1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD
FROM _______________ TO _______________
Commission File Number 2-90200
FIRST MCMINNVILLE CORPORATION
-----------------------------------------------------------
(Exact Name of Registrant As Specified in its Charter)
Tennessee 62-1198119
- --------------------------------- -----------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
200 East Main Street, McMinnville, TN 37110
-------------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
(931) 473-4402
-----------------------------------------------------
(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: October 29, 1998 - 533,371.
---------------------------
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited consolidated financial statements of the
registrant and its wholly-owned subsidiary, First National
Bank of McMinnville (the "Bank") are as follows:
Consolidated Balance Sheets - September 30, 1998 and December
31, 1997.
Consolidated Statements of Earnings - For the three months and
nine months ended September 30, 1998 and 1997.
Consolidated Statements of Comprehensive Earnings - For the
three months and nine months ended September 30, 1998 and 1997.
Consolidated Statements of Cash Flows - For the nine months
ended September 30, 1998 and 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
September 30 December 31,
1998 1997
---- ----
(In Thousands)
Assets
Loans $ 119,897 111,473
Less: Allowance for loan losses (1,470) (1,314)
--------- ----------
Net loans 118,427 110,159
Securities:
Held to maturity, at cost (market value $49,087,000 and
$47,584,000, respectively) 47,726 46,495
Available-for-sale, at market (amortized cost $56,710,000
and $43,513,000, respectively) 57,655 43,868
Interest-bearing deposits in other banks 100 100
Federal funds sold 22,600 2,650
--------- ----------
Total earning assets 246,508 203,272
Cash and due from banks 6,087 4,461
Bank premises and equipment, net of accumulated depreciation 2,096 2,230
Accrued interest receivable 2,419 2,020
Deferred tax asset -- 39
Other real estate 11 11
Other assets 454 732
--------- ----------
$ 257,575 212,765
========= ==========
Liabilities and Stockholders' Equity
Deposits $ 199,796 172,891
Securities sold under repurchase agreements 15,820 4,350
Advances from Federal Home Loan Bank 4,000 --
Deferred tax liability 185 --
Accrued interest and other liabilities 2,403 2,967
--------- ----------
Total liabilities 222,204 180,208
--------- ----------
Stockholders' equity:
Common stock, $2.50 par value; authorized 5,000,000 shares,
issued 606,740 shares and 605,800 shares, respectively 1,517 1,514
Additional paid-in capital 1,620 1,568
Retained earnings 34,169 31,561
Net unrealized gains on available-for-sale securities,
net of income taxes of $359,000 and $135,000, respectively 587 220
--------- ----------
37,893 34,863
Less cost of treasury stock of 73,169 shares and 69,696 shares,
respectively (2,522) (2,306)
--------- ----------
Total stockholders' equity 35,371 32,557
--------- ----------
$ 257,575 212,765
========= ==========
See accompanying notes to consolidated financial statements (unaudited).
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1998 1997 1998 1997
(Dollars In Thousands, Except Per Share Amount)
Interest income:
Interest and fees on loans $2,458 2,447 7,248 7,221
Interest and dividends on securities:
Taxable securities 1,654 1,126 4,408 3,241
Tax exempt from Federal income taxes 355 298 1,010 875
Interest on federal funds sold 27 56 113 166
Interest on interest-bearing deposits in other banks and
other interest 2 2 5 5
------ ------ ------ ------
Total Interest income 4,496 3,929 12,784 11,508
------ ------ ------ ------
Interest expense:
Interest on negotiable order of withdrawal accounts 125 119 371 356
Interest on money market demand and savings accounts 191 284 749 843
Interest on certificates of deposit 1,846 1,375 4,856 3,959
Interest on securities sold under repurchase agreements
and short term borrowings 114 34 213 81
Interest on Federal funds purchased 12 -- 14 10
Interest on advances from Federal Home Loan Bank 53 -- 94 --
------ ------ ------ ------
Total interest expense 2,341 1,812 6,297 5,249
------ ------ ------ ------
Net interest income 2,155 2,117 6,487 6,259
Provision for loan losses 45 30 135 90
------ ------ ------ ------
Net interest Income after provision for loan losses 2,110 2,087 6,352 6,169
------ ------ ------ ------
Other income:
Service charges on deposit accounts 137 119 387 366
Other fees and commissions 77 58 197 177
Commissions and fees on fiduciary activities 8 8 25 25
Security gains related to available-for-sale securities 26 -- 26 9
Other income 33 12 58 32
------ ------ ------ ------
Total other income 281 197 693 609
------ ------ ------ ------
Other expenses:
Salaries and employee benefits 650 628 1,865 1,806
Occupancy expenses, net 61 82 174 192
Furniture and equipment expense 19 24 63 69
Data processing expense 50 50 147 157
Security losses related to available-for-sale securities -- 18 4 18
Other operating expenses 228 224 655 647
------ ------ ------ ------
Total other expenses 1,008 1,026 2,908 2,889
------ ------ ------ ------
Earnings before income taxes 1,383 1,258 4,137 3,889
Income taxes 423 370 1,235 1,169
------ ------ ------ ------
Net earnings $ 960 888 2,902 2,720
====== ====== ====== ======
Basic earnings per common share $ 1.80 1.65 5.43 5.07
====== ====== ====== ======
Diluted earnings per common share $ 1.80 1.65 5.42 5.07
====== ====== ====== ======
Dividends per share $ -- -- .55 .50
====== ====== ====== ======
See accompanying notes to consolidated financial statements (unaudited).
