ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
THE COMPANY
First McMinnville Corporation (the "Company") is a bank holding company that, at February 20, 1998, owned all of the stock of The First National Bank of McMinnville (the "Bank" or "The First National Bank"). At December 31, 1997, the Company had total assets of approximately $212,765,000 and total Shareholders' equity of $32,557,000. The Company reported net earnings of approximately $3,581,000 for fiscal 1997. The Company, a financial services corporation incorporated under the laws of the State of Tennessee, was formed in 1984 for the purpose of acquiring all of the issued and outstanding common stock of The First National Bank. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). At December 31, 1997, the Bank's total loans (net of allowance for possible loan losses of $1,314,000) were $110,159,000 and its total deposits were $172,891,000.
The principal executive offices of the Company and The First National Bank are located at 200 East Main Street, McMinnville, Warren County, Tennessee 37110, telephone (931) 473-4402.
(a) Business Development.
During 1997 the Company and the Bank have focused on developing the financial services of the Bank in Warren County, Tennessee and in other areas (generally, in those counties contiguous to Warren County). Additional information concerning the general development of the Company's business since the beginning of the last fiscal year for which this Annual Report on Form 10-K (this "Report") is filed is set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation ("Managements Discussion")," and in Item 8, "Financial Statements and Supplementary Data (the "Consolidated Financial Statements")," in this Report as well as in "Business of the Company" below in this Item.
(b) Business of the Company.
The Company's principal business is the ownership of the Bank. The Company currently conducts all of its material operations through The First National Bank, its wholly owned subsidiary. The Company and the Bank concentrate on developing the financial service business of the Bank in Warren County, Tennessee and in other trade areas (generally, in those counties contiguous to Warren County).
The Company's principal source of income in 1997 was the earnings of the Bank. The First National Bank's earnings are primarily derived from interest income from loans and returns from its investment portfolio. The availability of funds to the Bank is primarily dependent upon the economic policies of the government, the economy in general and the general credit market for loans. The Company may in the future engage in various business activities permitted to bank holding companies, either directly, through newly formed subsidiaries, or through acquisitions. The Company intends to provide banking and financial services in Tennessee, primarily in the Warren County trade area, through the Bank's operations.
The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Potential software failures due to processing errors arising from calculations using the Year 2000 date are a known risk. Further discussion of this issue is presented below in this Item under the caption "Computers and the Year 2000" and within "Item 7, Management's Discussion and Analysis" appearing later in this Report.
The Company and the Bank are subject to extensive supervision and regulation by federal banking agencies. Their respective operations are subject to a wide array of federal and state laws applicable to banking and to bank
holding companies. Certain of the laws and regulations that affect these operations are outlined briefly below in this Item and in other portions of this Report.
Please refer also to the Consolidated Financial Statements for additional, important information concerning the Company and First National Bank.
FINANCIAL SUMMARY OF THE COMPANY
A financial summary of the Company and its consolidated subsidiary, The First National Bank, is detailed below (amounts are rounded):
OPERATIONS
The First National Bank operates five full-service banking offices located in Warren County, Tennessee. Its principal office is located in McMinnville, Tennessee and it has additional branches in McMinnville, Morrison, and Viola, Tennessee. The Bank provides banking, trust and other financial services throughout the Tennessee markets of Warren County and other contiguous counties, as well as, to a lesser extent, other areas. The First National Bank, a national banking association, was originally established in 1874. The Bank operates five automated teller machines ("ATMs").
For retail customers, The First National Bank offers a full range of depository products including regular and money market checking accounts; regular, special, and money market savings accounts; various types of certificates of deposit and Individual Retirement Accounts, as well as safe deposit facilities. The Bank also offers its retail customers consumer and other installment loans and credit services. The Bank makes available to local businesses and institutions traditional lending services, such as lines of credit, real estate loans and real estate construction loans, as well as standard depository services and certain other special services. Its principal source of income is from interest earned on personal, commercial, agricultural, and real estate loans of various types. The Bank is a correspondent bank of First Tennessee Bank National Association, Chattanooga, Tennessee, and National Bank of Commerce, Birmingham, Alabama. The Bank operates a trust department. The Company and The First National Bank intend for the foreseeable future to concentrate their efforts in their existing markets.
The Company and the Bank are subject to extensive supervision and regulation by federal banking agencies. Their respective operations are subject to a wide array of federal and state laws applicable to financial services, to
banks, and to bank holding companies. Certain of the laws and regulations that affect these operations are outlined briefly below in this Item and in other portions of this Report.
There also have been a number of recent legislative and regulatory proposals designed to overhaul or otherwise "strengthen" the federal deposit insurance system and to improve the overall financial stability of the banking system in the United States. Some of these proposals provide for other changes in the bank regulatory structure, including proposals to reduce regulatory burdens on banking organizations and to expand (or to limit) the nature of products and services banks and bank holding companies may offer. It is not possible to predict whether or in what form these proposals may be adopted in the future, and, if adopted, their impact upon either the Company or the financial services industries in which the Company and the Bank compete.
SUBSIDIARY
The Bank is the Company's sole subsidiary.
SERVICES TO AND TRANSACTIONS WITH SUBSIDIARY
Intercompany transactions between the Company and its subsidiary, The First National Bank, are subject to restrictions of existing banking laws (such as Sections 23A and 23B of the Federal Reserve Act) and accepted principles of fair dealing. The Company can provide the Bank with advice and specialized services in the areas of accounting and taxation, budgeting and strategic planning, employee benefits and human resources, auditing, trust, and banking and corporate law. The Company may elect to charge a fee for these services from time to time. The responsibility for the management of the Bank, however, remains with its Board of Directors and with the officers elected by the Bank's Board.
SUPERVISION AND REGULATION
The operations of any bank holding company and banking subsidiary are affected by various requirements and restrictions imposed by the laws of the United States and the State of Tennessee, including requirements to maintain reserves against deposits, limitations on the interest rates that may be charged on various types of loans, and restrictions on the nature and amount of loans that may be granted and on the types of investments which may be made. The operations of bank holding companies and banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity, truth in savings disclosures, debt collection laws, and regulation of consumer lending practices. Congress and state legislatures periodically propose new legislation affecting the operations of bank holding companies and banks, so no assurance can be given that the statutes and regulations described below will remain in effect or that the Company and its subsidiary, The First National Bank, will remain at all times in complete compliance with applicable laws and regulations. The Company and the Bank are subject also to extensive regulation under state and federal statutes and regulations. The discussion in this section, which briefly summarizes certain of such statutes, does not purport to be complete, and it is qualified in its entirety by reference to such statutes and regulations.
Bank Holding Company Act
As a registered bank holding company, the financial condition and operations of the Company as well as those of its subsidiary (the Bank) are subject to examination and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Bank Holding Company Act requires prior Federal Reserve Board approval for bank acquisitions and prohibits a bank holding company from engaging in any business other than banking or bank-related activities. Specifically, the Bank Holding Company Act requires that a bank holding company obtain prior approval of the Federal Reserve Board before (1) acquiring, directly or indirectly (except in certain limited circumstances), ownership or control of more than 5% of the voting stock of a bank, (2) acquiring all or substantially all of the assets of a bank, or (3) merging or consolidating with another bank holding company. The Bank Holding Company Act also generally limits the business in which a bank holding company may engage to banking, managing or controlling banks, and furnishing or performing services for the banks that it controls.
In addition, pursuant to the Bank Holding Company Act, a bank holding company may engage in nonbanking activities, or may acquire shares in a company engaged in nonbanking activities provided that the Federal Reserve Board has determined by regulation or order that the activity is so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Except in certain circumstances, the Bank Holding Company Act has historically prohibited a bank holding company from acquiring a bank outside the state where the bank holding company's banking business is principally conducted, unless the laws of the state where the bank is located specifically authorize such acquisitions by out-of-state bank holding companies. Effective September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"), which is discussed below, removed most restrictions to the expansion of interstate banking. Riegle-Neal is likely to have far-reaching effects on the historical rules applicable to interstate banking and interstate branching.
Federal Reserve Act
The Federal Reserve Act imposes strict limitations on investments by subsidiary banks in the stock or other securities of their parent bank holding company or any of its other subsidiaries and on the taking of such stock or securities as collateral for loans to any borrowers. In addition, the Federal Reserve Act imposes strict limitations on extensions of credit and other transactions by and between subsidiary banks and their parent bank holding company or any of its other subsidiaries or corporate affiliates. As a subsidiary of the Company, The First National Bank will be subject to limitations under Sections 23A and 23B of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with the Company. Further, any loans and extensions of credit from The First National Bank to the Company also would be subject to various loan-to-value collateral requirements. The Bank Holding Company Act and regulations of the Federal Reserve Board prohibit a bank holding company and its subsidiaries from engaging in certain (but not all) tie-in arrangements in connection with any extension of credit, lease, or sale of property or the furnishing of services.
Capital Adequacy. The Federal Reserve Board has issued standards for measuring capital adequacy for bank holding companies. These standards are designed to provide risk-responsive capital guidelines and to incorporate a consistent framework for use by financial institutions operating in major international financial markets. The banking regulators have issued standards for banks that are similar to, but not identical with, the standards for bank holding companies. In general, the risk-related standards require financial institutions and financial institution holding companies to maintain certain capital levels based on "risk-adjusted" assets, so that categories of assets with potentially higher credit risk will require more capital backing than categories with lower credit risk. In addition, banks and bank holding companies are required to maintain capital to support off-balance-sheet activities such as loan commitments. The Company and its subsidiary financial institution, The First National Bank, exceed all applicable capital adequacy minimums. Please refer to the Consolidated Financial Statements (Item 8 of this Report) and to the Section entitled "Management's Discussion and Analysis and Results of Operation," which appears as Item 7 of this Report, for additional information.
Support of Subsidiary Banks. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to its subsidiary (the Bank) and to commit resources to support the Bank in circumstances where it might not choose to do so absent such a policy. This support may be required at times when the Company may not find itself able to provide it. In addition, any capital loans by the Company to the Bank would also be subordinate in right of payment to depositors and certain other indebtedness of such subsidiary Bank. Consistent with this policy regarding bank holding companies serving as a source of financial strength for their subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the bank holding company's capital needs, asset quality and over all financial condition.
FIRREA and FDICIA.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") contains a cross-guarantee provision which could result in insured depository institutions owned by the Company being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other insured depository institution owned by the Company. Under FIRREA, failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made extensive changes to the federal banking laws. FDICIA instituted certain changes to the supervisory process, including provisions that mandate certain regulatory agency actions against undercapitalized institutions within specified time limits. FDICIA contains various other provisions that may affect the operations of banks and savings institutions.
The prompt corrective action provision of FDICIA requires the federal banking regulators to assign each insured institution to one of five capital categories ("well capitalized," "adequately capitalized" or one of three "undercapitalized" categories) and to take progressively more restrictive actions based on the capital categorization, as specified below. Under FDICIA, capital requirements would include a leverage limit, a risk-based capital requirement and any other measure of capital deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the minimum levels for any relevant capital measure.
The FDIC and the Federal Reserve Board adopted capital-related regulations under FDICIA. Under those regulations, a bank will be well capitalized if it:(i) had a risk-based capital ratio of 10% or greater; (ii) had a ratio of Tier I capital to risk-adjusted assets of 6% or greater; (iii) had a ratio of Tier I capital to adjusted total assets of 5% or greater; and (iv) was not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An association will be adequately capitalized if it was not "well capitalized" and: (i) had a risk-based capital ratio of 8% or greater; (ii) had a ratio of Tier I capital to risk-adjusted assets of 4% or greater; and (iii) had a ratio of Tier I capital to adjusted total assets of 4% or greater (except that certain associations rated "Composite 1" under the federal banking agencies' CAMEL(S) rating system may be adequately capitalized if their ratios of core capital to adjusted total assets were 3% or greater). Management believes that as of December 31, 1997, The First National Bank, the Company's subsidiary financial institution, met all of the financial criteria to be categorized as "well capitalized" within the meaning of the capital adequacy regulations.
FDICIA made extensive changes in then-existing rules regarding audits, examinations and accounting. It generally requires annual on-site, full scope examinations by each bank's primary federal regulator. It also imposed new responsibilities on management, the independent audit committee and outside accountants to develop or approve reports regarding the effectiveness of internal controls, legal compliance and off-balance-sheet liabilities and assets.
Depositor Preference Statute. Legislation enacted in August 1993 provides a preference for deposits and certain claims for administrative expenses and employee compensation against an insured depository institution in the liquidation or other resolution of such an institution by any receiver. Such obligations would be afforded priority over other general unsecured claims against such an institution, including federal funds and letters of credit, as well as any obligation to shareholders of such an institution in their capacity as shareholders.
FDIC Insurance Assessments. The Bank, as a subsidiary depository institution of the Company, is subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-based premium schedule. Each financial institution is assigned to one of three capital groups--well capitalized, adequately capitalized or undercapitalized--and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors, and on the basis of other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a
particular institution will, therefore, depend in part upon the risk assessment classification so assigned to the institution by the FDIC. See "FIRREA and FDICIA."
FIRREA, adopted in August 1989 to provide for the resolution of insolvent savings associations, required the FDIC to establish separate deposit insurance funds--the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations. FIRREA also required the FDIC to set deposit insurance assessments at such levels as would cause BIF and SAIF to reach their "designated reserve ratios" of 1.25 percent of the deposits insured by them within a reasonable period of time. Due to low costs of resolving bank insolvencies in the last few years, BIF reached its designated reserve ratio in May 1995. As a result, effective January 1, 1996, the FDIC eliminated deposit insurance assessments (except for the minimum $2,000 payment required by law) for banks that are well capitalized and well managed and reduced the deposit insurance assessments for all other banks. As of January 1, 1996, the SAIF had not reached the designated reserve ratio. The Company has not acquired any SAIF-insured deposits during the years from 1989 to the present, and as of December 31, 1997, none of The First National Bank's deposits were insured by the SAIF.
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), enacted as part of the Omnibus Appropriations Bill on September 30, 1996, required the FDIC to take immediate steps to recapitalize the SAIF and to change the basis on which funds are raised to make the scheduled payments on the Financing Corporation ("FICO") bonds issued in 1987 to replenish the Federal Savings and Loan Insurance Corporation. The new legislation, combined with regulations issued by the FDIC immediately after enactment of the Funds Act, provided for a special assessment in the amount of 65.7 basis points per $100 of insured deposits on SAIF-insured deposits held by depository institutions on March 31, 1995 (the special assessment was required by the Funds Act to recapitalize the SAIF to the designated reserve ratio of 1.25 percent of the deposits insured by SAIF). Payments of this assessment were made in November 1996, but were accrued by financial institutions in the third calendar quarter of 1996. For 1997, the effective BIF and SAIF assessment rates ranged from zero basis points for well-capitalized institutions displaying little risk, to twenty-seven basis points for undercapitalized institutions displaying high risk. Both BIF insured banks and SAIF insured thrift institutions are also required to pay interest on FICO bonds issued in connection with the federal government's bail out program in connection with the thrift industry.
Institutions that have deposits insured by both the BIF and the SAIF ("Oakar Banks") were required to pay the special assessment on 80% of their "adjusted attributable deposit amounts"("AADA"). In addition, for purposes of future regular deposit insurance assessments, the AADA on which Oakar Banks pay assessments to SAIF was also reduced by 20%. Commencing January 1, 1997, BIF insured institutions are responsible for a portion of the annual carrying costs of the FICO bonds. Such institutions will be assessed at 80% of the rate applicable to SAIF-insured institutions until December 31, 1999. Effective January 1, 1997, the Funds Act also reduced ongoing SAIF deposit insurance assessment rates to a range from 6.4 cents to 23 cents (from previous rates of 23 cents to 31 cents) per $100 of insured deposits and increased ongoing BIF deposit insurance assessment rates to a range from zero to 1.3 cents per $100 of insured deposits. Additionally, pursuant to the Funds Act, if the reserves in the BIF at the end of any semiannual assessment period exceed 1.25% of insured deposits, the FDIC is required to refund the excess to the BIF-insured institutions.
The Funds Act contemplates the merger of the SAIF and BIF by 1999, provided the consolidation/merger of federal bank and thrift charters under applicable law and regulation has been achieved by that time. Until such time, however, depository institutions will continue to be prohibited from shifting deposits from SAIF insurance coverage to BIF insurance coverage in an attempt to avoid the higher SAIF assessments. The FDIC is required to issue regulations to guard against the shifting of deposits from SAIF to BIF. As noted above, as of December 31, 1997, none of The First National Bank's deposits were insured by the SAIF.
Please refer to the Section of this Report entitled "Restrictions on Dividends Paid by the Bank as a Company Subsidiary," to Item 5(c) "Dividends," and to the Consolidated Financial Statements.
Interstate Banking and Other Recent Legislation. In September 1994, legislation was enacted that is expected to have a significant effect in restructuring the banking industry in the United States. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") facilitates the interstate expansion and consolidation of banking organizations by permitting (i) bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state, (ii) interstate merger of banks after June 1, 1997, subject to the right of individual states to "opt in" or to "opt out" of this authority before that date, (iii) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state, (iv) foreign banks to establish, with approval of the regulators in the United States, branches outside their home states to the same extent that national or state banks located in the home state would be authorized to do so, and (v) banks to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for any bank or thrift affiliate, whether the affiliate is located in the same state or a different state. One effect of Riegle-Neal is to permit the Company to acquire banks located in any state and to permit bank holding companies located in any state to acquire banks and bank holding companies in Tennessee. Overall, Riegle-Neal is expected to have the effect of increasing competition and promoting geographic diversification in the banking industry.
In addition, the Funds Act contains a variety of regulatory relief measures affecting banks and thrifts, including provisions modifying some of the more onerous requirements imposed under federal banking laws passed in the late 1980s and early 1990s. Among the measures are provisions reducing certain regulatory burdens imposed upon bank holding companies. For example, the Funds Act eliminates the requirement that a bank holding company file an application with the OTS to (i) acquire control of a thrift, or (ii) become a unitary savings and loan holding company as a result of such acquisition.
The law requires each Federal banking agency to prescribe uniform regulations including guidelines ensuring that interstate branches operated by out-of-State banks are reasonably helping to meet the credit needs of communities where they operate. These agencies are required to conduct evaluations of overall Community Reinvestment Act performance of institutions with interstate branches. New procedural requirements are also required of the Federal banking agencies pertaining to agency preemption opinion letters and interpretive rules in connection with community reinvestment, consumer protection, fair lending and establishment of intrastate branches.
Revival of Statute of Limitations. The Act permits the FDIC or Resolution Trust Corporation, in certain circumstances, acting as conservator or receiver of a failed depository institution to "revive" tort claims that had expired under a State statute of limitations within five years of the appointment of a receiver or conservator.
The Funds Act also provides that a bank holding company owning or controlling a thrift will no longer be subject to the supervision and regulation of the OTS. The OTS will continue to regulate and supervise all thrifts acquired in such transactions.
Riegle-Neal provided also for certain community investment and development programs. The "Community Development Financial Institutions Fund" portion of the legislation is supposed to promote economic revitalization and community development through investment in "Community Development Financial Institutions." Subtitle B, entitled "The Home Ownership and Equity Protection Act of 1994," has the stated purpose of increasing the protections afforded to individuals most at risk from abusive lending practices. This section applies particularly to high-interest mortgages secured by the borrowers' homes.
In addition, Riegle-Neal contains provisions intended to enhance small business capital formation. In part, the law seeks to remove impediments in existing law to the securitization of small business loans and leases. The Small Business Loan Securitization and Secondary Market Enhancement Act of 1994 creates a secondary market framework for small business related securities, with the goal of stimulating the flow of funds to small businesses, thus creating new jobs and stimulating economic growth. The Small Business Capital Enhancement Act provides for the use of $50 million in Federal funds to encourage and expand certain defined Capital Access Programs administered by states and other localities.
