<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 2-90200
-------
FIRST MCMINNVILLE CORPORATION
----------------------------------------------------
(Exact Name of Registrant As Specified in its Charter)
Tennessee 62-1198119
------------------------------ ---------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
200 East Main Street, McMinnville, TN 37110
---------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
(931) 473-4402
--------------------------------------------------
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock outstanding: 533,274 shares at May 3, 1999
-------
1
<PAGE> 2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited consolidated financial statements of the registrant and its
wholly-owned subsidiary, First National Bank of McMinnville (Bank), are as
follows:
Consolidated Balance Sheets - March 31, 1999 and December 31, 1998.
Consolidated Statements of Earnings - For the three months ended March 31,
1999 and 1998.
Consolidated Statements of Comprehensive Earnings - For the three months
ended March 31, 1999 and 1998.
Consolidated Statements of Cash Flows - For the three months ended March
31, 1999 and 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Disclosures required by Item 3. are incorporated by reference to
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(In Thousands)
<S> <C> <C>
Assets
Loans $ 128,081 126,665
Less: Allowance for loan losses (1,557) (1,495)
--------- --------
Net loans 126,524 125,170
Securities:
Held to maturity, at cost (market value - $45,303,000 and
$47,393,000, respectively) 44,388 46,217
Available-for-sale, at market (amortized cost - $73,287,000
and $61,318,000, respectively) 72,716 61,743
--------- --------
Total earning assets 243,628 233,130
Cash and due from banks 4,282 5,241
Bank premises and equipment, net of accumulated depreciation 1,988 2,058
Accrued interest receivable 2,470 2,034
Deferred tax asset 441 63
Other real estate 11 11
Other assets 497 490
--------- --------
Total assets $ 253,317 243,027
========= ========
Liabilities and Stockholders' Equity
Deposits $ 190,254 185,305
Securities sold under repurchase agreements 16,202 13,699
Federal funds purchased 5,000 2,000
Advances from Federal Home Loan Bank 4,000 4,000
Accrued interest and other liabilities 2,496 3,137
--------- --------
Total liabilities 217,952 208,141
--------- --------
Stockholders' equity:
Common stock, $2.50 par value; authorized 5,000,000 shares,
issued 606,875 shares and 606,795, respectively 1,517 1,517
Additional paid-in capital 1,628 1,623
Retained earnings 35,124 34,017
Accumulated other comprehensive earnings:
Net unrealized gains (losses) on available-for-sale securities, net
of income tax benefit of $217,000 and income taxes of
$162,000, respectively (354) 264
--------- --------
37,915 37,421
Less cost of treasury stock of 73,601 shares at March 31, 1999
and 73,369 shares at December 31, 1998 (2,550) (2,535)
--------- --------
Total stockholders' equity 35,365 34,886
--------- --------
$ 253,317 243,027
========= ========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
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FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
(Dollars In Thousands
Except Per Share Amount)
<S> <C> <C>
Interest income:
Interest and fees on loans $2,594 2,392
Interest and dividends on securities:
Taxable securities 1,408 1,234
Exempt from Federal income taxes 366 319
Interest on federal funds sold 1 27
Interest on interest-bearing deposits in other banks and other
interest -- 2
------ -----
Total interest income 4,369 3,974
------ -----
Interest expense:
Interest on negotiable order of withdrawal accounts 161 120
Interest on money market demand and savings accounts 285 278
Interest on certificates of deposit 1,471 1,383
Interest on securities sold under repurchase agreements and
short term borrowings 132 42
Interest on Federal funds purchased 40 2
Interest on advances from Federal Home Loan Bank 52 --
------ -----
Total interest expense 2,141 1,825
------ -----
Net interest income 2,228 2,149
Provision for loan losses 45 45
------ -----
Net interest income after provision for loan losses 2,183 2,104
------ -----
Non-interest income:
Service charges on deposit accounts 108 119
Other fees and commissions 81 60
Commissions and fees on fiduciary activities 20 12
Security gains related to available-for-sale securities 5 --
Gain on sale of bank premises 166 --
Other income 12 13
------ -----
392 204
------ -----
Non-interest expense:
Salaries and employee benefits 666 634
Occupancy expenses, net 51 58
Furniture and equipment expense 19 22
Data processing expense 40 51
FDIC insurance 6 5
Other operating expenses 216 202
------ -----
998 972
------ -----
Earnings before income taxes 1,577 1,336
Income taxes 470 390
------ -----
Net earnings $1,107 946
====== =====
Basic earnings per common share $ 2.08 1.77
====== =====
Diluted earnings per common share $ 2.07 1.77