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
(In Thousands)
1998 1997 1998 1997
---- ---- ---- ----
Net earnings $ 960 888 2,902 2,720
--------- -------- -------- ---------
Other comprehensive earnings, net of tax:
Unrealized gains on available-for-sale securities
arising during period, net of taxes of $223,000,
$118,000, $233,000 and $161,000, respectively 364 193 381 263
Less: reclassification adjustment for losses
(gains) included in net earnings, net of tax
(expense) benefit of $10,000, $7,000, $8,000
and $3,000, respectively (16) 11 (14) 6
--------- -------- -------- ---------
Other comprehensive earnings 348 204 367 269
--------- -------- -------- ---------
Comprehensive earnings $ 1,308 1,092 3,269 2,989
========= ======== ======== =========
See accompanying notes to consolidated financial statements (unaudited).
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1998 1997
---- ----
(In Thousands)
Cash flows from operating activities:
Interest received $ 12,333 11,191
Fees and commissions received 667 600
Interest paid (5,981) (4,769)
Cash paid to suppliers and employees (2,448) (2,429)
Income taxes paid (1,061) (1,260)
--------- ---------
Net cash provided by operating activities 3,510 3,333
--------- ---------
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity securities 18,459 17,216
Proceeds from maturities of available-for-sale securities 146,950 10,313
Proceeds from sales of available-for-sale securities 17,383 5,284
Purchase of available-for-sale securities (177,471) (31,153)
Purchase of held-to-maturity securities (19,675) (9,644)
Loans made to customers, net of repayments (8,403) (3,494)
Purchase of premise and equipment (25) (96)
Proceeds from sales of other real estate -- 58
--------- ---------
Net cash used in investing activities (22,782) (11,516)
--------- ---------
Cash flows from financing activities:
Net increase in non-interest bearing, savings and NOW
deposit accounts 22,744 435
Net increase in time deposits 4,161 10,043
Increase in securities sold under repurchase agreement 11,470 1,658
Decrease in Federal funds purchased -- (500)
Dividends paid (1,366) (1,290)
Payments to acquire treasury stock (216) (88)
Advances from Federal Home Loan Bank 4,000 --
Proceeds from sales of common stock 55 58
--------- ---------
Net cash provided by financing activities 40,848 10,316
--------- ---------
Net increase in cash and cash equivalents 21,576 2,133
Cash and cash equivalents at beginning of period 7,111 3,532
--------- ---------
Cash and cash equivalents at end of period $ 28,687 5,665
========= =========
See accompanying notes to consolidated financial statements (unaudited).
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
1998 1997
---- ----
(In Thousands)
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 2,902 2,720
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 159 173
Provision for loan losses 135 90
Securities losses related to available-for-sale 4 18
Security gains related to available-for-sale (26) (9)
FHLB dividend reinvestment (37) (33)
Decrease in refundable income taxes 226 15
Increase in interest receivable (399) (272)
Decrease in taxes payable (53) (106)
Increase in interest payable 316 480
Increase in other assets 76 2
Increase in other liabilities 207 255
--------- ---------
Total adjustments 608 613
--------- ---------
Net cash provided by operating activities $ 3,510 3,333
========= =========
Supplemental schedule of non-cash activities:
Unrealized gain in value of securities available-for-sale,
net of income taxes of $224,000 in 1998 and $165,000
in 1997 $ 367,000 269,000
========= =========
See accompanying notes to consolidated financial statements (unaudited).
