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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB/A
Amendment No. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Murfreesboro Bancorp, Inc.
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(Name of Small Business Issuer in its charter)
Tennessee 62-1694317
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
615 Memorial Boulevard, Murfreesboro, Tennessee 37129
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (615) 890-1111
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered under Section 12(g) of the Act:
Common Stock
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(Title of class)
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS AND DEVELOPMENT OF THE COMPANY
Murfreesboro Bancorp, Inc. (the "Company") is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended, and became so upon its
formation of the Bank of Murfreesboro (the "Bank"). An application was approved
by the Federal Reserve Bank of Atlanta ("FRB"). See SUPERVISION & REGULATION.
The Company was incorporated under the laws of the State of Tennessee as a
Tennessee corporation on October 21, 1996. The Company's activities will be
conducted primarily through its subsidiary, the Bank. The Bank began its
operations on October 6, 1997. Except for the issuance of one share of common
stock to the organizer for $25, the Company was inactive prior to January 1,
1997. The offices of the Company are located at 607 and 615 Memorial Boulevard,
Murfreesboro, Tennessee 37129, and its telephone number is (615) 890-1111. Its
permanent offices will be the same as the offices of the Bank. See BUSINESS OF
THE BANK - General.
The Directors have determined that there are a number of advantages in forming
the Company to own the Bank. The first to be considered is the general planning
flexibility that a bank holding company offers. State and federal banking laws
restrict not only the activities in which banks are allowed to engage, but also
the general operations and procedures a bank may follow. The bank holding
company offers increased flexibility in such areas as estate planning,
acquisitions, expanded range of permissible activities to meet bank and non-bank
competition, capital formation options, and facilitation of a more rapid capital
generation through retained earnings. Basically, this corporate structure will
allow more options.
The formation of a bank holding company can also be an advantage to the whole
banking entity. A more efficient bank can offer services to its customers at a
lower price or can offer additional or better services at the same price.
Nonbanking subsidiaries of a bank holding company can also offer services to the
community which the bank is unable to provide.
Other advantages include added tax strategies, the ability to acquire bank
assets in other states, and the opportunities to acquire thrift institutions
that might not be available without a holding company structure. While the
Company has no present plans to form any other subsidiaries or make other
acquisitions other than the Bank at this time, the Directors determined that
this would be the easiest, most efficient, and cheapest time to form a bank
holding company so the Company and Bank can take advantage of opportunities
immediately when they arise.
BUSINESS OF THE BANK
GENERAL
The Bank is an independent and locally oriented bank headquartered in
Murfreesboro, Rutherford County, Tennessee. The Company believes that the
existing and future banking market in Murfreesboro presents an excellent
opportunity for a new locally oriented bank for several reasons: (i) the recent
sale of another community bank to an out-of-county bank holding company, (ii) a
locally oriented and managed institution can better assess the commercial
banking needs of local businesses and more timely respond to the needs of
customers, and (iii) the strength of the Murfreesboro economy can provide a
solid foundation for growth of local financial institutions. It is expected that
the Bank will provide a full range of banking and related financial services
with a focus on service to customers and small business.
The Bank applies the same standards and requirements in the conduct of all
facets of its business to all of its customers. The general banking business
conducted includes the receipt of deposits, making of loans,
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issuance of checks, acceptance of drafts, consumer credit operations, and all
aspects of a full service bank, including the authority to operate a trust
department, as approved by the Tennessee Department of Financial Institutions
("TDFI") and the Federal Deposit Insurance Corporation ("FDIC.")
DESCRIPTION OF BUSINESS
The mission of the Company is to enhance shareholder value while serving the
financial needs of the Rutherford County community, its businesses (including
minority-owned), and its citizens,(including low-income families). The Bank is
in the financial services business and charged with the responsibility of
serving the financial needs of businesses and families in the market area.
The primary mission of the Bank is to maximize its sustainable earnings.
Management wants to maximize the total earnings of the Bank over the long term.
When appropriate, the Bank will sacrifice short-term earnings for higher profits
in the future.
The Bank will be a responsible citizen and business leader of Rutherford County.
The Bank will take its citizenship duties seriously and will strive to take
actions that are in the best interest of the community.
Providing financial services to the customers is the business of the Bank. The
products are designed to meet the financial needs of the customers, the hours
are to be set to meet the needs of customers, and the employees are hired to
meet the needs of the customers. High quality customer service is also a mission
of the Bank. It is only through the accomplishment of this mission that the
Bank's growth and profitability goals can be achieved.
The major asset with which to accomplish the Bank's mission is the employees.
Without dedicated and responsible employees, it would be impossible for the Bank
to be a responsible citizen of the community or to render high quality customer
service. A mission of the Bank, therefore, is to be a responsible employer. All
Bank employees will be treated with dignity and respect. All will be given equal
opportunity regardless of race, sex, age, or physical disability.
The directors believe that with Mr. William E. Rowland as President and Chief
Executive Officer, they can attract experienced local bankers with experience in
the Rutherford County market and having a customer base that will allow the Bank
to grow its deposits and loans in a manner to become cumulatively profitable. It
is the intent of management to concentrate on controlled growth in a manner to
build a network servicing a quality customer base in Rutherford County. The
focus will be to serve Rutherford County from a centralized location in
Murfreesboro. The target customer will be individuals having strong ties to the
local market. The Bank's marketing will be directed toward individuals who feel
that the Murfreesboro and the Rutherford County market is their home and the
center of their world and to be differentiated from the individual that views
Murfreesboro as a bedroom community of Nashville which is the focus of their
employment, business, shopping and/or social activities.
It is the intent of the Bank to concentrate on the Murfreesboro/Rutherford
County market and to search for avenues to provide banking services at the least
possible cost. Full service brick and mortar branches carry the cost burden of
the opportunity cost on the investment, depreciation on the building and
equipment, and personnel cost. Instead of adding numerous branch locations, the
Bank wi11 operate from one or two locations (preferably one) and search for ways
to provide a network to deliver service throughout the community by the use of
Automated Teller Machines ("ATM's"), credit cards, debit cards, home banking and
the use of other future electronic vehicles. It will be the objective to provide
personal hometown banking by having bankers that know the market and are
sensitive to the financial needs of the customer. Management selected computer
services that allow the Bank to provide the state of the art electronic
products. It will be the Bank's objective to maintain a competitive advantage
through cost control and by avoiding the costs associated with a brick and
mortar branch system.
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Commercial Banking The range of services provided by the Bank in the commercial
banking area include business loans, both short and long term, secured and
unsecured, money management services and transaction services. Most of the
services to be offered in this market are anticipated to be proprietary, with
some reliance upon services developed by other financial service institutions.
The Bank's targeted market in the commercial banking area is small to
medium-sized businesses. Typically, these commercial customers have annual
revenues of $100 million or less and probably encompass most of the local
businesses in the Bank's market area. Certain not-for-profit and governmental
entities may also find the Bank's services attractive.
The Bank's focus in the commercial banking market is to provide intensive,
high-quality service for its customers. Particularly in the credit service area,
the Bank endeavors to give its commercial customers access to a highly-trained
servicing team of credit and deposit service specialists who remain with the
customer relationship for long periods of time. Credit decision-making is
customized to meet the borrower's financial needs and designed for rapid
response. Credit judgments involve the Bank's senior management and, where
legally required, involve the Directors of the Bank.
Consumer Banking The Bank offers a broad range of financial services designed to
meet the credit, thrift, transaction and trust needs of the general consumer
market place. These services include traditional demand and time deposit
accounts, safe deposit facilities, automated teller facilities, credit card
services, traveler's checks, and consumer loans including mortgage loans.
Trust Services The Bank intends to offer limited trust services, such as
pre-paid funeral contracts and simple personal trusts. The Bank has trust powers
but has not exercised the powers at this time.
COMPETITION
The Bank is subject to intense competition from various financial institutions
and other companies or firms that offer financial services. The Bank competes
for deposits with other commercial banks, savings and loan associations, credit
unions, and issuers of commercial paper and other securities, such as
money-market and mutual funds. In making loans, the Bank competes with other
commercial banks, savings and loan associations, consumer finance companies,
credit unions, leasing companies, and other lenders.
In Rutherford County, there are 10 commercial banks, with at least 36 offices
actively engaged in banking activities, including 8 major state-wide financial
institutions. In addition, there is one savings and loan association with 6
locations and numerous credit unions, finance companies, and other financial
service providers. Total deposits held by banks and savings and loan
associations in Rutherford County as of June 30, 1997 were over $1.3 billion. Of
those deposits, banks held approximately 84% and savings and loans held
approximately 16%. Of the bank deposits, the offices of major bank holding
companies held 95.86%.
REGULATORY APPROVALS
The Bank received a bank certificate of authority from the Tennessee department
of Financial Institutions ("TDFI") on September 30, 1997 and approval from the
Federal Deposit Insurance Corporation ("FDIC") on September 5, 1997. The Bank
has insurance on deposits up to $100,000 by the Bank Insurance Fund. The Bank is
subject to regulation by the TDFI and the FDIC. The Company is subject to
regulation by the FRB and the laws of the state of Tennessee relating to
corporations. See SUPERVISION AND REGULATION.
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EMPLOYEES
The Bank had a staff of approximately 14 full-time employees at December 31,
1997 and 18 full-time employees and 1 part-time employee at March 31, 1998.
William E. Rowland serves as the Bank's President and Chief Executive Officer,
and Joyce Ewell serves as the Bank's senior vice president. The Bank offers a
typical health and disability insurance plan to its employees. Beginning in 1998
the Bank instituted a 401(k) employee benefit plan.
POLICIES AND PROCEDURES
The Board of Directors of the Bank established a statement of lending policies
and procedures, or loan policy, to be used by loan officers of the Bank when
making loans. The loan policy incorporates general lending principles and then
more specific principles/policies relating to specific departments within the
Bank's lending framework. The loan policy defines the trade area as the
Rutherford County market and surrounding counties, and any loan made outside
such area will require approval of the Bank's loan committee. The Bank's goal is
to achieve a loan to deposit ratio of 80% and a specific breakdown of the
targeted types of loans are included in the loan policy. Lending limits of
specific officers and the loan committee are included.
The Board of Directors of the Bank also established an investment policy which
guides Bank officers in determining the investment portfolio of the Bank. The
Bank's investment policy sets forth the general objectives and criteria for the
Bank in making investments in securities. The investment policy establishes and
sets forth the duties of an investment committee which shall control the
policies concerning the investment portfolio. A portfolio investment manager
shall be appointed to be responsible for the day to day operations and
implementation of the policies and strategies set forth by the investment
committee.
As banking has become more volatile, it has become increasingly more difficult
to produce adequate earnings on a consistent basis. In addition, federal
regulators have become quite interested in the asset/liability management of
banks; and examiners are strongly suggesting that written policies and
procedures are necessary. Therefore, the Board of Directors of the Bank has
developed a written statement detailing the Bank's asset/liability policy and
procedures to minimize the Bank's interest rate risk. The goal of the policy is
to maintain adequate earnings in all future interest rate environments. The
asset/liability management policy establishes an asset/liability management
committee which is assigned the responsibility to establish procedures to
achieve the Bank's goals while adhering to prudent banking policies. The
analysis to be conducted by the committee is set forth in the policy as well as
other duties and responsibilities. One such duty is to address the liquidity
needs of the Bank to assure that sufficient funds are available to meet credit
demands and deposit withdrawals.
Other policies include an Interbank Liabilities policy, Code of Ethics, and
Audit policy.
THE MARKET
The Bank will focus its efforts and attention on serving consumers and
businesses in the Murfreesboro (the "City") and Rutherford County (the "County")
area. According to the Murfreesboro Chamber of Commerce, Rutherford County has
experienced a strong and steady growth pattern in the past several years. There
has been an excellent increase in new industry, new business, and population.
This is a result of the many advantages the community has to offer. There is a
desire on the part of the City and County officials to have the community grow
and prosper. An avid interest in the potential of the county by the business and
civic leaders as well as its residents makes this a progressive community.
Rutherford County has grown to become the fifth most populous of Tennessee's
ninety-five counties. Population at June 30, 1997 was estimated to be 154,333.
This reflects an increase of 35,583, or 37.5%, from the 1990 United States
Census report of 118,750. This makes Rutherford County the fastest growing
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county in Tennessee during the 1990's based on actual population increase and
second fastest growing county in Tennessee based upon percentage increase
(second only to Williamson County which has grown 38.1% over the same period.)
It is also part of the eight county Nashville Standard Metropolitan Statistical
Area which is the largest SMSA in Tennessee.
The city of Murfreesboro (which serves as the county seat of Rutherford County)
has a population of 59,506 according to a special 1998 census. This is a 32.3%
increase from the 1990 United States Census population of 44,922. In addition,
this reflects a 13.7% in the past two years from the 1996 special census of
52,341. Murfreesboro is the sixth largest city in the state (behind Memphis,
Nashville, Knoxville, Chattanooga and Clarksville.)
The population of Smyrna (which is located in the northwest section of
Rutherford County) totaled 24,077 in a special 1998 census. This represents an
increase of 10,430, or 76.4%, from the 1990 U.S. census population of 13,647.
LaVergne (also located in the northwest area of Rutherford County) reflected an
increase of 8,502, or 141.7%, in its special 1998. The population according to
this census was 16,007 compared to a 1990 U.S. Census of 7,499. Of the ten
fastest growing cities in Tennessee with populations of 5,000 or more, three are
located in Rutherford. No other county had more than two of the ten fastest
growing cities.
The U.S. Bureau of the Census estimated Tennessee's population in 1995 to be 3.5
million people making it the seventeenth most populous state. By the year 2025
the population is expected to be increase by 1.4 million people to 6.7 million
people making it the fifteenth most populous state. The state's net gain during
this time will be the thirteenth largest of the fifty states and District of
Columbia. By the year 2000 Tennessee is projected to have a population of 5.7
million people making it the sixteenth most populous state. Its rate of increase
during that five year span is projected to be ninth largest net gain of the
fifty states and District of Columbia.
Rutherford County had an unemployment rate of 3.2% for March 1998 compared to
4.7% for Tennessee and a national average of 5.0%.
Rutherford County is the geographic center of Tennessee, located Southeast of
Nashville on the major interstate (1-24) corridor between Nashville and
Chattanooga. Chief topographic features are the Stones River and J. Percy Priest
Lake. Rutherford County encompasses 612 square miles and the average elevation
is 619 feet above sea level. Rutherford County is easily associated as a
"bedroom" community for Nashville because of its natural proximity, but this
term is less and less accurate as more and more people, companies, and
diversified employment/career opportunities take root in our area for local
employment, educational and shopping interests, resulting in less medium-haul
commuting.
The county seat, Murfreesboro, sits in the center of Rutherford County along the
river named after early settler and explorer Uriah Stone, who in 1775 navigated
up the river from its mouth near Fort Donelson (now Nashville). The community
and local area grew along with the new state of Tennessee. The first county seat
was established in the community of Jefferson, near Smyrna, and in 1811 the town
of Cannonsburgh was incorporated as the County seat. After only 33 days the name
of the town was changed to Murfreesboro in honor of Revolutionary War Colonel
Hardy Murfree, one of several early settlers.
Rutherford County, with beginnings all the way back to the first years of the
new state of Tennessee, was actually began as part of a much larger geographic
area that spanned east towards the Cumberland Plateau, and south towards the
southern edge of the Highland Rim. Originally part of Davidson County and the
government of what was Fort Donelson and Nashborough, in 1803 the area was
granted county status independent of what we now know as Nashville. In just a
few more years, as the American westward movement became more pronounced, the
legislature was petitioned to carve new counties out of the area that was
Rutherford County, but still left one of the larger-sized area counties in the
Middle Tennessee area (620+ square miles).
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Murfreesboro was the state capital of Tennessee from 1819 to 1825, during which
time the center of the downtown area was the economic hub of the state. However,
political and economic influences from the city (and larger river port) of, just
32 miles to the northwest, drew away the center of state government to its
present home. Murfreesboro nevertheless remained a significant economic center
based largely on its agriculture and location between Nashville and Chattanooga.
There are four incorporated municipalities in the County which are Murfreesboro,
Smyrna, LaVergne, and Eagleville. Many other smaller communities such as
Lascassas, Milton, Walter Hill, Almaville, Christiana, Fosterville, Kittrell,
Leanna, Crescent, Barfield, Compton, Rockvale, Windrow and others, are
unincorporated but still rural centers for residential and agricultural life.
Rutherford County had a population estimated at 148,000 in 1995 by the State of
Tennessee and 154,333 in 1997. The rate of growth indicates the area is one of
the fastest growing centers in Tennessee and the Southeastern United States.
