ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
THE COMPANY
First McMinnville Corporation (the "Company") is a bank holding company that, at February 28, 2000, owned all of the stock of the First National Bank of McMinnville (the "Bank" or "First National Bank"). The Company is a financial services corporation incorporated under the laws of the State of Tennessee. It was formed in 1984 for the purpose of acquiring all of the issued and outstanding common stock of the First National Bank and it is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act").
The Company's principal business is its ownership of the Bank, which engages in the commercial banking business. At December 31, 1999, the Company had total assets of approximately $263,707,000 and total Shareholders' equity of $33,600,000. The Company reported net earnings of approximately $4,216,000 for fiscal 1999. At December 31, 1999, the Bank's total loans (net of allowance for possible loan losses of $1,502,000) were $133,873,000 and its total deposits were $195,924,000. As of that date, the Bank's Tier 1 capital ratio was 26.7%, its total risk-based capital ratio was 27.8%, and its leverage ratio was 14.2%.
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 1999 the Company and the Bank have continued to focus on developing the financial services of the Bank in Warren County, Tennessee and in other areas (generally, in those counties contiguous to Warren County). The Company and the Bank provide a wide range of commercial banking services to small and medium-sized businesses, including those engaged in the nursery business, business executives, professionals and other individuals. The Company, through First National Bank, operates throughout Warren County, Tennessee, with five offices located in McMinnville, Morrison, and Viola. 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" ("Management's 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. CERTAIN OF THE STATEMENTS IN THIS REPORT AND IN THE CONSOLIDATED FINANCIAL STATEMENTS ARE "FORWARD LOOKING," AND THE COMPANY'S ACTUAL COSTS, EXPERIENCE, AND RESULTS MAY DIFFER DUE TO, AMONG OTHER THINGS, ACTUAL EXPERIENCE, GOVERNMENTAL REGULATIONS, OVERALL ECONOMIC CONDITIONS, AND OTHER FACTORS THAT, AS TO OCCURRENCE OR IMPACT, CANNOT BE RELIABLY PREDICTED. SEE "FORWARD-LOOKING STATEMENTS" BELOW.
(b) Business of the Company.
The Company's principal business is the ownership of First National Bank. The Company currently conducts all of its material operations through the 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 primary source of income in 1999 was the earnings of First National Bank, which earnings are principally 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 recognized the need to ensure to the maximum practicable extent that its operations would not be adversely impacted by Year 2000 software failures. Potential software failures due to processing errors arising from calculations using the Year 2000 date were identified as 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, 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 set forth below (amounts are rounded). Please refer to the Consolidated Financial Statements for a more detailed presentation.
THE BANK'S COMMERCIAL BANKING BUSINESS
The First National Bank operates five full-service banking offices located in Warren County, Tennessee. Its main 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 four 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 Bank intend for the foreseeable future to concentrate their efforts in their existing markets.
The Company and First National 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. The enactment of the "Gramm-Leach-Bliley Act of 1999" in late 1999 was an important development. See "Financial Services Modernization Act," below.
SUBSIDIARY
The First National 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.
FORWARD-LOOKING STATEMENTS
In this report and in documents incorporated herein by reference, the Company may communicate statements relating to the future results of the Company that may be considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by the words "believe, expect, anticipate, intend, estimate" and similar expressions. These statements may relate to, among other things, Year 2000 issues and unforeseen or unanticipated costs associated with Year 2000 compliance, loan loss reserve adequacy, simulation of changes in interest rates and litigation results. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, social, political and economic conditions, interest rate fluctuations, 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 definitively identified. Many factors affecting the Company's financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events, equity and fixed income market fluctuations, personal and corporate customers' bankruptcies, inflation, technological change, changes in law, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties 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 readers of this Report with information relevant to understanding and assessing the financial condition and results of operations of the Company and 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.
SUPERVISION AND REGULATION
General
The commercial banking business is highly regulated. Both the Company and the First National Bank are subject to the supervision, examination, and regulation of various federal and state agencies, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the Office of the Comptroller of the Currency (the "OCC"). The requirements and restrictions imposed by the laws of the United States and the State of Tennessee on the Bank and/or on the Company include 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, privacy regulations, 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, supervision, and examination under state and federal statutes and regulations. Although the Company is extensively regulated under both federal and state law, this regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of shareholders or customers of the Company or First National Bank. 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.
Major new legislation was enacted by Congress in November of 1999. See "Financial Services Modernization Act," below.
First McMinnville Corporation
As a registered bank holding company, the Company is subject to regulation under the Bank Holding Company Act. Thus it is required to file quarterly and annual reports, and such additional information as may be requested, with the Federal Reserve Board. The Federal Reserve Board may conduct examinations of the Company and all of its subsidiaries, including First National Bank.
The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities.
Under the Bank Holding Company Act and regulations adopted by the Federal Reserve Board, a bank holding company and its non-banking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease
or sale of property, or furnishing of services. Further, the Company is required by the Federal Reserve Board to maintain certain levels of capital. See "Capital Adequacy," below.
