.
During the year ended December 31, 2015, the Board of Directors held a total of twelve meetings. In addition to
other committees, as of December 31, 2015, the Board had a Nominating Committee and Audit Committee.
The Nominating Committee consists of the Board of Directors of the Company. Nominations to the
Board of Directors made by stockholders must be made in writing to the Secretary and received by the Company
not less than 60 days prior to the anniversary date of the immediately preceding annual meeting of stockholders
of the Company. Notice to the Company of such nominations must include certain information required pursuant
to the Company's bylaws. The Nominating Committee, which is not a standing committee, typically meets
annually.
The Audit Committee is comprised of Directors Newman, McKinney and Sykes. This standing
committee is responsible for developing and maintaining the Company's internal and external audit review
program. The Committee also meets with the Company's independent accountants. The Committee met meets at
least quarterly each year.
INFORMATION ABOUT THE SO-CALLED “CONCERNED SHAREHOLDERS
OF SFB BANCORP, INC.”
A group calling itself the “Concerned Shareholders of SFB Bancorp, Inc.” has created a website and may
have recently attempted to communicate with our stockholders. It appears that this group consists only of the
website’s creator, Colin Peterson, the managing member of Trondheim Capital, LLC, a registered investment
advisor based in Scottsdale, Arizona. Neither Colin Peterson nor Trondheim Capital, LLC are stockholders of
the Company as neither of them own a single share of common stock of the Company. Trondheim Capital
Partners, L.P., a hedge fund in Scottsdale, Arizona (“TCP”), holds 32,600 shares of the Company’s common
stock. According to Mr. Peterson, Trondheim Capital, LLC is the general partner of TCP. Mr. Peterson, who
personally owns no shares of common stock of the Company, through TCP, has attempted to nominate himself to
the Company’s Board of Directors. Also, through TCP, he has attempted to place a stockholder proposal on the
agenda for the Meeting requiring, among other things, the Company to stop purchasing U.S. Treasury and
municipal securities, despite the fact that these are among the safest investments the Company can make. In
addition, Mr. Peterson’s proposal is not a proper subject for stockholder action under Tennessee corporate law
and the Bylaws of the Company. Therefore, such proposal will not be considered or voted on at the Meeting.
WE URGE YOU NOT TO VOTE FOR ANY PROPOSAL TCP OR MR. PETERSON MAY REQUEST
FROM YOU AND TO DISCARD ANY MATERIALS SENT TO YOU BY MR. PETERSON OR TCP.
Despite attempting to nominate himself for a board seat, we do not believe Mr. Peterson’s real agenda is
to serve on the Company’s board of directors. For the past several weeks, Mr. Peterson, along with two other
individuals discussed below, has been attempting to force the Company to buy back all shares of Company stock
owned by TCP for over $1.3 million. The Company believed it had reach an agreement on a reduced purchase
price for the stock, but Mr. Peterson’s New York lawyers starting adding conditions to the purchase agreement
that would, among other things, require your Company to pay a $50,000 “breakup fee” to TCP as compensation
for the “impact” on TCP’s “reputation” if the Company was not able to obtain regulatory approval by a certain
date for the repurchase of shares. The Company has no control over federal and state banking authorities and
cannot guaranty regulatory approval of any transaction. The Company did not agree to this unreasonable and
expensive condition which would benefit only one stockholder and perhaps a few of his family members and
friends, including Mr. Peterson’s mother.
Meixler Investment Management, LTD., is a small investment advisory firm located in Show Low,
Arizona. Michael Meixler is the President of Meixler Investment Management, LTD., and a record owner of
15,875 shares of the Company’s common stock. Mr. Meixler has attempted to nominate himself to the Board of
Directors and submit a stockholder proposal for consideration at the Meeting. Mr. Meixler’s proposal would
require the Company to retain a financial advisor to explore “long-term options, including a sale of Security
6
Federal Bank.” Like Mr. Peterson’s proposal, Mr. Meixler’s proposal is not a proper subject for stockholder
action under Tennessee corporate law and the Bylaws of the Company. It, therefore, will not be considered or
voted on at the Meeting. YOUR COMPANY URGES YOU NOT TO VOTE FOR ANY PROPOSAL MR.
MEIXLER MAY REQUEST FROM YOU AND TO DISCARD ANY MATERIALS SENT TO YOU BY
MR. MEIXLER.
Since going public in 1997, the Company has repurchased approximately 40% of the shares issued in the
initial public offering boosting current book value to $40.09 per share. We are committed to operating the Bank in
a safe, prudent and conservative manner for the benefit of our shareholders, many of whom have been with us for
decades and are loyal and appreciative investors. Our goal is to grow the Bank so that we have One Hundred
Million Dollars ($100,000,000.00) in total assets, while protecting your investment. Your vote for Mr. Frank
Newman, Mr. Steven Barry Sykes and Dr. Harriette L. Hampton, may be one of the most important in the history
of the Company.
Mr. Colin Peterson and Mr. Michael Meixler, are each seeking a seat on our Board of Directors replacing
our current Directors, Mr. Frank Newman and Mr. Steven Barry Sykes. The Board of Directors of SFB Bancorp
urges you to vote FOR our nominees for directors on our WHITE proxy card and to discard any other proxy
materials you receive from these investors. The Board's opposition to these investors is based in part on the
following factors: (1) These investors have no connection, contact or knowledge of our community or customer
base; (2) Our plans to employ part of our capital to expand into neighboring counties as well as to renovate our
main office and build a new branch have either been ignored or rejected; (3) We are convinced that these investors
are stock traders, not investors, seeking a quick, fire sale of our Company; (4) Our current Directors seeking
election possess impeccable credentials and status in the community regardless of the number of shares they own.
Upon receipt of your proxy materials, we urge you to vote FOR Mr. Frank Newman, Mr. Steven Barry Sykes
and Dr. Harriette L. Hampton.
DIRECTOR COMPENSATION
Each of the directors is paid a monthly fee of $600. Additionally, each director, other than Mrs. Price, is
also a member of the Executive/Loan Committee and receives a fee of $35 per meeting attended.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank, like many financial institutions, has followed a policy of granting various types of loans to
officers, directors, and employees. The loans have been made in the ordinary course of business and on
substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with the Bank's other customers, and do not involve more than the normal risk of collectability, or
present other unfavorable features. In addition, Peter W. Hampton, Jr. performs certain legal work for the Bank.