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FIRST MCMINNVILLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of First
McMinnville Corporation (Company) and its wholly-owned subsidiary, The First
National Bank of McMinnville (Bank).
The accompanying consolidated financial statements have been prepared, without
audit, in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, the statements contain all adjustments and
disclosures necessary to summarize fairly the financial position of the Company
as of September 30, 1998 and December 31, 1997, the results of operations for
the nine months and three months ended September 30, 1998 and 1997,
comprehensive earnings for the nine months and three months ended September 30,
1998 and 1997 and changes in cash flows for the nine months ended September 30,
1998 and 1997. All significant intercompany transactions have been eliminated.
The interim consolidated financial statements should be read in conjunction with
the notes to the consolidated financial statements presented in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The results for
interim periods are not necessarily indicative of results to be expected for the
complete fiscal year.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
Nine Months Ended
September 30,
------------------------
1998 1997
---- ----
(In Thousands)
Balance, January 1, 1998 and 1997, respectively $ 1,314 1,724
Add (deduct):
Losses charged to allowance (14) (24)
Recoveries credited to allowance 35 25
Provision for loan losses 135 90
---------- --------
Balance, September 30, 1998 and 1997, respectively $ 1,470 1,815
========== ========
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to provide insight into the
financial condition and results of operations of the Registrant and its
subsidiary. This discussion should be read in conjunction with the consolidated
financial statements. Reference should also be made to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 for a more complete
discussion of factors that impact liquidity, capital and the results of
operations.
FORWARD - LOOKING STATEMENTS
Management's discussion of the Company, and management's analysis
of the Company's operations and prospects, and other matters, may include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and other provisions of federal and state
securities laws. Although the Company believes that the assumptions underlying
such forward-looking statements contained in this Report are reasonable, any of
the assumptions could be inaccurate and, accordingly, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
The use of such words as expect, anticipate, forecast, and comparable terms
should be understood by the reader to indicate that the statement is
"forward-looking" and thus subject to change in a manner that can be
unpredictable. Factors that could cause actual results to differ from the
results anticipated, but not guaranteed, in this Report, include (without
limitation) economic and social conditions, competition for loans, mortgages,
and other financial services and products, changes in interest rates, unforeseen
changes in liquidity, results of operations, and financial conditions affecting
the Company's customers, material unforeseen complications related to addressing
Year 2000 issues (both as to the Company and as to its customers, vendors,
consultants and governmental agencies), as well as other risks that cannot be
accurately quantified or completely identified. Many factors affecting the
Company's financial condition and profitability, including changes in economic
conditions, the volatility of interest rates, political events and competition
from other providers of financial services simply cannot be predicted. Because
these factors are unpredictable and beyond the Company's control, earnings may
fluctuate from period to period. The purpose of this type of information (such
as in Item 2, as well as other portions of this Report) is to provide Form 10-Q
readers with information relevant to understanding and assessing the financial
conditions and results of operations of the Company, and not to predict the
future or to guarantee results. The Company is unable to predict the types of
circumstances, conditions, and factors that can cause anticipated results to
change. The Company undertakes no obligation to publish revised forward-looking
statements to reflect the occurrence of changes or of unanticipated events,
circumstances, or results.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The concept of liquidity involves the ability of the Company and
its subsidiary to meet future cash flow requirements, particularly those of
customers who are either withdrawing funds from their accounts or borrowing to
meet their credit needs.
Proper asset/liability management is designed to maintain
stability in the balance of interest-sensitive assets to interest-sensitive
liabilities in order to provide a stable growth in net interest margins.
Earnings on interest-sensitive assets such as loans tied to the prime rate of
interest and federal funds sold, may vary considerably from fixed rate assets
such as long-term investment securities and fixed rate loans. Interest-sensitive
liabilities such as large certificates of deposit and money market certificates,
generally require higher costs than fixed rate instruments such as passbook
savings.
