UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
MARK ONE
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
| | |
o | | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD
FROM _______________ TO _______________
Commission File Number2-90200
FIRST MCMINNVILLE CORPORATION
(Exact Name of Registrant As Specified in its Charter)
| | |
Tennessee | | 62-1198119 |
| | |
(State or Other Jurisdiction of | | (IRS Employer Identification Number) |
Incorporation or Organization) | | |
200 East Main Street, McMinnville, TN 37110
(Address of Principal Executive Offices and Zip Code)
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YESx NOo
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
o Large accelerated filer o Accelerated filer x Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YESo NOx
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Common stock outstanding 1,026,864 shares at November 14, 2006
1
FIRST MCMINNVILLE CORPORATION
FORM 10Q
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST MCMINNVILLE CORPORATION
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(Unaudited)
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2006 | | | 2005 | |
| | (In Thousands) | |
Assets | | | | | | | | |
Loans, less allowance for loan losses of $1,825,000 and $1,816,000, respectively | | $ | 162,557 | | | | 151,750 | |
Securities: | | | | | | | | |
Held-to-maturity, at cost (market value $52,498,000 and $60,301,000, respectively) | | | 52,047 | | | | 59,956 | |
Available-for-sale, at market (amortized cost $87,692,000 and $95,930,000, respectively) | | | 86,205 | | | | 93,892 | |
| | | | | | |
Total securities | | | 138,252 | | | | 153,848 | |
| | | | | | |
Federal funds sold | | | 2,000 | | | | — | |
Interest-bearing deposits in financial institutions | | | 33 | | | | 45 | |
Restricted equity securities | | | 1,415 | | | | 1,359 | |
| | | | | | |
Total earning assets | | | 304,257 | | | | 307,002 | |
| | | | | | |
Cash and due from banks | | | 6,056 | | | | 5,649 | |
Premises and equipment, net | | | 1,772 | | | | 1,836 | |
Accrued interest receivable | | | 2,156 | | | | 1,890 | |
Deferred tax asset, net | | | 545 | | | | 756 | |
Foreclosed assets | | | 249 | | | | 203 | |
Other assets | | | 316 | | | | 445 | |
| | | | | | |
Total assets | | $ | 315,351 | | | | 317,781 | |
| | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Deposits | | $ | 235,516 | | | | 239,088 | |
Securities sold under repurchase agreements | | | 22,888 | | | | 19,389 | |
Federal funds purchased | | | — | | | | 4,300 | |
Advances from Federal Home Loan Bank | | | 1,000 | | | | 1,000 | |
Accrued interest and other liabilities | | | 2,094 | | | | 2,787 | |
| | | | | | |
Total liabilities | | | 261,498 | | | | 266,564 | |
| | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock, no par value; authorized 5,000,000 shares issued 1,237,764 shares and 1,233,922 shares, respectively | | | 3,868 | | | | 3,804 | |
Surplus | | | 17 | | | | — | |
Retained earnings | | | 56,157 | | | | 53,620 | |
Net unrealized losses on available-for-sale securities, net of income taxes of $570,000 and $780,000, respectively | | | (918 | ) | | | (1,257 | ) |
| | | | | | |
| | | 59,124 | | | | 56,167 | |
Less cost of treasury stock of 211,645 shares and 205,440 shares, respectively | | | (5,271 | ) | | | (4,950 | ) |
| | | | | | |
Total stockholders’ equity | | | 53,853 | | | | 51,217 | |
| | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 315,351 | | | | 317,781 | |
| | | | | | |
See accompanying notes to consolidated financial statements (unaudited).
3
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Earnings
Three Months and Nine Months Ended September 30, 2006 and 2005
(Unaudited)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | (Dollars In Thousands, Except Per Share Amount) | |
Interest income: | | | | | | | | | | | | | | | | |
Interest and fees on loans | | $ | 2,970 | | | | 2,462 | | | $ | 8,289 | | | | 7,300 | |
Interest and dividends on securities: | | | | | | | | | | | | | | | | |
Taxable securities | | | 1,117 | | | | 1,009 | | | | 3,343 | | | | 2,878 | |
Exempt from Federal income taxes | | | 322 | | | | 361 | | | | 1,014 | | | | 1,098 | |
Interest on federal funds sold | | | 2 | | | | 89 | | | | 89 | | | | 185 | |
Interest on interest-bearing deposits in other banks and other interest | | | — | | | | — | | | | 1 | | | | 1 | |
| | | | | | | | | | | | |
Total interest income | | | 4,411 | | | | 3,921 | | | | 12,736 | | | | 11,462 | |
| | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | |
Interest on negotiable order of withdrawal accounts | | | 70 | | | | 58 | | | | 209 | | | | 170 | |
Interest on money market demand and savings accounts | | | 160 | | | | 131 | | | | 469 | | | | 352 | |
Interest on certificates of deposit | | | 1,568 | | | | 1,089 | | | | 4,336 | | | | 2,981 | |
Interest on securities sold under repurchase agreements and short term borrowings | | | 150 | | | | 99 | | | | 359 | | | | 277 | |
Interest on advances from Federal Home Loan Bank | | | 14 | | | | 14 | | | | 42 | | | | 42 | |
| | | | | | | | | | | | |
Total interest expense | | | 1,962 | | | | 1,391 | | | | 5,415 | | | | 3,822 | |
| | | | | | | | | | | | |
Net interest income | | | 2,449 | | | | 2,530 | | | | 7,321 | | | | 7,640 | |
Provision for loan losses | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 2,449 | | | | 2,530 | | | | 7,321 | | | | 7,640 | |
| | | | | | | | | | | | |
Other income: | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | 116 | | | | 122 | | | | 318 | | | | 363 | |
Other fees and commissions | | | 45 | | | | 46 | | | | 145 | | | | 140 | |
Commissions and fees on fiduciary activities | | | 17 | | | | 21 | | | | 38 | | | | 44 | |
Securities gains | | | 3 | | | | 2 | | | | 14 | | | | 6 | |
| | | | | | | | | | | | |
Total other income | | | 181 | | | | 191 | | | | 515 | | | | 553 | |
| | | | | | | | | | | | |
Other expenses: | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 724 | | | | 732 | | | | 2,246 | | | | 2,266 | |
Occupancy expenses, net | | | 53 | | | | 52 | | | | 151 | | | | 159 | |
Furniture and equipment expense | | | 16 | | | | 24 | | | | 51 | | | | 76 | |
Data processing expense | | | 71 | | | | 43 | | | | 238 | | | | 185 | |
FDIC insurance | | | 8 | | | | 7 | | | | 23 | | | | 23 | |
Other operating expenses | | | 264 | | | | 193 | | | | 751 | | | | 653 | |
| | | | | | | | | | | | |
Total other expenses | | | 1,136 | | | | 1,051 | | | | 3,460 | | | | 3,362 | |
| | | | | | | | | | | | |
Earnings before income taxes | | | 1,494 | | | | 1,670 | | | | 4,376 | | | | 4,831 | |
Income taxes | | | 512 | | | | 521 | | | | 1,398 | | | | 1,540 | |
| | | | | | | | | | | | |
Net earnings | | $ | 982 | | | | 1,149 | | | $ | 2,978 | | | | 3,291 | |
| | | | | | | | | | | | |
Basic earnings per common share | | $ | .96 | | | | 1.11 | | | $ | 2.90 | | | | 3.17 | |
| | | | | | | | | | | | |
Diluted earnings per common share | | $ | .94 | | | | 1.09 | | | $ | 2.84 | | | | 3.11 | |
| | | | | | | | | | | | |
Dividends per share | | $ | — | | | | — | | | $ | .43 | | | | .43 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements (unaudited).
