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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
[ ] 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.
--------------------------
(Exact Name of Registrant As Specified in Its Charter)
Tennessee 62-1694317
--------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
615 Memorial Boulevard, Murfreesboro, Tennessee 37129
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
(615) 890-1111
--------------
(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 August 11, 1998.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MURFREESBORO BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
C O N T E N T S
Page
Number
------
Consolidated Balance Sheet .................................................................... 3
Consolidated Statements of Operations ......................................................... 4-5
Consolidated Statement of Cash Flows .......................................................... 6
Notes to Consolidated Financial Statements .................................................... 7
2
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
(Tabular amounts are in thousands)
ASSETS
June 30, Dec.31,
1998 1997
(Unaudited)
Cash and due from banks $ 931 $ 1,006
Federal funds sold 1,921 7,704
- ----------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 2,852 8,710
- ----------------------------------------------------------------------------------------------------------
Securities available for sale 21,266 14,732
Securities held to maturity 4,296 -
- ----------------------------------------------------------------------------------------------------------
Total investment securities 25,562 14,732
- ----------------------------------------------------------------------------------------------------------
Loans, less allowance for possible loan losses
of $297,000 and $68,000, respectively 23,443 5,333
Premises and equipment, net 1,567 1,558
Accrued interest receivable 455 149
Other assets 124 128
- ----------------------------------------------------------------------------------------------------------
Total assets $ 54,003 $30,610
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 45,390 $ 21,765
Accrued interest payable 161 74
Other liabilities 72 81
- ----------------------------------------------------------------------------------------------------------
Total liabilities 45,623 21,920
- ----------------------------------------------------------------------------------------------------------
Contingencies -- --
Shareholders' equity :
Preferred stock, no assigned value or rights, 1,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $5.00 par value, 2,000,000 shares authorized
and 907,609 shares issued and outstanding 4,538 4,538
Additional paid-in capital 4,530 4,530
Deficit (688) (369)
- -----------------------------------------------------------------------------------------------------------
Realized shareholders' equity 8,380 8,699
Accumulated other comprehensive income - (9)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,380 8,690
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $54,003 $30,610
==========================================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
Interest income:
Interest and fees on loans $ 613
Interest on taxable investment securities 628
Interest on federal funds sold 108
- ----------------------------------------------------------------------------------------------------------
Total interest income 1,349
- ----------------------------------------------------------------------------------------------------------
Interest expense:
Interest on negotiable order of withdrawal accounts 315
Interest on money market demand accounts 99
Interest on savings deposits 1
Interest on certificates of deposit 447
- ----------------------------------------------------------------------------------------------------------
Total interest expense on deposits 862
- ----------------------------------------------------------------------------------------------------------
Interest on securities sold under agreement to repurchase 2
- ----------------------------------------------------------------------------------------------------------
Total interest expense 864
- ----------------------------------------------------------------------------------------------------------
Net interest income 485
Provision for possible loan losses 229
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 256
Non-interest income:
Service charges on deposits 36
Other fees and commissions 3
Other non-interest income 6
- ----------------------------------------------------------------------------------------------------------
Total non-interest income 45
- ----------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 306
Occupancy expenses, net 32
Furniture and equipment expense 39
Other non-interest expense 243
- ----------------------------------------------------------------------------------------------------------
Total non-interest expense 620
- ----------------------------------------------------------------------------------------------------------
Loss before income taxes (319)
Income tax benefit -
- ----------------------------------------------------------------------------------------------------------
Net loss $ (319)
==========================================================================================================
Loss per share - basic (no dilutive items outstanding) $(0.36)
===============================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 1998
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
(Tabular amounts are in thousands except per share amounts)
Interest income:
Interest and fees on loans $407
Interest on taxable investment securities 368
Interest on federal funds sold 36
- ----------------------------------------------------------------------------------------------------------
Total interest income 811
- ----------------------------------------------------------------------------------------------------------
Interest expense:
Interest on negotiable order of withdrawal accounts 177
Interest on money market demand accounts 65
Interest on savings deposits 1
Interest on certificates of deposit 274
- ----------------------------------------------------------------------------------------------------------
Total interest expense on deposits 517
- ----------------------------------------------------------------------------------------------------------
Interest on securities sold under agreement to repurchase 2
- ----------------------------------------------------------------------------------------------------------
Total interest expense 519
- ----------------------------------------------------------------------------------------------------------
Net interest income 292
Provision for possible loan losses 116
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 256
Non-interest income:
Service charges on deposits 24
Other fees and commissions 2
Other non-interest income 4
- ----------------------------------------------------------------------------------------------------------
Total non-interest income 30
- ----------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 167
Occupancy expenses, net 23
Furniture and equipment expense 20
Other non-interest expense 140
- ----------------------------------------------------------------------------------------------------------
Total non-interest expense 350
- ----------------------------------------------------------------------------------------------------------
Loss before income taxes (144)
Income tax benefit -
- ----------------------------------------------------------------------------------------------------------
Net loss $(144)
==========================================================================================================
Loss per share - basic (no dilutive items outstanding) $(0.17)
=========================================================================================
See notes to consolidated financial statements.
