First McMinnville Corporation

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

Commission File Number: 2-90200

FIRST MCMINNVILLE CORPORATION

(Exact name of registrant as specified in its charter)


Tennessee		62-1198119
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

200 East Main Street
McMinnville, Tennessee		37110
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, with area code: (931) 473-4402

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:		Name of each exchange on which
		registered:
None		None

Securities registered pursuant to Section 12(g) of the Act:

No par value common stock
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting and non-voting equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of First McMinnville Corporation ‘s most recently completed second fiscal quarter was $48,983,572. See “Calculation of Public Float” in Item 5 of this Report.

As of March 1, 2006, First McMinnville Corporation had 1,030,771 shares of its common voting stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference herein:

Specified portions of the Registrant’s definitive Proxy Statement for the 2006 Annual Meeting of Shareholders filed with the Commission under Regulation 14A, as set forth in Part III of this Annual Report on Form 10-K.

PART I

Cautionary Warning Regarding Forward-Looking Statements

In this Annual Report on Form 10-K and in documents incorporated herein by reference, First McMinnville Corporation (the “Company”) may communicate statements relating to the future results of the Company and The First National Bank of McMinnville (“Bank” or “First National Bank”) that may be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act). The Company’s results depend almost entirely on the results of First National Bank. The actual results achieved by the Company and/or the Bank 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, 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, and unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company and/or its customers, 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 that provided in Item 7, as well as other portions of this Annual Report on Form 10-K, is to provide readers of this Annual 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. Please refer to the section of this Item 1 captioned “Factors That May Affect Future Results of Operations” and to Item 1A “Risk Factors.”

ITEM 1. BUSINESS

Description of Business

The Company

First McMinnville Corporation (the “Company”) is a one bank holding company that, at December 31, 2005, owned all of the stock of the First National Bank of McMinnville (“First National Bank” or “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 has historically elected not to seek financial holding company status, although it believes that it is eligible to do so.

The primary function of the Company is the ownership of the shares of the Bank. Accordingly, the Company’s results of operation and financial performance were virtually identical to those of the Bank in 2005. The Company’s principal business is its ownership of the Bank, which engages in the commercial banking business. At December 31, 2005, the Company had total assets of approximately $317,781,000 and total Shareholders’ equity of $51,217,000. The Company reported net after-tax earnings of approximately $4,393,000 for fiscal 2005. At December 31, 2005, the Bank’s total loans (net of allowance for possible loan losses of $1,816,000) were $151,750,000 and its total deposits were $239,088,000. As of that date, the Company’s Tier 1 capital ratio was 30.52%, its total risk-based capital ratio was 31.57%, and its leverage ratio was 16.87%. Please refer to the Company’s audited financial statements (the “Consolidated Financial Statements”) in Item 8 for additional information.

During 2005 the Bank has continued to focus on developing its financial services business in Warren County, Tennessee and in other areas (generally, in those counties contiguous to Warren County, Tennessee). The Bank provides a wide range of commercial banking services to small and medium-sized businesses, including those engaged in the nursery business, the real estate development business, local industry, business executives, professionals and other individuals. The Bank operates throughout Warren County, Tennessee, with three offices located in McMinnville and one located in each of Morrison and Viola. Additional information concerning the general development of the Company’s business since the beginning of the Company’s last fiscal year is set forth as part of Item 7, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and the Consolidated Financial Statements in Item 8, in this Annual Report on Form 10-K as well as in “Business of the Bank” below in this Item.

The Company’s principal executive offices are located at 200 East Main Street, McMinnville, Warren County, Tennessee 37110, telephone (931) 473-4402.

First National Bank of McMinnville

The First National Bank of McMinnville (“First National Bank” or the “Bank”) is a commercial bank with deposits insured by the Bank Insurance Fund that is administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is chartered under the National Bank Act. It is subject to comprehensive examination, supervision and regulation by the Office of the Comptroller of the Currency (called the “OCC”). The Bank was initially chartered in 1874 and has operated continuously since then.

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’s primary service area is located in Warren County, Tennessee, and the counties surrounding Warren County. The Bank operates four automated teller machines (“ATMs”). The Bank provides banking, trust and other financial services throughout Warren County and in other areas.

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 operates a trust department. The Company and the Bank intend for the foreseeable future to concentrate their efforts in their existing markets. The Bank formed a subsidiary known as First Community Title & Escrow Company in 2001 to engage in the title insurance business, as agent.

Within the defined service area of the Bank’s main office, the banking business is highly competitive. The Bank competes primarily with banks and with other types of financial institutions, including credit unions, finance companies, brokerage firms, insurance companies, retailers, and other types of businesses that offer credit, loans, check cashing, and comparable services. Deposit deregulation has intensified the competition for deposits among banks and other types of companies in recent years. Deposit gathering and the effective and profitable use of those deposits are two of the most challenging tasks faced by the Bank in particular and the financial services sector in general.

The Bank’s primary source of income in 2005 was its earnings principally derived from interest income from loans and returns from its investment portfolio. The Bank derived approximately 95% of its gross earnings from interest income and just over 5% from fees and other non-interest sources. 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 Bank may in the future engage in various business activities permitted to commercial banks and their subsidiaries, either directly, through one or more subsidiaries, or through acquisitions. The Bank intends to provide banking and financial services in Southern Middle Tennessee, primarily in the Warren County and surrounding county trade areas, through its commercial banking operations.