MISCELLANEOUS
The cost of soliciting proxies will be borne by the Company. The Company will reimburse brokerage
firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy
materials to the beneficial owners of Common Stock. In addition to solicitations by mail, directors, officers, and
regular employees of the Company or the Bank may solicit proxies personally or by telegraph or telephone
without additional compensation. If necessary, the Board of Directors may adjourn the Meeting to solicit
additional proxies. The Company has retained Laurel Hill Advisory Group to assist in the solicitation of proxies
for the Meeting. If you have any questions about voting your shares, or need additional assistance, please
contact Laurel Hill Advisory Group toll-free at (888) 742-1305.
7
OTHER MATTERS
The Board of Directors is not aware of any business to come before the Meeting other than those matters
described in this Proxy Statement. However, if any other matters should properly come before the Meeting or any
adjournment thereof, it is intended that proxies in the accompanying form will be voted in respect thereof in
accordance with the determination of the Board of Directors.
BY ORDER OF THE BOARD OF DIRECTORS
Frank D. Newman
Secretary
April 20, 2016
The Company’s Proxy Solicitor is:
2 Robbins Lane, Suite 201
Jericho, New York 11753
Banks and Brokers Call (516) 933-3100
All Others Call Toll-Free (888) 742-1305
8
2015
Annual Report
SFB Bancorp, Inc.
SFB Bancorp, Inc.
2015 Annual Report
Table of Contents
Letter to Stockholders
Independent Auditors’ Report ..................................................................... 1-2
Consolidated Financial Statements ............................................................ 3-8
Notes to Consolidated Financial Statements............................................ 9-30
Corporate Information ............................................................................. 31-32
SFB Bancorp, Inc.
Consolidated Financial Statements
Years Ended December 31, 2015 and 2014
SFB Bancorp, Inc. and Subsidiary
Table of Contents
Independent Auditors’ Report ..................................................................................................................
1
Financials Statements:
Consolidated Balance Sheets .............................................................................................................
3
Consolidated Statements of Income ...................................................................................................
4
Consolidated Statements of Comprehensive Income .........................................................................
5
Consolidated Statements of Stockholders’ Equity ..............................................................................
6
Consolidated Statements of Cash Flows ............................................................................................
7
Notes to Consolidated Financial Statements ......................................................................................
9
Corporate Information..........................................................................................................................
31
INDEPENDENT AUDITORS’ REPORT
Board of Directors
We have audited the accompanying consolidated financial statements of SFB Bancorp, Inc. and Subsidiary
(the “Company”), which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and
the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash
flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation, and maintenance of internal control relevant to the preparation
and fair presentation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
1
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of SFB Bancorp, Inc. and Subsidiary as of December 31, 2015 and 2014, and the
results of their operations and their cash flows for the years then ended in accordance with accounting
principles generally accepted in the United States of America.
Charlotte, North Carolina
April 18, 2016
2
Consolidated Balance Sheets
December 31, 2015 and 2014
(in thousands, except share and per share data)
2015
ASSETS
Cash on hand
Interest-earning deposits
Cash and cash equivalents
$
Investment securities:
Held to maturity
(market value of $3,597 in 2015 and $2,515 in 2014)
Available for sale
(amortized cost of $14,132 in 2015 and $9,614 in 2014)
Loans receivable, net
Premises and equipment, net
Other real estate owned
Federal Home Loan Bank stock, at cost
Accrued interest receivable
Bank owned life insurance
Other assets
Total assets
556
1,442
1,998
2014
$
594
1,992
2,586
3,588
2,452
14,316
38,541
630
22
735
266
2,089
837
9,812
38,623
651
735
248
2,038
736
$
63,022
$
57,881
$
2,088
42,829
44,917
$
1,384
40,355
41,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Federal Home Loan Bank advances
Advance payments by borrowers for taxes and insurance
Accrued expenses and other liabilities
Deferred tax liability
Total liabilities
3,000
116
80
271
1,500
121
136
235
48,384
43,731
46
(1,666)
2,242
13,900
116
46
(1,661)
2,242
13,401
122
14,638
14,150
Commitments and contingencies
Stockholders' equity:
Common stock ($.10 par value, 4,000,000 shares
authorized; 458,270 shares issued and outstanding
at December 31, 2015 and 2014)
Treasury stock -- 93,112 and 92,887 shares--at cost
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
$
3
63,022
$
57,881
Consolidated Statements of Income
(in thousands, except per share data)
2015
Interest income:
Loans
Investments
$
Total interest income
2014
2,264
359
$
2,291
324
2,623
2,615
Interest expense:
Deposits
Federal Home Loan Bank advances
247
12
281
15
Total interest expense
259
296
2,364
2,319
Net interest income
Provision for (recovery of) loan losses
28
Net interest income after provision for loan losses
(47)
2,336
2,366
Non-interest income:
Loan fees and service charges
Bank owned life insurance
Other
180
50
251
128
38
160
Total non-interest income
481
326
975
155
116
106
477
917
147
129
116
482
Total non-interest expenses
1,829
1,791
Income before income taxes
988
901
306
281
Non-interest expenses:
Compensation
Employee benefits
Net occupancy expense
Data processing
Other
Income tax expense
Net income
Earnings per share:
Basic
Diluted
4
$
682
$
620
$
$
1.87
1.87
$
$
1.67
1.67
Consolidated Statements of Comprehensive Income
(in thousands)
2015
Net income
$
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for
sale, net of taxes of $(2) and $118, respectively
Comprehensive income
682
$
(6)
$
5
2014
676
620
180
$
800
Balance at December 31, 2015
Net income
Other comprehensive (loss)
Purchase of treasury stock
Cash dividends declared and paid
Net income
Other comprehensive income
Cash dividends declared and paid
$
$
46
-
46
-
46
Common
Stock
Consolidated Statements of Stockholders' Equity
(in thousands)
$
$
6
(1,666)
(5)
-
(1,661)
(394)
-
(1,267)
Treasury
Stock
$
$
2,242
-
2,242
-
2,242
Paid-in
Capital
$
$
13,900
682
(183)
13,401
620
(148)
12,929
Retained
Income
$
$
116
(6)
-
122
180
-
(58)
Accumulated
Other
Comprehensive
Income (Loss)
$
$
14,638
682
(6)
(5)
(183)
14,150
620
180
(394)
(148)
13,892
Total
Consolidated Statements of Cash Flows
(in thousands)
2015
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for (recovery of) loan losses
Gain on sale of loans
Proceeds from sale of loans
Loans originated for sale
Depreciation
Deferred income taxes
Cash surrender value of life insurance
Net decrease in deferred loan fees
Amortization of discounts/premiums
on investment securities, net
Gain on sale of other real estate owned
Net changes in:
Other assets
Accrued interest receivable
Accrued expenses and other liabilities
Net cash provided by operating activities
Investing activities:
Purchase of investment securities held to maturity
Maturities and calls of investment securities held to maturity
Purchase of investment securities available for sale
Maturities and calls of investment securities available for sale
Sales on investment securities available for sale
Sales on investment securities held to maturity
Principal payments on investment securities available
for sale
Net decrease in loans
Purchase of bank owned life insurance