Finally, Riegle-Neal contained a number of initiatives to lessen the regulatory burden placed upon depository institutions, to improve consumer protection areas of advertizing, to deal further with money laundering and to
improve the financial condition of the National Flood Insurance Program (the "NFIP"). This legislation is designed to improve compliance with the mandatory purchase requirements of the NFIP by lenders and secondary market purchasers, which is anticipated to increase participation nationally by individuals with mortgaged homes or businesses in special flood hazard areas.
Various proposed new laws have been (and will likely be) introduced in the Tennessee General Assembly in response to the Interstate Banking Act, as well as in response to other legal, regulatory, interest group, and economic developments, the form or impact of which cannot be reliably predicted.
TENNESSEE BANK AND BANK HOLDING COMPANY REGULATION
Subject to certain exceptions and the ultimate impact of the Interstate Banking Act, a Tennessee bank holding company is prohibited under Tennessee law from acquiring a bank outside the four major metropolitan areas (Shelby, Davidson, Knox, and Hamilton Counties in which Memphis, Nashville, Knoxville, and Chattanooga are located, respectively), unless the bank has been in operation for at least five (5) years. A bank or bank holding company is prohibited from acquiring any bank in Tennessee if the bank or bank holding company (including all insured depository institutions which are affiliates of the bank or bank holding company), upon consummation of the acquisition, would control thirty percent (30%) or more of the total amount of the deposits of the insured depository institutions in Tennessee. Under Tennessee law, any Tennessee bank that has been in operation for at least five years may be acquired, under certain circumstances, by banks and bank holding companies from outside Tennessee. Acquisitions are subject to the approval of the Commissioner of the Tennessee Department of Financial Institutions (the "TDFI"), the FDIC, and the Federal Reserve Board based upon a variety of statutory and regulatory criteria. Branching is regulated generally by the OCC, subject to certain state law requirements and provisions of the Interstate Banking Act.
A bank chartered under the National Bank Act, such as The First National Bank, is subject to the applicable provisions of that Act and, to a lesser degree, to certain of the limitations created by Tennessee law (such as, solely by way of example and not limitation, in respect of usury and branching). All national banks, and all subsidiary banks of a bank holding company, must become and remain insured banks under the Federal Deposit Insurance Act ("FDIA"). As a national bank The First National Bank is required to be a member of the Federal Reserve System. The First National Bank is subject to the provisions of FDIA and to supervision and regular examination by the OCC. Such examinations, however, are for the protection of the bank insurance fund and, indirectly depositors, and are not for the protection of investors and shareholders. Certain provisions of Tennessee law may be preempted by the Interstate Banking Act and no prediction can be made as to its impact on Tennessee law or the Company's regulation thereunder.
The First National Bank is limited in the amount of dividends that it may declare under federal law. Prior regulatory approval must be obtained before declaring any dividends if the amount of capital, and surplus is below certain statutory limits. Please refer to the Consolidated Financial Statements and to Item 5 of this Report, "Market for Registrant's Common Equity and Related Stockholder Matters," for additional information on dividends.
BUSINESS COMBINATION ACT
The Tennessee Business Combination Act (the "Business Combination Act") limits the ability of Tennessee corporations to engage in business combinations with "interested shareholders". The Business Combination Act may significantly impede, delay or prevent a purchaser's ability to acquire a significant equity interest in the Company. In general, the Business Combination Act prevents an "interested shareholder" (generally, a shareholder beneficially owning 10% or more of a corporation's outstanding voting stock) or an affiliate or associate thereof from engaging in a "business combination" (defined as a variety of transactions including a merger as described generally below) with a Tennessee corporation for a period of five years following the date on which the shareholder became an interested shareholder. The Company's common stock ("Common Stock") may become registered with the Securities and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Hence, in the future, the Company may become subject to the provisions of the Business Combination Act.
Constitutional questions may serve to limit the effect of the Business Combinations Act and, accordingly, the effect of the Business Combination Act on the Company and the Company's Common Stock (if any) is uncertain.
USURY PROVISIONS
The Constitution of the State of Tennessee requires the state legislature to fix interest rates in the state, and the legislature has adopted statutes to accomplish this purpose. The general interest rate statutes currently in effect establish a maximum "formula rate" of interest at 4% above the average prime loan rate (or the average short-term business average rate, however denominated) for the most recent week for which such average rate has been published by the Federal Reserve Board, or 24% per annum, whichever is lower. In the event that the Federal Reserve Board fails to publish the average rate for four consecutive weeks or the maximum effective rate should be adjudicated or become inapplicable for any reason whatsoever, the maximum effective rate is deemed to be 24% per annum until the Tennessee General Assembly otherwise provides. As of February 10, 1998, the maximum "formula rate" of interest was approximately 12.5%. Specific usury laws may apply also to particular classes of lenders (e.g., credit unions and savings and loan associations) and transactions (e.g., bank installment loans and home mortgages). The maximum possible nominal rate of interest under these laws generally cannot exceed (and may be less than) 24% per annum.
The relative importance of the usury laws to the financial operations of the Company and The First National Bank varies from time to time, depending on a number of factors, including conditions in the money markets, the cost and the availability of funds, and prevailing interest rates. The management of the Company is unable to state whether existing usury laws have had or will have a material adverse effect on its businesses or earnings.
RESTRICTIONS ON DIVIDENDS PAID BY THE BANK AS A COMPANY SUBSIDIARY
The Company is a legal entity separate and distinct from the Bank, its sole financial institution subsidiary. The Company has derived and expects to continue to derive most of its funds for operations and substantially all funds available for the payment of dividends from The First National Bank. Both federal and state laws impose restrictions on the ability of banks to pay dividends. State law restricts the ability of corporations (such as the Company) to pay dividends (as is more fully discussed in Item 5 of this Report), and federal law limits dividends by the Bank.
The Company and the Bank are subject to regulatory capital requirements administered by the OCC and the Federal Reserve Board. Various federal and state statutory provisions limit the amount of dividends an affiliate financial institution can pay to the Company without regulatory approval. The approval of federal and state bank regulatory agencies, as appropriate, is required for any dividend if the total of all dividends declared in any calendar year would exceed the total of the institution's net profits, as defined by regulatory agencies, for such year combined with its retained net profits for the preceding two years. In addition, a national bank may not pay a dividend in an amount greater than its net profits then on hand. The payment of dividends by any financial institution subsidiary may also be affected by other factors, such as the maintenance of adequate capital. Please refer to Item 5 of this Report, "Market for Registrant's Common Equity and Related Stockholder Matters," for additional information on dividends.
Failure to meet capital requirements can initiate certain mandatory - and possibly additional discretionary actions by regulators that could, in that event, have a direct material effect on the institutions financial statements. The relevant regulations require The First National Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets and liabilities as calculated under regulatory accounting principles. The regulations also require the regulators to make qualitative judgments about the Company and the Bank. Those qualitative judgments could also affect the Company's and the Bank's capital status and the amounts of dividends the subsidiary bank may distribute. At December 31, 1997, management believes that the Company and the Bank meet all such capital requirements to which they are, respectively, subject.
Certain Transactions with Affiliates. The Company is a legal entity separate and distinct from The First National Bank. There are various legal restrictions on the extent to which a bank holding company (such as the Company) and any nonbank subsidiary that it might form or own in the future can borrow or otherwise obtain credit from any bank subsidiary such as the Bank. For example, The First National Bank is subject to limitations imposed
by Section 23A of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with, the Company. In general, these restrictions require that any such extensions of credit must be on non-preferential terms and secured by designated amounts of specified collateral and be limited, as to the holding company or any one of such nonbank subsidiaries, to 10% of the lending institution's capital stock and surplus, and as to the holding company and all such nonbank subsidiaries in the aggregate, to 20% of such capital stock and surplus. Further, Section 23B of the Federal Reserve Act imposes restrictions on "non-credit" transactions between the Bank and the Company (and nonbank Company affiliates).
COMPETITION
The banking business in the areas served by the Company and The First National Bank is highly competitive. One of the Company's competitors is a subsidiary of a regional Tennessee bank holding company system and may have greater financial and other resources than the Company. Competition exists with other area state and national banks, as well as with other financial services organizations, such as thrift institutions, brokerage houses and government agencies, for deposits and/or loans. The First National Bank also competes for funds with savings and loan associations and credit unions. Competition also exists for loans from other financial institutions, such as savings and loan associations, insurance companies, small loan companies, credit unions, and certain governmental agencies. The deregulation of depository institutions, as well as the increased ability of nonbanking financial institutions to provide services previously reserved for commercial banks, has intensified competition. Because nonbanking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, in many instances they may operate with greater flexibility because they may not be subject to the same types of regulatory applications and processes as are the Company and The First National Bank.
The principal geographic area of the Company's and The First National Bank's operations encompasses McMinnville, other areas of Warren County, and surrounding areas of Tennessee. In this area, there are various commercial banks and other financial institutions operating more than ten offices and branches (exclusive of free-standing ATM's) and holding an aggregate (reportedly) of more than $400 million in deposits as of approximately December 31, 1997. The Company competes with some of the largest bank holding companies in Tennessee, which have or control businesses, banks or branches in the area, including regional financial institutions such as First American National Bank, as well as with a variety of local and regional banks.
To compete with major financial institutions in its service area, the Company and The First National Bank rely, in part, on specialized services, local promotional activity, and personal contacts with customers by its officers, directors, and employees. For customers whose loan demands exceed The First National Bank's lending limit, The First National Bank seeks to arrange for loans on a participation basis with correspondent banks. The First National Bank also assists customers requiring services not offered by The First National Bank in obtaining those services from its correspondent banks.
EMPLOYEES
At January 23, 1998, the Registrant and its banking subsidiary (the Bank) employed sixty-three persons on a full-time, and ten persons on a part-time, basis. None of these employees is covered by a collective-bargaining agreement. Group life, health, and disability insurance are maintained for or made available to employees by First National Bank, as is a 401(k) profit-sharing plan adopted by the Bank as are certain benefit plans (described elsewhere herein) adopted by the Bank. The Company believes its relations with its employees are satisfactory.
ECONOMIC CONDITIONS AND GOVERNMENTAL POLICY
The Company's earnings are affected not only by the extensive regulation described above, but also by general economic conditions. These economic conditions influence, and are themselves influenced, by the monetary and fiscal policies of the United States government and its various agencies, particularly the FRB. The Registrant cannot predict changes in monetary policies or their impact on its operations and earnings.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local statutes and ordinances regulating the discharge of materials into the environment. The Company does not believe that it will be required to expend any material amounts in order to comply with these laws and regulations by virtue of its and The First National Bank's activities. However, such laws may from time to time affect the Company and the Bank in the context of lending activities to borrowers who may themselves engage in activities or encounter circumstances in which the environmental laws, rules, and regulations are implicated.
RESEARCH
The Company makes no material expenditures for research and development. However, the reader is referred to the following section on "Computers and the Year 2000."
COMPUTERS AND THE YEAR 2000
The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Potential software failures due to processing errors arising from calculations using the Year 2000 date are a known risk. The Company has appointed its own task force (designated an "Action Team"), and it is working with outside vendors, to evaluate and manage the risks, solutions, and costs associated with addressing this issue. The Company is coordinating closely with its outside electronic data processing vendor to assure that both it and the Company are as adequately prepared as is possible to deal with computer and data-processing issues related to the Year 2000. Of course, the Company must not only address the impact of these issues on its own operations, but also on the operations and prospects of customers, vendors, and other financial institutions and companies.
The costs incurred, except property and equipment writedowns, in addressing the Year 2000 problem will be expensed as incurred in compliance with generally accepted accounting principles. Management estimates the cost of achieving Year 2000 compliance to be approximately $150,000 (pre-tax) over the cost of normal software upgrades and replacements that would have been incurred through the year 1999. (Of course, this number is subject to change to change.) The Company anticipates that it will complete its own operational changes, including its data processing changes, by December 31, 1998. Testing of software and hardware will likely continue throughout calendar 1999.
The Company is actively working with its software and hardware suppliers, as well as with those who supply data-processing services to the Company, in connection with Year 2000 issues. Management believes, based on its inquiries to them, that those vendors which are material to the Company are generally on schedule to meet their and the Company's Year 2000 goals. The Company assumes, but cannot be assured, that all applicable federal and state governmental agencies, especially those which are important to the banking and payment systems, will achieve Year 2000 compliance on time.
The Company's credit customers are also subject to potential loses as a result of Year 2000 issues relating to their own businesses, computers, customers, and vendors. The Company is studying this issue and expects to work with its customers in addressing Year 2000 issues that could reasonably be expected adversely to affect the Company. Any exposure that, in the opinion of management of the Company, is not adequately addressed to management's satisfaction, will be taken into consideration in assessing the risk and/or loss potential, if any, associated with that credit relationship.
The Company does not anticipate that its expenditures in connection with the remediation of Year 2000 issues will be material to its results of operations, liquidity, and capital resources taken as a whole. The preceding statements in this paragraph are forward looking, and the Company's actual costs, experience, and results may differ due to, among other things, the conversion of various data-processing systems, additional system testing, vendor contract negotiations, and technological developments.
In October 1997, the Accounting Standards Executive Committee of the AICPA voted to issue a final Statement of Position ("Position Statement"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." However, the issuance of this Position Statement is subject to approval by the Financial Accounting Standards Board ("FASB"). The AICPA has expressed a hope to issue a final Position Statement in the first quarter of 1998. The Position Statement would be effective for financial statements for fiscal years beginning after December 15, 1998, with earlier application encouraged.
In summary, the Position Statement states that the following costs incurred in developing internal-use software should be capitalized: direct costs for materials and services paid to external parties for developing or obtaining the software; payroll and payroll-related costs for employees' time spent directly on the project; and interest costs incurred in developing the software.
Currently, banks must expense such costs, which can be material to the results of operation, in accordance with the guidance provided by banking regulators such as the Office of the Comptroller of the Currency. The impact of this Position Statement to the Company's results is currently being evaluated and cannot currently be estimated.
DEPENDENCE UPON A SINGLE CUSTOMER
The Bank's principal customers are generally located in the Middle Tennessee area with a concentration in Warren County, Tennessee. Neither the Company nor The First National Bank is dependent upon a single customer or a very few customers. However, approximately ten percent (10%) of the Bank's total loans were to customers in the nursery industry.
LINE OF BUSINESS
The Company operates under the Bank Holding Company Act of 1956 in the area of finance. The Company derived 100% of its consolidated total operating income from the commercial banking business in 1997.
FORWARD-LOOKING STATEMENTS
Management's discussion of the Company, and management's analysis of the Company's operation sand 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. 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 6 and Item 7, as well as other portions of this Report) is to provide Form 10-KSB readers with information relevant to understanding and assessing the financial condition and results of operations of the Company not to predict the future or to guarantee results. The Company undertakes no obligation to publish revised forward- looking statements to reflect the occurrence of changes or of unanticipated events, circumstances, or results.
SELECTED FINANCIAL DATA AND STATISTICAL INFORMATION
Certain selected financial data and certain statistical data concerning the Company that should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" is set forth as a part of Item 7 and is also presented in certain of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
The First National Bank owns four parcels of property on which it has established banking offices. The Bank leases the land (but owns the building) for one of its branches at commercial leasing rates pursuant to a long-term lease and owns one other parcel of property for future expansion. The Main Office is located at 200 East Main Street, McMinnville. The Bank utilizes five ATM's for the convenience of its customers. In the judgment of management, the facilities of the Company and The First National Bank are generally suitable and adequate for the current and reasonably foreseeable needs of the Company and the Bank. However, new office sites are considered from time to time.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There were no material legal proceedings pending at December 31, 1997, against the Company or the Bank other than ordinary routine litigation incidental to their respective businesses, to which the Company or its subsidiary Bank is a party or of which any of their property is the subject. It is to be expected that various actions and proceedings may be anticipated to be pending or threatened against, or to involve, the Company and/or The First National Bank from time to time in the ordinary course of business. Some of these may from time to time involve large demands for compensatory and/or punitive damages. At the present time, management knows of no pending or threatened litigation the ultimate resolution of which would have a material adverse effect on the Company's or The First National Bank's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION
There is no established public trading market for the Company's Common Stock. Management, however, believes that Middle Tennessee is the principal market area for the Common Stock. The following table sets forth the high and low sales prices per share of the Common Stock for the first quarter of 1998 (through January 23, 1998) and for each quarter of fiscal 1997 and 1996. During 1997 the Company redeemed 1,679 shares of its Common Stock with a view toward providing some liquidity in the stock. Certain of the other information included below has been reported to the Company by certain selling or purchasing Shareholders in privately negotiated transactions during the periods indicated. Although management believes that the information supplied by purchasers and sellers concerning their respective transactions is generally reliable, it has not been verified. Such information may not include all transactions in the Company's Common Stock for the respective periods shown, and it is possible that transactions occurred during the periods reflected or discussed at prices higher or lower than the prices set forth below. Certain of the transactions involved, or may have involved, the Company or its principals. (The stated prices have been adjusted to reflect a two-for-one stock split that occurred effective October 1, 1994.)
The last trade known to management involved a redemption by the Company of 1,192 shares at an estimated $60.01 per share in January of 1998. Because there is no established public trading market for the Company's Common Stock, and because the Company and those closely affiliated with the Company may be involved in particular transactions, the prices shown above may not necessarily be indicative of the fair market value of the Common Stock or of the prices at which the Company's Common Stock would trade if there were an established public trading market. Accordingly, there can be no assurance that the Common Stock will subsequently be purchased or sold at prices comparable to the prices set forth above.
THE COMPANY'S COMMON STOCK
The Company is authorized by its Charter to issue 5,000,000 shares of Common Stock, par value of $2.50 per share. The Company declared a 2-for-1 stock split that was effective October 1, 1994. (Unless otherwise stated, all share and per share information in this Report has been adjusted to reflect said stock split.) At February 1, 1998, the Company had 534,912 shares outstanding (compared to 536,104 at December 31, 1997). No shares are reserved for issuance except 57,500 shares reserved in connection with the 1997 First McMinnville Corporation Stock Option Plan (the "Stock Option Plan") and the number of shares needed to fulfill Rights Agreement described elsewhere herein.
Holders of the Company's Common Stock are entitled to (a) cumulate the votes of each share held of record in connection with the election of directors and (b) to cast one vote for each share held of record on all other matters submitted to a vote of the shareholders. Holders of the Common Stock have no preemptive rights to subscribe for or to purchase any additional shares of the Company's Common Stock. In the event of liquidation, holders of the Company's Common Stock are entitled to share in the distribution of assets remaining after payment of debts and expenses. Holders of the Common Stock are entitled to receive dividends when declared by the Company's Board of Directors out of funds legally available therefor. Under its Charter, the Company is required to indemnify its directors and officers for acts on behalf of the Company to the fullest extent permitted under applicable law. Certain of the statutes and regulations described in Item 1 and in other places in this Report may further affect the matters described in this Item.
Stock Option Plan
Certain shares are reserved for issuance as set forth in the description of the Stock Option Plan appearing elsewhere in this Report.
Shareholders Rights Agreement
Effective as of June 10, 1997, the Board of Directors of the Company adopted a Shareholders Rights Agreement (the "Rights Agreement") and authorized and declared a dividend of one common share purchase right (a
"Right") for each outstanding share of the Company's Common Stock (the "Common Shares"). The dividend was payable on June 10, 1997, to the shareholders of record on that date (the "Record Date"), and with respect to Common Shares issued thereafter until the Distribution Date (as hereinafter defined) or the expiration or earlier redemption or exchange of the Rights. Except as set forth below, each Right entitles the registered holder to purchase from the Company, at any time after the Distribution Date one Common Share at a price per share of $120, subject to adjustment (the "Purchase Price"). The description and terms of the Rights are as set forth in the Rights Agreement. The following description of the Rights is qualified by reference to the Rights Agreement, which is an Exhibit to this Report.
Initially the Rights will be attached to all certificates representing Common Shares then outstanding, and no separate Right Certificates will be distributed. The Rights will separate from the Common Shares upon the earliest to occur of (i) ten (10) days after the public announcement of a person's or group of affiliated or associated persons' having acquired beneficial ownership of ten percent (10%) or more of the outstanding Common Shares (such person or group being hereinafter referred to as an "Acquiring Person"); or (ii) ten (10) days (or such later date as the Board may determine) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in a person or group's becoming an Acquiring Person (the earlier of such dates being called the "Distribution Date").
