<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 nine month period ended September 30, 1999
------------------
[ ] 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, 1999.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MURFREESBORO BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
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 Statements of Cash Flows .................................... 5
Notes to Consolidated Financial Statements ............................... 6-8
</TABLE>
1
<PAGE> 3
MURFREESBORO BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Tabular amounts are in thousands)
<TABLE>
<CAPTION>
ASSETS (Unaudited)
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $ 1,498 $ 2,402
Federal funds sold 7,169 7,070
- ----------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,667 9,472
- ----------------------------------------------------------------------------------------------
Securities available for sale 14,093 20,198
Securities held to maturity 8,865 6,384
- ----------------------------------------------------------------------------------------------
Total investment securities 22,958 26,582
- ----------------------------------------------------------------------------------------------
Loans, less allowance for possible loan losses
of $707,000 and $473,000, respectively 55,859 37,318
Premises and equipment, net 3,087 1,605
Accrued interest receivable 662 540
Other assets 1,663 1,583
Deferred tax assets 209 323
- ----------------------------------------------------------------------------------------------
Total assets $93,105 $77,423
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $75,385 $65,002
Securities sold under agreements to repurchase 5,573 3,590
Accrued interest payable 247 205
Accrued expenses and other liabilities 251 92
Convertible debentures 2,975 --
- ----------------------------------------------------------------------------------------------
Total liabilities 84,431 68,889
- ----------------------------------------------------------------------------------------------
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 (305) (546)
- -----------------------------------------------------------------------------------------------
Realized shareholders' equity 8,763 8,522
Accumulated other comprehensive income (89) 12
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 8,674 8,534
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $93,105 $77,423
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Interest income:
Interest and fees on loans $3,009 $1,200
Interest on taxable investment securities 1,062 1,002
Interest on federal funds sold 112 188
- -------------------------------------------------------------------------------------------------
Total interest income 4,183 2,390
- -------------------------------------------------------------------------------------------------
Interest expense:
Interest on negotiable order of withdrawal accounts 349 555
Interest on money market demand accounts 295 170
Interest on savings deposits 5 3
Interest on certificates of deposit 1,469 805
- -------------------------------------------------------------------------------------------------
Total interest expense on deposits 2,118 1,533
Interest on securities sold under agreement to repurchase 109 26
- -------------------------------------------------------------------------------------------------
Total interest expense 2,227 1,559
- -------------------------------------------------------------------------------------------------
Net interest income 1,956 831
Provision for possible loan losses 237 335
- -------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 1,719 496
- -------------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 159 82
Other fees and commissions 8 8
Increase in cash surrender value of officers' life insurance 56 --
Gain on sale of investment securities 2 --
Other non-interest income 34 15
- -------------------------------------------------------------------------------------------------
Total non-interest income 259 105
- -------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 867 487
Occupancy expenses, net 54 54
Furniture and equipment expense 109 62
Other non-interest expense 571 398
- -------------------------------------------------------------------------------------------------
Total non-interest expense 1,601 1,001
- -------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle 377 (400)
Income tax expense 121 --
- -------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle 256 (400)
Cumulative effect of a change in accounting principle, removing
start-up costs (no tax effect required) -- (38)
- --------------------------------------------------------------------------------------------------
Net income (loss) $ 256 $(438)
==================================================================================================
Earnings per share:
Basic:
Income (loss) before cumulative effect of a change
in accounting principle $ 0.28 $(0.44)
Cumulative effect of a change in accounting principle -- $(0.04)
- --------------------------------------------------------------------------------------------------
Net income (loss) $ 0.28 $(0.48)
==================================================================================================
Diluted:
Income (loss) before cumulative effect of a change
in accounting principle $ 0.28 $(0.44)
Cumulative effect of a change in accounting principle -- (.04)
- --------------------------------------------------------------------------------------------------
Net income (loss) $ 0.28 $(0.48)
==================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(Tabular amounts are in thousands except per share amounts)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Interest income:
Interest and fees on loans $1,153 $ 587
Interest on taxable investment securities 337 374
Interest on federal funds sold 54 80
- ---------------------------------------------------------------------------------------------------
Total interest income 1,544 1,041
- ---------------------------------------------------------------------------------------------------
Interest expense:
Interest on negotiable order of withdrawal accounts 83 241
Interest on money market demand accounts 116 71
Interest on savings deposits 2 1
Interest on certificates of deposit 579 358
- ---------------------------------------------------------------------------------------------------
Total interest expense on deposits 780 671
Interest on securities sold under agreement to repurchase 46 24
- ---------------------------------------------------------------------------------------------------
Total interest expense 826 695
- ---------------------------------------------------------------------------------------------------
Net interest income 718 346
Provision for possible loan losses 62 106
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 656 240
- ---------------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 61 46
Other fees and commissions 2 4
Increase in cash surrender value of officers' life insurance 18 --
Gain on sale of investment securities 2 --
Other non-interest income 9 9
- ---------------------------------------------------------------------------------------------------
Total non-interest income 92 59
- ---------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 321 181
Occupancy expenses, net 19 22
Furniture and equipment expense 39 23
Other non-interest expense 173 154
