<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-24161
MURFREESBORO BANCORP, INC.
--------------------------
(Exact Name of Registrant As Specified in Its Charter)
Tennessee 62-1694317
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
615 Memorial Boulevard, Murfreesboro, Tennessee 37129
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
(615) 890-1111
--------------
(Registrant's telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock outstanding: 907,609 shares at November 12, 1998.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MURFREESBORO BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
C O N T E N T S
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Consolidated Balance Sheets ......................................... 2
Consolidated Statements of Operations ............................... 3-4
Consolidated Statement of Cash Flows ................................ 5
Notes to Consolidated Financial Statements .......................... 6
</TABLE>
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MURFREESBORO BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
(Tabular amounts are in thousands)
<TABLE>
<CAPTION>
ASSETS
Sept. 30, Dec.31,
1998 1997
(Unaudited)
<S> <C> <C>
Cash and due from banks $1,270 $1,006
Federal funds sold 22,536 7,704
- -----------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 23,806 8,710
- -----------------------------------------------------------------------------------------------------------
Securities available for sale 18,089 14,732
Securities held to maturity 5,894 --
- -----------------------------------------------------------------------------------------------------------
Total investment securities 23,983 14,732
- -----------------------------------------------------------------------------------------------------------
Loans, less allowance for possible loan losses
of $403,000 and $68,000, respectively 31,843 5,333
Premises and equipment, net 1,592 1,558
Accrued interest receivable 534 149
Other assets 120 128
- -----------------------------------------------------------------------------------------------------------
Total assets $81,878 $30,610
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $68,560 $21,765
Securities sold under agreements to repurchase 4,650 --
Accrued interest payable 184 74
Other liabilities 112 81
- -----------------------------------------------------------------------------------------------------------
Total liabilities 73,506 21,920
- -----------------------------------------------------------------------------------------------------------
Contingencies -- --
Shareholders' equity :
Preferred stock, no assigned value or rights, 1,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $5.00 par value, 2,000,000 shares authorized
and 907,609 shares issued and outstanding 4,538 4,538
Additional paid-in capital 4,530 4,530
Deficit (769) (369)
- -----------------------------------------------------------------------------------------------------------
Realized shareholders' equity 8,299 8,699
Accumulated other comprehensive income 73 (9)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,372 8,690
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $81,878 $30,610
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
<TABLE>
<S> <C>
Interest income:
Interest and fees on loans $1,200
Interest on taxable investment securities 1,002
Interest on federal funds sold 188
- -----------------------------------------------------------------------------------
Total interest income 2,390
- -----------------------------------------------------------------------------------
Interest expense:
Interest on negotiable order of withdrawal accounts 555
Interest on money market demand accounts 170
Interest on savings deposits 3
Interest on certificates of deposit 805
- -----------------------------------------------------------------------------------
Total interest expense on deposits 1,533
Interest on securities sold under agreement to repurchase 26
- -----------------------------------------------------------------------------------
Total interest expense 1,559
- -----------------------------------------------------------------------------------
Net interest income 831
Provision for possible loan losses 335
- -----------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 496
- -----------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 82
Other fees and commissions 8
Other non-interest income 15
- -----------------------------------------------------------------------------------
Total non-interest income 105
- -----------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 487
Occupancy expenses, net 54
Furniture and equipment expense 62
Other non-interest expense 398
- -----------------------------------------------------------------------------------
Total non-interest expense 1,001
- -----------------------------------------------------------------------------------
Loss before income taxes (400)
Income tax benefit --
- -----------------------------------------------------------------------------------
Net loss $(400)
===================================================================================
Loss per share - basic ( no dilutive items outstanding) $(0.44)
===================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
<TABLE>
<S> <C>
Interest income:
Interest and fees on loans $587
Interest on taxable investment securities 374
Interest on federal funds sold 80
- ---------------------------------------------------------------------------------
Total interest income 1,041
- ---------------------------------------------------------------------------------
Interest expense:
Interest on negotiable order of withdrawal accounts 241
Interest on money market demand accounts 71
Interest on savings deposits 1
Interest on certificates of deposit 358
- ---------------------------------------------------------------------------------
Total interest expense on deposits 671
Interest on securities sold under agreement to repurchase 24
- ---------------------------------------------------------------------------------
Total interest expense 695
- ---------------------------------------------------------------------------------
Net interest income 346
Provision for possible loan losses 106
- ---------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 240
- ---------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 46
Other fees and commissions 4
Other non-interest income 9
- ---------------------------------------------------------------------------------
Total non-interest income 59
- ---------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 181
Occupancy expenses, net 22
Furniture and equipment expense 23
Other non-interest expense 154
- ---------------------------------------------------------------------------------
Total non-interest expense 380
- ---------------------------------------------------------------------------------
Loss before income taxes (81)
Income tax benefit --
- ---------------------------------------------------------------------------------
Net loss $(81)
=================================================================================
Loss per share - basic (no dilutive items outstanding) $(0.09)
=================================================================================
</TABLE>
See notes to consolidated financial statements.
4
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MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(Tabular amounts are in thousands)
<TABLE>
<S> <C>
Operating activities:
Net loss $(400)
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Provision for loan losses 335
Provision for depreciation, amortization and accretion, net 81
Changes in assets and liabilities:
Increase in accrued interest receivable (385)
Increase in other assets (5)
Increase in accrued interest payable 110
Decrease in other liabilities 29
- -------------------------------------------------------------------------------------
Net cash used by operating activities (235)
- -------------------------------------------------------------------------------------
Investing activities:
Purchase of securities available for sale (11,515)
Purchase of securities held to maturity (7,405)
Maturities and calls of securities available for sale 8,250
Maturities and calls of securities held to maturity 1,500
Increase in loans, net (26,845)
Additions to premises and equipment (99)
- -------------------------------------------------------------------------------------
Net cash used by investing activities (36,114)
- -------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 46,795
Net increase in securities sold under agreement to repurchase 4,650
- -------------------------------------------------------------------------------------
Net cash provided by financing activities 51,445
- -------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 15,096
Cash and cash equivalents at the beginning of the period 8,710
- -------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $23,806
=====================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $1,174
=====================================================================================
Non-cash transactions:
Decrease in unrealized loss on securities available for sale $82
=====================================================================================
</TABLE>
See notes to consolidated financial statements.