4
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Comprehensive Earnings
Three Months and Nine Months Ended September 30, 2006 and 2005
(Unaudited)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | | | | | (In Thousands) | | | | | |
Net earnings | | $ | 982 | | | | 1,149 | | | $ | 2,978 | | | | 3,291 | |
| | | | | | | | | | | | |
Other comprehensive earnings (losses), net of tax: | | | | | | | | | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities arising during period, net of income taxes of $413,000, $93,000, $220,000 and $277,000, respectively | | | 666 | | | | (149 | ) | | | 354 | | | | (446 | ) |
Reclassification adjustment for gains included in net earnings, net of taxes of $2,000, $1,000, $9,000 and $2,000, respectively | | | (3 | ) | | | (1 | ) | | | (14 | ) | | | (4 | ) |
| | | | | | | | | | | | |
Other comprehensive earnings (loss) | | | 663 | | | | (150 | ) | | | 340 | | | | (450 | ) |
| | | | | | | | | | | | |
Comprehensive earnings | | $ | 1,645 | | | | 999 | | | $ | 3,318 | | | | 2,841 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements (unaudited).
5
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
| | | | | | | | |
| | 2006 | | | 2005 | |
| | (In Thousands) | |
Cash flows from operating activities: | | | | | | | | |
Interest received | | $ | 12,048 | | | | 11,014 | |
Fees and commissions received | | | 501 | | | | 547 | |
Interest paid | | | (4,965 | ) | | | (3,409 | ) |
Cash paid to suppliers and employees | | | (2,985 | ) | | | (3,023 | ) |
Income taxes paid | | | (1,332 | ) | | | (1,483 | ) |
| | | | | | |
Net cash provided by operating activities | | | 3,267 | | | | 3,646 | |
| | | | | | |
Cash flows from investing activities: | | | | | | | | |
Proceeds from maturities of held-to-maturity securities | | | 8,293 | | | | 2,501 | |
Proceeds from maturities of available-for-sale securities | | | 16,219 | | | | 14,204 | |
Purchase of available-for-sale securities | | | (7,985 | ) | | | (17,000 | ) |
Purchase of held-to-maturity securities | | | — | | | | (4,750 | ) |
Loans made to customers, net of repayments | | | (10,847 | ) | | | 7,099 | |
Purchase of premises and equipment | | | (120 | ) | | | (284 | ) |
Decrease (increase) in interest bearing deposits in financial institutions | | | 12 | | | | (20 | ) |
Proceeds from sale of other real estate | | | — | | | | 96 | |
| | | | | | |
Net cash provided by investing activities | | | 5,572 | | | | 1,846 | |
| | | | | | |
Cash flows from financing activities: | | | | | | | | |
Net increase (decrease) in non-interest bearing, savings and NOW deposit accounts | | | (9,626 | ) | | | 4,171 | |
Net increase in time deposits | | | 6,054 | | | | 4,866 | |
Increase (decrease) in securities sold under repurchase agreement | | | 3,499 | | | | (7,719 | ) |
Repayment of federal funds purchased | | | (4,300 | ) | | | — | |
Dividends paid | | | (1,802 | ) | | | (1,822 | ) |
Payments to acquire treasury stock | | | (321 | ) | | | (530 | ) |
Proceeds from sales of common stock | | | 64 | | | | 50 | |
| | | | | | |
Net cash used in financing activities | | | (6,432 | ) | | | (984 | ) |
| | | | | | |
Net increase in cash and cash equivalents | | | 2,407 | | | | 4,508 | |
Cash and cash equivalents at beginning of period | | | 5,649 | | | | 10,220 | |
| | | | | | |
Cash and cash equivalents at end of period | | $ | 8,056 | | | | 14,728 | |
| | | | | | |
See accompanying notes to consolidated financial statements (unaudited).