====== =====
Dividends per share $ -- --
====== =====
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
<PAGE> 5
FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Net earnings $1,107 946
------ ---
Other comprehensive earnings (loss), net of tax:
Unrealized gains (losses) on available-for-sale securities
arising during period, net of tax benefit of $376,000 and
income taxes of $1,000, respectively (615) 3
Less: reclassification adjustment for gains included in
net earnings, net of taxes of $2,000 (3) --
------ ---
Other comprehensive earnings (loss) (618) 3
------ ---
Comprehensive earnings $ 489 949
====== ===
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE> 6
FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 3,920 3,762
Fees and commissions received 221 204
Interest paid (1,975) (1,533)
Cash paid to suppliers and employees (974) (902)
Income taxes paid (143) (67)
-------- -------
Net cash provided by operating activities 1,049 1,464
-------- -------
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity securities 7,431 7,807
Proceeds from maturities of available-for-sale securities 1,183 7,578
Proceeds from sales of available-for-sale securities 1,005 --
Purchase of held-to-maturity securities (5,602) (11,101)
Purchase of available-for-sale securities (14,139) (9,543)
Loans made to customers, net of repayments (1,399) (739)
Purchase of premise and equipment (13) --
Proceeds from sale of premises and equipment 204 --
-------- -------
Net cash used in investing activities (11,330) (5,998)
-------- -------
Cash flows from financing activities:
Net (decrease) increase in non-interest bearing, savings and
NOW deposit accounts 901 (580)
Net increase in time deposits 4,048 3,355
Increase in securities sold under repurchase agreement 2,503 808
Increase in Federal funds purchased 3,000 --
Dividends paid (1,120) (1,072)
Proceeds from issuance of common stock 5 47
Payments to acquire treasury stock (15) (72)
-------- -------
Net cash provided by financing activities 9,322 2,486
-------- -------
Net decrease in cash and cash equivalents (959) (2,048)
Cash and cash equivalents at beginning of period 5,241 7,111
-------- -------
Cash and cash equivalents at end of period $ 4,282 5,063
======== =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
6
<PAGE> 7
FIRST MCMINNVILLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 1,107 946
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 45 53
Provision for loan losses 45 45
Gain on sale of available-for-sale securities (5) --
Gain on sale of premises and equipment (166) --
FHLB dividend reinvestment (13) (12)
Decrease (increase) in other assets, net (7) 226
Increase in other liabilities 313 114
Increase in interest receivable (436) (200)
Increase in interest payable 166 292
------- ------
Total adjustments (58) 518
------- ------
Net cash provided by operating activities $ 1,049 1,464
======= ======
Supplemental schedule of non-cash activities:
Unrealized gain (loss) in value of securities available-for-
sale, net of income tax benefit of $379,000 and income
taxes of $2,000, respectively $ (618) 3
======= ======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
7
<PAGE> 8
FIRST MCMINNVILLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of First
McMinnville Corporation (Company or Registrant) and its wholly-owned subsidiary,
First National Bank of McMinnville (Bank).
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 statements contain all adjustments and
disclosures necessary to summarize fairly the financial position of the Company
as of March 31, 1999 and December 31, 1998, the results of operations for the
three months ended March 31, 1999 and 1998, comprehensive earnings for the three
months ended March 31, 1999 and 1998 and changes in cash flows for the three
months ended March 31, 1999 and 1998. All significant intercompany transactions
have been eliminated. The interim consolidated financial statements should be
read in conjunction with the notes to the consolidated financial statements
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. The results for interim periods are not necessarily
indicative of results to be expected for the complete fiscal year.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Balance, January 1, 1999 and 1998, respectively $ 1,495 1,314
Add (deduct):
Losses charged to allowance (3) (5)
Recoveries credited to allowance 20 19
Provision for loan losses 45 45
------- ------
Balance, March 31, 1999 and 1998, respectively $ 1,557 1,373
======= ======
</TABLE>
8
<PAGE> 9
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company and its subsidiary. This
discussion should be read in conjunction with the consolidated financial
statements. Reference should also be made to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 for a complete discussion of factors
that impact liquidity, capital and the results of operations.