The Bank engages in a full service commercial and consumer banking business, including the following services:

•		Accepting time and demand deposits,

•		Providing personal and business checking accounts at competitive rates, and

•		Making secured and unsecured commercial and consumer loans.

The Bank is a locally managed community bank that seeks to provide personal attention and professional assistance to its customer base which consists principally of individuals and small and medium-sized businesses. The Bank’s philosophy includes offering direct access to its officers and personnel, providing friendly, informed and courteous service, local and timely decision making, flexible and reasonable operating procedures, and consistently-applied credit policies.

The Bank’s acceptance of time, demand, and savings deposits includes NOW accounts, money market accounts, regular savings accounts, and certificates of deposit.

The Bank makes secured and unsecured commercial, consumer, installment and construction loans. Residential mortgages and small business loans are core products. Consumer loans include revolving credit lines and installment loans.

The Bank offers the following support services to make financial management more efficient and convenient for its customers:


•	personalized service	•	interest bearing accounts, such as CD’s and IRA’s

•	money market accounts	•	safe deposit boxes

•	night deposit services	•	drive-through banking

•	on-line banking	•	super NOW accounts, small business checking

•	Hometown Direct (direct deposit services)	•	travelers’ checks

•	telephone banking	•	trust department services

For retail customers, the 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 has a number of correspondent bank relationships, through which the Bank is effectively able to offer customers services generally available only from larger financial institutions.

The Bank is subject to extensive supervision and regulation by federal banking agencies. Its operations are subject to a wide array of federal and state laws applicable to financial services, to banks, and to lending. Certain of the laws and regulations that affect these operations are utlined briefly below in this Item and in other portions of this Annual Report on Form 10-K.

There have been many legislative and regulatory proposals designed to overhaul or otherwise improve 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 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 Bank or the financial services industries in which the Bank competes. However, the enactment of the “Sarbanes-Oxley Act of 2002,” the “USA PATRIOT Act,” and the recent capital initiatives commonly referred to as “Basel II” have been important developments. See “Capital Adequacy Developments,” “Financial Services Modernization Act,” “USA PATRIOT Act,” and “Recent Developments and Future Legislation” in the following pages.

Expenditures for research and development activities were not material for the years 2003 through 2005.

Neither the Bank nor any of its significant subsidiaries is dependent upon a single customer or very few customers. The Bank has some concentration in lending to the nursery business, which comprises a large part of the local Warren County, Tennessee economy.

Please refer also to the Consolidated Financial Statements (Item 8 of this Annual Report on Form 10-K) for additional information concerning the Bank.

The principal executive offices of the Bank are located at 200 East Main Street, McMinnville, Warren County, Tennessee 37110, telephone (931) 473-4402.

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 also to the Consolidated Financial Statements for additional, important information concerning the Company and First National Bank.

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003,
(Dollars in Thousands Except Per Share Data)


	2005		2004		2003

Total Assets	$	317,781	$	308,534	$	304,399

Total Earning Assets		307,002		299,953		292,808

Deposits		239,088		226,588		224,221

Stockholders’ Equity		51,217		50,079		47,960

Gross Revenues		16,263		15,740		16,694

Interest Income		15,448		15,013		15,866

Non-Interest Income		815		727		828

Earnings Before Income Taxes		6,344		6,715		7,068

Net Earnings		4,393		4,650		4,899

Basic Earnings per Share	$	4.24	$	4.46	$	4.70

Diluted Earnings per Share	$	4.16	$	4.38	$	4.63

Dividends Declared per Share	$	1.75	$	1.75	$	1.70

Please refer also to the Consolidated Financial Statements (Item 8) for additional, important information concerning the Bank..

Capital Requirements

The Company is required to maintain certain capital ratios. These include Tier I, Total Capital and Leverage Ratios. As is reflected below, the Company’s capital ratios far exceed minimum levels.


	Capital Level Meeting
	Regulatory Definition of
	"Well Capitalized"		First McMinnville Corporation

			2005		2004
	(%)		(%)		(%)

Tier I Ratio		4.0		30.52		29.79

Total Risk-Based Ratio		8.0		31.57		30.86

Leverage Ratio		4.0		16.87		16.17

Based solely on its analysis of federal banking regulatory categories, the Company appears to fall within the “well capitalized” categories, including the regulatory framework for prompt corrective action. See Note 12 to the Company’s Consolidated Financial Statements (Item 8). See also “Supervision and Regulation — Capital Adequacy,” below.

Efficiency

Frequently, one measure of productivity in the banking industry is sometimes referred to as the “efficiency ratio.” This ratio is calculated to measure the cost of generating a dollar of revenue. That is, the ratio is designed to reflect the percentage of a dollar which must be expended to generate one dollar of revenue. Fifty percent (that is, $.50 for each $1.00 of revenue generated) is considered by some to be a standard by which a financial organization’s “efficiency” can be measured. As reported in the Uniform Bank Performance Report for First National Bank, the Bank’s efficiency ratio in 2005 was 39.79% (compared to its peer group of 58.57%), 38.53% for 2003 (compared to its peer group of 59.86%), and 37.24% for 2003 (compared to its peer group of 59.89%). Because the Company is operated on the principle of community bank levels of service, however, money center bank measures of “efficiency ratios” may not be fairly applicable to the Company or to First National Bank. In order to compete more effectively against larger commercial banks and thrifts, the Company has elected to provide the high levels of service that mandate or merit higher levels of personnel per dollar of assets than might be true of a larger institution. However, like any other well run business, the Company remains committed to aggressively managing its costs within the framework of its own business model. This is a forward-looking statement, and actual results could differ because of several factors, including those specified or described in the discussion of “Cautionary Warning Regarding Forward-Looking Statements.”

