1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-24161
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MURFREESBORO BANCORP, INC.
--------------------------
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 62-1694317
--------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
615 Memorial Boulevard, Murfreesboro, Tennessee 37129
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
(615) 890-1111
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(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.
YES [X] NO
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: 907,609 shares at May 11, 2000.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MURFREESBORO BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
C O N T E N T S
Page
Number
------
Consolidated Balance Sheets ........................................... 2
Consolidated Statements of Operations ................................. 3
Consolidated Statements of Cash Flows ................................. 4
Notes to Consolidated Financial Statements ............................ 5
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MURFREESBORO BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Tabular amounts are in thousands)
ASSETS
March 31, December 31,
2000 1999
---- ----
Cash and due from banks $ 3,004 $ 3,114
Federal funds sold 1,155 2,160
- -------------------------------------------------------------------------------------
Total cash and cash equivalents 4,159 5,274
- -------------------------------------------------------------------------------------
Securities available for sale 17,383 17,387
Securities held to maturity 8,855 8,859
- -------------------------------------------------------------------------------------
Total investment securities 26,238 26,246
- -------------------------------------------------------------------------------------
Loans, less allowance for possible loan losses
of $874,000 and $817,000, respectively 69,036 64,480
Premises and equipment, net 4,917 4,475
Accrued interest receivable 789 745
Other assets 1,793 1,684
Deferred tax assets 347 342
- -------------------------------------------------------------------------------------
Total assets $107,279 $103,246
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 90,267 $ 85,695
Securities sold under agreements to repurchase 4,478 4,889
Accrued interest payable 408 344
Accrued expenses and other liabilities 391 624
Subordinated convertible capital debentures 3,000 3,000
- -------------------------------------------------------------------------------------
Total liabilities 98,544 94,552
- -------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, no assigned value or rights, 1,000,000
shares authorized, no shares issued or outstanding -- --
Common stock, $5.00 par value, 2,000,000 shares authorized
and 907,609 shares issued and outstanding 4,538 4,538
Additional paid-in capital 4,530 4,530
Deficit (209) (253)
- -------------------------------------------------------------------------------------
Realized shareholders' equity 8,859 8,815
Accumulated other comprehensive loss (124) (121)
- -------------------------------------------------------------------------------------
Total shareholders' equity 8,735 8,694
- -------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $107,279 $103,246
=====================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
2000 1999
Interest income:
Interest and fees on loans $1,472 $ 846
Interest on taxable investment securities 381 397
Interest on federal funds sold 27 30
- ----------------------------------------------------------------------------------------------
Total interest income 1,880 1,273
- ----------------------------------------------------------------------------------------------
Interest expense:
Interest on negotiable order of withdrawal accounts 64 159
Interest on money market demand accounts 110 79
Interest on savings deposits 2 1
Interest on certificates of deposit 823 432
- ----------------------------------------------------------------------------------------------
Total interest expense on deposits 999 671
Interest on convertible debentures 61 --
Interest on securities sold under agreement to repurchase 61 29
- ----------------------------------------------------------------------------------------------
Total interest expense 1,121 700
- ----------------------------------------------------------------------------------------------
Net interest income 759 573
Provision for possible loan losses 60 96
- ----------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 699 477
- ----------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 66 47
Other fees and commissions 4 2
Increase in cash surrender value of officers' life insurance 19 19
Other non-interest income 17 10
- ----------------------------------------------------------------------------------------------
Total non-interest income 106 78
- ----------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 385 257
Occupancy expenses, net 27 17
Furniture and equipment expense 43 32
Other non-interest expense 294 175
- ----------------------------------------------------------------------------------------------
Total non-interest expense 749 481
- ----------------------------------------------------------------------------------------------
Income (loss) before income taxes 56 74
Income tax expense 13 21
- ----------------------------------------------------------------------------------------------
Net income $ 43 $ 53
==============================================================================================
Earnings per share:
Basic:
Net income $ 0.05 $ 0.06
==============================================================================================
Diluted:
Net income $ 0.05 $ 0.06
==============================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
(Tabular amounts are in thousands)
2000 1999
---- ----
Operating activities:
Net income $ 43 $ 53
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 60 96
Provision for depreciation, amortization and accretion, net 40 33
Stock dividend on Federal Home Loan Bank stock (4) (3)
Changes in assets and liabilities:
Increase in accrued interest receivable (44) (87)
Increase in cash surrender value of officers' life insurance (19) (19)
Increase in deferred tax asset (5) (7)
(Increase) decrease in other assets (90) 10
Increase (decrease) in accrued interest payable 64 (9)
Decrease in accrued expenses and other liabilities (233) 24
- ---------------------------------------------------------------------------------------------------
Net cash used by operating activities (188) 91
- ---------------------------------------------------------------------------------------------------
Investing activities:
Purchase of securities available for sale -- (4,000)
Purchase of securities held to maturity -- (3,502)
Maturities and calls of securities available for sale -- 9,500
Maturities and calls of securities held to maturity -- 500
Increase in loans, net (4,613) (7,719)
Additions to premises and equipment (475) (149)
- ---------------------------------------------------------------------------------------------------
Net cash used by investing activities (5,088) (5,370)
- ---------------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 4,572 670
Net decrease in securities sold under agreement to repurchase (411) (335)
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,161 335
- ---------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,115) (4,944)
Cash and cash equivalents at the beginning of the period 5,274 9,472
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 4,159 $ 4,528
===================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the quarter for:
Interest $ 1,057 $ 680
===================================================================================================
Income taxes $ 120 --
===================================================================================================
Non-cash transactions:
Increase in unrealized loss on securities available for sale $ (5) $ (6)
===================================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts
of Murfreesboro Bancorp, Inc. and its subsidiary, Bank of
Murfreesboro. 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 consolidated
financial statements contain all adjustments and disclosures
necessary to summarize fairly the financial position of the Company
as of March 31, 2000 and December 31, 1999, the results of
operations for the quarters ended March 31, 2000 and 1999, and
changes in cash flows for the quarters ended March 31, 2000 and
1999. 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 to Shareholders.
The results of the interim periods are not necessarily indicative of
the results to be expected for the complete fiscal year.
(2) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," was adopted by the Company on
January 1, 1998. SFAS 130 establishes standards for reporting
comprehensive income. Comprehensive income includes net income and
other comprehensive net income which is defined as non-owner related
transactions in equity. The following table sets forth the amounts of
other comprehensive income (loss) included in equity along with the
related tax effect for the quarters ended March 31, 2000 and 1999,
respectively.