Official population figures for the area are as follows:
Population Figures (1990 US Census)
Murfreesboro 44,922
Smyrna 13,647
LaVergne 7,499
Eagleville 462
RUTHERFORD COUNTY 140,700
Murfreesboro and Smyrna both have a substantial downtown area and several
shopping centers which provide a variety of commercial establishments for
shopping convenience. Specialty shops offer unique buying opportunities.
LaVergne has the county's largest industrial park, which functions in part as
one of the largest distribution centers in the Southeastern United States.
Murfreesboro is home to many antique and collectible item dealers. It holds the
reputation of being the "Antique Center of the South," in tandem with much of
its antebellum heritage.
According to the Tennessee Department of Economic and Community Development the
major employers in Rutherford County include:
<TABLE>
<CAPTION>
FIRM PRODUCT/SERVICE TOTAL EMPLOYMENT
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<S> <C> <C>
Nissan Motor Manufacturing Corp., USA Car Manufacturing 6,070
Rutherford County Government Government 2,657
Ingram Distribution Publications 2,000
Whirlpool Corporation Refrigerators, Air Conditioners 2,000
Bridgestone/Firestone Tires 1,900
Middle Tennessee State University University 1,650
Alvin C. York V.A. Medical Center Hospital 1,448
City of Murfreesboro Municipality 1,232
Middle Tennessee Medical Center Hospital 1,030
Perrigo of Tennessee Plastic Bottles and Personal Care Products 1,000
Caradon Better-Bilt Aluminum Storm Doors, Windows 850
State Farm Insurance Co. Insurance 809
National HealthCare, L.P. Health Care 800
Waldenbooks Publications 774
</TABLE>
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Per capita personal income in Rutherford County has grown 23.6% between 1990
through 1994 from $15,948 to $19,716. During the same period, total employment
has grown 24.8% from 62,723 to 78,306 according to the United States Department
of Commerce. Total employment has continued to grow to over 80,000 at the end of
June 1996.
Middle Tennessee State University ("MTSU"), established in 1911, has a
significant impact on the community in the Rutherford County area. With an
enrollment of more than 17,000, MTSU offers 143 degree programs in five
under-graduate colleges and a graduate college, and is the fastest growing and
third largest university in Tennessee. MTSU is the site for many academic,
cultural, sporting, and entertainment events, including MTSU's Murphy Center,
which is a popular venue for super star entertainment.
SUPERVISION AND REGULATION
The following summaries of statutes and regulations affecting banks and bank
holding companies do not purport to be complete; however, these summaries
include all the material aspects of the statutes and regulations. Such summaries
are qualified in their entirety by reference to the statutes and regulations
described.
BANK HOLDING COMPANY ACT OF 1956
The Company is a bank holding company registered under the provisions of the
federal Bank Holding Company Act of 1956, as amended (the "Act"), and
consequently will be subject to examination by the Board of Governors of the
Federal Reserve System.
A bank holding company is required to file with the Federal Reserve annual
reports and other information regarding its business operations and those of its
subsidiaries. It is also subject to examination by the Federal Reserve and is
required to obtain Federal Reserve approval prior to acquiring, directly or
indirectly, ownership or control of any voting shares of any bank, if, after
such acquisition, it would own or control, directly or indirectly, more than 5%
of the voting stock of such bank unless it already owns a majority of the voting
stock of such bank. Furthermore, a bank holding company is, with limited
exceptions, prohibited from acquiring direct or indirect ownership or control of
any voting stock of any company which is not a bank or a bank holding company,
and must engage only in the business of banking or managing or controlling banks
or furnishing services to or performing services for its subsidiary banks. One
of the exceptions to this prohibition is the ownership of shares of a company
the activities of which the Federal Reserve Board has determined to be so
closely related to banking or management or controlling banks as to be proper
incident thereto.
A bank holding company and its subsidiaries are also prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit or
provision of any property or service. Thus, an affiliate of a bank holding
company may not extend credit, lease, sell property, or furnish any services or
fix or vary the consideration for these on the condition that (i) the customer
must obtain or provide some additional credit, property, or services from or to
its bank holding company or subsidiaries thereof or (ii) the customer may not
obtain some other credit, property, or services from a competitor, except to the
extent reasonable conditions are imposed to assure the soundness of the credit
extended. Proposals to allow some exceptions to these rules recently have been
enacted, and additional regulatory relief on this issue is pending.
In approving acquisitions by bank holding companies of banks and companies
engaged in the banking-related activities described above, the Federal Reserve
considers a number of factors, including the expected benefits to the public
such as greater convenience, increased competition, or gains in efficiency,
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as weighed against the risks of possible adverse effects such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. The Federal Reserve is also empowered to
differentiate between new activities and activities commenced through the
acquisition of a going concern.
The Attorney General of the United States may, within 15 days after approval by
the Federal Reserve Board of an acquisition, bring an action challenging such
acquisition under the federal antitrust laws, in which case the effectiveness of
such approval is stayed pending a final ruling by the courts. Failure of the
Attorney General to challenge an acquisition does not, however, exempt the
holding company from complying with both state and federal antitrust laws after
the acquisition is consummated or immunize the acquisition from future challenge
under the anti-monopolization provisions of the Sherman Act.
TENNESSEE BANKING ACT; FEDERAL DEPOSIT INSURANCE ACT
The Bank was incorporated under the banking laws of the State of Tennessee and,
as such, is subject to the applicable provisions of those laws. The Bank is
subject to the supervision of the TDFI and to regular examination by that
department. The Bank's deposits are insured by the FDIC through the Bank
Insurance Fund ("BIF"), and it is, therefore, subject to the provisions of the
Federal Deposit Insurance Act and to examination by the FDIC.
Tennessee statutes and the Federal Deposit Insurance Act ("FDIA") regulate a
variety of the banking activities of the Bank, including required reserves,
investments, loans, mergers and consolidations, issuance of securities, payment
of dividends, and establishment of branches. There are certain limitations under
federal and Tennessee law on the payment of dividends by banks. Under Tennessee
law, the directors of a state bank, after making proper deduction for all
expenditures, expenses, taxes, losses, bad debts, and any write-offs or other
deductions required by the TDFI, may credit net profits to the bank's undivided
profits account, and may quarterly, semi-annually, or annually declare a
dividend in such amount as they shall judge expedient after deducting any net
loss from the undivided profits account and transferring to the bank's surplus
account (1) the amount (if any) required to raise the surplus ("Additional
Paid-in-Capital Account") to 50% of the capital stock and (2) the amount
required (if any), but not more than 10% of net profits, until the
paid-in-surplus account equals the capital stock account, provided that the bank
is adequately reserved against deposits and such reserves will not be impaired
by the declaration of the dividend.
A state bank, with the approval of the TDFI, may transfer funds from its surplus
account to the undivided profits (retained earnings) account or any part of its
paid-in-capital account. The payment of dividends by any bank is dependent upon
its earnings and financial condition and, in addition to the limitations
referred to above, is subject to the statutory power of certain federal and
state regulatory agencies to act to prevent what they deem unsafe or unsound
banking practices. The payment of dividends could, depending upon the financial
condition of the Bank, be deemed to constitute such an unsafe or unsound
practice. Tennessee law prohibits state banks from paying dividends other than
from undivided profits, and when the surplus account is less than the capital
stock account, imposes certain other restrictions on dividends. The FDIA
prohibits a state bank, the deposits of which are insured by the FDIC, from
paying dividends if it is in default in the payment of any assessments due the
FDIC.
State banks also are subject to regulation respecting the maintenance of certain
minimum capital levels (see below), and the Bank will be required to file annual
reports and such additional information as the Tennessee Banking Act and FDIC
regulations require. The Bank also is subject to certain restrictions on loan
amounts, interest rates, "insider" loans to officers, directors and principal
shareholders, tie-in arrangements, and transactions with affiliates, as well as
many other matters. Strict compliance at all times with state and federal
banking laws will be required.
Tennessee law contains limitations on the interest rates that may be charged on
various types of loans, and restrictions on the nature and amount of loans that
may be granted and on the types of investments which
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may be made. The operations of banks are also affected by various consumer laws
and regulations, including those relating to equal credit opportunity and
regulation of consumer lending practices. All Tennessee banks, must become and
remain insured banks under the FDIA. (See 12 U.S.C. ss. 1811, et seq.).
Under Tennessee law, state banks are prohibited from lending to any one person,
firm or corporation amounts more than fifteen percent of its equity capital
accounts, except (i) in the case of certain loans secured by negotiable title
documents covering readily marketable nonperishable staples or (ii) with the
prior approval of the Bank's Board of Directors or finance committee (however
titled), the Bank may make a loan to one person, firm or corporation of up to
25% of its equity capital accounts.
Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") on August 9, 1989. FIRREA provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC insured depository institution in danger of default. FIRREA provides that
certain types of persons affiliated with financial institutions can be fined by
the federal regulatory agency having jurisdiction over a depository institution
with federal deposit insurance (such as the Bank) could be fined up to $1
million per day for each violation of certain regulations related (primarily) to
lending to and transactions with executive officers, directors, and principal
shareholders, including the interests of these individuals. Other violations may
result in civil money penalties of $5,000 to $25,000 per day or in criminal
fines and penalties. In addition, the FDIC has been granted enhanced authority
to withdraw or to suspend deposit insurance in certain cases.
The Federal Deposit Insurance Bank Improvement Act of 1991 ("FDICIA") which was
enacted on December 19, 1991, substantially revised the depository institution
regulatory and funding provisions of the FDIA and made revisions to several
other federal banking statutes. Among other things, FDICIA requires the federal
banking regulators to take "prompt corrective action" in respect of FDIC-insured
depository institutions that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under applicable regulations, a FDIC-insured depository
institution is defined to be well capitalized if it maintains a Leverage Ratio
of at least 5%, a risk adjusted Tier I Capital Ratio of at least 6% and a Total
Capital Ratio of at least 10% and is not subject to a directive, order or
written agreement to meet and maintain specific capital levels. An insured
depository institution is defined to be adequately capitalized if it meets all
of its minimum capitals requirements. (See CAPITAL REQUIREMENTS for specifics).
In addition, an insured depository institution will be considered
undercapitalized if it fails to meet any minimum required measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to maintain a level of tangible equity equal to not
less than 2% of total assets. An insured depository institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it receives an unsatisfactory examination rating.
FDICIA generally prohibits an FDIC-insured depository institution from making
any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an amount
equal to the lesser of 5% of the depository institution's assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
<PAGE> 11
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
FDICIA contain numerous other provisions, including new accounting, audit and
reporting requirements, beginning in 1995 termination of the "too big to fail"
doctrine except in special cases, limitations on the FDIC's payment of deposits
at foreign branches, new regulatory standards in such areas as asset quality,
earnings and compensation and revised regulatory standards for, among other
things, powers of state banks, real estate lending and capital adequacy. FDICIA
also requires that a depository institution provide 90 days prior notice of the
closing of any branches.
Various other legislation, including proposals to revise the bank regulatory
system and to limit or expand the investments that a depository institution may
make with insured funds, is from time to time introduced in Congress. The TDFI
and the FDIC examine the Bank periodically for compliance with various
regulatory requirements. Such examinations, however, are for the protection of
the BIF and for depositors and not for the protection of investors and
shareholders.
INTERSTATE ACT
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act"), which was enacted on September 29, 1994, among other things
and subject to certain conditions and exceptions, (i) permits bank holding
company acquisitions commencing one year after enactment of banks of a minimum
age of up to five years as established by state law in any state, (ii) mergers
of national and state banks after May 31, 1997 across state lines unless the
home state of either bank has opted out of the interstate bank merger provision,
(iii) branching de novo by national and state banks into other states if the
state has opted-in to this provision of the Interstate Act, and (iv) certain
interstate bank agency activities after one year after enactment. Regulations
have not yet been issued under the Interstate Act. A bill has been enacted by
the Tennessee legislature which repeals the Tennessee Reciprocal Banking Act,
amends the Tennessee Bank Structure Act of 1974, and amends Tennessee's bank
branching laws by opting in to the Interstate Act. Management cannot predict the
extent to which the business of the Bank may be affected.
BROKERED DEPOSITS
The FDIC has adopted regulations under FDICIA governing the receipt of brokered
deposits. Under the regulations, a bank cannot accept a rollover or renew
brokered deposits unless (i) it is well capitalized or (ii) it is adequately
capitalized and receives a waiver from the FDICIA. A bank that cannot receive
brokered deposits also cannot offer "pass-through" insurance on certain employee
benefit accounts. Whether or not it has obtained such a waiver, an adequately
capitalized bank may not pay an interest rate on any deposits in excess of .75%
over certain prevailing market rates specified by regulation. There are no such
restrictions on a bank that is well capitalized. These brokered deposit
regulations may have an affect on the funding or liquidity of the Bank.
FDIC INSURANCE PREMIUMS
The Bank is required to pay semiannual FDIC deposit insurance assessments to the
BIF. As required by FDICIA, the FDIC adopted a risk-based premium schedule which
increased the assessment rates for most FDIC-insured depository institutions.
Under the schedule, the premiums initially ranged from $.23 to $.31 for every
$100 of deposits. Based upon certain requirements of FDICIA, effective January
1, 1994, an institution's premium assessment is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. Currently the assessment rate schedule for BIF members currently
range from no
<PAGE> 12
assessment to $.27 for every $100 of deposits. Any change in these rates and the
category of risk into which the Bank will fall could have an adverse effect on
the Bank's earnings.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.
Congress recently passed the Deposit Insurance Funds Act of 1996 to recapitalize
the Savings Association Insurance Fund ("SAIF"). The thrift industry is paying a
one-time assessment of $4.5 billion to capitalize the SAIF, and banks will bear
part of the cost of the Financing Corporation ("FICO") bonds sold from 1987-89
in an effort to shore up the former Federal Savings and Loan Insurance
Corporation. BIF-member institutions, such as the Bank, will pay one-fifth the
rate paid by SAIF members for the first three years. After January 1, 2000, BIF
and SAIF members will share the FICO payments on a pro-rata basis.
CAPITAL REQUIREMENTS
The federal regulatory agencies use capital adequacy guidelines in their
examination and regulation of banks. If the capital falls below the minimum
levels established by these guidelines, the Bank may be denied approval to
acquire or establish additional banks or non-bank businesses, or to open
facilities, or the Bank may be subject to other regulatory restrictions or
actions.
Banking organizations historically were required to maintain a minimum ratio of
primary capital to total assets of 5.5%, and a minimum ratio of total capital to
total assets of 6.0%. The primary and total capital ratio requirements have been
replaced by the adoption of risk-based and leverage capital requirements.
Risk-Based Capital Requirements The FDIC adopted risk-based capital guidelines
for banks effective after December 31, 1990. The risk-based capital guidelines
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among banks to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The ratios
are minimums. The guidelines require all federally regulated banks to maintain a
minimum risk-based total capital ratio of 8%, of which at least 4% must be Tier
I capital (see the description of Tier I capital and Tier 2 capital below).
A banking organization's qualifying total capital consists of two components:
Tier I capital (core capital) and Tier II capital (supplementary capital). Tier
I capital is an amount equal to the sum of (i) common shareholders' equity
(including adjustments for any surplus or deficit); (ii) non-cumulative
perpetual preferred stock; and (iii) minority interests in the equity accounts
of consolidated subsidiaries. Intangible assets generally must be deducted from
Tier I capital, subject to limited exceptions for goodwill arising from certain
supervisory acquisitions. Other intangible assets may be included in an amount
up to 25% of Tier I capital, provided that the asset meets each of the following
criteria: (i) the asset must be able to be separated and sold apart from the
banking organization or the bulk of its assets; (ii) the market value of the
asset must be established on an annual basis through an identifiable stream of
cash flows and there must be a high degree of certainty that the asset will hold
this market value notwithstanding the future prospects of the banking
organization; and (iii) the banking organization must demonstrate that a liquid
market exists for the asset. Intangible assets in excess of 25% of Tier I
capital generally are deducted from a banking organization's regulatory capital.
At least 50% of the banking organization's total regulatory capital must consist
of Tier I capital.
Tier II capital is an amount equal to the sum of (i) the allowance for possible
loan losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock with an original maturity of 20 years or more and
related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both
<PAGE> 13
debt and equity), perpetual debt and mandatory convertible debt securities; and
(iv) in an amount up to 50% of Tier I capital, eligible term subordinated debt
and intermediate-term preferred stock with an original maturity of five years or
more, including related surplus. The inclusion of the foregoing elements of Tier
II capital are subject to certain requirements and limitations of the FDIC.
Investments in unconsolidated banking and finance subsidiaries, investments in
securities subsidiaries and reciprocal holdings of capital instruments must be
deducted from capital. The federal banking regulators may require other
deductions on a case-by-case basis.