The Company is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company.
The Company is prohibited by the Bank Holding Company Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, the Company, subject to the prior approval of the Federal Reserve Board, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both.
The Company is also a bank holding company within the meaning of T.C.A. ss.45-2-1401 of the Tennessee Banking Act. As such, the Company and its subsidiaries could be subject to examination by, and could be required to file reports with, the Tennessee Department of Financial Institutions under specified circumstances.
The Company is required to file quarterly, annual and other types of reports with the Securities and Exchange Commission under Section 15(d) of the Exchange Act. However, the Company's securities are not registered under the Exchange Act and, accordingly, the Company is not subject to many of the information, proxy solicitation, and other requirements and restrictions of the Exchange Act.
First National Bank
The First National Bank of McMinnville, as a national banking association, is subject to primary supervision, examination, and regulation by the OCC. To a lesser extent, the Bank is also subject to certain regulations promulgated by the Federal Reserve Board. If, as a result of an examination of the Bank, the examining regulator should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the regulatory agencies. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the bank's deposit insurance. The Bank has not been subject to any such actions by its regulatory authorities.
Various requirements and restrictions under the laws of the State of Tennessee and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Banks' operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements. Further, the Bank is required to maintain certain levels of capital. See "Capital Adequacy."
Financial Services Modernization Act
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general intent of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act, which is also known as the "Gramm-Leach-Bliley Act of 1999":
- - Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers;
- - Provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies;
- - Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries;
- - Provides an enhanced framework for protecting the privacy of consumer information;
- - Adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system;
- - Modifies the laws governing the implementation of the Community Reinvestment Act ("CRA"); and
- - Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
Presently, the Company does not plan to become a "Financial Holding Company" within the meaning of the Financial Services Modernization Act. If the Company were to decided to utilize the ability to affiliate with other financial services providers, it would first have to become a "Financial Holding Company" as permitted under an amendment to the Bank Holding Company Act. To become a Financial Holding Company, the Company would file a declaration with the Federal Reserve Board, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because First National Bank (its sole financial institution subsidiary) is well-capitalized and well-managed. In addition, the Federal Reserve Board must also determine that the Bank, as the Company's only insured depository institution subsidiary, has at least a "satisfactory" Community Reinvestment Act rating (which it does). See "The Bank - Community Reinvestment Act and Fair Lending Developments," below. The Company believes that it meets the requirements to make an election to become a Financial Holding Company. However, management has determined at this time that the Company will not seek an election to become a Financial Holding Company. The Company expects to continue to re-examine its decision under the Financial Services Modernization Act from time to time. Presently, however, given its current strategic business plan, market and financial conditions, regulatory capital requirements, general economic conditions, and other factors, the Company does not intent to utilize any of its expanded powers provided in the Financial Services Modernization Act.
The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be "well-capitalized" and "well-managed." The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank's total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank's assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because, under the so-called "wild-card" or "parity" statute (T.C.A. ss.45-2-601), Tennessee chartered commercial banks are generally permitted by the State of Tennessee to engage in any activity permissible for national banks, competitor state banks will also be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as a national bank such as First National Bank. In order to form a financial subsidiary, the bank must be well-capitalized, and the bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks.
The Company and First National Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on its operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. As a result, the Company and the Bank may find that they are compelled to compete with even larger and more diversified financial institutions than is currently the case. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this new law may have the result of increasing the amount of competition that the Company and First National Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than either the Company or the Bank. The impact of this or any other development under the Financial Services Modernization Act cannot be predicted.
Dividends and Other Transfers of Funds
Dividends from First National Bank constitute the principal source of income to the Company. The Company is a legal entity separate and distinct from First National Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by First National Bank totaled $9.6 million at December 31, 1999. In addition, the OCC and the Federal Reserve Board have the authority to prohibit the Bank from paying dividends, depending upon the Bank's financial condition, if such payment is deemed to constitute an unsafe or unsound practice.
The bank regulatory activities also have authority to prohibit the Bank from engaging in activities that, in their respective opinions, constitute unsafe or unsound practices in conducting their business. It is possible, depending upon the financial condition of the bank in question and other factors, that the bank regulatory activities could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the bank regulatory authorities have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay. An insured depository institution is prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. See "Prompt Corrective Regulatory Action and Other Enforcement Mechanisms," "The Federal Deposit Insurance Improvement Act," and "Capital Adequacy" in this Item 1 for a discussion of these additional restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless any such loan(s) is secured by marketable obligations of designated amounts. Further, such secured loans and investments by First National Bank to or in the Company or to or in any other affiliate are limited, individually, to 10.0% of the Bank's capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20.0% of the respective bank's capital and surplus (as defined by federal regulations). Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "Prompt Corrective Action and Other Enforcement Mechanisms," "Federal Deposit Insurance Corporation Improvement Act," and "Bank and Bank Holding Company Regulation; Restrictions on Dividends" in this Item 1.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve perceived problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 1999, First National Bank and the Company exceeded the required ratios for classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.