Proceeds from the sale of other real estate owned
Proceeds from the sale of assets
Proceeds from the sale of premises and equipment
Gain on sale of other assets
Purchase of premises and equipment
Net cash used by investing activities
7
$
2014
682
$
625
28
(188)
5,012
(4,824)
66
41
(51)
(2)
(47)
(56)
1,647
(1,591)
71
(19)
(38)
(2)
42
(33)
69
(10)
(98)
(18)
(56)
601
(52)
(38)
63
622
(2,500)
1,367
(9,071)
1,482
2,203
-
(229)
571
(4,524)
138
1,858
823
(153)
220
(45)
(5,674)
532
(1,403)
(2,000)
109
214
35
(65)
(26)
(4,790)
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
2015
2014
Financing activities:
Net increase (decrease) in deposits
$
3,178
$
(185)
(Decrease) in advance payments by borrowers
for taxes and insurance
(5)
Proceeds from FHLB advances
(32)
1,500
Treasury stock acquired
Dividends paid
Net cash provided by financing activities
1,000
(5)
(394)
(183)
(148)
4,485
Decrease in cash and cash equivalents
241
(588)
Cash and cash equivalents at beginning of year
(3,927)
2,586
Cash and cash equivalents at end of year
6,513
$
1,998
$
2,586
$
272
$
309
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
411
411
209
99
Non-cash transactions:
Transfer from loans to real estate owned
Change in unrealized gains (losses) losses on securities and mortgagebacked securities available for sale, net of income taxes
$
8
(6)
$
176
Notes to Financial Statements
(Tabular amounts in thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies
The accounting and reporting policies of SFB Bancorp, Inc. (the “Company”) and its subsidiary, Security Federal
Bank (the “Bank”), conform, in all material respects, to U.S. generally accepted accounting principles and to general
practices within the banking industry. The following summarize the more significant of these policies and practices.
Nature of operations
The Company’s only line of business is investing in its bank subsidiary. The Bank’s principal line of business is
originating mortgage and non-mortgage loans, and accepting deposits from the general public from its offices in
Elizabethton, Tennessee.
Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the Bank, herein collectively
referred to as the Company. Inter-company balances and transactions have been eliminated.
Cash and Cash Equivalents
As presented in the consolidated statements of cash flows, cash, and cash equivalents include cash on hand and
interest-earning deposits in other banks.
Loans Receivable
Loans receivable are carried at their unpaid principal balance less, where applicable, net deferred loan fees and
allowances for losses. Additions to the allowances for losses are based on management’s evaluation of the loan
portfolio under current economic conditions and such other factors that, in management’s judgment, deserve
recognition in estimating losses. Interest accrual is discontinued when a loan becomes 90 days delinquent unless,
in management’s opinion, the loan is well secured and in process of collection. Past due status is based on
contractual terms of the loan. Interest income is accrued at the contractual rate based on the principal outstanding.
Interest income on impaired loans is recognized only to the extent of interest payments received.
Loan Fees
Loan fees result from the origination of loans. Such fees and certain direct incremental costs related to origination
of such loans are deferred (“net deferred loan fees”) and reflected as a reduction of the carrying value of loans. The
net deferred loan fees (or costs) are amortized using the interest method. Unamortized net deferred loan fees on
loans sold prior to maturity are credited to income at the time of sale. The Company’s net deferred loan fees were
approximately $3,000 and $5,000 at December 31, 2015 and 2014, respectively.
9
Mortgage Servicing Rights
Mortgage servicing rights assets result from sales of residential real estate loans to third parties, in which the sales
agreement calls for the Company to continue servicing the loan. The Company initially records servicing assets and
liabilities at fair value. The estimation of fair value requires management to make an estimate of prepayments of
the underlying loan sold. The Company amortizes servicing assets and liabilities over the contractual life of the
loan, and tests them for impairment on an annual basis.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual
percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. The
amortization of mortgage servicing rights is netted against loan servicing fee income. The Company serviced loans
with a remaining principal balance of approximately $12,942,000 and $10,106,000 at December 31, 2015 and 2014,
respectively.
Investment Securities and Mortgage-Backed Securities
Investment securities held to maturity are stated at amortized cost since the Company has both the ability and
positive intent to hold such securities to maturity. Premiums and discounts on the investment securities are
amortized or accreted into income over the contractual terms of the securities using a level yield interest method.
Gains and losses on the sale of these securities are calculated based on the specific identification method.
Investment securities and mortgage-backed securities available for sale are carried at fair value. The Company has
identified their holdings in certain debt securities and all mortgage-backed securities as available for sale. The
unrealized holding gains or losses on securities available for sale are reported, net of related income tax effects, as
accumulated other comprehensive income. Changes in unrealized holding gains or losses are included as a
component of other comprehensive income until realized. Gains or losses on sales of securities available for sale
are based on the specific identification method. Other than temporary impairment on investments is included in the
statement of income when identified.
Other Real Estate Owned
Real estate properties acquired through loan foreclosure are initially recorded at fair value less estimated costs to
sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated
costs to sell (net realizable value). Real estate property held for investment is carried at the lower of cost, including
cost of property improvements incurred subsequent to acquisition less depreciation, or net realizable value. Costs
relating to development and improvement of properties are capitalized, whereas costs relating to the holding of
property are expensed. Revenue and expenses from operations and changes in the valuation allowance are
included in net expenses from real estate. As of December 31, 2015, the Bank had no residential real estate loans
in the process of foreclosure and $22,000 of foreclosed residential real estate property included in foreclosed real
estate.
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation is
computed on a straight-line method over the estimated useful lives of the assets ranging from 5 to 40 years. The
cost of maintenance and repairs is charged to expense as incurred while expenditures that materially increase
property lives are capitalized.
Federal Home Loan Bank Stock
Investment in stock of a Federal Home Loan Bank (“FHLB”) is required by law of every federally insured savings
and loan or savings bank. The investment is carried at cost. No ready market exists for the stock, and it has no
quoted market value. Due to the redemption provisions of the FHLB, the Company estimated that fair value equals
cost and that this investment was not impaired.
10
Bank Owned Life Insurance
Bank owned life insurance policies represent the cash value of policies on certain officers of the Company.
Income Taxes
The Company follows the practice of filing consolidated income tax returns. Income taxes are allocated as though
separate returns are being filed.
Income taxes are provided for the tax effects of transactions reported in the financial statements. Deferred income
taxes are provided for the estimated tax effects of differences between the financial statement carrying amounts
and the tax bases of recognized assets and liabilities. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized.