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(Tabular amounts are in thousands)
Operating activities:
Net loss $(319)
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Provision for loan losses 229
Provision for depreciation, amortization and accretion, net 43
Changes in assets and liabilities:
Increase in accrued interest receivable (306)
Increase in accrued interest payable 87
Decrease in other liabilities (9)
- ----------------------------------------------------------------------------------------------------------
Net cash used by operating activities (275)
- ----------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of securities available for sale (11,515)
Purchase of securities held to maturity (5,552)
Maturities and calls of securities available for sale 5,000
Maturities and calls of securities held to maturity 1,250
Increase in loans, net (18,339)
Additions to premises and equipment (52)
- ----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (29,208)
- ----------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 23,625
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 23,625
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (5,858)
Cash and cash equivalents at the beginning of the period 8,710
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 2,852
==========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 777
==================================================================================================
Non-cash transactions:
Decrease in unrealized loss on securities available for sale $ 9
==================================================================================================
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MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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 June 30, 1998 and December 31, 1997, the results
of operations for the six months and quarter ended June 30,
1998, comprehensive earnings for the six months and quarter
ended June 30, 1998 and changes in cash flows for the six
months ended June 30, 1998. 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 Form 10-SB. The results of the interim periods
are not necessarily indicative of the results to be expected
for the complete fiscal year. The Company was basically
inactive during the first six months of 1997 so no comparative
financial data is presented for the six months and quarter
ended June 30, 1997.
(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 three months and six
months ended June 30, 1998, respectively.
Tax Net of
Pre-Tax Expense Tax
Amount Benefit Amount
------- ------- ------
(In thousands)
Three months ended June 30, 1998
Net unrealized gain on securities available for sale $ 6 $ - $ 6
- ------------------------------------------------------------- ------- ------ ------
Other comprehensive income $ 6 $ - $ 6
============================================================= ======= ====== ======
Six months ended June 30, 1998
Net unrealized gain on securities available for sale $ 9 $ - $ 9
- ------------------------------------------------------------- ------- ------ ======
Other comprehensive income $ 9 $ - $ 9
============================================================= ======= ====== ======
(3) EARNINGS PER SHARE The weighted average number of common
shares outstanding during the six months ended and quarter
ended June 30, 1998 was 907,609. There were no dilutive items
outstanding during the six months and quarter ending June 30,
1998.
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PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS AND PLAN 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. The Company was inactive and dormant from its formation on
October 21, 1996 until December 31, 1996. Prior to opening on October 6, 1997,
the Company was in organization without significant activity in the six months
ended June 30, 1997 and the quarter ended June 30, 1997. There is no meaningful
comparative data from the corresponding periods in 1997.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the six months ended June 30, 1998
totaled $39,461,000, which represented 92.1% of average total assets. Earning
assets totaled $51,223,000 at June 30, 1998. Average earning assets for the
quarter ended June 30, 1998 totaled $46,335,000, which represented 92.3% of
average total assets.
Loan Portfolio. The Company's average loans for the six months ended June 30,
1998 were $14,786,000 and for the quarter ended June 30, 1998 were $19,697,000.
The balance in total loans at June 30, 1998 was $23,740,000 at June 30, 1998.
Investment Portfolio. The Company's investment securities portfolio averaged
$20,890,000 for the six months ended June 30, 1998 and $24,162,000 for the
quarter ended June 30, 1998. The portfolio totaled $25,562,000 at June 30, 1998.
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 book value. At December
31, 1997, unrealized losses in the "Available for Sale" portfolio amounted to
$9,000 and no loss at June 30, 1998. The average balance of securities
"Available for Sale" during the quarter ended June 30, 1998 was $20,059,000, for
the six months ended was $18,329,000 and the balance at June 30, 1998 was
$21,266,000. The average balance of securities "Held to Maturity" during the
quarter ended June 30, 1998 was $4,104,000, for the six months ended $2,562,000
and the balance at June 30, 1998 was $4,296,000.
Deposits. The Company's average deposits were $34,062,000 during the six months
ended June 30, 1998. This included average noninterest-bearing deposits of
$1,435,000, average certificates of deposit of $15,692,000, average saving
deposits of $116,000 and average interest bearing transaction accounts of
$16,819,000. The Company's average deposits for the quarter ended June 30, 1998
were $41,366,000. This included average non-interest bearing deposits of
$1,716,000, average certificates of deposit of $19,303,000, average savings
deposits of $142,000 and average interest bearing transaction accounts of
$20,205,000. Deposits at June 30, 1998 were $45,390,000.