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Banks, in general, must maintain large cash balances to meet
day-to-day cash flow requirements as well as maintaining required reserves for
regulatory agencies. The cash balances maintained are the primary source of
liquidity. Federal funds sold, which are basically overnight or short-term loans
to other banks that increase the other bank's required reserves, are also a
major source of liquidity.
The Company's investment portfolio consists of earning assets that
provide interest income. For those securities classified as held-to-maturity the
Company has the ability and intention to hold these securities until maturity.
Securities classified as available for sale include securities intended to be
used as part of the Company's asset/liability strategy and/or securities that
may be sold in response to changes in interest rate, prepayment risk, the need
or desire to increase capital and similar economic factors. Securities totaling
approximately $5.4 million mature or reprice within the next twelve months.
A secondary source of liquidity is the Bank's loan portfolio. At
September 30, 1998 commercial loans of approximately $28.7 million and other
loans (mortgage and consumer) of approximately $5.7 million either will become
due or will be subject to rate adjustments within twelve months. Continued
emphasis will be placed on structuring adjustable rate loans.
As for liabilities, certificates of deposit of $100,000 or greater
of approximately $28.0 million will become due during the next twelve months.
The Bank's deposit base increased approximately $26.9 million during the nine
months ended September 30, 1998. Securities sold under repurchase agreements
increased approximately $11.5 million during the nine months ended September 30,
1998 and approximately $6.2 million during the three months ended September 30,
1997. The deposit base increased approximately $10.5 million during the nine
months ended September 30, 1997. Federal funds sold were $22,600,000 at
September 30, 1998 as compared to $2,650,000 at December 31, 1997. The increase
in Federal funds sold was due primarily to funds being made available to
distribute approximately $21,000,000 to members of a customer's in early
October, 1998. The customer purchased a certificate of deposit earlier in the
year to be used for the eventual distribution and the Bank invested the funds in
short-term securities during this period. It is not known what amount, if any,
of this distribution will be redeposited in the Bank on a long-term basis.
Historically, there has been no significant reduction in
immediately withdrawable accounts such as negotiable order of withdrawal
accounts, money market demand accounts, demand deposit and regular savings.
Management anticipates that there will be no significant withdrawals from these
accounts in the future.
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The Bank is limited by banking regulatory agencies as to the
amount of dividends that it can pay. At September 30, 1998, the Bank can declare
during the remainder of 1998 cash dividends in an aggregate amount not to exceed
approximately $5.3 million, exclusive of any 1998 net earnings, without prior
approval of the Comptroller of the Currency. However, most of these funds will
be retained for use in the Bank's operations rather than being paid out in
dividends. It is anticipated that with present maturities, the anticipated
growth in deposit base, and the efforts of management in its asset/liability
management program, liquidity will not pose a problem in the foreseeable future.
At the present time there are no known trends or any known commitments, demands,
events or uncertainties that management believes will result in or that are
reasonable likely to result in the Company's liquidity changing in any material
way.
CAPITAL RESOURCES
A primary source of capital is internal growth through retained
earnings. The ratio of stockholder's equity to total assets was 13.7% at
September 30, 1998 and 15.3% at December 31, 1997. The decline in the ratio
results from the large increase in federal funds sold discussed above. Total
assets increased 21.1% during the nine months ended September 30, 1998. The
annualized rate of return on stockholders' equity for the first nine months of
1998 was 11.4% compared to 12.1% for the comparable period in 1997. Principally
because of the relatively high percentage of equity capital, the return on
equity is lower than the reported average for many banks in the Bank's peer
group. Dividends of $294,000 and $269,000 or $.55 and $.50 per share were
declared in the nine months ended September 30, 1998 and 1997, respectively.
Cash dividends will be increased in the remainder of 1998 over 1997 only in the
discretion of the Board of Directors and as profits permit. Dividends paid
during 1997 were $2.50 per share. No material changes in the mix or cost of
capital is anticipated in the foreseeable future. At the present time, there are
no material commitments for capital expenditures.