Tax positions must meet a recognition threshold of moreͲlikelyͲthanͲnot in order for the benefit of those tax positions
to be recognized in the Company’s financial statements. The Company has determined that it does not have any
material unrecognized tax benefits or obligations as of December 31. Interest and penalties related to income tax
assessments, if any, are reflected in other non-interest expense in the accompanying statement of income. Fiscal
years ending on or after December 31, 2012 remain subject to examination by federal and state tax authorities.
Earnings Per Share
Basic earnings per share represents income available to common shareholders divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per share reflect additional common
shares that would have been outstanding if dilutive potential common shares had been issued, as well as any
adjustment to income that would result from the assumed issuance. Potential common shares that may be issued
by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.
For the years ended December 31, 2015 and 2014, there were no dilutive shares.
Earnings per share have been computed based on the following for the years ended December 31,:
2015
Net income applicable to stock
Average number of common shares
outstanding used to calculate basic and diluted
earnings per share
$
2014
682
365,189
$
625
373,763
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net
income. However 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 stockholders’ equity section of the balance sheet. Such
items, along with net income, are components of comprehensive income. Unrealized gains and losses on available
for sale securities are the sole component of accumulated other comprehensive income.
Reclassifications
Certain prior year amounts have been reclassified to conform to the December 31, 2015 presentation with no impact
on stockholders’ equity or net income as previously reported.
11
Subsequent Events
The Company has evaluated subsequent events through April 18, 2016, the date these consolidated financial
statements were available to be issued.
2.
Investment Securities
The amortized cost and estimated fair values of investment securities are summarized as follows:
Securities to be held to
maturity:
December 31, 2015
Municipal securities
Certificates of deposit
December 31, 2014
U.S. government security
Certificates of deposit
Securities available for sale:
December 31, 2015:
U.S. government securities
Collateralized mortgage
Obligations
Mortgage-backed securities:
GNMA
FNMA
FHLMC
Total securities available for
sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
9
-
$
-
758
2,830
Estimated
Fair
Value
$
767
2,830
$
3,588
$
9
$
-
$
3,597
$
994
1,128
330
$
6
57
-
$
-
$
1,000
1,185
330
$
2,452
$
63
$
-
$
2,515
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
$
$
$
8,538
1,460
222
6
6
8,760
1,460
356
1
-
357
1,203
1,487
1,088
1
17
16
7
1,186
1,471
1,082
14,132
12
$
230
$
46
$
14,316
December 31, 2014:
SBA Development
Company Participation
Certificates
U.S. government securities
Obligations
GNMA
FNMA
FHLMC
Total securities available for
sale
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
$
$
399
5,075
739
193
8
425
-
5
998
1,029
949
$
12
1
14
3
9,614
$
223
$
387
5,267
747
-
430
12
-
986
1,043
952
25
$
9,812
Although mortgage-backed securities are initially issued with a stated maturity date, the underlying mortgage
collateral may be prepaid by the mortgagee and, therefore, such securities may not reach their maturity date. The
amortized cost and estimated market values of debt securities by contractual maturity are as follows:
Amortized Cost
2014
2015
Securities to be held to
maturity:
Due in one year
Due after one year through
five years
Due after 5 years through
ten years
Due after 10 years
$
$
272
$
994
Estimated Fair Value
2015
2014
$
280
$
1,000
3,316
330
3,317
330
-
852
276
-
899
286
3,588
13
$
2,452
$
3,597
$
2,515
Amortized Cost
2014
2015
Securities available for sale:
Due in one year
Due after one year through
five years
Due after five years through
ten years
Due after ten years
$
Mortgage-backed securities
356
$
Estimated Fair Value
2015
2014
-
$
357
$
-
863
250
861
250
6,891
2,244
2,543
3,845
7,035
2,324
2,624
3,957
$
10,354
$
6,638
$
10,577
$
6,831
$
3,778
$
2,976
$
3,739
$
2,981
The Company had investment securities with an amortized cost of approximately $6,907,000 and $4,250,000
pledged against public deposits at December 31, 2015 and 2014, respectively.
The following table reflects all investment securities held in a continuous loss position for less than 12 months and
for 12 months or longer at December 31, 2015 and 2014.
Less Than 12 Months
Unrealize
Fair
d
Value
Losses
Description
2015
U.S. Government Securities
2014
SBA Development
Company participation
certificates
$ 1,211
3,008
12 Months or Longer
Fair
Value
Total
Unrealized
Losses
$
6
35
$
280
$
5
Fair
Value
$ 1,211
3,288
Unrealized
Losses
$
6
40
$
4,219
$
41
$
280
$
5
$
4,499
$
46
$
114
$
1
$
-
$
-
$
114
$
1
480
$
594
3
$
4
387
504
$
891
12
9
$
21
387
984
$
1,485
12
12
$
25
At December 31, 2015 and 2014, the unrealized losses on securities were related to fourteen and nineteen
securities, respectively. Management of the Company believes all unrealized losses as of December 31, 2015 and
2014 represent temporary impairment. The Company has the intent to hold the securities until a recovery of the
value or maturity. The Company has determined that it is not more likely than not that it will be required to sell any
of the investments prior to a recovery of the value. The unrealized losses have resulted from temporary changes in
the interest rate market.
14
3.
Loans Receivable
Loans receivable are summarized as follows:
December 31,
2014
2015
Mortgage loans:
Real estate—commercial
Real estate—residential
Construction
Total mortgage loans
$
Nonmortgage loans:
Commercial and industrial
Consumer
Total nonmortgage loans
6,483
25,124
4,047
35,654
$
1,879
1,427
3,306
Total loans
Less:
Allowance for loan losses
$
5,158
27,083
3,531
35,772
1,874
1,467
3,341
38,960
39,113
419
490
38,541
$
38,623
The Company’s primary lending area for the origination of mortgage loans includes Carter County, Tennessee, and
adjoining counties. The Company limits uninsured loans to 89% of the appraised value of the property securing the
loan. Generally, the Company allows loans covered by private mortgage insurance up to 97% of the appraised
value of the property securing the loan.
The general policy is to limit loans on commercial real estate to 80% of the lesser of appraised value or construction
cost of the property securing the loan.
The Company’s policy requires that consumer and other installment loans be supported primarily by the borrower’s
ability to repay the loan and secondarily by the value of the collateral securing the loan, if any.
The Company values an impaired loan at the loan’s fair value if it is probable that the Company will be unable to
collect all amounts due according to the terms of the loan agreement. Fair value may be determined based upon
the present value of expected cash flows, market price of the loan, if available, or the value of the underlying
collateral. Expected cash flows are required to be discounted at the loan’s effective interest rate.