Capital Resources. Shareholders' equity totaled $8,380,000 at of June 30, 1998.
This included $9,068,000 of common stock and additional paid-in-capital less a
deficit of $688,000 and no accumulated other comprehensive income.
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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 noninterest bearing deposit accounts. At June 30, 1998, the
Company had $2,300,000 of federal funds purchase lines available at three
correspondent banks. None of these lines were drawn at June 30, 1998.
Because of the level of capital obtained information, no additional capital
funds or notes payable are anticipated to be deemed necessary during the next
twelve months.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
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 six months ended June 30, 1998 totaled $485,000.
This was the result of interest income of $1,349,000 and interest expense of
$864,000 for the same period. Interest income produced by the loan portfolio
totaled $613,000, interest income on investment securities totaled $628,000 and
interest income on federal funds totaled $108,000. Interest expense included
$447,000 of interest expense on certificates of deposit and interest expense of
$415,000 on interest-bearing transaction accounts, savings accounts and money
market accounts and $2,000 of interest expense on securities sold under
agreement to repurchase.
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 1997 was 2.48%. The net cost of funds, defined
as interest expense divided by average-earning assets, was 4.41% for the same
period. The yield on earning assets was 6.89% for the six months ended June 30,
1998.
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 interests rate spreads have
been under intense pressure to maintain historical levels, due in part to tax
laws that discouraged investment in tax-exempt securities
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and intense competition for funds with non-bank institutions. The interest rate
spread for the six months ended June 30, 1998 was 1.56%.
As the Company continues to grow interest income can be expected to increase
particularly in the area of interest and fees on loans. It is management's
desire to continue quality loan growth which should increase the yield on
interest-earning assets. As the Company grows, it can be expected that deposits
will increase and increase the interest expense. It is management's intent to
maintain or lower the cost of funds which should show an increase in net
interest income.
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 which 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.
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 which 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 $297,000 at June 30, 1998 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.
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. 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.
The Company had no non-performing assets or impaired loans as of June 30, 1998.
Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and profits. 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 $45,000 for the six months ended June
30, 1998. This included $36,000 from service charges on deposit accounts, $3,000
of fee income and $6,000 of other non-interest income. There were no gain or
losses on securities during the six months ended June 30, 1998. Non-interest
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income should increase as the Company grows and adds deposit accounts for which
service charges my be made and additional fee generating services are expanded.
Non-interest Expenses. Non-interest expense for the six months ended June 30,
1998 totaled $620,000. Salaries and employee benefits for the period totaled
$306,000, occupancy expense totaled $32,000 while furniture and equipment
expense totaled $39,000. All other non-interest expenses totaled $243,000 for
the six months ended June 30, 1998. Other non-interest expense include supplies
and printing, data processing, telephone, postage and legal and audit fees.
Management expects an increase in certain areas of non-interest expense as the
company grows; however, costs associated with personnel (salaries and benefits),
occupancy expense and furniture and equipment expense should show only a slight
increase as the Company grows through the remainder of 1998.
Income Taxes. At June 30, 1998, the Company has net operating losses for federal
and state income taxes of approximately $310,000 which expire in tax year 2012
for federal and state purposes and $107,000 which expire in tax year 2018 for
federal purposes and 2013 for state purposes. The Company recorded no tax
benefit for the six months ended June 30, 1998 as a valuation allowance of
$119,000 was recorded related to the deferred tax asset for these net operating
losses and other temporary differences, the primary of which is provision for
possible loan losses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998
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 three months ended June 30, 1998 totaled $292,000.
This was the result of interest income of $811,000 and interest expense of
$519,000 for the same period. Interest income produced by the loan portfolio
totaled $407,000, interest income on investment securities totaled $368,000 and
interest income on federal funds totaled $36,000. Interest expense included
$274,000 of interest expense on certificates of deposit and interest expense of
$243,000 on interest-bearing transaction accounts, savings accounts and money
market accounts and $2,000 of interest expense on securities sold under
agreement to repurchase.
The net interest margin for the quarter ended June 30, 1998 was 2.56%. The net
cost of funds, defined as interest expense divided by average-earning assets,
was 4.49% for the quarter ended June 30, 1998. The yield on earning assets was
7.02%. The interest rate spread for the quarter ended June 30, 1998 was 1.78%.
Non-interest Income Total non-interest income totaled $30,000 for the quarter
ended June 30, 1998. This included $24,000 from service charges on deposit
accounts, $2,000 of fee income and $4,000 of other non-interest income. There
were no gain or losses on securities during the quarter ended June 30, 1998.