5
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MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts
of Murfreesboro Bancorp, Inc. and its subsidiary Bank of
Murfreesboro. The accompanying consolidated financial statements
have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the consolidated
financial statements contain all adjustments and disclosures
necessary to summarize fairly the financial position of the Company
as of September 30, 1998 and December 31, 1997, the results of
operations for the nine months and quarter ended September 30, 1998,
comprehensive earnings for the nine months and quarter ended
September 30, 1998 and changes in cash flows for the nine months
ended September 30, 1998. All significant intercompany transactions
have been eliminated. The interim consolidated financial statements
should be read in conjunction with the notes to the consolidated
financial statements presented in the Company's Form 10-SB. The
results of the interim periods are not necessarily indicative of the
results to be expected for the complete fiscal year. The Company was
basically inactive during the first nine months of 1997 so no
meaningful comparative financial data is presented for the nine
months and quarter ended September 30, 1997.
(2) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," was adopted by the Company on
January 1, 1998. SFAS 130 establishes standards for reporting
comprehensive income. Comprehensive income includes net income and
other comprehensive net income which is defined as non-owner related
transactions in equity. The following table sets forth the amounts of
other comprehensive income included in equity along with the related
tax effect for the three months and nine months ended September 30,
1998, respectively.
<TABLE>
<CAPTION>
Tax Net of
Pre-Tax Expense Tax
Amount Benefit Amount
------ ------- ------
(In thousands)
<S> <C> <C> <C>
Three months ended September 30, 1998
Net unrealized gain on securities available for sale $73 $ -- $73
--------------------------------------------------------- ---- ---- ----
Other comprehensive income $73 $ -- $73
========================================================= ==== ==== ====
Nine months ended September 30, 1998
Net unrealized gain on securities available for sale $82 $ -- $82
--------------------------------------------------------- ---- ---- ----
Other comprehensive income $82 $ -- $82
========================================================= ==== ==== ====
</TABLE>
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(3) EARNINGS PER SHARE
The weighted average number of common shares outstanding during the
nine months ended and quarter ended September 30, 1998 was 907,609.
There were no dilutive items outstanding during the nine months and
quarter ending September 30, 1998.
(4) CHANGE IN TOTAL ASSETS AND DEPOSITS
On September 30, 1998 the Bank received a large deposit of public
funds of approximately $13,000,000. Of this amount, approximately
$4.4 million was transferred out of the Bank on October 1, 1998.
There were additional transfers out of the original $13 million. It
is expected that only minimal balances will remain with this company
on a continuing basis. The $13 million appears in the Consolidated
Balance Sheets in "Deposits" and elsewhere in this document in
"Interest-bearing demand accounts". Since the funds were received on
the last day of the quarter, there was little affect on the
year-to-date and quarterly average balances.
(5) YEAR 2000 COMPUTER PROBLEM
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Corporation's programs that have time sensitive software may
recognize the date as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The
Federal Financial Institutions Examination Council recognizes five
phases that banks must complete to achieve Year 2000 readiness: 1)
Awareness of the potential risks associated with Year 2000; 2)
Assessment of all information and environmental systems needing
enhancements; 3) Renovation of the systems that are not Year 2000
ready; 4) Validation of the renovated systems to assure Year 2000
readiness; and 5) Implementation of the renovated product into the
ongoing operations. The Corporation has completed the Awareness,
Assessment and Renovation phases and is currently in the process of
validating its core processing systems for Year 2000 readiness. At
this time it is not expected that expenses to address year 2000
issues will materially impact future operating results.
The following section contains forward-looking statements, which
involve risks and uncertainties. The actual impact of the Year 2000
issue on the Bank could materially differ from that which is
anticipated in these forward-looking statements as a result of
certain factors identified below.
Company's State of Readiness
Management is aware of the possibility of exposure by banks to a
computer problem known as the "Year 2000 Problem" or the "Millennium
Bug" (the inability of some computer programs to distinguish between
the year 1900 and the year 2000). If :not corrected, some computer
applications could fail or create erroneous results by or at the
Year 2000. This could cause entire system failures, miscalculations,
and disruptions of normal business operations including, among other
things, a temporary inability to process transactions, send
statements, or engage in similar day to day business
7
<PAGE> 9
activities. The extent of the potential impact of the Year 2000
Problem in not yet known, and if not timely corrected, it could
affect the global economy.
Management has assessed the extent of vulnerability of the Bank's
computer systems to the problem. The Company entered into a contract
with Financial Data Technologies, Inc. (FiData) of Franklin,
Tennessee to handle data processing functions. FiData uses
Information Technology, Inc. (ITI) software and a Unisys mainframe
computer. Management studied ITI and FiData's Year 2000 preparation
when selecting a data processor. Unisys and ITI have been doing
internal testing of their equipment and FiData is presently testing
their computer system using the Bank's data. Management anticipates
the first session of testing will be completed by the end of 1998
and additional testing and follow-up testing is planned for early
1999.
Risk Assessment of Year 2000
The Company believes that, with modifications to existing software
and conversions to new software, the Year 2000 problem will not pose
a significant operational problem for the Company. However, because
most computer systems are, by their very nature, interdependent, it
is possible that non-compliant third party computers could impact the
Company's computer systems.
Additionally, the Company has taken steps to communicate with the
third parties, such as wire transfer systems, telephone systems,
electric companies and other utility companies with which it deals to
coordinate Year 2000 compliance but could be adversely affected if it
or the unrelated third parties are unsuccessful. The Company is also
assessing the impact, if any, the Year 2000 may have on its large
loan (credit risk) and deposit customers.