In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency.
The Federal Deposit Insurance Corporation Improvement Act
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act ("FDIA") as well as several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure and significantly undercapitalized if it is significantly below such measure. The critically undercapitalized level occurs where tangible equity is less than 2% of total tangible assets or less than 65% of the minimum leverage ratio to be prescribed by regulation (except to the extent that 2% would be higher than such 65% level). A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.
FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are also subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.
The five FDICIA capital categories described above will be used by the banking regulators to determine the severity of corrective action the appropriate regulator may take in the event an institution reaches a given level of undercapitalization. For example, an institution which becomes "undercapitalized" must submit a capital restoration plan to the appropriate regulator outlining the steps it will take to become adequately capitalized. Upon approving the plan, the regulator will monitor the institution's compliance. Before a capital restoration plan will be approved, any entity controlling a bank (i.e., bank holding companies) must guarantee compliance with the plan until the institution has been adequately capitalized for four consecutive calendar quarters. The liability of the holding company is limited to the lesser of 5% of the institution's total assets or the amount which is necessary to bring the institution into compliance with all capital standards. In addition, "undercapitalized" institutions will be restricted from paying management fees, dividends and other capital distributions. Further, these institutions will be subject to certain asset growth restrictions and will be required to obtain prior approval from the appropriate regulator to open new branches or expand into new lines of business. As an institution drops to lower capital levels, the extent of action to be taken by the appropriate regulator increases, restricting the types of transactions in which the institution may engage and ultimately providing for the appointment of a receiver for certain institutions deemed to be critically undercapitalized.
In order to comply with the FDICIA, the Federal Reserve Board and the FDIC have adopted regulations defining operational and managerial standards relating to internal controls, loan documentation, credit underwriting criteria, interest rate exposure, asset growth, and compensation, fees and benefits.
Capital Adequacy
Under the Federal Reserve Board's risk-based capital guidelines applicable to the Company, the minimum ratio of capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. To be considered a "well capitalized" bank under the guidelines, a bank must have a total risk-based capital ratio in excess of 10%. Under these guidelines, at least half of the total capital is to be comprised of common equity, retained earnings and a limited amount of perpetual preferred stock, after subtracting certain intangibles, and certain other adjustments ("Tier 1 capital"). The remainder may consist of perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock not qualifying for Tier 1 capital and a limited amount of loan loss reserves ("Tier 2 capital"). The First National Bank is subject to similar capital requirements adopted by the OCC.
In addition, the Federal Reserve Board, the OCC and the Federal Deposit Insurance Corporation ("FDIC") have adopted a minimum leverage ratio (Tier 1 capital to adjusted quarterly average assets) of 4%. Generally, banking organizations are expected to operate well above the minimum required capital level of 4% unless they meet certain specified criteria, including that they have the highest regulatory ratings. Most banking organizations are required to maintain a leverage ratio of 4% plus an additional cushion of at least 1% to 2%. (For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.) The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance upon intangible assets. Failure to meet 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, issuance of a capital directive, a prohibition on the taking of brokered deposits and certain other restrictions.
On December 31, 1999 the Company's subsidiary bank exceeded the "well capitalized" threshold per the guidelines, with a Tier 1 capital ratio of 26.7%, a total risk-based capital ratio of 27.8%, and a leverage ratio of 14.2%.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.
Premiums for Deposit Insurance
The Bank's deposit accounts are insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC, up to the maximum permitted by law. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which as of December 31, 1999, ranged from 0 to 27 basis points per $100 of insured deposits, based on the risk a particular institution poses to its deposit insurance fund. The risk classification is based on an institution's capital group and supervisory subgroup assignment. Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at January 1, 1997, the Bank began paying, in addition to their normal deposit insurance premium as a member of the BIF, an amount equal to approximately 1.3 basis points per $100 of insured deposits toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery of the savings and loan industry. Members of the Savings Association Insurance Fund ("SAIF"), by contrast, pay, in addition to their normal deposit insurance premium, approximately 6.4 basis points. Under the Paperwork Reduction Act, the FDIC is not permitted to establish SAIF assessment rates that are lower than comparable BIF assessment rates. Effective January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF. The Paperwork Reduction Act also provided for the merging of the BIF and the SAIF by January 1, 1999 provided there were no financial institutions still chartered as savings associations at that time. However, as of January 1, 1999, there were still financial institutions chartered as savings associations.
Interstate Banking and Branching
The Bank Holding Company Act permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide- and state-imposed concentration limits. The Company has the ability, subject to certain restrictions, to acquire by acquisition or merger branches outside its home state. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets.