Non-interest Expenses. Non-interest expense for the quarter ended June 30, 1998
totaled $350,000. Salaries and employee benefits totaled $167,000, occupancy
expense totaled $23,000 and furniture and equipment expense totaled $20,000 for
the three months ended June 30, 1998. All other non-interest expenses totaled
$140,000 for the period.
Income Taxes. The Company recorded no tax benefit for the quarter ended June 30,
1998 as a valuation allowance of $14,000 was recorded related to the deferred
tax asset for these net operating losses and other temporary differences.
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RETURN ON EQUITY AND ASSETS
Return on assets (net loss divided by average total assets) for the six months
ended June 30, 1998 was (1.50%.) Return on equity (net loss divided by average
equity) for the six months ended June 30, 1998 was (7.48%.) Equity to assets
(average equity divided by average total assets) for the six months ended June
30, 1998 was 20.09%.
Return on assets for the quarter ended June 30, 1998 was (1.15%). Return on
equity for the quarter ended June 30, 1998 was (6.71%). Equity to assets for the
quarter ended June 30, 1998 was 17.15%.
There were no dividends paid during 1998, so no dividend payout ratio is
presented.
As the Company attempts to increase net interest income, the return on assets
and return on equity should be expected to increase.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead, and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
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AVERAGE BALANCE SHEET AND NET INTEREST INCOME
The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the six months ended June 30, 1998 indicated
and certain other information:
Interest
Average Average
Yields/ Income/
Balance Expense Rates
-------- -------- -----
ASSETS: (Fully taxable equivalent - dollars in thousands)
Interest-earning assets:
Loans $ 14,786 $ 613 8.36%
U.S. Treasury and other U.S. government agencies 20,890 628 6.06%
States and municipalities - - N/A
Federal funds sold 3,785 108 5.75%
Interest bearing deposits with other financial institutions - - N/A
- ----------------------------------------------------------- -------- -------- -----
Total interest-earning assets/interest income 39,461 1,349 6.89%
- ----------------------------------------------------------- -------- -------- -----
Cash and due from banks 1,156
Other assets 2,403
Allowance for possible loan losses (168)
- ----------------------------------------------------------- --------
Total assets $ 42,852
=========================================================== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 16,935 415 4.94%
Certificates of deposit 15,692 447 5.74%
Repurchase agreements 39 2 5.50%
- ----------------------------------------------------------- -------- -------- -----
Total interest-bearing liabilities/interest expense 32,666 864 5.33%
- ----------------------------------------------------------- -------- -------- -----
Non-interest-bearing demand deposits 1,435
Other liabilities 142
Shareholders' equity 8,609
- ----------------------------------------------------------- --------
Total liabilities and shareholders' equity $ 42,852
=========================================================== ========
Net interest earnings $ 485
=========================================================== ========
Net interest income on interest-earning assets 2.48%
=========================================================== =====
Taxable equivalent adjustment: N/A
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The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the quarter ended June 30, 1998 indicated and
certain other information:
Interest
Average Average
Yields/ Income/
Balance Expense Rates
-------- -------- -----
ASSETS: (Fully taxable equivalent - dollars in thousands)
Interest-earning assets:
Loans $ 19,697 $ 407 8.29%
U.S. Treasury and other U.S. government agencies 24,162 368 6.11%
States and municipalities -- -- N/A
Federal funds sold 2,476 36 5.83%
Interest bearing deposits with other financial institutions -- -- N/A
- ------------------------------------------------------------ -------- -------- -----
Total interest-earning assets/interest income 46,335 811 7.02%
- ------------------------------------------------------------ -------- -------- -----
Cash and due from banks 1,378
Other assets 2,722
Allowance for possible loan losses (226)
- ------------------------------------------------------------ --------
Total assets $ 50,209
============================================================ ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 20,347 243 4.79%
Certificates of deposit 19,303 274 5.69%
Repurchase agreements 77 2 5.50%
- ------------------------------------------------------------ -------- -------- -----
Total interest-bearing liabilities/interest expense 39,727 519 5.24%
- ------------------------------------------------------------ -------- -------- -----
Non-interest-bearing demand deposits 1,716
Other liabilities 157
Shareholders' equity 8,609
- ------------------------------------------------------------ --------
Total liabilities and shareholders' equity $ 50,209
============================================================ ========
Net interest earnings $ 292
============================================================ ========
Net interest income on interest-earning assets 2.53%
============================================================ =====
Taxable equivalent adjustment: N/A
Since there are no corresponding periods for which to compare in 1997, no table
reflecting the changes in interest income and expense as a result of the changes
of average volume and average rate is presented.