Under the risk-weighted capital guidelines, balance sheet assets and certain
off-balance sheet items, such as standby letters of credit, are assigned to one
of four risk weight categories (0%, 20%, 50%, or 100%) according to the nature
of the asset and its collateral or the identity of any obligor or guarantor. For
example, cash is assigned to the 0% risk category, while loans secured by
one-to-four family residences are assigned to the 50% risk category. The
aggregate amount of such asset and off-balance sheet items in each risk category
is adjusted by the risk weight assigned to that category to determine weighted
values, which are added together to determine the total risk-weighted assets for
the banking organization. Accordingly, an asset, such as a commercial loan,
which is assigned to a 100% risk category is included in risk-weighted assets at
its nominal face value, whereas a loan secured by a single-family home mortgage
is included at only 50% of its nominal face value. The application ratios are
equal to capital, as determined, divided by risk-weighted assets, as determined.
Leverage Capital Requirements The FDIC has issued a final regulation requiring
certain banking organizations to maintain additional capital of 1% to 2% above a
3% minimum Tier I Leverage Capital Ratio (Tier I capital, less intangible
assets, to total assets). In order for an institution to operate at or near the
minimum Tier I leverage capital requirement of 3%, the FDIC expects that such
institution would have well-diversified risk, no undue rate risk exposure,
excellent asset quality, high liquidity and good earnings. In general, the Bank
would have to be considered a strong banking organization, rated in the highest
category under the bank rating system and have no significant plans for
expansion. Higher Tier I leverage capital ratios of up to 5% will generally be
required if all of the above characteristics are not exhibited, or if the
institution is undertaking expansion, seeking to engage in new activities, or
otherwise faces unusual or abnormal risks.
The FDIC rule provides that institutions not in compliance with the regulation
are expected to be operating in compliance with a capital plan or agreement with
the regulator. If they do not do so, they are deemed to be engaging in an unsafe
and unsound practice and may be subject to enforcement action. Failure to
maintain capital of at least 2% of assets constitutes an unsafe and unsound
practice and may be subject to enforcement action. Failure to maintain capital
of at least 2% of assets constitutes an unsafe and unsound condition justifying
termination of FDIC insurance.
EFFECTS OF GOVERNMENTAL POLICIES
The Bank's earnings are affected by the difference between the interest earned
by the Bank on its loans and investments and the interest paid by the Bank on
its deposits or other borrowings. The yields on its assets and the rates paid on
its liabilities are sensitive to changes in prevailing market rates of interest.
Thus, the earnings and growth of the Bank are influenced by general economic
conditions, fiscal policies of the federal government, and the policies of
regulatory agencies, particularly the Federal Reserve, which establishes
national monetary policy. The nature and impact of any future changes in fiscal
or monetary policies cannot be predicted.
Commercial banks are affected by the credit policy of various regulatory
authorities, including the Federal Reserve. An important function of the Federal
Reserve is to regulate the national supply of bank credit. Among the instruments
of monetary policy used by the Federal Reserve to implement these objections are
open market operations in U.S. Government securities, changes in reserve
requirements on bank deposits, changes in the discount rate on bank borrowings,
and limitations on interest rates that banks may pay on
<PAGE> 14
time and savings deposits. The Federal Reserve uses these means in varying
combinations to influence overall growth of bank loans, investments and
deposits, and also to affect interest rates charged on loans, received on
investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including the
Federal Reserve, also affect the banking industry. Through changes in the
reserve requirements against bank deposits, open market operations in U.S.
Government securities and changes in the discount rate on bank borrowings, the
Federal Reserve influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible future
changes in interest rates, deposit levels or loan demand or with respect to the
impact of such changes on the business and earnings of the proposed Bank.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial
institutions. For example, the Depository Institutions Deregulation and Monetary
Control Act of 1980 (the "Deregulation Act") provided for the phasing out of
restrictions on deposit interest rate ceilings, the authorization of new
accounts and related services, and the expansion of the lending authority of
savings and loan associations. The Deregulation Act has altered, to a certain
extent, the competitive relationship that previously existed among financial
institutions, and it may result in a substantial reduction in the historical
distinction between the services offered by banks, savings and loan
associations, and other financial institutions.
<PAGE> 15
PART I
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
AND PLAN OF OPERATIONS
GENERAL
The Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations and Plan of Operations should be read in conjunction with
the information and tables which follow. When describing the period from January
1, 1997 until December 31, 1997, this period will be referred to as 1997. The
Company was inactive and dormant from its formation on October 21, 1996 until
December 31, 1996.
SUMMARY
Net loss for 1997 was $369,000 and the net loss for the quarter ended March 31,
1998 was $175,000.
Effective October 6, 1997, the Company and Bank began operating activities.
Prior to that time, the Company was in organization.
For the remainder of 1998, the Company will continue its objectives of
maintaining asset quality and providing superior customer service to its
markets.
FINANCIAL CONDITION
Earning Assets. Average earning assets for 1997 totaled $4,654.000, which
represented 82.6% of average total assets. Earning assets totaled $27,837,000 at
December 31, 1997. Average earning assets for the quarter ended March 31, 1998
totaled $32,587,000, which represented 91.8% of average total assets. Earning
assets totaled $39,403,000 at March 31, 1998.
Loan Portfolio. The Company's average loans for 1997 were $627,000 and for the
quarter ended March 31, 1998 were $9,876,000. The balance in total loans at
December 31, 1997 was $5,401,000 and $14,473,000 at March 31, 1998.
Investment Portfolio. The Company's investment securities portfolio averaged
$1,485,000 for 1997 and $17,619,000 for the quarter ended March 31, 1998. The
portfolio totaled $14,732,000 at December 31, 1997 and $22,364,000 at March 31,
1998.
The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities: "Held to Maturity" and "Available
for Sale." The "Available for Sale" securities are carried at fair market value,
whereas the "Held to Maturity" securities are carried at book value. At December
31, 1997, unrealized losses in the "Available for Sale" portfolio amounted to
$9,000 and $3,000 at March 31, 1998. The average balance of securities
"Available for Sale" during the quarter ended March 31, 1998 was $16,599,000 and
the balance at March 31, 1998 was $18,813,000. The average balance of securities
"Held to Maturity" during the quarter ended March 31, 1998 was $1,020,000 and
the balance at March 31, 1998 was $3,551,000. All securities held at December
31, 1997 and during 1997 were classified as "Available for Sale."
<PAGE> 16
Deposits. The Company's average deposits were $2,782,000 during 1997. This
included average noninterest-bearing deposits of $283,000, average certificates
of deposit of $1,446,000, average saving deposits of $8,000 and average interest
bearing transaction accounts of $1,045,000. The Company's average deposits for
the quarter ended March 31, 1998 were $26,873,000. This included average
non-interest bearing deposits of $1,268,000, average certificates of deposit of
$12,082,000, average savings deposits of $90,000 and average interest bearing
transaction accounts of $13,434,000. Deposits at March 31, 1998 were $33,603,000
and $21,760,000 at December 31, 1997.
Capital Resources. Shareholders' equity totaled $8,690,000 at of December 31,
1997. This included $9,068,000 of common stock and additional paid-in-capital
less a deficit of $369,000 and unrealized loss on securities available for sale
of $9,000. Shareholders' equity totaled $8,521,000 at March 31, 1998. This
included $9,068,000 of common stock and additional paid in capital less a
deficit of $544,000 and unrealized loss on securities available for sale of
$3,000.
BALANCE SHEET MANAGEMENT
Liquidity Management. Liquidity is the ability of a company to convert assets
into cash without significant loss and to raise funds by increasing liabilities.
Liquidity management involves having the ability to meet the day-to-day cash
flow requirements of its customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
investments in federal funds and maturities of investment securities. Additional
sources of liquidity are loan repayments and possible prepayments from the
mortgage-backed securities from the investment portfolio.
The liability portion of the balance sheet provides liquidity through various
interest bearing and noninterest bearing deposit accounts. At December 31, 1997
and March 31, 1998, the Company had $2,300,000 of federal funds purchase lines
available at three correspondent banks. None of these lines were drawn at March
31, 1998 or December 31, 1997.
Because of the level of capital obtained information, no additional capital
funds or notes payable are anticipated to be deemed necessary during the next
twelve months.
RESULTS OF OPERATIONS
Net Interest Income. Net interest income is the principal component of a
financial institution's income stream and represents the spread between interest
and fee income generated from earning assets and the interest expense paid on
deposits. The following discussion is on a fully taxable equivalent basis.
Net interest income for 1997 totaled $145,000. This was the result of interest
income of $292,000 for 1997 and interest expense of $147,000. Interest income
produced by the loan portfolio totaled $63,000 and interest income on investment
securities totaled $90,000. Interest income on federal funds totaled $112,000
while interest income on escrow funds totaled $27,000. Interest expense included
$87,000 of interest expense on certificates of deposit, interest expense of
$40,000 on interest-bearing transaction accounts and interest expense of $15,000
on money market demand accounts, $4,000 on the note payable and savings accounts
of $1,000.
<PAGE> 17
Net interest income for the quarter ended March 31, 1998 totaled $193,000. This
was the result of interest income of $538,000 for the quarter ended March 31,
1998 and interest expense of $345,000. Interest income produced by the loan
portfolio totaled $206,000 and interest income on investment securities totaled
$260,000. Interest income on federal funds totaled $72,000. Interest expense
included $173,000 of interest expense on certificates of deposit, interest
expense of $137,000 on interest-bearing transaction accounts and interest
expense of $34,000 on money market demand accounts and savings accounts of
$1,000.
The trend in net interest income is commonly evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets is computed by dividing fully taxable
equivalent net interest income by average earning assets. This ratio represents
the difference between the average yield on average earning assets and the
average rate paid for all funds used to support those earning assets.
The net interest margin for 1997 was 3.11%. The net cost of funds, defined as
interest expense divided by average-earning assets, was 3.16% for 1997. The
yield on earning assets was 6.27% for 1997. The net interest margin for the
quarter ended March 31, 1998 was 2.38%. The net cost of funds for the quarter
ended March 31, 1998 was 4.22% and the yield on earning assets was 6.60%.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of non-interest bearing funds and
gives a direct perspective on the effect of market interest rate movements.
During recent years, the net interest margins and interests rate spreads have
been under intense pressure to maintain historical levels, due in part to tax
laws that discouraged investment in tax-exempt securities and intense
competition for funds with non-bank institutions. The interest rate spread for
1997 was 0.51% and for the quarter ended March 31, 1998 was 1.23%.
Allowance for Possible Loan Losses. Lending officers are responsible for the
ongoing review and administration of each loan. They make the initial
identification of loans which present some difficulty in collection or where
there is an indication that the probability of loss exists. Lending officers are
responsible for the collection effort on a delinquent loan. Senior management is
informed of the status of delinquent and problem loans on a monthly basis.
Senior management makes recommendations monthly to the board of directors as to
charge-offs. Senior management reviews the allowance for possible loan losses on
a quarterly basis. The Company's policy is to discontinue interest accrual when
payment of principal and interest is 90 days or more in arrears.
The allowance for possible loan losses represents management's assessment of the
risks associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for possible loan losses and the appropriate provisions
required to maintain a level considered adequate to absorb anticipated loan
losses. In assessing the adequacy of the allowance, management reviews the size,
quality and risk of loans in the portfolio. Management also considers such
factors as loan loss experience, the amount of past due and non-performing
loans, specific known risk, the status and amount of non-performing assets,
underlying collateral values securing loans, current and anticipated economic
conditions and other factors which affect the allowance for potential credit
losses.
While it is the Company's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
Management believes that the $68,000 for December 31, 1997 and $181,000 for
March 31, 1998 in the allowance for possible loan losses are adequate to absorb
known risks in the portfolio. No assurance can
<PAGE> 18
be given, however, that adverse economic circumstances will not result in
increased losses in the loan portfolio, and require greater provisions for
possible loan losses in the future.
Non-performing Assets. Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans include loans
classified as non-accrual or renegotiated. The Company's policy is to place a
loan on non-accrual status when it is contractually past due 90 days or more as
to payment of principal or interest. At the time a loan is placed on non-accrual
status, interest previously accrued but not collected is reversed and charged
against current earnings. Recognition of any interest after a loan has been
placed on non-accrual is accounted for on a cash basis.
The Company had no non-performing assets or impaired loans as of March 31, 1998
or December 31, 1997.
Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and profits as well as interest earned on escrow funds held by the Company
before the Bank began operations. In addition, any gains or losses realized from
the sale of investment portfolio securities available for sale are included in
non-interest income. Total non-interest income totaled $6,000 for 1997. This
included $4,000 from service charges on deposit accounts. There were no gain or
losses on securities during 1997.
Non-interest income totaled $15,000 for the quarter ended March 31, 1998. This
included $12,000 on service charge on deposits, other fees of $1,000 and $2,000
of other non-interest income.
Non-interest Expenses. Non-interest expense for 1997 totaled $452,000. Salaries
and employee benefits for 1997 totaled $202,000. Occupancy expense for 1997
totaled $12,000 while furniture and equipment expense totaled $24,000. All other
non-interest expenses totaled $214,000 for 1997. Other non-interest expense
include supplies and printing, telephone, postage and legal and audit fees and
start-up costs related to the commencement of operations of the Company.
Non-interest expense for the quarter ended March 31, 1998 totaled $270,000.
Salaries and employee benefits totaled $139,000 for the quarter ended March 31,
1998. Occupancy expenses for the quarter ended March 31, 1998 totaled $9,000
while furniture and equipment expenses totaled $19,000. Other non-interest
expenses totaled $103,000.
Non-recurring items. During 1997 the Company earned $27,000 in interest income
from escrow funds related to stock subscriptions and incurred start-up costs of
$149,000 excluding $40,000 of capitalized organizational costs. Such income and
start-up costs will not recur in future periods.
Income Taxes. At December 31, 1997, the Company has net operating losses for
federal and state income taxes of approximately $310,000 which expire in tax
year 2012 for federal and state purposes. The Company recorded no tax benefit
for 1997 as a valuation allowance of $138,000 was recorded related to the
deferred tax asset for these net operating losses and other temporary
differences.
At March 31, 1998 the Company has net operating losses for federal and state
income taxes of approximately $170,000 which expire in tax year 2018 for federal
and state purposes. The Company recorded no tax benefit for the quarter ended
March 31, 1998 as a valuation allowance of $65,000 was recorded related to the
deferred tax asset for these net operating losses and other temporary
differences.
<PAGE> 19
RETURN ON EQUITY AND ASSETS
Return on assets (net income divided by average total assets) for 1997 was
(6.55%.) Return on equity (net income divided by average equity) for 1997 was
(17.66%.) Equity to assets (average equity divided by average total assets) for
1997 was 37.1%. There were no dividends paid during 1997, so no dividend payout
ratio is presented.
Return on assets for the quarter ended March 31, 1998 was (2.00%). Return on
equity for the quarter ended March 31, 1998 was (8.23%). Equity to assets for
the quarter ended March 31, 1998 was 24.25%. There were no dividends paid during
the quarter ended March 31, 1998.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead, and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
<PAGE> 20
AVERAGE BALANCE SHEET AND NET INTEREST INCOME
The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the quarter ended March 31, 1998 indicated and
certain other information:
<TABLE>
<CAPTION>
Interest
Average Average
Yields/ Income/
Balance Expense Rates
-------- -------- -----
(Fully taxable equivalent - dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans $ 9,876 $ 206 8.34%
U.S. Treasury and other U.S. government agencies 17,619 260 5.90%
States and municipalities -- -- N/A
Federal funds sold 5,092 72 5.66%
Interest bearing deposits with other financial institutions -- -- N/A
-------- -------- ----
Total interest-earning assets/interest income 32,587 538 6.60%
-------- -------- ----
Cash and due from banks 934
Other assets 2,084
Allowance for possible loan losses (111)
--------
Total assets $ 35,494
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 13,523 172 5.09%
Certificates of deposit 12,082 172 5.69%
Note payable -- -- N/A
-------- -------- ----
Total interest-bearing liabilities/interest expense 25,605 344 5.37%
-------- -------- ----
Non-interest-bearing demand deposits 1,154
Other liabilities 126
Shareholders' equity 8,609
--------
Total liabilities and shareholders' equity $ 35,494
========
Net interest earnings $ 194
========
Net interest income on interest-earning assets 2.38%
====
Taxable equivalent adjustment: N/A
</TABLE>
<PAGE> 21
The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the year ended December 31, 1997 indicated and
certain other information:
<TABLE>
<CAPTION>
Interest
Average Average
Yields/ Income/
Balance Expense Rates
-------- -------- -----
(Fully taxable equivalent - dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans $ 627 $ 63 10.05%
U.S. Treasury and other U.S. government agencies 1,485 90 6.06%
States and municipalities -- -- N/A
Federal funds sold 2,100 112 5.33%
Interest bearing deposits with other financial institutions 442 27 6.11%
------- ------- -----
Total interest-earning assets/interest income 4,654 292 6.27%
------- ------- -----
Cash and due from banks 251
Other assets 739
Allowance for possible loan losses (8)
-------
Total assets $ 5,636
=======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 1,053 56 5.32%
Certificates of deposit 1,446 87 6.02%
Note payable 54 4 7.41%
------- ------- -----
Total interest-bearing liabilities/interest expense 2,553 147 5.76%
------- ------- -----
Non-interest-bearing demand deposits 283
Other liabilities 710
Shareholders' equity 2,090
-------
Total liabilities and shareholders' equity $ 5,636
=======
Net interest earnings $ 145
=======
Net interest income on interest-earning assets 3.11%
=====
Taxable equivalent adjustment: N/A
</TABLE>
Since there is no period for which to compare 1997 and the quarter ended March
31, 1998, no table reflecting the changes in interest income and expense as a
result of the changes of average volume and average rate is presented.
