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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, 1999
[ ] 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: November 12, 1999 - 532,156 .
----------------------------
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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, 1999 and
December 31, 1998.
Consolidated Statements of Earnings - For the three months
and nine months ended September 30, 1999 and 1998.
Consolidated Statements of Comprehensive Earnings - For the
three months and nine months ended September 30, 1999 and 1998.
Consolidated Statements of Cash Flows - For the nine
months ended September 30, 1999 and 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Disclosures required by Item 3 are incorporated by reference to
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
September 30, December 31,
1999 1998
------------ ------------
(In Thousands)
Assets
Loans $ 132,172 126,665
Less: Allowance for loan losses (1,640) (1,495)
--------- --------
Net loans 130,532 125,170
Securities:
Held to maturity, at cost (market value $35,915,000 and
$47,393,000, respectively) 36,616 46,217
Available-for-sale, at market (amortized cost $87,694,000
and $61,318,000, respectively) 83,308 61,743
Interest-bearing deposits in other banks 73 --
--------- --------
Total earning assets 250,529 233,130
Cash and due from banks 5,094 5,241
Bank premises and equipment, net of accumulated depreciation 1,911 2,058
Accrued interest receivable 2,463 2,034
Deferred tax asset 1,890 63
Other real estate 11 11
Other assets 450 490
--------- --------
$ 262,348 243,027
========= ========
Liabilities and Stockholders' Equity
Deposits $ 199,920 185,305
Securities sold under repurchase agreements 15,137 13,699
Federal funds purchased 3,100 2,000
Advances from Federal Home Loan Bank 7,200 4,000
Accrued interest and other liabilities 2,340 3,137
--------- --------
Total liabilities 227,697 208,141
--------- --------
Stockholders' equity:
Common stock, $2.50 par value; authorized 5,000,000 shares,
issued 609,150 shares and 606,795 shares, respectively 1,523 1,517
Additional paid-in capital 1,754 1,623
Retained earnings 36,878 34,017
Net unrealized gains (losses) on available-for-sale securities,
net of income tax benefit of $1,665,000 and income taxes of
$162,000 respectively (2,721) 264
--------- --------
37,434 37,421
Less cost of treasury stock of 76,994 shares and 73,769 shares,
respectively (2,783) (2,535)
--------- --------
Total stockholders' equity 34,651 34,886
--------- --------
$ 262,348 243,027
========= ========
See accompanying notes to consolidated financial statements (unaudited).
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars In Thousands, Except Per Share Amount)
Interest income:
Interest and fees on loans $2,688 2,458 7,911 7,248
Interest and dividends on securities:
Taxable securities 1,570 1,654 4,421 4,408
Tax exempt from Federal income taxes 372 355 1,091 1,010
Interest on federal funds sold -- 27 10 113
Interest on interest-bearing deposits in other banks and
other interest 1 2 1 5
------ ----- ------ ------
Total interest income 4,631 4,496 13,434 12,784
------ ----- ------ ------
Interest expense:
Interest on negotiable order of withdrawal accounts 186 125 527 371
Interest on money market demand and savings accounts 275 191 797 749
Interest on certificates of deposit 1,532 1,846 4,526 4,856
Interest on securities sold under repurchase agreements
and short term borrowings 156 114 443 213
Interest on Federal funds purchased 58 12 122 14
Interest on advances from Federal Home Loan Bank 75 53 179 94
------ ----- ------ ------
Total interest expense 2,282 2,341 6,594 6,297
------ ----- ------ ------
Net interest income 2,349 2,155 6,840 6,487
Provision for loan losses 45 45 135 135
------ ----- ------ ------
Net interest Income after provision for loan losses 2,304 2,110 6,705 6,352
------ ----- ------ ------
Other income:
Service charges on deposit accounts 116 137 333 387
Other fees and commissions 99 77 280 197
Commissions and fees on fiduciary activities 8 8 33 25
Security gains related to available-for-sale securities -- 26 8 26
Gain on sale of bank premises -- -- 166 --
Other income 7 33 25 58
------ ----- ------ ------
Total other income 230 281 845 693
------ ----- ------ ------
Other expenses:
Salaries and employee benefits 669 650 1,923 1,865
Occupancy expenses, net 53 61 154 174
Furniture and equipment expense 25 19 63 63
Data processing expense 65 50 151 147
Security losses related to available-for-sale securities -- -- -- 4
FDIC insurance 6 5 17 16
Other operating expenses 203 223 664 639
------ ----- ------ ------
Total other expenses 1,021 1,008 2,972 2,908
------ ----- ------ ------
Earnings before income taxes 1,513 1,383 4,578 4,137
Income taxes 470 423 1,396 1,235
------ ----- ------ ------
Net earnings $1,043 960 3,182 2,902
====== ===== ====== ======
Basic earnings per common share $ 1.96 1.80 5.97 5.43
====== ===== ====== ======
Diluted earnings per common share $ 1.95 1.80 5.94 5.42
====== ===== ====== ======
Dividends per share $ -- -- .60 .55
====== ===== ====== ======
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, 1999 AND 1998
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
(In Thousands)
1999 1998 1999 1998
---- ---- ---- ----
Net earnings $ 1,043 960 3,182 2,902
------- ------ ------ ------
Other comprehensive earnings, net of tax:
Unrealized gains (losses) on available-for-sale
securities arising during period, net of income
tax benefit of $564,000, income taxes of
$223,000, income tax benefit of $1,823,000
and income taxes of $233,000, respectively (921) 364 (2,980) 381
Less: reclassification adjustment for gains
included in net earnings, net of tax of
$10,000, $3,000 and $8,000, respectively -- (16) (5) (14)
------- ------ ------ ------
Other comprehensive earnings (loss) (921) 348 (2,985) 367
------- ------ ------ ------
Comprehensive earnings $ 122 1,308 197 3,269
======= ====== ====== ======
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, 1999 AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1999 1998
---- ----
(In Thousands)
Cash flows from operating activities:
Interest received $ 12,955 12,333
Fees and commissions received 671 667
Interest paid (6,429) (5,981)
Cash paid to suppliers and employees (2,571) (2,448)
Income taxes paid (1,466) (1,061)
-------- --------
Net cash provided by operating activities 3,160 3,510
-------- --------
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity securities 24,845 18,459
Proceeds from maturities of available-for-sale securities 17,790 146,950
Proceeds from sales of available-for-sale securities 3,898 17,383
Purchase of available-for-sale securities (48,018) (177,471)
Purchase of held-to-maturity securities (15,232) (19,675)
Loans made to customers, net of repayments (5,497) (8,403)
Purchase of premise and equipment (25) (25)
Proceeds from sale of premises and equipment 204 --
-------- --------
Net cash used in investing activities (22,035) (22,782)
-------- --------
Cash flows from financing activities:
Net increase in non-interest bearing, savings and NOW
deposit accounts 5,529 22,744
Net increase in time deposits 9,086 4,161
Increase in securities sold under repurchase agreement 1,438 11,470
Increase in Federal funds purchased 1,100 --
Dividends paid (1,441) (1,366)
Payments to acquire treasury stock (248) (216)
Advances from Federal Home Loan Bank 3,200 4,000
Proceeds from sales of common stock 137 55
-------- --------
Net cash provided by financing activities 18,801 40,848
-------- --------
Net increase (decrease) in cash and cash equivalents (74) 21,576
Cash and cash equivalents at beginning of period 5,241 7,111
-------- --------
Cash and cash equivalents at end of period $ 5,167 28,687
======== ========
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, 1999 AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
1999 1998
---- ----
(In Thousands)
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 3,182 2,902
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 134 159
Provision for loan losses 135 135
Securities losses related to available-for-sale -- 4
Security gains related to available-for-sale (8) (26)
Gain on sale of premises and equipment (166) --
FHLB dividend reinvestment (38) (37)
Decrease in refundable income taxes 43 226
Increase in interest receivable (429) (399)
Decrease in taxes payable (113) (53)
Increase in interest payable 165 316
(Increase) decrease in other assets (4) 76
Increase in other liabilities 259 207
----------- --------
Total adjustments (22) 608
----------- --------
Net cash provided by operating activities $ 3,160 3,510
=========== ========