Subsidiary

The First National Bank is the Company’s sole subsidiary. The Bank has one, subsidiary, First Community Title & Escrow Company, which was formed in 2001 to act as a title insurance agency.

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. See “Supervision and Regulation,” below.

Expansion Strategy and Subsidiaries

The Company, through the Bank, will continue to focus on expansion through internal organic growth. However, the Company becomes aware from time to time of opportunities for growth through acquisition. The Company’s philosophy in considering such a transaction is to evaluate the acquisition for its potential to bolster the Company’s presence in its chosen markets as well as for long-term profitability. Ultimately, the purpose of any such acquisition should be to enhance long-term shareholder value. Presently, there are no ongoing discussions that should be disclosed pursuant to federal or state securities laws.

Supervision and Regulation

The commercial banking business is highly regulated. The following discussion contains a summary of the material aspects of the regulatory framework applicable to bank holding companies and their subsidiaries, and provides certain specific information about the Company. The bank regulatory framework is intended primarily for the protection of depositors, the deposit insurance system, and the banking system, and not for the protection of shareholders or any other group. In addition, certain present or potential activities of the Company and the Bank are subject to various securities and insurance laws and are regulated by the Securities and Exchange Commission and the Tennessee Department of Commerce and Insurance. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material and unpredictable effect on the business of the Company.

General

First McMinnville Corporation The Company is registered as a bank holding company with the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). The Company is subject to comprehensive examination, regulation and supervision by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is required to file annual reports and such additional information as the Federal Reserve Board may require pursuant to the

Bank Holding Company Act with the Federal Reserve Board. The Company is also subject to Tennessee regulations.

The Bank Holding Company Act permits the Federal Reserve Board to approve an application by a bank holding company to acquire a bank located outside the acquirer’s principal state of operations without regard to whether the transaction is prohibited under state law.

The Company is also a bank holding company within the meaning of T.C.A. §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. Effective September 29, 1995, the Tennessee Bank Structure Act of 1974 was amended to, among other things, prohibit (subject to certain exceptions) a bank holding company from acquiring a bank for which the home state is Tennessee (a Tennessee bank) if, upon consummation, the company would directly or indirectly control 30% or more of the total deposits in insured depository institutions in Tennessee. As of June 30, 2005, the Company estimates that it held less than 1% of such deposits. Subject to certain exceptions, the Tennessee Bank Structure Act prohibits a bank holding company from acquiring a bank in Tennessee which has been in operation for less than three years. Tennessee law permits a Tennessee bank to establish branches in any county in Tennessee and national banks can do likewise.

The Company’s common stock is registered under Section 12 of the Exchange Act. As a result, the Company is required to file quarterly, annual and other types of reports with the Securities and Exchange Commission under the Exchange Act. The Company is subject to the information, proxy solicitation, and other requirements and restrictions of the Exchange Act.

The First National Bank of McMinnville. The Company’s subsidiary Bank is subject to comprehensive supervision and examination by the OCC and, to some extent, by other federal agencies. The Bank is chartered under the National Bank Act and it is a member of the Federal Reserve System. All national banks, and all subsidiary banks of a bank holding company, must become and remain insured banks under the Federal Deposit Insurance Act. (See 12 U.S.C. § 1811, et seq.) The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon and limitations on the types of investments that may be made, activities that may be engaged in, and types of services that may be offered. The operations of the Bank 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. In addition to the impact of direct regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.

Strict compliance at all times with state and federal banking laws, as well as other laws, is and will continue to be required. The Bank believes that the experience of its executive management will assist it in its continuing efforts to achieve the requisite level of compliance. Certain provisions of

Tennessee law may be preempted by existing and future federal laws, rules and regulations and no prediction can be made as to the impact of preemption on Tennessee law or the regulation of the Bank thereunder.

Payment of Dividends

The Company is a legal entity separate and distinct from its banking subsidiary. The principal source of cash flow of the Company, including cash flow to pay dividends on its stock, is dividends from the Bank. There are statutory, regulatory and prudential limitations on the payment of dividends by the Bank to the Company, as well as by the Company to its shareholders. The Company declared dividends of $1.75 per share in 2005 and 2004, compared to $1.70 per share in 2003.

Federal law restricts the timing and amount of dividends that may be paid by the Bank. The Bank, as a national bank, is required by federal law to obtain the prior approval of the OCC for the payment of dividends if the total of all dividends declared by the board of directors of the Bank in any year will exceed the total of (i) its net profits (as defined and interpreted by regulation) for that year plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfers to surplus. A national bank also can pay dividends only to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation). The payment of dividends by any financial institution subsidiary may also be affected by other factors, such as the critical requirement of 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, Related Stockholder Matters and Issuer Purchases of Equity Securities,” for additional information on dividends. See also the section of this Report entitled “Capital Adequacy.” Prior regulatory approval must be obtained before declaring any dividends if the amount of the Bank’s capital, and surplus is below certain statutory limits.