The Company applies cash receipts on impaired loans first to outstanding interest then to principal.
A loan is also considered impaired if its terms are modified in a troubled debt restructuring. For these accruing
impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms
of the restructured loan agreement. Interest income is generally recognized on these loans using the accrual method
of accounting.
4.
Allowance for Loan Losses and Credit Quality
The allowance for loan losses is maintained at a level that the Company believes is sufficient to absorb probable
loan losses inherent in the loan portfolio. The allowance is increased (decreased) by charges to (recovery of)
earnings in the form of provision for (recovery of) loan losses and recoveries of prior loan charge-offs, and
15
decreased by loans charged off. The provision (recovery) is calculated to bring the allowance to a level which,
according to a systematic process of measurement, reflects the amount management estimates is needed to absorb
probable losses within the portfolio. While management utilizes its best judgment and information available, the
ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including
among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and
the view of the regulatory authorities toward loan classifications.
Management performs quarterly assessments to determine the appropriate level of allowance for loan losses.
Differences between actual loan loss experience and estimates are reflected through adjustments that are made
by either increasing or decreasing the allowance based upon current measurement criteria. In the prior year, the
Company enhanced the allowance for loan loss model. The model better reflects the Mortgage and Nonmortgage
loan segments as they agree to regulatory reports. Additionally, the Company updated the rolling three year
historical loss factor by class to the Company’s own historical data or in instances where there was no historical
data, a percentage of peer statistics. The Company uses increased loss factors for classified loans. The specific
components of the allowance include allocations to individual impaired credits and allocations to the remaining
general pools of loans that have not been deemed impaired. Management’s general reserve allocations are based
on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within
the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not
necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions,
changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio
volume, maturities, composition, delinquencies, and non-accruals. Historical loss rates for each class of loans are
adjusted by environmental factors to estimate the amount of reserve needed by segment. While management has
allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use
against any type of loan loss deemed appropriate by management.
The changes in the allowance for loan losses for the years ended December 31 are summarized as follows:
December 31, 2015
Beginning
Balance
(Dollars in Thousands)
Construction
Consumer
Provision
(recovery)
charged
to income
(Chargeoffs), net of
recoveries
Ending
Balance
$
134
255
68
13
20
$
27
13
(15)
3
$
(79)
(20)
-
$
82
248
53
13
23
$
490
$
28
$
(99)
$
419
December 31, 2014
Beginning
Balance
Construction
Consumer
Provision
(recovery)
charged
to income
(Chargeoffs), net of
recoveries
Ending
Balance
$
151
309
27
16
34
$
(17)
(54)
41
(3)
(14)
$
-
$
134
255
68
13
20
$
537
$
(47)
$
-
$
490
16
The Company’s portfolio segments are subject to risks that could have an adverse impact on the credit quality of
the loan portfolio. Management identified the risks described below as significant risks that are generally similar
among the loan segments.
Real estate–commercial, and commercial and industrial loans are primarily dependent on the ability of the
Company’s commercial loan customers to achieve business results consistent with those projected at loan
origination resulting in cash flow sufficient to service the debt. To the extent that a borrower's actual business results
significantly underperform the original projections, the ability of that borrower to service the Company’s loan on a
basis consistent with the contractual terms may be at risk. While these loans and leases are generally secured by
real property, personal property, or business assets such as inventory or accounts receivable, it is possible that the
liquidation of the collateral will not fully satisfy the obligation.
Real estate residential loans are to individuals and are typically secured by 1-4 family residential property,
undeveloped land, and partially developed land in anticipation of pending construction of a personal residence.
Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt
levels in excess of the current market value of the collateral. Recent declines in value have led to unprecedented
levels of foreclosures and losses within the banking industry.
Construction loans are highly dependent on the supply and demand for real estate in the Company’s markets.
Prolonged deterioration in demand could result in significant decreases in the underlying collateral values and make
repayment of the outstanding loans more difficult for the Company’s borrowers. Construction and land development
loans can experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete
the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.
Consumer loans include loans secured by personal property such as automobiles, marketable securities, other
titled recreational vehicles, including boats and motorcycles, as well as unsecured consumer debt. The value of
underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of
loan origination in excess of principal repayment. The primary risk associated with these loans is the financial ability
of the borrower to produce adequate cash flow to service the debt. High unemployment or generally weak economic
conditions may result in the borrower having difficulty to fully satisfy the obligation.
The Company identifies loans for potential impairment through a variety of means including, but not limited to,
ongoing loan review, renewal processes, delinquency data, market communications, and public information. If it is
determined that it is probable that the Company will not collect all principal and interest amounts contractually due,
the loan is generally deemed to be impaired.
The following tables present the Company’s recorded investment in loans considered to be impaired and related
information on those impaired loans for the years ended December 31:
December 31, 2015
Loans without a related allowance:
Construction
Recorded
Investment
$
Total loans without a related allowance
1,351
90
Related
Allowance
$
-
1,441
-
Loans with a related allowance:
Construction
69
151
10
19
Total loans with a related allowance
220
29
Total
$
1,661
Unpaid
Principal
Balance
$
17
29
$
1,351
90
Year-to-Date
Average
Interest
Recorded
Income
Investment
Recognized
$
1,441
$
1,372
90
$
71
6
1,462
77
69
151
70
161
5
18
220
231
23
1,661
$
1,693
$
100
December 31, 2014
Loans without a related allowance:
Real estate—consumer
Construction
Total loans without a related allowance
Loans with a related allowance:
Construction
Total loans with a related allowance
Total
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Year-to-Date
Average
Interest
Recorded
Income
Investment
Recognized
$
811
1,430
177
$
-
$
811
1,430
177
$
812
1,450
174
$
14
97
11
$
2,418
$
-
$
2,418
$
2,436
$
122
$
162
195
$
98
22
$
162
195
$
169
195
$
12
8
$
357
$
120
$
357
$
364
$
20
$
2,775
$
120
$
2,775
$
2,800
$
142
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain
credit quality indicators including trends related to the risk rating of commercial loans, the level of classified
commercial loans, net charge-offs, non-performing loans and general economic conditions. Through the loan review
process, loans are identified for upgrade or downgrade in risk rating and changed to reflect current information as
part of the process.