FORWARD-LOOKING STATEMENTS
Management's discussion of the Company, and management's analysis of the
Company's operations and prospects, and other matters, may include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and other provisions of federal and state
securities laws. Although the Company believes that the assumptions underlying
such forward-looking statements contained in this Report are reasonable, any of
the assumptions could be inaccurate and, accordingly, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
The use of such words as expect, anticipate, forecast, and comparable terms
should be understood by the reader to indicate that the statement is
"forward-looking" and thus subject to change in a manner that can be
unpredictable. Factors that could cause actual results to differ from the
results anticipated, but not guaranteed, in this Report, include (without
limitation) economic and social conditions, competition for loans, mortgages,
and other financial services and products, changes in interest rates, unforeseen
changes in liquidity, results of operations, and financial conditions affecting
the Company's customers, material unforeseen complications related to addressing
Year 2000 issues (both as to the Company and as to its customers, vendors,
consultants and governmental agencies), as well as other risks that cannot be
accurately quantified or completely identified. Many factors affecting the
Company's financial condition and profitability, including changes in economic
conditions, the volatility of interest rates, political events and competition
from other providers of financial services simply cannot be predicted. Because
these factors are unpredictable and beyond the Company's control, earnings may
fluctuate from period to period. The purpose of this type of information (such
as in Item 2, as well as other portions of this Report) is to provide Form 10-Q
readers with information relevant to understanding and assessing the financial
conditions and results of operations of the Company, and not to predict the
future or to guarantee results. The Company is unable to predict the types of
circumstances, conditions, and factors that can cause anticipated results to
change. The Company undertakes no obligation to publish revised forward-looking
statements to reflect the occurrence of changes or of unanticipated events,
circumstances, or results.
9
<PAGE> 10
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The concept of liquidity involves the ability of the Registrant and its
subsidiary to meet future cash flow requirements, particularly those of
customers who are either withdrawing funds from their accounts or borrowing to
meet their credit needs.
Proper asset/liability management is designed to maintain stability in
the balance of interest-sensitive assets to interest-sensitive liabilities in
order to provide a stable growth in net interest margins. Earnings on
interest-sensitive assets such as loans tied to the prime rate of interest and
federal funds sold, may vary considerably from fixed rate assets such as
long-term investment securities and fixed rate loans. Interest-sensitive
liabilities such as large certificates of deposit and money market certificates,
generally require higher costs than fixed rate instruments such as passbook
savings.
Banks, in general, must maintain large cash balances to meet day-to-day
cash flow requirements as well as maintaining required reserves for regulatory
agencies. The cash balances maintained are the primary source of liquidity.
Federal funds sold, which are basically overnight or short-term loans to other
banks that increase the other bank's required reserves, are also a major source
of liquidity.
The Company's investment portfolio consists of earning assets that
provide interest income. For those securities classified as held to maturity,
the Company has the ability and intention to hold these securities until
maturity. Securities classified as available-for-sale include securities
intended to be used as part of the Company's asset/liability strategy and/or
securities that may be sold in response to changes in interest rate, prepayment
risk, the need or desire to increase capital and similar economic factors.
Securities totaling approximately $3.6 million mature or reprice within the next
twelve months.
A secondary source of liquidity is the Bank's loan portfolio. At March
31, 1999 commercial loans of approximately $26.3 million and other loans
(mortgage and consumer) of approximately $6.7 million either will become due or
will be subject to rate adjustments within twelve months from the respective
date. Emphasis is placed on structuring adjustable rate loans.
As for liabilities, certificates of deposit of $100,000 or greater of
approximately $36.2 million will become due during the next twelve months. The
Bank's deposit base increased approximately $4.9 million during the quarter
ended March 31, 1999. Securities sold under repurchase agreements increased
approximately $2.5 million and Federal funds purchased increased $3.0 million
during the first three months of 1999. The increase in Federal funds purchased
was necessary due to the increase in earning assets of $10.5 million which were
also funded by the increase in deposits and securities sold under repurchase
agreements.
Historically, there has been no significant reduction in immediately
withdrawable accounts such as negotiable order of withdrawal accounts, money
market demand accounts, demand deposit and regular savings. Management does not
expect that there will be significant withdrawals from these accounts in the
future that are inconsistent with past experience.
