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 nine month period ended September 30, 2000
[ ] 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
MURFREESBORO BANCORP, INC.
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(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
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(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 November 12, 2000.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MURFREESBORO BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
C O N T E N T S
Page
Number
------
Consolidated Balance Sheets ........................................... 2
Consolidated Statements of Operations ................................. 3-4
Consolidated Statements of Cash Flows ................................. 5
Notes to Consolidated Financial Statements ............................ 6-7
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MURFREESBORO BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(Tabular amounts are in thousands)
ASSETS (Unaudited)
September 30, December 31,
2000 1999
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Cash and due from banks $ 1,718 $ 3,114
Federal funds sold 4,260 2,160
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Total cash and cash equivalents 5,978 5,274
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Securities available for sale 17,983 17,387
Securities held to maturity 8,848 8,859
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Total investment securities 26,831 26,246
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Loans, less allowance for possible loan losses
of $935,000 and $817,000, respectively 73,924 64,480
Premises and equipment, net 5,026 4,475
Accrued interest receivable 812 745
Other assets 2,040 1,684
Deferred tax assets 158 342
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Total assets $ 114,769 $ 103,246
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 96,160 $ 85,695
Short-term borrowings 5,539 4,889
Accrued interest payable 634 344
Accrued expenses and other liabilities 567 624
Subordinated convertible capital debentures 3,000 3,000
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Total liabilities $ 105,900 $ 94,552
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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, 5,000,000 shares authorized
and 907,609 shares issued and outstanding 4,538 4,538
Additional paid-in capital 4,530 4,530
Deficit (133) (253)
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Realized shareholders' equity 8,935 8,815
Accumulated other comprehensive income (66) (121)
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Total shareholders' equity 8,869 8,694
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Total liabilities and shareholders' equity $ 114,769 $ 103,246
=======================================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
2000 1999
Interest income:
Interest and fees on loans $4,805 $3,009
Interest on taxable investment securities 1,123 1,062
Interest on federal funds sold 127 112
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Total interest income 6,055 4,183
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Interest expense:
Interest on negotiable order of withdrawal accounts 182 349
Interest on money market demand accounts 364 295
Interest on savings deposits 9 5
Interest on certificates of deposit 2,790 1,469
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Total interest expense on deposits 3,345 2,118
Interest on securities sold under agreement to repurchase 191 109
Interest on subordinated convertible capital debentures 194 --
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Total interest expense 3,730 2,227
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Net interest income 2,325 1,956
Provision for possible loan losses 127 237
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Net interest income after provision for possible loan losses 2,198 1,719
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Non-interest income:
Service charges on deposits 234 159
Other fees and commissions 14 8
Increase in cash surrender value of officers' life insurance 59 56
Gain on sale of investment securities -- 2
Other non-interest income 87 34
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Total non-interest income 394 259
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Non-interest expense:
Salaries and employee benefits 1,217 867
Occupancy expenses, net 130 54
Furniture and equipment expense 162 109
Other non-interest expense 913 571
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Total non-interest expense 2,422 1,601
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Income before income taxes 170 377
Income tax expense 51 121
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Net income $ 119 $ 256
=======================================================================================
Earnings per share:
Basic net income $ 0.13 $ 0.28
=======================================================================================
Diluted net income $ 0.13 $ 0.28
=======================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
2000 1999
Interest income:
Interest and fees on loans $1,733 $ 1,153
Interest on taxable investment securities 366 337
Interest on federal funds sold 77 54
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Total interest income 2,176 1,544
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Interest expense:
Interest on negotiable order of withdrawal accounts 59 83
Interest on money market demand accounts 128 116
Interest on savings deposits 4 2
Interest on certificates of deposit 1,050 579
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Total interest expense on deposits 1,241 780
Interest on securities sold under agreement to repurchase 68 46
Interest on subordinated convertible capital debentures 67 --
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Total interest expense 1,376 826
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Net interest income 800 718
Provision for possible loan losses 34 62
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Net interest income after provision for possible loan losses 766 656
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Non-interest income:
Service charges on deposits 93 61
Other fees and commissions 4 2
Increase in cash surrender value of officers' life insurance 19 18
Gain on sale of investment securities -- 2
Other non-interest income 35 9
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Total non-interest income 151 92