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general
characteristics of the risk grades is as follows:
x
Pass - This grade includes loans to borrowers of acceptable credit quality and risk. The Company further
differentiates within this grade based upon borrower characteristics which include: capital strength,
earnings stability, leverage, and industry.
x
Special Mention - This grade includes loans that require more than a normal degree of supervision and
attention. These loans have all the characteristics of an adequate asset, but due to being adversely
affected by economic or financial conditions have a potential weakness that deserves management’s close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the loan.
x
Substandard - This grade includes loans that have well defined weaknesses which make payment default
or principal exposure possible, but not yet certain. Such loans are apt to be dependent upon collateral
liquidation, a secondary source of repayment, or an event outside of the normal course of business to
meet the repayment terms.
x
Doubtful - This grade includes loans that are placed on non-accrual status. These loans have all the
weaknesses inherent in a “substandard’ loan with the added factor that the weaknesses are so severe
that collection or liquidation in full, on the basis of current existing facts, conditions and values, is extremely
unlikely, but because of certain specific pending factors, the amount of loss cannot yet be determined.
x
Loss - This grade includes loans that are to be charged-off or charged-down when payment is
acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is
not intended to imply that the asset has no recovery or salvage value, but simply that it is not practical or
desirable to defer writing off all or some portion of the loan, even though partial recovery may be affected
in the future.
18
The following table presents the Company’s investment in loans by internal credit grade indicator at December 31.
Construction
Consumer
Total loans
Pass
Total loans
Loss
Total
$
6,483
23,472
3,754
1,857
1,406
$
-
$
1,652
292
23
21
$
-
$
-
$
6,483
25,124
4,046
1,880
1,427
$
36,972
$
-
$
1,988
$
-
$
-
$
38,960
Construction
Consumer
December 31, 2015
SubDoubtful
standard
Special
Mention
December 31, 2014
SubDoubtful
standard
Special
Mention
Pass
Loss
Total
$
4,185
25,451
3,141
1,851
1,467
$
-
$
973
1,632
390
23
-
$
-
$
-
$
5,158
27,083
3,531
1,874
1,467
$
36,095
$
-
$
3,018
$
-
$
-
$
39,113
The following table details the Company’s recorded investment in loans related to each segment in the allowance
for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology at
December 31:
December 31, 2015
Mortgage loans:
Construction
Loans
Individually
Evaluated
for
Impairment
$
Nonmortgage loans:
Consumer
Total loans
Allowance for
Loans
Individually
Evaluated
1,420
241
1,661
$
$
10
19
29
Loans
Collectively
Evaluated for
Impairment
Allowance for
Loans
Collectively
Evaluated
$
$
-
1,661
$
19
29
6,483
23,704
3,806
33,993
1,879
1,427
3,306
$
37,299
83
238
34
355
12
23
35
$
390
December 31, 2014
Loans
Individually
Evaluated
for
Impairment
Mortgage loans:
Construction
$
Allowance for
Loans
Individually
Evaluated
973
1,430
372
2,775
Nonmortgage loans:
Consumer
$
98
22
120
-
Total loans
$
Loans
Collectively
Evaluated for
Impairment
Allowance for
Loans
Collectively
Evaluated
$
$
-
2,775
$
4,185
25,653
3,159
32,997
37
255
46
338
1,874
1,467
3,341
120
$
12
20
32
36,338
$
370
Non-accrual and Past Due Loans
Non-accrual loans, presented by loan class, consisted of the following at December 31:
2015
Construction
Consumer
Total non-accrual loans
2014
$
239
133
19
-
$
939
293
21
-
$
391
$
1,253
The following table presents the aging of the recorded investment in past due loans, by loan class, as of December
31. There were no loans past due 90 days and still accruing interest at December 31, 2015 or 2014. Non-accrual
loans are included in the applicable delinquency category.
Construction
Consumer
Total loans
$
1,019
-
$
52
88
-
$
294
-
$
52
1,401
-
$
1,019
$
140
$
294
$
1,453
30-59
Days
Construction
Consumer
Total loans
December 31, 2015
Total
90+ Days
Past Due
60-89
Days
30-59
Days
Current
Loans
$
December 31, 2014
Total
Past Due
90+ Days
60-89
Days
Total
Loans
6,431
23,723
4,046
1,880
1,427
$
6,483
25,124
4,046
1,880
1,427
$37,507
$
38,960
Current
Loans
Total
Loans
$
66
305
-
$
35
-
$
620
183
-
$
686
523
-
$
4,472
26,560
3,531
1,874
1,467
$
5,158
27,083
3,531
1,874
1,467
$
371
$
35
$
803
$
1,209
$
37,904
$
39,113
20
A troubled debt restructuring (“TDR”) occurs when a borrower is experiencing financial difficulty and the Company
grants a non-market concession to provide the borrower relief from one or more of the contractual loan conditions.
Concessions that the Company might consider include the allowance of interest-only payments on a temporary
basis, the reduction of interest rates, the extension of the loan term, the forgiveness of principal, or a combination
of these.
The follow tables summarize the Company’s recorded investment in TDRs modified during the periods indicated.
The Company made two TDR modifications during 2015. The Company extended payment terms on one loan
during 2015.
Year Ended December 31, 2015
PrePostmodification
modification
Outstanding
Outstanding
Recorded
Recorded
Number of
Investment
Investment
Loans
Extended payment terms:
2
$
95
$
95
There were no loans that were modified as trouble debt restructuring within the previous 12 months that had a
payment default during the years ended December 31, 2015 or 2014.
5.
Premises and Equipment
Premises and equipment are summarized as follows:
December 31,
2015
Land and improvements
Buildings
Vehicles
Furniture, fixtures and equipment
$
202
1,539
38
676
2,455
1,825
$
202
1,506
38
666
2,412
1,761
$
630
$
651
Less accumulated depreciation
21
2014
6.
Deposits
The Company had deposit accounts in amounts of $250,000 or more of approximately $5.91 million and $5.95
million at December 31, 2015 and 2014, respectively. Contractual maturities of time deposits are summarized as
follows:
December 31,
2014
2015
12 months or less
After 1 but within 3 years
After 3 years
7.
$
24,979
4,105
1,488
$
21,711
6,123
1,028
$
30,572
$
28,862
Federal Home Loan Bank Advances
The Company had $3.0 million and $1.5 million in outstanding advances from the Federal Home Loan Bank of
Cincinnati (FHLB) at December 31, 2015 and 2014, respectively, with a weighted average rate of 0.67% and 0.97%
for the years ended 2015 and 2014, respectively. The Company pledges as collateral for any borrowings its FHLB
stock and its entire loan portfolio of qualifying mortgages (as defined) under a blanket collateral agreement with the
FHLB. The Company has total credit availability with the FHLB of up to $8.3 million. The advances are scheduled
to mature as of January 2016, February 2017 and February 2018 in the amounts of $2 million, $500,000 and
$500,000 respectively.
8.