10
<PAGE> 11
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT, CONTINUED
The Bank is limited by banking regulatory agencies as to the amount of
dividends that it can pay. At March 31, 1999, the Bank can declare during the
remainder of 1999 cash dividends in an aggregate amount not to exceed
approximately $6.2 million, exclusive of any 1999 net earnings, without prior
approval of the office of the Comptroller of the Currency. However, most of
these funds will be retained for use in the Bank's operations rather than being
paid out in dividends. It is anticipated that with present maturities, the
expected growth in deposit base, and the efforts of management in its
asset/liability management program, liquidity will not pose a problem in the
foreseeable future. At the present time there are no known trends or any known
commitments, demands, events or uncertainties that will result in or that are
reasonable likely to result in the Company's liquidity changing in any material
way.
CAPITAL RESOURCES
A primary source of capital is internal growth through retained
earnings. The ratio of stockholders' equity to total assets was 14.0% at March
31, 1999 and 14.4% at December 31, 1998. Total assets increased 4.2% during the
three months ended March 31, 1999. The annualized rate of return on
stockholders' equity for the three months ended March 31, 1999 was 12.6%
compared to 11.8% for the comparable period in 1998. Principally because of the
relatively high percentage of equity capital the return on equity is lower than
the reported average for many banks in the Bank's peer group. Cash dividends
will be increased during the remainder of 1999 over 1998 only in the discretion
of the Board of Directors and as profits permit. Dividends paid during 1998 were
$2.65 per share. No material changes in the mix or cost of capital is
anticipated in the foreseeable future. At the present time there are no material
commitments for capital expenditures.
Regulations of the Comptroller of the Currency establish required
minimum capital levels for the Bank. Under these regulations, national banks
must maintain certain capital levels as a percentage of average total assets
(leverage capital ratio) and as a percentage of total risk-based assets
(risk-based capital ratio). Under the risk-based requirements, various
categories of assets and commitments are assigned a percentage related to credit
risk ranging from 0% for assets backed by the full faith and credit of the
United States to 100% for loans other than residential real estate loans and
certain off-balance sheet commitments. Total capital is characterized as either
Tier 1 capital - common shareholders' equity, noncumulative perpetual preferred
stock and a limited amount of cumulative perpetual preferred - or total capital
which includes the allowance for loan losses up to 1.25% of risk weighted
assets, perpetual preferred stock, subordinated debt and various other hybrid
capital instruments, subject to various limits. Goodwill is not includable in
Tier 1 or total capital. National banks must maintain a Tier 1 capital to
risk-based assets of at least 4.0%, a total capital to risk-based assets ratio
of at least 8.0% and a leverage capital ratio (defined as Tier 1 capital to
average total assets for the most recent quarter) of at least 4.0%. The same
ratios are also required in order for a national bank to be considered
"adequately capitalized" under the OCC's "prompt corrective action" regulations,
which impose certain operating restrictions on institutions which are not
adequately capitalized. The Bank has a Tier 1 risk-based ratio of 26.4%, a total
capital to risk-based ratio of 27.6% and a Tier 1 leverage ratio of 14.4%, and
fell within the category of "well capitalized" under the regulations.
11
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FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
CAPITAL RESOURCES, CONTINUED
The Federal Reserve Board imposes consolidated capital guidelines on
bank holding companies (such as the Company) which have more than $150 million
in consolidated assets. These guidelines required bank holding companies to
maintain consolidated capital ratios which are essentially the same as the
minimum capital levels required for national banks. The Company's consolidated
capital ratios were substantially the same as those set forth above for the
Bank, and exceeded the minimums required under these Federal Reserve Board
guidelines.
On April 8, 1997, the Company's stockholders approved the First
McMinnville Corporation 1997 Stock Option Plan. The Company has granted the
right to purchase 41,000 shares of stock to its directors, officers and
employees at an exercise price of $58.15 per share. At March 31, 1999, 2,075
shares had been exercised and 12,185 shares were exercisable. The shares granted
to Directors totaling 16,500 are exercisable over a three year period. Shares
granted to officers and employees are exercisable over a period of 10 years or
until the optionee reaches age 65, whichever is less. The Company has adopted
the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). The impact of the adoption
of SFAS No. 123 has been reflected as a proforma disclosure in the notes to the
annual consolidated financial statements.
YEAR 2000 ISSUES
The term "Year 2000 issue" refers to the necessity of converting
computer information systems so that such systems recognize more than two digits
to identify a year in any given date field, and are thereby able to
differentiate between years in the twentieth and twenty-first centuries ending
with the same two digits (e.g., 1900 and 2000) and recognize that the Year 2000
is a leap year. To address the Year 2000 issue, the Company has adopted a
broad-based approach designed to encompass the Company's total environment.