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Non-interest expense:
Salaries and employee benefits 422 321
Occupancy expenses, net 54 19
Furniture and equipment expense 65 39
Other non-interest expense 325 173
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Total non-interest expense 866 552
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Income before income taxes 51 196
Income tax expense 20 66
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Net income (loss) $ 31 $ 130
========================================================================================
Earnings per share:
Basic net income $ 0.03 $ 0.14
========================================================================================
Diluted net income $ 0.03 $ 0.14
========================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(Tabular amounts are in thousands)
2000 1999
Operating activities:
Net income $ 119 $ 256
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 127 237
Provision for depreciation, amortization and accretion, net 177 134
Changes in assets and liabilities:
Increase in accrued interest receivable (67) (122)
Increase in cash surrender value of officers' life insurance (59) (56)
(Increase) decrease in deferred tax asset 221 (7)
Increase in other assets (297) (80)
Increase in accrued interest payable 290 42
Increase in accrued expenses and other liabilities (57) 280
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Net cash provided by operating activities 454 684
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Investing activities:
Purchase of securities available for sale (4,486) (9,232)
Purchase of securities held to maturity -- (4,501)
Maturities and calls of securities available for sale 4,000 14,267
Maturities and calls of securities held to maturity -- 2,000
Proceeds from sales of securities available for sale -- 990
Increase in loans, net (9,663) (18,775)
Additions to premises and equipment (716) (1,579)
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Net cash used by investing activities (10,865) (16,830)
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Financing activities:
Sale of subordinated convertible capital debentures -- 2,975
Net increase in deposits 10,465 10,383
Net increase in securities sold under agreement to repurchase 650 1,983
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Net cash provided by financing activities 11,115 15,341
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Net increase (decrease) in cash and cash equivalents 704 (805)
Cash and cash equivalents at the beginning of the period 5,274 9,472
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Cash and cash equivalents at the end of the period $ 5,978 $ 8,667
==============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $ 3,440 $ 2,185
==============================================================================================================
Non-cash transactions:
Stock dividend on Federal Home Loan Bank common stock $ 13 $ 12
Increase in unrealized gain (loss) on securities available for sale, net of
$23,000 and $(23,000) in tax effect $ 97 $ (108)
==============================================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 2000 and December 31, 1999, the results of
operations for the quarters and nine months ended September 30, 2000
and 1999, the changes in cash flows for the quarters and nine months
ended September 30, 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 included in equity along with the related
tax effect for the nine months ended September 30, 2000 and 1999,
respectively.
Tax Net of
Pre-Tax Expense Tax
Amount (Benefit) Amount
------ --------- ------
(In thousands)
Nine months ended September 30, 2000
Net unrealized gain on securities available for sale $ 97 $ 42 $ 55
----------------------------------------------------------------------------------
Other comprehensive income $ 97 $ 42 $ 55
==================================================================================
Nine months ended September 30, 1999
Net unrealized loss on securities available for sale $(132) $(43) $(89)
----------------------------------------------------------------------------------
Other comprehensive income (loss) $(132) $(43) $(89)
==================================================================================
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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 September 30, 2000 and 1999, respectively.
Tax Net of
Pre-Tax Expense Tax
Amount (Benefit) Amount
------ --------- ------
(In thousands)
Quarter ended September 30, 2000
Net unrealized gain on securities available for sale $ 76 $ 26 $ 50
----------------------------------------------------------------------------------
Other comprehensive income $ 76 $ 26 $ 50
==================================================================================
Quarters ended September 30, 1999
Net unrealized gain on securities available for sale $ 20 $ -- $ 20
----------------------------------------------------------------------------------
Other comprehensive income $ 20 $ -- $ 20
==================================================================================
(3) EARNINGS PER SHARE
The weighted average number of common shares outstanding during the
nine months and quarters ended September 30, 2000 and 1999 was 907,609.
The effect of dilutive common stock options was 17,800 shares for the
quarters ended September 30, 2000 and 1999. The effect of dilutive
common stock options was 17,800 shares for the nine months ended
September 30, 1999. The dilutive effect of common stock options is
estimated at 21,118 for the nine months ended September 30, 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 nine months ended September 30, 2000 was $119,000 and the net
income for the nine months ended September 30, 1999 was $256,000.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the nine months ended September 30,
2000 totaled $98,617,000, which represents 91.4% of average total assets.
Earning assets totaled $105,950,000 at September 30, 2000. Average earning
assets for the nine months ended September 30, 1999 totaled $75,505,000, which
represented 93.6% of average total assets. Earning assets totaled $86,693,000 at
September 30, 1999 and $93,703,000 at December 31, 1999.
Loan Portfolio. The Company's average loans for the nine months ended September
30, 2000 were $70,431,000 and for the nine months ended September 30, 1999 were
$47,737,000. The balance in total loans at September 30, 2000 was $74,859,000,
$65,297,000 at December 31, 1999, and $56,566,000 at September 30, 1999.