Income Taxes
Income tax expense (benefit) is summarized as follows:
Years Ended December 31,
2015
State
Federal
Current
Deferred
Total
Total
2014
State
Federal
Total
$
208
36
$
57
5
$
265
41
$
240
(15)
$
60
(4)
$
300
(19)
$
244
$
62
$
306
$
225
$
56
$
281
22
The differences between actual income tax expense and the amount computed by applying the federal statutory
income tax rate of 34% to income before income taxes are reconciled as follows:
Years Ended December 31,
2014
2015
Computed income tax expense
Increase (decrease) resulting from:
State income tax, net of federal tax benefit
Non-taxable income
Other
$
Actual income tax expense
$
336
$
306
37
(59)
(8)
306
39
(49)
(15)
$
281
The components of net deferred tax liabilities are as follows:
December 31,
2014
2015
Deferred tax liabilities:
Excess tax depreciation
FHLB stock dividends
Loan losses
Purchased discounts on mortgage-backed
securities
Unrealized gains on investments
Prepaid expenses
$
Deferred tax assets:
Accrued expenses
Reserve for uncollected interest
Supplemental executive retirement plan
Other
Net deferred tax liability
$
34
162
17
$
38
162
1
1
70
7
291
1
76
4
282
1
12
5
2
20
4
42
1
47
271
$
235
The Company’s annual addition to its reserve for bad debts allowed under the Internal Revenue Code may differ
significantly from the bad debt experience used for financial statement purposes. Such bad debt deductions for
income tax purposes are included in taxable income of later years only if the bad debt reserves are used for
purposes other than to absorb bad debt losses. Since the Company does not intend to use the reserve for purposes
other than to absorb losses, no deferred income taxes have been provided on the amount of bad debt reserves for
tax purposes that arose in tax years beginning before December 31, 1987. Therefore, retained earnings at
December 31, 2015 and 2014, includes approximately $825,000, representing such bad debt deductions for which
no deferred income taxes have been provided.
23
9.
Regulatory Matters
The Bank is a federally-insured state-chartered bank and is subject to the rules and regulations of the Tennessee
Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). Failure to meet the
minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary
actions by regulators that if undertaken, could have a direct material effect on the Bank and its financial statements.
Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines involving quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts
and classification under the prompt corrective action guidelines are 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 of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31,
2015 and 2014, that the Bank met all capital adequacy requirements to which it is subject.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table below) of Tier I capital (as defined in the regulations) to average total
assets (as defined), and of Tier I and total risk-based capital (as defined) to risk-weighted assets (as defined).
Management believes, as of December 31, 2015 and 2014, that the Bank met all capital adequacy requirements to
which it is subject.
As of December 31, 2015, the most recent notification from regulators categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum (Tier I leverage, Tier I risk-based, total risk-based capital) ratios as set forth in the table. There
are no conditions or events since that notification that management believes have changed the Bank’s category.
No deduction from capital for interest-rate risk was required.
New regulatory capital regulations that were effective in March 2015 and created a new capital ratio, the Common
Equity Tier 1 (CET 1) to risk-weighted assets as well as required an increase in the minimum capital requirement
for Tier 1 capital to risk-weighted assets to 6% from 4%. The new capital regulations will require that in 2016 through
2019 that regulated financial institutions build up a capital conservation buffer within the CET 1 ratio of an additional
2.5%. This will begin with a .625% requirement in 2016 and will increased thereafter by .625% until the 2.5% CET
1 threshold is fully effective.
24
The Bank’s actual capital amounts (in thousands) and ratios are also presented in the following table.
For Capital
Adequacy Purposes
Amount
Ratio
Actual
Amount
Ratio
As of December 31, 2015:
Tier I Capital (to
average assets)
Tier I Capital (to riskweighted assets)
Tier I minimum common
equity risk-based capital
(to risk-weighted assets)
Total Capital (to riskweighted assets)
As of December 31, 2014:
Tier I Capital (to
average assets)
Tier I Capital (to riskweighted assets)
Total Capital (to riskweighted assets)
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$ 13,605
22.2%
$
2,451
>4.0%
$
3,064
>5.0%
$ 13,605
40.9%
$
1,996
>6.0%
$
2,661
>8.0%
$ 13,605
40.9%
$
1,497
>4.5%
$
2,162
>6.5%
$ 14,020
42.2%
$
2,658
>8.0%
$
3,322
>10.0%
$ 13,094
22.8%
$
2,297
>4.0%
$
2,871
>5.0%
$ 13,094
40.9%
$
1,281
>4.0%
$
1,921
>6.0%
$ 13,495
42.2%
$
2,558
>8.0%
$
3,198
>10.0%
10. Employee Benefit Plans
The Company sponsors a profit sharing plan under Section 401(k) of the Internal Revenue Code (the Plan) whereby
employees who meet the minimum eligibility requirements can participate. Employees can make elective deferrals
of their salaries into the plan up to limits established by federal tax laws. The Company, at the Board’s discretion,
can choose to make a profit sharing contribution into the plan based on its profitability and performance. The
matching contribution to the plan was approximately $20,000 each of the years ended December 31, 2015 and
2014.
The Company has an Employee Stock Ownership Plan (“ESOP”) for all employees who have attained the age of
21 and have been credited with at least 1,000 hours of service during a 12-month period. Benefits become fully
vested at the end of six years of service under the terms of the ESOP Plan. Benefits may be payable upon
retirement, death, disability, or separation from service. Since the Company’s annual contributions are discretionary,
benefits payable under the ESOP cannot be estimated. No contribution was made to the ESOP for either of the
years ended December 31, 2015 and 2014.
At December 31, 2015 and 2014, the ESOP had no unallocated shares.
During 2014, the Company established non-qualified compensation programs providing benefits to certain key
officers. The benefits under the plans are computed and payable under certain terms as specified in each
agreement. The estimated present value of future benefits to be paid is being accrued over the period from the
effective date of the agreements until retirement. The expense incurred for the year ended December 31, 2015,
was $8,421. The cumulative accrued liability for the above plans is approximately $12,966 at December 31, 2015
and presented in the accompanying consolidated balance sheet in “Accrued expenses and other liabilities.”
25
During 2014, The Company purchased and is the owner and beneficiary of certain life insurance policies to
potentially fund the benefits under certain agreements. Proceeds from the insurance policies are payable to the
Company upon the death of the participant. The cash surrender value of the policies included in the accompanying
consolidated balance sheet was approximately $2,089,000 at December 31, 2015.
11.
Commitments and Contingencies
The Company makes commitments to lend funds to customers. 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. Since many
of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness. The
amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on
management’s credit evaluation of the counterparty. Collateral may include first and second mortgages; property,
plant, and equipment; accounts receivable; deposit accounts; and income-producing commercial properties. The
Company does not anticipate any losses as a result of these transactions.
Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including
availability of lines of credit) of approximately $804,800 at December 31, 2015.