The Company has appointed a Year 2000 committee which was established in
mid-1997. The Y2K Committee has representation from all affected areas for the
purpose of managing the process of assessing and correcting non-compliance
throughout the organization. Areas being addressed by the Y2K Committee include:
- The subsidiary Bank's primary data processing system. Banctec,
Inc., a data processing firm, provides the primary software and
hardware for the data processing system of the subsidiary banks.
This software and hardware is of the highest priority for day to
day operations, accounting and success of the subsidiary Bank.
- Government systems, such as the Federal Reserve Bank for check
clearing, wire transfers, and the free flow and exchange of funds
between institutions are absolutely critical.
- The internal PC hardware and software systems within the
subsidiary Bank, along with telecommunications systems.
12
<PAGE> 13
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
YEAR 2000 ISSUES, CONTINUED
- The primary securities portfolio accounting and safekeeping
system for the subsidiary Bank.
- Credit administration - the committee is reviewing the risk
associated with Year 2000 status of the subsidiary Bank's loan
customers and depositors.
The Company's Y2K Committee is using a 4-phase approach in its Year 2000
project made up of awareness, assessment, renovation, and validation-testing.
The Company is currently in the final phase of the Y2K Plan.
The purpose of the Y2K committee is to assess, test and correct the
Company's hardware, software and equipment to ensure these systems operate
properly in the Year 2000. The Committee has substantially completed its
assessment of the Company's systems, has identified the Company's hardware,
software and equipment that will not operate properly in the Year 2000 and has
remedied the problem with the replacement of hardware and software that is
compliant. As of December 31, 1998 the Y2K committee determined that
substantially all of the Company's systems will operate properly in the Year
2000.
Programming changes and software replacement for systems that were not
Year 2000 compliant as of December 31, 1998 were completed during the first
quarter of 1999. Banctec, Inc. has tested the Access 8.0 Operating system and
the Company has documentation on file that the operating system is Y2K
compliant. However, the Company tested the software using its own database to
ensure the readiness of the Company to service its customer base into the Year
2000. The testing was completed during 1998, and found to be Y2K compliant.
The Company has requested written documentation from vendors and
suppliers with whom the Company has a material relationship regarding their
ability to operate properly in the Year 2000. The Company will consider
alternatives related to vendors and suppliers that do not confirm their Year
2000 readiness. There can be no assurance however, that all of the Company's
significant vendors and suppliers will have remedied their Year 2000 issues. The
Company will continue to monitor its significant vendors and suppliers to seek
to minimize the Company's risk.
The Company is requiring Y2K readiness information from all of its major
borrowers. The Company believes commercial borrowers must realize the impact
that the Y2K could have on their respective businesses. Seminars, questionnaires
and individual contact with loan customers have been used and will be continued
to be used as an ongoing prevention measure during the 1999 year that is
intended to ameliorate Y2K problems to the extent reasonably practical. The
Company realizes that the lack of Y2K preparation of loan customers could have a
materially adverse impact on the Company during the Year 2000.
13
<PAGE> 14
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
YEAR 2000 ISSUES, CONTINUED
Customer awareness of the Company's Y2K readiness is critical. The steps
taken by the Company to prepare for the Year 2000 will be shared with customers
through Quarterly Newsletters, statement stuffers and the Y2K training of
employees. The Company believes customers must have a high confidence level in
the Company at the end of 1999 to avoid the potential for mass withdrawals of
funds from the Company.
The Company estimates that the cost of its Year 2000 project will not
exceed $200,000 in the aggregate and that the cost will not be material to
earnings. Actual expenditures to date together with currently anticipated future
expenditures are within this estimate. The Company's management believes its
approach to the Year 2000 issue to be comprehensive, and does not expect the
Year 2000 issue to have a material impact on its results of operations,
liquidity or financial condition. However, given the widespread nature of the
problem, and the number of factors outside of the Company's direct control,
management is continuously evaluating the risks associated with Year 2000.
Management believes that the Company's ultimate ability to successfully address
Year 2000 issues will be significantly affected by external factors such as the
success of government agencies, suppliers, vendors and customers to address
their own respective Year 2000 issues. Although management is actively
addressing and establishing contingency plans to deal with these external
factors, they ultimately are beyond management's control.