If, in the opinion of the applicable federal bank regulatory authority, a depository institution or a holding company is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution or holding company, could include the payment of dividends), such authority may require that such institution or holding company cease and desist from such practice. The federal bank regulatory agencies have indicated that paying dividends that deplete a depository institution’s or holding company’s capital base to an inadequate level would be such an unsafe and unsound banking practice. Moreover, the OCC, the Federal Reserve Board, and the FDIC have issued policy statements which provide that bank holding companies and insured depository institutions generally should only pay dividends out of current operating earnings.

In addition, under the Federal Deposit Insurance Act, an FDIC-insured depository institution may not make any capital distributions (including the payment of dividends) or pay any management fees to its holding company or pay any dividend if it is undercapitalized or if such payment would cause it to become undercapitalized.

Under Tennessee law, the Company is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or if the Company’s total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if the Company were dissolving. It is presently anticipated that the Company will pay a cash dividend in 2005 consistent with past practices. However, the payment of dividends by the Company and the Bank may be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines and debt covenants. See “Capital Adequacy” and “Prompt Corrective Action.” Dividends will be paid only as the board of directors may determine from time to time in accordance with legal requirements and principles of safety and soundness.

Bank Holding Company Regulation

As a bank holding company subject to the Bank Holding Company Act, the Company must obtain prior Federal Reserve Board approval for bank acquisitions and is generally limited to engaging in banking or bank-related activities. The Company must 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. Interstate banking and interstate branching are now permitted.

The Company is subject to various legal restrictions on the extent to which it and any nonbank subsidiary that it might own or form in the future can borrow or otherwise obtain credit from the Bank. For example, the Company and the Bank are 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 any affiliate, including any transactions between the Bank and 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 on the one hand and the Company (and “nonbank” bank holding company) affiliates on the other hand. On October 31, 2002, the Federal Reserve issued a new regulation that became effective on April 1, 2003. The Federal Reserve Board’s“Regulation W” is intended to comprehensively implement sections 23A and 23B of the Federal Reserve Act and to protect insured depository institutions from incurring losses arising from transactions with affiliates.

The regulation unifies and updates staff interpretations issued over many years, and it incorporates several new interpretative proposals. Among other things, Regulation W is supposed to clarify when transactions with an unrelated third party will be attributed to an affiliate. The regulation also addresses new issues arising as a result of the expanded scope of nonbanking activities engaged in

by bank and bank holding companies in recent years and authorized for financial holding companies under the Gramm-Leach-Bliley Act.

The Federal Reserve Board may require that a bank holding 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, a bank holding company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities.

Eligible bank holding companies that elect to become financial holding companies may affiliate with securities firms and insurance companies and engage in activities that are financial in nature generally without the prior approval of the Federal Reserve Board. See “Financial Services Modernization Act.” The Company has not elected to become a financial holding company but believes that it is eligible to do so.

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. (This is discussed in the context of “Cross-Guarantee Liability.”) 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.

Bank holding companies within the meaning of T.C.A. §45-2-1401 of the Tennessee Banking Act are also subject to regulation under that Tennessee Act. As such, a bank holding company and its subsidiaries could be subject to examination by, and could be required to file reports with, the TDFI under specified circumstances.

In late 1995, the Tennessee Bank Structure Act of 1974 was amended to, among other things, prohibit (subject to certain exceptions) a bank holding company from acquiring a bank for which the home state is Tennessee (a Tennessee bank) if, upon consummation, the company would directly or indirectly control 30% or more of the total deposits in insured depository institutions in Tennessee. Based on information published by the FDIC as of June 30, 2005, the Company estimates that it held less than one percent of such deposits. Subject to certain exceptions, the Tennessee Bank Structure Act prohibits a bank holding company from acquiring a bank in Tennessee which has been in operation for less than three years. Tennessee law permits a Tennessee bank to establish branches in any county in Tennessee.

Source of Financial Strength. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to, and to commit resources to support, the Bank. This support may be required at times when, absent such Federal Reserve Board policy, the Company may not be inclined to provide it. In addition, any capital loans by a bank holding company to the Bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Moreover, as a shareholder the Company would probably rank low in recipients in the event that the Bank were liquidated. Depositors of a bank, and the FDIC as their subrogee, would likely be entitled to priority over creditors of the Bank, including the Company, in the event of a liquidation of the Bank.

Cross-Guarantee Liability. Under the Federal Deposit Insurance Act, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution in danger of default. Default is defined generally as the appointment of a conservator or receiver and in danger of default is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The Company and the Bank are subject to these cross-guarantee provisions. As a result, any loss suffered by the FDIC in respect of any of the Bank would likely result in assertion of the cross-guarantee provisions and the assessment of such estimated losses against the Company.

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 deposit concentration limits. The Company and the Bank will have 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.

National Bank Act Regulation

First National Bank is chartered as a national banking association under the banking laws of the United States. As such, the Bank is subject to a myriad of federal and state banking and corporate laws, and to comprehensive supervision, regulation and examination by the OCC, although such regulation and examination is for the protection of the banking system and the deposit insurance fund managed by the FDIC and not for the protection of shareholders or any other investors. The OCC is the Bank’s primary federal regulator. It is intended that the Bank’s deposit accounts will

always be insured up to legally prescribed limits by the FDIC. The Bank files and will continue to be required to file reports with the OCC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to consummating certain transactions, including branching, mergers or acquisitions. A variety of laws serves to limit the amount of dividends payable by the Bank. See “Payment of Dividends.”