- ---------------------------------------------------------------------------------------------------
Total non-interest expense 552 380
- ----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 196 (81)
Income tax expense 66 --
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 130 $ (81)
====================================================================================================
Earnings per share:
Basic net income (loss) $ 0.14 $(0.09)
====================================================================================================
Diluted net income (loss) $ 0.14 $(0.09)
====================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
MURFREESBORO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(Tabular amounts are in thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Operating activities:
Net income (loss) before cumulative effect of a
change in accounting principle $ 256 $ (438)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Provision for loan losses 237 335
Provision for depreciation, amortization and accretion, net 134 119
Changes in assets and liabilities:
Increase in accrued interest receivable (122) (385)
Increase in cash surrender value of officers' life insurance (80) --
Increase in deferred tax asset (7) --
Increase in other assets (80) (5)
Increase (decrease) in accrued interest payable 42 110
Increase in accrued expenses and other liabilities 280 29
- -----------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 747 (235)
- -----------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of securities available for sale (8,043) (11,515)
Purchase of securities held to maturity (4,501) (7,405)
Maturities and calls of securities available for sale 14,267 8,250
Maturities and calls of securities held to maturity 2,000 1,500
Proceeds from sales of securities available for sale 990 --
Increase in loans, net (18,775) (26,845)
Additions to premises and equipment (1,579) (99)
- -----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (16,893) (36,114)
- -----------------------------------------------------------------------------------------------------------
Financing activities:
Sale of convertible debentures 2,975 --
Net increase in deposits 10,383 46,795
Net increase in securities sold under agreement to repurchase 1,983 4,650
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,341 51,445
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (805) 15,096
Cash and cash equivalents at the beginning of the period 9,472 8,710
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 8,667 $ 23,806
==========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $ 2,185 $ 1,174
==========================================================================================================
Non-cash transactions:
Stock dividend on Federal Home Loan Bank common stock $ 12 $ --
- ----------------------------------------------------------------------------------------------------------
Increase in unrealized gain (loss) on securities
available for sale, net of $23,000 and $50,000 in tax effect $ (108) $ (82)
==========================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
MURFREESBORO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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, 1999 and December 31, 1998, the results of
operations for the nine months ended September 30, 1999 and 1998,
the results of operations for the quarters ended September 30, 1999
and 1998, comprehensive income for the nine months ended September
30, 1999 and 1998, comprehensive income for the quarters ended
September 30, 1999 and 1998 and changes in cash flows for the nine
months ended September 30, 1999 and 1998. All significant
intercompany transactions have been eliminated. The interim
consolidated financial statements should be read in conjunction with
the notes to the consolidated financial statements presented in the
Company's Annual Report to Shareholders. The results of the interim
periods are not necessarily indicative of the results to be expected
for the complete fiscal year.
(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 nine months ended September 30, 1999 and
1998, respectively.
<TABLE>
<CAPTION>
Tax Net of
Pre-Tax Expense Tax
Amount (Benefit) Amount
------ --------- ------
(In thousands)
<S> <C> <C> <C>
Nine months ended September 30, 1999
Net unrealized loss on securities available for sale $(132) $(43) $(89)
----- ---- ----
Other comprehensive income (loss) $(132) $(43) $(89)
----- ---- ----
Nine months ended September 30, 1998
Net unrealized loss on securities available for sale $ (73) $ -- $(73)
----- ---- ----
Other comprehensive income $ (73) $ -- $(73)
===== ==== ====
</TABLE>
(3) EARNINGS PER SHARE
The weighted average number of common shares outstanding during the
nine months ended September 30, 1999 and 1998 was 907,609. The
effect of dilutive common stock options was 17,800 shares for the
nine months ended September 30, 1999. There were no dilutive items
outstanding during the nine months ending September 30, 1998.
6
<PAGE> 8
(4) CHANGE IN ACCOUNTING PRINCIPLE
During 1998, the Company adopted the provisions of Statement of
Position 98-5 (SOP 98-5) Reporting on the Costs of Start-Up
Activities. Under SOP 98-5, all start-up costs should be expensed as
incurred which differed from the prior method of capitalization of
such costs and amortizing using the straight-line-method over a
sixty-month term. In accordance with SOP 98-5, the Company expensed
organizational costs of approximately $38,000 with no tax benefit
recorded as a full allowance for deferred tax assets had been
established as of the beginning of the nine months. This change in
accounting principle increased the loss per share by $0.04 for both
basic and dilutive purposes.
(5) YEAR 2000 COMPUTER ISSUE
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 Company'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 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 performed
testing in 1998 and 1999 and plans further testing in 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,
7
<PAGE> 9
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, has modified 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
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.
SUMMARY
Net loss for the nine months ended September 30, 1998 was $438,000 and the net
income for the nine months ended September 30, 1999 was $256,000.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the nine months ended September 30,
1998 totaled $45,992,000, which represents 94.4% of average total assets.
Earning assets totaled $78,765,000 at September 30, 1998. Average earning assets
for the nine months ended September 30, 1999 totaled $75,505,000, which
represented 93.6% of average total assets. Earning assets totaled $86,693,000 at
September 30, 1999 and $71,443,000 at December 31, 1998.
Loan Portfolio. The Company's average loans for the nine months ended September
30, 1998 were $19,306,000 and for the nine months ended September 30, 1999 were
$47,737,000. The balance in total loans at September 30, 1998 was $32,246,000,
$37,670,000 at December 31, 1998, and $56,566,000 at September 30, 1999.
Investment Portfolio. The Company's investment securities portfolio averaged
$22,307,000 for the nine months ended September 30, 1998 and $24,729,000 for the
nine months ended September 30, 1999. The portfolio totaled $23,983,000 at
September 30, 1998, $26,582,000 at December 31, 1998, and $22,958,000 at
September 30, 1999.