<PAGE> 22
DEPOSITS
The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at December 31, 1997:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(In thousands) (In thousands)
<S> <C> <C>
Non interest-bearing deposits:
Individuals, partnerships and corporations $ 2,368 $ 808
U. S. Government and states and political subdivisions -- --
Certified and official checks 107 156
------- -------
Total non-interest-bearing deposits 2,475 964
------- -------
Interest-bearing deposits:
Interest-bearing demand accounts 15,804 10,545
Saving accounts 106 59
Certificates of deposit, less than $100,000 10,720 6,312
Certificates of deposit, more than $100,000 4,498 3,885
------- -------
Total interest-bearing deposits 31,128 20,801
------- -------
Total deposits $33,603 $21,765
======= =======
</TABLE>
The following table presents a breakdown by category of the average amount of
deposits and the average rate paid on deposits for 1997 and the quarter ended
March 31, 1998:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, 1998 December 31, 1997
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Non interest-bearing deposits $ 1,154 N/A $ 283 N/A
Interest-bearing demand deposits 13,434 5.40% 1,045 5.32%
Savings accounts 89 2.54% 8 2.52%
Certificates of deposit 12,082 6.07% 1,446 6.02%
------- ---- ------- ----
Total deposits $26,759 5.45% $ 2,782 5.72%
======= ==== ======= ====
</TABLE>
At March 31, 1998, certificates of deposits greater than $100,000 aggregated
approximately $4,498,000. The following table indicates, as of March 31, 1998,
the dollar amount of $100,000 or more by the time remaining until maturity (in
thousands):
<TABLE>
<CAPTION>
3 Months 3 to 12 1 to 5 Over 5
or less Months Years Years
------ ------ ------ ------
<S> <C> <C> <C> <C>
Certificates of deposit $1,668 $2,430 $ 400 --
====== ====== ====== ======
</TABLE>
At December 31, 1997, certificates of deposits greater than $100,000 aggregated
approximately $3,885,000. The following table indicates, as of December 31,
1997, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):
<TABLE>
<CAPTION>
3 Months 3 to 12 1 to 5 Over 5
or less Months Years Years
------ ------ ------ ------
<S> <C> <C> <C> <C>
Certificates of deposit $3,135 $ 750 -- --
====== ====== ====== ======
</TABLE>
<PAGE> 23
ASSETS
The management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Company's interest-earning assets by category at March 31, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(In thousands) (In thousands)
<S> <C> <C>
Interest-bearing deposits with banks $ -- $ --
Investment securities 22,364 14,732
Federal funds sold 2,566 7,704
Loans:
Real estate 7,179 3,600
Commercial and other 7,294 1,801
------- -------
Total loans 14,473 5,401
------- -------
Interest-earning assets $39,403 $27,837
======= =======
</TABLE>
INVESTMENT PORTFOLIO
The Company has classified all investment securities as either available for
sale or held to maturity depending upon whether the Company has the intent and
ability to hold the investment securities to maturity. The classification of
certain investment securities as available for sale is consistent with the
Company's investment philosophy of maintaining flexibility to manage the
portfolio. At March 31, 1998, approximately $18,816,000 of investment securities
were classified as available for sale and at December 31, 1997, approximately
$14,741,000 of investment securities were classified as available for sale.
Approximately $3,000 and $9,000 of unrealized loss was included in shareholders'
equity related to the available for sale investment securities as of March 31,
1998 and December 31, 1997, respectively. There were $3,551,000 of securities at
March 31, 1998 classified as held to maturity. There were no securities at
December 31, 1997 classified as held to maturity.
At year end 1997 as well as March 31, 1998, obligations of the United States
Government or its agencies represented approximately 100% of the total
investment portfolio. The following table presents the carrying amounts of the
Company's investment portfolio at March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------- -------
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ -- $ --
U.S. Government agencies 18,816 18,813
States and political subdivisions -- --
Other securities -- --
------- -------
Total available for sale $18,816 $18,813
======= =======
</TABLE>
<PAGE> 24
<TABLE>
<S> <C> <C>
HELD TO MATURITY:
U.S. Treasury $ -- $ --
U.S. Government agencies 3,551 3,561
States and political subdivisions -- --
Other securities -- --
------- -------
Total held to maturity $ 3,551 $ 3,561
======= =======
Total investment portfolio $22,367 $22,374
======= =======
</TABLE>
At year end 1997, obligations of the United States Government or its agencies
represented approximately 100% of the total investment portfolio. The following
table presents the carrying amounts of the Company's investment portfolio at
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------- -------
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ -- $ --
U.S. Government agencies 14,741 14,732
States and political subdivisions -- --
Other securities -- --
------- -------
Total available for sale $14,741 $14,732
======= =======
HELD TO MATURITY:
U.S. Treasury $ -- $ --
U.S. Government agencies -- --
States and political subdivisions -- --
Other securities -- --
------- -------
Total held to maturity $ -- $ --
======= =======
Total investment portfolio $14,741 $14,732
======= =======
</TABLE>
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at March 31, 1998.
The weighted average yields on these instruments are presented based on final
maturity.
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost Fair Value Average Yield
------- ---------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries: -- -- N/A
U.S. Government agencies:
Due within 1 year $ 2,744 $ 2,745 5.78%
Due after 1 year but within 5 years 16,030 16,026 6.08%
Due after 5 years but within 10 years -- -- N/A
Due after 10 years -- -- N/A
------- ------- -------
Total 18,774 18,771 6.03%
------- ------- -------
States and political subdivisions: -- -- N/A
Other: -- -- N/A
------- ------- -------
Total investments available for sale $18,774 $18,771 6.03%
======= ======= =======
</TABLE>
<PAGE> 25
<TABLE>
<S> <C> <C> <C>
HELD TO MATURITY:
U.S. Treasuries: $ -- $ -- N/A
U.S. Government agencies:
Due within 1 year -- -- N/A
Due after 1 year but within 5 years 1,005 1,007 6.15%
Due after 5 years but within 10 years 2,546 2,554 5.94%
Due after 10 years -- -- N/A
------- ------- -------
Total $ 3,551 $ 3,561 6.00%
------- ------- -------
States and political subdivisions:
-- -- N/A
Other: -- -- N/A
------- ------- -------
Total held to maturity $ 3,551 $ 3,561 6.00%
======= ======= =======
Total investment portfolio $22,322 $22,332 6.02%
======= ======= =======
</TABLE>
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at December 31, 1997.
The weighted average yields on these instruments are presented based on final
maturity.
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost Fair Value Average Yield
------- ---------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries: $ -- $ -- N/A
U.S. Government agencies:
Due within 1 year 2,741 2,739 5.79%
Due after 1 year but within 5 years 12,000 11,993 6.07%
Due after 5 years but within 10 years -- -- N/A
Due after 10 years -- -- N/A
------- ------- -------
Total $14,741 $14,732 6.02%
------- ------- -------
States and political subdivisions:
-- -- N/A
Other: -- -- N/A
------- ------- -------
Total investments available for sale $14,741 $14,732 6.02%
======= ======= =======
</TABLE>
HELD TO MATURITY:
There were no securities classified as "held to maturity" at December 31, 1997.
INVESTMENT POLICY
The objective of the Company's investment policy is to invest funds not
otherwise needed to meet the loan demand of the Bank's market area to earn the
maximum return for the Bank, yet still maintain sufficient liquidity to meet
fluctuations in the Bank's loan demand and deposit structure. In doing so, the
Company balances the market and credit risk against the potential investment
return, makes investments compatible with the pledge requirements of the Bank's
deposits of public funds, maintains compliance with regulatory investment
requirements, and assists the various public entities with their financing
needs. The Investment Committee is comprised of the president and three other
directors. The president is authorized to execute security transactions for the
investment portfolio and to make decisions on purchases and sales of securities.
All the investment transactions occurring since the previous board of directors'
meeting are reviewed by the board at its next monthly meeting. Limitations on
the Committee's investment authority include: (a) investment in any one
municipal security may not exceed 20% of equity capital; (b) the entire
investment
<PAGE> 26
portfolio may not increase or decrease by more than 10% in any one month; (c)
investments in obligations of the State of Tennessee may not exceed 30% of
equity capital; and (d) investment in mortgage-backed securities may not exceed
more than 40% of equity capital. The investment policy allows portfolio holdings
to include short-term securities purchased to provide the Bank's needed
liquidity and longer term securities purchased to generate stable income for the
Bank during periods of interest rate fluctuations.
LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
at March 31, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
Percent of
Balance Total Loans
-------- -----------
<S> <C> <C>
Real estate loans:
Construction and land development $ 602 4.2%
Secured by residential properties 2,650 18.3%
Secured by commercial real estate 3,927 27.1%
-------- ------
Total real estate loans 7,179 49.6%
Commercial and industrial loans 4,998 34.5%
Other consumer loans 2,296 15.9%
All other loans -- 0.00%
-------- ------
Total loans 14,473 100.0%
Less:
Allowance for possible loan losses (181) N/A
-------- ------
Net loans $ 14,292 N/A
======== ======
</TABLE>
The following table sets forth the composition of the Company's loan portfolio
at December 31, 1997 (dollars in thousands).
<TABLE>
<CAPTION>
Percent of
Balance Total Loans
-------- -----------
<S> <C> <C>
Real estate loans:
Construction and land development $ 334 6.2%
Secured by residential properties 1,018 18.8%
Secured by commercial real estate 2,248 41.6%
-------- ------
Total real estate loans 3,600 66.7%
Commercial and industrial loans 1,134 21.0%
Other consumer loans 667 12.4%
All other loans -- 0.00%
-------- ------
Total loans 5,401 100.0%
Less:
Allowance for possible loan losses 68 N/A
-------- ------
Net loans $ 5,333 N/A
======== ======
</TABLE>
<PAGE> 27
The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
March 31, 1998 (in thousands).
<TABLE>
<CAPTION>
Maturity Range
----------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
-------- ----------- ---------- -------
<S> <C> <C> <C> <C>
LOAN MATURITY:
Real estate construction loans $ 602 $ -- $ -- $ 602
Real estate mortgage loans 3,504 2,960 113 6,577
Commercial and industrial loans 4,611 387 -- 4,998
All other loans 1,799 497 -- 2,296
------- ------ ---- -------
Total loans $10,516 $3,844 $113 $14,473
======= ====== ==== =======
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates $ 1,870 $2,228 $113 $ 4,211
Floating or adjustable interest rates 8,646 1,616 -- 10,262
------- ------ ---- -------
Total $10,516 $3,844 $113 $14,473
======= ====== ==== =======
</TABLE>
The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
December 31, 1997 (in thousands).
<TABLE>
<CAPTION>
Maturity Range
----------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
-------- ----------- ---------- -------
<S> <C> <C> <C> <C>
LOAN MATURITY:
Real estate construction loans $ 334 $ -- $ -- $ 334
Real estate mortgage loans 91 3,147 28 3,266
Commercial and industrial loans 680 454 -- 1,134
All other loans 287 380 -- 667
------- ------ ---- -------
Total loans $ 1,392 $3,981 $ 28 $ 5,401
======= ====== ==== =======
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates $ 1,221 $1,890 $ -- $ 3,111
Floating or adjustable interest rates 171 2,091 28 2,290
------- ------ ---- -------
Total $ 1,392 $3,981 $ 28 $ 5,401
======= ====== ==== =======
</TABLE>
LOAN POLICY
All lending activities of Bank are under the direct supervision and control of
the Bank's Board with secondary authority vested in the Executive Committee. The
Senior Loan Committee, which consists of the president, one other director and
two senior lending officers, enforces loan authorizations for each officer,
decides on loans exceeding such limits, services all requests for officer
credits to the extent allowable under current laws and regulations, administers
all problem credits, and determines the allocation of funds for each lending
division. The loan portfolio consists primarily of real estate, commercial,
small business, residential construction and consumer installment loans.
Maturity of term loans is normally limited to 15 years. Conventional real estate
loans may be made up to 80% of the appraised value or purchase cost of the real
<PAGE> 28
estate for no more than a 30-year term. Installment loans are based on the
earning capacity and vocational stability of the borrower.
The Bank board at its regularly scheduled meetings reviews all new loans made
the preceding month and discusses and approves any loans that exceed a loan
officer's authority. Loans which are 30 days or more past due are reviewed
monthly.
The Loan Committee of the Bank periodically reviews the loan portfolio,
particularly nonaccrual and renegotiated loans. Each loan officer is responsible
for monitoring and collecting his or her own loan portfolio. Loan Committee
review may result in a determination that a loan should be placed on a
nonaccrual status for income recognition, subject to Bank Board approval. In
addition, to the extent that management identifies potential losses in the loan
portfolio and reduces the book value of such loans through charge-offs, to their
estimated collectible value, the Company's policy is to classify as nonaccrual
any loan on which payment of principal or interest is 90 days or more past due,
where there is adequate collateral to cover principal and accrued interest and
the loan is in the process of collection. No concessions are granted and late
fees are collected. In addition, a loan will be classified as nonaccrual if, in
the opinion of the Loan Committee, based upon a review of the borrower's or
guarantor's financial condition, collateral value or other factors, payment is
questionable, even though payments are not 90 days or more past due.
When a loan is classified as nonaccrual, any unpaid interest is reversed against
current income. Interest is included in income thereafter only to the extent
received in cash. The loan remains in a nonaccrual classification until such
time as the loan is brought current, when it may be returned to accrual
classification. When principal or interest on a nonaccrual loan is brought
current, if in management's opinion future payments are questionable, the loan
would remain classified as nonaccrual. After a nonaccrual or renegotiated loan
is charged off, any subsequent payments of either interest or principal are
applied first to any remaining balance outstanding, then to recoveries and
lastly to income.
The large number of consumer installment loans and the relatively small dollar
amount of each makes an individual review impracticable. It is the Company's
policy to charge off any consumer installment loan which is past due 90 days or
more and are not adequately collateralized.
In addition, mortgage loans secured by real estate are placed on nonaccrual
status when the mortgagor is in bankruptcy, or foreclosure proceedings are
instituted. Any accrued interest receivable remains in interest income as an
obligation of the borrower.
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Credit risk and exposure to loss are inherent parts of the banking business.
Management seeks to manage and minimize these risks through its loan and
investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures that
it believes reflect the risk sensitive nature of the Company. The loan review
procedures are set to monitor adherence to the established criteria and to
ensure that on a continuing basis such standards are enforced and maintained.
Management's objective in establishing lending and investment standards is to
manage the risk of loss and to provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
loans with a three-year or less fixed maturity which may be amortized over a
maximum of 15 years.
The loan portfolio is regularly reviewed and management determines the amount of
loans to be charged-off. In addition, such factors as the Company's previous
loan loss experience, prevailing and anticipated economic conditions, industry
concentrations and the overall quality of the loan portfolio are considered.
While management uses available information to recognize losses on loans and
real estate owned, future
<PAGE> 29
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for possible losses
on loans and real estate owned. Such agencies may require the Company to
recognize additions to the allowances based on their judgments about information
available at the time of their examinations. In addition, any loan or portion
thereof which is classified as a "loss" by regulatory examiners is charged-off.