The deposits of the Bank are insured to a maximum of $100,000 per depositor, subject to certain aggregation rules that can have the effect of limiting the amount of deposit insurance coverage. The FDIC establishes rates for the payment of premiums by federally insured banks and thrifts for deposit insurance. Separate insurance funds (the Bank Insurance Fund, and the Savings Association Insurance Fund), are maintained for commercial banks and thrifts, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. The Bank’s deposits are insured under the Bank Insurance Fund. The FDIC has adopted a risk-based deposit insurance premium system for all insured depository institutions, including the Bank, which requires that a depository institution pay a premium for deposit insurance on insured deposits depending on its capital levels and risk profile, as determined by its primary federal regulator on a semi-annual basis.

National banking statutes regulate a variety of the banking activities of the Bank including required reserves, permitted investments, loans, mergers and share exchanges, issuance of securities, payment of dividends, and establishment of branches. Under federal law, a national bank is prohibited from lending to any one person, firm or corporation amounts more than a specified percentage of its equity capital accounts, with very limited exceptions. The Bank must obtain the prior approval of the OCC for a variety of matters. These include branching, relocations, mergers, acquisitions, charter amendments, and other matters. State and federal statutes and regulations also relate to many aspects of the Banks’ operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits and chargeable as interest on 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.”

Depositor Preference

The Omnibus Budget Reconciliation Act of 1993 provides that deposits and certain claims for administrative expenses and employee compensation against an insured depositary institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the “liquidation or other resolution” of such an institution by any receiver.

Capital Adequacy

The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. The minimum guideline for the ratio of total capital (Total Capital) to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%, and the minimum ratio of Tier 1 Capital (defined below) to risk-weighted assets is 4%. At least half of the Total

Capital must be composed of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (Tier 1 Capital). The remainder may consist of qualifying subordinated debt, certain types of mandatory convertible securities and perpetual debt, other preferred stock and a limited amount of loan loss reserves.

In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to quarterly average assets, less goodwill and certain other intangible assets (the Leverage Ratio), of 4% for bank holding companies that meet certain specific criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 4%, plus an additional cushion of 100 to 200 basis points. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a tangible Tier 1 Capital leverage ratio (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities.

The Federal Reserve Board, the FDIC and the OCC have adopted rules to incorporate market and interest-rate risk components into their risk-based capital standards and that explicitly identify concentration of credit risk and certain risks arising from non-traditional activities, and the management of such risks, as important factors to consider in assessing an institution’s overall capital adequacy. Under the market risk requirements, capital is allocated to support the amount of market risk related to a financial institution’s ongoing trading activities for banks with relatively large trading activities. Institutions will be able to satisfy this additional requirement, in part, by issuing short-term subordinated debt that qualifies as Tier 3 capital. The Company is not required to make any allocation of capital under these rules.

The Bank is also subject to risk-based and leverage capital requirements similar to those described above adopted by the OCC. The Company believes that the Bank was in compliance with applicable minimum capital requirements as of December 31, 2005.

Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business and in certain circumstances to the appointment of a conservator or receiver. See “Prompt Corrective Action.”

The federal regulators continue to study and to propose changes to the capital requirements applicable to the Company and First National Bank. For example, in 2001 the federal banking regulators issued regulations to establish special minimum capital requirements for equity investments in nonfinancial companies (defined as companies not previously determined to be financial in nature by the federal banking regulators) and the impact of such investments on a financial institution’s Tier 1 capital. These regulations became effective on April 1, 2002. On April

9, 2002, federal banking agencies issued a final rule amending their risk-based capital standards for banks, bank holding companies and savings associations (institutions) to reduce the risk weight applied to claims on, or guaranteed by, qualifying securities firms.

The rule became effective on July 1, 2002, although financial institutions had the opportunity to being applying it upon adoption. The Company does not anticipate that these changes will adversely affect the Company or the Bank.

As noted in the Company’s Annual Report on Form 10-K for fiscal 2003, some of the developments related to capital are international in scope. We noted that on January 16, 2001, the Basel Committee proposed its second draft of a new capital adequacy framework. The new capital framework would consist of minimum capital requirements, a supervisory review process and the effective use of market discipline. The Basel Committee has now issued its revised “Framework” and that document is being incorporated into federal capital adequacy standards. The supervisory review aspect of the Basel framework would seek to ensure that a bank’s capital position is consistent with its overall risk profile and strategy. The supervisory review process would also encourage early supervisory intervention when a bank’s capital position deteriorates. The third aspect of the new framework, market discipline, would call for detailed disclosure of a bank’s capital adequacy in order to encourage high disclosure standards and to enhance the role of market participants in encouraging banks to hold adequate capital. Banks must also disclose how they evaluate their own capital adequacy. The Company does not anticipate that these changes will adversely affect the Company or the Bank. The Company believes that is capital position is adequate and that it meets all federal capital standards applicable to it and to the Bank. See “Capital Adequacy Developments.”

Please refer to Items 7 and 8 of this Annual Report on Form 10-K, especially Note 12 to the Consolidated Financial Statements, for additional information about the Company’s and First National Bank’s respective capital positions.