Regulations of the Comptroller of the Currency establish required
minimum capital levels for the Bank. Under these regulations, national banks
must maintain certain capital levels as a percentage of average total assets
(leverage capital ratio) and as a percentage of total risk-based assets
(risk-based capital ratio). Under the risk-based requirements, various
categories of assets and commitments are assigned a percentage related to credit
risk ranging from 0% for assets backed by the full faith and credit of the
United States to 100% for loans other than residential real estate loans and
certain off-balance sheet commitments. Total capital is characterized as either
Tier 1 capital which includes common shareholders' equity, noncumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
- - or Tier 2 capital which includes the allowance for loan losses up to 1.25% of
risk weighted assets, perpetual preferred stock, subordinated debt and various
other hybrid capital instruments, subject to various limits. Goodwill is not
includable in Tier 1 or Tier 2 capital. National banks must maintain a Tier 1
capital to risk-based assets of at least 4.0%, a total capital to risk-based
assets ratio of at least 8.0% and a leverage capital ratio defined as Tier 1
capital to average total assets of at least 4.0%. The same ratios are also
required in order for a national bank to be considered "adequately capitalized"
under the OCC's "prompt corrective action" regulations, which impose certain
operating restrictions on institutions which are not adequately capitalized. The
Bank has a Tier 1 risk-based ratio of 26.7%, a total capital to risk-based ratio
of 27.9% and a Tier 1 leverage ratio of 13.6%, and was thus in the "well
capitalized" category under the regulations.
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS,
CONTINUED
CAPITAL RESOURCES, CONTINUED
The Federal Reserve Board imposes consolidated capital guidelines
on bank holding companies which have more than $150 million in consolidated
assets. These guidelines require bank holding companies to maintain consolidated
capital ratios which are essentially the same as the minimum capital levels
required for national banks. The Company's consolidated capital ratios were
substantially the same as those set forth above for the Bank, and exceeded the
minimums required under these Federal Reserve Board guidelines at September 30,
1998.
On April 8, 1997, the Company's stockholders approved the First
McMinnville Corporation 1997 Stock Option Plan. The Company has granted the
right to purchase 41,000 shares of stock to its directors, officers and
employees at an exercise price of $58.15 per share. At September 30, 1998 1,940
shares had been exercised and 12,320 shares were exercisable. The shares granted
to Directors totaling 16,500 are exercisable over a three year period. Shares
granted to officers and employees are exercisable over a period of 10 years or
the number of years until the optionee reaches age 65, whichever is less.
YEAR 2000 ISSUES
The term "Year 2000 issue" refers to the necessity of converting
computer information systems so that such systems recognize more than two digits
to identify a year in any given date field, and are thereby able to
differentiate between years in the twentieth and twenty-first centuries ending
with the same two digits (e.g., 1900 and 2000). To address the Year 2000 issue,
the Company has adopted a broad-based approach designed to encompass the
Company's total environment.
The Company has appointed a Year 2000 Steering Committee which was
established in mid-1997. The Y2K Steering Committee has representation from all
affected areas for the purpose of managing the process of assessing and
correcting non-compliance throughout the organization. Areas being addressed by
the Y2K Steering Committee include:
- Bank's primary data processing system. BancTech Financial,
Inc., a major data processor, provides the primary software
and hardware for the data processing system of the Bank. This
is of the highest priority for day to day operations,
accounting and success of the Bank.
- Government systems, such as the Federal Reserve Bank for check
clearing, wire transfers, and the free flow and exchange of
funds between institutions are absolutely critical.
- The internal PC hardware and software systems within the Bank,
along with telecommunications systems.
- The primary securities portfolio accounting and safekeeping
system for the Bank.
- Credit administration - the committee is reviewing the risk
associated with Year 2000 status of Bank's loan customers and
depositors.
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
YEAR 2000 ISSUES, CONTINUED
The Company's Y2K Steering Committee is using a 4-phase approach
in its Year 2000 project made up of awareness, assessment, renovation, and
validation-testing. The Company has contacted its primary data processing
supplier together with all other vendor supplied systems and determined
compliance of these systems. The Y2K Steering Committee is in the process of
testing these systems, and anticipates having substantially completed the
testing of all critical applications by the end of 1998.
The Company estimates that the cost of its Year 2000 project will
not exceed $200,000 in the aggregate and that the cost will not be material to
earnings. Actual expenditures to date and currently anticipated future
expenditures are within this estimate. The Company's management believes its
approach to the Year 2000 issue to be comprehensive, and does not expect the
Year 2000 issue to have a material impact on its results of operations,
liquidity or financial condition. However, given the widespread nature of the
problem, and the number of factors outside of the Company's direct control,
management is continuously evaluating the risks associated with Year 2000.