Cost of Year 2000
As described above, our primary systems are Year 2000 compliant,
therefore, little programming costs will be incurred. Most of the
costs incurred in addressing this problem are related to planning and
internal testing and validation, which are expected to be expensed as
incurred. The financial impact to the Company of Year 2000 compliance
has not been and is not anticipated to be material to the Company's
financial position or results of operations for 1998 or 1999.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel
trained in this area, the replacement of noncompliance of third party
vendors, and similar uncertainties.
Contingency Plans
Management, in conjunction with its Year 2000 and Disaster Recovery
consultants, is in the process of modifying its disaster recover
plans to include the response to a Year 2000 problem in a most likely
worst case scenario. The Company's preliminary contingency plans
involve the use of manual labor to compensate for the loss temporary
of certain automated computer systems or third party vendors.
8
<PAGE> 10
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
AND PLAN OF OPERATIONS
GENERAL
The Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the information and
tables which follow. The Company was inactive and dormant from its formation on
October 21, 1996 until December 31, 1996. Prior to opening on October 6, 1997,
the Company was in organization without significant activity in the nine months
ended September 30, 1997 and the quarter ended September 30, 1997. There is no
meaningful comparative data from the corresponding periods in 1997.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the nine months ended September 30,
1998 totaled $45,992,000, which represented 94.0% of average total assets.
Earning assets totaled $78,765,000 at September 30, 1998. Average earning assets
for the quarter ended September 30, 1998 totaled $59,055,000, which represented
96.7% of average total assets.
Loan Portfolio. The Company's average loans for the nine months ended September
30, 1998 were $19,306,000 and for the quarter ended September 30, 1998 were
$28,345,000. The balance in total loans at September 30, 1998 was $32,246,000 at
September 30, 1998.
Investment Portfolio. The Company's investment securities portfolio averaged
$22,307,000 for the nine months ended September 30, 1998 and $25,141,000 for the
quarter ended September 30, 1998. The portfolio totaled $23,983,000 at September
30, 1998.
The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities: "Held to Maturity" and "Available
for Sale." The "Available for Sale" securities are carried at fair market value,
whereas the "Held to Maturity" securities are carried at book value. At December
31, 1997, unrealized losses in the "Available for Sale" portfolio amounted to
$9,000 and unrealized gains in the "Available for Sale" portfolio totaled
$73,000 at September 30, 1998. The average balance of securities "Available for
Sale" during the quarter ended September 30, 1998 was $20,564,000, for the nine
months ended was $19,074,000 and the balance at September 30, 1998 was
$18,089,000. The average balance of securities "Held to Maturity" during the
quarter ended September 30, 1998 was $4,576,000, for the nine months ended
$3,233,000 and the balance at September 30, 1998 was $5,894,000.
Deposits. The Company's average deposits were $39,700,000 during the nine months
ended September 30, 1998. This included average noninterest-bearing deposits of
$1,313,000, average certificates of deposit of $18,741,000, average saving
deposits of $143,000 and average interest bearing transaction accounts of
$19,503,000. The Company's average deposits for the quarter ended September 30,
1998 were $50,875,000. This included average non-interest bearing deposits of
$1,069,000, average certificates of deposit of $24,837,000, average savings
deposits of $200,000 and average interest bearing transaction accounts of
$24,869,000. Deposits at September 30, 1998 were $68,560,000.
Capital Resources. Shareholders' equity totaled $8,372,000 at of September 30,
1998. This included $9,068,000 of common stock and additional paid-in-capital
less a deficit of $769,000 and $73,000 accumulated other comprehensive income.
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BALANCE SHEET MANAGEMENT
Liquidity Management. Liquidity is the ability of a company to convert assets
into cash without significant loss and to raise funds by increasing liabilities.
Liquidity management involves having the ability to meet the day-to-day cash
flow requirements of its customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
investments in federal funds and maturities of investment securities. Additional
sources of liquidity are loan repayments and possible prepayments from the
mortgage-backed securities from the investment portfolio.
The liability portion of the balance sheet provides liquidity through various
interest bearing and noninterest bearing deposit accounts. At September 30,
1998, the Company had $2,300,000 of federal funds purchase lines available at
three correspondent banks. None of these lines were drawn at September 30, 1998.
Because of the level of capital obtained in formation, no additional capital
funds or notes payable are anticipated to be deemed necessary during the next
twelve months.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Net Interest Income. Net interest income is the principal component of a
financial institution's income stream and represents the spread between interest
and fee income generated from earning assets and the interest expense paid on
deposits. The following discussion is on a fully taxable equivalent basis.
Net interest income for the nine months ended September 30, 1998 totaled
$831,000. This was the result of interest income of $2,390,000 and interest
expense of $1,559,000 for the same period. Interest income produced by the loan
portfolio totaled $1,200,000, interest income on investment securities totaled
$1,002,000 and interest income on federal funds totaled $188,000. Interest
expense included $805,000 of interest expense on certificates of deposit, and
interest expense of $728,000 on interest-bearing transaction accounts, savings
accounts and money market accounts and $26,000 of interest expense on securities
sold under agreement to repurchase.
The trend in net interest income is commonly evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets is computed by dividing fully taxable
equivalent net interest income by average earning assets. This ratio represents
the difference between the average yield on average earning assets and the
average rate paid for all funds used to support those earning assets.
The net interest margin for the nine months ended September 30, 1998 was 2.45%.
The net cost of funds, defined as interest expense divided by average-earning
assets, was 4.41% for the same period. The yield on earning assets was 6.95% for
the nine months ended September 30, 1998.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of non-interest bearing funds and
gives a direct perspective on the effect of market interest rate movements.
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<PAGE> 12
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
the nine months ended September 30, 1998 was 1.56%.