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 amortized cost. At
September 30, 1998, there was unrealized loss of $73,000 in the "Available for
Sale" portfolio and there was an unrealized loss of $132,000 at September 30,
1999. The average balance of securities "Available for Sale" during the nine
months ended September 30, 1998 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 nine months ended September 30, 1998 was $3,233,000 and the balance
at September 30, 1998 was $5,894,000. The average balance of securities
"Available for Sale" during the nine months ended September 30, 1999 was
$15,812,000 and the balance at September 30, 1999 was $14,093,000. The average
balance of securities "Available for Sale" during the quarter ended September
30, 1999 was $14,390,000 and $20,564,000 for the quarter ended September 30,
1998. The average balance of securities "Held to Maturity" during the nine
months ended September 30, 1999 was $8,917,000 and the balance at September 30,
1999 was $8,865,000. The average balance of securities "Held to Maturity" during
the quarter ended September 30, 1999 was $8,867,000 and $4,577,000 for the
quarter ended September 30, 1998.
Deposits. The Company's average deposits were $39,334,000 for the nine months
ended September 30, 1998. This included average non-interest-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
$19,137,000. The Company's average deposits for the nine months ended September
30, 1999 were $66,095,000. This included average non-interest-bearing deposits
of $3,095,000, average certificates of deposit of $35,402,000, average savings
deposits of $338,000 and average interest-bearing transaction
9
<PAGE> 11
accounts of $26,330,000. Deposits totaled $68,560,000 at September 30, 1998,
$65,002,000 at December 31, 1998, and $75,385,000 at September 30, 1999.
Long-Term Debt. The Company issued $3,000,000 of floating rate subordinated
convertible capital debentures ("debentures) on September 29, 1999. Issuance
costs related to the debentures is approximately $25,000. The debentures convert
to common stock of the Corporation on August 31, 2011 at a conversion factor
based upon the market value of the common stock on that date. If converted
before that date, the conversion will be based upon one share of common stock
for every $12.50 of debentures held. The debentures begin accruing interest on
January 1, 2000 and pay interest every December 15 with the final interest
payment being made at maturity. Interest payment is based upon a rate equal to
the weighted average prime rate less 0.5%.
Capital Resources. Shareholders' equity totaled $8,674,000 at of September 30,
1999. This included $9,068,000 of common stock and additional paid-in-capital
less a deficit of $305,000 and other comprehensive income in the form of an
unrealized loss on securities available for sale of $89,000.
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 non-interest bearing deposit accounts. At September 30,
1998 and September 30, 1999, the Company had $2,300,000 of federal funds
purchase lines available at three correspondent banks as well as a secured
federal funds purchase line of $4,000,000. None of these lines were drawn at
September 30, 1999.
The Company raised $3,000,000 of additional capital in the form of subordinated
convertible debentures during the third quarter of 1999. This amount will be
reduced by approximately $25,000 of offering costs.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 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. 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, interest expense of
$728,000 on interest-bearing transaction accounts, money market demand accounts,
and savings accounts and interest expense on securities sold under agreement to
repurchase of $26,000.
10
<PAGE> 12
Net interest income for the nine months ended September 30, 1999 totaled
$1,956,000. This was the result of interest income of $4,183,000 and interest
expense of $2,227,000. Interest income produced by the loan portfolio totaled
$3,009,000, interest income on investment securities totaled $1,062,000 and
interest income on federal funds totaled $112,000. Interest expense included
$1,469,000 of interest expense on certificates of deposit, interest expense of
$649,000 on interest-bearing transaction accounts, money market demand accounts,
and savings accounts and interest expense on securities sold under agreement to
repurchase of $109,000.
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 the nine months ended September 30, 1998 was 2.42%.
The net cost of funds, defined as interest expense divided by average-earning
assets, was 4.51% and the yield on earning assets was 6.95% for the nine months
ended September 30, 1998. The net interest margin for the nine months ended
September 30, 1999 was 3.45%. The net cost of funds for the nine months ended
September 30, 1999 was 3.96% and the yield on earning assets was 7.41%.
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 interest 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% and for the nine months ended
September 30, 1999 was 3.04%.
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 that 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, unless there is
sufficient collateral to justify continued accrual.
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 that 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 $473,000 at December 31, 1998 and $707,000 at
September 30, 1999 in the allowance for possible loan losses are adequate to
absorb known risks in the portfolio. No assurance can be
11
<PAGE> 13
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 unless there is reason to believe the
collection of principal and interest is fairly certain. 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.
There were no impaired loans, loans on non-accrual status or foreclosed real
estate held for sale at December 31, 1998 or at September 30, 1999. Loans past
due ninety days or more and still accruing interest at December 31, 1998 totaled
$3,000 and $151,000 at September 30, 1999.
Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and increase in the cash surrender value of officer's life insurance. 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 $105,000 for the nine months ended September 30,
1998. This included $82,000 from service charges on deposit accounts, other fees
of $8,000 and $15,000 of other non-interest income. There were no gains or
losses on securities during the nine months ended September 30, 1998.
Non-interest income totaled $259,000 for the nine months ended September 30,
1999. This included $159,000 on service charge on deposit accounts, $8,000 of
other fees, $34,000 of other non-interest income including brokerage income,
$56,000 from the increase in the cash surrender value of the officer's life
insurance and a $2,000 gain on sale of investment securities.