6
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Cash Flows, Continued
Nine Months Ended September 30, 2006 and 2005
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
| | | | | | | | |
| | 2006 | | | 2005 | |
| | (In Thousands) | |
Reconciliation of net earnings to net cash provided by operating activities: | | | | | | | | |
Net earnings | | $ | 2,978 | | | | 3,291 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | |
Depreciation | | | 184 | | | | 188 | |
Amortization and accretion, net | | | (366 | ) | | | (298 | ) |
Securities gains | | | (14 | ) | | | (6 | ) |
Gain on sale of other real estate | | | (6 | ) | | | (14 | ) |
FHLB dividend reinvestment | | | (56 | ) | | | (41 | ) |
Increase in interest receivable | | | (266 | ) | | | (109 | ) |
Decrease (increase) in other assets, net | | | 89 | | | | (69 | ) |
Increase in interest payable | | | 450 | | | | 413 | |
Increase in other liabilities, net | | | 274 | | | | 291 | |
| | | | | | |
Total adjustments | | | 289 | | | | 355 | |
| | | | | | |
Net cash provided by operating activities | | $ | 3,267 | | | | 3,646 | |
| | | | | | |
| | | | | | | | |
Supplemental schedule of non-cash activities: | | | | | | | | |
Unrealized gain (loss) in value of securities available-for-sale, net of income taxes of $211,000 and $279,000, respectively | | $ | 340 | | | | (450 | ) |
| | | | | | |
Transfer of loans to other real estate | | $ | 156 | | | | 120 | |
| | | | | | |
Other real estate transferred to loans | | $ | 116 | | | | 95 | |
| | | | | | |
See accompanying notes to consolidated financial statements (unaudited).
7
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Basis of Presentation
The unaudited consolidated financial statements include the accounts of First McMinnville Corporation (Company or Registrant) and its wholly-owned subsidiary, First National Bank of McMinnville (Bank) and the Bank’s wholly-owned subsidiary, First Community Title & Escrow Company.
The accompanying consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the statements contain all adjustments and disclosures necessary to summarize fairly the financial position of the Company as of September 30, 2006 and December 31, 2005, the results of operations for the nine months and three months ended September 30, 2006 and 2005, comprehensive earnings for the nine months and three months ended September 30, 2006 and 2005 and changes in cash flows for the nine months ended September 30, 2006 and 2005. All significant intercompany transactions have been eliminated. The interim consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The results for interim periods are not necessarily indicative of results to be expected for the complete fiscal year.
8
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its subsidiary. This discussion should be read in conjunction with the consolidated financial statements. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 for a more complete discussion of factors that affect liquidity, capital and the results of operations.
Cautionary Note Concerning Forward — Looking Statements
In this Quarterly Report and in documents incorporated herein by reference, or to which we refer, the Company may communicate statements relating to anticipated future results of the Bank or the Company that may be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act). The Company’s consolidated actual results may differ materially from those included in such forward-looking statements, such as those described in Item 2 of Part I “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Forward-looking statements are typically identified by the words “believe, expect, anticipate, intend, estimate” and similar expressions of belief, planning, and strategy. These statements may relate to, among other things, loan loss reserve adequacy, changes in interest rates, the impact of changes in interest rates, and litigation results. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, social, political and economic conditions, interest rate fluctuations, competition for loans, mortgages, and other financial services and products, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company and/or the Bank, and/or its customers, as well as other risks that cannot be accurately quantified or definitively identified. Many factors may affect our financial condition and profitability, including changes in economic conditions, the volatility of and relative impact of particular interest rates, political events, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, technological change, natural disasters, changes in law and regulation, regulatory issues and concerns, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, and success in gaining regulatory approvals when required, as well as other risks and uncertainties and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond our control, earnings may fluctuate from period to period. The purpose of this type of information, such as that provided in this section, as well as other portions of this Quarterly Report, is to provide reader of this report with information relevant to understanding and assessing the financial condition and results of operations of the consolidated Company and not to predict the future or to guarantee results. The Company does not intend, and expressly disclaims any obligation, to publish revised forward-looking statements to reflect the occurrence of changes or of unanticipated events, circumstances, or results.
Liquidity and Interest Rate Sensitivity Management
The concept of liquidity involves the ability of the Company and its subsidiary to meet future cash flow requirements, particularly those of customers who are either withdrawing funds from their accounts or borrowing to meet their credit needs.
9
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Liquidity and Interest Rate Sensitivity Management, Continued
Proper asset/liability management is designed to maintain stability in the balance of interest-sensitive assets to interest-sensitive liabilities in order to provide stability in net interest margins. Earnings on interest-sensitive assets such as loans tied to the prime rate of interest and Federal funds sold, may vary considerably from fixed rate assets such as long-term investment securities and fixed rate loans. Interest-sensitive liabilities such as large certificates of deposit and money market certificates, generally involve higher costs than fixed rate instruments such as passbook savings.
The Company maintains a formal asset and liability management process that is designed to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines. (Please refer to Item 3 of this Part I for additional information).
Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments held for purposes other than trading, changes in market conditions, loan volumns and pricing and deposit volumn and mix. These assumptions are inherently uncertain, and, as a result, interest income can not be precisely estimated nor can the impact of higher or lower interest rates on net interest income be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions, and management’s strategies, among other factors.
Based on the results of the analysis as of September 30, 2006, the Company would expect net interest income to increase approximately $225,000 over a twelve month period if rates increased 2%. Net interest income would be expected to decrease approximately $154,000 over a 12 month period should rates decrease 2%. The rate sensitivity as of September 30, 2006 was .93 to 1 (0-91 days) and .91 to 1 (0-365 days). This asset/liability mismatch in pricing is referred to as “gap” and is measured as rate sensitive assets divided by rate sensitive liabilities for a defined time period. A gap of 1.0 means that assets and liabilities are perfectly matched as to pricing within a specific time period and interest rate movements will not affect net interest margin, assuming all other factors hold constant.
Banks, in general, must maintain large cash balances to meet day-to-day cash flow requirements as well as maintaining required reserves for regulatory agencies. The cash balances maintained are the primary source of liquidity. Federal funds sold, which are basically overnight or short-term loans to other banks that increase the other bank’s required reserves, are also a major source of liquidity. Federal funds sold were $2.0 million at September 30, 2006. As of December 31, 2005 the bank was in a federal funds purchased position of $4.3 million. This increase in federal funds sold and decrease in federal funds purchased related primarily to the funding which became available from the large number of securities that have been called during 2006.