As the Company continues to grow interest income can be expected to increase
particularly in the area of interest and fees on loans. It is management's
desire to continue quality loan growth which should increase the yield on
interest-earning assets. As the Company grows, it can be expected that deposits
will increase and increase the interest expense. It is management's intent to
maintain or lower the cost of funds which should show an increase in net
interest income.
Allowance for Possible Loan Losses. Lending officers are responsible for the
ongoing review and administration of each loan. They make the initial
identification of loans which present some difficulty in collection or where
there is an indication that the probability of loss exists. Lending officers are
responsible for the collection effort on a delinquent loan. Senior management is
informed of the status of delinquent and problem loans on a monthly basis.
Senior management makes recommendations monthly to the board of directors as to
charge-offs. Senior management reviews the allowance for possible loan losses on
a quarterly basis. The Company's policy is to discontinue interest accrual when
payment of principal and interest is 90 days or more in arrears.
The allowance for possible loan losses represents management's assessment of the
risks associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for possible loan losses and the appropriate provisions
required to maintain a level considered adequate to absorb anticipated loan
losses. In assessing the adequacy of the allowance, management reviews the size,
quality and risk of loans in the portfolio. Management also considers such
factors as loan loss experience, the amount of past due and non-performing
loans, specific known risk, the status and amount of non-performing assets,
underlying collateral values securing loans, current and anticipated economic
conditions and other factors which affect the allowance for potential credit
losses.
While it is the Company's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
Management believes that the $403,000 at September 30, 1998 in the allowance for
possible loan losses is adequate to absorb known risks in the portfolio. No
assurance can be given, however, that adverse economic circumstances will not
result in increased losses in the loan portfolio, and require greater provisions
for possible loan losses in the future.
Non-performing Assets. Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans include loans
classified as non-accrual or renegotiated. The Company's policy is to place a
loan on non-accrual status when it is contractually past due 90 days or more as
to payment of principal or interest. At the time a loan is placed on non-accrual
status, interest previously accrued but not collected is reversed and charged
against current earnings. Recognition of any interest after a loan has been
placed on non-accrual is accounted for on a cash basis.
The Company had no non-performing assets or impaired loans as of September 30,
1998.
Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and profits. In addition, any gains or losses realized from the sale of
investment portfolio securities available for sale are included in non-interest
income.
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<PAGE> 13
Total non-interest income totaled $105,000 for the nine months ended September
30, 1998. This included $82,000 from service charges on deposit accounts, $8,000
of fee income and $15,000 of other non-interest income. There were no realized
gains or losses on securities during the nine months ended September 30, 1998.
Non-interest income should increase as the Company grows and adds deposit
accounts for which service charges may be made and additional fee generating
services are expanded.
Non-interest Expenses. Non-interest expense for the nine months ended September
30, 1998 totaled $1,001,000. Salaries and employee benefits for the period
totaled $487,000, occupancy expense totaled $54,000 while furniture and
equipment expense totaled $62,000. All other non-interest expenses totaled
$398,000 for the nine months ended September 30, 1998. Other non-interest
expenses include supplies and printing, data processing, telephone, postage and
legal and audit fees. Management expects an increase in certain areas of
non-interest expense as the Company grows; however, costs associated with
personnel (salaries and benefits), occupancy expense and furniture and equipment
expense should show only a slight increase as the Company grows through the
remainder of 1998.
Income Taxes. At September 30, 1998, the Company has net operating losses for
federal and state income taxes of approximately $310,000 which expire in tax
year 2012 for federal and state purposes and $107,000 which expire in tax year
2018 for federal purposes and 2013 for state purposes. The Company recorded no
tax benefit for the nine months ended September 30, 1998 as a valuation
allowance offset the tax benefit related to the deferred tax asset for these net
operating losses and other temporary differences, the primary of which is
provision for possible loan losses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Net Interest Income. Net interest income is the principal component of a
financial institution's income stream and represents the spread between interest
and fee income generated from earning assets and the interest expense paid on
deposits. The following discussion is on a fully taxable equivalent basis.
Net interest income for the three months ended September 30, 1998 totaled
$346,000. This was the result of interest income of $1,041,000 and interest
expense of $695,000 for the same period. Interest income produced by the loan
portfolio totaled $587,000, interest income on investment securities totaled
$374,000 and interest income on federal funds totaled $80,000. Interest expense
included $358,000 of interest expense on certificates of deposit, and interest
expense of $313,000 on interest-bearing transaction accounts, savings accounts
and money market accounts and $24,000 of interest expense on securities sold
under agreement to repurchase.
The net interest margin for the quarter ended September 30, 1998 was 2.42%. The
net cost of funds, defined as interest expense divided by average-earning
assets, was 4.71% for the quarter ended September 30, 1998. The yield on earning
assets was 6.99%. The interest rate spread for the quarter ended September 30,
1998 was 1.65%.
Non-interest Income Total non-interest income totaled $59,000 for the quarter
ended September 30, 1998. This included $46,000 from service charges on deposit
accounts, $4,000 of fee income and $9,000 of other non-interest income. There
were no realized gains or losses on securities during the quarter ended
September 30, 1998.
Non-interest Expenses. Non-interest expense for the quarter ended September 30,
1998 totaled $380,000. Salaries and employee benefits totaled $181,000,
occupancy expense totaled $22,000 and furniture and equipment expense totaled
$23,000 for the three months ended September 30, 1998. All other non-interest
expenses totaled $154,000 for the period.
12
<PAGE> 14
Income Taxes. The Company recorded no tax benefit for the quarter ended
September 30, 1998 as a valuation allowance offset the tax benefit related to
the deferred tax asset for these net operating losses and other temporary
differences.
RETURN ON EQUITY AND ASSETS
Return on assets (net loss divided by average total assets) for the nine months
ended September 30, 1998 was (1.10%.) Return on equity (net loss divided by
average equity) for the nine months ended September 30, 1998 was (6.37%.) Equity
to assets (average equity divided by average total assets) for the nine months
ended September 30, 1998 was 17.18%.