Non-interest Expenses. Non-interest expense for the nine months ended September
30, 1998 totaled $1,001,000. Salaries and employee benefits for the nine months
ended September 30, 1998 totaled $487,000. Occupancy expense for the nine months
ended September 30, 1998 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, telephone, postage and legal and audit fees.
Non-interest expense for the nine months ended September 30, 1999 totaled
$1,601,000. Salaries and employee benefits for the nine months ended September
30, 1999 totaled $867,000. Occupancy expenses for the nine months ended
September 30, 1999 totaled $54,000 while furniture and equipment expenses
totaled $109,000. Other non-interest expenses totaled $571,000. Other
non-interest expenses include supplies and printing, telephone, postage and
legal and audit fees.
Income Taxes. At December 31, 1998, the Company had net operating losses for
federal and state income taxes of approximately $560,000 of which $310,000
expire in tax year 2012 for federal and state purposes. Approximately $250,000
will expire in tax year 2013 for state purposes and in tax year 2018 for federal
purposes.
For the nine months ended September 30, 1999, the Company incurred income tax
expenses of $121,000 for an effective tax rate of 32.1%.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 1999 AND 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.
12
<PAGE> 14
Net interest income for the quarter ended September 30, 1998 totaled $346,000.
This was the result of interest income of $1,041,000 and interest expense of
$695,000. 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, interest expense of $313,000 on
interest-bearing transaction accounts, savings accounts, and money market
accounts and interest expense of $24,000 on securities sold under agreement to
repurchase.
Net interest income for the quarter ended September 30, 1999 totaled $718,000.
This was the result of interest income of $1,544,000 and interest expense of
$826,000. Interest income produced by the loan portfolio totaled $1,153,000,
interest income on investment securities totaled $337,000 and interest income on
federal funds totaled $54,000. Interest expense included $579,000 of interest
expense on certificates of deposit, interest expense of $201,000 on
interest-bearing transaction accounts, money market demand accounts, and savings
accounts and interest expense on securities sold under agreement to repurchase
of $46,000.
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 the quarter ended September 30, 1998 was 2.32%. The
net cost of funds, defined as interest expense divided by average-earning
assets, was 4.71% and the yield on earning assets was 6.99% for the quarter
ended September 30, 1998. The net interest margin for the quarter ended
September 30, 1999 was 3.47%. The net cost of funds for the quarter ended
September 30, 1999 was 4.07% and the yield on earning assets was 7.53%.
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 interest 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 quarter ended September 30, 1998 was 1.65% and for the quarter ended
September 30, 1999 was 3.02%.
Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and increase in the cash surrender value of officer's life insurance. 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 $59,000 for the quarter ended September 30, 1998.
This included $46,000 from service charges on deposit accounts, other fees of
$4,000 and $9,000 of other non-interest income. There were no gains or losses on
securities during the quarter ended September 30, 1998.
Non-interest income totaled $92,000 for the quarter ended September 30, 1999.
This included $61,000 on service charge on deposit accounts, other fees of
$2,000, $9,000 of other non-interest income including brokerage income, gain on
the sale of investment securities of $2,000 and $18,000 from the increase in the
cash surrender value of the officer's life insurance.
Non-interest Expenses. Non-interest expense for the quarter ended September 30,
1998 totaled $380,000. Salaries and employee benefits for the quarter ended
September 30, 1998 totaled $181,000. Occupancy expense for the quarter ended
September 30, 1998 totaled $22,000 while furniture and equipment expense totaled
$23,000. All other non-interest expenses totaled $154,000 for the quarter ended
September 30, 1998. Other non-interest expenses include supplies and printing,
telephone, postage and legal and audit fees.
13
<PAGE> 15
Non-interest expense for the quarter ended September 30, 1999 totaled $552,000.
Salaries and employee benefits for the quarter ended September 30, 1999 totaled
$321,000. Occupancy expenses for the quarter ended September 30, 1999 totaled
$19,000 while furniture and equipment expenses totaled $39,000. Other
non-interest expenses totaled $173,000.
Income Taxes. At December 31, 1998, the Company had net operating losses for
federal and state income taxes of approximately $560,000 of which $310,000
expire in tax year 2012 for federal and state purposes. Approximately $250,000
will expire in tax year 2013 for state purposes and in tax year 2018 for federal
purposes.
For the quarter ended September 30, 1999, the Company incurred income tax
expenses of $66,000 for an effective tax rate of 33.7%.
RETURN ON EQUITY AND ASSETS
Return on assets (net income divided by average total assets) for the nine
months ended September 30, 1998 was (1.10%.) Return on assets for the nine
months ended September 30, 1999 was 0.42%. Return on assets for the quarter
ended September 30, 1998 was (0.53%.) while return on assets for the quarter
ended September 30, 1999 was 0.60%.
Return on equity (net income divided by average equity) for the nine months
ended September 30, 1998 was (6.82%). Return on equity for the nine months ended
September 30, 1999 was 3.97%. Return on equity for the quarter ended September
30, 1998 was (4.03%) while return on equity for the quarter ended September 30,
1999 was 6.07%.
Equity to assets (average equity divided by average total assets) for the nine
months ended September 30, 1998 was 17.57%. Equity to assets for the nine months
ended September 30, 1999 was 10.44%. Equity to assets for the quarter ended
September 30, 1998 was 13.76% while equity to assets for the quarter ended
September 30, 1999 was 9.89%.