Management believes, however, that the Company's ultimate ability to
successfully address Year 2000 issues will be significantly affected by external
factors such as the success of government agencies, suppliers, and customers to
address their own respective Year 2000 issues. Although management is actively
addressing and establishing contingency plans to deal with these external
factors, they utlimately are beyond managements' control.
RESULTS OF OPERATIONS
Net earnings were $2,902,000 for the nine months ended September
30, 1998 as compared to $2,720,000 for the same period in 1997. Net earnings
were $960,000 for the quarter ended September 30, 1998 as compared to $888,000
during the same quarter in 1997.
As in most financial institutions, a major element in analyzing
the statement of earnings is net interest income which is the excess of interest
earned over interest paid. This is particularly true with the volatility of
interest rates encountered in recent years.
The Company's interest income, excluding tax equivalent
adjustments, increased by $1,276,000 or 11.1% during the nine months ended
September 30, 1998 as compared to the comparable period in 1997. Interest income
for the quarter ended September 30, 1998 increased $567,000 or 14.4% when
compared to the quarter ended September 30, 1997 and $182,000 or 4.2% as
compared to the second quarter of 1998. The increases were primarily
attributable to an increase in average earning assets. The ratio of average
earning assets to total average assets was 96.4% for the nine months ended
September 30, 1998 as compared to 96.2% for the same period in 1997.
Interest expense increased by $1,048,000 for the nine months ended
September 30, 1998 or 20.0% as compared to the same period in 1997. Interest
expense for the quarter ended September 30, 1998 increased $529,000 or 29.2% as
compared to the quarter ended September 30, 1997. Interest expense for the
quarter ended September 30, 1998 increased $210,000 or 9.9% over the quarter
ended June 30, 1998. Such increases in interest expense can be attributable
primarily to an increase in average interest bearing liabilities.
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
The foregoing resulted in net interest income of $6,487,000 for
the nine months ended September 30, 1998, an increase of $228,000 or 3.6%
compared to the prior year period. Net interest income for the quarter ended
September 30, 1998 increased $38,000 or 1.8% as compared to the third quarter of
1997 and decreased $28,000 or 1.3% over the quarter ended June 30, 1998.
The provision for loan losses was $135,000 and $90,000 for the
first nine months of 1998 and 1997, respectively. The provision was $45,000 and
$30,000 for each of the quarters ended September 30, 1998 and 1997,
respectively. The provision for loan losses is based on past loan experience and
other factors which, in management's judgment, deserve current recognition in
estimating possible loan losses. Such factors include past loan loss experience,
growth and composition of the loan portfolio, review of specific loan problems,
the relationship of the allowance for loan losses to outstanding loans, and
current economic conditions that may affect the borrower's ability to repay.
Management has in place a system that is designed to identify and to monitor
loan problems on a timely basis.
The Company accounts for impaired loans under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures". These
pronouncements apply to impaired loans except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
including credit card, residential mortgage, and consumer installment loans.
A loan is impaired when it is probable that the Company will be
unable to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, the Company shall
recognize an impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or credit to the
provision for loan losses.
The Company's first mortgage single family residential, consumer
and credit card loans which total approximately $56,987,000, $2,890,000 and
$303,000, respectively at September 30, 1998, are divided into various groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
and thus are not subject to the provisions of SFAS Nos. 114 and 118.
Substantially all other loans of the Company are evaluated for impairment under
the provisions of SFAS Nos. 114 and 118.
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
The Company considers all loans on nonaccrual status to be
impaired. Loans are placed on nonaccrual status when doubt as to timely
collection of principal or interest exists, or when principal or interest is
past due 90 days or more unless such loans are well-secured and in the process
of collection. Delays or shortfalls in loan payments are evaluated with various
other factors to determine if a loan should be considered to be impaired.
Generally, delinquencies under 90 days are considered insignificant unless
certain other factors are present which indicate impairment is probable. The
decision to place a loan on nonaccrual status is also based on an evaluation of
the borrower's financial condition, collateral, liquidation value, and other
factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all
interest accrued on the loan in the current fiscal year is reversed from income,
and all interest accrued and uncollected from the prior year is charged off
against the allowance for loan losses. Thereafter, interest on nonaccrual loans
is recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt. At
September 30, 1998, the Company had no loans on nonaccrual status and there were
no nonaccrual loans outstanding at any time during the nine months and year
ended September 30, 1998 and December 31, 1997, respectively. Therefore, all
interest income during these periods was recognized on the accrual basis.