Return on assets for the quarter ended September 30, 1998 was (0.53%). Return on
equity for the quarter ended September 30, 1998 was (4.03%). Equity to assets
for the quarter ended September 30, 1998 was 13.10%.
There were no dividends paid during 1998, so no dividend payout ratio is
presented.
As the Company attempts to increase net interest income, the return on assets
and return on equity should be expected to increase.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead, and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
13
<PAGE> 15
AVERAGE BALANCE SHEET AND NET INTEREST INCOME
The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the nine months ended September 30, 1998 and
certain other information:
<TABLE>
<CAPTION>
Interest Average
Average Income/ Yields/
Balance Expense Rates
------- ------- -----
ASSETS: (Fully taxable equivalent - dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans $19,306 $1,200 8.31%
U.S. Treasury and other U.S. government agencies 22,307 1,002 6.00%
States and municipalities -- -- N/A
Federal funds sold 4,379 188 5.75%
Interest bearing deposits with other financial institutions -- -- N/A
- ------------------------------------------------------------- ------- ------ -------
Total interest-earning assets/interest income 45,992 2,390 6.95%
- ------------------------------------------------------------- ------- ------ -------
Cash and due from banks 852
Other assets 2,097
Allowance for possible loan losses (225)
- ------------------------------------------------------------- -------
Total assets $48,716
============================================================= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $19,280 728 5.05%
Certificates of deposit 18,741 805 5.75%
Repurchase agreements 647 26 5.36%
- ------------------------------------------------------------- ------- ------ -------
Total interest-bearing liabilities/interest expense 39,668 1,559 5.39%
- ------------------------------------------------------------- ------- ------ -------
Non-interest-bearing demand deposits 1,313
Other liabilities 178
Shareholders' equity 8,557
- ------------------------------------------------------------- -------
Total liabilities and shareholders' equity $48,716
============================================================= =======
Net interest earnings $831
============================================================= ======
Net interest income on interest-earning assets 2.42%
============================================================= ========
Taxable equivalent adjustment: N/A
------
</TABLE>
Since there are no corresponding periods of meaningful data for which to compare
in 1997, no table reflecting the changes in interest income and expense as a
result of the changes of average volume and average rate is presented.
14
<PAGE> 16
The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the quarter ended September 30, 1998 and
certain other information:
<TABLE>
<CAPTION>
Interest Average
Average Income/ Yields/
Balance Expense Rates
------- ------- -----
ASSETS: (Fully taxable equivalent - dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 28,345 $ 587 8.22%
U.S. Treasury and other U.S. government agencies 25,141 374 5.9%
States and municipalities -- -- N/A
Federal funds sold 5,569 80 5.70%
Interest bearing deposits with other financial institutions -- -- N/A
- --------------------------------------------------------------- -------- ------ -------
Total interest-earning assets/interest income 59,055 1,041 6.99%
- --------------------------------------------------------------- -------- ------ -------
Cash and due from banks 592
Other assets 2,135
Allowance for possible loan losses (339)
- --------------------------------------------------------------- --------
Total assets $61,443
=============================================================== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $24,969 313 4.98%
Certificates of deposit 24,837 358 5.72%
Repurchase agreements 1,865 24 5.11%
- --------------------------------------------------------------- -------- ------ -------
Total interest-bearing liabilities/interest expense 51,671 695 5.34%
- --------------------------------------------------------------- -------- ------ -------
Non-interest-bearing demand deposits 1,069
Other liabilities 250
Shareholders' equity 8,453
- --------------------------------------------------------------- --------
Total liabilities and shareholders' equity $61,443
=============================================================== ========
Net interest earnings $346
=============================================================== ======
Net interest income on interest-earning assets 2.32%
=============================================================== =======
Taxable equivalent adjustment: N/A
</TABLE>
Since there are no corresponding periods of meaningful data for which to compare
in 1997, no table reflecting the changes in interest income and expense as a
result of the changes of average volume and average rate is presented.
15
<PAGE> 17
DEPOSITS
The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at September 30, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(In thousands) (In thousands)
<S> <C> <C>
Non interest-bearing deposits:
Individuals, partnerships and corporations $ 1,450 $ 808
U. S. Government and states and political subdivisions -- --
Certified and official checks 87 156
- -------------------------------------------------------------- ------- -------
Total non-interest-bearing deposits 1,537 964
- -------------------------------------------------------------- ------- -------
Interest-bearing deposits:
Interest-bearing demand accounts 41,423 10,545
Saving accounts 225 59
Certificates of deposit, less than $100,000 19,636 6,312
Certificates of deposit, more than $100,000 5,739 3,885
- -------------------------------------------------------------- ------- -------
Total interest-bearing deposits 67,023 20,801
- -------------------------------------------------------------- ------- -------
Total deposits $68,560 $21,765
============================================================== ======= =======
</TABLE>
The growth in deposits during the first nine months of 1998 can be attributed to
the growing geographic market in which the Company is located along with the
opportunity afforded a new community bank. Management expects the growth to
continue throughout the remainder of 1998 and even into 1999, but at a slower
rate. Management does not anticipate any increase in the cost of funds unless
rates increase significantly.