Tax Net of
Pre-Tax Expense Tax
Amount (Benefit) Amount
------ --------- ------
(In thousands)
Quarter ended March 31, 2000
Net unrealized loss on securities available for sale $ (5) $ (2) $ (3)
--------------------------------------------------------------------------------------
Other comprehensive loss $ (5) $ (2) $ (3)
======================================================================================
Quarter ended March 31, 1999
Net unrealized loss on securities available for sale $(26) $(12) $(14)
--------------------------------------------------------------------------------------
Other comprehensive loss $(26) $(12) $(14)
======================================================================================
(3) EARNINGS PER SHARE
The weighted average number of common shares outstanding during the
quarters ended March 31, 2000 and 1999 was 907,609. The effect of
dilutive common stock options was 17,800 shares for the quarter ended
March 31, 1999. The dilutive effect of common stock options is
estimated at 23,158 for the quarter ended March 31, 2000. The
contingent issuance of common stock as related to the subordinated
convertible capital debentures was anti-dilutive, as the effect of
the related interest expense exceeded the impact of contingent
issuance of common stock shares.
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PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the information and
tables which follow.
SUMMARY
Net income for the quarter ended March 31, 2000 was $43,000 and the net income
for the quarter ended March 31, 1999 was $53,000.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the quarter ended March 31, 2000
totaled $95,585,000, which represented 91.3% of average total assets. Earning
assets totaled $96,425,000 at March 31, 2000. Average earning assets for the
quarter ended March 31, 1999 totaled $71,502,000, which represented 93.0% of
average total assets. Earning assets totaled $92,886,000 at March 31, 1999.
Loan Portfolio. The Company's average loans for the quarter ended March 31, 2000
were $67,216,000 and for the quarter ended March 31, 1999 were $41,019,000. The
balance in total loans at March 31, 2000 was $69,910,000 and $45,510,000 at
March 31, 1999.
Investment Portfolio. The Company's investment securities portfolio averaged
$26,223,000 for the quarter ended March 31, 2000 and $28,041,000 for the quarter
ended March 31, 1999. The portfolio totaled $26,234,000 at March 31, 2000 and
$24,033,000 at March 31, 1999.
The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities: "Held to Maturity" and "Available
for Sale." The "Available for Sale" securities are carried at fair market value,
whereas the "Held to Maturity" securities are carried at amortized book value.
At March 31, 2000, unrealized losses in the "Available for Sale" portfolio
amounted to $200,000 and there was an unrealized loss of $23,000 at March 31,
1999. The average balance of securities "Available for Sale" during the quarter
ended March 31, 2000 was $17,365,000 and the balance at March 31, 2000 was
$17,379,000. The average balance of securities "Held to Maturity" during the
quarter ended March 31, 2000 was $8,858,000 and the balance at March 31, 2000
was $8,855,000. The average balance of securities "Available for Sale" during
the quarter ended March 31, 1999 was $19,192,000 and the balance at March 31,
1999 was $14,656,000. The average balance of securities "Held to Maturity"
during the quarter ended March 31, 1999 was $8,849,000 and the balance at March
31, 1999 was $9,377,000.
Deposits. The Company's average deposits were $87,652,000 for the quarter ended
March 31, 2000. This included average non-interest-bearing deposits of
$5,840,000, average certificates of deposit of $59,586,000, average saving
deposits of $448,000 and average interest-bearing transaction accounts of
$21,778,000. The Company's average deposits for the quarter ended March 31, 1999
were $65,157,000. This included average non-interest-bearing deposits of
$2,822,000, average certificates of deposit of $33,928,000, average savings
deposits of $259,000 and average interest-bearing transaction accounts of
$28,148,000. Deposits at March 31, 2000 were $90,267,000 and $65,672,000 at
March 31, 1999.
Capital Resources. Shareholders' equity totaled $8,735,000 at of March 31, 2000.
This included $9,068,000 of common stock and additional paid-in-capital less a
deficit of $209,000 and other comprehensive loss in the form of an unrealized
loss on securities available for sale of $124,000.
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Long-Term Debt. The Company issued $3,000,000 of floating rate subordinated
convertible capital debentures ("debentures) during September 1999. Issuance
costs related to the debentures is approximately $25,000. The debentures convert
to common stock of the Corporation on August 31, 2011 at a conversion factor
based upon the market value of the common stock on that date. If converted
before that date, the conversion will be based upon one share of common stock
for every $12.50 of debentures held. The debentures begin accruing interest on
January 1, 2000 and pay interest every December 15 with the final interest
payment being made at maturity. Interest payment is based upon a rate equal to
the weighted average prime rate less 0.5%. Interest expense for the quarter
ended March 31, 2000 on the debentures totaled $61,000.
BALANCE SHEET MANAGEMENT
Liquidity Management. Liquidity is the ability of a company to convert assets
into cash without significant loss and to raise funds by increasing liabilities.
Liquidity management involves having the ability to meet the day-to-day cash
flow requirements of its customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
investments in federal funds and maturities of investment securities. Additional
sources of liquidity are loan repayments and possible prepayments from the
mortgage-backed securities from the investment portfolio.
The liability portion of the balance sheet provides liquidity through various
interest bearing and non-interest bearing deposit accounts. At March 31, 2000
and March 31, 1999, the Company had $2,300,000 of federal funds purchase lines
available at three correspondent banks. None of these lines were drawn at March
31, 1999 or March 31, 2000.
Because of the level of capital obtained in formation and from the funds derived
from the long-term debt issued in September 1999, no additional capital funds or
long-term debt are anticipated to be deemed necessary during the next twelve
months.
RESULTS OF OPERATIONS
Net Interest Income. Net interest income is the principal component of a
financial institution's income stream and represents the spread between interest
and fee income generated from earning assets and the interest expense paid on
deposits. The following discussion is on a fully taxable equivalent basis.
Net interest income for the quarter ended March 31, 2000 totaled $759,000. This
was the result of interest income of $1,880,000 and interest expense of
$1,121,000. Interest income produced by the loan portfolio totaled $1,472,000,
interest income on investment securities totaled $381,000, and interest income
on federal funds totaled $27,000. Interest expense included $823,000 of interest
expense on certificates of deposit, interest expense of $64,000 on
interest-bearing transaction accounts, interest expense of $110,000 on money
market demand accounts, interest expense of $2,000 on savings accounts, interest
expense of $61,000 on repurchase agreements and interest expense of $61,000 on
the subordinated convertible capital debentures.