There were no dividends paid during the quarters or nine months ended September
30, 1998 or 1999, so no dividend payout ratio is presented.
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.
14
<PAGE> 16
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, 1999
indicated 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 $ 47,737 $ 3,009 8.43%
U.S. Treasury and other U.S. government agencies 24,729 1,062 5.74%
States and municipalities -- -- N/A
Federal funds sold 3,039 112 4.92%
Interest bearing deposits with other financial institutions -- -- N/A
-------- ------- ------
Total interest-earning assets/interest income 75,505 4,183 7.41%
-------- ------- ------
Cash and due from banks 1,310
Other assets 4,438
Allowance for possible loan losses (588)
--------
Total assets $ 80,665
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 26,668 649 3.26%
Certificates of deposit 38,413 1,469 5.11%
Repurchase agreements 2,865 109 5.07%
Note payable -- -- N/A
-------- ------- ------
Total interest-bearing liabilities/interest expense 65,865 2,227 4.37%
-------- ------- ------
Non-interest-bearing demand deposits 3,304
Other liabilities 357
Shareholders' equity 8,423
--------
Total liabilities and shareholders' equity $ 77,740
========
Net interest earnings $ 1,956
=======
Net interest income on interest-earning assets 3.45%
======
Taxable equivalent adjustment: N/A
</TABLE>
15
<PAGE> 17
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
indicated 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%
-------- ------ ------
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 38,668 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>
16
<PAGE> 18
The following table presents changes in the Company's various categories of
interest income and interest expense based upon the change in the average rate
and the change in the average volume from the nine months ended September 30,
1998 to the nine months ended September 30, 1999 (in thousands).
<TABLE>
<CAPTION>
INCREASE INCREASE
INCREASE (DECREASE) (DECREASE)
(DECREASE) DUE TO RATE DUE TO VOLUME
- -----------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Interest earning assets:
Federal funds sold $ (76) $ (18) $ (58)
Investment securities 60 (49) 109
Loans 1,809 37 1,772
- -------------------------------------------------------------------------------------
Total interest earning assets $1,793 $ (30) $1,823
- -------------------------------------------------------------------------------------
LIABILITIES
Interest bearing liabilities:
Demand deposits and savings accounts $ (79) $(394) $ 315
Certificates of deposits 664 (55) 719
Repurchase agreements 83 (6) 89
- -------------------------------------------------------------------------------------
Total interest bearing liabilities 668 (455) 1,123
- -------------------------------------------------------------------------------------
Total $1,125 $ 425 $ 700
=====================================================================================
</TABLE>
17
<PAGE> 19
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 September 30, 1999 indicated
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 $ 53,722 $1,153 8.51%
U.S. Treasury and other U.S. government agencies 23,257 337 5.76%
States and municipalities -- -- N/A
Federal funds sold 4,319 54 4.95%
Interest bearing deposits with other financial institutions -- -- N/A
-------- ------ ------
Total interest-earning assets/interest income 81,298 1,544 7.53%
-------- ------ ------
Cash and due from banks 953
Other assets 4,930
Allowance for possible loan losses (666)
--------
Total assets $ 86,515
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 24,809 201 3.22%
Certificates of deposit 44,436 579 5.16%
Repurchase agreements 4,108 46 4.48%
-------- ------ ------
Total interest-bearing liabilities/interest expense 73,353 826 4.51%
-------- ------ ------
Non-interest-bearing demand deposits 3,721
Other liabilities 881
Shareholders' equity 8,560
--------
Total liabilities and shareholders' equity $ 86,515
========
Net interest earnings $ 718
======
Net interest income on interest-earning assets 3.47%
======
Taxable equivalent adjustment: N/A
</TABLE>
18
<PAGE> 20
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 indicated
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 5.90%
States and municipalities -- -- N/A
Federal funds sold 5,569 80 5.70%
-------- ------ ------
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>
19
<PAGE> 21
The following table presents changes in the Company's various categories of
interest income and interest expense based upon the change in the average rate
and the change in the average volume from the quarter ended September 30, 1998
to the quarter ended September 30, 1999 (in thousands).