14
15
DEPOSITS
The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at June 30, 1998 and
December 31, 1997:
June 30, 1998 December 31, 1997
(In thousands) (In thousands)
Non interest-bearing deposits:
Individuals, partnerships and corporations $ 1,553 $ 808
U. S. Government and states and political subdivisions -- --
Certified and official checks 203 156
- ------------------------------------------------------------------ ------------- -------
Total non-interest-bearing deposits 1,756 964
- ------------------------------------------------------------------ ------------- -------
Interest-bearing deposits:
Interest-bearing demand accounts 21,956 10,545
Saving accounts 165 59
Certificates of deposit, less than $100,000 16,111 6,312
Certificates of deposit, more than $100,000 5,402 3,885
- ------------------------------------------------------------------ ------------- -------
Total interest-bearing deposits 43,634 20,801
- ------------------------------------------------------------------ ------------- -------
Total deposits $ 45,390 $21,765
================================================================== ============= =======
The growth in deposits during the first six months of 1998 can be attributed to
the growing geographic market in which the Company is located along with the
opportunity afforded a new community bank. Management expects the growth to
continue throughout the remainder of 1998 and even into 1999, but at a slower
rate. Management does not anticipate any increase in the cost of funds unless
rates increase significantly.
The following table presents a breakdown by category of the average amount of
deposits and the average rate paid on deposits for the six months ended June 30,
1998 and year ended December 31, 1997:
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
(Dollars in thousands) (Dollars in thousands)
Non interest-bearing deposits $ 1,435 N/A $ 283 N/A
Interest-bearing demand deposits 16,819 4.96% 1,045 5.32%
Savings accounts 116 2.57% 8 2.52%
Certificates of deposit 15,692 5.74% 1,446 6.02%
------- ---- ------ ----
Total deposits $34,062 5.33% $2,782 5.72%
======= ==== ====== ====
At June 30, 1998, certificates of deposits greater than $100,000 aggregated
approximately $5,402,000. The following table indicates, as of June 30, 1998,
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 $ 2,130 $2,872 $ 400 -
======================================= ======= ====== ====== ======
15
16
At December 31, 1997, certificates of deposits greater than $100,000 aggregated
approximately $3,885,000. The following table indicates, as of December 31,
1997, 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 $ 3,135 $ 750 - -
======================================= ======== ======= ======== ======
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 June 30, 1998 and December 31,
1997:
June 30, 1998 December 31, 1997
(In thousands) (In thousands)
Interest-bearing deposits with banks $ - $ -
Investment securities 25,562 14,732
Federal funds sold 1,921 7,704
Loans:
Real estate 11,658 3,600
Commercial and other 12,082 1,801
- ---------------------------------------------- ------- -------
Total loans 23,740 5,401
- ---------------------------------------------- ------- -------
Interest-earning assets $51,223 $27,837
============================================== ======= =======
Asset growth can be extended to continue throughout 1998. It is the intent of
management to increase loans (i.e. the higher yielding asset category) and keep
the balances in investment securities and federal funds sold rather constant
throughout the remainder of 1998 and into 1999. Management intends to maintain
quality loans while growing the portfolio.
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 June 30, 1998, approximately $21,266,000 of investment securities
were classified as available for sale and at December 31, 1997, approximately
$14,741,000 of investment securities were classified as available for sale.
Approximately $9,000 of unrealized loss was related to the available for sale
investment securities at December 31, 1997. There was no unrealized gain or loss
at June 30, 1998. There were $4,296,000 of securities at June 30, 1998
classified as held to maturity.
There were no securities at December 31, 1997 classified as held to maturity.