Net interest income for the quarter ended March 31, 1999 totaled $573,000. This
was the result of interest income of $1,273,000 and interest expense of
$700,000. Interest income produced by the loan portfolio totaled $846,000,
interest income on investment securities totaled $397,000 and interest income on
federal
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funds totaled $30,000. Interest expense included $432,000 of interest expense on
certificates of deposit, interest expense of $159,000 on interest-bearing
transaction accounts, interest expense of $79,000 on money market demand
accounts, interest expense on savings accounts of $1,000 and interest expense on
repurchase agreements of $29,000.
The trend in net interest income is commonly evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. This ratio
represents the difference between the average yield on average earning assets
and the average rate paid for all funds used to support those earning assets.
The net interest margin for the quarter ended March 31, 2000 was 3.19%. The net
cost of funds, defined as interest expense divided by average-earning assets,
was 4.72% and the yield on earning assets was 7.91% for the quarter ended March
31, 2000. The net interest margin for the quarter ended March 31, 1999 was
3.25%. The net cost of funds for the quarter ended March 31, 1999 was 3.97% and
the yield on earning assets was 7.22%.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of non-interest bearing funds and
gives a direct perspective on the effect of market interest rate movements.
During recent years, the net interest margins and interest rate spreads have
been under intense pressure to maintain historical levels, due in part to tax
laws that discouraged investment in tax-exempt securities and intense
competition for funds with non-bank institutions. The interest rate spread for
the quarter ended March 31, 2000 was 2.86% and for the quarter ended March 31,
1999 was 2.86%.
Allowance for Possible Loan Losses. Lending officers are responsible for the
ongoing review and administration of each loan. They make the initial
identification of loans that present some difficulty in collection or where
there is an indication that the probability of loss exists. Lending officers are
responsible for the collection effort on a delinquent loan. Senior management is
informed of the status of delinquent and problem loans on a monthly basis.
Senior management makes recommendations monthly to the board of directors as to
charge-offs. Senior management reviews the allowance for possible loan losses on
a quarterly basis. The Company's policy is to discontinue interest accrual when
payment of principal and interest is 90 days or more in arrears, unless there is
sufficient collateral to justify continued accrual.
The allowance for possible loan losses represents management's assessment of the
risks associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for possible loan losses and the appropriate provisions
required to maintain a level considered adequate to absorb anticipated loan
losses. In assessing the adequacy of the allowance, management reviews the size,
quality and risk of loans in the portfolio. Management also considers such
factors as loan loss experience, the amount of past due and non-performing
loans, specific known risk, the status and amount of non-performing assets,
underlying collateral values securing loans, current and anticipated economic
conditions and other factors which affect the allowance for potential credit
losses.
While it is the Company's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
Management believes that the $874,000 at March 31, 2000 and $817,000 at December
31, 1999 in the allowance for possible loan losses are adequate to absorb known
risks in the portfolio. No assurance can be given, however, that adverse
economic circumstances will not result in increased losses in the loan
portfolio, and require greater provisions for possible loan losses in the
future.
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Non-performing Assets. Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans include loans
classified as non-accrual or renegotiated. The Company's policy is to place a
loan on non-accrual status when it is contractually past due 90 days or more as
to payment of principal or interest unless there is reason to believe the
collection of principal and interest is fairly certain. At the time a loan is
placed on non-accrual status, interest previously accrued but not collected is
reversed and charged against current earnings. Recognition of any interest after
a loan has been placed on non-accrual is accounted for on a cash basis.
There were no impaired loans, loans on non-accrual status or foreclosed real
estate held for sale at December 31, 1999 or at March 31, 2000. Loans past due
ninety days or more and still accruing interest at December 31, 1999 totaled
$34,000. There were no loans past due ninety days or more and still accruing
interest at March 31, 2000. Loans on non-accrual status at March 31, 2000
totaled $19,000 and there were no loans on non-accrual status at December 31,
1999.
Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and increase in the cash surrender value of officer's life insurance. In
addition, any gains or losses realized from the sale of investment portfolio
securities available for sale are included in non-interest income. Total
non-interest income totaled $106,000 for the quarter ended March 31, 2000. This
included $66,000 from service charges on deposit accounts, other fees of $4,000,
$19,000 from the increase in the cash surrender value of officers' life
insurance and $17,000 of other non-interest income. There were no gains or
losses on securities during the quarter ended March 31, 2000.
Non-interest income totaled $78,000 for the quarter ended March 31, 1999. This
included $47,000 on service charge on deposit accounts, other fees of $2,000,
$19,000 from the increase in the cash surrender value of the officers' life
insurance and $10,000 of other non-interest income including brokerage income.
Non-interest Expenses. Non-interest expense for the quarter ended March 31, 2000
totaled $749,000. Salaries and employee benefits for the quarter ended March 31,
2000 totaled $385,000. Occupancy expense for the quarter ended March 31, 2000
totaled $27,000 while furniture and equipment expense totaled $43,000. All other
non-interest expenses totaled $294,000 for the quarter ended March 31, 2000.
Other non-interest expenses include supplies and printing, telephone, postage
and legal and audit fees.
Non-interest expense for the quarter ended March 31, 1999 totaled $481,000.
Salaries and employee benefits for the quarter ended March 31, 1999 totaled
$257,000. Occupancy expenses for the quarter ended March 31, 1999 totaled
$17,000 while furniture and equipment expenses totaled $32,000. Other
non-interest expenses totaled $175,000.
Income Taxes. For the quarter ended March 31, 2000 the Company incurred $13,000
of income tax expenses. For the quarter ended March 31, 1999 the Company
incurred income tax expenses of $21,000.
RETURN ON EQUITY AND ASSETS
Return on assets (net income divided by average total assets) for the quarter
ended March 31, 2000 was 0.19%. Return on equity (net income divided by average
equity) for the quarter ended March 31, 1998 was 2.26%. Equity to assets
(average equity divided by average total assets) for the quarter ended March 31,
2000 was 8.30%. There were no dividends paid during the quarter ended March 31,
2000, so no dividend payout ratio is presented.
Return on assets for the quarter ended March 31, 1999 was 0.28%. Return on
equity for the quarter ended March 31, 1999 was 2.45%. Equity to assets for the
quarter ended March 31, 1999 was 11.27%. There were no dividends paid during the
quarter ended March 31, 1999 so no dividend payout ratio is presented.