The following table presents a breakdown by category of the average amount of
deposits and the average rate paid on deposits for the nine months ended
September 30, 1998 and year ended December 31, 1997:
<TABLE>
<CAPTION>
Nine months ended Year Ended
September 30, 1998 December 31, 1997
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Non interest-bearing deposits $ 1,313 N/A $ 283 N/A
Interest-bearing demand deposits 19,503 4.96% 1,045 5.32%
Savings accounts 143 2.59% 8 2.52%
Certificates of deposit 18,741 5.75% 1,446 6.02%
------ ----- ------ -----
Total deposits $39,700 5.34% $2,782 5.72%
====== ===== ====== =====
</TABLE>
At September 30, 1998, certificates of deposits greater than $100,000 aggregated
approximately $5,739,000. The following table indicates, as of September 30,
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 $2,473 $2,566 $ 700 --
================================================ ====== ====== ====== ======
</TABLE>
16
<PAGE> 18
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>
ASSETS
The management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Company's interest-earning assets by category at September 30, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(In thousands) (In thousands)
<S> <C> <C>
Interest-bearing deposits with banks $ -- $ --
Investment securities 23,983 14,732
Federal funds sold 22,536 7,704
Loans:
Real estate 20,150 3,600
Commercial and other 12,096 1,801
- ---------------------------------------------- ------- -------
Total loans 32,246 5,401
- ---------------------------------------------- ------- -------
Interest-earning assets $78,765 $27,837
============================================== ======= =======
</TABLE>
Asset growth can be expected to continue throughout 1998 and into 1999. It is
the intent of management to increase loans (i.e. the higher yielding asset
category). The balances in investment securities and federal funds will
fluctuate in response to new deposit growth and the lag period in utilizing
funds from new deposits as part of a quality loan portfolio throughout the
remainder of 1998 and into 1999. Management intends to maintain quality loans
while growing the portfolio.
INVESTMENT PORTFOLIO
The Company has classified all investment securities as either available for
sale or held to maturity depending upon whether the Company has the intent and
ability to hold the investment securities to maturity. The classification of
certain investment securities as available for sale is consistent with the
Company's investment philosophy of maintaining flexibility to manage the
portfolio. At September 30, 1998, approximately $18,016,000 of investment
securities were classified as available for sale and at December 31, 1997,
approximately $14,741,000 of investment securities were classified as available
for sale. Approximately $9,000 of unrealized loss was related to the available
for sale investment securities at December 31, 1997. There was $73,000 of
unrealized gains at September 30, 1998. There were $5,894,000 of securities at
September 30, 1998 classified as held to maturity. There were no securities at
December 31, 1997 classified as held to maturity.
At December 31, 1997 as well as September 30, 1998, obligations of the United
States Government or its agencies represented approximately 100% of the total
investment portfolio. The following table presents the carrying amounts of the
Company's investment portfolio at September 30, 1998 (in thousands):
17
<PAGE> 19
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-------- ----------
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ -- $ --
U.S. Government agencies 18,016 18,089
States and political subdivisions -- --
Other securities -- --
- ----------------------------------------------- -------- --------
Total available for sale $ 18,016 $ 18,089
=============================================== ======== ========
HELD TO MATURITY:
U.S. Treasury $ -- $ --
U.S. Government agencies 4,894 4,961
States and political subdivisions -- --
Other securities 1,000 1,000
- ----------------------------------------------- -------- --------
Total held to maturity $ 5,894 $ 5,961
=============================================== ======== ========
Total investment portfolio $ 23,910 $ 24,050
=============================================== ======== ========
</TABLE>
At December 31, 1997, obligations of the United States Government or its
agencies represented approximately 100% of the total investment portfolio. The
following table presents the carrying amounts of the Company's investment
portfolio at December 31, 1997 (in thousands):
<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 growth in investment securities during the first nine months of 1998 was the
result of a growth in deposits of the Bank. As quality loan demand increases,
management expects the investment portfolio to grow at a much slower rate during
the remainder of 1998. The growth during 1998 has been in securities available
for sale since it has been management's intention to maintain liquidity to fund
loan demand. Any growth in the investment portfolio during the remainder of 1998
will probably occur in securities available for sale since it is important to
have liquidity to meet loan demand. Many of the securities in the portfolio have
call features so the portfolio may experience some turnover depending upon the
issuers' decision whether to call a particular security.
18
<PAGE> 20
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at September 30,
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 1,500 1,501 5.80%
Due after 1 year but within 5 years 16,516 16,588 6.00%
Due after 5 years but within 10 years -- -- N/A
Due after 10 years -- -- N/A
- -------------------------------------------- ------- ------- -----
Total 18,016 18,089 5.99%
- -------------------------------------------- ------- ------- -----
States and political subdivisions -- -- N/A
Other -- -- N/A
- -------------------------------------------- ------- ------- -----
Total investments available for sale $18,016 $18,089 5.99%
============================================ ======= ======= =====
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 1,003 1,010 6.15%
Due after 5 years but within 10 years 3,891 3,951 6.10%
Due after 10 years -- -- N/A
- -------------------------------------------- ------- ------- -----
Total $ 4,894 $ 4,961 6.11%
- -------------------------------------------- ------- ------- -----
States and political subdivisions -- -- N/A
Other 1,000 1,000 5.57%
- -------------------------------------------- ------- ------- -----
Total held to maturity $ 5,894 $ 5,961 6.02%
============================================ ======= ======= =====
Total investment portfolio $23,910 $24,050 6.00%
============================================ ======= ======= =====
</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%
========================================== ======= ======= =====
HELD TO MATURITY:
</TABLE>
19
<PAGE> 21
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 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 September 30, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
Percent of
Balance Total Loans
------- -----------
<S> <C> <C>
Real estate loans:
Construction and land development $ 985 3.1%
Secured by residential properties 9,556 29.5%
Secured by commercial real estate 9,609 29.7%
------- ------
Total real estate loans 20,150 62.3%
Commercial and industrial loans 6,334 19.6%
Other consumer loans 5,712 17.9%
All other loans 50 0.2%
- ---------------------------------------------- ------- ------
Total loans 32,246 100.0%
Less:
Allowance for possible loan losses (403) N/A
- ---------------------------------------------- ------- ------
Net loans $31,843 N/A
============================================== ======= ======
</TABLE>
20
<PAGE> 22
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>
The increase in loans during the first nine months of 1998 was the result of
growth of the Bank's deposits and the vibrant growing market in which the Bank
is located. In addition, additional lending personnel were added which provided
the staffing necessary to meet growing loan demand. In addition, favorable
interest rates for borrowers in the market have increased the refinancing of
first mortgages. The rates have also helped increase housing starts in the
market. Finally, increased home sales have provided additional mortgage loan
demand. The growing market has also contributed to growth in commercial loans as
more new businesses are moving into the area or starting up and existing
businesses are expanding. Consumer loan demand has also increased as the Bank
has been able to better penetrate the market and offer loan consumer services to
its deposit customers. Management anticipates continued loan growth
(particularly in the area of single family residential mortgage loans) through
the remainder of 1998 and into 1999, but growth may slow somewhat. It is the
intent of management to maintain a quality loan portfolio. Management will
manage loan growth throughout 1998 and into 1999.