Federal law provides that, as of September 29, 1995, adequately capitalized and managed bank holding companies are permitted to acquire banks in any state. State laws prohibiting interstate banking or discriminating against out-of-state banks were preempted as of the effective date, although states were permitted to require that target banks located within the state be in existence for a period of up to five years before such banks may be subject to the Interstate Banking Act. The "Interstate Banking Act" established deposit caps which prohibit acquisitions that would result in the acquirer controlling 30% or more of the deposits of insured banks and thrifts held in the state in which the acquisition or merger is occurring or in any state in which the target maintains a branch or 10% or more of the deposits nationwide. State-level deposit caps are not preempted as long as they do not discriminate against out-of-state acquirers, and the federal deposit caps apply only to initial entry acquisitions.
In addition, the Interstate Banking Act provided that as of June 1, 1997, adequately capitalized and managed banks may engage in interstate branching by merging banks in different states and allowing banks to maintain branches in states other than the states where they maintain their principal place of business. 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.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods. A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a performance- based evaluation system which bases CRA ratings on an institution's lending service and investment performance. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve Board will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of "outstanding", "satisfactory", "needs to improve" or "substantial noncompliance." As of its most recent CRA examination, conducted in 1998, the Bank was rated at least "satisfactory."
Year 2000 Compliance
The Federal Financial Institutions Examination Council issued an interagency statement to the chief executive officers of all federally supervised financial institutions regarding year 2000 project management awareness. The statement provides guidance to financial institutions, providers of data services, and all examining personnel of the federal banking agencies regarding the potential year 2000 problem. The federal banking agencies conducted year 2000 compliance examinations to ascertain whether a bank's year 2000 readiness presented an unsafe and unsound banking practice. The Company's core banking systems successfully responded to the century date change. The Company will continue to monitor its major vendors and clients throughout year 2000.
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 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 has had 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.
CHANGES IN LAWS AND REGULATIONS
Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on the Company and its subsidiaries, however, cannot be determined at this time.
DEPOSIT INSURANCE
The First National Bank is subject to charges for deposit insurance coverage by the FDIC. The Bank's deposits are insured under the Bank Insurance Fund, which is administered by the FDIC. The rates charged to the Bank for deposit insurance vary from year to year and ARE EXPECTED TO INCREASE FOR THE YEAR 2000.
BANK AND BANK HOLDING COMPANY REGULATION; RESTRICTIONS ON DIVIDENDS
Subject to certain exceptions and the ultimate impact of the Interstate Banking Act, both a bank holding company and an out-of-state bank are prohibited under Tennessee law from acquiring control of, merging, or consolidating with a Tennessee bank, unless the Tennessee bank has been in operation for at least five (5) years. Notwithstanding the above-described prohibition(s), a bank which does not have its home state in Tennessee may establish or acquire a branch in Tennessee through the acquisition of all or substantially all of the assets and the assumption of all or substantially all of the liabilities of or related to a branch located in Tennessee which has been in operation for at least five (5) years, provided that the laws of the home state of the out-of-state bank permit Tennessee banks to establish and maintain branches in that state through the acquisition of a branch under substantially the same terms and conditions. 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 OCC, and the Federal Reserve Board based upon a variety of statutory and regulatory criteria. Branching is regulated generally by the OCC pursuant to certain state and federal law requirements and 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 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, for depositors, and are not for the protection of borrowers, investors or 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 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 and bank holding companies to pay dividends. State law restricts the ability of corporations (such as the Company) to pay dividends, and federal law limits dividends by the Bank. For example, prior regulatory approval must be obtained before declaring any dividends if the amount of capital, and surplus is below certain statutory limits. In addition, the approval of the OCC 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 the OCC, 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 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. See also the section of this Report entitled "Capital Adequacy."
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 institution's financial statements. The relevant regulations require First 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, 1999, management believes that the Company and the Bank meet all such capital requirements to which they are, respectively, subject.
The Company and the Bank are subject to various legal restrictions on the extent to which a bank holding company (such as the Company) and any nonbank subsidiary that it might own or form 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).
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 23, 2000, the maximum "formula rate" of interest was 12.75%. 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 effect on its businesses or earnings.
RECENT DEVELOPMENTS
As noted previously, new laws and regulations are commonly prescribed by governmental agencies that affect the Company and the Bank. The best known new development was the enactment of the Gramm-Leach-Bliley Act of 1999, which is expected to have an extensive impact on financial services in the United States. Other developments include, for example, a recent change in Tennessee law removed the prohibition against the acquisition of certain branches that have been in existence for at least five years by out-of-state banks and bank holding companies. It has also become possible to have "S corporation" tax status as a bank under federal income tax laws, with the effect that the tax attributes of S corporations are available, under federal law, to financial institutions.
Other developments include certain new accounting proposals. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. This Statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company does not expect the adoption of this Statement to have a material impact on financial condition or results of operation. At the initial application of this Statement, the Company may elect to transfer any security classified by the Company as held-to-maturity to the available-for-sale or trading classification. In addition, the Company may elect to transfer any security classified as available-for-sale to the trading classification. Presently, management does not expect to elect these options.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises employers' disclosures about pension and other post-retirement benefit plans. The statement does not change the measurement or recognition of those plans, but requires additional information on changes in benefits obligations and fair values of plan assets, and eliminates certain disclosures previously required by SFAS Nos. 87, 88 and 106. This statement is effective for fiscal
years beginning after December 15, 1997. The Company does not expect the adoption of this Statement to have a material effect on the Company's financial reporting.