<TABLE>
<CAPTION>
INCREASE INCREASE
INCREASE (DECREASE) (DECREASE)
(DECREASE) DUE TO RATE DUE TO VOLUME
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold $ (26) $ (10) $ (16)
Investment securities (37) (9) (28)
Loans 566 21 545
- ---------------------------------------------------------------------------------
Total interest earning assets 503 (2) 501
- ---------------------------------------------------------------------------------
LIABILITIES
Interest bearing liabilities:
Demand deposits and savings accounts (112) (110) (2)
Certificates of deposits 221 (35) 256
Repurchase agreements 22 (3) 25
- ---------------------------------------------------------------------------------
Total interest bearing liabilities 131 (148) 279
- ---------------------------------------------------------------------------------
Total $ 372 $ 150 $ 222
=================================================================================
</TABLE>
20
<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 September 30, 1999
and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
September 30 December 31,
1999 1998
---- ----
<S> <C> <C>
Non-interest-bearing deposits:
Individuals, partnerships and corporations $ 4,491 $ 2,567
U. S. Government and states and political subdivisions -- --
Certified and official checks 515 389
------- -------
Total non-interest-bearing deposits 5,006 2,956
------- -------
Interest-bearing deposits:
Interest-bearing demand accounts 22,505 29,557
Saving accounts 301 221
Certificates of deposit, less than $100,000 22,414 23,752
Certificates of deposit, $100,000 or greater 15,159 8,516
------- -------
Total interest-bearing deposits 70,379 62,046
------- -------
Total deposits $75,385 $65,002
======= =======
</TABLE>
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, 1999 and the year ended December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Nine months Ended Year Ended
September 30, 1999 December 31,1998
------------------ ----------------
<S> <C> <C> <C> <C>
Non-interest-bearing deposits $ 3,304 N/A $ 1,803 N/A
Interest-bearing demand deposits 26,330 3.27% 22,400 4.96%
Savings accounts 338 2.09% 160 2.51%
Certificates of deposit 38,413 5.11% 21,174 5.64%
------- ----- ------- -----
Total deposits $68,385 4.35% $45,537 5.28%
======= ===== ======= =====
</TABLE>
At December 31, 1998, certificates of deposits greater than $100,000 aggregated
approximately $8,516,000. The following table indicates, as of December 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 $1,722 $5,794 $ 1,000 --
====== ====== ======= ======
</TABLE>
At September 30, 1999, certificates of deposits greater than $100,000 aggregated
approximately $15,159,000. The following table indicates, as of September 30,
1999, 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 $3,658 $9,759 1,742 --
====== ====== ======= ======
</TABLE>
21
<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 September 30, 1999 and December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Interest-bearing deposits with banks $ -- $ --
Investment securities 22,958 26,582
Federal funds sold 7,169 7,070
Loans:
Real estate 37,892 23,256
Commercial and other 18,674 14,414
--------- --------
Total loans 56,566 37,670
--------- --------
Interest-earning assets $ 86,693 $ 71,322
========= ========
</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 September 30, 1999, approximately $14,093,000 of investment
securities was classified as available for sale and at December 31, 1998,
approximately $20,198,000 of investment securities was classified as available
for sale. Approximately $89,000 of unrealized loss (net of tax) and $12,000 of
unrealized gain (net of tax) was included in shareholders' equity related to the
available for sale investment securities as of September 30, 1999 and December
31, 1998, respectively. There was $8,865,000 and $6,384,000 of securities at
September 30, 1999 and December 31, 1998 classified as held to maturity,
respectively.
22
<PAGE> 24
At December 31, 1998, obligations of the United States Government or its
agencies represented approximately 100% of the total investment debt portfolio.
The Company acquired restricted stock in the Federal Home Loan Bank of
Cincinnati during 1998. The following table presents the carrying amounts of the
Company's investment portfolio at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ -- $ --
U.S. Government agencies 20,016 20,035
States and political subdivisions -- --
Other securities -- --
------- -------
Total available for sale debt securities 20,016 20,035
Federal Home Loan Bank stock 163 163
------- -------
Total available for sale 20,179 20,198
======= =======
HELD TO MATURITY:
U.S. Treasury -- --
U.S. Government agencies 6,384 6,422
States and political subdivisions -- --
Other securities -- --
------- -------
Total held to maturity 6,384 6,422
------- -------
Total investment portfolio $26,563 $26,620
======= =======
</TABLE>
At September 30, 1999, obligations of the United States Government or its
agencies represented approximately 100% of the total investment debt portfolio.
The following table presents the carrying amounts of the Company's investment
portfolio at September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ -- $ --
U.S. Government agencies 13,989 13,857
States and political subdivisions -- --
Other securities -- --
------- -------
Total available for sale - debt securities 13,989 13,857
------- -------
Federal Home Loan Bank Stock 236 236
------- -------
Total available for sale $14,225 $14,093
======= =======
HELD TO MATURITY:
U.S. Treasury -- --
U.S. Government agencies 8,865 8,699
States and political subdivisions -- --
Other securities -- --
------- -------
Total held to maturity 8,865 8,699
======= =======
Total investment portfolio $24,104 $22,792
======= =======
</TABLE>
23
<PAGE> 25
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment debt portfolio at September 30,
1999. The weighted average yields on these instruments are presented based on
final maturity (dollars in thousands).
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost Fair Value Average Yield
--------- ---------- -------------
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries $ -- $ -- N/A
U.S. Government agencies:
Due within 1 year 2,000 1,993 5.31%
Due after 1 year but within 5 years 11,989 11,864 5.60%
Due after 5 years but within 10 years -- -- N/A
Due after 10 years -- -- N/A
------- ------- ------
Total 13,989 13,857 5.60%
------- ------- ------
States and political subdivisions -- -- N/A
Other -- -- N/A
------- ------- ------
Total investments available for sale-debt 13,989 13,857 5.60%
======= ======= ======
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 5,998 5,893 5.93%
Due after 5 years but within 10 years 2,867 2,806 6.17%
Due after 10 years -- -- N/A
------- ------- ------
Total 8,865 8,699 6.01%
------- ------- ------
States and political subdivisions -- -- N/A
Other -- -- N/A
------- ------- ------
Total held to maturity 8,865 8,699 6.01%
======= ======= ======
Total investment portfolio-debt securities $22,865 $22,556 5.73%
======= ======= ======
</TABLE>
24
<PAGE> 26
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment debt portfolio at December 31,
1998. The weighted average yields on these instruments are presented based on
final maturity (dollars in thousands).