10
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Liquidity and Interest Rate Sensitivity Management, Continued
The Company’s investment portfolio consists of earning assets that provide interest income. For those securities classified as held-to-maturity the Company has the ability and intention to hold these securities until maturity. Securities classified as available for sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, the need or desire to increase capital and similar economic factors. Securities totaling approximately $34.7 million mature or reprice within the next twelve months.
A secondary source of liquidity is the Bank’s loan portfolio. At September 30, 2006 commercial, consumer and other loans of approximately $46.0 million and single family residential loans of approximately $16.1 million either will become due or will be subject to rate adjustments within twelve months.
As for liabilities, certificates of deposit of $100,000 or greater of approximately $56.1 million will become due during the next twelve months. The Bank’s deposit base decreased approximately $3.6 million during the nine months ended September 30, 2006. Securities sold under repurchase agreements increased approximately $3.5 million during the nine months ended September 30, 2006. An increase in securities sold under repurchase agreements of approximately $4.7 million occurred during the quarter ended September 30, 2006. The deposit base decreased approximately $5.3 million during the quarter ended September 30, 2006. Advances from the Federal Home Loan Bank were $1,000,000 at September 30, 2006 and December 31, 2005. This balance may remain static for some time due to a prepayment premium provision which may apply in the event of a principal reduction before the April 8, 2008 maturity date.
Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit and regular savings. Management does not expect that there will be significant withdrawals from these accounts in the future that are inconsistent with past experience.
It is expected that with present maturities, the anticipated change in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the foreseeable future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity changing in any material way.
11
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Capital Resources
A primary source of capital is internal growth through retained earnings. The ratio of stockholders’ equity to total assets (excluding the unrealized gain or loss on available-for-sale securities) was 17.4% at September 30, 2006 and 16.5% at December 31, 2005. The increase in the ratio resulted primarily from net earnings of $2,978,000 during the nine months ended September 30, 2006. Total assets decreased approximately $2.4 million during the nine months ended September 30, 2006. The annualized rate of return on stockholders’ equity (excluding the unrealized gain or loss on available-for-sale securities) for the first nine months of 2006 was 7.4% compared to 8.5% for the comparable period in 2005. Dividends to shareholders of $442,000 and $446,000 or $.43 per share were declared in the nine months ended September 30, 2006 and 2005, respectively. Cash dividends will be increased in the remainder of 2006 over 2005 only at the discretion of the Board of Directors and as profits permit. Dividends paid to shareholders during 2005 were $1.75 per share. No material changes in the mix or cost of capital is anticipated in the foreseeable future. At the present time, there are no material commitments for capital expenditures.
Regulations of the Comptroller of the Currency (OCC) establish required minimum capital levels for the Bank. Under these regulations, national banks must maintain certain capital levels as a percentage of average total assets (leverage capital ratio) and as a percentage of total risk-based assets (risk-based capital ratio). Under the risk-based requirements, various categories of assets and commitments are assigned a percentage related to credit risk ranging from zero percent for assets backed by the full faith and credit of the United States to 100% for loans other than residential real estate loans and certain off-balance sheet commitments. Total capital is characterized as either Tier 1 capital which includes common shareholders’ equity, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred or total risk-based capital which includes the allowance for loan losses up to 1.25% of risk weighted assets, perpetual preferred stock, subordinated debt and various other hybrid capital instruments, subject to various limits. Goodwill is not includable in Tier 1 or total capital. National banks must maintain a Tier 1 capital to risk-based assets of at least 4.0%, a total capital to risk-based assets ratio of at least 8.0% and a leverage capital ratio defined as Tier 1 capital to average total assets for the most recent quarter of at least 4.0%. The same ratios are also required in order for a national bank to be considered “adequately capitalized” under the OCC’s “prompt corrective action” regulations, which impose certain operating restrictions on institutions which are not adequately capitalized. As of September 30, 2006, the Bank has a Tier 1 risk-based ratio of 31.5%, a total capital to risk-based ratio of 32.5% and a Tier 1 leverage ratio of 17.3%. These percentages fall within the “well capitalized” category under the regulations.
The Company is a legal entity separate and distinct from the Bank. The principal source of cash flow of the Company, including cash flow to pay dividends, is dividends from the Bank. There are statutory, regulatory and prudential limitations on the payment of dividends by the Bank to the Company, as well as by the Company to its shareholders. Dividends are never assured and remain both restricted by law and prudential considerations and subject to the discretion of the Company’s and the Bank’s respective Board of Directors.
12
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Capital Resources, Continued
The Federal Reserve Board imposes consolidated capital guidelines on bank holding companies (such as the Company) which have more than $150 million in consolidated assets. These guidelines require bank holding companies to maintain consolidated capital ratios which are essentially the same as the minimum capital levels required for national banks. The Company’s consolidated capital ratios were substantially the same as those set forth above for the Bank, and exceeded the minimums required under these Federal Reserve Board guidelines.
Results of Operations
Net earnings were $2,978,000 for the nine months ended September 30, 2006 as compared to $3,291,000 for the same period in 2005. Net earnings were $982,000 for the quarter ended September 30, 2006 as compared to $1,149,000 during the same quarter in 2005.
As in most financial institutions, a major element in analyzing the statement of earnings is net interest income which is the excess of interest earned over interest paid. The net interest margin could be materially affected during periods of volatility in interest rates.
The Company’s interest income, excluding tax equivalent adjustments, increased by $1,274,000 or 11.1% during the nine months ended September 30, 2006 as compared to the comparable period in 2005. Interest income for the quarter ended September 30, 2006 increased $490,000 or 12.5% when compared to the quarter ended September 30, 2005 and increased $206,000 or 4.9% as compared to the second quarter of 2006. The increases in 2006 are due primarily to significant increases in the interest rates by the Federal Reserve Bank during the last two quarters of 2005 and continued increases during 2006. This increase comes after record low interest rates during early 2005. The ratio of average earning assets to total average assets was 96.5% for the nine months ended September 30, 2006 as compared to 96.6% for the same period in 2005.