Investment Portfolio. The Company's investment securities portfolio averaged
$25,447,000 for the nine months ended September 30, 2000 and $24,729,000 for the
nine months ended September 30, 1999. The portfolio totaled $26,831,000 at
September 30, 2000, $26,246,000 at December 31, 1999, and $22,958,000 at
September 30, 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 cost. At
September 30, 2000, there was unrealized loss of $98,000 in the "Available for
Sale" portfolio and there was an unrealized loss of $132,000 at September 30,
1999. The average balance of securities "Available for Sale" during the nine
months ended September 30, 2000 was $16,593,000 and the balance at September 30,
2000 was $17,983,000. The average balance of securities "Held to Maturity"
during the nine months ended September 30, 2000 was $8,854,000 and the balance
at September 30, 2000 was $8,848,000. The average balance of securities
"Available for Sale" during the nine months ended September 30, 1999 was
$15,812,000 and the balance at September 30, 1999 was $14,093,000. The average
balance of securities "Available for Sale" during the quarter ended September
30, 1999 was $14,390,000 and $15,717,000 for the quarter ended September 30,
2000. The average balance of securities "Held to Maturity" during the nine
months ended September 30, 1999 was $8,917,000 and the balance at September 30,
1999 was $8,865,000. The average balance of securities "Held to Maturity" during
the quarter ended September 30, 1999 was $8,867,000 and $8,850,000 for the
quarter ended September 30, 2000.
Deposits. The Company's average deposits were $90,887,000 for the nine months
ended September 30, 2000. This included average non-interest-bearing deposits of
$5,751,000, average certificates of deposit of $62,830,000, average saving
deposits of $605,000 and average interest-bearing transaction accounts of
$21,701,000. The Company's average deposits for the nine months ended September
30, 1999 were $68,385,000. This included average non-interest-bearing deposits
of $3,304,000, average certificates of
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deposit of $38,413,000, average savings deposits of $338,000 and average
interest-bearing transaction accounts of $26,330,000. Deposits totaled
$96,160,000 at September 30, 2000, $85,695,000 at December 31, 1999, and
$75,385,000 at September 30, 1999.
Long-Term Debt. The Company issued $3,000,000 of floating rate subordinated
convertible capital debentures ("debentures) on September 29, 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 began 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%.
Capital Resources. Shareholders' equity totaled $8,869,000 at of September 30,
2000. This included $9,068,000 of common stock and additional paid-in-capital
less a deficit of $133,000 and other comprehensive income in the form of an
unrealized loss on securities available for sale (net of tax) of $66,000.
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 September 30,
2000 and September 30, 1999, the Company had $2,300,000 of federal funds
purchase lines available at three correspondent banks as well as a secured
federal funds purchase line of $4,000,000. None of these lines were drawn at
September 30, 2000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
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 nine months ended September 30, 2000 totaled
$2,325,000. This was the result of interest income of $6,055,000 and interest
expense of $3,730,000. Interest income produced by the loan portfolio totaled
$4,805,000, interest income on investment securities totaled $1,123,000, and
interest income on federal funds totaled $127,000. Interest expense included
$2,790,000 of interest expense on certificates of deposit, interest expense of
$555,000 on interest-bearing transaction accounts, money market demand accounts,
and savings accounts and interest expense on securities sold under agreement to
repurchase of $191,000 and interest expense on subordinated convertible capital
debentures of $194,000.
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Net interest income for the nine months ended September 30, 1999 totaled
$1,956,000. This was the result of interest income of $4,183,000 and interest
expense of $2,227,000. Interest income produced by the loan portfolio totaled
$3,009,000, interest income on investment securities totaled $1,062,000 and
interest income on federal funds totaled $112,000. Interest expense included
$1,469,000 of interest expense on certificates of deposit, interest expense of
$649,000 on interest-bearing transaction accounts, money market demand accounts,
and savings accounts and interest expense on securities sold under agreement to
repurchase of $109,000.
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 nine months ended September 30, 2000 was 3.15%.
The net cost of funds, defined as interest expense divided by average-earning
assets, was 5.05% and the yield on earning assets was 8.20% for the nine months
ended September 30, 2000. The net interest margin for the nine months ended
September 30, 1999 was 3.45%. The net cost of funds for the nine months ended
September 30, 1999 was 3.96% and the yield on earning assets was 7.41%.
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 nine months ended September 30, 2000 was 2.81% and for the nine months ended
September 30, 1999 was 3.04%.
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 $817,000 at December 31, 1999 and $935,000 at
September 30, 2000 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 September 30, 1999. Loans past
due ninety days or more and still accruing interest at December 31, 1999 totaled
$34,000 and $151,000 at September 30, 1999. Loans on non-accrual status at
September 30, 2000 totaled $97,000.
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 $394,000 for the nine months ended September 30,
2000. This included $234,000 from service charges on deposit accounts, other
fees of $14,000, $59,000 from the increase in the cash surrender value of
officer's life insurance and $87,000 of other non-interest income. There were no
gains or losses on securities during the nine months ended September 30, 2000.
Non-interest income totaled $259,000 for the nine months ended September 30,
1999. This included $159,000 on service charge on deposit accounts, $8,000 of
other fees, $34,000 of other non-interest income including brokerage income,
$56,000 from the increase in the cash surrender value of the officer's life
insurance and a $2,000 gain on sale of investment securities.