The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with, and only with, the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights) new Common Share certificates issued after the Record Date upon transfer or new issuance of Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Shares outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate.
As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date (and to each initial record holder of certain Common Shares issued after the Distribution Date), and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will expire on June 4, 2007 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below.
In the event that any person becomes an Acquiring Person (except pursuant to a tender or exchange offer which is for all outstanding Common Shares at a price and on terms which a majority of certain members of the Board of Directors determines to be adequate and in the best interests of the Company, its stockholders and other relevant constituencies, other than such Acquiring Person, its affiliates and associates (a "Permitted Offer")), each holder of a Right will thereafter have the right (the "Flip-In Right") to acquire a Common Share for a purchase price equal to fifteen percent (15%) of the then current market price, or at such greater price as the Rights Committee shall determine (not to exceed thirty-three percent (33 1/3%) of such current market price). Notwithstanding the foregoing, all Rights that are, or were, beneficially owned by any Acquiring Person or any affiliate or associate thereof will be null and void and not exercisable.
In the event that, at any time following the Distribution Date, (i) the Company is acquired in a merger or other business combination transaction in which the holders of all of the outstanding Common Shares immediately prior to the consummation of the transaction are not the holders of all of the surviving corporation's voting power, or (ii) more than fifty percent (50%) of the Company's assets or earning power is sold or transferred, then each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have the right (the "Flip-Over Right") to receive, upon exercise and payment of the Purchase Price, common shares of the acquiring company having a value equal to two times the Purchase Price. If a transaction would otherwise result in a holder's having a Flip-In as well as a Flip-Over Right, then only the Flip-Over Right will be exercisable; if a transaction results
in a holders having a Flip-Over Right subsequent to a transaction resulting in a holders having a Flip-In Right, a holder will have Flip-Over Rights only to the extent such holders Flip-In Rights have not been exercised.
The Purchase Price payable, and the number of Common Shares or other securities or property issuable, upon exercise of Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of Common Shares, (ii) upon the grant to holders of Common Shares of certain rights or warrants to subscribe for or purchase Common Shares at a price, or securities convertible into Common Shares with a conversion price, less than the then current market price of Common Shares, or (iii) upon the distribution to holders of Common Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Common Shares) or of subscription rights or warrants (other than those referred to above). However, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least one percent (1%). No fractional Common Shares will be issued and in lieu thereof, an adjustment in cash will be made based on the market price of Common Shares on the last trading day prior to the date of exercise.
At any time prior to the time a person becomes an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right, subject to adjustment by the Rights Committee at a price between $.001 and $.01 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time on such basis and with such conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
At any time after any person becomes an Acquiring Person and prior to the acquisition by such person or group of Common Shares representing 50% or more of the then outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights which have become null and void), in whole or in part, at an exchange ratio of one Common Share per Right (subject to adjustment).
All of the provisions of the Rights Agreement may be amended prior to the Distribution Date by the Board of Directors of the Company for any reason it deems appropriate. Prior to the Distribution Date, the Board is also authorized, as it deems appropriate, to lower the thresholds for distribution and Flip-In Rights to not less than the greater of (i) any percentage greater than the largest percentage then held by any shareholder, or (ii) 10%. After the Distribution Date, the provisions of the Rights Agreement may be amended by the Board in order to cure any ambiguity, defect or inconsistency, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person), or, subject to certain limitations, to shorten or lengthen any time period under the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to shareholders of the Company, shareholders may, depending upon the circumstances, recognize taxable income should the Rights become exercisable or upon the occurrence of certain events thereafter.
(B) HOLDERS
The approximate number of record holders, including those shares held in "nominee" or "street name," of the Company's Common Stock at February 1, 1998 was approximately 476.
(C) DIVIDENDS
The Company declared and paid semi-annual cash dividends on its Common Stock of $2.50 per share in 1997, $2.40 per share in 1996, and $2.25 per share in 1995. Future dividends may be paid as determined by the Company's Board of Directors from time to time in accordance with federal and state law. To the extent practicable,
but in all event subject to a wide variety of considerations and to the discretion of the Board of Directors, the Company expects to pay dividends semi-annually in accordance with past practices. However, any dividends that may be declared and paid by the Company will depend upon earnings, financial condition, regulatory and prudential considerations, and or other factors affecting the Company that cannot be reliably predicted.
The Company, as a corporation governed in part by the Tennessee Business Corporation Act ("TBCA"), as amended, is subject to the limitations on dividends and other distributions set forth in the TBCA. The TBCA contains certain statutory restrictions on the ability to make distributions, including the payment of dividends. Tennessee law allows a for-profit corporation to pay dividends under certain circumstances that might preclude payments of dividends by a national bank. Under Tennessee law, a corporation, including a bank holding company, may declare and pay dividends provided that (1) the payment of dividends would not render the corporation unable to pay its debts as they become due in the usual course of business; (2) the corporation's total assets are less than the sum of its total liabilities plus (unless the charter permits otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy upon dissolution the preferential rights of shareholders whose preferential rights are superior to those receiving the distribution; or (3) the payment of dividends would not be contrary to any restriction contained in the corporation's charter. At present, the Company's charter does not expressly permit distributions described in (2) above, nor does the Company have any shareholders with rights preferential to holders of the Company's common equity. The Company has no restriction in its charter concerning the payment of dividends.
The Company expects that funds for the payment of dividends and expenses of the Company will come from dividends paid to the Company by the Bank. If the Company requires additional funds for acquisitions or investments, it may be able to obtain those funds from additional dividends paid by the Bank or from external financing.
The National Bank Act and Related Regulations. The First National Bank's ability to pay dividends is limited by the National Bank Act and related regulations. Essentially, the Bank may pay dividends from its earnings for the preceding period after deducting all loan losses, bad debts, current operating expenses, actual losses, required transfers to surplus, accrued dividends on any preferred stock then outstanding, and all federal and state taxes. Prior OCC approval is required as to certain dividends. It is unlikely that the Bank will pay out the maximum amount that it is permitted to pay in dividends as most of the Bank's earnings are reinvested in its operations or added to capital to support future growth.
The payment of dividends by any bank is, of course, dependent upon its earnings and financial condition and, in addition to the limitations discussed above, is subject to the statutory power of certain federal regulatory agencies to act to prevent unsafe or unsound banking practices. Please refer also to the discussion of "Restrictions on Dividends Paid by Subsidiary Bank" set forth in Item 1 of this Report, to Item 7 of this Report ("Management's Discussion and Analysis of Financial Condition and Results of Operation"), and to the Consolidated Financial Statements.
(D) SALES OF UNREGISTERED SECURITIES
The Company has not sold any unregistered securities that were not previously reported in a quarterly report on its quarterly Report on Form 10-Q except as set forth in this paragraph. In 1997, the Company issued one thousand (1,000) shares to certain of the participants in the Stock Option Plan at a weighted average exercise price of $58.15 per share. Please refer to Note 17 of the Consolidated Financial Statements for additional information on the Stock Option Plan and to Note 16 thereof with respect to earnings per share. 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 general distribution of securities within the meaning of the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Certain selected financial data are included in this Report immediately following Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The purpose of the discussion that begins on the next page is to provide insight into the financial condition and results of operations of the Company and the Bank, its subsidiary. This discussion should be read in conjunction with the consolidated financial statements.
(Please turn to the following page.)
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.
GENERAL
First McMinnville Corporation is a one bank holding company which owns 100% of First National Bank of McMinnville. First National Bank of McMinnville ("Bank") is a community bank headquartered in McMinnville, Tennessee serving Warren County, Tennessee as its primary market area. The Company serves as a financial intermediary whereby its profitability is determined to a large degree by the interest spread it achieves and the successful measurement of risks. The Company's management believes that Warren County offers an environment for continued growth and the Company's target market is local consumers, professionals and small businesses. The Company offers a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposits, and loans for consumer, commercial and real estate purposes. The Company also offers custodial and trust services. Deposit instruments in the form of demand deposits, money market savings and certificates of deposits are offered to customers to establish the Company's core deposit base.
In a market such as Warren County, management believes there is an opportunity to increase the loan portfolio. The Company has targeted commercial business lending, commercial and residential real estate lending, and consumer lending as areas of focus. It is the Company's intention to limit the size of its loan portfolio to approximately 75% to 80% of deposit balances; however, the quality of lending opportunities as well as the desired loan to deposit ratio will determine the size of the loan portfolio. As a practice, the Company generates substantially all of its own loans and occasionally buys participations from other institutions. The Company attempts to maintain a loan portfolio which is capable of adjustment to swings in interest rates. The Company's policy is to have a diverse loan portfolio. At December 31, 1997, the nursery industry constituted the largest single industry segment and accounted for $10,737,000 (9.63% of the Company's loan portfolio) as compared to $11,287,000 or 10.3% in 1996. No other segment accounted for more than 10% of the portfolio. Management is not aware of any adverse trends or expected losses in respect to the nursery industry.
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
Regulations of the Office of the Comptroller of the Currency ("OCC") 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 risk-based 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 risk-based capital. The Company and its national bank subsidiary must maintain a Tier 1 capital to risk-based assets of at least 4.0%, a Total risk-based capital to risk-based assets ratio of at least 8.0% and a leverage capital ratio defined as Tier 1 capital to adjusted total assets for the most recent quarter of at least 4%. 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
capitalized. The Company has a Tier 1 risk based ratio of 27.9%, a total risk-based capital ratio of 28.9% and a leverage capital ratio of 15.2%, and was therefore within the "well capitalized" category under the regulations. The subsidiary bank's ratios were substantially the same as those setforth for the Company.
Dividends of approximately $1,341,000 and $1,294,000 were declared during 1997 and 1996, respectively. Principally because of the high percent of equity capital, the return on equity is lower than banks in the Company's peer group. Cash dividends are anticipated to be increased in 1998 if profits increase. The dividend payout ratio (dividends declared divided by net earnings) was 37.4%, 37.6% and 40.0% in 1997, 1996 and 1995, respectively. No material changes in the mix or cost of capital is anticipated in the foreseeable future.
The dividends by the Company are primarily funded by dividends received by the Company from the Bank. The Bank is limited by law, regulation and prudence as to the amount of dividends it can pay. At December 31, 1997, under the most restrictive of these regulatory limits, the Bank could declare in 1998 cash dividends in an aggregate amount of up to approximately $5.6 million, plus any 1998 net earnings, without prior approval of the Comptroller of the Currency. Because of sound business considerations and other Regulatory capital requirements, it is unlikely that the Company would ever pay a significant portion of this amount as dividends.
During 1996, the Bank completed construction of a new branch at a total cost of approximately $910,000 of which approximately $657,000 was incurred during 1995. The Bank also completed remodeling a portion of the main office during 1996 at a total cost of approximately $179,000 of which approximately $48,000 was incurred during 1995. During 1997, the Bank opened a new branch at a total cost of $100,000.
The Company has conducted a study of the data processing changes which will be necessary as a result of The Year 2000 Issue which relates to the ability to process year-date data accurately beyond 1999. Management estimates the cost to become compliant is between $100,000 and $200,000. Management estimates that an additional $300,000 may be spent on computer upgrades in the next two to three years.
FINANCIAL CONDITION
During 1997, total assets increased $17,033,000 or 8.7% from $195,732,000 at December 31, 1996 to $212,765,000 at December 31, 1997. Loans, net of allowance for possible loan losses, increased from $107,940,000 to $110,159,000 or 2.1% during fiscal year 1997. The aggregate increases in loans for 1997 was due primarily to a 4.2% increase in real estate - mortgage loans accompanied by a 4.6% decrease in commercial, financial and agricultural loans.
Securities increased 14.7% from $78,809,000 at December 31, 1996 to $90,363,000 at December 31, 1997. The carrying value of securities of U.S. Treasury and other U.S. Government obligations increased $11,161,000, obligations of state and political subdivisions increased $1,301,000, corporate and other securities decreased $610,000 and there was a decrease in mortgage backed securities of $298,000. At December 31, 1997 and 1996 the market value of the Company's securities portfolio exceeded its amortized cost by $1,444,000 (1.6%) and $531,000 (.7%), respectively. The weighted average yield (stated on a tax-equivalent basis, assuming a Federal income tax rate of 34%) of the securities at December 31, 1997 was 7.4% with an average maturity of 8.0 years, as compared to an average yield of 7.8% and an average maturity of 7.0 years at December 31, 1996.
Effective January 1, 1994 the Company adopted the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Accounting for Certain Investments in Debt and Equity Securities". Under the provisions of the Statement, securities are to be classified in three categories and accounted for as follows:
- - - Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.
- - - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and
- - - Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity.
The Company's classification of securities as of December 31, 1997 is as follows:
A portion of the capital increase in 1995 was $687,000 which represents the unrealized losses in securities available-for-sale of $1,107,000 net of applicable tax expense of $420,000. The net decrease in capital at December 31, 1996 totaled $233,000 which represents the unrealized appreciation in securities available-for-sale of $375,000 net of applicable tax benefit of $142,000. During the year ended December 31, 1997, the net increase in capital totaled $331,000 which represents the unrealized appreciation in securities available-for-sale of $534,000 net of applicable taxes of $203,000.
The increase in assets in 1997 was funded primarily by increases in deposits. Total deposits increased from $159,746,000 at December 31, 1996 to $172,891,000 at December 31, 1997 representing an increase of 8.2%. Demand deposits increased 13.0% from $18,802,000 at December 31, 1996 to $21,241,000 at December 31, 1997. Additionally, increases in certificates of deposit and individual retirement accounts of $10,106,000 (11.5%) contributed to the increases in deposits for 1997. Securities sold under repurchase agreements increased $1,819,000 during 1997 and were also
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
used to fund increases in assets. Federal funds purchased decreased $500,000 in 1997. The subsidiary bank has unused lines of credit of $10,000,000 and the Company has an unused line of credit of $2,000,000 at December 31, 1997. Management does not presently anticipate a need to use these lines.
The Company's allowance for loan losses at December 31, 1997 was $1,314,000 as compared to $1,724,000 at December 31, 1996. Non-performing loans amounted to $255,000 at December 31, 1997 compared to $1,000 at December 31, 1996. Non-performing loans are loans which have been placed on non-accrual status, loans 90 days past due plus renegotiated loans. Net charge-offs to average outstanding loans for 1997 was .57%. Net recoveries to average outstanding loans for 1996 was .01%. Net charge-offs totaled $630,000 for 1997. In 1997, net charge-offs exceeded the provision by $410,000. The net charge-offs in 1997 relate primarily to one customer and is not considered by management to be a trend.
The allowance for possible loan losses, amounting to $1,314,000 at December 31, 1997, represents 1.18% of total loans outstanding. At December 31, 1996, the allowance for possible loan losses represented 1.57% of total loans outstanding. Management has in place a system to identify and monitor problem loans. Management believes the allowance for possible loan losses at December 31, 1997 to be adequate.
LIQUIDITY
Liquidity represents the ability to efficiently and economically accommodate decreases in deposits and other liabilities, as well as fund increases in assets. A Company has liquidity potential when it has the ability to obtain sufficient funds in a timely manner at a reasonable cost. The availability of funds through deposits, the purchase and sales of securities in the investment portfolio, the use of funds for consumer and commercial loans and the access to debt markets affect the liquidity of the Company. The Company's loan to deposit ratio was approximately 64% and 69% at December 31, 1997 and December 31, 1996, respectively.
The Company's investment portfolio, as represented above, consists of earning assets that provide interest income. Federal Funds sold which are invested overnight are the most liquid of the investments. The Company had no Federal funds sold at December 31, 1996. Federal funds sold totaled $2,650,000 at December 31, 1997. There were no Federal funds purchased at December 31, 1997. Federal funds purchased were $500,000 at December 31, 1996.
Funds management decisions must reflect management's intent to maintain profitability in both the immediate and long-term earnings. 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 of the Bank. These meetings focus on the spread between the subsidiary bank's cost of funds and interest yields generated primarily through loans and investments.
First McMinnville Corporation presently maintains a liability sensitive position over the 1997 year or a negative gap. Liability sensitivity means that more of the Company's liabilities are capable of repricing over certain time frames than assets. The interest rates associated with these liabilities may not actually change over this period but are capable of changing. For example, the six month gap is a picture of the possible repricing over a six month period. The following table shows the rate sensitivity gaps for different time periods as of December 31, 1997:
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
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 anticipate that there will be significant withdrawals from these accounts in the future.
It is anticipated that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the foreseeable future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity changing in any material way.
RESULTS OF OPERATIONS
Net earnings for the year ended December 31, 1997 were $3,581,000 an increase of $137,000 or 4.0% from fiscal year 1996. Net earnings for 1996 totaled $3,444,000 which was an increase of $338,000 or 10.9% from $3,106,000 for 1995. Basic earning per common share was $6.68 in 1997, $6.34 in 1996 and $5.62 in 1995 after giving retroactive effect to a two-for-one stock split effective October 1, 1994. Diluted earnings per common share were $6.67, $6.34 and $5.62 in 1997, 1996 and 1995, respectively. Average earning assets increased $13,480,000 for the year ended December 31, 1997 as compared to year ended December 31, 1996. Average earning assets increased $8,061,000 for the year ended December 31, 1996 as compared to year ended December 31, 1995. Additionally, the net interest spread decreased from 4.19% in 1996 to 4.09% in 1997. The net interest spread was 4.05% in 1995. Net interest spread is defined as the effective yield on earning assets less the effective cost of deposits and borrowed funds, as calculated on a fully taxable equivalent basis.
Net interest income before provision for loan losses for 1997 totaled $8,610,000 as compared to $8,071,000 for 1996 and $7,474,000 for 1995. The provision for loan losses was $220,000 in 1997 as compared to $150,000 in 1996 and $160,000 in 1995. Net charge-offs in 1997 were $630,000 as compared to net recoveries of $12,000 in 1996 and net charge-offs of $46,000 in 1995. The 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
charge-offs related primarily to one customer and is unrelated to the nursery business. The increase in the provision in 1997 is primarily due to the increase in net charge-offs.
Non-interest income decreased 6.2% to $618,000 in 1997 from $659,000 in 1996. This decrease was due primarily to decreases in service charges on deposits of $24,000, other fees and commissions of $15,000 and commissions on fiduciary activities of $17,000 which were off-set by an increase in other income totaling $15,000. Non-interest income of $659,000 in 1996 was an increase of approximately 3.9% from $634,000 in 1995. The increase in 1996 resulted primarily from an increase in service charges on deposits and in securities gains.
Non-interest expense increased 4.1% to $3,850,000 in 1997 from $3,700,000 in 1996. Non-interest expense was $3,543,000 in 1995. Non-interest expense which includes, among other things, salaries and employee benefits, occupancy expenses, furniture and fixtures expenses, data processing, Federal Deposit Insurance premiums, supplies and general operating costs increased commensurate with the continued growth of the Company. The increase in 1997 was primarily attributable to an increase in salaries and employment benefits of $166,000 (7.7%), increases in occupancy expenses ($38,000 or 16.4%) and Federal Deposit insurance premiums ($18,000). These increases in 1997 were offset by a decrease of $20,000 in furniture and equipment expenses. The non-interest expense increased approximately 4.4% from 1995 to 1996 and was due primarily to increases in salaries and employees benefits, occupancy expenses, furniture and equipment expenses and securities losses with an offset from the decrease in Federal Deposit insurance premiums.
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.
The Company plans to adopt Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income". The new statement which becomes effective for years beginning after December 15, 1997, requires a new financial statement that includes unrealized gains and losses on certain assets and liabilities. The statement will provide additional information but will not impact existing statements.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance since they impact both interest revenues and interest costs.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
I. Distribution of Assets, Liabilities and Stockholders' Equity: Interest Rate and Interest Differential
The Schedule which follows indicates the average balances for each major balance sheet item, an analysis of net interest income and the change in interest income and interest expense attributable to changes in volume and changes in rates.
The difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities is net interest income, which is the Company's gross margin. Analysis of net interest income is more meaningful when income from tax-exempt earning assets is adjusted to a tax equivalent basis. Accordingly, the following schedule includes a tax equivalent adjustment of tax-exempt earning assets, assuming a weighted average Federal income tax rate of 34%.
In this Schedule "change due to volume" is the change in volume multiplied by the interest rate for the prior year. "Change due to rate" is the change in interest rate multiplied by the volume for the current year. Changes in interest income and expenses not due solely to volume or rate changes are included in the "change due to rate" category.
Non-accrual loans, if any, have been included in their respective loan category. Loan fees of $39,000, $42,000 and $34,000 for 1997, 1996 and 1995, respectively, are included in consumer loan income and represent an adjustment of the yield on these loans. In 1996 loan fees of $11,000 are included in real estate loan income and represent an adjustment of the yield on these loans.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
II. Investment Portfolio
A. Securities at December 31, 1997 consist of the following:
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
II. Investment Portfolio, Continued
A. Continued:
Securities at December 31, 1996 consist of the following:
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
II. Investment Portfolio, Continued
B. The following schedule details the estimated maturities and weighted average yields of securities of the Company at December 31, 1997.
* Weighted average yield is stated on a tax-equivalent basis, assuming a weighted average Federal income tax rate of 34%.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
II. Investment Portfolio, Continued
B. Continued
* Weighted average yield is stated on a tax-equivalent basis, assuming a weighted average Federal income tax rate of 34%.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
III. Loan Portfolio:
A. Loan Types
The following schedule details the loans of the Company at December 31, 1997 and 1996.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
III. Loan Portfolio, Continued:
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following schedule details maturities and sensitivity to interest rates changes for commercial loans of the Company at December 31, 1997.
* Includes demand loans, bankers acceptances, commercial paper and overdrafts.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1997
III. Loan Portfolio, Continued
C. Risk Elements
The following schedule details selected information as to non-performing loans of the Company at December 31, 1997 and 1996.
FIRST MCMINNVILLE CORPORATION
FORM 10-KSB
December 31, 1997
III. Loan Portfolio, Continued:
C. Risk Elements, Continued:
The accrual of interest income is discontinued when it is determined that collection of interest is less than probable or the collection of any amount of principal is doubtful. The decision to place a loan on a non-accrual status is based on an evaluation of the borrower's financial condition, collateral liquidation value, economic and business conditions and other factors that affect the borrower's ability to pay. At the time a loan is placed on a non-accrual status, the accrued but unpaid interest is also evaluated as to collectibility. If collectibility is doubtful, the unpaid interest is charged off. Thereafter, interest on non-accrual loans is recognized only as received. There were no loans on non-accrual status at December 31, 1997 and 1996.
At December 31, 1997, loans totaling $6,015,000 were included in the Company's internal classified loan list. Of these loans, $1,302,000 are real estate, $4,658,000 are commercial and $55,000 are consumer. The collateral valuations received by management securing these loans total approximately $9,339,000, ($1,952,000 related to real estate, $7,377,000 related to commercial and $10,000 related to consumer loans). Such loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. The loan classifications do not represent or result from trends or uncertainties which management expects will materially impact future operating results, liquidity or capital resources.
At December 31, 1997 and 1996, there were loans to customers in the nursery industry totaling approximately $10,737,000 and $11,287,000, respectively, which represents an industry concentration of approximately 10% of total loans. Loan concentrations are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions.
At December 31, 1997, other real estate totaled $11,000 and consisted of one commercial property. The balance at December 31, 1997 decreased from December 31, 1996 by $58,000 due to the sale of two properties during 1997. Management is attempting to sell the property included in other real estate at December 31, 1997 and no loss is anticipated thereon.
FIRST MCMINNVILLE CORPORATION
FORM 10-KSB
December 31, 1997
III. Loan Portfolio, Continued:
D. Other Interest-Bearing Assets
There were no material amounts of other interest-bearing assets (interest-bearing deposits with other banks, municipal bonds, etc.) at December 31, 1997 which would be required to be disclosed as past due, non-accrual, restructured or potential problem loans, if such interest-bearing assets were loans.
FIRST MCMINNVILLE CORPORATION
FORM 10-KSB
December 31, 1997
IV. Summary of Loan Loss Experience
The following schedule details selected information related to the allowance for possible loan loss account of the Company at December 31, 1997 and 1996 and the years then ended.
FIRST MCMINNVILLE CORPORATION
FORM 10-KSB
December 31, 1997
IV. Summary of Loan Loss Experience, Continued
The allowance for possible loan losses is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The provision for possible loan losses charged to operating expense is based on past loan loss experience and other factors which, in management's judgment, deserve current recognition in estimating possible loan losses. Such other factors considered by management include growth and composition of the loan portfolio, review of specific loan problems, the relationship of the allowance for possible loan losses to outstanding loans, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions that may affect the borrower's ability to pay.
Management conducts a continuous review of all loans that are delinquent, previously charged down or loans which are determined to be potentially uncollectible. Loan classifications are reviewed periodically by a person independent of the lending function. The Board of Directors periodically reviews the adequacy of the allowance for possible loan losses.
The breakdown of the allowance by loan category is based in part on evaluations of specific loans, past history and economic conditions within specific industries or geographic areas. Accordingly, since all of these conditions are subject to change, the allocation is not necessarily indicative of the breakdown of the future losses.
The following detail provides a breakdown of the allocation of the allowance for possible loan losses:
FIRST MCMINNVILLE CORPORATION
FORM 10-KSB
December 31, 1997
V. Deposits
The average amounts and average interest rates for deposits for 1997 and 1996 are detailed in the following schedule:
The following schedule details the maturities of certificates of deposit and individual retirement accounts of $100,000 and over at December 31, 1997.
In addition, approximately $668,000 of other time deposits of $100,000 and over are included in "other savings deposits," which are passbook accounts with a 90-day maturity.
FIRST MCMINNVILLE CORPORATION
FORM 10-KSB
December 31, 1997
VI. Return on Equity and Assets
The following schedule details selected key ratios of the Company at December 31, 1997, 1996, and 1995.
The minimum leverage capital ratio required by the regulatory agencies is 4%.
Beginning January 1, 1991, new risk-based capital guidelines were adopted by regulatory agencies. Under these guidelines, a credit risk is assigned to various categories of assets and commitments ranging from 0% to 100% based on the risk associated with the asset.
FIRST MCMINNVILLE CORPORATION
FORM 10-KSB
December 31, 1997
VI. Return on Equity and Assets, Continued
The following schedule details the Company's risk-based capital at December 31, 1997 (excluding the net unrealized gain on available-for-sale securities which is shown as an addition to stockholders' equity in the consolidated financial statements.)
The Company is required to maintain a total risk-based capital to risk weighted asset ratio of 8% and a Tier I capital to risk weighted asset ratio of 4%. At December 31, 1997, the Company and its subsidiary bank were in compliance with these requirements.
FIRST MCMINNVILLE CORPORATION
Form 10-KSB
December 31, 1997
VI. Return on Equity and Assets, Continued
The following schedule details the Company's interest rate sensitivity at December 31, 1997:
The Company presently maintains a liability sensitive position over the next twelve months. However, management expects that liabilities of a demand nature will renew and that it will not be necessary to replace them with significantly higher cost funds.
SELECTED FINANCIAL DATA (UNAUDITED)
The following schedule presents the results of operations, cash dividends declared, total assets, stockholders' equity and per share information for the Company for each of the five years ended December 31, 1997.
* Per share data has been retroactively restated to reflect a two-for-one stock split on October 1, 1994.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to the Consolidated Financial Statements, the Statistical Data, Item 6, Item 7, and Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of the Company and subsidiary (commencing at page) are included in this Report:
- Independent Auditors' Report;
- Consolidated Balance Sheets - December 31, 1997 and 1996;
- Consolidated Statements of Earnings - Three years ended December 31, 1997;
- Consolidated Statements of Changes in Stockholders' Equity - Three years ended December 31, 1997;
- Consolidated Statements of Cash Flows - Three years ended December 31, 1997; and all
- Notes to Consolidated Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND, EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
IDENTIFICATION OF DIRECTORS.
The following tables identify, as of February 20, 1998, the names and ages of the directors and executive officers of the Company, the year first elected, and their respective business experience during the past five years. Directors are elected to serve three year terms and until their successors have been elected and duly qualified. Those persons named under "Class II" are being nominated for three year terms to the Board of Directors for consideration at the 1998 Annual Meeting of Stockholders of the Company. The following is a list of the names and ages of the executive officers of the Company and all positions and offices with the Company presently held by the person named. There is no family relationship between any of the named persons except as disclosed elsewhere in this Annual Report on Form 10-K.
DIRECTORS OF THE REGISTRANT
IDENTIFICATION OF EXECUTIVE OFFICERS.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers were elected by, and they serve at the pleasure of, the Board of Directors.
(B) IDENTIFICATION OF SIGNIFICANT EMPLOYEES
Significant employees are identified in the preceding section under the caption "Identification of Executive Officers."
(C) FAMILY RELATIONSHIPS.
There is no family relationship between any of the above officers or between any officer, director or nominee for director, except that Mr. Henry Boyd is the uncle by marriage of Mr. G. B. Greene, and Mr. G. B. Greene is the brother of Bank Assistant Vice President Fred Greene.
(D) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
None.
(E) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company is not registered pursuant to Section 12 of the Exchange Act, is not a closed-end investment company registered under the Investment Company Act of 1940, and is not a holding company registered pursuant to the Public Utility Holding Company Act of 1935. Accordingly, the Company is not subject to Section 16(a) of the Exchange Act.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid or accrued by the Registrant during the most recent three fiscal years ended December 31, 1997, 1996, and 1995 for (i) the Chief Executive Officer of the Registrant and (ii) each of the other executive officers of the Registrant whose compensation exceeded $100,000 (collectively, the "Named Executive Officers"):
EXECUTIVE COMPENSATION
REMUNERATION OF DIRECTORS AND OFFICERS
There were no changes in the Company's chief executive during the last fiscal year. The following table sets forth the compensation of the Company's Chief Executive Officer for 1997 and the other four most highly compensated executive officers as of December 31, 1997 (if their total annual salary and bonus equaled or exceeded $100,000). The figures below include all compensation paid for all services to the Company for that fiscal year.
SUMMARY COMPENSATION TABLE
NOTES TO SUMMARY COMPENSATION TABLE
(1) This amount includes Director's fees and insurance premiums.
(2) The amounts in this column reflect the number of unexercised options granted to the named person(s) in the year(s) indicated.
(3) This amount represents the Company's contribution to the Company's 401(k) plan on behalf of the named executive(s) together with the estimated contribution for the named person in respect of the Company's defined benefit (pension) plan described in this Report.
***
STOCK OPTION GRANTS
The Company granted 1,500 stock options to the Directors, which included each of the executive officer(s) named in the Summary Compensation Table, and 2,000 options to the named officer in his capacity as such. (As noted previously, all per share data have been adjusted to reflect the two-for-one stock split that occurred on October 1, 1994.) Of these, 500 shares granted to the named person as a Director became exercisable on May 13, 1997; and the remaining two thirds are exercisable over the following two years. The shares granted to the named person as an officer are exercisable ten percent (10%) per year commencing on May 13, 1998, pursuant to certain terms and subject to certain specified limitations. All options granted in 1997 were granted at the then estimated fair market value of $58.15 per share at the date of grant. The Company has granted no stock appreciation rights to the executive officer(s) named in the Summary Compensation Table.
1997 STOCK EXERCISES
The table below provides information as to exercises of options under the Company's stock option plan by the named executive officer(s) reflected in the Summary Compensation Table and the year-end value of unexercised options held by such officer(s). (The Company grants no stock appreciation rights.)
OPTIONS/SARS GRANTS IN LAST FISCAL YEAR
NOTE TO PRECEDING TABLE
(1) The Company granted 1,500 options to this person as a Director. This number represented 9.1% of the options granted to the Directors in 1997. The grant to the named person as an officer was 2,000 shares, which represented 8.2% of all options granted to employees.
(2) The value of the stock options granted is based upon the minimum value method as permitted in Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." Under the minimum value method, the volatility is assumed to approach zero and is appropriate in situations in which there is no established public trading market for the stock. These assumptions are included pursuant to 17 C.F.R. ss.229.402(c).
***
1997 STOCK EXERCISES
The table below provides information as to exercises of options under the Company's stock option plan by the named executive officer(s) reflected in the Summary Compensation Table and the year-end value of unexercised options held by such officer(s). (The Company grants no stock appreciation rights.)
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES(1)
NOTES TO PRECEDING TABLE
(1) Unless otherwise expressly stated, all per share data in this Report have been adjusted to reflect the two-for-one stock split that became effective on October 1, 1994.
(2) This amount represents the difference between the estimated market price on February 1, 1998 of approximately $60.01 per share and the respective exercise price(s) of the options at the date(s) of grant. Such amounts may not necessarily be realized. Actual values that may be realized, if any, upon the exercise of such options will be based on the market price of the Common Stock at the time of any such exercise(s) and thus are dependent upon future performance of the Common Stock.
***
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors has appointed a Compensation Committee, which is comprised of three members. The Committee makes recommendations to the full Board of Directors as to the compensation for executive officers, including the Chief Executive Officer, as well as to compensation for other officers and employees. The principal component of executive officer compensation is salary, with secondary reliance on bonuses, stock option incentives, and other types of long-term benefits such as participation in the Company's 401(k) plan and in the Company's defined benefit ("pension") plan. The Committee utilizes information concerning the performance of the Company as compared to its peer group and in achieving its established goals in evaluating the overall performance of its employees, including the Chief Executive Officer. The Committee takes a long-term, as opposed to a short-term, view of compensation and overall results of operations. The Company compares, among other factors, the Bank's performance compared to other similarly situated commercial banks, with primary emphasis given to banks located in Tennessee. Important factors include return on average assets, return on equity, asset quality, comparisons of executive compensation at other comparable institutions, and similar objective criteria. Both overall profitability and increased earnings per share figured into, but were not the exclusive criteria, in the Committee's recommendation. Other factors included length and quality of service to the Bank and to the Community, demonstrated leadership ability, the apparent trends evident in the Bank's results of operations, and a variety of other subjective and objective factors. The Committee was generally pleased with the performance of the Company compared both to its peer group and to its goals. Accordingly the Committee recommended, and the Board of Directors approved in all material respects the levels of compensation recommended by the Committee. In addition, the Committee considered the historical profitability, competitiveness, and perceived prospects in arriving at this recommendation, as well as in concurring in the stock option grants described elsewhere in this Report.
The foregoing report has been furnished by the members of the Compensation Committee:
Robert W. Jones G. B. Greene Carl M. Stanley
BENEFITS
In April 1997, the stockholders of the Company approved the 1997 First McMinnville Corporation Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan provides for the granting of stock options, and authorizes the issuance of common stock upon the exercise of such options, for up to 57,500 shares of common stock, to employees, nonemployee directors and advisors of the Company, of which 1,500 were specified in the Stock Option Plan to be granted to each then-current Director of the Company.
Under the Stock Option Plan, stock option awards may be granted in the form of incentive stock options or nonstatutory stock options, and are generally exercisable for up to ten years following the date such option awards are
granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of common stock on the grant date.
The Stock Option Committee designated by the Board administers the Stock Option Plan. The Stock Option Plan may be terminated at any time by the Board of Directors. Options granted under the Stock Option Plan are exercisable as determined by the Board of Directors and generally are expected to vest approximately 10% per year over a ten year period and expire after ten years, although this period may be shortened by the Board of Directors. According to the plan, however, the options granted to the Directors in 1997 vested one-third per year commencing on May 13, 1997. The Stock Option Plan provides that options must be exercised no later than ten years after being granted (five years in the case of incentive Stock Options granted to an employee who owns more than 10% of the voting power of all stock).
The Stock Option Plan provides that the Board of Directors shall approve the exercise price of options on the date of grant, which for incentive stock options cannot be less than the fair market value of the Common Stock on that date (110% of the fair market value for Incentive Stock Options granted to any employee who owns more than 10% of the voting stock). The number of shares which may be issued under the Stock Option Plan and the exercise prices for outstanding options are subject to adjustment in the event that the number of outstanding shares of Common Stock are changed by reason of stock splits, stock dividends, reclassifications or recapitalizations. In addition, upon a merger or consolidation involving the Company, participants may be entitled to shares in the surviving corporation upon the terms set forth in the Stock Option Plan.
Options granted under the Stock Option Plan are nontransferable, other than by will, the laws of descent and distribution or, for nonstatutory stock options, pursuant to certain domestic relations orders. Payment for shares of Common Stock to be issued upon exercise of an Option may, if permitted in the option agreement, be made in cash, by delivery of Common Stock valued at its fair market value on the date of exercise or delivery of a promissory note as specified in the option agreement.
Pension Plan. The Bank has a noncontributory pension plan for all eligible employees. In order to be eligible, an employee must perform at least 1,000 or more hours of service within six (6) months of his or her date of employment. The employee shall become eligible on the first day of May first following the completion of one year of service and the attainment of age 21, provided such person was hired prior to his or her 60th birthday.
The amount of a participant's monthly normal retirement annuity is equal to .85% of the first $833 of the participant's average monthly compensation plus 1.50% of the compensation in excess of the first $833, multiplied by the number of years of credited service to the participant's normal retirement date which is attainment of age 65. The number of years of credited service used in the formula will be limited to a maximum of 35. Average monthly compensation is defined as the sum of the participant's reported basic earnings in the five consecutive plan years that produce the highest amount divided by 60. Early retirement, postponed retirement and disability retirement are also provided for in the plan.
A plan participant has a vested benefit equal to a percentage of his or her accrued benefit based on the length of his or her service, beginning at 20% after three years of service and increasing 20% per year for the next four years, with a participant fully vested at the end of year seven. Mr. Jacobs has 30 years of credited service under the Plan with current compensation covered by the Plan of $149,691, and the estimated amount of the Company's 1997 contribution for Mr. Jacobs was $11,408, as is reflected in the Summary Compensation Table appearing elsewhere in this Report. Mr. Jacobs' anticipated monthly benefit at retirement based on 35 years of service is $5,546.05.
The following table sets forth the estimated annual retirement benefits on a straight life annuity basis to participating employees, including the Named Executive Officer, for designated years of service and remuneration levels.
Effective March 24, 1986, the Plan was amended by including, for purposes of calculating a participant's compensation under the Plan, any and all bonuses paid to the participant during the plan year. Please refer to Note 9 of the Consolidated Financial Statements for additional information.
The Company also offers a 401(k) profit-sharing plan for eligible employees, which was adopted in 1988. To be eligible, an employee must have obtained the age of 21 and she or he must have completed one year of services. The provisions of this plan provide for both employer and employee contributions. In 1997, the Company contributed approximately $45,000 to the plan, as compared to $41,000 in 1996 and $43,000 in 1995. Please refer to Note 9 of the Consolidated Financial Statements for additional information.
Director Compensation. Directors of the Bank receive $800 for each meeting of the full Board of Directors attended plus $200 for each committee meeting attended. However, attendance at the December meeting is not required for a Director to receive Board fees.
Consultation Agreement. Pursuant to a consultation agreement, last executed to be effective January 1, 1996, the Company has retained the services of Robert W. Jones as a paid consultant, for which he receives a consultation fee of $1,000 per month, plus reimbursement for documented expenses incurred for the Company and/or the Bank. This Agreement continues for so long as Mr. Jones continues to serve as Chairman of the Board of Directors. Pursuant to this Agreement, Mr. Jones is not considered to be an employee of the Bank or of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company is authorized to issue 5,000,000 shares of its Common Stock. (Please refer to Item 5 of this Report for additional discussion of the Company's authorized classes of securities.) As of February 1, 1998 there were 534,912 shares of the Company's Common Stock issued and outstanding.