At December 31, 1997 as well as June 30, 1998, obligations of the United States
Government or its agencies represented approximately 100% of the total
investment portfolio. The following table presents the carrying amounts of the
Company's investment portfolio at June 30, 1998 (in thousands):
16
17
Amortized Estimated
Cost Fair Value
AVAILABLE FOR SALE: --------- ----------
U.S. Treasury $ -- $ --
U.S. Government agencies 21,266 21,266
States and political subdivisions -- --
Other securities -- --
- -------------------------------------------------- --------- ----------
Total available for sale $ 21,266 $ 21,266
================================================== ========= ==========
HELD TO MATURITY:
U.S. Treasury $ -- $ --
U.S. Government agencies 4,296 4,318
States and political subdivisions -- --
Other securities -- --
- -------------------------------------------------- --------- ----------
Total held to maturity $ 4,296 $ 4,318
================================================== ========= ==========
Total investment portfolio $ 25,562 $ 25,562
================================================== ========= ==========
At December 31, 1997, obligations of the United States Government or its
agencies represented approximately 100% of the total investment portfolio. The
following table presents the carrying amounts of the Company's investment
portfolio at December 31, 1997 (in thousands):
Amortized Estimated
Cost Fair Value
AVAILABLE FOR SALE:
U.S. Treasury $ -- $ --
U.S. Government agencies 14,741 14,732
States and political subdivisions -- --
Other securities -- --
- -------------------------------------------------- ------- -------
Total available for sale $14,741 $14,732
================================================== ======= =======
HELD TO MATURITY:
U.S. Treasury $ -- $ --
U.S. Government agencies -- --
States and political subdivisions -- --
Other securities -- --
- -------------------------------------------------- ------- -------
Total held to maturity $ -- $ --
================================================== ======= =======
Total investment portfolio $14,741 $14,732
================================================== ======= =======
The growth in investment securities during the first six months of 1998 was the
result of a growth in deposits of the Bank. As quality loan demand increases,
management expects the investment portfolio to grow at a much slower rate during
the remainder of 1998. The growth during 1998 has been in securities available
for sale since it has been management's intention to maintain liquidity as loan
demand increases. Any growth in the investment portfolio during the remainder of
1998 will probably occur in securities available for sale since it is important
to have liquidity to meet loan demand. Many of the securities in the portfolio
have call features so the portfolio may experience some turnover depending upon
the issuers' decision whether to call a particular security.
17
18
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at June 30, 1998. The
weighted average yields on these instruments are presented based on final
maturity.
Amortized Estimated Weighted
Cost Fair Value Average Yield
--------- ---------- -------------
(Dollars in thousands)
AVAILABLE FOR SALE:
U.S. Treasuries $ -- $ -- N/A
U.S. Government agencies:
Due within 1 year 2,747 2,748 5.73%
Due after 1 year but within 5 years 17,500 17,489 5.99%
Due after 5 years but within 10 years 1,019 1,029 6.18%
Due after 10 years -- -- N/A
- ------------------------------------- ------- ------- ----
Total 21,266 21,266 5.97%
- ------------------------------------- ------- ------- ----
States and political subdivisions -- -- N/A
Other -- -- N/A
- ------------------------------------- ------- ------- ----
Total investments available for sale $21,266 $21,266 5.97%
===================================== ======= ======= ====
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 1,253 1,256 6.22%
Due after 5 years but within 10 years 3,043 3,062 6.18%
Due after 10 years -- -- N/A
- ------------------------------------- ------- ------- ----
Total $ 4,296 $ 4,318 6.19%
- ------------------------------------- ------- ------- ----
States and political subdivisions -- -- N/A
Other -- -- N/A
- ------------------------------------- ------- ------- ----
Total held to maturity $ 4,296 $ 4,318 6.19%
===================================== ======= ======= ====
Total investment portfolio $25,562 $25,584 6.01%
===================================== ======= ======= ====
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at December 31, 1997.
The weighted average yields on these instruments are presented based on final
maturity.
Amortized Estimated Weighted
Cost Fair Value Average Yield
--------- ---------- -------------
(Dollars in thousands)
AVAILABLE FOR SALE:
U.S. Treasuries $ -- $ -- N/A
U.S. Government agencies:
Due within 1 year 2,741 2,739 5.79%
Due after 1 year but within 5 years 12,000 11,993 6.07%
Due after 5 years but within 10 years -- -- N/A
Due after 10 years -- -- N/A
- ------------------------------------- ------- ------- ----
Total 14,741 14,732 6.02%
- ------------------------------------- ------- ------- ----
States and political subdivisions -- -- N/A
Other -- -- N/A
- ------------------------------------- ------- ------- ----
Total investments available for sale $14,741 $14,732 6.02%
===================================== ======= ======= ====
HELD TO MATURITY:
There were no securities classified as "held to maturity" at December 31, 1997.
18
19
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.
LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
at June 30, 1998 (dollars in thousands).
Percent of
Balance Total Loans
-------- -----------
Real estate loans:
Construction and land development $ 921 3.9%
Secured by residential properties 7,646 32.2%
Secured by commercial real estate 3,091 13.0%
--------- -----
Total real estate loans 11,658 49.1%
Commercial and industrial loans 7,535 31.7%
Other consumer loans 3,022 12.7%
All other loans 1,525 6.5%
- ---------------------------------------------- --------- -----
Total loans 23,740 100.0%
Less:
Allowance for possible loan losses (297) N/A
- ---------------------------------------------- --------- -----
Net loans $ 23,443 N/A
============================================== ========= =====
19
20
The following table sets forth the composition of the Company's loan portfolio
at December 31, 1997 (dollars in thousands).