Supplemental schedule of non-cash activities:
Unrealized gain (loss) in value of securities available-for-
sale, net of income tax benefit of $1,827,000 and income
taxes of $224,000, respectively $(2,985,000) 367,000
=========== ========
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, 1999 and December 31, 1998, the results of operations for
the nine months and three months ended September 30, 1999 and 1998,
comprehensive earnings for the nine months and three months ended September 30,
1999 and 1998 and changes in cash flows for the nine months ended September 30,
1999 and 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
Annual Report on Form 10-K for the year ended December 31, 1998. 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,
---------------------------
1999 1998
---- ----
(In Thousands)
Balance, January 1, 1999 and 1998, respectively $ 1,495 1,314
Add (deduct):
Losses charged to allowance (17) (14)
Recoveries credited to allowance 27 35
Provision for loan losses 135 135
------------ -----------
Balance, September 30, 1999 and 1998, respectively $ 1,640 1,470
============ ===========
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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, 1998 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 $3.0 million mature or reprice within the next twelve months.
A secondary source of liquidity is the Bank's loan portfolio. At
September 30, 1999 commercial loans of approximately $25.4 million and other
loans (mortgage and consumer) of approximately $8.3 million either will become
due or will be subject to rate adjustments within twelve months. Emphasis
continues to be placed on structuring adjustable rate loans.
As for liabilities, certificates of deposit of $100,000 or greater
of approximately $36.5 million will become due during the next twelve months.
The Bank's deposit base increased approximately $14.6 million during the nine
months ended September 30, 1999. Securities sold under repurchase agreements
increased approximately $1.4 million during the nine months ended September 30,
1999. The decrease in securities sold under agreements to resale was
approximately $1.1 million during the quarter ended September 30, 1999. The
deposit base increased approximately $11.8 million during the nine months ended
September 30, 1998. The Company did not have Federal funds sold at September 30,
1999, or at December 31, 1998. Federal funds purchased were $3.1 million and $2
million at September 30, 1999 and December 31, 1998, respectively, and $1.6
million at June 30, 1999. Advances from the Federal Home Loan Bank were $7.2
million at September 30, 1999 and were $4 million at June 30, 1999 and at
December 31, 1998. These advances are scheduled to mature over periods ranging
from one to two years.
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 except as discussed in the preceding paragraph.
The Subsidiary Bank is limited by banking regulatory agencies as
to the amount of dividends that it can pay. At September 30, 1999, the Bank can
declare during the remainder of 1999 cash dividends in an aggregate amount not
to exceed approximately $5.9 million, exclusive of any 1999 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
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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
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 stockholders' equity to total assets was 13.2% at
September 30, 1999 and 14.4% at December 31, 1998. The decline in the ratio
resulted primarily from an increase in the net unrealized loss on securities
available for sale of approximately $3 million during the nine months ended
September 30, 1999. Total assets increased 8.0% during the nine months ended
September 30, 1999. The annualized rate of return on stockholders' equity for
the first nine months of 1999 was 12.1% compared to 11.4% for the comparable
period in 1998. 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 $321,000 and $294,000 or $.60 and $.55
per share were declared in the nine months ended September 30, 1999 and 1998,
respectively. Cash dividends will be increased in the remainder of 1999 over
1998 only in the discretion of the Board of Directors and as profits permit.
Dividends paid during 1998 were $2.65 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.