Non-interest Expenses. Non-interest expense for the nine months ended September
30, 2000 totaled $2,422,000. Salaries and employee benefits for the nine months
ended September 30, 2000 totaled $1,217,000. Occupancy expense for the nine
months ended September 30, 2000 totaled $130,000 while furniture and equipment
expense totaled $162,000. All other non-interest expenses totaled $913,000 for
the nine months ended September 30, 2000. Other non-interest expenses include
supplies and printing, telephone, postage and legal and audit fees.
Non-interest expense for the nine months ended September 30, 1999 totaled
$1,601,000. Salaries and employee benefits for the nine months ended September
30, 1999 totaled $867,000. Occupancy expenses for the nine months ended
September 30, 1999 totaled $54,000 while furniture and equipment expenses
totaled $109,000. Other non-interest expenses totaled $571,000. Other
non-interest expenses include supplies and printing, telephone, postage and
legal and audit fees.
For the nine months ended September 30, 2000, the Company incurred income tax
expenses of $51,000 for an effective tax rate of 30.0%.
For the nine months ended September 30, 1999, the Company incurred income tax
expenses of $121,000 for an effective tax rate of 32.1%.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999
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.
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Net interest income for the quarter ended September 30, 2000 totaled $800,000.
This was the result of interest income of $2,176,000 and interest expense of
$1,376,000. Interest income produced by the loan portfolio totaled $1,733,000,
interest income on investment securities totaled $366,000, and interest income
on federal funds totaled $77,000. Interest expense included $1,050,000 of
interest expense on certificates of deposit, interest expense of $191,000 on
interest-bearing transaction accounts, savings accounts, and money market
accounts, interest expense of $67,000 on subordinated convertible capital
debentures and interest expense of $68,000 on securities sold under agreement to
repurchase.
Net interest income for the quarter ended September 30, 1999 totaled $718,000.
This was the result of interest income of $1,544,000 and interest expense of
$826,000. Interest income produced by the loan portfolio totaled $1,153,000,
interest income on investment securities totaled $337,000 and interest income on
federal funds totaled $54,000. Interest expense included $579,000 of interest
expense on certificates of deposit, interest expense of $201,000 on
interest-bearing transaction accounts, money market demand accounts, and savings
accounts and interest expense on securities sold under agreement to repurchase
of $46,000.
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 September 30, 2000 was 3.12%. The
net cost of funds, defined as interest expense divided by average-earning
assets, was 5.36% and the yield on earning assets was 8.48% for the quarter
ended September 30, 2000. The net interest margin for the quarter ended
September 30, 1999 was 3.47%. The net cost of funds for the quarter ended
September 30, 1999 was 4.07% and the yield on earning assets was 7.53%.
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 September 30, 2000 was 2.80% and for the quarter ended
September 30, 1999 was 3.02%.
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 officers' 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 $151,000 for the quarter ended September 30, 2000.
This included $93,000 from service charges on deposit accounts, other fees of
$4,000, $19,000 the increase in cash surrender value of officers' life insurance
and $35,000 of other non-interest income. There were no gains or losses on
securities during the quarter ended September 30, 2000.
Non-interest income totaled $92,000 for the quarter ended September 30, 1999.
This included $61,000 on service charge on deposit accounts, other fees of
$2,000, $9,000 of other non-interest income including brokerage income, gain on
the sale of investment securities of $2,000 and $18,000 from the increase in the
cash surrender value of the officers' life insurance.
Non-interest Expenses. Non-interest expense for the quarter ended September 30,
2000 totaled $866,000. Salaries and employee benefits for the quarter ended
September 30, 2000 totaled $422,000. Occupancy expense for the quarter ended
September 30, 2000 totaled $54,000 while furniture and equipment expense totaled
$65,000. All other non-interest expenses totaled $325,000 for the quarter ended
September 30, 2000. Other non-interest expenses include supplies and printing,
telephone, postage and legal and audit fees.
12
14
Non-interest expense for the quarter ended September 30, 1999 totaled $552,000.
Salaries and employee benefits for the quarter ended September 30, 1999 totaled
$321,000. Occupancy expenses for the quarter ended September 30, 1999 totaled
$19,000 while furniture and equipment expenses totaled $39,000. Other
non-interest expenses totaled $173,000.
For the quarter ended September 30, 2000, the Company incurred income tax
expense of $20,000 for an effective tax rate of 39.2%.
For the quarter ended September 30, 1999, the Company incurred income tax
expenses of $66,000 for an effective tax rate of 33.7%.
RETURN ON EQUITY AND ASSETS
Return on assets (annualized net income divided by average total assets) for the
nine months ended September 30, 2000 was 0.15%. Return on assets for the nine
months ended September 30, 1999 was 0.42%. Return on assets for the quarter
ended September 30, 2000 was 0.11%. while return on assets for the quarter ended
September 30, 1999 was 0.60%.
Return on equity (annualized net income divided by average equity) for the nine
months ended September 30, 2000 was 1.82%. Return on equity for the nine months
ended September 30, 1999 was 3.97%. Return on equity for the quarter ended
September 30, 2000 was 1.39% while return on equity for the quarter ended
September 30, 1999 was 6.07%.