Prompt Corrective Action

The Federal Deposit Insurance Act requires, among other things, that the federal banking regulators take prompt corrective action with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. Under the Federal Deposit Insurance Act, insured depository institutions are divided into five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under applicable regulations, an institution is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a Tier 1 Capital ratio of at least 6% and a Total Capital ratio of at least 10% and is not subject to a directive, order or written agreement to meet and maintain specific capital levels. An institution is defined to be adequately capitalized if it meets all of its minimum capital requirements as described above. An institution will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it has a Total Risk-Based Capital ratio of less than 6%, a Tier 1 Risk-Based Capital ratio of less than 3% or a Leverage Ratio of less than 3% and critically undercapitalized if it fails to maintain a level of tangible equity equal to at least 2% of total

assets. An 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.

The Federal Deposit Insurance Act generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are 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. An insured 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, for the plan to be accepted by the applicable federal regulatory authority. 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, generally within ninety days of the date on which they become critically undercapitalized.

The Company believes that the Bank, as of December 31, 2005, had sufficient capital to qualify as “well capitalized” under applicable regulatory capital requirements. Please refer to Items 7 and 8 of this Annual Report on Form 10-K, especially Note 12 to the Consolidated Financial Statements, for additional information about the Company’s and First National Bank’s respective capital positions.

General Regulatory Considerations

Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), all insured institutions must undergo regular on-site examination by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC and the appropriate agency (and state supervisor when applicable). FDICIA also directs the FDIC to develop with other appropriate agencies a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution. FDICIA also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies

relating, among other things, to: (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset quality.

In response to perceived needs in financial institution regulation, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989. That statute, called FIRREA, provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC insured depository institution in danger of default. FIRREA provides that certain types of persons affiliated with financial institutions can be fined by the federal regulatory agency having jurisdiction over a depository institution with federal deposit insurance (such as the Bank) could be fined up to $1 million per day for each violation of certain regulations related (primarily) to lending to and transactions with executive officers, directors, and principal shareholders, including the interests of these individuals. Other violations may result in civil money penalties of $5,000 to $25,000 per day or in criminal fines and penalties. In addition, the FDIC has been granted enhanced authority to withdraw or to suspend deposit insurance in certain cases. The banking regulators have not been reluctant to use the new enforcement authorities provided under FIRREA. Further, regulators have broad power to issue cease and desist orders that may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts or take other actions as determined by the ordering agency to be appropriate.

The Bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal stockholders and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

The Community Reinvestment Act

The federal law known as the Community Reinvestment Act requires that each insured depository institution shall be evaluated by its primary federal regulator with respect to its record in meeting the credit needs of its local community, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.

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

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.

Capital Adequacy Developments

In June of 2004, the Basel Committee on Banking Supervision released its document entitled “International Convergence of Capital Measurement and Capital Standards: A Revised Framework.” This framework is customarily referred to as “Basel II.” It represents the work of the Basel Committee, in which American bank and thrift regulatory agencies have actively participated. The goal of Basel II is to improve the consistency of capital regulations internationally, to make regulatory capital more risk sensitive, and to promote enhanced risk-management practices among large, internationally active banking organizations.

Based on the issuance by the Basel Committee, the federal agencies have begun to develop proposed changes in their existing risk-based capital adequacy regulations. The regulators anticipate that a small number of large, internationally active U.S. banking institutions would actually be mandated to apply Basel II at this time. Those organizations would use only the most advanced approaches for determining their risk-based capital requirements. Other American financial institutions would have the option to use, or not use, the advanced approaches. Notwithstanding Basel I, American banking institutions continue to be subject to the leverage capital ratio requirement under existing regulations. The “Prompt Corrective Action” requirements remain in effect as well. See “Prompt Corrective Action.”

The federal regulators have announced that they have developed a comprehensive plan to incorporate the advanced risk and capital measurement methodologies of Basel II into their regulations and supervisory guidance applicable to U.S. Banks. This plan is expected to ensure that U.S. implementation efforts are consistent with the expectations of Basel II.

In November of 2004, the federal banking agencies began a survey concerning Basel II. The survey is intended to provide the agencies a better understanding of how the implementation of a more risk-sensitive approach for regulatory capital standards might affect minimum required capital at the industry, institution, and portfolio level. The survey is also intended to provide insight, based on detailed “loss event data,” into various implications of the proposed Basel II standards that should assist the regulators in evaluating operational risk.

The Agencies anticipate that a notice of proposed rulemaking on possible revisions to risk-based capital adequacy regulations relating to Basel II will be published in mid-2005. Implementation is expected in the second quarter of 2006. Possible changes to capital regulations for U.S. banking organizations not subject to the Basel II-based regulations are to be considered and addressed in this same general time.

Basel II is not expected to have any immediate impact on the Company or on First National Bank. However, any developments related to capital adequacy can eventually have an impact on the Company and the Bank.

Financial Services Modernization Act

The Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) became law on November 12, 1999. 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. The term “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. The Financial Services Modernization Act is also known as the “Gramm-Leach-Bliley Act of 1999.”

The Company does 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 may find that it is 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 the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company or the Bank. The Company cannot predict the potential effect that the Act will have on its business and operations, although the Company expects that the general effect of the Act will be to increase competition, and possibly to encourage further consolidation, in the financial services industry generally.

USA Patriot Act

After the terrorist attacks of September 11, 2001, Congress enacted broad anti-terrorism legislation called the “United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,” which is generally known as the “USA Patriot Act.” Title III of the USA Patriot Act requires financial institutions, including the Company and First National Bank, to help prevent, detect and prosecute international money laundering and the financing of terrorism. The Department of the Treasury has adopted additional requirements to further implement Title III.