The Board of Directors is aware of the Y2K problem and is receiving
monthly updates on the Y2K Committee's progress. The Board has approved the
Company's written contingency plan. The plan addresses all aspects of the
Company's operation systems identifying alternative solutions. The contingency
plan identifies all of the subsidiary Banks' major processing systems as
critical, semi-critical and non-critical. A processing solution is in place and
tested has been successfully completed on each of these applications detailing
information on alternative processors and their capabilities.
The foregoing notwithstanding, management does not currently believe
that the costs of assessment, remediation, or replacement of the Company's
systems, or the potential failure of third parties' systems will have a material
adverse effect on the Company's business, financial condition, results of
operations, or liquidity based on the published information known to management
at this time.
14
<PAGE> 15
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS
Net earnings were $1,107,000 for the three months ended March 31, 1999
as compared to $946,000 for the same period in 1998.
As in most financial institutions, a major element in analyzing the
statement of earnings is net interest income which is the excess of interest
earned over interest paid. The net interest margin could be materially affected
during period of volatility in interest.
The Company's interest income, excluding tax equivalent adjustments,
increased by $395,000 or 9.9% during the three months ended March 31, 1999 as
compared to an increase of $273,000 or 7.4% for the same period in 1998. The
increase in 1999 was attributable primarily to an increase in average earning
assets. The ratio of average earning assets to total average assets was 96.4%
for the quarter ended March 31, 1999 and 95.5% for the quarter ended March 31,
1998.
Interest expense increased by $316,000 for the three months ended March
31, 1999 or 17.3% compared to an increase of $151,000 or 9.0% for the same
period in 1998. Such increases in interest expense can be attributable primarily
to an increase in interest bearing liabilities.
The foregoing resulted in net interest income of $2,228,000 for the
three months ended March 31, 1999 an increase of $79,000 or 3.7% compared to the
same period in 1998.
The provision for loan losses was $45,000 for the first three months of
1999 and 1998, respectively. The provision for loan losses is based on past loan
experience and other factors which, in management's judgment, deserve current
recognition in estimating possible loan losses. Such factors include growth and
composition of the loan portfolio, review of specific loan problems, the
relationship of the allowance for loan losses to outstanding loans, and current
economic conditions that may affect the borrower's ability to repay. Management
has in place a system designed to identify and monitor problems on a timely
basis.
The Company accounts for impaired loans under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures". These
pronouncements apply to impaired loans except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
including credit card, residential mortgage, and consumer installment loans.
A loan is deemed to be impaired when it is probable that the Company
will be unable to collect the scheduled payments of principal and interest due
under the contractual terms of the loan agreement. Impaired loans are measured
at the present value of expected future cash flows discounted at the loan's
effective interest rate, at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. If the measure of
the impaired loan is less than the recorded investment in the loan, the Company
shall recognize an impairment by creating a valuation allowance with a
corresponding charge to the provision for loan losses or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for loan losses.
15
<PAGE> 16
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS
The Company's first mortgage single family residential, consumer and
credit card loans which total approximately $60,274,000, $2,728,000 and
$277,000, respectively at March 31, 1999, are divided into various groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
and thus are not subject to the provisions of SFAS Nos. 114 and 118.
Substantially all other loans of the Company are evaluated for impairment under
the provisions of SFAS Nos. 114 and 118.
The Company considers all loans on nonaccrual status to be impaired.
Loans are placed on nonaccrual status when doubt as to timely collection of
principal or interest exists, or when principal or interest is past due 90 days
or more unless such loans are well-secured and in the process of collection.
Delays or shortfalls in loan payments are evaluated with various other factors
to determine if a loan is impaired. Generally, delinquencies under 90 days are
considered insignificant unless certain other factors are present which indicate
impairment is probable. The decision to place a loan on nonaccrual status is
also based on an evaluation of the borrower's financial condition, collateral,
liquidation value, and other factors that, in the judgment of management, affect
the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all
interest accrued on the loan in the current fiscal year is reversed from income,
and all interest accrued and uncollected from the prior year is charged off
against the allowance for loan losses. Thereafter, interest on nonaccrual loans
is recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt. At March
31, 1999, the Company had no loans on nonaccrual status and there were no
nonaccrual loans outstanding at any time during the three months and year ended
March 31, 1999 and December 31, 1998, respectively. Therefore, all interest
income during these periods was recognized on the accrual basis.
Loans not on nonaccrual status are classified as impaired in certain
cases where there is inadequate protection by the current net worth and
financial capacity of the borrower or of the collateral pledged, if any. In
those cases, such loans have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Company will sustain some loss. In
such cases, interest income continues to accrue as long as the loan does not
meet the Company's criteria for nonaccrual status.