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EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
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AVERAGE BALANCE SHEET AND NET INTEREST INCOME
The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the quarter ended March 31, 2000 and certain
other information:
Interest Average
Average Income/ Yields/
Balance Expense Rates
------- ------- -----
ASSETS: (Fully taxable equivalent - dollars in thousands)
Interest-earning assets:
Loans $ 67,216 $ 1,472 8.87%
U.S. Treasury and other U.S. government agencies 26,223 381 5.85%
States and municipalities -- -- N/A
Federal funds sold 2,146 27 5.01%
- --------------------------------------------------------------------------------------------------
Total interest-earning assets/interest income 95,585 1,880 7.91%
- --------------------------------------------------------------------------------------------------
Cash and due from banks 2,372
Other assets 7,535
Allowance for possible loan losses (830)
- --------------------------------------------------------------------------------------------------
Total assets $104,662
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 22,226 176 3.19%
Certificates of deposit 59,586 823 5.55%
Repurchase agreements 4,492 61 5.44%
Subordinated convertible capital debentures 3,000 61 8.13%
- --------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 89,304 1,121 5.05%
- --------------------------------------------------------------------------------------------------
Non-interest-bearing demand deposits 5,840
Other liabilities 831
Shareholders' equity 8,687
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $104,662
==================================================================================================
Net interest earnings $ 759
==================================================================================================
Net interest income on interest-earning assets 3.19%
==================================================================================================
Taxable equivalent adjustment: N/A
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The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the quarter ended March 31, 1999 and certain
other information:
Interest Average
Average Income/ Yields/
Balance Expense Rates
------- ------- -----
ASSETS: (Fully taxable equivalent - dollars in thousands)
Interest-earning assets:
Loans $41,019 $ 846 8.36%
U.S. Treasury and other U.S. government agencies 28,041 397 5.75%
States and municipalities -- -- N/A
Federal funds sold 2,442 30 4.93%
Interest bearing deposits with other financial institutions -- -- N/A
- ----------------------------------------------------------------------------------------------------
Total interest-earning assets/interest income 71,502 1,273 7.22%
- ----------------------------------------------------------------------------------------------------
Cash and due from banks 1,536
Other assets 4,315
Allowance for possible loan losses (498)
- ----------------------------------------------------------------------------------------------------
Total assets $76,855
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $28,407 239 3.37%
Certificates of deposit 33,928 432 5.09%
Repurchase agreements 2,744 29 4.23%
- ----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 65,079 700 4.36%
- ----------------------------------------------------------------------------------------------------
Non-interest-bearing demand deposits 2,822
Other liabilities 290
Shareholders' equity 8,664
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $76,855
====================================================================================================
Net interest earnings $ 573
====================================================================================================
Net interest income on interest-earning assets 3.25%
====================================================================================================
Taxable equivalent adjustment: N/A
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The following table presents changes in the Company's various categories of
interest income and interest expense based upon the change in the average rate
and the change in the average volume from the quarter ended March 31, 1999 to
the quarter ended March 31, 2000 (in thousands).
Increase
Increase Increase (Decrease)
(Decrease) (Decrease) Due to
Increase Due to Due to Rate and
(Decrease) Volume Rate Volume
- ---------------------------------------------------------------------------------------------------
ASSETS
Federal funds sold $ (3) $ 1 $ (4) $ --
Investment securities:
Available for sale (20) 4 (25) 1
Held to maturity 4 4 -- --
- ---------------------------------------------------------------------------------------------------
Investment securities (16) 8 (25) 1
- ---------------------------------------------------------------------------------------------------
Loans 626 52 548 26
- ---------------------------------------------------------------------------------------------------
Total interest earning assets 607 61 519 27
- ---------------------------------------------------------------------------------------------------
LIABILITIES
Demand deposits and savings accounts (63) (13) (48) (2)
Certificates of deposits 391 39 314 38
- ---------------------------------------------------------------------------------------------------
Total interest bearing deposits 328 26 266 36
- ---------------------------------------------------------------------------------------------------
Short-term borrowings 32 8 18 6
Long-term debt 61 -- -- 61
- ---------------------------------------------------------------------------------------------------
Total interest bearing liabilities 421 34 284 103
- ---------------------------------------------------------------------------------------------------
Total $186 $ 27 $ 235 $ (76)
===================================================================================================
Amounts are adjusted to a fully taxable basis, based on the statutory Federal
income tax rates, adjusted for applicable state income taxes net of the related
Federal tax benefit. The effect of volume change is computed by multiplying the
change in volume by the prior year rate. The effect of rate change is computed
by multiplying the change in rate by the prior year volume. Rate/volume change
is computed by multiplying the change in volume by the change in rate.
ASSETS
The management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Company's interest-earning assets by category at March 31, 2000 and December 31,
1999 (in thousands):
March 31, 2000 December 31, 1999
-------------- -----------------
Interest-bearing deposits with banks $ -- $ --
Investment securities 26,238 26,246
Federal funds sold 1,155 2,160
Loans:
Real estate 47,765 34,906
Commercial and other 22,145 30,139
- ----------------------------------------------------------------------------------------------
Total loans 69,910 65,045
- ----------------------------------------------------------------------------------------------
Interest-earning assets $ 97,303 $ 93,451
==============================================================================================
13
15
INVESTMENT PORTFOLIO
The Company has classified all investment securities as either available for
sale or held to maturity depending upon whether the Company has the intent and
ability to hold the investment securities to maturity. The classification of
certain investment securities as available for sale is consistent with the
Company's investment philosophy of maintaining flexibility to manage the
portfolio. At March 31, 2000, approximately $17,383,000 of investment securities
was classified as available for sale and at December 31, 1999, approximately
$17,387,000 of investment securities was classified as available for sale.
Approximately $200,000 of unrealized loss and $195,000 of unrealized loss was
included in shareholders' equity related to the available for sale investment
securities as of March 31, 2000 and December 31, 1999, respectively. There was
$8,855,000 and $8,859,000 of securities at March 31, 2000 and December 31, 1999
classified as held to maturity, respectively.
At March 31, 2000, obligations of the United States Government or its agencies
represented approximately 100% of the total investment debt portfolio. The
following table presents the carrying amounts of the Company's investment
portfolio at March 31, 2000 (in thousands):
Amortized Estimated
Cost Fair Value
---- ----------
AVAILABLE FOR SALE:
U.S. Treasury $ 2,995 $ 2,988
U.S. Government agencies 13,997 13,804
States and political subdivisions -- --
Other securities -- --
- --------------------------------------------------------------------------------
Total available for sale debt securities 16,992 16,792
Federal Reserve Bank stock 343 343
Federal Home Loan Bank stock 248 248
- --------------------------------------------------------------------------------
Total available for sale 17,583 17,383
================================================================================
HELD TO MATURITY:
U.S. Treasury -- --
U.S. Government agencies 8,855 8,602
States and political subdivisions -- --
Other securities -- --
- --------------------------------------------------------------------------------
Total held to maturity 8,855 8,602
================================================================================
Total investment portfolio $ 26,438 $ 25,981
================================================================================
14
16
At December 31, 1999, obligations of the United States Government or its
agencies represented approximately 100% of the total investment debt portfolio.