COMPETITION
The commercial banking business is highly competitive and the Company and First National Bank compete actively with national and state banks and bank holding company organizations for deposits, loans and trust accounts, and with savings and loan associations and credit unions for deposits and loans. In addition, the Bank competes with other financial institutions, including securities brokers and dealers, personal loan companies, insurance companies, finance companies, leasing companies and certain governmental agencies, all of which actively engage in marketing various types of loans, deposit accounts and other services. For example, one of the Company's competitors is a subsidiary of a regional bank holding company system that may have greater financial and other resources than the Company. 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 approximately seventeen offices and branches (exclusive of free-standing ATM's) and holding an aggregate (reportedly) of more than $500 million in deposits as of approximately June 30, 1999 (based on data published by the Federal Deposition Insurance Corporation). 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 Union Planters Bank, N.A., Star Bank, and First American National Bank (soon to be AmSouth 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 1, 2000, the Registrant and its banking subsidiary (the Bank) employed sixty-one persons on a full-time, and eleven 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 considers its employee relations to be satisfactory.
ECONOMIC CONDITIONS AND GOVERNMENTAL POLICY; LAWS AND REGULATIONS
The Company's profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on its interest-earning assets, such as loans extended to its borrowers, together with securities held in its investment portfolio, comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Company and First National Bank, such as inflation, recession and unemployment, and the impact which future changes in domestic and even in foreign economic conditions might have on the Company and the Bank cannot be predicted.
The Company's business is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open- market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid
on interest-bearing liabilities. The nature and impact on the Company and the Bank of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the federal Congress, in the state legislatures, and before various regulatory agencies. Please refer to "Item 1. Business - Supervision and Regulation."
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 Federal Reserve Board. 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 "Y2K" ISSUE
The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. The term "Year 2000 issue" refers to the necessity of converting computer information systems so that such systems recognize more than two digits to identify a year in any given date field, and are thereby able to differentiate between years in the twentieth and twenty-first centuries ending with the same two digits (e.g., 1900 and 2000). To address the Year 2000 issue, the Company adopted a broad-based approach designed to encompass the Company's total environment. To its best knowledge, neither the Company nor the Bank experienced any material "Year 2000" issues. However, as noted above, the Company intends to be aware that software and hardware computer problems may arise at any time, and may or may not be related to "Year 2000" (including the fact that Year 2000 is also a leap year).
Of course, the ultimate effect of the Y2K issues on the Company and the Bank will depend not only on the Company's response, for itself and the Bank, but also on the efforts of the Bank's vendors, customers, government agencies, unaffiliated financial services companies (including other banks and including those in the securities markets) and others. The foregoing notwithstanding, management does not currently believe that the costs of assessment, remediation, or replacement of the Company's systems, or the potential failure of third parties' systems will have a material adverse effect on the Company's business, financial condition, results of operations, or liquidity.
Effective for periods ending after December 15, 1998, the Accounting Standards Executive Committee issued Statement of Position No. 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company plans to adopt the provisions of this statement and it has determined that the adoption of this statement is not expected to have a material impact on the Company.
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 OCC.
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 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATION
In addition to the other information contained in this report, the following risks may affect the Company. If any of these risks occurs, our business, financial condition or operating results could be adversely affected.
The Company's financial performance and profitability will depend on its ability to execute its corporate growth strategy and to manage recent and anticipated future growth. The Company's success and profitability depend on the Company's ability to maintain profitable operations through continued implementation of the Company's community banking philosophy which emphasizes personal service and customer attention.
Changes in market interest rates may adversely affect the Company's performance. For instance, the Company's earnings are affected by changing interest rates. Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities and rates paid on deposits and borrowings. The relationship between the rates received on loans and securities and the rates paid on deposits and borrowings is known as interest rate spread. Given the Company's current volume and mix of interest-bearing liabilities and interest-earning assets, its interest rate spread could be expected to decrease during times of rising interest rates and, conversely, to increase during times of falling interest rates. Although management believes that the current level of interest rate sensitivity is reasonable, significant fluctuations and/or further increases in interest rates may have an adverse effect on the Company's business, financial condition and results of operations.
The Company's Warren County and Southern Middle Tennessee business focus and economic conditions in these areas could adversely affect our operations. This is true because our operations are centralized and focused on this narrowly defined geographic area. As a result of this geographic concentration, the Company's operating results depend largely upon economic conditions in these areas. A deterioration in economic conditions in these market areas, particularly in the nursery and real estate industries on which these areas depend, could have a material adverse impact on the quality of the Bank's loan portfolio and on the demand for the Company's products and services, which in turn can be expected to have a negative, and perhaps material adverse, effect on results of operations.