Percent of
Balance Total Loans
------- -----------
Real estate loans:
Construction and land development $ 334 6.2%
Secured by residential properties 1,018 18.8%
Secured by commercial real estate 2,248 41.6%
------- ------
Total real estate loans 3,600 66.7%
Commercial and industrial loans 1,134 21.0%
Other consumer loans 667 12.4%
All other loans -- 0.00%
------- ------
- ----------------------------------------------
Total loans 5,401 100.0%
Less:
Allowance for possible loan losses 68 N/A
- ---------------------------------------------- ------- ------
Net loans $5,333 N/A
============================================== ======= ======
The increase in loans during the first six months of 1998 was the result of
growth of the Bank's deposits and the vibrant growing market in which the Bank
is located. In addition, additional lending personnel was added which provided
the staffing necessary to meet growing loan demand. In addition, favorable
interest rates for borrowers in the market have increased the refinancing of
first mortgages. The rates have also helped increase housing starts in the
market. Finally, increased home sales have provided additional mortgage loan
demand. The growing market has also contributed to growth in commercial loans as
more new businesses are moving into the area or starting up and existing
businesses are expanding. Consumer loan demand has also increased as the Bank
has been able to better the penetrate the market and offer loan consumer
services to its deposit customers. Management anticipates continued loan growth
(particularly in the area of single family residential mortgage loans) through
the remainder of 1998 and into 1999, but growth may slow somewhat. It is the
intent of management to maintain a quality loan portfolio.
Management will manage loan growth throughout 1998 and into 1999.
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
June 30, 1998 (in thousands).
Maturity Range
---------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
-------- ----------- ---------- -------
LOAN MATURITY:
Real estate construction loans $ 842 $ 79 $ -- $ 921
Real estate mortgage loans 334 10,145 258 10,737
Commercial and industrial loans 4,403 2,387 745 7,535
All other loans 2,087 2,250 210 4,547
- ------------------------------------------- -------- ----------- ---------- -------
Total loans $ 7,666 $ 14,861 $ 1,213 $23,740
=========================================== ======== =========== ========== =======
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates $ 883 $ 4,781 $ 998 $ 6,662
Floating or adjustable interest rates 6,783 10,080 215 17,078
- ------------------------------------------- -------- ----------- ---------- -------
Total $ 7,666 $ 14,861 $ 1,213 $23,740
=========================================== ======== =========== ========== =======
20
21
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, 1997 (in thousands).
Maturity Range
---------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
-------- ----------- ---------- -------
LOAN MATURITY:
Real estate construction loans $ 334 $ - $ - $ 334
Real estate mortgage loans 91 3,147 28 3,266
Commercial and industrial loans 680 454 - 1,134
All other loans 287 380 - 667
- ------------------------------------------- -------- ----------- ---------- --------
Total loans $ 1,392 $ 3,981 $ 28 $ 5,401
=========================================== ======== =========== ========== ========
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates $ 1,221 $ 1,890 $ - $ 3,111
Floating or adjustable interest rates 171 2,091 28 2,290
- ------------------------------------------- -------- ----------- ---------- --------
Total $ 1,392 $ 3,981 $ 28 $ 5,401
=========================================== ======== =========== ========== ========
LOAN POLICY
All lending activities of 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 which 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,
where there is adequate collateral to cover principal and accrued interest and
the loan is in the process of collection. No concessions are granted and late
fees are collected. 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
21
22
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 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
lastly to income.
The large number of consumer installment loans and the relatively small dollar
amount of each makes an individual review impracticable. It is the Company's
policy to charge off any consumer installment loan which 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. Any accrued interest receivable remains in interest income as an
obligation of the borrower.
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 flows 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 $68,000 as of December 31, 1997 or
1.25% of loans outstanding. The allowance for possible loan losses was
22
23
$297,000 as of June 30, 1998, or 1.25% of loans outstanding. No loans were
charged-off (nor any recoveries made) during 1997 nor the first six months of
1998. The provision for possible loan losses charged against earnings during the
first six months of 1998 was $229,000 and the provision for possible loan losses
charged against earnings during the quarter ended June 30, 1998 was $116,000.
There were no non-performing loans of the Company at December 31, 1997 or at
June 30, 1998. This includes non-accrual loans and restructured loans. 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 were also no loans past due ninety days
or more, any other real estate owned or foreclosed, any repossessed assets or
impaired loans at December 31, 1997 or at June 30, 1998.
CAPITAL RESOURCES/LIQUIDITY
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 which will be required and
maintains relationships with a diversified customer 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 which
are reasonably likely to result in liquidity increasing or decreasing in any
material manner. The ratio for average loans to average deposits for the six
months ended June 30, 1998 was 43.4% and 47.6%for the quarter ended June 30,
1998.
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.
23
24
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
Tier II capital which is primarily a 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.