The allowance for possible loan losses is increased by provisions charged to
operating expense. The allowance for possible loan losses is reduced by charging
off loans or portions of loans at the time they are deemed by management to be
uncollectible and increased when loans previously charged off are recovered. The
resulting allowance for possible loan losses is viewed by management as a
single, unallocated reserve available for all loans and, in management's
opinion, is adequate to provide for reasonably foreseeable potential loan
losses. The risk associated with loans varies with the creditworthiness of the
borrower, the type of loan (consumer, commercial or real estate) and its
maturity. Cash flows adequate to support a repayment schedule is an element
considered for all types of loans. Real estate loans are impacted by market
conditions regarding the value of the underlying property used as collateral.
Commercial loans are also impacted by the management of the business as well as
economic conditions. Management believes the allowance for possible loan losses
is adequate to absorb such anticipated charge-offs.
Rules and formulas relative to the adequacy of the allowance for possible loan
losses, although useful as guidelines to management, are not rigidly applied.
The allowance for possible loan losses was $68,000 as of December 31, 1997 or
1.25% of loans outstanding. The allowance for possible loan losses was $181,000
as of March 31, 1998, or 1.25% of loans outstanding. No loans were charged-off
(nor any recoveries made) during 1997. The provision for possible loan losses
charged against earnings during 1997 was $68,000. No loans were charged-off (nor
any recoveries made) during the quarter ended March 31, 1998. The provision for
possible loan losses charged against earnings during the quarter ended March 31,
1998 was $113,000.
There were no non-performing loans of the Company on at December 31, 1997 or at
March 31, 1998. This includes non-accrual loans and restructured loans. Accrual
of interest is discontinued when there is reasonable doubt as to the full,
timely collections of interest or principal. When a loan becomes contractually
past due ninety (90) days with respect to interest or principal, it is reviewed
and a determination is made as to whether it should be placed on non-accrual
status. When a loan is placed on non-accrual status, all interest previously
accrued but not collected is reversed against current period interest income.
Income on such loans is then recognized only to the extent that cash is received
and where the future collection of principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
principal and interest and when, in the judgment of management, the loans are
estimated to be fully collectible as to principal and interest. Restructured
loans are those loans on which concessions in terms have been granted because of
a borrower's financial difficulty. Interest is generally accrued on such loans
in accordance with the new terms. There were also no loans past due ninety days
or more, any other real estate owned or foreclosed, any repossessed assets or
impaired loans at December 31, 1997 or at March 31, 1998.
CAPITAL RESOURCES/ LIQUIDITY
Liquidity. Of primary importance to depositors, creditors and regulators is the
ability to have readily available funds sufficient to repay fully maturing
liabilities. The Company's liquidity, represented by cash and cash due from
banks, is a result of its operating, investing and financing activities. In
order to insure funds are available at all times, the Company devotes resources
to projecting on a monthly basis the amount of funds which will be required and
maintains relationships with a diversified customer base so funds are
accessible. Liquidity requirements can also be met through short-term borrowings
or the disposition of short-term assets which are generally matched to
correspond to the maturity of liabilities.
<PAGE> 30
The Company has a formal liquidity policy, and in the opinion of management, its
liquidity levels are considered adequate. Neither the Company nor the Bank is
subject to any specific regulation liquidity requirements imposed by regulatory
authorities. The Bank is subject to general FDIC guidelines which do not require
a minimum level of liquidity. Management believes its liquidity ratios meet or
exceed these guidelines. Management does not know of any trends or demands which
are reasonably likely to result in liquidity increasing or decreasing in any
material manner. The ratio for average loans to average deposits for 1997 was
22.5% and for the quarter ended March 31, 1998 was 36.7%.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain asset growth
over time and to absorb losses. The objective of the Company's management is to
maintain a level of capitalization that is sufficient to take advantage of
profitable growth opportunities while meeting regulatory requirements. This is
achieved by improving profitability through effectively allocating resources to
more profitable businesses, improving asset quality, strengthening service
quality, and streamlining costs. The primary measures used by management to
monitor the results of these efforts are the ratios of average equity to average
assets, average tangible equity to average tangible assets, and average equity
to net loans. The Federal Reserve Board and FDIC have adopted capital guidelines
governing the activities of bank holding companies and banks. These guidelines
require the maintenance of an amount of capital based on risk-adjusted assets so
that categories of assets with potentially higher credit risk will require more
capital backing than assets with lower risk. In addition, banks and bank holding
companies are required to maintain capital to support, on a risk-adjusted basis,
certain off-balance sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as Tier I
and Tier II. Under risk-based capital requirements, total capital consists of
Tier I capital which is generally common shareholders' equity less goodwill and
Tier II capital which is primarily a portion of the allowance for possible loan
losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based
capital. In 1990 regulators added a leverage computation to the capital
requirements, comparing Tier I capital to total average assets less goodwill.
<PAGE> 31
The following table gives the various capital ratios and balances at March 31,
1998 and December 31, 1997 (dollars in thousands) for the Company:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(In thousands) (In thousands)
<S> <C> <C>
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,524 $ 8,699
Less disallowed intangibles -- --
------- -------
Total Tier I capital 8,524 $ 8,699
------- -------
Tier II capital:
Qualifying debt-
Qualifying allowance for loan losses 181 68
------- -------
Total Tier II capital 181 68
------- -------
Total capital $ 8,705 $ 8,767
======= =======
Risk-adjusted assets $24,694 $11,883
======= =======
Quarterly average assets (since
commencement of operations) $35,494 $20,770
======= =======
RATIOS:
Tier I capital to risk-adjusted assets 34.5% 73.2%
Tier II capital to risk-adjusted assets 0.7% 0.6%
Total capital to risk-adjusted assets 34.3% 73.8%
Leverage-- Tier I capital to quarterly
Average assets less disallowed intangibles 24.0% 41.9%
</TABLE>
<PAGE> 32
The following table gives the various capital ratios and balances at March 31,
1998 and December 31, 1997 (dollars in thousands) for the Bank:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(In thousands) (In thousands)
<S> <C> <C>
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,382 $ 7,757
Less disallowed intangibles -- --
------- -------
Total Tier I capital 8,382 $ 7,757
------- -------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for loan losses 181 68
------- -------
Total Tier II capital 181 68
------- -------
Total capital $ 8,563 $ 7,825
======= =======
Risk-adjusted assets $24,694 $11,845
======= =======
Quarterly average assets (since
commencement of operations) $35,494 $18,823
======= =======
RATIOS:
Tier I capital to risk-adjusted assets 34.0% 65.5%
Tier II capital to risk-adjusted assets 0.7% 0.6%
Total capital to risk-adjusted assets 34.7% 66.1%
Leverage-- Tier I capital to quarterly
Average assets less disallowed intangibles 23.6% 41.2%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five capital categories for banks and bank holding companies. The
bank regulators adopted regulations defining these five capital categories in
September 1992. Under these new regulations each bank is classified into one of
the five categories based on its level of risk-based capital as measured by Tier
I capital, total risk-based capital, and Tier I leverage ratios and its
supervisory ratings. The following table lists the five categories of capital
and each of the minimum requirements for the three risk-based capital ratios.
<TABLE>
<CAPTION>
Total Risk-Based Tier I Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
------------- ------------- -----
<S> <C> <C> <C>
Well-capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- 2% or less
</TABLE>
On December 31, 1997 and March 31, 1998, the Company exceeded the regulatory
minimums and qualified as a well-capitalized institution under the regulations.
SHORT-TERM BORROWINGS:
The average balance for short-term borrowings of the Company was less than 30%
of shareholders' equity at December 31, 1997 and March 31, 1998.
<PAGE> 33
PROPERTY ACQUISITIONS:
No significant property acquisitions are planned for the next year beyond normal
additions for operations and minor refurbishing of the building at 607 Memorial
Boulevard.
PERSONNEL:
The Company anticipates increasing the number of employees from the present
level of 14 to 23 employees to service the anticipated loan and deposit growth
and related support services during the next twelve months.
RESEARCH AND DEVELOPMENT:
The Company does not engage in product research and development and does not
anticipate any such activities during the next twelve months.
FOREIGN TRANSACTIONS:
The Company and the Bank have not had any investment securities, loans or
deposits of foreign governments, corporations or other entities.
<PAGE> 34
PART I
ITEM 3 - PROPERTIES
The Company owns two one-story commercial buildings in Murfreesboro, Tennessee
located at 615 Memorial Boulevard and 607 Memorial Boulevard. The buildings are
located on approximately 2.5 acres of land. The main building is located at 615
Memorial Boulevard and contains approximately 2,168 square feet of office space.
It was constructed in 1977 and houses the Bank's new accounts, teller area,
vault and safe deposit boxes and serves as the main retail service center for
the Bank. The building located at 607 Memorial Boulevard serves as the loan
origination and operations area as well as housing the executive offices of the
Bank. It contains approximately 3,944 square feet of office space and was
constructed in 1976. Both sites have been renovated to meet the needs of the
Company. A new automated teller machine is located in a small facility adjacent
to and detached from the main office. The property also contains approximately
1.5 acres of paved parking lot.
It is not the policy of the Company to acquire properties for possible capital
gains or income generation. Investments in real estate will be limited to
properties utilized for operational activities.
The Company offers loans secured by real estate mortgages as a component of its
lending function. The Company will originate and may service mortgage loans in
connection with the lending function.
The Company does not invest in securities of real estate entities or in
developed or undeveloped properties. In the future the Company may purchase
mortgage-backed securities as part of its investment portfolio; however, based
upon current market conditions, management does not presently intend to purchase
any mortgage-backed securities in the short-term or long-term.
<PAGE> 35
PART I
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following individual's hold 5% or more of the outstanding voting (common)
stock of the Company. No other individual's hold 5% or more of the outstanding
voting (common) stock of the Company.
<TABLE>
<CAPTION>
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE PERCENT
CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
----- ------------------- -------------------- --------
<S> <C> <C> <C>
Common William E. Rowland 75,000 (1) 8.26%
1110 Virginia Avenue
Murfreesboro, Tennessee 37130
Common Joseph M. Swanson 64,500 (2) 7.11%
100 East Vine Street - Suite 1500
Murfreesboro, Tennessee 37130
</TABLE>
(1) - Includes 40,000 shares held as trustee for two sons' trusts.
(2) - Includes 500 shares held jointly with daughter.
The following include all executive officers who hold 5% or more of the
outstanding voting (common) stock of the Company and a total of the common stock
held by all directors and executive officers.
<TABLE>
<CAPTION>
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE PERCENT
CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
----- ------------------- -------------------- --------
<S> <C> <C> <C>
Common William E. Rowland (2) 75,000 (1) 8.26%
1110 Virginia Avenue
Murfreesboro, Tennessee 37130
Common All directors and executive officers
as a group 210,500 23.19%
</TABLE>
(1) - Includes 40,000 shares held as trustee for two sons' trusts.
(2) - Chief Executive Officer.
There are currently no arrangements which may result in a change of ownership of
control of the Company.
<PAGE> 36
PART I
ITEM 5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table relates to directors, executive officers, promoters and
control persons of the Company at December 31, 1997:
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL POSITION(S)
WITH COMPANY AGE (1) BUSINESS AFFILIATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William E. Rowland 50 Executive Vice President, Secretary and Director - First City
Chief Executive Officer, Bank (January 1986-March 1996); President, Chief Executive
President and Director Officer and Director - First City Bancorp, Inc. (May 1988-March
1996); President - Tennessee Credit Corporation (March
1996-June 1996); President, Chief Executive Officer and
Director - Bank of Murfreesboro (October 1997 - Present);
President, Chief Executive Officer and Director -
Murfreesboro Bancorp, Inc. (October 1997 - Present)
- ------------------------------------------------------------------------------------------------------------
Joyce Ewell 54 First Vice President and Director - First City Bank (January
Senior Vice President, 1986-March 1996); Vice President - First American National Bank
Secretary and Director (March 1996-January 1997); Senior Vice President and Director -
Bank of Murfreesboro (October 1997-Present)
- ------------------------------------------------------------------------------------------------------------
Olin O. Williams 67 Surgeon - Murfreesboro Medical Clinic (September 1967-January
Chairman of the Board of 1994); Director - National Health Care, L.P. (1971-Present);
Directors Director - First City Bank (January 1986-March 1996); Director
- First City Bancorp, Inc. (May 1988-March 1996)
- ------------------------------------------------------------------------------------------------------------
Melvin R. Adams 58 Agent - State Farm Insurance Company (1971-Present); Director -
Director First City Bank (January 1986-March 1996); Director - First
City Bancorp, Inc. (May 1988-March 1996)
- ------------------------------------------------------------------------------------------------------------
Thomas E. Batey 63 President/Owner - Batey's (office supply) (1957-Present);
Director Director - First City Bank (May 1988-March 1996); Director -
First City Bancorp, Inc. (May 1988-March 1996)
- ------------------------------------------------------------------------------------------------------------
John Stanley Hooper 65 President/Owner - Hooper Supply Co., Inc. (1957-95); Director -
Director First City Bank (May 1988-March 1996); Director - First City
Bancorp, Inc. (May 1988-March 1996)
- ------------------------------------------------------------------------------------------------------------
William H. Sloan 63 President/Owner - Sloan's Sales and Service, Inc. (motorcycle
Director sales, parts and service) (1960-Present); Director - First City
Bank (January 1994-March 1996)
- ------------------------------------------------------------------------------------------------------------
Joseph M. Swanson 59 President - Swanson, Inc. (1960-Present); Owner - Swanson
Director Developments (1983-Present); Director - First City Bank
(January 1986-March 1996); Director - First City Bancorp, Inc.
(May 1988-March 1996)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) - As of December 31, 1997
The above directors have served as directors since commencement of operations on
October 6, 1997 and were re-elected at the shareholder meeting on April 16,
1998. The term is for one year with annual reappointment.
<PAGE> 37
At December 31, 1997, there were no family relationships among directors and
executive officers. Further, no director or executive officer has been involved
in any legal proceedings including bankruptcy, criminal proceedings or
injunction from involvement with any business, banking or securities activities.
<PAGE> 38
PART I
ITEM 6 - EXECUTIVE COMPENSATION
The following table relates to executive compensation paid during 1997:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
SECURITIES
OTHER UNDER-
ALL ANNUAL RESTRICTED LYING OTHER
NAME AND COMPEN- STOCK OPTIONS/ COMPEN-
PRINCIPAL POSITION SALARY BONUS SATION AWARDS SAR'S PAYOUTS SATION
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Rowland, $16,300 $- $- $- $- $- $750 (1)
Chief Executive Officer
</TABLE>
(1) - Director fees.
No executive officer had compensation in excess of $100,000.
The directors are paid $250 per month. There is no other compensation for the
directors.
Currently there are no employment contracts between the Company and any of its
employees or the Bank and any of its employees.
<PAGE> 39
PART I
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company purchased its primary retail banking location located at 615
Memorial Boulevard in Murfreesboro, Tennessee from Director Joseph M. Swanson
for approximately $411,000. This amount approximated its estimated fair value.
Federal banking regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and must not involve more
than the normal risk of repayment or present other unfavorable features. The
Bank's policy is not to make any new loans or extensions of credit to the Bank's
executive officers and directors at different rates or terms than those offered
to the general public. The aggregate amount of loans by the Bank to its
executive officers and directors was approximately $1,215,000 at December 31,
1997.
<PAGE> 40
PART I
ITEM 8 - DESCRIPTION OF SECURITIES
The Company is authorized by its charter to issue a maximum of 2,000,000 shares
of Common Stock, $5.00 par value per share, (the "Shares") and 1,000,000 shares
of Preferred Stock, no stated par value. There are 907,609 shares of Common
Stock, and no shares of Preferred Stock, issued and outstanding. The outstanding
Shares of Common Stock were fully paid and nonassessable.
COMMON STOCK
The following is a summary of certain rights and provisions of the Shares. This
summary includes all of the material rights and provisions of the shares,
however, this summary does not purport to be complete and is qualified in its
entirety by reference to the charter of the Company and the Tennessee
corporation laws.
Dividend Rights and Limitations on Payments of Dividends - The holders of Common
Stock are entitled to receive, pro rata, such dividends and other distributions
as and when declared by the Company's Board of Directors out of the assets and
funds legally available therefor. The availability of funds to the Company is
dependent upon dividends from the Bank which may declare dividends only once in
each calendar quarter and only from its undivided profits account so long as its
reserve against deposits is not or will not be impaired. However, no net
earnings, and therefore no moneys which may be distributed as dividends, are
projected for the first three years of operation. Also, despite the availability
of net or accumulated earnings in later years of operations, and the capacity to
maintain capital at levels required by governmental regulation, the Board of the
Bank may choose to retain all earnings for the operation of the business.
Voting Rights - The holders of Common Stock are entitled to one vote per share
on all matters presented for a shareholder vote. There is no provision for
cumulative voting. The business of the Company is controlled by a Board of
Directors. This Board is elected by a majority vote of the shareholders. A set
of bylaws has been adopted for the guidance and control of the Company.