The following table presents the carrying amounts of the Company's investment
portfolio at December 31, 1999 (in thousands):
Amortized Estimated
Cost Fair Value
---- ----------
AVAILABLE FOR SALE:
U.S. Treasury $ 2,997 $ 2,988
U.S. Government agencies 13,998 13,812
States and political subdivisions -- --
Other securities -- --
- --------------------------------------------------------------------------------
Total available for sale - debt securities 16,995 16,800
- ---------------------------------------------------------------------------------
Federal Reserve Bank stock 343 343
Federal Home Loan Bank Stock 244 244
- ---------------------------------------------------------------------------------
Total available for sale 17,582 17,387
=================================================================================
HELD TO MATURITY:
U.S. Treasury -- --
U.S. Government agencies 8,859 8,628
States and political subdivisions -- --
Other securities -- --
- ---------------------------------------------------------------------------------
Total held to maturity 8,859 8,628
=================================================================================
Total investment portfolio $ 26,441 $ 26,015
=================================================================================
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at March 31, 2000.
The weighted average yields on these instruments are presented based on final
maturity (dollars in thousands).
Amortized Estimated Weighted
Cost Fair Value Average Yield
---- ---------- -------------
AVAILABLE FOR SALE:
U.S. Treasuries
Due within 1 year $ 2,995 2,988 5.39%
U.S. Government agencies:
Due within 1 year 4,996 4,950 5.25%
Due after 1 year but within 5 years 7,997 7,872 5.72%
Due after 5 years but within 10 years 1,004 982 6.16%
Due after 10 years -- -- N/A
- --------------------------------------------------------------------------------------------
Total 16,992 16,792 5.56%
- --------------------------------------------------------------------------------------------
States and political subdivisions -- -- N/A
Other -- -- N/A
- --------------------------------------------------------------------------------------------
Total investments available for sale-debt 16,992 16,792 5.53%
- --------------------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Treasuries -- -- N/A
U.S. Government agencies:
Due within 1 year -- -- N/A
Due after 1 year but within 5 years 5,994 5,843 4.49%
Due after 5 years but within 10 years 2,861 2,759 6.17%
Due after 10 years -- -- N/A
- --------------------------------------------------------------------------------------------
Total 8,855 8,602 6.01%
- --------------------------------------------------------------------------------------------
States and political subdivisions -- -- N/A
Other -- -- N/A
- --------------------------------------------------------------------------------------------
Total held to maturity 8,855 8,602 6.00%
- --------------------------------------------------------------------------------------------
Total investment portfolio-debt securities $ 25,847 $25,394 5.70%
============================================================================================
15
17
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at December 31, 1999.
The weighted average yields on these instruments are presented based on final
maturity (dollars in thousands).
Amortized Estimated Weighted
Cost Fair Value Average Yield
---- ---------- -------------
AVAILABLE FOR SALE:
U.S. Treasuries
Due within 1 year $ 2,997 2,988 5.39%
U.S. Government agencies:
Due within 1 year 3,999 3,968 5.15%
Due after 1 year but within 5 years 8,994 8,854 5.68%
Due after 5 years but within 10 years 1,005 990 6.18%
Due after 10 years -- -- N/A
- --------------------------------------------------------------------------------------------
Total 16,995 16,800 5.56%
- --------------------------------------------------------------------------------------------
States and political subdivisions -- -- N/A
Other -- -- N/A
- --------------------------------------------------------------------------------------------
Total investments available for sale-debt 16,995 16,800 5.53%
- --------------------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Treasuries -- -- N/A
U.S. Government agencies:
Due within 1 year -- -- N/A
Due after 1 year but within 5 years 5,998 5,841 4.49%
Due after 5 years but within 10 years 2,861 2,787 6.17%
Due after 10 years -- -- N/A
- --------------------------------------------------------------------------------------------
Total 8,859 8,628 6.01%
- --------------------------------------------------------------------------------------------
States and political subdivisions -- -- N/A
Other -- -- N/A
- --------------------------------------------------------------------------------------------
Total held to maturity 8,859 8,628 6.00%
- --------------------------------------------------------------------------------------------
Total investment portfolio-debt securities $ 25,854 $ 25,428 5.70%
===========================================================================================
INVESTMENT POLICY
The objective of the Company's investment policy is to invest funds not
otherwise needed to meet the loan demand of the Bank's market area to earn the
maximum return for the Bank, yet still maintain sufficient liquidity to meet
fluctuations in the Bank's loan demand and deposit structure. In doing so, the
Company balances the market and credit risk against the potential investment
return, makes investments compatible with the pledge requirements of the Bank's
deposits of public funds, maintains compliance with regulatory investment
requirements, and assists the various public entities with their financing
needs. The Investment Committee is comprised of the president and three other
directors. The President is authorized to execute security transactions for the
investment portfolio and to make decisions on purchases and sales of securities.
All the investment transactions occurring since the previous board of directors'
meeting are reviewed by the board at its next monthly meeting. Limitations on
the Committee's investment authority include: (a) investment in any one
municipal security may not exceed 20% of equity capital; (b) the entire
investment portfolio may not increase or decrease by more than 10% in any one
month; (c) investments in obligations of the State of Tennessee may not exceed
30% of equity capital; and (d) investment in mortgage-backed securities may not
exceed more than 40% of equity capital. The investment policy allows portfolio
holdings to include short-term securities purchased to provide the Bank's needed
liquidity and longer-term securities purchased to generate stable income for the
Bank during periods of interest rate fluctuations.
16
18
LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
at March 31, 2000 (dollars in thousands).
Percent of
Balance Total Loans
------- -----------
Real estate loans:
Construction and land development $ 4,118 5.9%
Secured by residential properties 23,423 33.6%
Secured by commercial real estate 20,224 29.1%
- ---------------------------------------------------------------------------------
Total real estate loans 47,765 68.6%
- ---------------------------------------------------------------------------------
Commercial and industrial loans 9,729 14.0%
Other consumer loans 12,144 17.4%
- ---------------------------------------------------------------------------------
Total loans 69,638 100.0%
Unamortized (discounts) premiums and
net deferred loan costs 272 N/A
Allowance for possible loan losses (874) N/A
- ---------------------------------------------------------------------------------
Net loans $ 69,036 N/A
=================================================================================
The following table sets forth the composition of the Company's loan portfolio
at December 31, 1999 (dollars in thousands).