The following table sets forth certain information regarding the beneficial ownership of the Common Stock by (1) directors of the Company, and (2) the directors and executive officers of the Company as a group. No person known to the Company is the beneficial owner of more than 5% of the issued and outstanding shares of the Company's Common Stock. This information is based on information filed with or provided to and by the Company as of approximately February 1, 1998. This table includes, in the ownership and percentage calculations, shares subject to options which may be exercised within the next sixty days by all Directors and Executive Officers who are option holders in accordance with Rule 13d-3(d)(1) under the Exchange Act. However, each Director's percentage of ownership is based on such Director's pro forma ownership (including shares subject to being obtained by the exercise of options within the next 60 days) and the actual number of shares outstanding (534,912) at said date plus the number of shares obtainable by such person with the next sixty days.
- - ---------------------------
* Less than 1%.
NOTES TO TABLE
(1) Based on 534,912 shares of the Common Stock outstanding at February 1, 1998, plus that number of shares obtainable by the person named within the next 60 days pursuant to the exercise of stock options. All Directors hold 1,500 options pursuant to the Stock Option Plan except that Mr. Boyd and Mr. Barnes each exercised 500 options in 1997. This information is based in part on information supplied to the Company by the persons named in the Table.
(2) Includes 3,000 shares held by a corporation controlled by an interest of Mr. Barnes.
(3) Includes 184 shares held on behalf of Mr. Brock's spouse, as to which Mr. Brock disclaims beneficial ownership.
(4) Includes 492 shares held jointly by Mr. Gillespie and his children. Also includes 396 shares held by Mr. Gillespie's spouse, as to which Mr. Gillespie disclaims beneficial ownership.
(5) This total includes also 4,446 shares held by Mr. Jones' spouse, as to which Mr. Jones disclaims beneficial ownership.
(6) Includes 208 shares held jointly by Mr. Savage and his spouse.
(7) Includes 4,438 held by the W. B. Whitson Grandchildren Trust of which Mr. Whitson is a Co-Trustee. This total includes also 200 shares held by Mr. Whitson's spouse, as to which Mr. Whitson disclaims beneficial ownership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The First National Bank's directors and principal officers, as well as business organizations and individuals associated with them, are customers of the Bank and had normal banking transactions with the Bank during 1997. At December 31, 1997, the dollar amount of loans to the Company's Directors and Executive Officers, and their respective affiliates, was approximately $2,450,000. This approximated 7.53% of Shareholders equity and 2.22% of the Company's total loans (net of the allowance for possible loan losses). All loan transactions were made in the ordinary course of
business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated borrowers and did not involve more than the normal risk of collectibility or present other unfavorable features. The Company relies upon its Directors and executive officers for identification of their respective associates and affiliates (as those terms are defined in the Exchange Act).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. The following statements and the Report of Maggart & Associates, P.C., Independent Certified Public Accountants, commence on page of this Annual Report on Form 10-K:
a. Consolidated Balance Sheets as of December 31, 1997 and 1996;
b. Consolidated Statements of Earnings for the three years ended December 31, 1997;
c. Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1997;
d. Consolidated Statements of Cash Flows for the three years ended December 31, 1997; and
e. All Notes to the foregoing Consolidated Financial Statements.
2. Listing of Exhibits:
a. 3(i) Charter as amended.*
b. 3(ii) Bylaws.*
c. 4.1 Charter as amended.*
d. 4.2 Bylaws.*
e. 4.3 1997 First McMinnville Corporation Stock Option Plan.
f. 4.4 Shareholders Rights Agreement dated June 10, 1997.
g. 10.1 First National Bank of McMinnville 401(k) Retirement Plan.**
h. 10.2 Consulting Agreement dated February 9, 1996, between First National Bank of McMinnville and Robert W. Jones, replacing prior agreement dated December 14, 1993, as amended.***
i. 11 Statement re: computation of per share earnings (Incorporated by reference to Note 16 of the Consolidated Financial Statements).
j. 21 Subsidiaries of the Registrant for the year ended December 31, 1997.
k. 27 Financial Statement Schedule (for SEC use only) [Omitted in Paper Copies].
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1997.
(c) Exhibits - The exhibits required to be filed with this Annual Report are attached hereto as a separate section of this report.
(d) Financial Statement Schedules - All schedules have been omitted since the required information is either not applicable, is disclosed in Item 1 of this Report, or is disclosed in the consolidated financial statements or related notes to such financial statements.
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* Incorporated herein by reference to exhibits filed with Form 10-K Annual Report under the Exchange Act for the fiscal year ended December 31, 1994.
** Incorporated herein by reference to exhibits filed with Form 10-K Annual Report under the Exchange Act for the fiscal year ended December 31, 1988.
*** Incorporated herein by reference to exhibits filed with Form 10-KSB Annual Report under the Exchange Act for the fiscal year ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Charles C. Jacobs ----------------------------------- Charles C. Jacobs President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
1. Instructions.
(a) Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference (in which case see Rule 12b-23(d)), every registrant which files an annual report on this Form pursuant to Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this Form, four copies of the following:
(1) Any annual report to security holders covering the registrant's last fiscal year; and
(2) Every proxy statement, form of proxy or other proxy soliciting material sent to more than ten of the registrant's security holders with respect to any annual or other meeting of security holders.
(b) The foregoing material shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that the registrant specifically incorporates it in its annual report on this Form by reference.
(c) If no such annual report or proxy material has been sent to security holders, a statement to that effect shall be included under this caption. If such report or proxy material is to be furnished to security holders subsequent to the filing of the annual report of this Form, the registrant shall so state under this caption and shall furnish copies of such material to the Commission when it is sent to security holders.
2. Items Included:
(a) Annual Reports, Proxy Statements, and Form of Proxy.
(1) A copy of the annual report to security holders for the Company's last fiscal year is furnished herewith to the Commission for its information, pursuant to the instructions to Form 10-K, BUT NOT INCORPORATED BY REFERENCE.
(2) A copy of the form of proxy to be sent to security holders in respect of the Company's 1998 Annual Meeting of Shareholders is furnished herewith to the Commission for its information for its information, pursuant to the instructions to Form 10-K, BUT NOT INCORPORATED BY REFERENCE.
(These items appear commencing on page 126.)
FIRST MCMINNVILLE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
EXHIBIT INDEX
NOTES
(1) Incorporated herein by reference to exhibits filed with Form 10-K Annual Report under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1994.
(2) Incorporated herein by reference to exhibits filed with Form 10-K Annual Report under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1988.
(3) Incorporated herein by reference to exhibits filed with Form 10-KSB Annual Report under the Exchange Act for the fiscal year ended December 31, 1996.
(4) Incorporated by reference to Note 16 of First McMinnville Corporation's Consolidated Annual Financial Statements for the year ended December 31, 1997.
(5) This Exhibit is solely for the use of the United States Securities and Exchange Commission. No paper copy is being filed. This Schedule, filed only in electronic format, contains summary financial information extracted from the financial statements of the Company at December 31, 1997 and is qualified in its entirety by reference to such financial statements as set forth in the Company's Annual Report on Form 10-K for the period ending on December 31, 1997.
FIRST MCMINNVILLE CORPORATION MCMINNVILLE, TENNESSEE
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1997 AND 1996
(WITH INDEPENDENT AUDITOR'S REPORT THEREON)
MAGGART & ASSOCIATES, INC.
Certified Public Accountants FIRST UNION TOWER SUITE 2150 150 FOURTH AVENUE, NORTH NASHVILLE, TENNESSEE 37219-2417 Telephone (615) 252-6100 Facsimile (615) 252-6105
INDEPENDENT AUDITOR'S REPORT
The Board of Directors First McMinnville Corporation:
We have audited the accompanying consolidated balance sheets of First McMinnville Corporation and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First McMinnville Corporation and Subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
The audits referred to above were directed primarily toward formulating an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating schedules are presented for supplementary analysis purposes and are not intended to present the individual financial condition and results of operations of the components of the consolidated group in accordance with generally accepted accounting principles, nor are they necessary for a fair presentation of the financial condition and the results of operations and cash flows of the consolidated group. The consolidating schedules have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, are stated fairly in all material respects only when considered in conjunction with the consolidated financial statements taken as a whole.
/s/ Maggart & Associates, P.C.
Nashville, Tennessee January 28, 1998
FIRST MCMINNVILLE CORPORATION
Consolidated Balance Sheets
December 31, 1997 and 1996
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Earnings
Three Years Ended December 31, 1997
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
Three Years Ended December 31, 1997
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Cash Flows
Three Years Ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Cash Flows, Continued
Three Years Ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of First McMinnville Corporation (the "Company") and its wholly-owned subsidiary, the First National Bank of McMinnville ("Bank") are in accordance with generally accepted accounting principles and conform to general practices within the banking industry.
The following is a brief summary of the significant policies.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, First National Bank of McMinnville. All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Nature of Operations
The Company is registered as a one bank holding company under the Bank Holding Company Act of 1956. The Bank operates under a Federal Bank Charter and provides full banking services. As a national bank, the subsidiary bank is subject to regulation of the Office of the Comptroller of the Currency. The area served by First National Bank of McMinnville is Warren County, Tennessee and surrounding counties in Middle Tennessee. Services are provided at the main office and four branches.
(c) Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(d) Loans
Loans are stated at the principal amount outstanding. Unearned discount, deferred loan fees net of loan acquisition costs, and the allowance for possible loan losses are shown as reductions of loans. Loan origination and commitment fees and certain loan-related costs are being deferred and the net amount amortized as an adjustment of the related loan's yield over the contractual life of the loan. Unearned discount represents the unamortized amount of finance charges, principally related to certain installment loans. Interest income on most loans is accrued based on the principal amount outstanding.
The Company adopted, on a prospective basis effective January 1, 1995, 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 residential mortgage and installment loans.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(d) Loans, Continued
A loan is impaired when it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. Impaired loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company shall recognize an impairment by creating a valuation allowance with a corresponding charge to the provision for possible loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for possible loan losses.
The Company's consumer loans 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 along 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 affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all interest accrued and uncollected 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 possible 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 cash received is applied as a reduction of principal. A nonaccrual loan may be restored to an 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.
Loans not on nonaccrual status are classified as impaired in certain cases when 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.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(d) Loans, Continued
Generally, the Company also classifies as impaired any loans the terms of which have been modified in a troubled debt restructuring. Interest is generally accrued on such loans that continue to meet the modified terms of their loan agreements.
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.
(e) Allowance for Possible Loan Losses
The provision for possible loan losses represents a charge to earnings necessary, after loan charge-offs and recoveries, to maintain the allowance for possible loan losses at an appropriate level which is adequate to absorb estimated losses inherent in the loan portfolio. Such estimated losses arise primarily from the loan portfolio but may also be derived from other sources, including commitments to extend credit and standby letters of credit. The level of the allowance is determined on a quarterly basis using procedures which include: (1) categorizing commercial and commercial real estate loans into risk categories to estimate loss probabilities based primarily on the historical loss experience of those risk categories and current economic conditions; (2) analyzing significant commercial and commercial real estate credits and calculating specific reserves as necessary; (3) assessing various homogeneous consumer loan categories to estimate loss probabilities based primarily on historical loss experience; (4) reviewing unfunded commitments; and (5) considering various other factors, such as changes in credit concentrations, loan mix, and economic conditions which may not be specifically quantified in the loan analysis process.
The allowance for possible loan losses consists of an allocated portion and an unallocated, or general portion. The allocated portion is maintained to cover estimated losses applicable to specific segments of the loan portfolio. The unallocated portion is maintained to absorb losses which probably exist as of the evaluation date but are not identified by the more objective processes used for the allocated portion of the allowance due to risk of errors or imprecision. While the total allowance consists of an allocated portion and an unallocated portion, these terms are primarily used to describe a process. Both portions of the allowance are available to provide for inherent loss in the entire portfolio.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(e) Allowance for Possible Loan Losses, Continued
The allowance for possible loan losses is increased by provisions for possible loan losses charged to expense and is reduced (increased) by loans charged off net of recoveries on loans previously charged off. The provision is based on management's determination of the amount of the allowance necessary to provide for estimated loan losses based on its evaluation of the loan portfolio. Determining the appropriate level of the allowance and the amount of the provision involves uncertainties and matters of judgment and therefore cannot be determined with precision.
(f) Debt and Equity Securities
The Company follows the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under the provisions of the Statement, securities are classified in three categories and accounted for as follows:
- Securities Held-to-Maturity
Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Amortization of premiums and accretion of discounts are recognized by the interest method.
- Trading Securities
Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
- Securities Available-for-Sale
Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at estimated fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Premiums and discounts are recognized by the interest method.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(f) Debt and Equity Securities, Continued
No securities have been classified as trading securities.
Realized gains or losses from the sale of debt and equity securities were recognized based upon the specific identification method.
(g) Premises and Equipment
Premises and equipment are stated at cost. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the related assets. Gain or loss on items retired and otherwise disposed of is credited or charged to operations and cost and related accumulated depreciation are removed from the asset and accumulated depreciation accounts.
Expenditures for major renewals and improvements of premises and equipment are capitalized and those for maintenance and repairs are charged to earnings as incurred.
(h) Long-Lived Assets
In March, 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 1996, the company adopted this statement and determined that no impairment loss need be recognized for its long-lived assets.
(i) Other Real Estate
Real estate acquired in settlement of loans is initially recorded at the lower of cost (loan value of real estate acquired in settlement of loans plus incidental expense) or estimated fair value, less estimated cost to disposal. Based on periodic evaluations by management, the carrying values are reduced by a direct charge to earnings when they exceed net realizable value. Costs relating to the development and improvement of the property are capitalized, while holding costs of the property are charged to expense in the period incurred.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(j) Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax asset and liabilities are expected to be realized or settled as prescribed in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision of income taxes.
The Company and its subsidiary file a consolidated Federal income tax return. Each corporation provides for income taxes on a separate-return basis.
(k) Pension Expense
The subsidiary accounts for its defined benefit pension plan under the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". Accordingly, the net pension expense consists of service costs, interest cost, return on pension assets and amortization of unrecognized initial excess of projected benefits over plan assets and actuarial gains and losses.
(l) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and Federal funds sold. Generally, Federal funds sold are purchased and sold for one-day periods. The Bank maintains deposits with other financial institutions in excess of the Federal insurance amounts. Management makes deposits only with financial institutions it considers to be financially sound.
(m) Reclassifications
Certain reclassifications have been made to the 1996 and 1995 figures to conform to the presentation for 1997.
(n) Off-Balance-Sheet Financial Instruments
In the ordinary course of business the subsidiary bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(2) Loans and Allowance for Possible Loan Losses
Loans and allowance for possible loan losses at December 31, 1997 and 1996 are summarized as follows:
In the normal course of business, the Company's subsidiary has made loans at prevailing interest rates and terms to directors and officers of the Company, and to their affiliates. The aggregate dollar amount of these loans was $2,450,000 and $2,842,000 at December 31, 1997 and 1996, respectively. During 1997, $1,295,000 of such loans were made and repayments totaled $1,687,000. As of December 31, 1997, none of these loans were restructured, nor were any related party loans charged off during the past three years.
No loans had been placed on non-accrual status during 1997 and 1996.
The principal maturities on loans at December 31, 1997 are as follows:
At December 31, 1997, variable rate and fixed rate loans totaled approximately $14,362,000 and $97,111,000, respectively. At December 31, 1996, variable rate loans were approximately $18,252,000 and fixed rate loans totaled approximately $91,412,000.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(2) Loans and Allowance for Possible Loan Losses, Continued
Transactions in the allowance for possible loan losses for the years ended December 31, 1997, 1996 and 1995 are summarized as follows:
The Company's principal customers are basically in the Middle Tennessee area with a concentration in Warren County, Tennessee. At December 31, 1997, the Company had loans to customers in the nursery industry totaling approximately $10,737,000 as compared to $11,287,000 at December 31, 1996. Credit is extended to businesses and individuals and is evidenced by promissory notes. The terms and conditions of the loans including collateral vary depending upon the purpose of the credit and the borrower's financial condition.
Impaired loans and related loan loss reserve amounts at December 31, 1997 and 1996 were as follows:
The average recorded investment in impaired loans for the years ended December 31, 1997 and 1996 was $4,116,000 and $3,832,000, respectively.
The related total amount of interest income recognized on the accrual basis for the period that such loans were impaired was $393,000 and $367,000 for 1997 and 1996, respectively.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(3) Debt and Equity Securities
Debt and equity securities have been classified in the balance sheet according to management's intent. The Company's classification of securities at December 31, 1997 is as follows:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(3) Debt and Equity Securities, Continued
Debt and equity securities at December 31, 1996 consist of the following:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(3) Debt and Equity Securities, Continued
The amortized cost and estimated market value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(3) Debt and Equity Securities, Continued
Results from sales of debt and equity securities are as follows:
Included in the above gains and losses table is a realized loss of $12,000 in 1997 and gains of $13,000 and $12,000 in 1996 and 1995, respectively, related to calls of securities classified as held-to-maturity.
The Company periodically applies the stress test to its securities portfolio. To meet the stress test a security's estimated market value should not decline more than certain percentages given certain assumed interest rate increases. The Company had no securities to fail the stress test at December 31, 1997.
Securities with approximate carrying values of $15,251,000 (approximate market value of $15,367,000) and $14,641,000 (approximate market value of $14,730,000) at December 31, 1997 and 1996, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes required or permitted by law.
Included in the securities at December 31, 1997, are approximately $14,717,000 at amortized cost (approximate market value of $15,094,000) in obligations of political subdivisions located within the State of Tennessee. Management purchases only obligations of such political subdivisions it considers to be financially sound.
Securities that have rates that adjust prior to maturity totaled $3,489,000 (market value $3,415,000) at December 31, 1997 as compared to $4,004,000 (market value $3,869,000) at December 31, 1996.
Included in the securities portfolio is stock of the Federal Home Loan Bank amounting to $672,000 and $626,000 at December 31, 1997 and 1996, respectively. The stock can be sold back at par and only to the Federal Home Loan Bank or to another member institution.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(4) Premises and Equipment
The detail of premises and equipment at December 31, 1997 and 1996 is as follows:
During 1996, the Company constructed a branch facility on Smithville Highway in McMinnville, Tennessee at a building cost of $522,000. The contractor, who is a director of the Company, was paid construction costs of $478,000.
(5) Deposits
Deposits at December 31, 1997 and 1996 are summarized as follows:
Principal maturities of certificates of deposit and individual retirement accounts at December 31, 1997 are as follows:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(5) Deposits, Continued
The Bank is required to maintain cash balances or balances with the Federal Reserve Bank or other correspondent banks based on certain percentages of deposit types. The average required amounts for the years ended December 31, 1997 and 1996 were approximately $963,000 and $908,000, respectively.
(6) Securities Sold Under Repurchase Agreements
The maximum amounts of outstanding repurchase agreements during 1997 and 1996 was $6,383,000 and $5,666,000, respectively. The average daily balance outstanding during 1997, 1996 and 1995 was $3,968,000, $3,529,000 and $3,579,000, respectively. The underlying securities are typically held by other financial institutions and are designated as pledged.
(7) Non-Interest Income and Non-Interest Expense
The significant components of non-interest income and non-interest expense for the years ended December 31 are presented below:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(8) Income Taxes
The components of the net deferred tax asset are as follows:
The tax effects of each type of significant item that gave rise to deferred taxes at December 31 are:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(8) Income Taxes, Continued
The components of income tax expense (benefit) are summarized as follows:
A reconciliation of actual income tax expense of $1,577,000, $1,436,000 and $1,299,000 for the years ended December 31, 1997, 1996 and 1995, respectively, to the "expected" tax expense (computed by applying the statutory rate of 34% to earnings before income taxes) is as follows:
Total income tax expense for 1997 and 1996 includes income tax benefits of $3,000 and $35,000, respectively, related to losses on sales of securities. A tax expense of $19,000 related to gains on sales of securities is included in the 1995 total income tax expense.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(9) Employee Benefit Plans
The subsidiary bank has in effect a defined benefit noncontributory pension plan which covers substantially all employees over 21 years of age after they have been employed six months. The subsidiary's funding policy provides that payments to the pension trust shall be an amount equal to the plan's actuarial determined normal cost plus an amount required to amortize the prior service cost over ten years.