Amendments to the bylaws will be effected by majority vote of the shareholders.
The affirmative vote of the holders of a majority of the outstanding shares of
Common Stock is required for mergers, consolidations or other similar
transactions and for amendments to the charter of the Company.
Liquidation Rights - Upon the voluntary or involuntary dissolution, liquidation,
or winding up of the affairs of the Company, after the payment in full of its
debts and other liabilities, the remainder of its assets, if any, are to be
distributed pro rata among the holders of Shares. Subject to any required
regulatory approvals, the directors of the Company, at their discretion, may
authorize and issue debt obligations, whether or not subordinated, without prior
approval of the shareholders, thereby further depleting the liquidation value of
the Shares.
Preemptive Rights - Owners of Shares of the Company do not have the preemptive
right to purchase additional shares offered by the Company in the future. That
is, the Company may sell additional Shares to particular shareholders or to
non-shareholders without first offering each then current shareholder the right
to purchase the same percentage of such newly offered Shares as is the
shareholder's percentage of the then outstanding Shares of the Corporation.
Redemption - The Shares may not be redeemed in the sole discretion of the
Company.
Conversion Rights - The holders of Shares have no conversion rights.
<PAGE> 41
Payment of Dividends - The Company intends to pay dividends on the Common Stock
at some point in the future when permissible under applicable statutes. Payment
of these dividends will be dependent upon numerous factors including earnings,
capital ratios, asset quality and growth of the Company.
Liability to Further Calls or to Assessments by the Company - The Shares are not
subject to liability for further calls or to assessments by the Company.
SHAREHOLDER PROTECTION RIGHTS PLAN
At a meeting on March 18, 1998, the Murfreesboro Bancorp, Inc. Board of
Directors adopted a Shareholder Protection Rights Plan ("Plan") which is similar
to plans adopted by many other bank holding companies. The purpose of the plan
is to enhance the ability of the Board of Directors to deal with acquisition
proposals in the best interests of shareholders.
What follows is a summary of the major terms of the Shareholder Protection
Rights Plan. The summary does not purport to be complete; however, the summary
includes all the material aspects of the Plan. A copy of the entire Plan may be
obtained free of charge by contacting William E. Rowland, President and CEO,
Murfreesboro Bancorp, Inc., 615 Memorial Boulevard, Murfreesboro, Tennessee
37129, (615-890-1111)
Distribution and Transfer of Rights; Rights Certificate -- The Board has
declared a dividend of one Right for each share of Common Stock outstanding on
March 18, 1998. Prior to the Separation Time referred to below, the Rights will
be evidenced by and trade with the Common Stock and will not be exercisable.
After the Separation Time, the Company will mail Rights Certificates to
shareholders, and the Rights will become transferable apart from the Common
Stock.
Separation Time -- Rights will separate from the Common Stock and become
exercisable following the earlier of the (i) the date of the Flip-in Trigger
referred to below or (ii) the tenth business day (or such later date as the
Board may decide) after any person commenced a tender offer that would result in
such person holding a total of 19% or more of the Common Stock.
Exercise of Rights -- After the Separation Time, each Right will entitle the
holder to purchase, Participating Preferred Stock designed to have economic and
voting terms similar to those of one share of Common Stock.
"Flip-In" Trigger -- Upon announcement that any person has acquired 19% or more
of the outstanding Common Stock, then ten (10) days thereafter (or such earlier
or later day as the Board may decide):
(i) Rights owned by the person acquiring such stock (an "Acquiring
Person") or transferees thereof will automatically become void; and
(ii) each other Right will automatically become a right to buy, for the
Exercise Price, that a number of shares of Common Stock or
Participating Preferred Stock having a market value of twice the
Exercise Price.
Exchange Option -- If any person acquires between 19% and 50% of the outstanding
Common Stock, the Board may, in lieu of allowing Rights to be exercised, require
each outstanding Right to be exchanged for one share of Common Stock or
Participating Preferred Stock designed to have economic and voting terms similar
to those of one share of Common Stock.
"Flip-Over" Trigger -- After an Acquiring Person has become such, the Company
may not consolidate or merge with, or sell 50% or more of its assets or earning
power to, any person (a "Flip-over Transaction or Event") if at the time of such
merger or sale (or agreement to do any of the foregoing) the Acquiring Person
controls the Board of Directors and, in the case of a merger, will receive
different treatment than all other shareholders unless proper provision is made
so that each right would thereafter become a right to buy, for the Exercise
Price, that number of shares of common stock of such other person having a
market value of twice the Exercise Price.
Redemption -- The Rights may be redeemed by the Board at any time until a
"Flip-in" Trigger has occurred at a Redemption Price of $0.01 per Right.
Power to Amend -- The Board may amend the Plan in any respect until a "Flip-in"
Trigger has occurred. Thereafter, the Board may amend the Plan in any respect
not materially adverse to Rights holders generally.
Expiration -- The Rights will expire ten years from the date of their issuance.
PREFERRED STOCK
As of December 31, 1997, there were no shares of Preferred Stock outstanding.
The Charter of the Company authorizes the issuance by the Company of up to
1,000,000 shares of its Preferred Stock. The Preferred Stock may be issued by
vote of the Board of Directors without shareholder approval. The Preferred Stock
may be issued in one or more classes and series, with such designations, full or
limited voting rights (or without voting rights), redemption, conversion, or
sinking fund provisions, dividend rates or provisions, liquidation rights, and
other preferences and limitations as the Board of Directors may determine in the
exercise of its business judgment. The Preferred Stock may be issued by the
Board of Directors for a variety of reasons. The Corporation has no present
plans to issue any of its Preferred Stock. The Preferred Stock could be issued
in public or private transactions in one or more (isolated or series of) issues.
The shares of any issue of Preferred Stock could be issued with rights,
including voting, dividend, and liquidation features, superior to those of any
issue or class of shares, including the Common Stock. The issuance of shares of
the Preferred Stock could serve to dilute the voting rights or ownership
percentages of holders of the Common Shares (or any other shares.) The issuance
of shares of the Preferred Stock might also serve to deter or block any attempt
to obtain control of the Company, or facilitate any such attempt.
<PAGE> 42
PART II
ITEM 1 - MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
The Company's common stock is not traded on any exchange. There were no trades
of the common stock during 1997 to establish high and low bid information. The
last known trade was on April 21, 1998 for $11.00 per share; however, there is
no guarantee that the Company has record of the actual price paid for all stock
transferred. There were approximately 2,375 shareholders of record as of
December 31, 1997. The Company's ability to pay dividends is dependent upon the
earnings of the Bank. Banking regulations limit the amount of dividends that may
be paid by the Bank without prior approval of the Bank's regulatory agency, the
TDFI. There were no retained earnings against which dividends may be charged
subsequent to December 31, 1997. Future dividends will be dependent upon the
earnings of the Bank. No dividends have been paid on the common stock of the
Company. At December 31, 1997, there are no outstanding warrants or options to
purchase the Company's common stock and there are no outstanding securities
convertible into the Company's common stock.
ITEM 2 - LEGAL PROCEEDINGS
At the present time the Company is not aware of any pending or threatened
litigation, legal proceedings or enforcement actions against it.
ITEM 3 - CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS
The Company has not had any changes in nor disagreements with its independent
accountants.
ITEM 4 - RECENT SALES OF UNREGISTERED SECURITIES
All of the outstanding shares of the Company's common stock were issued during
1997 and sold by the Company as part of its initial offering and formation.
There were 877,609 shares that were sold for $10.00 per share and another 30,000
shares issued in exchange for land valued at $300,000. These shares were sold
pursuant to an exemption in Section 3(a)(12) of the Securities Act of 1933. As
indicated above in Item 1, there may have been some trading between shareholders
at various prices since the initial offering, but the Company does not have a
complete and exhaustive list of the transactions and actual price paid.
ITEM 5 - INDEMINIFICATION OF DIRECTORS AND OFFICERS
The Company has included in its charter:
"No person shall be liable for any loss or damage suffered on account of any
action taken or omitted to be taken by him as a director or officer of the
corporation in good faith and in accordance with the standard of conduct set
forth in Tennessee Code Annotated Section 48-18-502."
Pursuant to the Company's by laws and the Tennessee Business Corporation Act,
the Company shall indemnify to the fullest extent permitted by law any and all
persons who may serve or who have served at any time as directors or officers or
who at the request of the board of directors of the corporation may serve or at
any time have served as directors or officers of another corporation in which
the corporation at such time owned or may own shares of stock or of which it was
or may be a creditor, and their respective heirs, administrators, successors and
assigns, against any and all expenses, including amounts paid upon judgments,
counsel fees and amounts paid in settlement (before or after suit is commenced),
actually and necessarily incurred by such persons in connection with the defense
or settlement of any claim of action, suit, or proceeding in which they, or any
of them, are made parties, or a party, or which may be asserted against them or
any of them, by reason of being or having been directors or officers or a
director or officer
<PAGE> 43
of the corporation or such other corporation, except in relation to such matters
to which any such director or officer or former director or officer or person
shall be adjudged in any action, suit, or proceeding to be liable for his own
negligence or misconduct in the performance of his duty. Such indemnification
shall be in addition to any other rights to which those indemnified may be
entitled under any law, bylaw, agreement, vote of shareholders, or otherwise.
<PAGE> 44
PART F/S
Consolidated Financial Statements
MURFREESBORO BANCORP, INC.
December 31, 1997
<PAGE> 45
MURFREESBORO BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
C O N T E N T S
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Report ........................................................................ 1
Consolidated Balance Sheet .......................................................................... 2
Consolidated Statement of Operations ................................................................ 3
Consolidated Statement of Changes in Shareholders' Equity ........................................... 4
Consolidated Statement of Cash Flows ................................................................ 5
Notes to Consolidated Financial Statements .......................................................... 6-25
</TABLE>
<PAGE> 46
Independent Auditors' Report
The Board of Directors
Murfreesboro Bancorp, Inc.
Murfreesboro, Tennessee
We have audited the consolidated balance sheet of Murfreesboro Bancorp, Inc. and
subsidiary as of December 31, 1997, and the related consolidated statement of
operations, changes in shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Murfreesboro Bancorp, Inc. and subsidiary at December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
Nashville, Tennessee RAYBURN, BETTS & BATES, P.C.
March 25, 1998
1
<PAGE> 47
MURFREESBORO BANCORP, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(Tabular amounts are in thousands)
<TABLE>
<S> <C>
ASSETS
Cash and due from banks (note 2) $ 1,006
Federal funds sold 7,704
--------
Total cash and cash equivalents 8,710
--------
Securities available for sale (note 3) 14,732
Loans, less allowance for possible loan losses
of $68,000 (note 4) 5,333
Premises and equipment, net (note 5) 1,558
Accrued interest receivable 149
Other assets 128
--------
Total assets $ 30,610
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (notes 3 and 6) $ 21,765
Accrued interest payable 74
Other liabilities 81
--------
Total liabilities 21,920
--------
Contingencies (note 8)
Shareholders' equity (note 9):
Preferred stock, no assigned value or rights, 1,000,000 shares authorized,
no shares issued or outstanding at December 31, 1997 --
Common stock, $5.00 par value, 2,000,000 shares authorized
and 907,609 shares issued and outstanding at December 31, 1997 4,538
Additional paid-in capital 4,530
Deficit (369)
Unrealized loss on securities available for sale (9)
--------
Total shareholders' equity 8,690
--------
Total liabilities and shareholders' equity $ 30,610
========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 48
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Tabular amounts are in thousands except per share amounts)
<TABLE>
<S> <C>
Interest income:
Interest on federal funds sold $ 112
Interest on taxable investment securities 90
Interest and fees on loans 63
Interest on escrow funds 27
------
Total interest income 292
------
Interest expense:
Interest on negotiable order of withdrawal accounts 40
Interest on money market demand accounts 15
Interest on savings deposits 1
Interest on certificates of deposit 87
------
Total interest expense on deposits 143
Interest on note payable 4
------
Total interest expense 147
------
Net interest income 145
Provision for possible loan losses (note 4) 68
------
Net interest income after provision for possible loan losses 77
------
Non-interest income:
Service charges on deposits 4
Other fees and commissions 1
Other non-interest income 1
------
Total non-interest income 6
------
Non-interest expense:
Salaries and employee benefits 202
Occupancy expenses, net (note 5) 12
Furniture and equipment expense (note 5) 24
Other non-interest expenses 214
------
Total non-interest expense 452
------
Loss before income taxes (369)
Income tax benefit (note 7) --
------
Net loss $ (369)
======
Loss per share - basic (no dilutive items outstanding) $(1.71)
======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 49
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(Tabular amounts are in thousands except shares)
<TABLE>
<CAPTION>
Unrealized
Common Stock Loss on
--------------------- Additional Available
Par Paid-in for Sale
Shares Value Capital Deficit securities Total
-------- ------ ------ ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 1 $ -- $ -- $ -- -- $ --
October 6, 1997 - Redemption of
organizational stock for $25 (1) -- -- -- -- --
October 6, 1997 - Sale of
907,609 shares of common
stock, net of issue costs of $8,000 907,609 4,538 4,530 -- -- 9,068
Increase in unrealized loss
on securities available for
sale -- -- -- (9) (9)
Net loss -- -- -- (369) -- (369)
-------- ------ ------ ----- --- -------
Balance at
December 31, 1997 907,609 $4,538 $4,530 $(369) $(9) $ 8,690
======== ====== ====== ===== === =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 50
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Tabular amounts are in thousands)
<TABLE>
<S> <C>
Operating activities:
Net loss $ (369)
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Provision for loan losses 68
Provision for depreciation, amortization and accretion, net 22
Changes in assets and liabilities:
Increase in accrued interest receivable (149)
Increase in other assets (128)
Increase in accrued interest payable 74
Increase in other liabilities 81
--------
Net cash used by operating activities (401)
--------
Investing activities:
Purchase of securities available for sale (14,741)
Increase in loans, net (5,401)
Additions to premises and equipment (1,280)
--------
Net cash used in investing activities (21,422)
--------
Financing activities:
Proceeds from note payable 150
Repayment of note payable (150)
Net increase in deposits 21,765
Issuance of common stock 8,776
Stock issue costs (8)
--------
Net cash provided by financing activities 30,533
--------
Net increase in cash and cash equivalents 8,710
Cash and cash equivalents at the beginning of the year --
--------
Cash and cash equivalents at the end of the year $ 8,710
========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 73
Non-cash transactions:
Increase in unrealized loss on securities available for sale $ 9
========
Land acquired in exchange for 30,000 shares of common stock $ 300
========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 51
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Murfreesboro Bancorp, Inc. (the Company)
conform to generally accepted accounting principles and to general
practices within the banking industry. The following represent the more
significant of those policies and practices:
(a) Basis of Consolidated Financial Statements
The consolidated financial statements include the accounts of
the Company's wholly-owned subsidiary, Bank of Murfreesboro
(the Bank), which is a full service bank. Intercompany
accounts and transactions have been eliminated in
consolidation.
The Company derives substantially all of its revenues from the
Bank. The Bank is primarily engaged in the business of
attracting demand, savings and time deposits from the general
public in the Rutherford County, Tennessee market area and
investing these funds in investment securities and loans to
commercial and retail enterprises as well as individuals
located in the same general market area.
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Estimates used in
the preparation of the financial statements are based on
various factors including the current interest rate
environment and the general strength of the local economy.
Changes in the overall interest rate environment can
significantly affect the Company's net interest income and the
value of its recorded assets and liabilities. Actual results
could differ from those estimates used in the preparation of
the financial statements.
(b) Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash on hand and in
banks, federal funds sold and investment securities purchased
with an original ninety day or less remaining maturity.
(c) Investment Securities
The Company has adopted Statement of Financial Accounting
Standard ("SFAS") 115 Accounting for Certain Investments in
Debt and Equity Securities. SFAS 115 requires that all
investments in debt securities and all investments in equity
securities that have readily determinable fair values be
classified into three categories. Debt securities that
management has positive intent and ability to hold until
maturity will be classified as to be held to maturity.
Securities that are bought and held specifically for the
purpose of selling them in the near term will
6
<PAGE> 52
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Investment Securities (Continued)
be classified as trading securities. All other securities will
be classified as available for sale. Securities are designated
as available for sale if management intends to use such
securities in its asset/liability management strategy and
therefore such securities may be sold in response to changes
in interest rates. Securities classified as trading and
available for sale will be carried at market value.
Unrealized holding gains and losses for available for sale
securities are reported as a separate component of
shareholders' equity until realized, net of the estimated tax
effect. Investments classified as to be held to maturity will
be carried at amortized cost. Realized gains and losses on any
sales of securities are computed on the basis of specific
identification of the adjusted cost of each security and
included in non-interest income.