As discussed above, the Company is subject to government regulation that could limit or restrict its activities. In turn, this could adversely impact operations. The financial services industry is regulated extensively. Federal and state regulation is designed primarily to protect the deposit insurance funds and consumers, and not to benefit our shareholders. These regulations can sometimes impose significant limitations on Company and Bank operations. In addition, these regulations are constantly evolving and may change significantly over time. Significant new laws or changes in existing laws or repeal of existing laws may cause the Company's consolidated results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for us. The ultimate impact of financial institution affiliations under the Financial Services Modernization Act, and other aspects of that law, cannot yet be predicted but could adversely affect First National Bank and the Company.
Competition may adversely affect the Company's performance. The financial services business in the Company's market areas is highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. (For instance, AmSouth's recent acquisition of First American National Bank is another example of consolidation in the financial services business in the Company's market areas.) The Company
faces competition both in attracting deposits and in making loans. The Company competes for loans principally through the interest rates and loan fees charged and the efficiency and quality of services provided. Increasing levels of competition in the banking and financial services businesses may reduce the Company's market share or cause the prices charged by the Company and/or the Bank for services to fall. Thus results may differ in future periods depending upon the nature or level of competition.
If a significant number of borrowers, guarantors and related parties fail to perform as required by the terms of their loans, the Company will sustain losses. A significant source of risk arises from the possibility that losses will be sustained if a significant number of the Bank's borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. The Bank has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the Bank's credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect consolidated results of operations.
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 in the following pages.
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FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
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 expense 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 the loan category. Loan fees of $29,000, $37,000 and $39,000 for 1999, 1998 and 1997, respectively, are included in consumer loan income and represent an adjustment of the yield on these loans.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
II. Investment Portfolio:
A. Securities at December 31, 1999 consist of the following:
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
II. Investment Portfolio, Continued:
A. Continued
Investment securities at December 31, 1998 consist of the following:
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
II. Investment Portfolio, Continued:
B. The following schedule details the estimated maturities and weighted average yields of securities of the Company at December 31, 1999.
* 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, 1999
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, 1999
III. Loan Portfolio:
A. Loan Types
The following schedule details the loans of the Company at December 31, 1999, 1998, 1997, 1996 and 1995.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
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, 1999.
*Includes demand loans, bankers acceptances, commercial paper and deposit notes.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
III. Loan Portfolio, Continued:
C. Risk Elements
The following schedule details selected information as to non-performing loans of the Company at December 31, 1999, 1998, 1997, 1996 and 1995.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
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, 1999, 1998, 1997 and 1996. Non-accrual loans totaled $55,000 at December 31, 1995. Gross interest income that would have been recorded for the year ended December 31, 1995, if the loans had been current totaled approximately $8,835,000.
At December 31, 1999, loans totaling $6,094,000 were included in the Company's internal classified loan list. Of these loans, $1,840,000 are real estate, $4,198,000 are commercial and $56,000 are consumer. The collateral valuations received by management securing these loans total approximately $8,619,000, ($2,758,000 related to real estate, $5,828,000 related to commercial and $33,000 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, 1999 and 1998, there were loans to customers in the nursery industry totaling approximately $11,399,000 and $11,243,000, 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, 1999 and 1998, other real estate totaled $74,000 and $11,000, respectively. The balance at December 31, 1999 consists of two residential properties with carrying values of approximately $38,000 and $36,000 that had loans foreclosed during 1999. The balance at December 31, 1998 consisted of one commercial property that the Company transferred to bank premises in 1999. Management is attempting to sell the properties included in other real estate at December 31, 1999 and no material loss is anticipated thereon.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
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, 1999 which would be required to be disclosed as past due, non-accrual, restructured or potential problem loans, if such interest-bearing assets were loans.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
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, 1999, 1998, 1997, 1996 and 1995 and the years then ended.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
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-K
December 31, 1999
V. Deposits:
The average amounts and average interest rates for deposits for 1999 and 1998 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, 1999.
In addition, approximately $728,000 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-K
December 31, 1999
VI. Return on Equity and Assets:
The following schedule details selected key ratios of the Company at December 31, 1999, 1998, and 1997.
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-K
December 31, 1999
VI. Return on Equity and Assets, Continued:
The following schedule details the Company's risk-based capital at December 31, 1999, excluding the net unrealized gain on available-for-sale securities which is shown as an addition in stockholders' equity in the consolidated financial statements:
The Company is required to maintain a total risk-based capital to risk weighted asset rate of 8% and a Tier I capital to risk weighted asset ratio of 4%. At December 31, 1999, the Company and its subsidiary bank were in compliance with these requirements.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
VI. Return on Equity and Assets, Continued:
The following schedule details the Company's interest rate sensitivity at December 31, 1999:
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.