The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
September 30, 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 $ 908 $ 77 $ -- $ 985
Real estate residential mortgage loans 539 8,707 310 9,556
Real estate commercial loans 6,533 3,076 -- 9,609
Commercial and industrial loans 3,574 2,222 588 6,384
All other loans 2,024 3,588 100 5,712
- ------------------------------------------- ------- ------- ----- -------
Total loans $13,578 $17,670 $ 998 $32,246
=========================================== ======= ======= ===== =======
LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates $ 1,869 $ 4,425 $998 $ 7,292
Floating or adjustable interest rates 11,709 13,245 -- 24,954
- ------------------------------------------- ------- ------- ---- -------
Total $13,578 $17,670 $998 $32,246
=========================================== ======= ======= ==== =======
</TABLE>
21
<PAGE> 23
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
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 any 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.
22
<PAGE> 24
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 make an individual review impracticable. It is the Company's
policy to charge off any consumer installment loan which is past due 90 days or
more and is not adequately collateralized.
In addition, mortgage loans secured by real estate are placed on nonaccrual
status when the mortgagor is in bankruptcy, or foreclosure proceedings are
instituted. Any accrued interest receivable remains in interest income as an
obligation of the borrower.
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Credit risk and exposure to loss are inherent parts of the banking business.
Management seeks to manage and minimize these risks through its loan and
investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures that
it believes reflect the risk sensitive nature of the Company. The loan review
procedures are set to monitor adherence to the established criteria and to
ensure that on a continuing basis such standards are enforced and maintained.
Management's objective in establishing lending and investment standards is to
manage the risk of loss and to provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
loans with a three-year or less fixed maturity which may be amortized over a
maximum of 15 years.
The loan portfolio is regularly reviewed and management determines the amount of
loans to be charged-off. In addition, such factors as the Company's previous
loan loss experience, prevailing and anticipated economic conditions, industry
concentrations and the overall quality of the loan portfolio are considered.
While management uses available information to recognize losses on loans and
real estate owned, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for possible losses on loans and real estate owned. Such agencies may require
the Company to recognize additions to the allowances based on their judgments
about information available at the time of their examinations. In addition, any
loan or portion thereof which is classified as a "loss" by regulatory examiners
is charged-off.
The allowance for possible loan losses is increased by provisions charged to
operating expense. The allowance for possible loan losses is reduced by charging
off loans or portions of loans at the time they are deemed by management to be
uncollectible and increased when loans previously charged off are recovered. The
resulting allowance for possible loan losses is viewed by management as a
single, unallocated reserve available for all loans and, in management's
opinion, is adequate to provide for reasonably foreseeable potential loan
losses. The risk associated with loans varies with the creditworthiness of the
borrower, the type of loan (consumer, commercial or real estate) and its
maturity. Cash flows adequate to support a repayment schedule is an element
considered for all types of loans. Real estate loans are impacted by market
conditions regarding the value of the underlying property used as collateral.
Commercial loans are also impacted by the management of the business as well as
economic conditions. Management believes the allowance for possible loan losses
is adequate to absorb such anticipated charge-offs.
23
<PAGE> 25
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 $403,000
as of September 30, 1998, or 1.25% of loans outstanding. No loans were
charged-off (nor any recoveries made) during 1997 nor the first nine months of
1998. The provision for possible loan losses charged against earnings during the
first nine months of 1998 was $335,000 and the provision for possible loan
losses charged against earnings during the quarter ended September 30, 1998 was
$106,000.
There were no non-performing loans of the Company at December 31, 1997 or at
September 30, 1998. This includes non-accrual loans and restructured loans.
Accrual of interest is discontinued when there is reasonable doubt as to the
full, timely collections of interest or principal. When a loan becomes
contractually past due ninety (90) days with respect to interest or principal,
it is reviewed and a determination is made as to whether it should be placed on
non-accrual status. When a loan is placed on non-accrual status, all interest
previously accrued but not collected is reversed against current period interest
income. Income on such loans is then recognized only to the extent that cash is
received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to principal and interest and when, in the judgment of management, the
loans are estimated to be fully collectible as to principal and interest.
Restructured loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms. There were also no loans
past due ninety days or more, any other real estate owned or foreclosed, any
repossessed assets or impaired loans at December 31, 1997 or at September 30,
1998.
CAPITAL RESOURCES/LIQUIDITY
Liquidity. Of primary importance to depositors, creditors and regulators is the
ability to have readily available funds sufficient to repay fully maturing
liabilities. The Company's liquidity, represented by cash and cash due from
banks, is a result of its operating, investing and financing activities. In
order to insure funds are available at all times, the Company devotes resources
to projecting on a monthly basis the amount of funds which will be required and
maintains relationships with a diversified customer base so funds are
accessible. Liquidity requirements can also be met through short-term borrowings
or the disposition of short-term assets which are generally matched to
correspond to the maturity of liabilities.