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost Fair Value Average Yield
--------- ---------- -------------
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries $ -- $ -- N/A
U.S. Government agencies:
Due within 1 year 4,000 3,993 5.05%
Due after 1 year but within 5 years 15,002 15,011 5.61%
Due after 5 years but within 10 years 1,014 1,031 6.18%
Due after 10 years -- -- N/A
------- ------- ------
Total 20,016 20,035 5.52%
------- ------- ------
States and political subdivisions -- -- N/A
Other -- -- N/A
------- ------- ------
Total investments available for sale-debt securities $20,016 $20,035 5.52%
======= ======= ======
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 1,502 1,502 5.77%
Due after 5 years but within 10 years 4,882 4,920 6.07%
Due after 10 years -- -- N/A
------- ------- ------
Total 6,384 6,422 6.00%
------- ------- ------
States and political subdivisions -- -- N/A
Other -- -- N/A
------- ------- ------
Total held to maturity 6,384 6,422 6.00%
======= ======= ======
Total investment portfolio-debt securities $26,400 $26,457 5.64%
======= ======= ======
</TABLE>
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.
25
<PAGE> 27
LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
at December 31, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
Percent of
Balance Total Loans
------- -----------
<S> <C> <C>
Real estate loans:
Construction and land development $ 1,286 3.4%
Secured by residential properties 12,307 32.7%
Secured by commercial real estate 9,663 25.7%
- -----------------------------------------------------------------------------
Total real estate loans 23,256 61.8%
- -----------------------------------------------------------------------------
Commercial and industrial loans 7,789 20.7%
Other consumer loans 6,625 17.5%
- -----------------------------------------------------------------------------
Total loans 37,670 100.0%
Unamortized (discounts) premiums and
net deferred loan costs 121 N/A
Allowance for possible loan losses (473) N/A
- -----------------------------------------------------------------------------
Net loans $37,318 N/A
</TABLE>
The following table sets forth the composition of the Company's loan portfolio
at September 30, 1999 (dollars in thousands).
<TABLE>
<CAPTION>
Percent of
Balance Total Loans
------- -----------
<S> <C> <C>
Real estate loans:
Construction and land development $ 2,173 3.8%
Secured by residential properties 20,350 36.0%
Secured by commercial real estate 15,369 27.2%
- ------------------------------------------------------------------------------
Total real estate loans 37,892 67.0%
- ------------------------------------------------------------------------------
Commercial and industrial loans 7,881 13.9%
Other consumer loans 10,793 19.1%
- ------------------------------------------------------------------------------
Total loans 56,566 100.0%
Allowance for possible loan losses (707) N/A
- -------------------------------------------------------------------------------
Net loans $55,859 N/A
===============================================================================
</TABLE>
26
<PAGE> 28
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, 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 $ 1,188 $ 98 $ -- $ 1,286
Real estate mortgage loans 8,106 13,155 709 21,970
Commercial and industrial loans 3,134 3,924 731 7,789
All other loans 2,159 4,018 448 6,625
------- ------- ------ -------
Total loans $14,587 $21,195 $1,888 $37,670
======= ======= ====== =======
LOAN INTEREST RATE SENSITIVITY:
Predetermined interest rates $ 5,598 $ 4,724 $1,434 $11,756
Floating or adjustable interest rates 8,989 16,471 454 25,914
------- ------- ------ -------
Total $14,587 $21,195 $1,888 $37,670
======= ======= ====== =======
</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
September 30, 1999 (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 $ 1,504 $ 669 $ -- $ 2,173
Real estate mortgage loans 7,762 26,290 1,667 35,719
Commercial and industrial loans 1,599 6,282 -- 7,881
All other loans 2,205 7,096 1,492 10,793
------- ------- ------ -------
Total loans $13,070 $40,337 $3,159 $56,566
======= ======= ====== =======
LOAN INTEREST RATE SENSITIVITY:
Predetermined interest rates $ 2,673 $11,557 $3,159 $17,389
Floating or adjustable interest rates 10,397 28,780 -- 39,177
------- ------- ------ -------
Total $13,070 $40,337 $3,159 $56,566
======= ======= ====== =======
</TABLE>
27
<PAGE> 29
LOAN POLICY
All lending activities of the 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 that 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,
unless 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 make an individual review impracticable. It is the Company's
policy to charge off any consumer installment loan that 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.
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
28
<PAGE> 30
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 flow 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 $707,000 as of September 30, 1999 or
1.25% of loans outstanding. The allowance for possible loan losses was $473,000
as of December 31, 1998, or 1.25% of loans outstanding. Loans totaling $5,000
were charged off in 1999 and recoveries of $2,000 were made. The provision for
possible loan losses charged against earnings during 1999 was $237,000. Loans
totaling $1,000 were charged-off (with no recoveries made) during the year ended
December 31, 1998. The provision for possible loan losses charged against
earnings during the year ended December 31, 1998 was $406,000.
There were no non-performing loans of the Company on at September 30, 1999 or at
December 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 was no other real
estate owned or foreclosed, any repossessed assets or impaired loans at
September 30, 1999 or at December 31, 1998. There was $3,000 of loans past due
ninety or more days at December 31, 1998 and still accruing interest and
$151,000 of loans past due ninety or more days at September 30, 1999 and still
accruing interest.