Interest expense increased by $1,593,000 for the nine months ended September 30, 2006 or 41.7% as compared to the same period in 2005. Interest expense for the quarter ended September 30, 2006 increased $571,000 or 41.1% as compared to the quarter ended September 30, 2005. Interest expense for the quarter ended September 30, 2006 increased $192,000 or 10.9% over the quarter ended June 30, 2006. The increase in 2006 relates primarily to the changes in interest rates as previously discussed.
The foregoing resulted in net interest income of $7,321,000 for the nine months ended September 30, 2006, a decrease of $319,000 or 4.2% compared to the same period for 2005. Net interest income for the quarter ended September 30, 2006 decreased $81,000 or 3.2% as compared to the third quarter of 2005. Net interest income for the quarter ended September 30, 2006 increased $14,000 or 0.6% as compared to the quarter ended June 30, 2006.
13
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
The following schedule details the loans of the Company at September 30, 2006 and December 31, 2005:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2006 | | | 2005 | |
| | (In Thousands) | |
Commercial, financial and agricultural | | $ | 26,410 | | | | 20,957 | |
Real estate — construction | | | 8,946 | | | | 10,154 | |
Real estate — mortgage | | | 126,204 | | | | 119,587 | |
Consumer | | | 2,822 | | | | 2,868 | |
| | | | | | |
| | $ | 164,382 | | | | 153,566 | |
| | | | | | |
The Company accounts for impaired loans under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures”. These pronouncements apply to impaired loans except for large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment including credit card, residential mortgage, and consumer installment loans.
A loan is deemed to be impaired when it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the lending contract. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company shall recognize an impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses.
The Company’s first mortgage single family residential and consumer loans which total approximately $72,036,000 and $2,822,000, respectively at September 30, 2006, are divided into various groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and thus are not subject to the provisions of SFAS Nos. 114 and 118. Substantially all other loans of the Company are evaluated for impairment under the provisions of SFAS Nos. 114 and 118.
14
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
The Company considers all loans on nonaccrual status that are subject to the provisions of SFAS Nos. 114 and 118 to be impaired. Loans are placed on nonaccrual status when doubt as to timely collection of principal or interest exists, or when any required payment of principal or interest is past due 90 days or more unless such loans are well-secured and in the process of collection. Past due status is based on contractual terms of a loan. Delays or shortfalls in loan payments are evaluated with various other factors to determine if a loan is impaired. Generally, delinquencies under 90 days are considered insignificant unless certain other factors are present which indicate impairment is probable. The decision to place a loan on nonaccrual status is also based on an evaluation of the borrower’s financial condition, collateral, liquidation value, and other factors that, in the judgment of management, affect the borrower’s ability to pay or the Bank’s anticipated ability to collect from apparently available sources such as the borrower, collateral, and/or third party obligors.
Generally, at the time a loan is placed on nonaccrual status, all interest accrued on the loan in the current fiscal year is reversed from income, and all interest accrued and uncollected from the prior year is charged off against the allowance for loan losses. Thereafter, interest on nonaccrual loans is recognized as interest income only to the extent that cash is received and future collection of principal is not in doubt. If the collectibility of outstanding principal is doubtful, such interest received is applied as a reduction of principal. A nonaccrual loan may be restored to accruing status when principal and interest are no longer past due and unpaid and future collection of principal and interest on a timely basis is not in doubt. There were no loans on nonaccrual status at September 30, 2006 and 2005 nor at anytime during the nine month periods then ended. Therefore, all interest income during these periods was recognized on the accrual basis.
Loans not on nonaccrual status are classified as impaired in certain cases where there is inadequate protection by the current net worth and financial capacity of the borrower or of the collateral pledged, if any. In those cases, such loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company’s criteria for nonaccrual status.
Generally, the Company also classifies as impaired any loans the terms of which have been modified in a troubled debt restructuring after January 1, 1995. Interest is accrued on such loans that continue to meet the modified terms of their loan agreements. At September 30, 2006, the Company had no loans that have had the terms modified in a troubled debt restructuring after January 1, 1995.
The Company’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when they are considered uncollectible.
15
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
Impaired loans and related allowance for loan loss amounts at September 30, 2006 and December 31, 2005 were as follows:
| | | | | | | | |
| | (In Thousands) | |
| | September 30, | | | December 31, | |
| | 2006 | | | 2005 | |
Recorded investment | | $ | 5,787 | | | $ | 1,055 | |
Allowance for loan losses | | $ | 701 | | | $ | 370 | |
The allowance for loan loss related to impaired loans was measured based upon the estimated fair value of related collateral.
The average recorded investment in impaired loans for the nine months ended September 30, 2006 and 2005 was $2,272,000 and $1,034,000, respectively. The increase in impaired loans during the nine months ended September 30, 2006 relates primarily to a single customer whose loans were downgraded during the second quarter of 2006 as further discussed in the subsequent section of this report pertaining to internally graded loans. The related amount of interest income recognized on the accrual method for the period that such loans were impaired was approximately $63,000 and $61,000 for 2006 and 2005, respectively.