FIRST MCMINNVILLE CORPORATION
Form 10-K
December 31, 1999
Item 7A. Return on Equity and Assets, Continued:
The Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company's operations, the Company is not subject to foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both immediate and long term earnings through funds management/interest rate risk management. The Company's rate sensitivity position has an important impact on earnings. Senior management of the Company meets monthly to analyze the rate sensitivity position. These meetings focus the spread between the cost of funds and interest yields generated primarily through loans and investments.
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, 1999, 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 1999.
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 2000 (through February 11, 2000) and for each quarter of fiscal 1999 and 1998. During 1999 the Company redeemed 3,851 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 last trade known to management involved 300 shares at an estimated $70.32 per share in January of 2000. In February of 2000, the Company redeemed shares at a price of $71.12 per share. 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. At February 29, 2000, the Company had 524,989 shares outstanding. No shares are reserved for issuance except up to 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 January 31, 2000 was approximately 500.
(C) DIVIDENDS
The Company declared semi-annual cash dividends on its Common Stock in the aggregate amount of $2.80 per share in 1999, $2.65 per share in 1998, and $2.50 per share in 1997. 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 1999, the Company issued 2,355 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 18 of the Consolidated Financial Statements for additional information on the Stock Option Plan and to Note 17 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
The selected financial data required by this part of this Annual Report on Form 10-K are incorporated into this Report by reference to page 4 of the Company's 1999 Annual Report to Stockholders. Only the information set forth in the said 1999 Annual Report to Stockholders on page 4 under the caption "SUMMARY OF SELECTED FINANCIAL DATA (Unaudited)" is incorporated in response to this Part of the Company's Annual Report on Form 10-K for the year ended December 31, 1999. No portion of the 1999 Annual Report to Stockholders is incorporated by reference, however, except (as here) by express reference. The 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" that is set forth as a part of Item 7
Item 7 and is also presented in certain of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The "Management's Discussion and Analysis of Financial Condition and Results of Operation" called for by this part is expressly incorporated herein by reference to the section of the Company's 1999 Annual Report to Stockholders entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation". Only that portion of the said 1999 Annual Report to Stockholders is incorporated as part of this Item of the Company's Annual Report on Form 10-K for the year ended December 31, 1999. No portion of the 1999 Annual Report to Stockholders is incorporated by reference, however, except (as here) by express reference.
The purpose of this discussion 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 Company's Consolidated Financial Statements.
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 20 of the Company's 1999 Annual Report to Stockholders) are included in this Report:
- Independent Auditors' Report;
- Consolidated Balance Sheets - December 31, 1999 and 1998;
- Consolidated Statements of Earnings - Three years ended December 31, 1999;
- Consolidated Statements of Comprehensive Earnings - Three years ended December 31, 1999;
- Consolidated Statements of Changes in Stockholders' Equity - Three years ended December 31, 1999;
- Consolidated Statements of Cash Flows - Three years ended December 31, 1999; and all
- Notes to Consolidated Financial Statements.
The Consolidated Financial Statements called for by this Item are incorporated by reference to the Consolidated Financial Statements section of the Company's 1999 Annual Report to Stockholders, pages 25-45. No portion of the 1999 Annual Report to Stockholders is incorporated by reference, however, except (as here) by express reference.
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 14, 2000, 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 I" are being nominated for three year terms to the Board of Directors for consideration at the 2000 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.
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 has no class of securities 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, 1999, 1998, and 1997 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 1999 and the other four most highly compensated executive officers as of December 31, 1999 (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 no stock options to the Directors, or to any executive officer(s) named in the Summary Compensation Table in 1999. The Company grants no stock appreciation rights.
1999 STOCK OPTION 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
NOTE TO PRECEDING TABLE
(1) This amount represents the difference between the estimated market price on February 28, 2000 of approximately $71.12 per share and the respective exercise price(s) of the options at the date(s) of grant ($58.15). 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. 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).
***
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors has appointed a Compensation Committee 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 (and, hence, the Company's) performance compared to other similarly situated commercial banks, with primary emphasis given to comparable community 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 important to the Committee are length and quality of service to the Company, 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 J. Douglas Milner Carl M. Stanley
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the members of the Company's Compensation Committee during the last completed fiscal year were Directors Greene, Jones and Stanley. None of these individuals was, during the last fiscal year, an officer or employee of the Company or any of its subsidiaries, was formerly an officer of the registrant or any of its subsidiaries, or had any relationship requiring disclosure by the Company under any paragraph of Item 404 of the SEC's Regulation S-K except that Director Jones serves as a consultant to the Company and, as such consultant, as Chairman of the Company. (In addition, Director Jones retired in 1993 as chief executive officer of the Company). During the last completed fiscal year, no executive officer of the Company served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of the Company; or served as a director of another entity, one of whose executive officers served on the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of the Company; or served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of the Company.
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. Note 18 to the Consolidated Financial Statements of the Company for the year ended December 31, 1999 contains additional information concerning the Stock Option Plan.
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 32 years of credited service under the Plan with current compensation covered by the Plan of $162,149 and the estimated amount of the Company's 1999 contribution for Mr. Jacobs was $12,945, as is reflected in the Summary Compensation Table appearing elsewhere in this Report. Mr. Jacobs' anticipated monthly benefit at retirement at age 65 is currently estimated at $6,886.