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
29
<PAGE> 31
available at all times, the Company devotes resources to projecting on a monthly
basis the amount of funds that 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 that are reasonably likely to result in liquidity increasing or
decreasing in any material manner. The ratio for average loans to average
deposits for 1998 was 51.1% and for the nine months ended September 30, 1999 was
69.8%.
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
excess tax assets, and Tier II capital which is primarily the qualifying 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 and excess tax assets.
30
<PAGE> 32
The following table gives the various capital ratios and balances at September
30, 1999 and December 31, 1998 (dollars in thousands) for the Company:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------- -------
<S> <C> <C>
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,763 $ 8,522
Less excess tax assets 209 323
------- -------
Total Tier I capital 8,554 8,199
------- -------
Tier II capital:
Qualifying debt 2,975
Qualifying allowance for loan losses 707 473
------- -------
Total Tier II capital 3,682 473
------- -------
Total capital $12,236 $ 8,672
======= =======
Risk-adjusted assets $68,499 $47,883
======= =======
Quarterly average assets $86,515 $76,255
======= =======
RATIOS:
Tier I capital to risk-adjusted assets 12.5% 17.1%
Tier II capital to risk-adjusted assets 5.4% 1.0%
Total capital to risk-adjusted assets 17.9% 18.1%
Leverage--Tier I capital to quarterly
average assets less excess tax assets 9.9% 10.8%
</TABLE>
31
<PAGE> 33
The following table gives the various capital ratios and balances at September
30, 1999 and at December 31, 1998 (dollars in thousands) for the Bank:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
CAPITAL:
Tier I capital:
Shareholders' equity $11,539 $ 8,356
------- -------
Less excess tax assets 147 261
------- -------
Total Tier I capital 11,392 8,095
------- -------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for loan losses 707 473
------- -------
Total Tier II capital 707 473
------- -------
Total capital $12,099 $ 8,568
======= =======
Risk-adjusted assets $68,499 $47,862
======= =======
Quarterly average assets $86,515 $76,255
======= =======
RATIOS:
Tier I capital to risk-adjusted assets 16.6% 16.9%
Tier II capital to risk-adjusted assets 1.0% 1.0%
Total capital to risk-adjusted assets 17.7% 17.9%
Leverage--Tier I capital to quarterly
Average assets less excess tax assets 13.2% 10.6%
</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 September 30, 1999 and December 31, 1998, the Company exceeded the regulatory
minimums and qualified as a well-capitalized institution under the regulations.
32
<PAGE> 34
SHORT-TERM BORROWINGS:
The Company utilizes securities sold under repurchase agreements for short-term
borrowings. During the nine months ended and quarter ended September 30, 1999,
securities sold under repurchase agreements had the following:
<TABLE>
<CAPTION>
Nine Months Quarter
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
(Dollars in Thousands)
<S> <C> <C>
Maximum amount outstanding at end
of any month end in period $5,573 $5,573
====== ======
Average amount outstanding in period $2,865 $4,108
====== ======
Effective interest rate for period 5.07% 4.48%
====== ======
</TABLE>
At September 30, 1999, securities sold under agreement to repurchase totaled
$5,573,000 with a weighted average interest rate of 4.87%. Such agreements
mature on a daily basis and have U.S. Government agency securities underlying
the agreements with fair values of at least 100% of the borrowing.
The average balance for short-term borrowings of the Company was less than 30%
of shareholders' equity at December 31, 1998.
PROPERTY ACQUISITIONS:
During 1999, the Company began renovating the existing office premises and Bank
building into one combined main office. The cost of this renovation and
construction and related furnishings is estimated at $2,000,000. In addition,
the Bank has entered into a contract to purchase land and a commercial building
to use as a branch. Cost of acquiring the property and improvements that need to
be made for the building to be utilized as a branch are anticipated to
approximate $650,000. No other significant property acquisitions are planned for
the next year.
PERSONNEL:
The Company increased the number of employees from twenty-eight at December 31,
1998 to thirty-eight at September 30, 1999.
The Company anticipates increasing the number of employees during 1999 to
approximately forty employees to service the anticipated loan and deposit growth
and related support services as well as the branch during the next twelve
months. When the proposed new building is completed, additional employees will
be added during the year 2000 beginning with the second nine 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.
33
<PAGE> 35
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
34
<PAGE> 36
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 nine months for which this
report is filed
35
<PAGE> 37
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, 1999
---------------------
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.
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,498
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,169
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,093
<INVESTMENTS-CARRYING> 8,865
<INVESTMENTS-MARKET> 8,699
<LOANS> 56,566
<ALLOWANCE> 707
<TOTAL-ASSETS> 93,105
<DEPOSITS> 75,385
<SHORT-TERM> 5,573
<LIABILITIES-OTHER> 498
<LONG-TERM> 2,975
0
0
<COMMON> 9,068
<OTHER-SE> 394
<TOTAL-LIABILITIES-AND-EQUITY> 93,105
<INTEREST-LOAN> 3,009
<INTEREST-INVEST> 1,062
<INTEREST-OTHER> 112
<INTEREST-TOTAL> 4,183
<INTEREST-DEPOSIT> 2,118
<INTEREST-EXPENSE> 2,227
<INTEREST-INCOME-NET> 1,956
<LOAN-LOSSES> 237
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 1,601
<INCOME-PRETAX> 377
<INCOME-PRE-EXTRAORDINARY> 377
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 0.00
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 473
<CHARGE-OFFS> 5
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 707
<ALLOWANCE-DOMESTIC> 707
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