Total pension expense including prior service costs amortization amounted to $71,000 in 1997, $82,000 in 1996 and $99,000 in 1995. The pension expense for 1997, 1996 and 1995 is comprised of the following components.
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet at December 31, 1997 and 1996:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(9) Employee Benefit Plans, Continued
In December, 1988 the Bank adopted a 401(k) plan which covers eligible employees. To be eligible, an employee must have obtained the age of 21 and must have completed 1 year of service. The provisions of the plan provide for both employee and employer contributions. For the years ended December 31, 1997, 1996 and 1995, the Bank contributed $45,000, $41,000 and $43,000, respectively, to the plan.
(10) Regulatory Matters and Restrictions on Dividends
The Company and its wholly-owned subsidiary are subject to regulatory capital requirements administered by the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The Company's capital classifications are also subject to qualitative judgments by the Regulators about components, risk weightings and other factors. Those qualitative judgments could also affect the Company's and the Bank's capital status and the amounts of dividends the subsidiary may distribute. At December 31, 1997, management believes that the Company and the Bank meet all such capital requirements to which they are subject.
The Company and the Bank are required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by the banking regulators. At December 31, 1997, the Company and its bank subsidiary are required to have minimum Tier I and total risk-based capital ratios of 4.0% and 8.0%, respectively. The Company's actual ratios at that date were 27.9% and 28.9%, respectively. The leverage ratio at December 31, 1997 was 15.2% and the minimum requirement was 4.0%.
(11) Commitments and Contingent Liabilities
The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial position.
The Company has an unsecured $2,000,000 line of credit with another financial institution. The Bank has lines of credit with other financial institutions totaling $10,000,000. At December 31, 1997 and 1996, there was no outstanding balances under these lines of credit.
(12) Concentration of Credit Risk
Substantially all of the Company's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Company's market area. Virtually all such customers are depositors of the Bank. Investment in state and municipal securities also include governmental entities within the Company's market area. The concentrations of credit by type of loan are set forth in note 2 to the consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(12) Concentration of Credit Risk, Continued
At December 31, 1997, the Company's cash and due from banks included commercial bank deposit accounts aggregating $2,318,000 in excess of the Federal Deposit Insurance Corporation limit of $100,000 per institution.
In addition, Federal funds sold were deposited with two banks.
(13) Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral normally consists of real property.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation - Parent Company Financial Information
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Balance Sheets
December 31, 1997 and 1996
*Eliminated in consolidation.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation - Parent Company Financial Information, Continued
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Statements of Earnings
For the Three Years Ended December 31, 1997
* Eliminated in consolidation.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation - Parent Company Financial Information, Continued
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Statements of Earnings
For the Three Years Ended December 31, 1997
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation - Parent Company Financial Information, Continued
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Statements of Cash Flows
For the Three Years Ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation Parent Company Financial Information, Continued
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Statements of Cash Flows, Continued
For the Three Years Ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(15) Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments" requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments.
Cash and short-term investments
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities
The carrying amounts for short-term securities approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of longer-term securities and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.
SFAS No. 107 specifies that fair values should be calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. Accordingly, these considerations have not been incorporated into the fair value estimates.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, credit card and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms.
The fair value of the various categories of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining average estimated maturities.
The estimated maturity for mortgages is modified from the contractual terms to give consideration to management's experience with prepayments. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented below would be indicative of the value negotiated in an actual sale.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(15) Disclosures About Fair Value of Financial Instruments, Continued
Loans, Continued
The value of the loan portfolio is also discounted in consideration of the credit quality of the loan portfolio as would be the case between willing buyers and sellers. Particular emphasis has been given to loans on the subsidiary bank's internal watch list. Valuation of these loans is based upon borrower performance, collateral values (including external appraisals), etc.
Deposit Liabilities
The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Under the provision of SFAS No. 107 the fair value estimates for deposits does not include the benefit that results from the low cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
Securities Sold Under Repurchase Agreements
The securities sold under repurchase agreements are payable upon demand. For this reason the carrying amount is a reasonable estimate of fair value.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees Written
Loan commitments are made to customers generally for a period not to exceed one year and at the prevailing interest rates in effect at the time the loan is closed. Commitments to extend credit related to construction loans are made for a period not to exceed six months with interest rates at the current market rate at the date of closing. In addition, standby letters of credit are issued for periods up to three years with rates to be determined at the date the letter of credit is funded. Fees are only charged for the construction loans and the standby letters of credit and the amounts unearned at December 31, 1997 are insignificant. Accordingly, these commitments have no carrying value and management estimates the commitments to have no significant fair value.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(15) Disclosures About Fair Value of Financial Instruments, Continued
The carrying value and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(15) Disclosures About Fair Value of Financial Instruments, Continued
Limitations, Continued
Fair value estimates are based on estimating on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a mortgage department that contributes net fee income annually. The mortgage department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities and property, plant and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
(16) Earnings Per Share (EPS)
In 1997, Statement of Financial Accounting Standards ("SFAS") 128 "Earnings Per Share" established uniform standards for computing and presenting earnings per share. SFAS 128 replaces the presentation of primary earnings per share with the presentation of basic earnings per share and diluted earnings per share. 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.
The following is a summary of components comprising basic and diluted earnings per share (EPS):
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(17) Stock Option Plan
In April, 1997, the stockholders of the Company approved the First McMinnville Corporation 1997 Stock Option Plan (The "Stock Option Plan"). The Stock Option Plan provides for the granting of stock options, and authorizes the issuance of common stock upon the exercise of such options for up to 57,500 shares of common stock to directors and employees of the Company.
Under the Stock Option Plan awards may be granted in the form of incentive stock options or nonstatutory stock options, and are generally exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the common stock on the grant date.
In 1995, SFAS 123, "Accounting for Stock Based Compensation" (SFAS 123) changed the method for recognition of cost of plans similar to those of the Company. As is permitted, management has elected to continue accounting for the plan under APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the stock option plan. However, under SFAS 123, the Company is required to make proforma disclosures as if cost had been recognized in accordance with the pronouncement. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS 123, the Company's net earnings and basic earnings per common share and diluted earnings per common share would have been reduced to the proforma amounts indicated below:
Accordingly, due to the initial phase-in period, the effects of applying this statement for proforma disclosures are not likely to be representative of the effects on reported net income for future years.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(17) Stock Option Plan, Continued
A summary of the stock option activity for 1997 is as follows:
The following table summarizes information about fixed stock options at December 31, 1997:
SCHEDULE 1
FIRST MCMINNVILLE CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(1) To eliminate deposits of subsidiary held by the parent company.
(2) To eliminate investment in subsidiary.
(3) To eliminate intercompany accounts. SCHEDULE 2
FIRST MCMINNVILLE CORPORATION
CONSOLIDATING STATEMENT OF EARNINGS
DECEMBER 31, 1997
(1) To eliminate equity in earnings of the subsidiary.
SUPPLEMENTAL INFORMATION
SUPPLEMENTAL INFORMATION
1. Instructions
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
(a) Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference (in which case see Rule 12b-23(d)), every registrant which files an annual report on this Form pursuant to Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this Form, four copies of the following:
(1) Any annual report to security holders covering the registrant's last fiscal year; and
(2) Every proxy statement, form of proxy or other proxy soliciting material sent to more than ten of the registrant's security holders with respect to any annual or other meeting of security holders.
(b) The foregoing material shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that the registrant specifically incorporates it in its annual report on this Form by reference.
(c) If no such annual report or proxy material has been sent to security holders, a statement to that effect shall be included under this caption. If such report or proxy material is to be furnished to security holders subsequent to the filing of the annual report of this Form, the registrant shall so state under this caption and shall furnish copies of such material to the Commission when it is sent to security holders.
2. Supplemental Information Included: Proxy Materials
FIRST MCMINNVILLE CORPORATION 200 EAST MAIN STREET MCMINNVILLE, TENNESSEE 37110
TELEPHONE (931) 473-4402 FACSIMILE (931) 473-6952
February 21, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of Shareholders of (the "Company") to be held on April 14, 1998, at 2:30 o'clock p.m., local time, at the Main Office of The First National Bank of McMinnville, 200 East Main Street, McMinnville, Tennessee. At the 1998 Annual Meeting Shareholders, of record as of February 27, 1998, will be entitled to vote (1) upon the election of three Class II Members of the Board of Directors who will serve a term of three years and until their successors have been elected and duly qualified and (2) upon the ratification of the appointment of Maggart & Associates, P.C. as the independent auditors for the Company for the fiscal year ending December 31, 1998. The Shareholders also will vote upon any other business that may properly come before the 1998 Annual Meeting.
The enclosed Proxy Statement describes the proposed election of Directors and the appointment of independent auditors, and it contains other information about the 1998 Annual Meeting of Shareholders. Please read these materials carefully. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED WHETHER OR NOT YOU PLAN TO ATTEND THE 1998 ANNUAL MEETING. PLEASE COMPLETE THE ENCLOSED PROXY SHEET AND RETURN IT IN THE ENCLOSED ENVELOPE WITHOUT DELAY. IF YOU ATTEND THE 1998 ANNUAL MEETING OF SHAREHOLDERS, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON IF YOU WISH AS SET FORTH IN THE ACCOMPANYING PROXY STATEMENT BY GIVING APPROPRIATE NOTICE ANY TIME BEFORE THE VOTE IN RESPECT OF THE ELECTION OF DIRECTORS IS TAKEN.
On behalf of your Board of Directors, we urge you to vote FOR the election of Directors and the ratification of the independent auditors. We look forward to seeing you at the Annual Meeting.
Sincerely,
Charles C. Jacobs President
FIRST MCMINNVILLE CORPORATION 200 EAST MAIN STREET MCMINNVILLE, TENNESSEE 37110
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON TUESDAY, APRIL 14, 1998
-----------
Notice is hereby given that the Annual Meeting of Shareholders of FIRST MCMINNVILLE CORPORATION (the "Company"), will be held on Tuesday, April 14, 1998, at 2:30 o'clock p.m., in the Main Office of The First National Bank of McMinnville, 200 East Main Street, McMinnville, Tennessee 37110, for the following purposes:
(1) To elect three (3) Class II Directors (J. G. Brock, G. B. Greene, and Robert W. Jones) whose terms currently expire in 1998 to serve a three-year term until the 2001 Annual Meeting of Shareholders and until their successors have been elected and duly qualified;
(2) To approve the selection of Maggart & Associates, P.C., as the Company's independent auditors for the 1998 fiscal year; and
(3) To consider any other business that may properly come before the 1998 Annual Meeting of Shareholders.
The Board of Directors has fixed the close of business on February 27, 1998, as the record date for the determination of which Shareholders are entitled to notice of and to vote at the 1998 Annual Meeting of Shareholders. All times are local time in McMinnville, Tennessee. There are approximately 534,912 shares outstanding and entitled to vote.
Your attention is directed to Exhibit A to this Notice of Annual Meeting for additional information regarding matters to be acted upon at the 1998 Annual Meeting of Shareholders.
By Order of the Board of Directors
John J. Savage, Jr., Secretary February 21, 1998
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, THE BOARD OF DIRECTORS REQUESTS THAT YOU COMPLETE, DATE, SIGN, AND RETURN THE ENCLOSED PROXY SHEET AND USE THE ENCLOSED PRE-ADDRESSED ENVELOPE THAT REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND IN PERSON, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON BY NOTIFYING THE SECRETARY OF THE MEETING THAT YOU INTEND SO TO DO (AND AS OTHERWISE PROVIDED IN THE PROXY STATEMENT).
EXHIBIT A
PROPOSAL NUMBER 1
NOMINEES AND MEMBERS OF THE BOARD OF DIRECTORS
The following persons are members of the Board of Directors. Brief biographical information concerning each one is included below. The three (3) Directors listed in Class II are currently standing for election to the Board and, if elected, will serve three year terms and serve until their successors have been elected and duly qualified.
CLASS II DIRECTORS ARE THOSE STANDING FOR ELECTION IN 1998.
THE BOARD RECOMMENDS A VOTE "FOR" ALL OF THESE NOMINEES.
Exhibit A
NOMINEES AND MEMBERS OF THE BOARD OF DIRECTORS
CLASS III - (DIRECTORS WHOSE TERMS OF OFFICE WILL EXPIRE IN 1999):
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF THE NAMED DIRECTOR NOMINEES.
PROPOSAL NUMBER 2--RATIFICATION OF APPOINTMENT OF AUDITORS
The Directors have appointed Maggart & Associates, P.C., to serve as independent auditors for the Company for the fiscal year that ends December 31, 1998, subject to ratification of such appointment by the Shareholders. Maggart & Associates, P.C. served as the Corporation's accounting firm during the formation of the Corporation and for the year ending December 31, 1997. A representative of Maggart & Associates, P.C. is expected to be present at the 1998 Annual Meeting of Shareholders to respond to Shareholders' questions and such representative will have the opportunity to make a statement if she or he desires.
The appointment of the auditors must be ratified by a majority of the votes cast by the Shareholders at the 1998 Annual Meeting of Shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT OF MAGGART & ASSOCIATES, P.C. AS THE CORPORATION'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.
Exhibit A
MISCELLANEOUS MATTERS
The Board knows of no other matter which may properly come before the Annual Meeting for action. However, if any other matter does properly come before the Annual Meeting, the persons named in the enclosed proxy will vote in accordance with their judgment upon such other matter.
The Company will bear the expense of solicitation of the proxies for the 1998 Annual Meeting of Shareholders. The Company will reimburse brokerage firms and other custodians, nominees, and fiduciaries for their reasonable expenses incurred in sending proxy materials to the beneficial owners/Shareholders of the Common Stock in connection with the 1998 Annual Meeting of Shareholders. In addition to solicitations by the mails, the Company's Directors, officers, and regular employees may solicit proxies personally or by telephonic or telegraphic means, for which they will receive no additional compensation. The Company does not intend to employ or to compensate any other persons or entities to solicit proxies in connection with the 1998 Annual Meeting of Shareholders.
REVOCABILITY OF PROXY
A Shareholder of record who signs and returns a proxy in the accompanying form may revoke the same at any time before the authority granted thereby is exercised by attending the Annual Meeting and electing to vote in person, by filing with the Secretary of the Company a written revocation, or by duly executing a proxy bearing a later date. (Such later executed and dated proxy, to be effective, must be delivered to the Chairperson of the Annual Meeting before the vote in respect of Proposal No. 1 is taken.) Unless so revoked, the shares represented by the proxy will be voted at the Annual Meeting. Where a choice is specified on the proxy, the shares represented thereby will be voted in accordance with such specifications. If no specification is made, such shares will be voted for the election of all Director nominees, and for the approval of Maggart & Associates, P.C., as the Company's independent auditors for the 1998 fiscal year. Abstentions and broker non-votes will not be counted as affirmative votes. Neither the Tennessee Business Corporation Act, nor the Company's Charter or Bylaws, address the treatment of abstentions and broker non-votes.
When a proxy is properly executed and returned, the shares of Common Stock it represents will be voted in accordance with the directions indicated on the proxy. IF NO DIRECTIONS ARE INDICATED IN THE PROXY, ALL DULY EXECUTED PROXIES THAT HAVE NOT BEEN REVOKED WILL BE VOTED FOR PROPOSAL NUMBER 1 TO ELECT ALL OF THE CLASS II NOMINEES TO THE BOARD OF DIRECTORS; AND FOR PROPOSAL NUMBER 2 TO RATIFY THE APPOINTMENT OF MAGGART & ASSOCIATES, P.C., AS THE BANK'S INDEPENDENT AUDITORS FOR FISCAL YEAR 1998; AND, IN THE DISCRETION OF THE PROXY, IN RESPECT OF ANY OTHER ITEM OF BUSINESS THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING. Presently, other than such ministerial matters as approving of the minutes of the most recent meeting of the Shareholders, the Board of Directors knows of no other business that may properly come before the Annual Meeting.
Exhibit A
PROXY FIRST MCMINNVILLE CORPORATION ANNUAL MEETING OF SHAREHOLDERS, APRIL 14, 1998 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) C. M. STANLEY, J. J. SAVAGE, and W. B. WHITSON, JR., and each of them, as Proxies, each with full power to appoint his substitute, and hereby authorize(s) any of them to represent and to vote, as designated below, all of the shares of Common Stock of First McMinnville Corporation held of record by the undersigned at the close of business on February 27, 1998, at the 1998 Annual Meeting of Shareholders to be held at 200 East Main Street, McMinnville, Tennessee, on April 14, 1998, at 2:30 p.m. local time, and any adjournment(s) or postponements thereof.
THE BOARD RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
(1) ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY (except as marked to the to vote for all nominees contrary below) listed below
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE CHECK THE BOX TO VOTE "FOR" ALL NOMINEES AND STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
J. G. Brock, G. B. Greene, and Robert W. Jones
(2) To approve the selection of Maggart and Associates, P.C., as the Company's independent auditors for the fiscal year ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) In their discretion, on such other matters as may properly come before the 1998 Annual Meeting of Shareholders.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR THE NOMINEES IN THE ELECTION OF DIRECTORS, FOR THE SELECTION AND RATIFICATION OF MAGGART & ASSOCIATES, P.C., AS INDEPENDENT AUDITORS, AND IN THE DISCRETION OF THE PROXY AS TO OTHER MATTERS.
PLEASE SIGN AND DATE BELOW AND RETURN PROMPTLY.
DATED: , 1998 -------------- --------------------------------------------
DATED: , 1998 -------------- -------------------------------------------- Signatures of Shareholder(s) should correspond exactly with the name printed hereon. Joint owners should each sign personally. Executors, administrators, trustees, etc., should give full title and authority.
1997 ANNUAL REPORT TO STOCKHOLDERS
[GRAPHIC OF MAIN OFFICE]
FIRST MCMINNVILLE CORPORATION MCMINNVILLE, TENNESSEE
IN MEMORIAM
[PHOTOGRAPH]
WAYMAN E. HILLIS
Wayman E. Hillis served as a Director for First McMinnville Corporation from January 20, 1984 and First National Bank from February 10, 1953 until December 31, 1991. On January 1, 1992 he became an Honorary Director and served in that capacity until his death on April 29, 1997. During his distinguished tenure as a director he discharged his duties with enthusiasm, dedication and loyalty.
Not only did Mr. Hillis contribute to the success of our company, his contributions to our community are legendary. Many organizations recognized Mr. Hillis with awards signifying his accomplishments. He took a special delight in being involved with young men and women. For many years Mr. Hillis served the Boy Scouts of America in numerous capacities, supported local sports programs and instilled in each individual a commitment to excellence.
He was the owner of Hillis Hardware, a fixture on Main Street for many years and a vital part of the economy of our community. Mr. Hillis was married to the former Mary Bragg and the father of Ellen Finney and Susan Rambo.
First McMinnville Corporation and First National Bank will miss his counsel, support and encouragement. He was truly an inspiration to all who knew him, and the dedication of this annual report to him is only a small effort to express the respect and admiration we had for Mr. Hillis.
FIRST MCMINNVILLE CORPORATION 200 EAST MAIN STREET MCMINNVILLE, TENNESSEE 37110
Dear Shareholder:
The assets of First McMinnville Corporation and its subsidiary, First National Bank of McMinnville exceeded $200,000,000 for the first time in February of 1997. By year end assets had grown to almost $213,000,000. Our earnings per share for 1997 were $6.68 with 37.43% being paid to you, our shareholder, as dividends. For 1997 our return on assets was 1.73% and return on equity was 11.30%. The book value per share of our stock increased by 7.73% for the year with the value being $60.01 as of December 31, 1997.
On August 4, 1997, we officially relocated our Northgate Branch to 9970 Manchester Highway in Morrison. We have been very pleased with the reception our bank has been shown in the Morrison Community. This move was made possible by the outstanding acceptance our Smithville Highway branch has received since opening in August of 1996.