Equity to assets (average equity divided by average total assets) for the nine
months ended September 30, 2000 was 8.14%. Equity to assets for the nine months
ended September 30, 1999 was 10.44%. Equity to assets for the quarter ended
September 30, 2000 was 7.95% while equity to assets for the quarter ended
September 30, 1999 was 9.89%.
There were no dividends paid during the quarters or nine months ended September
30, 2000 or 1999, so no dividend payout ratio is presented.
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.
13
15
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 nine months ended September 30, 2000 and
certain other information:
Interest Average
Average Income/ Yields/
Balance Expense Rates
------- ------- -----
(Fully taxable equivalent -
dollars in thousands)
ASSETS:
Interest-earning assets:
Loans $ 70,431 $4,805 9.11%
U.S. Treasury and other U.S. government agencies 25,447 1,123 5.90%
States and municipalities -- -- N/A
Federal funds sold 2,739 127 6.21%
- -----------------------------------------------------------------------------------------
Total interest-earning assets/interest income 98,617 6,055 8.20%
- -----------------------------------------------------------------------------------------
Cash and due from banks 2,340
Other assets 7,812
Allowance for possible loan losses (874)
- -----------------------------------------------------------------------------------------
Total assets $ 107,895
=========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 22,306 555 3.32%
Certificates of deposit 62,830 2,790 5.93%
Repurchase agreements 4,400 191 5.81%
Subordinated convertible capital debentures 3,000 194 8.65%
- -----------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 92,536 3,730 5.39%
- -----------------------------------------------------------------------------------------
Non-interest-bearing demand deposits 5,751
Other liabilities 823
Shareholders' equity 8,785
- -----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 107,895
=========================================================================================
Net interest earnings $2,325
=========================================================================================
Net interest income on interest-earning assets 3.15%
=========================================================================================
Taxable equivalent adjustment: N/A
14
16
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 nine months ended September 30, 1999 and
certain other information:
Interest Average
Average Income/ Yields/
Balance Expense Rates
------- ------- -----
(Fully taxable equivalent -
dollars in thousands)
ASSETS:
Interest-earning assets:
Loans $ 47,737 $3,009 8.43%
U.S. Treasury and other U.S. government agencies 24,729 1,062 5.74%
States and municipalities -- -- N/A
Federal funds sold 3,039 112 4.92%
Interest bearing deposits with other financial institutions -- -- N/A
- ------------------------------------------------------------------------------------------------
Total interest-earning assets/interest income 75,505 4,183 7.41%
- ------------------------------------------------------------------------------------------------
Cash and due from banks 1,310
Other assets 4,438
Allowance for possible loan losses (588)
- ------------------------------------------------------------------------------------------------
Total assets $ 80,665
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 26,668 649 3.26%
Certificates of deposit 38,413 1,469 5.11%
Repurchase agreements 3,279 109 4.40%
- ------------------------------------------------------------------------------------------------
Note payable -- -- N/A
- ------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 68,360 2,227 4.37%
- ------------------------------------------------------------------------------------------------
Non-interest-bearing demand deposits 3,304
Other liabilities 533
Shareholders' equity 8,468
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 80,665
================================================================================================
Net interest earnings $1,956
================================================================================================
Net interest income on interest-earning assets 3.45%
================================================================================================
Taxable equivalent adjustment: N/A
15
17
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 nine month ended September 30,
2000 to the ended September 30, 1999 (in thousands).
Increase
Increase Increase (Decrease)
(Decrease) (Decrease) Due to
Increase Due to Due to Rate and
(Decrease) Rate Volume Volume
---------- ---- ------ ------
ASSETS
Interest earning assets:
Interest bearing deposits with other banks -- -- -- --
Federal funds sold 15 29 (11) (3)
Investment securities 61 29 31 1
Loans 1,796 245 1,431 120
- -------------------------------------------------------------------------------------------
Total interest earning assets 1,872 303 1,451 118
- -------------------------------------------------------------------------------------------
LIABILITIES
Interest Bearing liabilities:
Demand deposits and savings accounts (94) 12 (107) 1
Certificates of deposits 1,321 236 935 150
Repurchase agreements 82 35 37 10
Subordinated convertible
capital debentures 194 -- 194 --
- -------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,503 283 1,059 161
- -------------------------------------------------------------------------------------------
Total 369 20 392 (43)
===========================================================================================
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.