Loans not on nonaccrual status are classified as impaired in
certain cases where there is inadequate protection by the current net worth and
financial capacity of the borrower or of the collateral pledged, if any. In
those cases, such loans have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Company will sustain some loss. In
such cases, interest income continues to accrue as long as the loan does not
meet the Company's criteria for nonaccrual status.
Generally, the Company also classifies as impaired any loans the
terms of which have been modified in a troubled debt restructuring after January
1, 1995. Interest is accrued on such loans that continue to meet the modified
terms of their loan agreements. At September 30, 1998, the Company had no loans
that have had the terms modified in a troubled debt restructuring.
The Company's charge-off policy for impaired loans is similar to
its charge-off policy for all loans in that loans are charged-off in the month
when they are considered uncollectible.
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16
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Impaired loans and related allowance for loan loss amounts at
September 30, 1998 and December 31, 1997 were as follows:
1998 1997
------------------------ ----------------------
Allowance Allowance
Recorded for Recorded for
(In Thousands) Investment Loan Loss Investment Loan Loss
---------- --------- ---------- ---------
Impaired loans with allowance for
loan loss $ 2,886 600 3,454 675
Impaired loans with no allowance for
loan loss -- -- -- --
---------- --------- -------- ---------
$ 2,886 600 3,454 675
========== ========= ======== =========
The allowance for loan loss related to impaired loans was measured
based upon the estimated fair value of related collateral. The estimation of
collateral "fair value" is not an exact science and involves subjective
judgments which are not guaranteed.
The average recorded investment in impaired loans for the nine
months ended September 30, 1998 and 1997 was $3,142,000 and $4,133,000,
respectively. The related amount of interest income recognized on the accrual
method for the period that such loans were impaired was $227,000 and $297,000
for 1998 and 1997, respectively.
The following schedule details selected information as to
non-performing loans of the Company at September 30, 1998:
September 30, 1998
-----------------------
Past Due
90 Days Non-Accrual
-------- -----------
(In Thousands)
Real estate loans $ 162 --
Installment loans 6 --
Commercial -- --
------- --------
$ 168 --
======= ========
Renegotiated loans $ -- --
======= ========
At September 30, 1998, loans which include the above, totaling
$5,847,000 were included in the Company's internal classified loan list. Of
these loans $1,335,000 are real estate and $4,512,000 are commercial and other.
The collateral values, based on estimates received by management, securing these
loans total approximately $8,722,000 ($1,927,000 related to real property and
$6,795,000 related to commercial and other). Such loans are listed as classified
when information obtained about possible credit problems of the borrower has
prompted management to question the ability of the borrower to comply with the
repayment terms of the loan agreement. The loan classifications do not represent
or result from trends or uncertainties which management expects will materially
impact future operating results, liquidity or capital resources.
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at September
30, 1998 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
Non-interest income excluding securities transactions increased
$67,000 or 11.2% during the nine months ended September 30, 1998 as compared to
the same period in 1997. The increase for the quarter ended September 30, 1998
was $58,000 or 29.4% as compared to the comparable quarter in 1997. The
increases were due primarily to an increase in other fees and commissions of
$20,000 or 11.3%, an increase of $21,000 or 5.7% in service charges on deposit
accounts and a $20,000 gain on disposal of equipment included in other income.
The increases in other fees and commissions consisted primarily of increases in
document preparation fees and abstract title fees. This was the result of the
employment of an in-house attorney who performs title related work related to
mortgage loans. Commissions and service charges are monitored continually to
seek maximum return based on costs and competition.
Securities gains and losses during the nine months ended September
30, 1998 amounted to $26,000 and $4,000, respectively, as compared to gains of
$9,000 and $18,000 for the comparable period in 1997. The gains during 1998 and
1997 related to transactions in the available-for-sale category. These gains and
losses were incurred primarily in conjunction with management's strategies to
restructure the investment portfolio to improve the quality of the portfolio, to
improve maturity distribution and to maintain a flexible position to react to
market conditions.