The law is intended to enhance the powers of the federal government and law enforcement organizations to combat terrorism, organized crime and money laundering. The USA Patriot Act materially amended and expanded the application of the existing Bank Secrecy Act. It provided enhanced measures regarding customer identity, new suspicious activity reporting rules and enhanced anti-money laundering programs. Under the Act, each financial institution is required to establish and maintain anti-money laundering compliance and due diligence programs, which include, at a minimum, the development of internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs. In addition, the USA Patriot Act requires federal bank regulatory agencies to consider the record of a bank or bank holding company in combating money laundering activities in their evaluation of bank and bank holding company merger or acquisition transactions.

The federal Treasury Department issued regulations under the USA Patriot Act. The regulations state that a depository institution will be deemed in compliance with the Act provided it continues to comply with the current Bank Secrecy Act regulations. Under these regulations, a mechanism has been established for law enforcement to communicate names of suspected terrorists and money launderers to financial institutions, in return for securing the ability to promptly locate accounts and transactions involving those suspects. Financial institutions receiving names of suspects must search their account and transaction records for potential matches and report positive results to the Treasurer’s Financial Crimes Enforcement Network (“FinCEN”). Each financial institution must designate a point of contact to receive information requests. These regulations outline how financial institutions can share information concerning suspected terrorist and money laundering activity with other financial institutions under the protection from the statutory safe harbor from liability, provided each financial institution notifies FinCEN of its intent to share information.

The Department of the Treasury has also adopted regulations intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Financial institutions are required to take reasonable steps to ensure that they are not providing banking services directly or indirectly to foreign shell banks.

The Company and the Bank believe that their systems and procedures accomplish compliance with these requirements. This law and the related regulations impose come continuing costs on the Company and the Bank but they believe that the cost is not likely to be material to them.

Competition

The commercial banking business is highly competitive and the Company competes 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 Company 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, may of the Company’s competitors are affiliated with large bank holding company systems that 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 or the Bank.

The principal geographic area of the Company’s operations encompasses Warren County, Tennessee, and surrounding areas of Tennessee. In this area, there are many commercial banks and other financial institutions operating nineteen offices and branches (exclusive of free-standing ATM’s) and holding an aggregate of approximately $603 million in deposits ($465 million held by six commercial banks) as of approximately June 30, 2005, of which approximately 39.65% (51.42% of deposits held by commercial banks) are held by the Bank (based on data published by the FDIC). 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 national and regional financial institutions, as well as with a variety of other banks, financial institutions, and financial services companies.

To compete with major financial institutions in its service area, the Company relies, in part, on specialized services, on a high level of personalized service and intensive customer-oriented services, local promotional activity, and personal contacts with customers by its officers, directors, and employees. For customers whose loan demands exceed the Bank’s lending limit, the Bank seeks to arrange for loans on a participation basis with correspondent banks. The Bank also assists customers requiring services not offered by the Bank in obtaining those services from its correspondent banks or other sources. Due to the intense competition in the financial industry, the

Company makes no representation that its competitive position has remained constant, nor can it predict whether its position will change in the future.

Sources and Availability of Funds

Specific reference is made to the Management’s Discussion and Analysis of Financial Condition and Results of Operation section contained in Item 7 of this Report.

Personnel

At year-end 2005, the Bank employed a staff of sixty-two full-time and eleven part-time persons, not including contract labor for certain services. None of these employees is covered by a collective-bargaining agreement. Group life, health, dental, and disability insurance are maintained for or made available to employees by the 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 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 and non-interest income. 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 Bank’s earnings. These rates are highly sensitive to many factors that are beyond the control of the 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 Bank cannot be predicted by the Bank or the Company.

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. An important function of the Federal Reserve System is to regulate the national money supply. The Federal Reserve Board implements national monetary policies (with objectives such as addressing inflationary and recessionary pressures) 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. As described in Management’s Discussion and Analysis of Financial Condition and Results of Operation, changes in interest rates effected by the Federal Reserve Board can have a material impact on the Company and the Bank. For example, the impact can be to narrow the Bank’s net interest margin (the difference between what the Bank pays for deposits and what the Bank

charges for loans), thus adversely affecting earnings. The nature and impact on the Company of any future changes in monetary and fiscal policies cannot be predicted.

The Company and the Bank are also affected by the supervisory activities and regulatory policies of various bank regulatory authorities, including the Office of the Comptroller of the Currency, the FDIC, and the Federal Reserve Board. Regulatory policies, examinations and initiatives impose costs on both the Company and the Bank and influence their governance and operations.

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.”

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 Company’s activities. However, such laws may from time to time affect the Company 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.

Dependence Upon a Single Customer

The Company’s principal customers are generally located in the Southern Middle Tennessee area with a concentration in Warren County, Tennessee. The Company is not dependent upon a single customer or a very few customers. However, a substantial percentage of the Company’s total loans is secured by the assets of various businesses engaged in the nursery business, and by real estate, most of which property is located in or around Warren County, Tennessee. Accordingly, the Company has a significant concentration of credit that is dependent, under certain circumstances, on the continuing strength of the local nursery and real estate markets.

Line of Business

The Company’s principal business is the ownership of the stock of the First National Bank of McMinnville. The Bank operates under the National Bank Act and the Federal Deposit Insurance

Act in the area of finance. The Company and the Bank derived 100% of their consolidated total operating income from the commercial banking business in 2005.