The following schedule details selected information as to non-performing loans of the Company at September 30, 2006 and December 31, 2005:
| | | | | | | | | | | | | | | | |
| | September 30, 2006 | | | December 31, 2005 | |
| | Past Due | | | | | | | Past Due | | | | |
| | 90 Days | | | Non-Accrual | | | 90 Days | | | Non-Accrual | |
| | (In Thousands) | | | (In Thousands) | |
Real estate loans | | $ | 992 | | | | — | | | $ | 72 | | | | — | |
Consumer | | | 25 | | | | — | | | | 22 | | | | — | |
Commercial | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
| | $ | 1,017 | | | | — | | | $ | 94 | | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Renegotiated loans | | $ | — | | | | — | | | $ | — | | | | — | |
| | | | | | | | | | | | |
16
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
Transactions in the allowance for loan losses were as follows:
| | | | | | | | |
| | Nine Months Ended | |
| | September 30, | |
| | 2006 | | | 2005 | |
| | (In Thousands) | |
Balance, January 1, 2006 and 2006, respectively | | $ | 1,816 | | | | 1,816 | |
Add (deduct): | | | | | | | | |
Losses charged to allowance | | | (12 | ) | | | (27 | ) |
Recoveries credited to allowance | | | 27 | | | | 125 | |
Reclassification of allowance for off-balance sheet credit losses | | | (6 | ) | | | — | |
Provision for loan losses | | | — | | | | — | |
| | | | | | |
Balance, September 30, 2006 and 2005, respectively | | $ | 1,825 | | | | 1,914 | |
| | | | | | |
There was no provision for loan losses for the first nine months of 2006 nor was there a provision for the first nine months of 2005. The provision for loan losses is based on past loan experience and other factors which, in management’s subjective judgment, deserve current recognition in estimating possible loan losses. Such factors include past loan loss experience, growth and composition of the loan portfolio, review of specific loan problems, the relationship of the allowance for loan losses to outstanding loans, and current economic conditions that may affect the borrower’s ability to repay. This is not an exact science. Management has in place a system that is designed to identify and to monitor potential problem loans on a timely basis, of course, no system is either infallible or perfect. From time to time unscheduled developments, including requirements of bank regulatory agencies, may require additional contributions to the reserve.
The Company maintains an allowance for loan losses which management believes is adequate to absorb losses inherent in the loan portfolio. A formal review is prepared bi-monthly by the Loan Review Committee to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. The review includes analysis of historical performance, the level of non-performing and adversely rated loans, specific analysis of certain problem loans, loan activity since the previous assessment, reports prepared by the Loan Review Committee, consideration of current economic conditions, and other pertinent information. The level of the allowance to net loans outstanding will vary depending on the overall results of this bi-monthly assessment. The review is presented to and subsequently approved by the Board of Directors.
17
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
The following table presents total internally graded loans as of September 30, 2006 and December 31, 2005:
| | | | | | | | | | | | | | | | |
| | September 30, 2006 | |
| | (In Thousands) | |
| | | | | | Special | | | | | | | | |
| | Total | | Mention | | Substandard | | Doubtful |
| | | | | | | | | | | | |
Commercial, financial and agricultural | | $ | 12,133 | | | | 9,719 | | | | 2,414 | | | | — | |
Real estate mortgage | | | 2,159 | | | | — | | | | 2,159 | | | | — | |
Real estate construction | | | — | | | | — | | | | — | | | | — | |
Consumer | | | 65 | | | | — | | | | 52 | | | | 13 | |
| | | | | | | | | | | | |
| | $ | 14,357 | | | | 9,719 | | | | 4,625 | | | | 13 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | December 31, 2005 | |
| | (In Thousands) | |
| | | | | | Special | | | | | | | | |
| | Total | | Mention | | Substandard | | Doubtful |
| | | | | | | | | | | | |
Commercial, financial and agricultural | | $ | 5,759 | | | | 4,844 | | | | 915 | | | | — | |
Real estate mortgage | | | 3,319 | | | | 215 | | | | 3,104 | | | | — | |
Real estate construction | | | — | | | | — | | | | — | | | | — | |
Consumer | | | 83 | | | | — | | | | 83 | | | | — | |
| | | | | | | | | | | | |
| | $ | 9,161 | | | | 5,059 | | | | 4,102 | | | | — | |
| | | | | | | | | | | | |
The increase in internally graded commercial, financial and agricultural loans relates primarily to a single customer. The customer’s debt was downgraded in the second quarter of 2006 due to the Bank’s concerns about the customer’s lack of profitability and recurring losses from operations. The customer has advised the Bank that it is engaged in raising additional capital and has begun receiving payments on a relatively large contract. However, the Bank continues to monitor this account closely. The Bank has allocated a portion of its loan loss reserve specifically to this account (by reallocating another allocated part of the reserve as to which a specific reserve was deemed to be no longer necessary). The debt is collateralized by commercial real estate, accounts receivable, inventory, and machinery and equipment.
The collateral values, based on estimates by management, collateralizing the above internally graded loans total approximately $28,174,000 ($3,070,000 related to real estate loans and $25,104,000 related to commercial and other loans). Such loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. The loan classifications do not necessarily represent or result from trends or uncertainties which management expects will materially and adversely affect future operating results, liquidity or capital resources.
18
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
Residential real estate loans that are graded substandard totaling $2,159,000 and $3,104,000 at September 30, 2006 and December 31, 2005, respectively, consist of approximately thirty-seven individual loans that have been graded accordingly due to bankruptcies, inadequate cash flows and delinquencies. No material losses on these loans is anticipated by management. Management is unable to predict the impact, if any, of recent and planned industrial plant closings and related higher than state average unemployment rates in Warren County, Tennessee.
The following detail provides a breakdown of the allocation of the allowance for possible loans losses:
| | | | | | | | | | | | | | | | |
| | September 30, 2006 | | | December 31, 2005 | |
| | | | | | Percent of | | | | | | | Percent of | |
| | | | | | Loans In | | | | | | | Loans In | |
| | In | | | Each Category | | | In | | | Each Category | |
| | Thousands | | | To Total Loans | | | Thousands | | | To Total Loans | |
Commercial, financial and agricultural | | $ | 1,185 | | | | 16 | % | | $ | 759 | | | | 14 | % |
Real estate construction | | | 112 | | | | 5 | | | | 25 | | | | 7 | |
Real estate mortgage | | | 526 | | | | 77 | | | | 982 | | | | 78 | |
Consumer | | | 2 | | | | 2 | | | | 50 | | | | 1 | |
| | | | | | | | | | | | |
| | $ | 1,825 | | | | 100 | % | | $ | 1,816 | | | | 100 | % |
| | | | | | | | | | | | |
There were no material amounts of other interest-bearing assets (interest-bearing deposits with other banks, municipal bonds, etc.) at September 30, 2006 which would be required to be disclosed as past due, non-accrual, restructured or potential problem loans, if such interest-bearing assets were loans.