(d) Loans, less Allowance for Possible Loan Losses
Loans are stated at the principal amount outstanding. Unearned
interest on loans, which relates principally to installment
loans, is shown as a reduction of loans. Interest income on
installment loans with related unearned interest is recognized
by a method that does not differ materially from the
level-yield method. Interest on all other loans is computed on
the outstanding loan balance.
Loan origination fees are recognized in amounts estimated to
be the Company's loan origination costs related to
underwriting and closing the loans at origination. Fees
received in excess of the amount recognized at origination are
deferred and amortized into income over the estimated average
life of the loans using the level-yield method. The
unamortized balance of deferred loan origination fees is
credited to income at the time a loan is sold or paid off.
Loans, including impaired loans, are placed on a non-accrual
basis when payments of interest and/or principal have remained
delinquent for a period of over 90 days, unless the loan is
both well-secured and in the process of collection, or
management's evaluation indicates probable default prior to
the 90-day delinquency period.
Loans may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are
assured of repayment within an acceptable period of time, and
there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest
7
<PAGE> 53
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Loans, less Allowance for Possible Loan Losses (Continued)
and principal. While a loan is classified as nonaccrual,
interest income is generally recognized on a cash basis.
The decision to charge off a loan is based upon the borrower's
continued failure to pay principal or interest when due, or
circumstances indicating the payments will not or cannot be
made, along with evaluation of any collateral securing the
loan.
Consumer loans generally are charged off when contractually
delinquent 120 days or more, or when five payments have been
missed and there is no recent record of regular payment.
The allowance method is used by the Company to provide for
possible loan losses. Accordingly, all loan losses are charged
to the allowance for possible loan losses and all recoveries
are credited to it. The allowance is an amount that management
believes will be adequate to absorb possible losses on
existing loans that may become uncollectible. The provision
for possible loan losses charged to operating expense is based
on past loan loss experience and other factors which, in
management's judgment, deserve current recognition in
estimating possible loan losses. Such other factors considered
by management include growth and composition of the loan
portfolio, the relationship of the allowance for possible loan
losses to outstanding loans and current economic conditions
that may affect borrowers' ability to repay.
The Financial Accounting Standards Board ("FASB") issued SFAS
114 Accounting by Creditors for Impairment of a Loan. SFAS 114
addresses the accounting by creditors for impairment of
certain loans. It is generally applicable for all loans,
except large groups of smaller-balance homogenous loans that
are collectively evaluated for impairment including
residential mortgage loans and consumer installment loans.
SFAS 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate, or at the loan's observable
market price or the fair value of the collateral if the loan
is collateral dependent. A loan is considered impaired when,
based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement.
The FASB issued SFAS 118, which is effective concurrent with
the effective date of SFAS 114. This Statement amends SFAS 114
to allow a creditor to use existing methods for recognizing
interest income on impaired loans. Also, this
8
<PAGE> 54
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Loans, less Allowance for Possible Loan Losses (Continued)
statement requires the disclosure about the recorded
investment in certain impaired loans and how the creditor
recognizes interest income related to those impaired loans.
(e) Premises and Equipment
Premises and equipment are stated at cost. Depreciation is
computed primarily by the straight-line method over the
estimated useful lives of the related assets which primarily
range from 3 to 30 years. Gain or loss on items retired and
otherwise disposed of is credited or charged to operations and
cost and related accumulated depreciation are removed from the
asset and accumulated depreciation accounts.
(f) Other Real Estate
Properties acquired through foreclosure and unused premises
are stated at the lower of recorded amount of the loan or the
property's estimated net realizable value, reduced by
estimated selling costs. Write-down of the assets at, or prior
to, the date of foreclosure are charged to the allowance for
possible losses on loans. Subsequent write-downs, income and
expenses incurred in connection with holding such assets, and
gains and losses realized from the sales of such assets are
included in noninterest income and expense.
(g) Other Assets
Organizational costs of the Company are amortized on a
straight-line basis over five years.
(h) Income Taxes
The FASB has issued SFAS 109 Accounting for Income Taxes. SFAS
109 required a change from the deferred method previously used
in the consolidated financial statements to the asset and
liability method of computing deferred income taxes. Under the
asset and liability method, deferred income taxes are
recognized for the tax consequences of temporary differences
by applying future statutory tax rates to differences between
the financial statements carrying amounts and the tax basis of
existing assets and liabilities.
Deferred income taxes arise from temporary differences between
financial and tax reporting, principally related to
depreciation and provision for possible loan losses.
The provision for income taxes relates to items of income and
expense after elimination of principally non-deductible
officers' life insurance premiums.
The Company will file a consolidated federal income tax return
and a combined state excise (income) tax return with its
wholly-owned subsidiary. Income taxes are allocated on a
"separate entity" basis.
9
<PAGE> 55
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(2) CASH AND DUE FROM BANKS
At December 31, 1997, the Company had deposits in other financial
institutions in excess of Federal Deposit Insurance Corporation
insurance coverage limits by approximately $747,000.
The Bank is required to maintain cash balances with the Federal Reserve
Bank or other correspondent banks based on certain percentages of
deposit types. The approximate average amount for cash maintenance for
the year ended December 31, 1997 was $25,000.
(3) SECURITIES
The amortized cost and approximate estimated fair value of securities
available for sale at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of U.S
Government agencies
and corporations $14,741 $ -- $ 9 $14,732
======= ========= ====== =======
</TABLE>
The amortized cost and estimated fair value of securities available for
sale at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------- -------
<S> <C> <C>
Due in one year or less $2,741 $2,739
Due after one year
through five years 12,000 11,993
------- -------
Total $14,741 $14,732
======= =======
</TABLE>
There were no sales of securities available for sale during the period
ended December 31, 1997 and no securities were pledged at December 31,
1997 to secure public deposits, securities sold under repurchase
agreements and for the purposes required or permitted by law. There
were no securities classified as "trading" nor "held to maturity" at
December 31, 1997.
10
<PAGE> 56
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(4) LOANS, LESS ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans, less allowance for possible loan losses at December 31, 1997 are
summarized as follows:
<TABLE>
<S> <C>
Commercial, financial and agricultural $1,134
Real estate - construction 334
Real estate - commercial 2,248
Real estate - mortgage 1,018
Consumer and other 667
------
Total 5,401
Less allowance for possible loan losses 68
------
Total loans, net of allowance for possible loan losses $5,333
======
</TABLE>
The Bank grants commercial, consumer, residential and agribusiness
loans to customers throughout southern middle Tennessee, but primarily
concentrated in Rutherford County, Tennessee. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the local economy.
During the year ended December 31, 1997, the Company advanced funds of
$1,357,000 to directors, officers and affiliates of the Company.
Repayments on these loans totaled $142,000 during the year ended
December 31, 1997. At December 31, 1997, the Bank had loans to such
related parties aggregating approximately $1,215,000. In management's
opinion, all such loans were made in the ordinary course of business on
substantially the same terms as those prevailing at the time for
comparable transactions with unrelated parties.
At December 31, 1997, no loans were classified as impaired,
non-accrual, past due ninety days or more nor deemed non-performing.
Transactions in the allowance for possible loan losses for the year
ended December 31, 1997 are summarized as follows:
<TABLE>
<S> <C>
Balance - beginning of year $ -
Provision charged to operating expense 68
---
68
---
Loans charged-off -
Recoveries -
---
Net loans (charged-off) recoveries -
---
Balance - end of year $68
===
</TABLE>
11
<PAGE> 57
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(5) PREMISES AND EQUIPMENT, NET
The detail of premises and equipment, net at December 31, 1997 is as
follows:
<TABLE>
<S> <C>
Land $ 655
Buildings 477
Furniture and equipment 448
------
1,580
Less accumulated depreciation 22
------
Premises and equipment, net $1,558
======
</TABLE>
Depreciation related to premises and equipment for the year ended
December 31, 1997 was $22,000.
The Company purchased its primary bank premises from a director for
$411,000, which approximated its estimated fair value. The Company also
acquired equipment, supplies and furnishings of $57,000 from other
directors.
(6) DEPOSITS
Deposits at December 31, 1997 are summarized as follows:
<TABLE>
<S> <C>
Non-interest bearing deposits:
Demand deposits $ 964
Interest-bearing deposits:
NOW and Super NOW accounts 8,507
Money market demand accounts 2,038
Savings 59
Certificates of deposit $100,000 or greater 3,885
Other certificates of deposit 6,312
-------
Total $21,765
=======
</TABLE>
At December 31, 1997, the scheduled maturities of certificates of
deposit were:
<TABLE>
<S> <C>
For the year ending December 31,
1998 $10,037
1999 -
2000 -
2001 -
2002 160
-------
Total $10,197
=======
</TABLE>
12
<PAGE> 58
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands except percentages)
(7) INCOME TAXES
A reconciliation of income tax benefit for the year ended December 31,
1997 to the "expected" tax benefit computed by applying the statutory
federal income tax rate of 34 percent to loss before income taxes, is
as follows:
<TABLE>
<S> <C> <C>
Computed "expected" tax benefit $(125) (34%)
Increase (reduction) in taxes
resulting from:
Valuation allowance related to deferred tax assets 138 37%
State income taxes, net of federal tax benefit (15) (4%)
Other, net 2 1%
Income tax benefit $ -- --%
===== ===
</TABLE>
The sources of deferred income taxes (benefits) at December 31, 1997
and the tax effect of each are as follows:
<TABLE>
<S> <C>
Net operating loss $(117)
Provision for possible loan losses (23)
Other, net 2
Valuation allowance related to deferred tax asset 138
-----
Deferred taxes, net $ --
=====
</TABLE>
At December 31, 1997, the Company has net operating losses for federal
and state income taxes of approximately $310,000, which expire in tax
year 2012 for federal and state purposes.
(8) CONTINGENCIES
In the normal course of business there are contingent liabilities such
as legal proceedings pending against the Company. In the opinion of
management, no material adverse effect on the consolidated financial
position of the Company is anticipated as a result of these items.
13
<PAGE> 59
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(9) SHAREHOLDERS' EQUITY
Banking regulations limit the amount of dividends that may be paid by
the Bank without prior approval of the Bank's regulatory agency, the
Tennessee Department of Financial Institutions. There were no retained
earnings against which dividends may be charged subsequent to December
31, 1997, without regulatory approval. This amount will be increased
based upon future earnings.
Weighted average shares of common stock outstanding for the year ended
December 31, 1997 was 216,335.
(10) CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific
capital guidelines that involve quantitative measures of the Company's
and the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Company's and
Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum ratios of
Tier 1 and total capital as a percentage of assets and
off-balance-sheet exposures, adjusted for risk weights ranging from 0%
to 100%. Tier 1 capital consists of common shareholders' equity,
excluding the unrealized gain or loss on securities available for sale,
minus certain intangible assets. Tier 2 capital consists of the
allowance for loan losses subject to certain limitations. Total capital
for purposes of computing the capital ratios consists of the sum of
Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4%
for Tier 1 and 8% for total risk-based capital.
The Company and Bank are also required to maintain capital at a minimum
level based on total assets, which is known as the leverage ratio. Only
the strongest banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios of 1%
to 2% above the minimum.
14
<PAGE> 60
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands except percentages)
(10) CAPITAL REQUIREMENTS, (Continued)
As of December 31, 1997, the most recent notifications from the Bank's
regulators categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. There are no
conditions or events that management believes have changed the Bank's
categories.
The following table summarizes the estimated capital ratios and amounts
on a consolidated and Bank only basis and the regulatory minimum
requirements at December 31, 1997:
<TABLE>
<CAPTION>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
---------- ---------- --------
<S> <C> <C> <C>
Consolidated:
Actual ratio 73.210% 73.778% 41.885%
Regulatory minimum:
For capital adequacy purposes 4.000% 8.000% 4.000%
Calculated balance $ 8,699 $ 8,767 $ 8,699
Regulatory minimum:
For capital adequacy purposes $475 $951 $ 831
Bank Only:
Actual ratio 65.491% 66.061% 41.211%
Regulatory minimum:
For capital adequacy purposes 4.000% 8.000% 4.000%
To be well capitalized under prompt
corrective action provisions 6.000% 10.000% 5.000%
Calculated balance $ 7,757 $ 7,825 $ 7,757
Regulatory minimum:
For capital adequacy purposes $474 $ 948 $ 753
To be well capitalized under prompt
corrective action provisions $711 $ 1,184 $ 941
</TABLE>
15
<PAGE> 61
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(11) OFF-BALANCE SHEET RISK
During the normal course of business, the Company and the Bank are
party to financial instruments with off-balance sheet risk. This is
done to meet the financing needs of customers and to reduce the
Company's and the Bank's exposure to fluctuations in interest rate
risk. These financial instruments include commitments to extend credit,
letters of credit, unadvanced loan principal, construction loan
commitments, home equity lines of credit and commitments to purchase
financial instruments at predetermined prices. Those instruments
contain, to varying degrees, elements of credit and market risk in
excess of the amounts recognized in the consolidated balance sheets.
The credit risk relates to the possibility that a loss may occur from
the failure of another party to perform according to the terms of a
contract. The market risk relates to the possibility that future
changes in market prices may make a financial instrument less valuable
or more onerous.
Commitments to extend credit are legally binding agreements to lend to
a customer. Commitments, with the exception of credit cards, generally
have variable rates, fixed expiration dates and may require payment of
a fee. The variable rates are tied to the Bank's index rate limiting
the Company's market risk. Remaining unadvanced loan principal of
commitments totaled $278,000 at December 31, 1997. These balances do
not necessarily represent actual future cash requirements since many of
the commitments are expected to expire without being drawn upon. The
Bank, for a majority of the commitments, evaluates each customer's
credit worthiness on a case-by-case basis and collateral is obtained if
deemed necessary. Collateral includes accounts and notes receivable,
inventory, plant and equipment, marketable securities, and mortgages.
Construction loan commitments for both residential and commercial
properties totaled $415,000 at December 31, 1997 with $81,000 being
undrawn.
Credit cards are uncollateralized. At December 31, 1997, the Bank did
not offer credit card lines of credit. Home equity lines represent
collateralized equity in single family residences. At December 31,
1997, the home equity lines of credit totaled $155,000 with $65,000
undrawn.
Letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements, the purchase of domestic and international goods, and
required developer improvements to construction sites. Since most
letters of credit are not expected to be drawn upon, the total contract
amounts do not necessarily represent actual future cash requirements.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. When deemed
necessary, the Bank obtains marketable securities as collateral
supporting these letters of credit. Letters of credit totaled $37,000
at December 31, 1997.
16
<PAGE> 62
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(11) OFF-BALANCE SHEET RISK, (Continued)
The Bank had no commitments to purchase financial instruments at
predetermined prices at December 31, 1997. The exposure to credit risk
resides with the inability to deliver these financial instruments. The
loss would be confined to any adverse change in the market prices that
took place between the time of initiation and consummation of the
transaction. Market risk consists of the normal risk that resides with
any portfolio held when interest rates rise.
(12) EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS
The FASB issued SFAS 119 Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments. This statement
addresses the disclosure of derivative financial statements including
the face amount, nature and terms. For derivatives held for trading,
disclosure of average and period end fair values and disaggregated
gains and losses is required. For derivatives held for purposes other
than trading, disclosure of objectives, strategies, policies on
reporting and income recognition method is required. Currently the
Company does not own any derivative financial instruments, as defined
in SFAS 119. Therefore, the statement had no impact on the consolidated
financial statements.
The FASB issued SFAS 121, Accounting for the Impairment of Long-Lived
Assets to be Disposed of. This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the entity
should estimate the future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is
recognized. Otherwise, an impairment loss is not recognized.
Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should
be based on the fair value of the asset. The impact on the financial
statements for this statement has not been material.
The FASB issued SFAS 122, Accounting for Mortgage Servicing Rights.
This statement amends FASB Statement 65, Accounting for Certain
Mortgage Banking Activities to require that a banking enterprise
recognize as separate assets rights to service mortgage loans for
others, however, those servicing rights are acquired. The total cost of
the mortgage loans to be sold should be allocated between the mortgage
servicing rights and the loans based on their relative fair values if
it is practicable to estimate those fair values. If not, the entire
cost should be allocated to the mortgage loans. The impact on the
financial statements for this statement has not been material.
17
<PAGE> 63
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(12) EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS (Continued)
In June 1996, the FASB issued SFAS 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Under
this standard, accounting for transfers and servicing of financial
assets and extinguishments of liabilities is based on control. After a
transfer of financial assets, an entity recognizes the financial and
servicingassets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The effect of this
statement did not have a material effect on the financial statements of
the Company.