Generally the Company also classifies as impaired any loans the terms of
which have been modified in a troubled debt restructuring after January 1, 1995.
Interest is accrued on such loans that continue to meet the modified terms of
their loan agreements. At March 31, 1999, the Company had no loans that have had
the terms modified in a troubled debt restructuring.
16
<PAGE> 17
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
The Company's charge-off policy for impaired loans is similar to its
charge-off policy for all loans in that loans are charged-off in the month when
they are considered uncollectible.
Impaired loans and related allowance for loan loss amounts at March 31,
1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------- -------------------------
Allowance Allowance
Recorded for Recorded for
(In Thousands) Investment Loan Loss Investment Loan Loss
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Impaired loans with allowance for
loan loss $ 2,969 722 2,800 709
Impaired loans with no allowance for
loan loss -- -- -- --
---------- ----------- ----------- -----------
$ 2,969 722 2,800 709
========== =========== =========== ===========
</TABLE>
The allowance for loan loss related to impaired loans was measured based
upon the estimated fair value of related collateral.
The average recorded investment in impaired loans for the three months
ended March 31, 1999 and 1998 was $2,969,000 and $3,423,000, respectively. The
related amount of interest income recognized on the accrual method for the
period that such loans were impaired was approximately $67,000 and $81,000 for
1999 and 1998, respectively.
The following schedule details selected information as to non-performing
loans of the Company at March 31, 1999:
<TABLE>
<CAPTION>
Past Due
90 Days Non-Accrual
----------- -----------
(In Thousands)
<S> <C> <C>
Real estate loans $ 241 --
Installment loans 24 --
Commercial 28 --
----------- -----------
$ 293 --
=========== ===========
Renegotiated loans $ -- --
=========== ===========
</TABLE>
17
<PAGE> 18
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
At March 31, 1999, loans which include the above, totaling $6,193,000
were included in the Company's internal classified loan list. Of these loans
$1,585,000 are real estate and $4,608,000 are commercial and other. The
collateral values, based on estimates received by management, securing these
loans total approximately $9,206,000 ($2,298,000 related to real property and
$6,908,000 related to commercial and other). Such loans are listed as classified
when information obtained about possible credit problems of the borrower has
prompted management to question the ability of the borrower to comply with the
repayment terms of the loan agreement. The loan classifications do not represent
or result from trends or uncertainties which management expects will materially
and adversely affect impact future operating results, liquidity or capital
resources.
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at March 31,
1999 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
Non-interest income excluding securities transactions increased $183,000
or 89.7% during the three months ended March 31, 1999 compared to an increase of
$3,000 or 1.5% for the same period in 1998. The increase in 1999 was due
primarily to a gain on the sale of a former branch facility totaling $168,000. A
newly constructed branch facility opened in 1996 which replaced the former
branch. The property which was sold in 1999 had been leased to another company
during the period from the date of the branch closing to the date of sale.
Securities gains during the three months ended 1999 amounted to $5,000,
and related to transactions in the available-for-sale category. The gains during
1999 were incurred primarily in conjunction with management's strategies to
restructure the investment portfolio to improve the quality of the portfolio, to
improve maturity distribution and to maintain a flexible position to react to
market conditions. There were no securities gains or losses during the three
months ended March 31, 1998.
Non-interest expense increased $26,000 or 2.7% during the first three
months of 1999 compared to an increase of $78,000 or 8.7% during the same period
in 1998. The increases in 1999 and 1998 were due primarily to increases in
salaries and employee benefits. These increases relate to normal cost of living
and performance increases.
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding during the period. The computation
of diluted earnings per share for the Company begins with the basic earnings per
share plus the effect of common shares contingently issuable from stock options.
18
<PAGE> 19
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
The following is a summary of components comprising basic and diluted
earnings per share (EPS) for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
(In Thousands, except share amounts) 1999 1998
---- ----
<S> <C> <C>
Basic EPS Computation:
Numerator - income available to common
shareholders $ 1,107 946
-------------- --------------
Denominator - weighted average number of
common shares outstanding 533,320 535,426
-------------- --------------
Basic earnings per common share $ 2.08 1.77
============== ==============
Diluted EPS Computation:
Numerator $ 1,107 946
-------------- --------------
Denominator:
Weighted average number of common shares
outstanding 533,320 535,426
Dilutive effect of stock options 1,382 192
-------------- --------------
534,702 535,618
-------------- --------------
Diluted earnings per common share $ 2.07 1.77
============== ==============
</TABLE>
Management is not aware of any current recommendations by the regulatory
authorities which, if implemented, would have a material effect on the Company's
liquidity, capital resources or operations.