Non-interest income, exclusive of security gains, was $501,000 for the nine months ended September 30, 2006 as compared to $547,000 for the comparable period in 2005. There was a decrease during the quarter ended September 30, 2006 of $11,000 or 5.8% as compared to the same quarter in 2005. The increase was primarily due to decreases in service charges on deposit accounts of $6,000 and a decrease in commissions and fees on fiduciary activities of $4,000.
Securities gains were $14,000 and $6,000 during the nine month period ended September 30, 2006 and 2005, respectively. The gains in 2006 and 2005 relate primarily to calls of securities prior to their scheduled maturity.
Non-interest expense was $3,460,000 and $3,362,000 for the nine months ended September 30, 2006 and 2005, respectively. This increase for the nine month period was due primarily to a $53,000 increase in data processing expense and a $98,000 increase in other operating expenses, which included approximately $35,000 for the cost of a search for the presidents successor, net of a decrease of $20,000 in salaries and employee benefits and $25,000 decrease in furniture and equipment expense.
19
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
Management is not aware of any current recommendations by the regulatory authorities which, if implemented, would have a material adverse effect on the Company’s liquidity, capital resources or operations.
An interagency request for comment on proposed guidance for concentrations in commercial real estate (CRE) lending and sound risk management practices was issued in January, 2006. In addition to identifying institutions with CRE loan concentrations for closer supervisory scrutiny, the proposal would require the institution to have appropriate risk management practices and capital levels in place. Management does not anticipate a material adverse effect on the Company’s liquidity, capital resources or operations resulting from this proposed guidance.
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share for the Company begins with the basic earnings per share plus the effect of common shares contingently issuable from stock options.
The following is a summary of components comprising basic and diluted earnings per share (EPS) for the three and nine months ended September 30, 2006 and 2005:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
(In Thousands, except share amounts) | | 2006 | | | 2005 | | | 2006 | | | 2005 | |
Basic EPS Computation: | | | | | | | | | | | | | | | | |
Numerator — income available to common shareholders | | $ | 982 | | | | 1,149 | | | $ | 2,978 | | | | 3,291 | |
| | | | | | | | | | | | |
Denominator — weighted average number of common shares outstanding | | | 1,026,697 | | | | 1,034,909 | | | | 1,028,603 | | | | 1,038,498 | |
| | | | | | | | | | | | |
Basic earnings per common share | | $ | .96 | | | | 1.11 | | | $ | 2.90 | | | | 3.17 | |
| | | | | | | | | | | | |
Diluted EPS Computation: | | | | | | | | | | | | | | | | |
Numerator | | $ | 982 | | | | 1,149 | | | $ | 2,978 | | | | 3,291 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding | | | 1,026,697 | | | | 1,034,909 | | | | 1,028,603 | | | | 1,038,498 | |
Dilutive effect of stock options | | | 20,829 | | | | 19,076 | | | | 20,829 | | | | 19,076 | |
| | | | | | | | | | | | |
| | | 1,047,526 | | | | 1,053,985 | | | | 1,049,432 | | | | 1,057,574 | |
| | | | | | | | | | | | |
Diluted earnings per common share | | $ | .94 | | | | 1.09 | | | $ | 2.84 | | | | 3.11 | |
| | | | | | | | | | | | |
Stock Option Plan
In April, 1997, the stockholders of the Company approved the First McMinnville Corporation 1997 Stock Option Plan (The “Stock Option Plan”). The Stock Option Plan provides for the granting of stock options and authorizes the issuance of common stock upon the exercise of such options for up to 115,000 shares of common stock to directors and employees of the Company.
20
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Stock Option Plan, Continued
Under the Stock Option Plan awards may be granted in the form of incentive stock options or nonstatutory stock options, and are exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the common stock on the grant date.
In December, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised) (“SFAS No. 123(R)”) related to share based payments. For First McMinnville Corporation SFAS No. 123(R) applies to the accounting for stock options. The substance of the revised statement is to require companies to record as an expense amortization of the fair market value of stock options determined as of the grant date. The offsetting credit is to additional paid-in capital unless there is an obligation to buy back the stock or exchange other assets for the stock. If such an obligation exists the offsetting credit would be to a liability account. The statement is effective for the first interim reporting period after December 15, 2005. Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R). The Company has expensed $17,000 for the nine months ended September 30, 2006 as a result of the adoption of SFAS No. 123(R) related to the expensing of stock options.
Prior to the adoption of SFAS No. 123(R) , “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, sets forth the method for recognition of cost of plans similar to those of the Company. As was permitted, management elected to account for the plan under APB Opinion 25 and related Interpretations. Accordingly, no compensation cost was recognized for the stock option plan prior to the adoption of SFAS No. 123(R). However, under SFAS No. 123, the Company was required to make proforma disclosures as if cost had been recognized in accordance with the pronouncement. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, the Company’s net earnings and basic earnings per common share and diluted earnings per common share for the three months and nine months ended September 30, 2005, would have been reduced to the proforma amounts indicated below:
| | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
(In Thousands, except per share amounts)) | | September 30, 2005 | | | September 30, 2005 | |
Net earnings: | | | | | | | | |
As Reported | | $ | 1,149 | | | $ | 3,291 | |
Proforma | | $ | 1,145 | | | $ | 3,279 | |
| | | | | | | | |
Basic earnings per common share: | | | | | | | | |
As Reported | | $ | 1.11 | | | $ | 3.17 | |
Proforma | | $ | 1.11 | | | $ | 3.16 | |
| | | | | | | | |
Diluted earnings per common share: | | | | | | | | |
As Reported | | $ | 1.09 | | | $ | 3.11 | |
Proforma | | $ | 1.09 | | | $ | 3.10 | |
21
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Impact of Inflation
The primary impact which inflation has on the results of the Company’s operations is evidenced by its effects on interest rates. Interest rates tend to reflect, in part, the financial market’s expectations of the level of inflation and, therefore, will generally rise or fall as the level of expected inflation fluctuates. To the extent interest rates paid on deposits and other sources of funds rise or fall at a faster rate than the interest income earned on funds, loans or invested, net interest income will vary. Inflation also affects non-interest expenses as goods and services are purchased, although this has not had a significant effect on net earnings in recent years. If the inflation rate stays flat or increases slightly, the effect on profits is not expected to be significant.