Non-interest expense, excluding securities transactions, increased
$33,000 or 1.1% during the first nine months of 1998 as compared to the same
period in 1997. Non-interest expense excluding securities transactions was
$1,008,000 for each quarter ended September 30, 1998 and 1997. The increase
during the nine months ended September 30, 1998 resulted primarily from an
increase in salary and employee benefits which was partially offset by a
decrease in occupancy expenses. The increases in salaries and employee benefits
relate to normal cost of living and performance increases along with increases
related to the opening of a new branch. Occupancy expenses decreased due to
reduced repairs and maintenance expenses.
Management is not aware of any current recommendations by the
regulatory authorities which, if implemented, would have a material adverse
effect on the Company's liquidity, capital resources or operations.
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The following is a summary of components comprising basic and
diluted earnings per share (EPS) for the three and nine months ended September
30, 1998 and 1997:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
(In Thousands, except share amounts) 1998 1997 1998 1997
---- ---- ---- ----
Basic EPS Computation:
Numerator - income available to common
shareholders $ 960 888 2,902 2,720
-------- -------- -------- --------
Denominator - weighted average number
of common shares outstanding 533,753 536,863 534,825 536,626
-------- -------- -------- --------
Basic earnings per common share $ 1.80 1.65 5.43 5.07
======== ======== ======== ========
Diluted EPS Computation:
Numerator $ 960 888 2,902 2,720
-------- -------- -------- --------
Denominator:
Weighted average number of common
shares outstanding 533,753 536,863 534,825 536,626
Dilutive effect of stock options 824 84 824 84
-------- -------- -------- --------
534,577 536,947 535,649 536,710
-------- -------- -------- --------
Diluted earnings per common share $ 1.80 1.65 5.42 5.07
======== ======== ======== ========
IMPACT OF INFLATION
The primary impact which inflation has on the results of the
Company's operations is evidenced by its effects on interest rates. Interest
rates tend to reflect, in part, the financial market's expectations of the level
of inflation and, therefore, will generally rise or fall as the level of
expected inflation fluctuates. To the extent interest rates paid on deposits and
other sources of funds rise or fall at a faster rate than the interest income
earned on funds, loans or invested, net interest income will vary. Inflation
also affects non-interest expenses as goods and services are purchased, although
this has not appeared to have a significant effect on net earnings. If the
inflation rate stays flat or increases slightly, the effect on profits will not
be significant.
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19
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both the level
of income and expense recorded on a large portion of the Company's assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity. Based upon the nature of the Company's operations, the Company is not
subject to foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the
earnings risk associated with changing interest rates. Management seeks to
maintain profitability in both immediate and long term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the Company
meets monthly to analyze the rate sensitivity position. These meetings focus the
spread between the cost of funds and interest yields generated primarily through
loans and investments.
There have been no material changes in reported market risks
during the nine months ended September 30, 1998. Please refer to Item 2 of Part
I of this report for additional information related to market and other risks.
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20
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Shares of the Company's common stock were issued to
Directors and/or Employees pursuant to the Company's Stock
Option Plan as follows:
Number of
Shares of
Common Price
Date of Sale Stock Sold Per Share
------------ ---------- ---------
September 23, 1998 55 $ 58.15
September 24, 1998 55 $ 58.15
September 29, 1998 15 $ 58.15
The aggregate proceeds of the shares sold were $7,268.75.
There were no underwriters and no underwriting discounts or
commissions. All sales were for cash.
The Company believes that an exemption from registration of
these shares was available to the Company in that the
issuance thereof did not constitute a public offering of
securities within the meaning of the Securities Act of 1933,
as amended.
The securities sold are not convertible.
The proceeds of the sales are being used by the Company for
general corporate purposes.
(d) The only restrictions on working capital and/or dividends
are those reported in Part I.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
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21
PART II. OTHER INFORMATION, CONTINUED
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) None
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only) - This
schedule contains summary financial information extracted from the
consolidated financial statements of the Company at September 30,
1997 (unaudited) and is qualified in its entirety by reference to
such financial statements as set forth in the Company's quarterly
report on Form 10-Q for the period ending September 30, 1998.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FIRST MCMINNVILLE CORPORATION
----------------------------------------
(Registrant)
DATE: November 9, 1998 /s/ Charles C. Jacobs
-------------------------- ----------------------------------------
Charles C. Jacobs
President and Chief Executive Officer
DATE: November 9, 1998 /s/ Kenny D. Neal
-------------------------- ---------------------------------------
Kenny D. Neal
Chief Financial and Accounting Officer
22