IMPACT OF INFLATION
The primary impact which inflation has on the results of the Company's
operations is evidenced by its effects on interest rates. Interest rates tend to
reflect, in part, the financial market's expectations of the level of inflation
and, therefore, will generally rise or fall as the level of expected inflation
fluctuates. To the extent interest rates paid on deposits and other sources of
funds rise or fall at a faster rate than the interest income earned on funds,
loans or invested, net interest income will vary. Inflation also affects
non-interest expenses as goods and services are purchased, although this has not
had a significant effect on net earnings in recent years. If the inflation rate
stays flat or increases slightly, the effect on profits is not expected to be
significant.
19
<PAGE> 20
FIRST MCMINNVILLE CORPORATION
FORM 10-Q, CONTINUED
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both the level
of income and expense recorded on a large portion of the Company's assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity such as Federal funds sold or purchased and loans, securities and
deposits as discussed in Item 2. Based upon the nature of the Company's
operations, the Company is not subject to foreign currency exchange or commodity
price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the Company
meets monthly to analyze the rate sensitivity position. These meetings focus the
spread between the cost of funds and interest yields generated primarily through
loans and investments.
There have been no material changes in reported market risks during the
three months ended March 31, 1999. Please refer to Item 2 of Part I of this
Report for additional information related to market and other risks.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Shares of the Company's common stock were issued to
Directors and/or Employees pursuant to the Company's Stock
Option Plan as follows:
<TABLE>
<CAPTION>
Number of
Shares of
Common Price
Date of Sale Stock Sold Per Share
------------ ---------- ---------
<S> <C> <C>
January 19, 1999 80 $ 58.15
</TABLE>
The aggregate proceeds of the shares sold were $4,652.
There were no underwriters and no underwriting discounts or
commissions. All sales were for cash.
The Company believes that an exemption from registration of
these shares was available to the Company in that the
issuance thereof did not constitute a public offering of
securities within the meaning of the Securities Act of 1933,
as amended.
The securities sold are not convertible.
The proceeds of the sales are being used by the Company for
general corporate purposes.
(d) The only restrictions on working capital and/or dividends
are those reported in Part I.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
21
<PAGE> 22
PART II. OTHER INFORMATION, CONTINUED
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only) - This
schedule contains summary financial information extracted
from the consolidated financial statements of the Company at
March 31, 1999 (unaudited) and is qualified in its entirety
by reference to such financial statements as set forth in
the Company's quarterly report on Form 10-Q for the period
ending March 31, 1999 (omitted in paper copy).
(b) No reports on Form 8-K were filed during the quarter for
which this Report is filed.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FIRST MCMINNVILLE CORPORATION
-----------------------------
(Registrant)
DATE: May 12, 1999 /s/ Charles C. Jacobs
----------------------- --------------------------------------
Charles C. Jacobs
President and Chief Executive Officer
DATE: May 12, 1999 /s/ Kenny D. Neal
----------------------- --------------------------------------
Kenny D. Neal
Chief Financial and Accounting Officer
23
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,282
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,716
<INVESTMENTS-CARRYING> 44,388
<INVESTMENTS-MARKET> 45,303
<LOANS> 128,081
<ALLOWANCE> 1,557
<TOTAL-ASSETS> 253,317
<DEPOSITS> 190,254
<SHORT-TERM> 21,202
<LIABILITIES-OTHER> 2,496
<LONG-TERM> 4,000
0
0
<COMMON> 1,517
<OTHER-SE> 33,848
<TOTAL-LIABILITIES-AND-EQUITY> 253,317
<INTEREST-LOAN> 2,594
<INTEREST-INVEST> 1,775
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,369
<INTEREST-DEPOSIT> 1,917
<INTEREST-EXPENSE> 2,141
<INTEREST-INCOME-NET> 2,228
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 998
<INCOME-PRETAX> 1,577
<INCOME-PRE-EXTRAORDINARY> 1,577
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,107
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 2.07
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 293
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,193
<ALLOWANCE-OPEN> 1,495
<CHARGE-OFFS> 3
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 1,557
<ALLOWANCE-DOMESTIC> 1,557
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