The Company has a formal liquidity policy, and in the opinion of management, its
liquidity levels are considered adequate. Neither the Company nor the Bank is
subject to any specific regulation liquidity requirements imposed by regulatory
authorities. The Bank is subject to general FDIC guidelines which do not require
a minimum level of liquidity. Management believes its liquidity ratios meet or
exceed these guidelines. Management does not know of any trends or demands which
are reasonably likely to result in liquidity increasing or decreasing in any
material manner. The ratio for average loans to average deposits for the nine
months ended September 30, 1998 was 48.6% and 55.7%for the quarter ended
September 30, 1998.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain asset growth
over time and to absorb losses. The objective of the Company's management is to
maintain a level of capitalization that is sufficient to take advantage of
profitable growth opportunities while meeting regulatory requirements. This is
achieved by improving profitability through effectively allocating resources to
more profitable businesses, improving asset quality, strengthening service
quality, and streamlining costs. The primary measures used by management to
monitor the results of these efforts are the ratios of average equity to average
assets, average tangible equity to average tangible assets, and average equity
to net loans. The Federal Reserve Board and FDIC have adopted capital guidelines
governing the activities of bank holding
24
<PAGE> 26
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.
The following table gives the various capital ratios and balances at September
30, 1998 and December 31, 1997 (dollars in thousands) for the Company:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(In thousands) (In thousands)
<S> <C> <C>
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,299 $ 8,699
Less disallowed intangibles -- --
- ------------------------------------------------ ------- -------
Total Tier I capital 8,299 $ 8,699
- ------------------------------------------------ ------- -------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for possible loan losses 403 68
- ------------------------------------------------ ------- -------
Total Tier II capital 403 68
- ------------------------------------------------ ------- -------
Total capital $ 8,702 $ 8,767
================================================ ======= =======
Risk-adjusted assets $43,307 $11,883
================================================ ======= =======
Quarterly average assets (since
commencement of operations) $61,093 $20,770
================================================ ======= =======
RATIOS:
Tier I capital to risk-adjusted assets 19.2% 73.2%
Tier II capital to risk-adjusted assets 0.9% 0.6%
Total capital to risk-adjusted assets 20.1% 73.8%
Leverage-- Tier I capital to quarterly
Average assets less disallowed intangibles 13.6% 41.9%
</TABLE>
25
<PAGE> 27
The following table gives the various capital ratios and balances at September
30, 1998 and December 31, 1997 (dollars in thousands) for the Bank:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(In thousands) (In thousands)
<S> <C> <C>
CAPITAL:
Tier I capital:
Shareholders' equity $8,169 $ 7,757
--
Less disallowed intangibles -- --
- ---------------------------------------------------- ------- -------
Total Tier I capital 8,169 $ 7,757
- ---------------------------------------------------- ------- -------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for possible loan losses 403 68
- ---------------------------------------------------- ------- -------
Total Tier II capital 403 68
- ---------------------------------------------------- ------- -------
Total capital $ 8,572 $ 7,825
==================================================== ======= =======
Risk-adjusted assets $43,407 $11,845
==================================================== ======= =======
Quarterly average assets (since
commencement of operations) $62,181 $18,823
==================================================== ======= =======
RATIOS:
Tier I capital to risk-adjusted assets 18.8% 65.5%
Tier II capital to risk-adjusted assets 0.9% 0.6%
Total capital to risk-adjusted assets 19.7% 66.1%
Leverage-- Tier I capital to quarterly
Average assets less disallowed intangibles 13.1% 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 September 30, 1998, the Company exceeded the regulatory
minimums and qualified as a well-capitalized institution under the regulations.
SHORT-TERM BORROWINGS:
The average balance for short-term borrowings of the Company was less than 30%
of shareholders' equity at December 31, 1997 and September 30, 1998.
26
<PAGE> 28
PROPERTY ACQUISITIONS:
No significant property acquisitions are planned for the next year. Management
is looking at the possibility and feasibility of expanding the building located
at 607 Memorial Boulevard in the next year. The earliest time for which
construction would probably begin is early 1999.
PERSONNEL:
The Company increased the number of employees from the December 31, 1997 level
of 14 to 23 at September 30, 1998. Management anticipates the number of
employees at the end of 1998 to be approximately 25. Employees will be added as
needed to service the anticipated loan and deposit growth and related support
services during the next twelve months.
FOREIGN TRANSACTIONS:
The Company and the Bank have not had any investment securities, loans or
deposits of foreign governments, corporations or other entities nor anticipate
any such transactions in the future.
27
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
28
<PAGE> 30
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Murfreesboro Bancorp, Inc.
- -------------------------------------------------------------------------------
(Registrant)
Date November 12, 1998
---------------------
By /s/ William L. Webb
---------------------
(Signature) *
William L. Webb,
Principal Accounting Officer and Chief Financial Officer
* Print the name and title of each signing officer under his or her signature.
29
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MURFREESBORO BANCORP FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED INITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,270
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,536
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,089
<INVESTMENTS-CARRYING> 5,894
<INVESTMENTS-MARKET> 5,961
<LOANS> 32,246
<ALLOWANCE> 403
<TOTAL-ASSETS> 81,878
<DEPOSITS> 68,560
<SHORT-TERM> 4,650
<LIABILITIES-OTHER> 296
<LONG-TERM> 0
0
0
<COMMON> 9,068
<OTHER-SE> (696)
<TOTAL-LIABILITIES-AND-EQUITY> 81,878
<INTEREST-LOAN> 1,200
<INTEREST-INVEST> 1,002
<INTEREST-OTHER> 188
<INTEREST-TOTAL> 2,390
<INTEREST-DEPOSIT> 1,533
<INTEREST-EXPENSE> 1,559
<INTEREST-INCOME-NET> 831
<LOAN-LOSSES> 335
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,001
<INCOME-PRETAX> (400)
<INCOME-PRE-EXTRAORDINARY> (400)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (400)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
<YIELD-ACTUAL> 6.95
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 68
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 403
<ALLOWANCE-DOMESTIC> 403
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