The Company had outstanding commitments to originate seven fixed rate loans totaling approximately $804,700 at
December 31, 2015, with interest rates ranging from of 4.2% to 6.5% and terms of 12 to 60 months.
12.
Fair Values of Assets and Liabilities
The Company uses a three level fair value hierarchy that is fully described below. The Company reports fair value
on a recurring basis for certain assets and liabilities, most notably for available for sale investment securities. The
Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis.
These include assets that are measured at the lower of cost or market that were recognized at fair value which was
below cost at the end of the year. Assets subject to non-recurring use of fair value measurements could include
loans held for sale, impaired loans and other real estate owned.
As disclosed above, the Company groups its assets and liabilities measured at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine
fair value. These levels are:
x
Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock
Exchange. Level 1 also includes U.S. Treasury, other U.S. government and agency mortgage-backed
securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets or liabilities.
x
Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are
obtained from third party services for similar or comparable assets or liabilities.
x
Level 3 - Valuations for assets and liabilities that are derived from other valuation methodologies using
unobservable inputs, including option pricing models, discounted cash flow models and similar techniques,
and not based on market exchange, dealer, or brokered traded transactions. Level 3 valuations incorporate
certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
26
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at
December 31, 2015 and 2014. The assets consist of investment and mortgage-backed securities that are available
for sale.
Level 2
Level 1
December 31, 2015:
U.S government securities
Obligations
GNMA
FNMA
FHLMC
Total
$
-
$
$
Total
-
-
1,186
1,471
1,082
-
$
14,316
$
Level 2
-
$
-
357
-
$
$
-
Level 1
December 31, 2014:
SBA Development Company
Participation Certificates
U.S government securities
Obligations
GNMA
FNMA
FHLMC
8,760
1,460
Level 3
$
387
5,267
747
-
Level 3
$
-
-
430
-
-
986
1,043
952
-
-
$
9,812
$
-
The Company utilizes a third party pricing service to provide valuations on its securities portfolio. The third party
valuations are determined based on the characteristics of each security (such as maturity, duration, rating, etc.)
and in reference to similar or comparable securities. Due to the nature and methodology of these valuations, the
Company considers these fair value measurements as Level 2.
27
The table below presents the value of assets measured at fair value on a non-recurring basis at December 31, 2015
and 2014.
Level 1
Total
December 31, 2015:
Impaired loans
December 31, 2014:
Impaired loans
Level 2
Level 3
$
131
$
-
$
-
$
131
$
131
$
-
$
-
$
131
$
237
$
-
$
-
$
237
$
237
$
-
$
-
$
237
The following table presents quantitative information about financial and nonfinancial assets measured at fair value
on a nonrecurring basis using Level 3 valuation inputs as of December 31, 2015 and 2014:
2015
Fair Value
Impaired loans
Valuation Technique
Unobservable Input
Range (Weighted
Average)
$
131
Discounted appraisals (1)
Appraisal adjustments (2)
13%
$
237
Discounted appraisals (1)
Appraisal adjustments (2)
10% to 60% (4%)
2014
Impaired Loans
(1)
(2)
Fair value is generally based on appraisals of the underlying collateral
Appraisals may be adjusted by management for customized discounting criteria, estimated sales
costs, and proprietary qualitative adjustments.
There were no transfers between levels of fair value from 2014 to 2015.
28
13.
Condensed Parent Company Financial Information
The following condensed financial information for SFB Bancorp, Inc. (Parent Company Only) should be read in
conjunction with the consolidated financial statements and the notes thereto.
Parent Company Only
Condensed Balance Sheets
(in thousands)
December 31,
2014
2015
Assets:
Cash and cash equivalents
Equity in net assets of bank subsidiary
Other assets
Income tax receivable
Total assets
Liabilities:
Accrued liabilities
$
441
13,678
510
12
$
371
13,195
585
-
$
14,641
$
14,151
$
3
$
-
Total liabilities
3
-
Stockholders’ equity
14,638
14,151
Total liabilities and stockholders’ equity
$
Parent Company Only
Condensed Income Statement
(in thousands)
14,641
$
14,151
December 31,
2014
2015
Non-interest income
Dividends from bank subsidiary
Non-interest expense
Income before taxes
Income tax benefit
Income before equity earnings
Equity in undistributed earnings of bank subsidiary
Net income
29
$
17
210
(48)
179
12
191
491
$
13
149
(38)
124
8
132
488
$
682
$
620
Parent Company Only
Condensed Statements of Cash Flows
(in thousands)
For the Years Ended
2014
2015
Operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of bank subsidiary
Depreciation
(Increase) decrease in other assets
(Increase) in income tax receivable
(Increase) decrease in accrued liabilities
Net cash provided by operating activities
$
682
$
625
(491)
8
69
(12)
3
259
(488)
8
(74)
(4)
67
Financing activities:
Payment of cash dividends
Net cash used by financing activities
(6)
(183)
(189)
(394)
(148)
(542)
Net increase (decrease) in cash and cash
equivalents
70
(475)
371
846
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
30
441
$
371
CORPORATE INFORMATION
EXECUTIVE OFFICERS:
President/Chief Executive Officer
Frank D. Newman
Secretary/Treasurer
David T. LeVeau
Executive Vice President/Chief Financial Officer/Assistant Secretary
DIRECTORS:
Attorney
Frank D. Newman
Attorney
Carmella F. Price
Bank President
B. Steven Sykes
Architect
Michael L. McKinney
Contractor
Stock Transfer Agent
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
Special Legal Counsel
Jones Walker LLP
1227 25th Street, N.W.
Suite 200 West
Washington, D.C. 20037
Local Counsel
630 East Elk Avenue
Elizabethton, TN 37643
Independent Accountants
Dixon Hughes Goodman LLP
4350 Congress Street, Suite 900
Charlotte, NC 28211
Annual Meeting
The Annual Meeting of Stockholders of SFB Bancorp, Inc. will be held at 2:00 p.m. on May 19,
2016 at the Company’s corporate office at 632 East Elk Avenue, Elizabethton, TN.
Annual Report
A copy of the Annual Report will be furnished without charge to the Company’s stockholders
upon written request to SFB Bancorp, Inc., 632 East Elk Avenue, Elizabethton, TN 37643.
Corporate Office
SFB Bancorp, Inc.
632 East Elk Avenue · Elizabethton, TN 37643
111 Charlie Robinson Drive
632 East Elk Avenue
31
SFB BANCORP, INC
632 EAST ELK AVENUE
ELIZABETHTON, TENNESSEE
Stock Listing on the OTCBB - Symbol "SFBK"
32

SFB Bancorp, Inc. - Security Federal Bank

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