Percent of
Balance Total Loans
------- -----------
Real estate loans:
Construction and land development $ 2,702 4.1%
Secured by residential properties 22,457 34.5%
Secured by commercial real estate 18,839 29.0%
- ---------------------------------------------------------------------------------
Total real estate loans 43,998 67.6%
- ---------------------------------------------------------------------------------
Commercial and industrial loans 9,747 15.0%
Other consumer loans 11,300 17.4%
- ---------------------------------------------------------------------------------
Total loans 65,045 100.0%
Unamortized (discounts) premiums and net
deferred loan costs 252 N/A
Allowance for possible loan losses (817) N/A
- ---------------------------------------------------------------------------------
Net loans $ 64,480 N/A
=================================================================================
The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
March 31, 2000 (in thousands).
Maturity Range
------------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
LOAN MATURITY:
Real estate construction loans $ 3,464 $ 654 $ -- $ 4,118
Real estate mortgage loans 2,661 4,152 36,834 43,647
Commercial and industrial loans 7,837 1,401 491 9,729
All other loans 2,147 7,242 2,755 12,144
- ---------------------------------------------------------------------------------------------
Total loans $ 16,109 $ 13,449 $ 40,080 $ 69,638
=============================================================================================
LOAN INTEREST RATE SENSITIVITY:
Predetermined interest rates $ 4,645 $ 7,840 $ 9,423 $ 21,908
Floating or adjustable interest rates 11,464 5,609 30,657 47,730
- ---------------------------------------------------------------------------------------------
Total $ 16,109 $ 13,449 $ 40,080 $ 69,638
=============================================================================================
17
19
The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
December 31, 1999 (in thousands).
Maturity Range
----------------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
LOAN MATURITY:
Real estate construction loans $ 1,216 $ 426 $ 1,060 $ 2,702
Real estate mortgage loans 3,937 4,401 32,958 41,296
Commercial and industrial loans 7,611 1,856 280 9,747
All other loans 1,172 7,380 2,748 11,300
- ---------------------------------------------------------------------------------------------------------
Total loans $ 13,936 $ 14,063 $ 37,046 $ 65,045
=========================================================================================================
LOAN INTEREST RATE SENSITIVITY:
Predetermined interest rates $ 950 $ 8,235 $ 36,367 $ 45,552
Floating or adjustable interest rates 12,986 5,828 679 19,493
- ---------------------------------------------------------------------------------------------------------
Total $ 13,936 $ 14,063 $ 37,046 $ 65,045
=========================================================================================================
LOAN POLICY
All lending activities of the Bank are under the direct supervision and control
of the Bank's Board with secondary authority vested in the Executive Committee.
The Senior Loan Committee, which consists of the president, one other director
and two senior lending officers, enforces loan authorizations for each officer,
decides on loans exceeding such limits, services all requests for officer
credits to the extent allowable under current laws and regulations, administers
all problem credits, and determines the allocation of funds for each lending
division. The loan portfolio consists primarily of real estate, commercial,
small business, residential construction and consumer installment loans.
Maturity of term loans is normally limited to 15 years. Conventional real estate
loans may be made up to 80% of the appraised value or purchase cost of the real
estate for no more than a 30-year term. Installment loans are based on the
earning capacity and vocational stability of the borrower.
The Bank board at its regularly scheduled meetings reviews all new loans made
the preceding month and discusses and approves any loans that exceed a loan
officer's authority. Loans that are 30 days or more past due are reviewed
monthly.
The Loan Committee of the Bank periodically reviews the loan portfolio,
particularly nonaccrual and renegotiated loans. Each loan officer is responsible
for monitoring and collecting his or her own loan portfolio. Loan Committee
review may result in a determination that a loan should be placed on a
nonaccrual status for income recognition, subject to Bank Board approval. In
addition, to the extent that management identifies potential losses in the loan
portfolio and reduces the book value of such loans through charge-offs, to their
estimated collectible value, the Company's policy is to classify as nonaccrual
any loan on which payment of principal or interest is 90 days or more past due,
unless there is adequate collateral to cover principal and accrued interest and
the loan is in the process of collection. In addition, a loan will be classified
as nonaccrual if, in the opinion of the Loan Committee, based upon a review of
the borrower's or guarantor's financial condition, collateral value or other
factors, payment is questionable, even though payments are not 90 days or more
past due.
When a loan is classified as nonaccrual, any unpaid interest is reversed against
current income. Interest is included in income thereafter only to the extent
received in cash. The loan remains in a nonaccrual classification until such
time as the loan is brought current, when it may be returned to accrual
classification. When principal or interest on a nonaccrual loan is brought
current, if in management's opinion future payments are questionable, the loan
would remain classified as nonaccrual. After a
18
20
nonaccrual or renegotiated loan is charged off, any subsequent payments of
either interest or principal are applied first to any remaining balance
outstanding, then to recoveries and finally to income.
The large number of consumer installment loans and the relatively small dollar
amount of each make an individual review impracticable. It is the Company's
policy to charge off any consumer installment loan that is past due 90 days or
more and is not adequately collateralized.
In addition, mortgage loans secured by real estate are placed on nonaccrual
status when the mortgagor is in bankruptcy, or foreclosure proceedings are
instituted
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Credit risk and exposure to loss are inherent parts of the banking business.
Management seeks to manage and minimize these risks through its loan and
investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures that
it believes reflect the risk sensitive nature of the Company. The loan review
procedures are set to monitor adherence to the established criteria and to
ensure that on a continuing basis such standards are enforced and maintained.
Management's objective in establishing lending and investment standards is to
manage the risk of loss and to provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
loans with a three-year or less fixed maturity, which may be amortized over a
maximum of 15 years.
The loan portfolio is regularly reviewed and management determines the amount of
loans to be charged-off. In addition, such factors as the Company's previous
loan loss experience, prevailing and anticipated economic conditions, industry
concentrations and the overall quality of the loan portfolio are considered.
While management uses available information to recognize losses on loans and
real estate owned, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for possible losses on loans and real estate owned. Such agencies may require
the Company to recognize additions to the allowances based on their judgments
about information available at the time of their examinations. In addition, any
loan or portion thereof which is classified as a "loss" by regulatory examiners
is charged-off.