In December 1996, the FASB issued SFAS 126, Exemption from Certain
Required Disclosures about Financial Instruments for Certain Nonpublic
Entities. This statement amends FASB 107, Disclosures about Fair Value
of Financial Instruments, to make disclosures about the fair value of
financial instruments prescribed in FASB 107 optional for entities
meeting the criteria of being a nonpublic entity, having assets less
than $100 million on the financial statement date, and not having held
or issued any derivative financial instruments, as defined in FASB 119,
other than loan commitments, during the reporting period.
This statement is effective for fiscal years ending after December 15,
1996. Management has elected not to disclose fair values, as the
Company meets all criteria required to make such an election optional.
In February 1997, the FASB issued SFAS 128, Earnings Per Share, which
became effective for reporting periods after December 15, 1997. Under
the provisions of SFAS 128, primary and fully diluted earnings per
share were replaced with basic and diluted earnings per share in an
effort to simplify the computation of these measures and align them
with the methodology used internationally. Basic earnings per share is
arrived at by dividing net earnings available to common shareholders by
the weighted-average number of common shares outstanding and does not
include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is
similar to, but slightly different from, the previously required fully
diluted earnings per share method and is arrived a by dividing net
earnings less dividends on nonconvertible preferred stock by the
weighted-average number of shares outstanding, adjusted for the
dilutive effect of outstanding stock options and conversion impact of
convertible equity securities.
In February 1997 the FASB issued SFAS 129, Disclosure of Information
about Capital Structure. The statement established standards for
disclosing information about an entity's capital structure and applies
to all entities. This statement continues the previous requirements to
disclose certain information about an entity's capital structure found
in Accounting Principles Board ("APB") Opinions 10, Omnibus Opinion -
1966, and 15, Earnings Per Share and SFAS 47, Disclosure of Long-Term
Obligations, for entities that
18
<PAGE> 64
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(12) EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS (Continued)
were subject to those standards. This statement is effective for
financial statements for periods ending after December 15, 1997. This
statement contains no change in disclosure requirements for entities
that were previously subject to the requirements of APB Opinions 10 and
15 and SFAS 47. The adoption of the provisions of this statement is not
expected to have a material impact on the Company.
In July 1997 the FASB issued SFAS 130, Comprehensive Income. This
statement establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. It
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is presented with the same statements. It
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is presented with the same prominence as
other financial statements. This statement requires that companies (i)
classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial
condition. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comprehensive purposes is required.
In July 1997 the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. This statement requires that
financial and descriptive information be disclosed for each reportable
operating segment based upon the management approach. The management
approach focuses on financial information that an enterprise's decision
makers use to assess performance and make decisions about resource
allocation. The statement also prescribes the enterprise-wide
disclosures to be made about products, services, geographic areas and
major customers. SFAS 131 is effective for annual financial statements
issued for periods beginning after December 15, 1997, and for interim
financial statements in the second year of application. The adoption of
the provisions of this statement is not expected to have a material
impact on the Company.
19
<PAGE> 65
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(13) MURFREESBORO BANCORP, INC. - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Murfreesboro Bancorp, Inc.
(Parent Company Only)
Balance Sheet
As of December 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash $ 909*
Investment in subsidiary bank 7,747*
Other assets 39
-------
Total assets $ 8,695
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accrued liabilities $ 5
-------
Total liabilities 5
-------
Shareholders' equity:
Preferred stock, no assigned value or rights, 1,000,000 shares authorized,
no shares issued or outstanding at December 31, 1997 --
Common stock, $5.00 par value,
2,000,000 shares authorized, 907,609 shares
issued and outstanding at December 31, 1997 4,538
Additional paid-in capital 4,530
Deficit (369)
Unrealized loss on securities available for sale (9)
-------
Total shareholders' equity 8,690
-------
Total liabilities and shareholders' equity $ 8,695
=======
</TABLE>
* Eliminated in consolidation.
20
<PAGE> 66
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(13) MURFREESBORO BANCORP, INC. - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
(Continued)
Murfreesboro Bancorp, Inc.
(Parent Company Only)
Statement of Operations
For the Year ended December 31, 1997
<TABLE>
<S> <C>
Income:
Interest on escrow funds $ 27
-----
Total 27
-----
Expenses:
Interest on note payable 4
Salaries and benefits 83
Other non-interest expenses 66
-----
Total 153
-----
Loss before taxes and equity in loss of subsidiary bank (126)
Income tax benefits arising from parent company taxable loss --
-----
Loss before taxes and equity in loss of subsidiary bank (126)
Equity in loss of subsidiary bank (243)*
-----
Net loss $(369)
=====
</TABLE>
* Eliminated in consolidation
21
<PAGE> 67
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(13) MURFREESBORO BANCORP, INC. - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
(Continued)
Murfreesboro Bancorp, Inc.
(Parent Company Only)
Statement of Cash Flows
For the Year ended December 31, 1997
<TABLE>
<S> <C>
Operating activities:
Net loss $ (369)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for amortization 1
Equity in loss of subsidiary bank 243
Changes in assets and liabilities:
Increase in other assets (39)
Increase in accrued interest payable and other liabilities 5
-------
Net cash used by operating activities (159)
-------
Investing activities:
Proceeds from transfer of land to subsidiary bank 300
Investment in bank subsidiary (8,000)
-------
Net cash used by investing activities (7,700)
-------
Financing activities:
Proceeds from note payable 150
Repayment of note payable (150)
Issuance of common stock 8,768
-------
Net cash provided by financing activities 8,768
-------
Net increase in cash and cash equivalents 909
Cash and cash equivalents at beginning of year --
-------
Cash and cash equivalents at end of year $ 909
=======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 4
=======
Non-cash transactions:
Land acquired in exchange for 30,000 shares of common stock $ 300
=======
Increase in unrealized loss on securities available for sale $ 9
=======
</TABLE>
22
<PAGE> 68
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and fair values of the Company's financial
instruments are summarized as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Value Fair Value
-------- ----------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $ 8,710 $ 8,710
Securities available for sale 14,732 14,732
Loans 5,333 5,333
-------- ------
Total $ 28,775 $28,775
======== ======
FINANCIAL LIABILITIES:
Deposits $ 21,765 $21,765
-------- ------
Total $ 21,765 $21,765
======== ======
</TABLE>
The following methods and assumptions were used by the Company in
estimating the fair value for financial instruments:
CASH AND SHORT-TERM INVESTMENTS - The carrying amount for cash and
short-term investments approximates the fair value of the assets.
Included in this classification are cash and due from banks
(non-earning assets) and federal funds sold.
SECURITIES AVAILABLE FOR SALE - Fair values of these instruments are
based upon quoted market prices, where available. If quoted market
prices are not available, fair values are based upon the quoted values
of similar instruments.
LOANS - The fair values of loans are estimated using the discounted
cash flow analyses and using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality and
risk.
DEPOSITS - The fair value of demand deposits, NOW and Super NOW
accounts, money market demand accounts and savings accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e. their carrying amount). The fair values of certificates of
deposit and IRA's are estimated using a discounted cash flow
calculation that applied interest rates currently being offered on
these instruments to a schedule of aggregated expected monthly
maturities on time deposits.
23
<PAGE> 69
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - Fair value of commitments to
extend credit and letters of credit is not presented, since management
believes the fair value to be insignificant.
(15) SUBSEQUENT EVENTS
The Bank has placed into effect a contributory profit-sharing 401(k)
plan that covers employees beginning January 1, 1998. The Bank's
contribution are made at the discretion of the Board of Directors.
Effective March 18, 1998, the Board of Directors adopted a Shareholder
Protection Rights Plan. The Board of Directors has declared a dividend
of one right for each share of common stock as of March 18, 1998. The
distribution of the rights is designed to deter coercive takeover
tactics and help prevent partial tender offers and other abusive
tactics to gain control of the Company without dealing with all
shareholders on a fair and equal basis. Each right entitles
shareholders, under alternative circumstances, to buy either securities
of the Company or securities of the acquiring company (depending upon
the form of the transaction) at an exercise price that will be half the
market value of such securities at that time. The rights can be
exercised only if certain persons or groups acquire nineteen per cent
or more of the Company's outstanding common stock or launch a tender or
exchange offer that would result in ownership of nineteen percent or
more of its common stock and for a period of ten days following the
public announcement of such acquisition, the Company will be entitled
to redeem the rights at one cent per right. The rights expire on March
18, 2008.
(16) COMMENCEMENT OF OPERATIONS
Prior to October 6, 1997, the Company was in organization. Commencement
of operations began on October 6, 1997 upon formal approval by the
Company's and the subsidiary's regulatory authorities and the opening
of business of the Bank. Organizational expenditures of approximately
$40,000 were capitalized and are to be amortized using the
straight-line method over a period of five years.
The Company was inactive prior to January 1, 1997. The only previous
activity was the issuance of 1 share of organizational common stock in
exchange for $25.
24
<PAGE> 70
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
(Tabular amounts are in thousands)
(16) COMMENCEMENT OF OPERATIONS (Continued)
The following items were incurred before October 6, 1997 and reflected
as income and expense items in the Consolidated Statement of
Operations:
<TABLE>
<S> <C>
Interest income:
Interest on escrow funds $27
Interest expense:
Interest on note payable 4
Non-interest expense:
Salaries and employee benefits 83
Occupancy expenses, net 1
Other non-interest expenses 61
</TABLE>
(17) YEAR 2000 ISSUES
The Company has initiated a program to study the impact on its computer
system in order to be compliant when the system must process data
beyond December 31, 1999. This is commonly referred to as the Year 2000
("Y2K") and Century Date Change ("CDC"). This study not only involves
identifying any modifications and/or replacements of certain hardware
and/or software maintained by the Company and any of its key
third-party processors, but also receiving assurance from qualified,
independent parties that the appropriate actions have or are being
taken by third parties to remedy their Y2K issues for computer and data
processing systems that the third party is responsible for maintaining
and that are relied upon by the Company. In addition, the Company is
also taking appropriate actions to determine to receive assurance that
any of its customers, principally large commercial lending customers,
are taking necessary steps to remedy their Y2K issues due to the fact
that noncompliance could adversely effect their ability to repay
borrowings to the Company.
Under this program, the Company has identified the computer systems
which will require either modification, upgrade or replacement. The
Company anticipates that in-house personnel will be primarily
responsible for monitoring and completing these tasks and although
outside contractors may be used, the costs will not be significant. As
such, the Company believes that the necessary and/or planned
modifications, upgrades and replacement of existing systems, along with
third party confirmation, will be completed in a timely manner to
assure Y2K compliance and any related costs will not have a material
impact on the Company's results of operations, cash flows or financial
condition in future periods.
25
<PAGE> 71
MURFREESBORO BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
C O N T E N T S
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Consolidated Balance Sheet .......................................................................... 1
Consolidated Statement of Operations ................................................................ 2
Consolidated Statement of Cash Flows ................................................................ 3
Notes to Consolidated Financial Statements .......................................................... 4
</TABLE>
<PAGE> 72
MURFREESBORO BANCORP, INC.
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
(Tabular amounts are in thousands)
<TABLE>
<S> <C>
ASSETS
Cash and due from banks (note 2) $ 841
Federal funds sold 2,566
-------
Total cash and cash equivalents 3,407
-------
Investment securities:
Available for sale 18,771
Held to maturity 3,551
-------
Investment securities 22,322
-------
Loans less allowance for possible loan losses of $181,000 14,292
-------
Premises and equipment, net 1,550
Accrued interest receivable 348
Other assets 362
-------
Total assets $42,281
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $33,603
Accrued interest payable 105
Other liabilities 52
-------
Total Liabilities 33,760
-------
Shareholders' Equity:
Preferred stock, no assigned value or rights, 1,000,000 shares authorized,
no shares issued or outstanding at December 31, 1997 -
Common stock, $5.00 par value, 2,000,000 shares authorized
and 907,609 shares issued and outstanding at December 31, 1997 4,538
Additional paid-in capital 4,530
Retained earnings (544)
Unrealized loss on securities available for sale (3)
-------
Total shareholders' equity 8,521
-------
Total liabilities and shareholders' equity $42,281
=======
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 73
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, 1998
(Tabular amounts are in thousands except per share amounts)
<TABLE>
<S> <C>
Interest Income:
Interest on loans $ 206
Interest on investment securities 260
Interest on federal funds sold 72
------
Total interest income 538
------
Interest Expense:
Interest on interest-bearing transactions accounts 172
Interest on time deposits less than $100,000 113
Interest on time deposits $100,000 and greater 60
------
Total interest expense 345
------
Net interest income 193
Provision for possible loan losses 113
------
Net interest income after provision for possible loan losses 80
------
Non-Interest Income:
Service charges on deposits 12
Other fees and commissions 1
Other non-interest income 2
------
Total non-interest income 15
------
Non-Interest Expense:
Salaries and employee benefits 139
Occupancy expenses, net 9
Furniture and equipment expense 19
Other non-interest expenses 103
------
Total non-interest expense 270
------
Net income before taxes (175)
Income tax benefit (note 4) -
------
Net loss $ (175)
======
Loss per share - basic (no dilutive items outstanding) $(0.19)
======
Dividends per common share $ -
======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 74
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, 1998
(Tabular amounts are in thousands)
<TABLE>
<S> <C>
Operating activities:
Net loss $ (175)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Provision for loan losses 113
Provision for depreciation, amortization and accretion, net 15
Changes in assets and liabilities:
Increase in accrued interest receivable (199)
Increase in other assets (230)
Increase in accrued interest payable 31
Decrease in other liabilities (34)
--------
Net cash used by operating activities (479)
--------
Investing activities:
Purchase of securities available for sale (7,036)
Purchase of securities held for maturity (4,553)
Maturities and calls of securities available for sale 3,000
Maturities and calls of securities held to maturity 1,000
Increase in loans, net (9,072)
Additions to premises and equipment (6)
--------
Net cash used in investing activities (16,667)
--------
Financing activities:
Proceeds from note payable -
Repayment of note payable -
Net increase in deposits 11,843
Issuance of common stock -
Stock issue costs -
--------
Net cash provided by financing activities 11,843
--------
Net increase (decrease) in cash and cash equivalents (5,303)
Cash and cash equivalents at the beginning of the quarter 8,710
--------
Cash and cash equivalents at the end of the quarter $ 3,407
========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 313
--------
Non-cash transactions:
Decrease in unrealized loss on securities available for sale $ (6)
========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 75
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, 1998
(1) General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial statements of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments necessary for
a fair presentation of the financial position and results of operations
of the interim periods have been made. All such adjustments are of a
normal recurring nature. Results of operations for the three months
ended March 31, 1998 are not necessarily indicative of the results of
operations for the full year or any interim periods.
(2) Summary of Significant Accounting Policies
Reference is made to the accounting policies of the Company described
in the notes to consolidated financial statements contained in the
Company's general financial statements for the year ended December 31,
1997. The Company has followed those policies in preparing this report.
(3) Asset Growth
As a recently formed banking entity, the Company has had concentrated
efforts in generated loans and attracting new deposits. The Company has
increased loans from $5,401,000 at December 31, 1997 to $14,473,000 at
March 31, 1998 and deposits have increased from $21,765,000 at December
31, 1997 to $33,603,000 at March 31, 1998.
Such increases have been primarily the result of marketing and business
development efforts and not from rate pricings. The growth of loans has
been monitored by management, and the Company's loan underwriting
standards have been maintained during this period.
(4) Income Taxes
A valuation allowance of the deferred tax benefit of the net operating
loss for the quarter ended March 31, 1998 has been recorded as it has
not been determined that it more likely than not that at March 31, 1998
that this benefit is to be realized.
(5) Per Share
Loss per share of common stock is based on the weighted average number
of shares of common stock outstanding during the period.
4
<PAGE> 76
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Murfreesboro Bancorp, Inc.
- --------------------------------------------------------------------------------
(Registrant)
Date April 25, 1998
------------------
By /s/ William E. Rowland
----------------------------------
(Signature) *
William E. Rowland,
President and Chief Executive Officer
* Print the name and title of each signing officer under his or her signature.
<PAGE> 77
EXHIBITS
<TABLE>
<CAPTION>
INDEX
-----
<S> <C> <C>
(3) (i) Charter I
(ii) Bylaws II
(10) Material Contracts
(i) Shareholder protection rights agreement III
(ii) 1997 Statutory-Nonstatutory Stock Option Plan IV
(11) Statement Re: Computation of Per Share Earnings See Part III -
Income Statement
and Footnote 9
(12) Subsidiaries of the Registrant See Part I -
Item I
Description
of Business
(27) Financial Data Schedules V
</TABLE>