During 1997 we began offering estate planning and Mastermoney debit cards. The initial response to these services make us optimistic about their continued growth in the future. In 1998 we plan to establish a new department to offer alternate investments to our community.
In November of 1997, three individuals became advisory directors for our subsidiary. They are Arthur J. Dyer, President of Metal Products, Rufus Gonder, CPA, and Levoy Knowles, General Manager of Ben Lomand Telephone Cooperative. Each brings to our organization enthusiasm, integrity and expertise in their chosen profession.
On December 31, 1997, Vice President and Trust Officer Eva Sue Bouldin retired after forty-five years of dedicated service to our company. Many changes in banking occurred during her career, but Ms. Bouldin's commitment to our customers remained steadfast. Also retiring was Ethel Pierce who for almost a decade brightened the day of all with whom she came in contact. We extend our best wishes for a happy healthy retirement to each of them.
In April we were saddened by the death of Wayman E. Hillis. He was elected a director in 1953 and throughout his tenure on our board his wise counsel, loyalty and support were very beneficial.
As the value of your investment in First McMinnville Corporation continues to grow, we are confident you will encourage your family and friends to utilize the services First National Bank has to offer. With your support and loyalty, the dedication of our staff and the financial strength we have maintained for 124 years we intend to continue to serve our community and enhance your investment.
/s/ Charles C. Jacobs - - --------------------- Charles C. Jacobs CEO and President
SELECTED FINANCIAL DATA (UNAUDITED)
The following schedule presents the results of operations, cash dividends declared, total assets, stockholders' equity and per share information for the Company for each of the five years ended December 31, 1997.
* Per share data has been retroactively restated to reflect a two-for-one stock split on October 1, 1994.
ASSETS EQUITY
[GRAPH 1993-1997] [GRAPH 1993-1997]
DEPOSITS NET LOANS
[GRAPH 1993-1997] [GRAPH 1993-1997]
DIVIDENDS PER SHARE* BASIC EARNINGS PER SHARE*
[GRAPH 1993-1997] [GRAPH 1993-1997]
*Per share data has been retroactively restated to reflect a two-for-one stock split on October 1, 1994.
DIRECTORS OF FIRST MCMINNVILLE CORPORATION AND FIRST NATIONAL BANK OF MCMINNVILLE
[PHOTOGRAPH] [PHOTOGRAPH]
ROBERT W. JONES CHARLES C. JACOBS Chairman of the Board President , CEO and Secretary First National Bank and First National Bank First McMinnville Corporation President and CEO First McMinnville Corporation
[PHOTOGRAPH] [PHOTOGRAPH] [PHOTOGRAPH]
PAUL O. BARNES HENRY N. BOYD J. GREGORY BROCK Chairman Owner Owner B & P Lamp Supply, Inc. Boyd Nursery Brock Construction Company
[PHOTOGRAPH] [PHOTOGRAPH] [PHOTOGRAPH]
DEAN I. GILLESPIE G. B. GREENE DOUG MILNER President President General Manager and Bridge Builders, Inc. Womack Printing Co., Inc. Vice President Middle Tennessee Dr. Pepper Bottling Company
DIRECTORS OF FIRST MCMINNVILLE CORPORATION AND FIRST NATIONAL BANK OF MCMINNVILLE CONTINUED
[PHOTOGRAPH]
H.L. Molloy** Retired
[PHOTOGRAPH] [PHOTOGRAPH] [PHOTOGRAPH]
John J. Savage, Jr. Carl M. Stanley W.B. Whitson Former Executive Vice President President Chairman and Trust Officer Burroughs-Ross-Colville Burroughs-Ross-Colville First National Bank Secretary First McMinnville Corporation
[PHOTOGRAPH [PHOTOGRAPH] [PHOTOGRAPH]
Arthur J. Dyer* Rufus Gonder* Levoy Knowles* President C.P.A. General Manager Metal Products Company Ben Lomand Rural Telephone Cooperative
*Advisory **Honorary
OTHER OFFICERS OF FIRST MCMINNVILLE CORPORATION
[PHOTOGRAPH] [PHOTOGRAPH]
DIANE BOGLE LESTER COWELL Sr. Vice President Sr. Vice President
[PHOTOGRAPH] [PHOTOGRAPH]
KENNY NEAL PHIL WHISENHUNT Sr. Vice President Sr. Vice President Treasurer Chief Financial Officer
OFFICERS OF FIRST NATIONAL BANK OF McMINNVILLE
EMPLOYEES OF FIRST NATIONAL BANK OF MCMINNVILLE
[PHOTOGRAPH]
Left to right, Front row: Peggy Smith, Helen Martin, Kristy Tate, Ellen Brazle. Back row: Leanne Fisher, Connie Bell, David Marttala, Nettie Cutrell, Cindy Swann.
[PHOTOGRAPH]
Left to right, Front row: Susan Connelly, Carol Locke, Shirley Maxwell, Tiffany Simpson. Back Row: Shannon Reed, Nancy McBee, Michael Weeter, Shirley Reed, Michelle Grissom.
EMPLOYEES OF FIRST NATIONAL BANK OF MCMINNVILLE CONTINUED
[PHOTOGRAPH]
Left to right, Front row: Connie Sanders, Sherry Patterson, Frances Baker, Dean Cantrell. Back row: Pam Turner, Glenda Phillips, Brent Foster, Mary Jane Bell, Gail Youngblood.
[PHOTOGRAPH]
Left to right, Front row: Marian Jacobs, Charlotte Patterson, Judy Rigsby, Mozelle Terry, Jill Griffin. Back Row: Melodie Hawkins, Sue Jones, Fred Greene, Sue Heatherly, Arla Jean Simmons, Jennifer Mullican.
[VARIOUS PHOTOGRAPHS OF EMPLOYEES AND CUSTOMERS]
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
GENERAL
First McMinnville Corporation is a one bank holding company which owns 100% of First National Bank of McMinnville. First National Bank of McMinnville ("Bank") is a community bank headquartered in McMinnville, Tennessee serving Warren County, Tennessee as its primary market area. The Company serves as a financial intermediary whereby its profitability is determined to a large degree by the interest spread it achieves and the successful measurement of risks. The Company's management believes that Warren County offers an environment for continued growth and the Company's target market is local consumers, professionals and small businesses. The Company offers a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposits, and loans for consumer, commercial and real estate purposes. The Company also offers custodial and trust services. Deposit instruments in the form of demand deposits, money market savings and certificates of deposits are offered to customers to establish the Company's core deposit base.
In a market such as Warren County, management believes there is an opportunity to increase the loan portfolio. The Company has targeted commercial business lending, commercial and residential real estate lending, and consumer lending as areas of focus. It is the Company's intention to limit the size of its loan portfolio to approximately 75% to 80% of deposit balances; however, the quality of lending opportunities as well as the desired loan to deposit ratio will determine the size of the loan portfolio. As a practice, the Company generates substantially all of its own loans and occasionally buys participations from other institutions. The Company attempts to maintain a loan portfolio which is capable of adjustment to swings in interest rates. The Company's policy is to have a diverse loan portfolio. At December 31, 1997, the nursery industry constituted the largest single industry segment and accounted for $10,737,000 (9.63% of the Company's loan portfolio) as compared to $11,287,000 or 10.3% in 1996. No other segment accounted for more than 10% of the portfolio. Management is not aware of any adverse trends or expected losses in respect to the nursery industry.
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
Regulations of the Office of the Comptroller of the Currency ("OCC") 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 risk-based 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 risk-based capital. The Company and its national bank subsidiary must maintain a Tier 1 capital to risk-based assets of at least 4.0%, a Total risk-based capital to risk-based assets ratio of at least 8.0% and a leverage capital ratio defined as Tier 1 capital to adjusted total assets for the most recent quarter of at least 4%. 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
capitalized. The Company has a Tier 1 risk based ratio of 27.9%, a total risk-based capital ratio of 28.9% and a leverage capital ratio of 15.2%, and was therefore within the "well capitalized" category under the regulations. The subsidiary bank's ratios were substantially the same as those setforth for the Company.
Dividends of approximately $1,341,000 and $1,294,000 were declared during 1997 and 1996, respectively. Principally because of the high percent of equity capital, the return on equity is lower than banks in the Company's peer group. Cash dividends are anticipated to be increased in 1998 if profits increase. The dividend payout ratio (dividends declared divided by net earnings) was 37.4%, 37.6% and 40.0% in 1997, 1996 and 1995, respectively. No material changes in the mix or cost of capital is anticipated in the foreseeable future.
The dividends by the Company are primarily funded by dividends received by the Company from the Bank. The Bank is limited by law, regulation and prudence as to the amount of dividends it can pay. At December 31, 1997, under the most restrictive of these regulatory limits, the Bank could declare in 1998 cash dividends in an aggregate amount of up to approximately $5.6 million, plus any 1998 net earnings, without prior approval of the Comptroller of the Currency. Because of sound business considerations and other Regulatory capital requirements, it is unlikely that the Company would ever pay a significant portion of this amount as dividends.
During 1996, the Bank completed construction of a new branch at a total cost of approximately $910,000 of which approximately $657,000 was incurred during 1995. The Bank also completed remodeling a portion of the main office during 1996 at a total cost of approximately $179,000 of which approximately $48,000 was incurred during 1995. During 1997, the Bank opened a new branch at a total cost of $100,000.
The Company has conducted a study of the data processing changes which will be necessary as a result of The Year 2000 Issue which relates to the ability to process year-date data accurately beyond 1999. Management estimates the cost to become compliant is between $100,000 and $200,000. Management estimates that an additional $300,000 may be spent on computer upgrades in the next two to three years.
FINANCIAL CONDITION
During 1997, total assets increased $17,033,000 or 8.7% from $195,732,000 at December 31, 1996 to $212,765,000 at December 31, 1997. Loans, net of allowance for possible loan losses, increased from $107,940,000 to $110,159,000 or 2.1% during fiscal year 1997. The aggregate increases in loans for 1997 was due primarily to a 4.2% increase in real estate - mortgage loans accompanied by a 4.6% decrease in commercial, financial and agricultural loans.
Securities increased 14.7% from $78,809,000 at December 31, 1996 to $90,363,000 at December 31, 1997. The carrying value of securities of U.S. Treasury and other U.S. Government obligations increased $11,161,000, obligations of state and political subdivisions increased $1,301,000, corporate and other securities decreased $610,000 and there was a decrease in mortgage backed securities of $298,000. At December 31, 1997 and 1996 the market value of the Company's securities portfolio exceeded its amortized cost by $1,444,000 (1.6%) and $531,000 (.7%), respectively. The weighted average yield (stated on a tax-equivalent basis, assuming a Federal income tax rate of 34%) of the securities at December 31, 1997 was 7.4% with an average maturity of 8.0 years, as compared to an average yield of 7.8% and an average maturity of 7.0 years at December 31, 1996.
Effective January 1, 1994 the Company adopted the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities". Under the provisions of the Statement, securities are to be classified in three categories and accounted for as follows:
- - - Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.
- - - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and
- - - Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity.
The Company's classification of securities as of December 31, 1997 is a as follows:
A portion of the capital increase in 1995 was $687,000 which represents the unrealized losses in securities available-for-sale of $1,107,000 net of applicable tax expense of $420,000. The net decrease in capital at December 31, 1996 totaled $233,000 which represents the unrealized appreciation in securities available-for-sale of $375,000 net of applicable tax benefit of $142,000. During the year ended December 31, 1997, the net increase in capital totaled $331,000 which represents the unrealized appreciation in securities available-for-sale of $534,000 net of applicable taxes of $203,000.
The increase in assets in 1997 was funded primarily by increases in deposits. Total deposits increased from $159,746,000 at December 31, 1996 to $172,891,000 at December 31, 1997 representing an increase of 8.2%. Demand deposits increased 13.0% from $18,802,000 at December 31, 1996 to $21,241,000 at December 31, 1997. Additionally, increases in certificates of deposit and individual retirement accounts of $10,106,000 (11.5%) contributed to the increases in deposits for 1997. Securities sold under repurchase agreements increased $1,819,000 during 1997 and were also MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
used to fund increases in assets. Federal funds purchased decreased $500,000 in 1997. The subsidiary bank has unused lines of credit of $10,000,000 and the Company has an unused line of credit of $2,000,000 at December 31, 1997. Management does not presently anticipate a need to use these lines.
The Company's allowance for loan losses at December 31, 1997 was $1,314,000 as compared to $1,724,000 at December 31, 1996. Non-performing loans amounted to $255,000 at December 31, 1997 compared to $1,000 at December 31, 1996. Non-performing loans are loans which have been placed on non-accrual status, loans 90 days past due plus renegotiated loans. Net charge-offs to average outstanding loans for 1997 was .57%. Net recoveries to average outstanding loans for 1996 was .01%. Net charge-offs totaled $630,000 for 1997. In 1997, net charge-offs exceeded the provision by $410,000. The net charge-offs in 1997 relate primarily to one customer and is not considered by management to be a trend.
The allowance for possible loan losses, amounting to $1,314,000 at December 31, 1997, represents 1.18% of total loans outstanding. At December 31, 1996, the allowance for possible loan losses represented 1.57% of total loans outstanding. Management has in place a system to identify and monitor problem loans. Management believes the allowance for possible loan losses at December 31, 1997 to be adequate.
LIQUIDITY
Liquidity represents the ability to efficiently and economically accommodate decreases in deposits and other liabilities, as well as fund increases in assets. A Company has liquidity potential when it has the ability to obtain sufficient funds in a timely manner at a reasonable cost. The availability of funds through deposits, the purchase and sales of securities in the investment portfolio, the use of funds for consumer and commercial loans and the access to debt markets affect the liquidity of the Company. The Company's loan to deposit ratio was approximately 64% and 69% at December 31, 1997 and December 31, 1996, respectively.
The Company's investment portfolio, as represented above, consists of earning assets that provide interest income. Federal Funds sold which are invested overnight are the most liquid of the investments. The Company had no Federal funds sold at December 31, 1996. Federal funds sold totaled $2,650,000 at December 31, 1997. There were no Federal funds purchased at December 31, 1997. Federal funds purchased were $500,000 at December 31, 1996.
Funds management decisions must reflect management's intent to maintain profitability in both the immediate and long-term earnings. 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 of the Bank. These meetings focus on the spread between the subsidiary bank's cost of funds and interest yields generated primarily through loans and investments.
First McMinnville Corporation presently maintains a liability sensitive position over the 1997 year or a negative gap. Liability sensitivity means that more of the Company's liabilities are capable of repricing over certain time frames than assets. The interest rates associated with these liabilities may not actually change over this period but are capable of changing. For example, the six month gap is a picture of the possible repricing over a six month period. The following table shows the rate sensitivity gaps for different time periods as of December 31, 1997:
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
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 anticipate that there will be significant withdrawals from these accounts in the future.
It is anticipated that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the foreseeable future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity changing in any material way.
RESULTS OF OPERATIONS
Net earnings for the year ended December 31, 1997 were $3,581,000 an increase of $137,000 or 4.0% from fiscal year 1996. Net earnings for 1996 totaled $3,444,000 which was an increase of $338,000 or 10.9% from $3,106,000 for 1995. Basic earning per common share was $6.68 in 1997, $6.34 in 1996 and $5.62 in 1995 after giving retroactive effect to a two-for-one stock split effective October 1, 1994. Diluted earnings per common share were $6.67, $6.34 and $5.62 in 1997, 1996 and 1995, respectively. Average earning assets increased $13,480,000 for the year ended December 31, 1997 as compared to year ended December 31, 1996. Average earning assets increased $8,061,000 for the year ended December 31, 1996 as compared to year ended December 31, 1995. Additionally, the net interest spread decreased from 4.19% in 1996 to 4.09% in 1997. The net interest spread was 4.05% in 1995. Net interest spread is defined as the effective yield on earning assets less the effective cost of deposits and borrowed funds, as calculated on a fully taxable equivalent basis.
Net interest income before provision for loan losses for 1997 totaled $8,610,000 as compared to $8,071,000 for 1996 and $7,474,000 for 1995. The provision for loan losses was $220,000 in 1997 as compared to $150,000 in 1996 and $160,000 in 1995. Net charge-offs in 1997 were $630,000 as compared to net recoveries of $12,000 in 1996 and net charge-offs of $46,000 in 1995. The 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
charge-offs related primarily to one customer and is unrelated to the nursery business. The increase in the provision in 1997 is primarily due to the increase in net charge-offs.
Non-interest income decreased 6.2% to $618,000 in 1997 from $659,000 in 1996. This decrease was due primarily to decreases in service charges on deposits of $24,000, other fees and commissions of $15,000 and commissions on fiduciary activities of $17,000 which were off-set by an increase in other income totaling $15,000. Non-interest income of $659,000 in 1996 was an increase of approximately 3.9% from $634,000 in 1995. The increase in 1996 resulted primarily from an increase in service charges on deposits and in securities gains.
Non-interest expense increased 4.1% to $3,850,000 in 1997 from $3,700,000 in 1996. Non-interest expense was $3,543,000 in 1995. Non-interest expense which includes, among other things, salaries and employee benefits, occupancy expenses, furniture and fixtures expenses, data processing, Federal Deposit Insurance premiums, supplies and general operating costs increased commensurate with the continued growth of the Company. The increase in 1997 was primarily attributable to an increase in salaries and employment benefits of $166,000 (7.7%), increases in occupancy expenses ($38,000 or 16.4%) and Federal Deposit insurance premiums ($18,000). These increases in 1997 were offset by a decrease of $20,000 in furniture and equipment expenses. The non-interest expense increased approximately 4.4% from 1995 to 1996 and was due primarily to increases in salaries and employees benefits, occupancy expenses, furniture and equipment expenses and securities losses with an offset from the decrease in Federal Deposit insurance premiums.
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.
The Company plans to adopt Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income". The new statement which becomes effective for years beginning after December 15, 1997, requires a new financial statement that includes unrealized gains and losses on certain assets and liabilities. The statement will provide additional information but will not impact existing statements.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance since they impact both interest revenues and interest costs. MAGGART & ASSOCIATES, P.C. Certified Public Accountants FIRST UNION TOWER SUITE 2150 150 FOURTH AVENUE, NORTH NASHVILLE, TENNESSEE 37219-2417 Telephone (615) 252-6100 Facsimile (615) 252-6105
INDEPENDENT AUDITOR'S REPORT
The Board of Directors First McMinnville Corporation:
We have audited the accompanying balance sheets of First McMinnville Corporation and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First McMinnville Corporation and Subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Maggart & Associates, P.C.
Nashville, Tennessee January 28, 1998
FIRST MCMINNVILLE CORPORATION
Consolidated Balance Sheets
December 31, 1997 and 1996
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Earnings
Three Years Ended December 31, 1997
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
Three Years Ended December 31, 1997
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Cash Flows
Three Years Ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Consolidated Statements of Cash Flows, Continued
Three Years Ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
See accompanying notes to consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of First McMinnville Corporation (the "Company") and its wholly-owned subsidiary, the First National Bank of McMinnville ("Bank") are in accordance with generally accepted accounting principles and conform to general practices within the banking industry.
The following is a brief summary of the significant policies.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, First National Bank of McMinnville. All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Nature of Operations
The Company is registered as a one bank holding company under the Bank Holding Company Act of 1956. The Bank operates under a Federal Bank Charter and provides full banking services. As a national bank, the subsidiary bank is subject to regulation of the Office of the Comptroller of the Currency. The area served by First National Bank of McMinnville is Warren County, Tennessee and surrounding counties in Middle Tennessee. Services are provided at the main office and four branches.
(c) Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(d) Loans
Loans are stated at the principal amount outstanding. Unearned discount, deferred loan fees net of loan acquisition costs, and the allowance for possible loan losses are shown as reductions of loans. Loan origination and commitment fees and certain loan-related costs are being deferred and the net amount amortized as an adjustment of the related loan's yield over the contractual life of the loan. Unearned discount represents the unamortized amount of finance charges, principally related to certain installment loans. Interest income on most loans is accrued based on the principal amount outstanding.