16
18
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 September 30, 2000 and
certain other information:
Interest Average
Average Income/ Yields/
Balance Expense Rates
------- ------- -----
(Fully taxable equivalent -
dollars in thousands)
Assets:
Interest-earning assets:
Loans $ 72,889 $1,733 9.46%
U.S. Treasury and other U.S. government agencies 24,567 366 5.93%
States and municipalities -- -- N/A
Federal funds sold 4,608 77 6.64%
- -----------------------------------------------------------------------------------------
Total interest-earning assets/interest income 102,064 2,176 8.48%
- -----------------------------------------------------------------------------------------
Cash and due from banks 2,434
Other assets 8,193
Allowance for possible loan losses (908)
- -----------------------------------------------------------------------------------------
Total assets $ 111,783
=========================================================================================
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 22,095 191 3.40%
Certificates of deposit 66,623 1,050 6.27%
Repurchase agreements 4,404 68 6.11%
Subordinated convertible capital debentures 3,000 67 8.98%
- -----------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 96,122 1,376 5.68%
- -----------------------------------------------------------------------------------------
Non-interest-bearing demand deposits 5,793
Other liabilities 978
Shareholders' equity 8,890
- -----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 111,783
=========================================================================================
Net interest earnings $ 800
=========================================================================================
Net interest income on interest-earning assets 3.12%
=========================================================================================
Taxable equivalent adjustment: N/A
17
19
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 September 30, 1999 and
certain other information:
Interest Average
Average Income/ Yields/
Balance Expense Rates
------- ------- -----
(Fully taxable equivalent -
dollars in thousands)
ASSETS:
Interest-earning assets:
Loans $ 53,722 $1,153 8.51%
U.S. Treasury and other U.S. government agencies 23,257 337 5.76%
States and municipalities -- -- N/A
Federal funds sold 4,319 54 4.95%
Interest bearing deposits with other financial institutions -- -- N/A
- ------------------------------------------------------------------------------------------------
Total interest-earning assets/interest income 81,298 1,544 7.53%
- ------------------------------------------------------------------------------------------------
Cash and due from banks 953
Other assets 4,930
Allowance for possible loan losses (666)
- ------------------------------------------------------------------------------------------------
Total assets $ 86,515
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 24,809 201 3.22%
Certificates of deposit 44,436 579 5.16%
Repurchase agreements 4,108 46 4.48%
- ------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 73,353 826 4.51%
- ------------------------------------------------------------------------------------------------
Non-interest-bearing demand deposits 3,721
Other liabilities 881
Shareholders' equity 8,560
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 86,515
================================================================================================
Net interest earnings $ 718
================================================================================================
Net interest income on interest-earning assets 3.47%
================================================================================================
Taxable equivalent adjustment: N/A
18
20
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 September 30, 2000
to the quarter ended September 30, 1999 (in thousands):
Increase
Increase Increase (Decrease)
(Decrease) (Decrease) Due to
Increase Due to Due to Rate and
(Decrease) Rate Volume Volume
---------- ---- ------ ------
ASSETS
Interest earning assets:
Interest bearing deposits with other banks -- -- -- --
Federal funds sold 29 18 4 7
Investment securities 23 10 19 (6)
Loans 580 128 408 44
- --------------------------------------------------------------------------------------
Total interest earning assets 632 156 431 45
- --------------------------------------------------------------------------------------
LIABILITIES
Interest Bearing liabilities:
Demand deposits and savings accounts (10) 11 (22) 1
Certificates of deposits 471 123 286 62
Repurchase agreements 21 17 3 1
Subordinated convertible
capital debentures 68 -- 68 --
- --------------------------------------------------------------------------------------
Total interest bearing liabilities 550 151 335 64
- --------------------------------------------------------------------------------------
Total 82 5 96 (19)
======================================================================================
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 September 30, 2000 and December
31, 1999 (in thousands):
September 30, December 31,
2000 1999
------------- ------------
Interest-bearing deposits with banks $ -- $ --
Investment securities 26,831 26,246
Federal funds sold 4,260 2,160
Loans:
Real estate 51,295 43,998
Commercial and other 23,272 21,047
- --------------------------------------------------------------------------------------
Total loans 74,567 65,045
- --------------------------------------------------------------------------------------
Interest-earning assets $105,658 $93,451
======================================================================================
19
21
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 September 30, 2000, approximately $17,983,000 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 $98,000 and $195,000 of unrealized loss was included in
shareholders' equity related to the available for sale investment securities as
of September 30, 2000 and December 31, 1999, respectively. There was $8,848,000
and $8,859,000 of securities at September 30, 2000 and December 31, 1999
classified as held to maturity, respectively.