The Federal Reserve Bank increased interest rates during the nine
months ended September 30, 1999 resulting in higher interest rates on new issue
debt securities. The Company's securities portfolio consists primarily of debt
securities with an average yield less than the current market rate. These
factors contributed to an unrealized loss on securities available-for-sale of
$2,985,000 (net of income tax benefit of $1,827,000) during the nine months
ended September 30, 1999.
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 26.9%, a total capital to risk-based ratio
of 28.1% and a Tier 1 leverage ratio of 13.3%, 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,
1999.
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, 1999, 4,350
shares had been exercised and 17,212 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:
- The Subsidiary Bank's primary data processing system. Jack
Henry, a major data processor, provides the primary software
and hardware for the data processing system of the Subsidiary
Bank. This is of the highest priority for day to day
operations, accounting and success of the Subsidiary 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
Subsidiary Bank, along with telecommunications systems.
- The primary securities portfolio accounting and safekeeping
system for the Subsidiary Bank.
- Credit administration - the committee has reviewed the risk
associated with Year 2000 status of the Subsidiary 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 is currently in the final phase of the Y2K Plan.
The purpose of the Y2K committee is to assess, test and correct the
Company's hardware, software and equipment to ensure these systems operate
properly in the Year 2000. The Committee has substantially completed its
assessment of the Company's systems, has identified the Company's hardware,
software and equipment that will not operate properly in the Year 2000 and has
remedied the problem with the replacement of hardware and software that is
certified by the vendors as Year 2000 compliant. As of December 31, 1998 the Y2K
committee determined that substantially all of the Company's systems will
operate properly in the Year 2000.
Programming changes and software replacement for systems that were
not Year 2000 compliant as of December 31, 1998 were completed during the first
quarter of 1999. Jack Henry has tested the Access 8.0 Operating system and the
Company has documentation on file that the operating system is Y2K compliant.
However, the Company tested the software using its own database to ensure the
readiness of the Company to serve its customer base into the Year 2000. The
testing was completed during 1998, and the test results reflected that the
software is Year 2000 compliant.
The Company has requested written documentation from vendors and
suppliers with whom the Company has a material relationship regarding their
ability to operate properly in the Year 2000. The Company will consider
alternatives related to vendors and suppliers that do not confirm their Year
2000 readiness. There can be no assurance however, that all of the Company's
significant vendors and suppliers will have remedied their Year 2000 issues. The
Company will continue to monitor its significant vendors and suppliers to seek
to minimize the Company's risk.
The Company is requiring Y2K readiness information from all of its
major borrowers. The Company believes commercial borrowers must realize the
impact that the Y2K could have on their respective businesses. Seminars,
questionnaires and individual contact with loan customers have been used and
will be continued to be used as an ongoing prevention measure during the 1999
year that is intended to ameliorate Y2K problems to the extent reasonably
practical. The Company realizes that the lack of Y2K preparation of loan
customers could have a materially adverse impact on the Company during the Year
2000.
Customer awareness of the Company's Y2K readiness is critical. The
steps taken by the Company to prepare for the Year 2000 will be shared with
customers through Quarterly Newsletters, statement stuffers and the Y2K training
of employees. The Company believes customers must have a high confidence level
in the Company at the end of 1999 to avoid the potential for mass withdrawals of
funds from the Company.
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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 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 together with 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 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, vendors 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 ultimately are beyond management's control.
The Board of Directors is aware of the Y2K problem and is receiving
monthly updates on the Y2K Committee's progress. The Board has approved the
Company's written contingency plan. The plan addresses all aspects of the
Company's operation systems identifying alternative solutions. The contingency
plan identifies all of the subsidiary Banks' major processing systems as
critical, semi-critical and non-critical. A processing solution is in place and
tested has been successfully completed on each of these applications detailing
information on alternative processors and their capabilities.