Recent Development
Mr. Thomas Vance recently joined the Company as President and was elected to the Company’s Board on September 12, 2006. It is expected that Mr. Charles C. Jacobs, the Company’s current Chief Executive Office and Chairman of the Board of Directors, will retire in the near future and that Mr. Vance will become Chief Executive Office of both the Company and First National Bank of McMinnville at that time.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity such as Federal funds sold or purchased and loans, securities and deposits as discussed in Item 2. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both immediate and long term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company meets monthly to analyze the rate sensitivity position. These meetings focus on the spread between the cost of funds and interest yields generated primarily through loans and investments.
Managing interest rate risk is a very subjective exercise based on a wide variety of factors. This activity is based significantly on management’s subjective beliefs about future events (such as actions of the Federal Reserve Board and the conduct of competitors) and is never guaranteed.
There have been no material changes in reported market risks during the nine months ended September 30, 2006. Please refer to Item 2 of Part I of this report for additional information related to market and other risks.
22
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
Item 4.Controls and Procedures
Within the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our Company required to be included in our periodic SEC filings. In connection with the new rules, we are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with our business.
There have been no changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.
The implementation of Section 404 of the Sarbanes-Oxley Act, and related matters, could result in significant costs for the Company on a consolidated basis. Compliance with Section 404 of the Sarbanes-Oxley Act has been extended to the first fiscal year ending on or after July 15, 2007. At this time, such costs are not believed to be material.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. RISK FACTORS
Registrant incorporates herein by reference “Item 1A. Risk Factors” from its most recently filed Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| (a) | | Shares of the Company’s common stock were issued to Directors and/or Employees pursuant to the Company’s Stock Option Plan as follows: |
| | | | | | | | |
| | Number of Shares of | | |
Date of Sale | | Common Stock Sold | | Price Per Share |
September 12, 2006 | | | 19 | | | $ | 52.75 | |
September 15, 2006 | | | 30 | | | $ | 37.15 | |
September 18, 2006 | | | 30 | | | $ | 29.08 | |
The aggregate proceeds of the shares sold were $2,989.
There were no underwriters and no underwriting discounts or commissions. All sales were for cash.
The Company believes that an exemption from registration of these shares was available to the Company in that the issuance thereof did not constitute a public offering of securities within the meaning of Section 4(2) of the Securities Act of 1933, as amended.
The securities sold are not convertible.
The proceeds of the sales are being used by the Company for general corporate purposes.
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PART II. OTHER INFORMATION, CONTINUED
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS, CONTINUED
| (c) | | The Issuer repurchased 1,283 of its common shares in the third quarter of this fiscal year, which ended September 30, 2006. |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | (c) | | | (d) | |
| | | | | | | | | | Total Number | | | Maximum | |
| | | | | | | | | | of Shares | | | Number (or | |
Period Covered | | | | | | | | | | (or Units) | | | Approximate | |
by this Report - | | (a) | | | | | | | Purchased as | | | Dollar Value) | |
Third Fiscal | | Total Number | | | (b) | | | Part of Publicly | | | of Shares | |
Quarter of 2005 | | of Shares | | | Average Price | | | Announced | | | (or Units) | |
(July 1 through | | (or Units) | | | Paid Per | | | Plans | | | that May Yet | |
September 30) | | Purchased | | | Share (or Unit) | | | or Programs | | | Be Purchased | |
July 1 - 31 | | | 8 | * | | $ | 52.41 | | | | * | | | | * | |
August 1 - 31 | | | 1,200 | * | | | 52.58 | | | | * | | | | * | |
September 1 - 30 | | | 75 | * | | | 52.75 | | | | * | | | | * | |
| | | | | | | | | | | | | | |
Total | | | 1,283 | * | | $ | 52.58 | | | | * | | | | * | |
| | | | | | | | | | | | | | |
* The Issuer purchases shares of its stock from time to time in order to provide some liquidity in the stock. The Issuer does not solicit such purchases. There is no preset number of shares that the Issuer will purchase and no “plan” or “program” of purchases. Because there is no established public trading market, the Issuer has historically acted as the purchasor of last resort to provide some liquidity in the shares paying “book value”, as calculated by it, for shares based on the “book value” as of the immediately preceding month end (unaudited). The Issuer does not encourage such sales to it and does not compete in any manner in effecting such purchases.
The only restrictions on working capital and/or dividends are those reported in Part I.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) None.
(b) Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) None.
(b) Not Applicable.
(c) Not Applicable.
(d) Not Applicable.
Item 5. OTHER INFORMATION
(a) None.
(b) Not Applicable.
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PART II. OTHER INFORMATION, CONTINUED
Item 6. EXHIBITS
Exhibits 31.1 and 31.2 consist of Rule 13a-14(a)/15d-14(a) certifications.
Exhibits 32.1 and 32.2 consist of Section 1350 certifications.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| FIRST MCMINNVILLE CORPORATION (Registrant) | |
DATE: November 14, 2006 | /s/ Charles C. Jacobs | |
| Charles C. Jacobs | |
| Chairman and Chief Executive Officer | |
|
| | | | |
| | |
DATE: November 14, 2006 | /s/ Kenny D. Neal | |
| Kenny D. Neal | |
| Chief Financial and Accounting Officer | |
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