The allowance for possible loan losses is increased by provisions charged to
operating expense. The allowance for possible loan losses is reduced by charging
off loans or portions of loans at the time they are deemed by management to be
uncollectible and increased when loans previously charged off are recovered. The
resulting allowance for possible loan losses is viewed by management as a
single, unallocated reserve available for all loans and, in management's
opinion, is adequate to provide for reasonably foreseeable potential loan
losses. The risk associated with loans varies with the creditworthiness of the
borrower, the type of loan (consumer, commercial or real estate) and its
maturity. Cash flow adequate to support a repayment schedule is an element
considered for all types of loans. Real estate loans are impacted by market
conditions regarding the value of the underlying property used as collateral.
Commercial loans are also impacted by the management of the business as well as
economic conditions. Management believes the allowance for possible loan losses
is adequate to absorb such anticipated charge-offs.
Rules and formulas relative to the adequacy of the allowance for possible loan
losses, although useful as guidelines to management, are not rigidly applied.
The allowance for possible loan losses was $874,000 as of March 31, 2000 or
1.25% of loans outstanding. The allowance for possible loan losses was $817,000
as of December 31, 1999, or 1.25% of loans outstanding. The provision for
possible loan losses charged against earnings during 2000 was $60,000. Loans
totaling $3,000 were charged-off (with no recoveries made) during the quarter
ended March 31, 2000. The provision for possible loan losses charged against
earnings during the year ended December 31, 1999 was $353,000. Loans totaling
$10,000 were charged-off (with recoveries made of $1,000) during the year ended
December 31, 1999.
19
21
No loans were past due and still accruing interest at March 31, 2000. There were
$34,000 of loans past due and still accruing interest at December 31, 1999.
There were $19,000 of loans classified as non-accrual at March 31, 2000 and no
loans were classified as non-accrual at December 31, 1999. Accrual of interest
is discontinued when there is reasonable doubt as to the full, timely
collections of interest or principal. When a loan becomes contractually past due
ninety (90) days with respect to interest or principal, it is reviewed and a
determination is made as to whether it should be placed on non-accrual status.
When a loan is placed on non-accrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans only when they are brought fully current with respect to principal
and interest and when, in the judgment of management, the loans are estimated to
be fully collectible as to principal and interest. Restructured loans are those
loans on which concessions in terms have been granted because of a borrower's
financial difficulty. Interest is generally accrued on such loans in accordance
with the new terms. There was no other real estate owned or foreclosed, any
repossessed assets or impaired loans at March 31, 2000 or at December 31, 1999.
20
22
DEPOSITS
The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at March 31, 2000 and
December 31, 1999 (in thousands):
March 31, December 31,
2000 1999
---- ----
Non-interest-bearing deposits:
Individuals, partnerships and corporations $ 5,195 $ 6,873
U. S. Government and states and political subdivisions -- --
Certified and official checks 356 630
- ---------------------------------------------------------------------------------
Total non-interest-bearing deposits 5,551 7,503
- ---------------------------------------------------------------------------------
Interest-bearing deposits:
Interest-bearing demand accounts 22,657 21,794
Saving accounts 574 367
Certificates of deposit, less than $100,000 37,211 35,277
Certificates of deposit, $100,000 or greater 24,274 20,754
- ---------------------------------------------------------------------------------
Total interest-bearing deposits 84,716 78,192
- ---------------------------------------------------------------------------------
Total deposits $ 90,267 $ 85,695
=================================================================================
The following table presents a breakdown by category of the average amount of
deposits and the average rate paid on deposits for the quarter ended March 31,
2000 and the year ended December 31, 1999 (dollars in thousands):
Quarter Ended Year Ended
March 31, 2000 December 31,1999
-------------- ----------------
Non-interest-bearing deposits $ 5,840 N/A $ 3,859 N/A
Interest-bearing demand deposits 21,778 3.21% 25,591 3.22%
Savings accounts 448 2.07% 346 2.08%
Certificates of deposit 59,586 5.55% 41,353 5.16%
- ---------------------------------------------------------------------------------
Total deposits $ 87,652 4.91% $ 71,149 4.40%
=================================================================================
At March 31, 2000, certificates of deposits greater than $100,000 aggregated
approximately $24,274,000. The following table indicates, as of March 31, 2000,
the dollar amount of $100,000 or more by the time remaining until maturity (in
thousands):
3 Months 3 to 12 1 to 5 Over 5
or less Months Years Years
------- ------ ----- -----
Certificates of deposit $ 5,826 $ 15,756 $ 2,692 --
=================================================================================
At December 31, 1999, certificates of deposits greater than $100,000 aggregated
approximately $20,754,000. The following table indicates, as of December 31,
1999, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):
3 Months 3 to 12 1 to 5 Over 5
or less Months Years Years
------- ------ ----- -----
Certificates of deposit $ 10,643 $ 7,253 $ 2,858 --
=================================================================================
21
23
LIQUIDITY
Of primary importance to depositors, creditors and regulators is the ability to
have readily available funds sufficient to repay fully maturing liabilities. The
Company's liquidity, represented by cash and cash due from banks, is a result of
its operating, investing and financing activities. In order to insure funds are
available at all times, the Company devotes resources to projecting on a monthly
basis the amount of funds that will be required and maintains relationships with
a diversified funding base so funds are accessible. Liquidity requirements can
also be met through short-term borrowings or the disposition of short-term
assets, which are generally matched to correspond to the maturity of
liabilities.
The Company has a formal liquidity policy, and in the opinion of management, its
liquidity levels are considered adequate. Neither the Company nor the Bank is
subject to any specific regulation liquidity requirements imposed by regulatory
authorities. The Bank is subject to general FDIC guidelines, which do not
require a minimum level of liquidity. Management believes its liquidity ratios
meet or exceed these guidelines. Management does not know of any trends or
demands that are reasonably likely to result in liquidity increasing or
decreasing in any material manner. The ratio for average loans to average
deposits for 1999 was 71.7% and for the quarter ended March 31, 2000 was 76.7%.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain asset growth
over time and to absorb losses. The objective of the Company's management is to
maintain a level of capitalization that is sufficient to take advantage of
profitable growth opportunities while meeting regulatory requirements. This is
achieved by improving profitability through effectively allocating resources to
more profitable businesses, improving asset quality, strengthening service
quality, and streamlining costs. The primary measures used by management to
monitor the results of these efforts are the ratios of average equity to average
assets, average tangible equity to average tangible assets, and average equity
to net loans. The Federal Reserve Board and FDIC have adopted capital guidelines
governing the activities of bank holding companies and banks. These guidelines
require the maintenance of an amount of capital based on risk-adjusted assets so
that categories of assets with potentially higher credit risk will require more
capital backing than assets with lower risk. In addition, banks and bank holding
companies are required to maintain capital to support, on a risk-adjusted basis,
certain off-balance sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as Tier I
and Tier II. Under risk-based capital requirements, total capital consists of
Tier I capital, which is generally common shareholders' equity less goodwill and
excess tax assets, and Tier II capital which is primarily the qualifying portion
of the allowance for possible loan losses and certain qualifying debt
instruments. In determining risk-based capital requirements, assets are assigned
risk-weights of 0% to 100%, depending primarily on the regulatory assigned
levels of credit risk associated with such assets. Off-balance sheet items are
considered in the calculation of risk-adjusted assets through conversion factors
established by the regulators. The framework for calculating risk-based capital
requires banks and bank holding companies to meet the regulatory minimums of 4%
Tier I and 8% total risk-based capital. In 1990 regulators added a leverage
computation to the capital requirements, comparing Tier I capital to total
average assets less goodwill and excess tax assets. In 1999, the ratio was
modified to reduce Tier 1 Capital by the amount of investments in unconsolidated
subsidiaries.