The foregoing notwithstanding, management does not currently
believe that the costs of assessment, remediation, or replacement of the
Company's systems, or the potential failure of third parties' systems will have
a material adverse effect on the Company's business, financial condition,
results of operations, or liquidity based on the published information known to
management at this time.
RESULTS OF OPERATIONS
Net earnings were $3,182,000 for the nine months ended September
30, 1999 as compared to $2,902,000 for the same period in 1998. Net earnings
were $1,043,000 for the quarter ended September 30, 1999 as compared to $960,000
during the same quarter in 1998.
As in most financial institutions, a major element in analyzing the
statement of earnings is net interest income which is the excess of interest
earned over interest paid. The net interest margin could be materially affected
during periods of volatility in interest rates.
The Company's interest income, excluding tax equivalent
adjustments, increased by $650,000 or 5.1% during the nine months ended
September 30, 1999 as compared to the comparable period in 1998. Interest income
for the quarter ended September 30, 1999 increased $135,000 or 3% when compared
to the quarter ended September 30, 1998 and $197,000 or 4.4% as compared to the
second quarter of 1999. The increases were primarily attributable to an increase
in average earning assets. The ratio of average earning assets to total average
assets was 96.1% for the nine months ended September 30, 1999 as compared to
96.4% for the same period in 1998.
14
15
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Interest expense increased by $297,000 for the nine months ended
September 30, 1999 or 4.7% as compared to the same period in 1998. Interest
expense for the quarter ended September 30, 1999 decreased $59,000 or 2.5% as
compared to the quarter ended September 30, 1998. Interest expense for the
quarter ended September 30, 1999 increased $111,000 or 5.1% over the quarter
ended June 30, 1999. The increases in interest expense can be attributable
primarily to an increase in average interest bearing liabilities. The decrease
in interest expense during the third quarter of 1999 as compared to the same
period in 1998 was due to the maturity in October, 1998 of a certificate of
deposit of approximately $21,000,000 belonging to one customer. This certificate
was deposited during the third quarter 1998 and was distributed to members of
the customer's family during the fourth quarter of 1998.
The foregoing resulted in net interest income of $6,840,000 for
the nine months ended September 30, 1999, an increase of $353,000 or 5.4%
compared to the prior year period. Net interest income for the quarter ended
September 30, 1999 increased $194,000 or 9.0% as compared to the third quarter
of 1998 and $86,000 or 3.8% over the quarter ended June 30, 1999.
The provision for loan losses was $135,000 for the first nine
months of 1999 and 1998, respectively. The provision was $45,000 for each of the
quarters ended September 30, 1999 and 1998, 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.
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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
The Company's first mortgage single family residential, consumer
and credit card loans which total approximately $62,778,000, $2,808,000 and
$288,000, respectively at September 30, 1999, 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.
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, 1999, the Company had one loan with a balance of approximately
$98,000 and which was placed on nonaccrual status during the latter part of the
third quarter 1999 and there were no nonaccrual loans outstanding at any other
time during the nine months and year ended September 30, 1999 and December 31,
1998, 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, 1999, 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.
16
17
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Impaired loans and related allowance for loan loss amounts at
September 30, 1999 and December 31, 1998 were as follows:
1999 1998
----------------------- -----------------------
Allowance Allowance
Recorded for Recorded for
(In Thousands) Investment Loan Loss Investment Loan Loss
---------- --------- ---------- ---------
Impaired loans with allowance for
loan loss $ 2,073 621 3,454 675
Impaired loans with no allowance for
loan loss -- -- -- --
-------- --------- -------- ---------
$ 2,073 621 3,454 675
======== ========= ======== =========
One loan with a balance of approximately $670,000 at December 31,
1998 which had been considered impaired, was paid in full during the nine months
ended September 30, 1999. One other loan totaling approximately $600,000 at
December 31, 1998 is no longer considered impaired as the customer is now in
compliance with the terms of the loan agreement.