At September 30, 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 September 30, 2000 (in thousands):
Amortized Estimated
Cost Fair Value
------- ----------
AVAILABLE FOR SALE:
U.S. Treasury $ 999 $ 997
U.S. Government agencies 16,477 16,381
States and political subdivisions -- --
Other securities -- --
- --------------------------------------------------------------------------
Total available for sale - debt securities 17,476 17,378
- --------------------------------------------------------------------------
Federal Reserve Bank stock 346 346
Federal Home Loan Bank stock 259 259
- ---------------------------------------------------------------------------
Total available for sale 18,081 17,983
==========================================================================
HELD TO MATURITY:
U.S. Treasury -- --
U.S. Government agencies 8,848 8,691
States and political subdivisions -- --
Other securities -- --
- --------------------------------------------------------------------------
Total held to maturity 8,848 8,691
- --------------------------------------------------------------------------
Total investment portfolio $26,929 $26,674
==========================================================================
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
==========================================================================
20
22
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 debt portfolio at September 30,
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 $ 999 997 5.52%
U.S. Government agencies:
Due within 1 year 4,499 4,483 5.36%
Due after 1 year but within 5 years 11,978 11,898 6.20%
Due after 5 years but within 10 years -- -- N/A
Due after 10 years -- -- N/A
- ------------------------------------------------------------------------------
Total 17,476 17,378 5.94%
- ------------------------------------------------------------------------------
States and political subdivisions -- -- N/A
Other -- -- N/A
- ------------------------------------------------------------------------------
Total investments available for sale-debt 17,476 17,378 5.94%
==============================================================================
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 6,348 6,226 5.93%
Due after 5 years but within 10 years 2,500 2,465 6.16%
Due after 10 years -- -- N/A
- ------------------------------------------------------------------------------
Total 8,848 8,691 6.00%
- ------------------------------------------------------------------------------
States and political subdivisions -- -- N/A
Other -- -- N/A
- ------------------------------------------------------------------------------
Total held to maturity 8,848 8,691 6.00%
- ------------------------------------------------------------------------------
Total investment portfolio-debt securities $26,324 $26,070 5.96%
==============================================================================
21
23
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment debt 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.
22
24
LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
at September 30, 2000 (dollars in thousands).
Percent of
Balance Total Loans
------- -----------
Real estate loans:
Construction and land development $ 6,827 9.2%
Secured by residential properties 27,591 37.0%
Secured by commercial real estate 16,877 22.6%
- ---------------------------------------------------------------------------
Total real estate loans 51,295 68.8%
- ---------------------------------------------------------------------------
Commercial and industrial loans 9,710 13.0%
Other consumer loans 13,562 18.2%
- ---------------------------------------------------------------------------
Total loans 74,567 100.0%
Unamortized premiums and net deferred loan costs 292 N/A
Allowance for possible loan losses (935) N/A
- ---------------------------------------------------------------------------
Net loans $ 73,924 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
September 30, 2000 (in thousands).
Maturity Range
-------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
LOAN MATURITY:
Real estate construction loans $ 4,603 $ 2,224 $ -- $ 6,827
Real estate mortgage loans 9,091 34,989 298 44,378
Commercial and industrial loans 8,392 1,318 -- 9,710
All other loans 3,029 8,982 1,551 13,562
- ----------------------------------------------------------------------------------------------------------
Total loans $25,115 $47,603 $ 1,849 $74,567
==========================================================================================================
LOAN INTEREST RATE SENSITIVITY:
Predetermined interest rates $ 7,423 $14,565 $ 1,849 $23,837
Floating or adjustable interest rates 17,692 33,038 -- 50,730
- ----------------------------------------------------------------------------------------------------------
Total $25,115 $47,603 $ 1,849 $74,567
==========================================================================================================
23
25
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
24
26
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 $935,000 as of September 30, 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 the nine months ended
September 30, 2000 was $127,000. Loans totaling $10,000 were charged-off (with
recoveries made of $1,000) during the nine months ended September 30, 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.
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No loans were past due 90 days or more and still accruing interest at September
30, 2000. There were $34,000 of loans past due 90 days or more and still
accruing interest at December 31, 1999. There were $97,000 of loans classified
as non-accrual at September 30, 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 September 30, 2000 or at December 31, 1999.
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DEPOSITS
The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at September 30, 2000
and December 31, 1999 (in thousands):
September 30 December 31,
2000 1999
------- -------
Non-interest-bearing deposits:
Individuals, partnerships and corporations $ 5,516 $ 6,873
U. S. Government and states and political subdivisions -- --
Certified and official checks 475 630
- --------------------------------------------------------------------------------------
Total non-interest-bearing deposits 5,991 7,503
- --------------------------------------------------------------------------------------
Interest-bearing deposits:
Interest-bearing demand accounts 21,480 21,794
Saving accounts 710 367
Certificates of deposit, less than $100,000 42,740 35,277
Certificates of deposit, $100,000 or greater 25,239 20,754
- --------------------------------------------------------------------------------------
Total interest-bearing deposits 90,169 78,192
- --------------------------------------------------------------------------------------
Total deposits $96,160 $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 nine months ended
September 30, 2000 and the year ended December 31, 1999 (dollars in thousands):
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
--------------------- ---------------------
Non-interest-bearing deposits $ 5,751 N/A $ 3,859 N/A
Interest-bearing demand deposits 21,701 3.36% 25,591 3.22%
Savings accounts 605 2.08% 346 2.08%
Certificates of deposit 62,830 5.93% 41,353 5.16%
- --------------------------------------------------------------------------------------
Total deposits $90,887 5.25% $71,149 4.40%
======================================================================================
At September 30, 2000, certificates of deposits greater than $100,000 aggregated
approximately $25,239,000. The following table indicates, as of September 30,
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 $ 7,010 $14,951 $ 3,278 --
======================================================================================
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 --
======================================================================================
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LONG TERM DEBT
The Company has outstanding $3,000,000 of floating rate subordinated convertible
capital debentures at September 30, 2000 and December 31, 1999. Such debentures
earn interest at prime rate less 0.5%. The debentures convert to one share of
common stock for every $12.50 of debentures held.