22
24
The following table gives the various capital ratios and balances at March 31,
2000 and December 31, 1999 (dollars in thousands) for the Company:
March 31, 2000 December 31, 1999
-------------- -----------------
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,859 $ 8,815
Less investments in unconsolidated subsidiaries 25 --
Less excess tax assets 147 323
- -------------------------------------------------------------------------------------
Total Tier I capital 8,687 $ 8,559
- -------------------------------------------------------------------------------------
Tier II capital:
Qualifying debt 3,000 3,000
Qualifying allowance for loan losses 874 817
- -------------------------------------------------------------------------------------
Total Tier II capital 3,874 3,817
- -------------------------------------------------------------------------------------
Total capital $ 12,561 $ 12,376
=====================================================================================
Risk-adjusted assets $ 80,458 $ 76,553
=====================================================================================
Quarterly average assets $ 104,662 $ 95,890
=====================================================================================
RATIOS:
Tier I capital to risk-adjusted assets 10.8% 11.2%
Tier II capital to risk-adjusted assets 4.9% 5.0%
Total capital to risk-adjusted assets 15.6% 16.2%
Leverage--Tier I capital to quarterly
Average assets less disallowed intangibles 8.3% 8.9%
23
25
The following table gives the various capital ratios and balances at March 31,
2000 and at December 31, 1999 (dollars in thousands) for the Bank:
March 31, 2000 December 31, 1999
-------------- -----------------
CAPITAL:
Tier I capital:
Shareholders' equity $ 11,659 $ 11,569
Less investments in unconsolidated subsidiaries 25 --
Less excess tax assets 113 247
- ----------------------------------------------------------------------------------------------
Total Tier I capital 11,521 11,322
- ----------------------------------------------------------------------------------------------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for loan losses 874 817
- ----------------------------------------------------------------------------------------------
Total Tier II capital 874 817
- ----------------------------------------------------------------------------------------------
Total capital $ 12,395 $ 12,139
==============================================================================================
Risk-adjusted assets $ 80,402 $ 76,497
==============================================================================================
Quarterly average assets $ 104,365 $ 95,890
==============================================================================================
RATIOS:
Tier I capital to risk-adjusted assets 14.3% 14.8%
Tier II capital to risk-adjusted assets 1.1% 1.1%
Total capital to risk-adjusted assets 15.4% 15.9%
Leverage--Tier I capital to quarterly
Average assets less disallowed intangibles 11.0% 11.8%
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five capital categories for banks and bank holding companies. The
bank regulators adopted regulations defining these five capital categories in
September 1992. Under these new regulations each bank is classified into one of
the five categories based on its level of risk-based capital as measured by
Tier I capital, total risk-based capital, and Tier I leverage ratios and its
supervisory ratings. The following table lists the five categories of capital
and each of the minimum requirements for the three risk-based capital ratios.
Total Risk-Based Tier I Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
------------- ------------- -----
Well-capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- 2% or less
On March 31, 2000 and December 31, 1999, the Company exceeded the regulatory
minimums and qualified as a well-capitalized institution under the regulations.
24
26
SHORT-TERM BORROWINGS:
Short-term borrowings at March 31, 2000 and December 31, 1999 is comprised of
the following:
March 31, Dec. 31,
2000 1999
---- ----
Federal funds purchased $ -- $2,000
Securities sold under agreement to repurchase 4,478 2,889
- -------------------------------------------------------------------------------------
Total $ 4,478 $4,889
=====================================================================================
Securities underlying the repurchase agreements - obligations
of U.S. Government agencies and corporations with amortized
cost of approximately $5,093,000 and $6,364,000 at March 31,
2000 and December 31, 1999, respectively, and estimated
fair values of $4,965,000 and 6,211,000
at March 31, 2000 and December 31, 1999, respectively $ 4,478 $2,889
=====================================================================================
The Bank pays interest on these repurchase agreements at approximately 0.40%
below the federal funds rate. These repurchase agreements have maturities of one
day.
Securities sold under agreement to repurchase averaged approximately $4,492,000
during the quarter ended March 31, 2000 and $3,309,000 during the year ended
December 31, 1999 and the maximum amount outstanding at any month end during
these periods was approximately $4,806,000 and 5,892,000, respectively.
The securities underlying the repurchase agreements are held in safekeeping by a
separate third party bank.
PROPERTY ACQUISITIONS:
During 1999, the Company began renovating the existing office premises and Bank
building into one combined main office. The construction was significantly
completed in April 2000. The cost of this renovation and construction and
related furnishings is estimated at $2,400,000. No other significant property
acquisitions are planned for the next year.
PERSONNEL:
The Company increased the number of employees from forty-three at December 31,
1999 to forty-seven at March 31, 2000.
The Company anticipates increasing the number of employees during 2000 to
approximately fifty employees to service the anticipated loan and deposit growth
and related support services during the next twelve months. When the proposed
new building is completed, additional employees will be added during the year
2000 beginning with the second quarter.
RESEARCH AND DEVELOPMENT:
The Company does not engage in product research and development and does not
anticipate any such activities during the next twelve months.
FOREIGN TRANSACTIONS:
The Company and the Bank have not had any investment securities, loans or
deposits of foreign governments, corporations or other entities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Murfreesboro Bancorp, Inc.
- --------------------------------------------------------------------------------
(Registrant)
Date May 12, 2000
---------------------
By /s/ William L. Webb
---------------------------------------------
(Signature) *
William L. Webb,
Principal Accounting Officer and Chief Financial Officer
* Print the name and title of each signing officer under his or her signature.