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, 1999 and 1998 was $2,619,000 and $3,142,000,
respectively. The related amount of interest income recognized on the accrual
method for the period that such loans were impaired was $173,000 and $227,000
for 1999 and 1998, respectively.
The following schedule details selected information as to
non-performing loans of the Company at September 30, 1999:
September 30, 1999
--------------------------
Past Due
90 Days Non-Accrual
------- -----------
(In Thousands)
Real estate loans $ 200 --
Installment loans 26 --
Commercial 146 98
---------- ---------
$ 372 98
========== =========
Renegotiated loans $ -- --
========== =========
At September 30, 1999, loans which include the above, totaling
$6,884,000 were included in the Company's internal classified loan list. Of
these loans $1,814,000 are real estate and $5,070,000 are commercial and other.
The collateral values, based on estimates received by management, securing
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18
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
these loans total approximately $9,691,000 ($2,622,000 related to real property
and $7,069,000 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.
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at September
30, 1999 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
$170,000 or 25.5% during the nine months ended September 30, 1999 as compared to
the same period in 1998. There was a decrease during the quarter ended September
30, 1999 of $25,000 or 9.8% as compared to the comparable quarter in 1998. The
increase for the nine months ended September 30, 1999 was primarily the result
of a gain on the sale of branch facility totaling $166,000. A newly constructed
branch facility opened in 1996 which replaced the former branch. The decrease
during the third quarter of 1999 as compared to the same period in 1998 was the
result of decreases in insufficient funds and returned check charges which are
included in service charges on deposit accounts. The increases in other fees and
commissions consisted primarily of increases in document preparation fees and
abstract title fees. Commissions and service charges are monitored continually
to seek maximum return based on costs and competition.
Securities gains during the nine months ended September 30, 1999
amounted to $8,000 as compared to gains of $26,000 and losses of $4,000 for the
comparable period in 1998. The gains during 1999 and 1998 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
$68,000 or 2.3% during the first nine months of 1999 as compared to the same
period in 1998. Non-interest expense excluding securities transactions was
$1,021,000 and $1,008,000 for each quarter ended September 30, 1999 and 1998,
respectively. The increase during the nine months ended September 30, 1999
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, 1999 and 1998:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
(In Thousands, except share amounts) 1999 1998 1999 1998
---- ---- ---- ----
Basic EPS Computation:
Numerator - income available to common
shareholders $ 1,043 960 3,182 2,902
---------- --------- --------- ---------
Denominator - weighted average number
of common shares outstanding 532,300 533,753 533,064 534,825
---------- --------- --------- ---------
Basic earnings per common share $ 1.96 1.80 5.97 5.43
========== ========= ========= =========
Diluted EPS Computation:
Numerator $ 1,043 960 3,182 2,902
---------- --------- --------- ---------
Denominator:
Weighted average number of common
shares outstanding 532,300 533,753 533,064 534,825
Dilutive effect of stock options 2,375 824 2,375 824
---------- --------- --------- ---------
534,675 534,577 535,439 535,649
---------- --------- --------- ---------
Diluted earnings per common share $ 1.95 1.80 5.94 5.42
========== ========= ========= =========
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 is not
expected to be significant.
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20
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, 1999. Please refer to Item 2 of Part
I of this report for additional information related to market and other risks.
20
21
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
------------ ---------- ---------
July 8, 1999 55 $ 58.15
July 27, 1999 10 $ 58.15
August 27, 1999 20 $ 58.15
September 1, 1999 1,000 $ 58.15
September 8, 1999 15 $ 58.15
September 29, 1999 130 $ 58.15
The aggregate proceeds of the shares sold were $71,525.
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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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,
1998 (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, 1999.
(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 12, 1999 /s/ Charles C. Jacobs
----------------------- ------------------------------------
Charles C. Jacobs
President and Chief Executive Officer
DATE: November 12, 1999 /s/ Kenny D. Neal
----------------------- ------------------------------------
Kenny D. Neal
Chief Financial and Accounting Officer
23