The Company adopted, on a prospective basis effective January 1, 1995, 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 residential mortgage and installment loans.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(d) Loans, Continued
A loan is impaired when it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. Impaired loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company shall recognize an impairment by creating a valuation allowance with a corresponding charge to the provision for possible loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for possible loan losses.
The Company's consumer loans 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 along 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 affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all interest accrued and uncollected 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 possible 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 cash received is applied as a reduction of principal. A nonaccrual loan may be restored to an 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.
Loans not on nonaccrual status are classified as impaired in certain cases when 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.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(d) Loans, Continued
Generally, the Company also classifies as impaired any loans the terms of which have been modified in a troubled debt restructuring. Interest is generally accrued on such loans that continue to meet the modified terms of their loan agreements.
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.
(e) Allowance for Possible Loan Losses
The provision for possible loan losses represents a charge to earnings necessary, after loan charge-offs and recoveries, to maintain the allowance for possible loan losses at an appropriate level which is adequate to absorb estimated losses inherent in the loan portfolio. Such estimated losses arise primarily from the loan portfolio but may also be derived from other sources, including commitments to extend credit and standby letters of credit. The level of the allowance is determined on a quarterly basis using procedures which include: (1) categorizing commercial and commercial real estate loans into risk categories to estimate loss probabilities based primarily on the historical loss experience of those risk categories and current economic conditions; (2) analyzing significant commercial and commercial real estate credits and calculating specific reserves as necessary; (3) assessing various homogeneous consumer loan categories to estimate loss probabilities based primarily on historical loss experience; (4) reviewing unfunded commitments; and (5) considering various other factors, such as changes in credit concentrations, loan mix, and economic conditions which may not be specifically quantified in the loan analysis process.
The allowance for possible loan losses consists of an allocated portion and an unallocated, or general portion. The allocated portion is maintained to cover estimated losses applicable to specific segments of the loan portfolio. The unallocated portion is maintained to absorb losses which probably exist as of the evaluation date but are not identified by the more objective processes used for the allocated portion of the allowance due to risk of errors or imprecision. While the total allowance consists of an allocated portion and an unallocated portion, these terms are primarily used to describe a process. Both portions of the allowance are available to provide for inherent loss in the entire portfolio.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(e) Allowance for Possible Loan Losses, Continued
The allowance for possible loan losses is increased by provisions for possible loan losses charged to expense and is reduced (increased) by loans charged off net of recoveries on loans previously charged off. The provision is based on management's determination of the amount of the allowance necessary to provide for estimated loan losses based on its evaluation of the loan portfolio. Determining the appropriate level of the allowance and the amount of the provision involves uncertainties and matters of judgment and therefore cannot be determined with precision.
(f) Debt and Equity Securities
The Company follows the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under the provisions of the Statement, securities are classified in three categories and accounted for as follows:
- Securities Held-to-Maturity
Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Amortization of premiums and accretion of discounts are recognized by the interest method.
- Trading Securities
Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
- Securities Available-for-Sale
Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at estimated fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Premiums and discounts are recognized by the interest method.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(f) Debt and Equity Securities, Continued
No securities have been classified as trading securities.
Realized gains or losses from the sale of debt and equity securities were recognized based upon the specific identification method.
(g) Premises and Equipment
Premises and equipment are stated at cost. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the related assets. Gain or loss on items retired and otherwise disposed of is credited or charged to operations and cost and related accumulated depreciation are removed from the asset and accumulated depreciation accounts.
Expenditures for major renewals and improvements of premises and equipment are capitalized and those for maintenance and repairs are charged to earnings as incurred.
(h) Long-Lived Assets
In March, 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 1996, the company adopted this statement and determined that no impairment loss need be recognized for its long-lived assets.
(i) Other Real Estate
Real estate acquired in settlement of loans is initially recorded at the lower of cost (loan value of real estate acquired in settlement of loans plus incidental expense) or estimated fair value, less estimated cost to disposal. Based on periodic evaluations by management, the carrying values are reduced by a direct charge to earnings when they exceed net realizable value. Costs relating to the development and improvement of the property are capitalized, while holding costs of the property are charged to expense in the period incurred.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
(j) Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax asset and liabilities are expected to be realized or settled as prescribed in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision of income taxes.
The Company and its subsidiary file a consolidated Federal income tax return. Each corporation provides for income taxes on a separate-return basis.
(k) Pension Expense
The subsidiary accounts for its defined benefit pension plan under the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". Accordingly, the net pension expense consists of service costs, interest cost, return on pension assets and amortization of unrecognized initial excess of projected benefits over plan assets and actuarial gains and losses.
(l) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and Federal funds sold. Generally, Federal funds sold are purchased and sold for one-day periods. The Bank maintains deposits with other financial institutions in excess of the Federal insurance amounts. Management makes deposits only with financial institutions it considers to be financially sound.
(m) Reclassifications
Certain reclassifications have been made to the 1996 and 1995 figures to conform to the presentation for 1997.
(n) Off-Balance-Sheet Financial Instruments
In the ordinary course of business the subsidiary bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(2) Loans and Allowance for Possible Loan Losses
Loans and allowance for possible loan losses at December 31, 1997 and 1996 are summarized as follows:
In the normal course of business, the Company's subsidiary has made loans at prevailing interest rates and terms to directors and officers of the Company, and to their affiliates. The aggregate dollar amount of these loans was $2,450,000 and $2,842,000 at December 31, 1997 and 1996, respectively. During 1997, $1,295,000 of such loans were made and repayments totaled $1,687,000. As of December 31, 1997, none of these loans were restructured, nor were any related party loans charged off during the past three years.
No loans had been placed on non-accrual status during 1997 and 1996.
The principal maturities on loans at December 31, 1997 are as follows:
At December 31, 1997, variable rate and fixed rate loans totaled approximately $14,362,000 and $97,111,000, respectively. At December 31, 1996, variable rate loans were approximately $18,252,000 and fixed rate loans totaled approximately $91,412,000.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(2) Loans and Allowance for Possible Loan Losses, Continued
Transactions in the allowance for possible loan losses for the years ended December 31, 1997, 1996 and 1995 are summarized as follows:
The Company's principal customers are basically in the Middle Tennessee area with a concentration in Warren County, Tennessee. At December 31, 1997, the Company had loans to customers in the nursery industry totaling approximately $10,737,000 as compared to $11,287,000 at December 31, 1996. Credit is extended to businesses and individuals and is evidenced by promissory notes. The terms and conditions of the loans including collateral vary depending upon the purpose of the credit and the borrower's financial condition.
Impaired loans and related loan loss reserve amounts at December 31, 1997 and 1996 were as follows:
The average recorded investment in impaired loans for the years ended December 31, 1997 and 1996 was $4,116,000 and $3,832,000, respectively.
The related total amount of interest income recognized on the accrual basis for the period that such loans were impaired was $393,000 and $367,000 for 1997 and 1996, respectively.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(3) Debt and Equity Securities
Debt and equity securities have been classified in the balance sheet according to management's intent. The Company's classification of securities at December 31, 1997 is as follows:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(3) Debt and Equity Securities, Continued
Debt and equity securities at December 31, 1996 consist of the following:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(3) Debt and Equity Securities, Continued
The amortized cost and estimated market value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(3) Debt and Equity Securities, Continued
Results from sales of debt and equity securities are as follows:
Included in the above gains and losses table is a realized loss of $12,000 in 1997 and gains of $13,000 and $12,000 in 1996 and 1995, respectively, related to calls of securities classified as held-to-maturity.
The Company periodically applies the stress test to its securities portfolio. To meet the stress test a security's estimated market value should not decline more than certain percentages given certain assumed interest rate increases. The Company had no securities to fail the stress test at December 31, 1997.
Securities with approximate carrying values of $15,251,000 (approximate market value of $15,367,000) and $14,641,000 (approximate market value of $14,730,000) at December 31, 1997 and 1996, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes required or permitted by law.
Included in the securities at December 31, 1997, are approximately $14,717,000 at amortized cost (approximate market value of $15,094,000) in obligations of political subdivisions located within the State of Tennessee. Management purchases only obligations of such political subdivisions it considers to be financially sound.
Securities that have rates that adjust prior to maturity totaled $3,489,000 (market value $3,415,000) at December 31, 1997 as compared to $4,004,000 (market value $3,869,000) at December 31, 1996.
Included in the securities portfolio is stock of the Federal Home Loan Bank amounting to $672,000 and $626,000 at December 31, 1997 and 1996, respectively. The stock can be sold back at par and only to the Federal Home Loan Bank or to another member institution.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(4) Premises and Equipment
The detail of premises and equipment at December 31, 1997 and 1996 is as follows:
During 1996, the Company constructed a branch facility on Smithville Highway in McMinnville, Tennessee at a building cost of $522,000. The contractor, who is a director of the Company, was paid construction costs of $478,000.
(5) Deposits
Deposits at December 31, 1997 and 1996 are summarized as follows:
Principal maturities of certificates of deposit and individual retirement accounts at December 31, 1997 are as follows:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(5) Deposits, Continued
The Bank is required to maintain cash balances or balances with the Federal Reserve Bank or other correspondent banks based on certain percentages of deposit types. The average required amounts for the years ended December 31, 1997 and 1996 were approximately $963,000 and $908,000, respectively.
(6) Securities Sold Under Repurchase Agreements
The maximum amounts of outstanding repurchase agreements during 1997 and 1996 was $6,383,000 and $5,666,000, respectively. The average daily balance outstanding during 1997, 1996 and 1995 was $3,968,000, $3,529,000 and $3,579,000, respectively. The underlying securities are typically held by other financial institutions and are designated as pledged.
(7) Non-Interest Income and Non-Interest Expense
The significant components of non-interest income and non-interest expense for the years ended December 31 are presented below:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(8) Income Taxes
The components of the net deferred tax asset are as follows:
The tax effects of each type of significant item that gave rise to deferred taxes at December 31 are:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(8) Income Taxes, Continued
The components of income tax expense (benefit) are summarized as follows:
A reconciliation of actual income tax expense of $1,577,000, $1,436,000 and $1,299,000 for the years ended December 31, 1997, 1996 and 1995, respectively, to the "expected" tax expense (computed by applying the statutory rate of 34% to earnings before income taxes) is as follows:
Total income tax expense for 1997 and 1996 includes income tax benefits of $3,000 and $35,000, respectively, related to losses on sales of securities. A tax expense of $19,000 related to gains on sales of securities is included in the 1995 total income tax expense.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(9) Employee Benefit Plans
The subsidiary bank has in effect a defined benefit noncontributory pension plan which covers substantially all employees over 21 years of age after they have been employed six months. The subsidiary's funding policy provides that payments to the pension trust shall be an amount equal to the plan's actuarial determined normal cost plus an amount required to amortize the prior service cost over ten years.
Total pension expense including prior service costs amortization amounted to $71,000 in 1997, $82,000 in 1996 and $99,000 in 1995. The pension expense for 1997, 1996 and 1995 is comprised of the following components.
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet at December 31, 1997 and 1996:
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(9) Employee Benefit Plans, Continued
In December, 1988 the Bank adopted a 401(k) plan which covers eligible employees. To be eligible, an employee must have obtained the age of 21 and must have completed 1 year of service. The provisions of the plan provide for both employee and employer contributions. For the years ended December 31, 1997, 1996 and 1995, the Bank contributed $45,000, $41,000 and $43,000, respectively, to the plan.
(10) Regulatory Matters and Restrictions on Dividends
The Company and its wholly-owned subsidiary are subject to regulatory capital requirements administered by the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The Company's capital classifications are also subject to qualitative judgments by the Regulators about components, risk weightings and other factors. Those qualitative judgments could also affect the Company's and the Bank's capital status and the amounts of dividends the subsidiary may distribute. At December 31, 1997, management believes that the Company and the Bank meet all such capital requirements to which they are subject.
The Company and the Bank are required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by the banking regulators. At December 31, 1997, the Company and its bank subsidiary are required to have minimum Tier I and total risk-based capital ratios of 4.0% and 8.0%, respectively. The Company's actual ratios at that date were 27.9% and 28.9%, respectively. The leverage ratio at December 31, 1997 was 15.2% and the minimum requirement was 4.0%.
(11) Commitments and Contingent Liabilities
The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial position.
The Company has an unsecured $2,000,000 line of credit with another financial institution. The Bank has lines of credit with other financial institutions totaling $10,000,000. At December 31, 1997 and 1996, there was no outstanding balances under these lines of credit.
(12) Concentration of Credit Risk
Substantially all of the Company's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Company's market area. Virtually all such customers are depositors of the Bank. Investment in state and municipal securities also include governmental entities within the Company's market area. The concentrations of credit by type of loan are set forth in note 2 to the consolidated financial statements.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(12) Concentration of Credit Risk, Continued
At December 31, 1997, the Company's cash and due from banks included commercial bank deposit accounts aggregating $2,318,000 in excess of the Federal Deposit Insurance Corporation limit of $100,000 per institution.
In addition, Federal funds sold were deposited with two banks.
(13) Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral normally consists of real property.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation - Parent Company Financial Information
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Balance Sheets
December 31, 1997 and 1996
*Eliminated in consolidation.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation - Parent Company Financial Information, Continued
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Statements of Earnings
For the Three Years Ended December 31, 1997
* Eliminated in consolidation.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation - Parent Company Financial Information, Continued
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Statements of Earnings
For the Three Years Ended December 31, 1997
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation - Parent Company Financial Information, Continued
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Statements of Cash Flows
For the Three Years Ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(14) First McMinnville Corporation Parent Company Financial Information, Continued
FIRST MCMINNVILLE CORPORATION (Parent Company Only)
Statements of Cash Flows, Continued
For the Three Years Ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(15) Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments" requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments.
Cash and short-term investments
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities
The carrying amounts for short-term securities approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of longer-term securities and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.
SFAS No. 107 specifies that fair values should be calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. Accordingly, these considerations have not been incorporated into the fair value estimates.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, credit card and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms.
The fair value of the various categories of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining average estimated maturities.
The estimated maturity for mortgages is modified from the contractual terms to give consideration to management's experience with prepayments. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented below would be indicative of the value negotiated in an actual sale.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(15) Disclosures About Fair Value of Financial Instruments, Continued
Loans, Continued
The value of the loan portfolio is also discounted in consideration of the credit quality of the loan portfolio as would be the case between willing buyers and sellers. Particular emphasis has been given to loans on the subsidiary bank's internal watch list. Valuation of these loans is based upon borrower performance, collateral values (including external appraisals), etc.
Deposit Liabilities
The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Under the provision of SFAS No. 107 the fair value estimates for deposits does not include the benefit that results from the low cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
Securities Sold Under Repurchase Agreements
The securities sold under repurchase agreements are payable upon demand. For this reason the carrying amount is a reasonable estimate of fair value.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees Written
Loan commitments are made to customers generally for a period not to exceed one year and at the prevailing interest rates in effect at the time the loan is closed. Commitments to extend credit related to construction loans are made for a period not to exceed six months with interest rates at the current market rate at the date of closing. In addition, standby letters of credit are issued for periods up to three years with rates to be determined at the date the letter of credit is funded. Fees are only charged for the construction loans and the standby letters of credit and the amounts unearned at December 31, 1997 are insignificant. Accordingly, these commitments have no carrying value and management estimates the commitments to have no significant fair value.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(15) Disclosures About Fair Value of Financial Instruments, Continued
The carrying value and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(15) Disclosures About Fair Value of Financial Instruments, Continued
Limitations, Continued
Fair value estimates are based on estimating on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a mortgage department that contributes net fee income annually. The mortgage department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities and property, plant and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
(16) Earnings Per Share (EPS)
In 1997, Statement of Financial Accounting Standards ("SFAS") 128 "Earnings Per Share" established uniform standards for computing and presenting earnings per share. SFAS 128 replaces the presentation of primary earnings per share with the presentation of basic earnings per share and diluted earnings per share. 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.
The following is a summary of components comprising basic and diluted earnings per share (EPS):
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(17) Stock Option Plan
In April, 1997, the stockholders of the Company approved the First McMinnville Corporation 1997 Stock Option Plan (The "Stock Option Plan"). The Stock Option Plan provides for the granting of stock options, and authorizes the issuance of common stock upon the exercise of such options for up to 57,500 shares of common stock to directors and employees of the Company.
Under the Stock Option Plan awards may be granted in the form of incentive stock options or nonstatutory stock options, and are generally exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the common stock on the grant date.
In 1995, SFAS 123, "Accounting for Stock Based Compensation" (SFAS 123) changed the method for recognition of cost of plans similar to those of the Company. As is permitted, management has elected to continue accounting for the plan under APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the stock option plan. However, under SFAS 123, the Company is required to make proforma disclosures as if cost had been recognized in accordance with the pronouncement. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS 123, the Company's net earnings and basic earnings per common share and diluted earnings per common share would have been reduced to the proforma amounts indicated below:
Accordingly, due to the initial phase-in period, the effects of applying this statement for proforma disclosures are not likely to be representative of the effects on reported net income for future years.
FIRST MCMINNVILLE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997, 1996 and 1995
(17) Stock Option Plan, Continued
A summary of the stock option activity for 1997 is as follows:
The following table summarizes information about fixed stock options at December 31, 1997:
LINE OF BUSINESS
During 1997, the Company and its subsidiary, First National Bank of McMinnville (the "Bank"), were engaged primarily in the general banking business and activities closely related to banking or to managing or controlling banks, as authorized by the laws of the United States and the State of Tennessee and regulations pursuant thereto. Services offered by the Bank include checking, passbook savings an certificate accounts, safe deposit box rental, personal, commercial, agricultural, construction and real estate loans, traveler's checks, cashier's checks, bank drafts, discount brokerage services, trust services, estate planning and other banking services. The Bank renders other services in connection with its general banking business such as individual credit and financial counseling, automatic teller services, and credit card accounts.
DIVIDEND AND MARKET INFORMATION
As of December 31, 1997, there were 463 holders of First McMinnville Corporation Common Stock. The following table sets forth the approximate prices at which First McMinnville Corporation Common Stock was purchased and sold in privately negotiated transactions in the Company's service area as reported to the Company or as estimated by the Company during each calendar quarter in the preceding two years.
Holders of Company Common Stock are entitled to such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor. First McMinnville Corporation paid cash dividends of $2.40 and $2.50 per share during 18996 and 1997, respectively. First McMinnville Corporation expects comparable cash dividends in the future. The limitations on the amounts available to First McMinnville Corporation for payment of dividends to stockholders are discussed in Management's Discussion and Analysis or Plan of Operations on page 10 and in the Notes to the Consolidated Financial Statements.
ANNUAL REPORT ON FORM 10-K
A copy of the 1997 Annual Report of First McMinnville Corporation, as filed with the Securities and Exchange Commission pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10- K, will be provided to each stockholder free of charge on written request. Copies of any exhibits filed as part of this annual report will be provided on payment of a reasonable fee to cover reproduction cost. All requests should be addressed to: Charles C. Jacobs, President, First McMinnville Corporation, 200 East Main Street, McMinnville, TN 37110.
MAIN OFFICE 200 EAST MAIN STREET
BRANCHES
SMITHVILLE HWY. SPARTA STREET 917 SMITHVILLE HWY. 1408 SPARTA STREET
FARMERS & MERCHANTS MORRISON VIOLA, TENNESSEE 9970 MANCHESTER HWY.
OUR FIVE AUTOMATIC TELLER MACHINES MAKE IT POSSIBLE FOR YOU TO DO YOUR BANKING 24 HOURS A DAY. AND NOW WITH THE CIRRUS NETWORK YOU HAVE NATIONWIDE ACCESS. OUR ATMS ARE LOCATED AT 200 EAST MAIN STREET, 917 SMITHVILLE HIGHWAY, 1408 SPARTA STREET, 9970 MANCHESTER HIGHWAY AND THE LOBBY OF RIVER PARK HOSPITAL.
MEMBER FDIC