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 10 to 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 1999, the Company contributed approximately $50,000 to the plan, as compared to $43,000 in 1998 and $45,000 in 1997. Please refer to Note 10 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. Mr. Jones resigned as Chairman of the Company effective January 12, 2000, and the Consultation Agreement terminated at that time.
Employment Agreement. The Company executed an employment agreement with Chairman and President Charles C. Jacobs dated the 11th day of June, 1999. The agreement provides that Jacobs shall be employed by the Company to serve as the President and Chief Executive Officer of the Company and First National Bank for an initial term expiring December 31, 2003. Unless sooner terminated in accordance with its terms, the agreement is automatically extended for one year on each anniversary date. Mr. Jabobs' salary is to be set by the Board, to which Mr. Jacobs reports, but it is not to be lowered unless certain performance criteria are not met.
The agreement provides certain protections for Mr. Jacobs in the event of a change in control of the Company or the Bank, or for his termination other than "for cause."
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 29, 2000, there were 524,989 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 (A) directors of the Company, and (B) 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 January 31, 2000. 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 as set forth above 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 524,989 shares of the Common Stock outstanding at February 29, 2000, plus that number of shares obtainable by each 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 options (1,000 and 500, respectively). This information is based in part on information supplied to the Company by the persons named in the Table. The other options held by executive officers and exercisable within 60 days are Mr. Jacobs (400),Mrs. Bogle (240), Mr. Cowell (160), Mr. Foster (240), Mr. Marttala (240), Mr. Neal (240), and Mr. Whisenhunt (240).
(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.
(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.
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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 1999. At December 31, 1999, the dollar amount of loans to the Company's Directors and Executive Officers, and their respective affiliates, was approximately $2,764,000. This approximated 7.9% of Shareholders equity and 2.2% 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:
- The following statements and the Report of Maggart & Associates, P.C., Independent Certified Public Accountants, appear on pages 20 - 48 of the 1999 Annual Report to Stockholders of this Annual Report on Form 10-K, which portion of the 1999 Annual Report to Stockholders is hereby incorporated herein by reference:
- Consolidated Balance Sheets as of December 31, 1999 and 1998;
- Consolidated Statements of Earnings for the three years ended December 31, 1999;
- Consolidated Statements of Comprehensive Earnings for the three years ended December 31, 1999;
- Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1999;
- Consolidated Statements of Cash Flows for the three years ended December 31, 1999; and
- All Notes to the foregoing Consolidated Financial Statements.
- -- Listing of Exhibits:
- 3(i) Charter as amended.(1)
- 3(ii) Bylaws.(1)
- 4.1 Charter as amended.(1)
- 4.2 Bylaws.(1)
- 4.3 1997 First McMinnville Corporation Stock Option Plan.(2)
- 4.4 Shareholders Rights Agreement dated June 10, 1997.(2)
- 10.1 First National Bank of McMinnville 401(k) Retirement Plan.(3)
- 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. [Terminated January 2000](4)
- 10.3 Employment Agreement dated the 11th day of June, 1999, between First McMinnville Corporation and Charles C. Jacob.(5)
- 11 Statement re: computation of per share earnings (Incorporated by reference to Note 17 of the Consolidated Financial Statements).
- 13 Portions of the Annual Report to Security Holders, as set forth in the Exhibit Index. Omitted in paper copies.
- 21 Subsidiaries of the Registrant for the year ended December 31, 1999.
- 27 Financial Statement Schedule [Omitted in Paper Copies].
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1999.
(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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(1) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-KSB under the Exchange Act for the fiscal year ended December 31, 1994. (2) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-K under the Exchange Act for the fiscal year ended December 31, 1997. (3) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-K under the Exchange Act for the fiscal year ended December 31, 1988. (4) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-KSB 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 Chairman, President and Chief Executive Officer March 14, 2000
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 (except that certain portions thereof have been incorporated by reference in response to certain items of this Annual Report on Form 10-K).
(2)A copy of the form of proxy to be sent to security holders in respect of the Company's 2000 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.
EXHIBIT INDEX
(1) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-KSB under the Exchange Act for the fiscal year ended December 31, 1994.
(2) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-K under the Exchange Act for the fiscal year ended December 31, 1997.
(3) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-K under the Exchange Act for the fiscal year ended December 31, 1988.
(4) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-KSB under the Exchange Act for the fiscal year ended December 31, 1996.
(5) Incorporated by reference to Note 17 of the Consolidated Financial Statements.
(6) Portions of the Annual Report to Security Holders are incorporated by reference into the Form 10-K. These portions are "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operation," and the Company's Consolidated Financial Statements for the year ended December 31, 1999 (Part II and Part IV). This Exhibit is omitted in the paper copy pursuant to Instruction G(2) of the Instructions to Form 10-K.
(7) 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, 1999 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, 1999.