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 the year ended December 31, 1999 was 71.7% and for the nine months
ended September 30, 2000 was 77.5%.
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 2000, the ratio was
modified to reduce Tier 1 Capital by the amount of investments in unconsolidated
subsidiaries.
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30
The following table gives the various capital ratios and balances at September
30, 2000 and December 31, 1999 (dollars in thousands) for the Company:
September 30, December 31,
2000 1999
-------- -------
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,935 $ 8,815
Less investments in unconsolidated subsidiaries 15 --
Less excess tax assets 158 256
- -----------------------------------------------------------------------------
Total Tier I capital 8,762 $ 8,559
- -----------------------------------------------------------------------------
Tier II capital:
Qualifying debt 3,000 3,000
Qualifying allowance for loan losses 935 817
- -----------------------------------------------------------------------------
Total Tier II capital 3,935 3,817
- -----------------------------------------------------------------------------
Total capital $ 12,697 $12,376
=============================================================================
Risk-adjusted assets $ 76,160 $76,553
=============================================================================
Quarterly average assets $111,498 $95,890
=============================================================================
RATIOS:
Tier I capital to risk-adjusted assets 11.5% 11.2%
Tier II capital to risk-adjusted assets 5.2% 5.0%
Total capital to risk-adjusted assets 16.7% 16.2%
Leverage-- Tier I capital to quarterly
Average assets less disallowed intangibles 7.9% 8.9%
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31
The following table gives the various capital ratios and balances at September
30, 2000 and at December 31, 1999 (dollars in thousands) for the Bank:
September 30, December 31,
2000 1999
-------- -------
CAPITAL:
Tier I capital:
Shareholders' equity $ 11,845 $11,569
Less investments in unconsolidated subsidiaries 15 --
Less excess tax assets 313 247
- -----------------------------------------------------------------------------
Total Tier I capital 11,517 11,322
- -----------------------------------------------------------------------------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for loan losses 935 817
- -----------------------------------------------------------------------------
Total Tier II capital 935 817
- -----------------------------------------------------------------------------
Total capital $ 12,452 $12,139
=============================================================================
Risk-adjusted assets $ 76,160 $76,497
=============================================================================
Quarterly average assets $111,491 $95,890
=============================================================================
RATIOS:
Tier I capital to risk-adjusted assets 15.1% 14.8%
Tier II capital to risk-adjusted assets 1.2% 1.1%
Total capital to risk-adjusted assets 16.3% 15.9%
Leverage-- Tier I capital to quarterly
Average assets less disallowed intangibles 10.3% 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 September 30, 2000 and December 31, 1999, the Company exceeded the regulatory
minimums and qualified as a well-capitalized institution under the regulations.
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SHORT-TERM BORROWINGS:
Short-term borrowings at September 30, 2000 and December 31, 1999 is comprised
of the following:
September 30, Dec. 31,
2000 1999
----- -----
Federal funds purchased $ -- $2,000
Securities sold under agreement to repurchase 5,539 2,889
- --------------------------------------------------------------------------------------------
Total $5,539 $4,889
============================================================================================
Securities underlying the repurchase agreements - obligations
of U.S. Government agencies and corporations with amortized
cost of approximately $6,348,000 and $6,364,000 at September 30,
2000 and December 31, 1999, respectively, and estimated fair
values of $6,252,000 and 6,211,000 at September 30, 2000 and
December 31, 1999, respectively $5,539 $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 $4,400,000
during the nine months ended September 30, 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 $5,539,000 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 was approximately $2,400,000. No other significant property
acquisitions are planned for the next year. The Company sold its branch building
of approximately 6,500 square feet to a director in April 2000 for approximately
$425,000. The sales price was the at fair market value and equated the Company's
cost of the property. There was no gain or loss recognized on this transaction.
The Company has leased approximately 1,700 square feet of the property for five
years beginning in April 2000. The lease rate is at market rate and the lease
contains three five year renewal option periods. The Company's cost of the
leasehold improvements is approximately $202,000.
PERSONNEL:
The Company increased the number of employees from forty-three at December 31,
1999 to forty-eight at September 30, 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.
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.
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FOREIGN TRANSACTIONS:
The Company and the Bank have not had any investment securities, loans or
deposits of foreign governments, corporations or other entities.
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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34
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 November 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.