The following table gives the various capital ratios and balances at June 30,
1998 and December 31, 1997 (dollars in thousands) for the Company:
June 30, 1998 December 31, 1997
(In thousands) (In thousands)
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,380 $ 8,699
Less disallowed intangibles -- --
- ---------------------------------------------- ------- -------
Total Tier I capital 8,380 $ 8,699
- ---------------------------------------------- ------- -------
Tier II capital:
Qualifying debt
Qualifying allowance for possible loan losses 297 68
- ---------------------------------------------- ------- -------
Total Tier II capital 297 68
- ---------------------------------------------- ------- -------
Total capital $ 8,677 $ 8,767
============================================== ======= =======
Risk-adjusted assets $31,424 $11,883
============================================== ======= =======
Quarterly average assets (since
commencement of operations) $49,019 $20,770
============================================== ======= =======
RATIOS:
Tier I capital to risk-adjusted assets 26.7% 73.2%
Tier II capital to risk-adjusted assets 0.9% 0.6%
Total capital to risk-adjusted assets 27.6% 73.8%
Leverage-- Tier I capital to quarterly
Average assets less disallowed intangibles 17.1% 41.9%
24
25
The following table gives the various capital ratios and balances at June 30,
1998 and December 31, 1997 (dollars in thousands) for the Bank:
June 30, 1998 December 31, 1997
(In thousands) (In thousands)
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,241 $ 7,757
Less disallowed intangibles -- --
- ---------------------------------------------- ------- -------
Total Tier I capital 8,241 $ 7,757
- ---------------------------------------------- ------- -------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for possible loan losses 297 68
- ---------------------------------------------- ------- -------
Total Tier II capital 297 68
------- -------
Total capital $ 8,538 $ 7,825
============================================== ======= =======
Risk-adjusted assets $24,694 $11,845
============================================== ======= =======
Quarterly average assets (since
commencement of operations) $35,494 $18,823
============================================== ======= =======
RATIOS:
Tier I capital to risk-adjusted assets 33.4% 65.5%
Tier II capital to risk-adjusted assets 1.2% 0.6%
Total capital to risk-adjusted assets 34.6% 66.1%
Leverage-- Tier I capital to quarterly
Average assets less disallowed intangibles 23.2% 41.2%
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 December 31, 1997 and June 30, 1998, the Company exceeded the regulatory
minimums and qualified as a well-capitalized institution under the regulations.
SHORT-TERM BORROWINGS:
The average balance for short-term borrowings of the Company was less than 30%
of shareholders' equity at December 31, 1997 and June 30, 1998.
25
26
PROPERTY ACQUISITIONS:
No significant property acquisitions are planned for the next year. Management
is looking at the possibility and feasibility of expanding the building located
at 607 Memorial Boulevard in the next year. The earliest time for which
construction would probably begin is early 1999.
PERSONNEL:
The Company increased the number of employees from the December 31, 1997 level
of 14 to 22 at June 30, 1998. Management anticipates the number of employees at
the end of 1998 to be approximately 25. Employees will be added as needed to
service the anticipated loan and deposit growth and related support services
during the next twelve months.
FOREIGN TRANSACTIONS:
The Company and the Bank have not had any investment securities, loans or
deposits of foreign governments, corporations or other entities nor anticipate
any such transactions in the future.
26
27
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
(a) The Annual Meeting of Stockholders was held April 16, 1998.
(b) Each of the persons named in the Proxy Statement as a nominee for director
was elected, the Company's stock option plan was approved and the selection of
Rayburn, Betts and Bates, P.C. as independent auditors for the Company for 1998
was ratified. The following are the voting results on each of the matters:
(1) Election of the entire board of directors who are as follows:
Total Number of Shares Voting:
Shares Broker
Voting For Against Withheld Non-Votes
- -------------------------------------------------------------------------------------------------
Melvin R. Adams 541,305 541,105 200 0 0
Thomas E. Batey 541,305 541,105 200 0 0
Joyce Ewell 541,305 541,105 200 0 0
J. Stanley Hooper 541,305 541,105 200 0 0
William E. Rowland 541,305 541,105 200 0 0
William H. Sloan 541,305 541,105 200 0 0
Joseph M. Swanson 541,305 541,105 200 0 0
Olin O. Williams 541,305 541,105 200 0 0
(2) To approve the Company's stock option:
Total Number of Shares Voting:
Shares Broker
Voting For Against Abstain Non-Votes
- -------------------------------------------------------------------------------------------------
541,305 535,405 5,900 0 0
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(3) The election of Rayburn, Betts and Bates, P.C. as independent auditors for
the Company was as follows:
Total Number of Shares Voting:
Shares Broker
Voting For Against Abstain Non-Votes
- -------------------------------------------------------------------------------------------------
541,305 541,005 300 0 0
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.
29
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 August 12, 1998
---------------
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.