Factors That May Affect Future Results of Operation

In addition to the other information contained in this Annual Report on Form 10-K, the following risks may affect the Company. If any of these risks occurs, the Company’s 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. Interest rate fluctuations can have a decidedly negative effect on First National Bank’s (and thus the Company’s) profitability. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

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, with a concentration in the local nursery industry. 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 Bank’s products and services, which in turn can be expected to have a negative, and perhaps material adverse, effect on results of operations of both the Bank and the Company.

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 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 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. 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 the Bank’s 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.

Recent Developments and Future Legislation

The following discussion contains a summary of recent legislative developments that can be expected to affect the Company’s and the Bank’s operations.

The Sarbanes-Oxley Act of 2002. President Bush signed the Sarbanes-Oxley Act of 2002 into law on July 30, 2002. Regulations were issued by the SEC in connection with the new law during both 2002 and 2003, and additional regulations are anticipated. This important law has far reaching impact on corporate affairs, particularly for companies that are listed on public securities exchanges such as the New York Stock Exchange and the NASDAQ. It directly affects how independent public accountants and companies must interact with each other. It limits non-audit services that may be provided by public companies’ independent accountants and the companies that they audit with a view to maintaining or imposing independence on public companies and their independent auditors. It creates an oversight board for all certified public accounting firms that practice before the Securities and Exchange Commission (“SEC”). The Sarbanes-Oxley Act also seeks to enhance both the quality and reliability of financial statements, as well as improving corporate disclosure and the

timing of material disclosures. Public companies are also required to improve corporate governance, typically by establishing or reorganizing audit committees to assure audit committee independence and oversight. The law provides for restrictions on loans to officers and directors of public companies, although it appears that most bank loans to such persons are exempt so long as made pursuant to already existing federal restrictions on transactions between financial institutions and their insiders. Finally, the Sarbanes-Oxley Act imposes criminal penalties for certain violations. Obviously, this is a very broad brush and limited description of a very detailed and important new statute.

As noted previously, new laws and regulations are commonly prescribed by governmental agencies that affect the Bank. Other well known recent development was the enactment of the Financial Services Modernization Act, which is having an extensive impact on financial services in the United States. Additional 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 three years by out-of-state banks and bank holding companies. Moreover, the limitation on acquiring banks in Tennessee that have been in existence less than five years has been changed to three years. 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 certain qualifying financial institutions.

Various proposals related to so-called “predatory lending” continue to be advanced by regulators, legislators, and consumer groups. The ultimate form or impact of any actual legislation or regulation cannot be accurately predicted.

The effects of certain recent changes accounting standards are addressed in Note 1 to the Consolidated Financial Statements (Item 8 of the Annual Report on Form 10-K).

The foregoing list is not intended to be exclusive or exhaustive. Other legislative and regulatory proposals that affect commercial banks and their competitors, and regarding changes in banking and the regulation of banks, thrifts and other financial institutions and bank and bank holding company powers, are being considered by the executive branch of the Federal government, Congress and various state governments, including Tennessee. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. It cannot be reliably predicted whether any of these proposals will be adopted, and, if adopted, how these proposals will affect the Bank and the Company.

Selected Financial Data and Statistical Information

Certain selected financial data and certain statistical data are set forth as part of Appendix F immediately following the Consolidated Financial Statements in Appendix F. This information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Executive Officers of First McMinnville Corporation

The following are the Executive Officers of the Company and/or First National Bank (the “Bank”). Unless otherwise indicated, these officers have served in the indicated capacities during the last five years through the date hereof, except that Mr. Jacobs was elected to serve as Chairman of the Company and the Bank in January of 2000.


Name	Age		Office and Business Experience

Charles C. Jacobs		67	Chief Executive Officer, First McMinnville Corporation, January 1994 - present; Chairman, First McMinnville Corporation, 2000 - present; President of First McMinnville Corporation 2004 - present; 1994 - 2001; and Chairman and Chief Executive Officer, First National Bank, January 1994 - present; President, First National Bank, 2004 - Present; 1988 - 2001. Mr. Jacobs has served as a Director of First McMinnville Corporation and First National Bank since 1985.

P. D. Bogle		59	Senior Vice President, First McMinnville Corporation, First National Bank.

Larry B. Foster		46	Senior Vice President, First McMinnville Corporation, First National Bank.

David W. Marttala		44	Senior Vice President, First McMinnville Corporation, First National Bank.

Kenny D. Neal		55	Senior Vice President, First McMinnville Corporation, First National Bank, Chief Accounting and Financial Officer of both the Bank and the Company.

Cindy Swann		54	Internal Auditor and Compliance Officer for First McMinnville Corporation and First National Bank.

C. P. Whisenhunt		62	Senior Vice President, First McMinnville Corporation, First National Bank.

Dwayne Woods		43	Senior Vice President, First McMinnville Corporation, First National Bank.

Officers are generally elected annually by, and serve at the pleasure of, the board of directors. The Company has no employment contract with any executive officer.

Recent Developments and Future Legislation

The following discussion contains a summary of recent legislative developments that can be expected to affect First McMinnville Corporation’s operations.

The Sarbanes-Oxley Act of 2002. President Bush signed the Sarbanes-Oxley Act of 2002 into law on July 30, 2002. Regulations have been issued by the SEC in connection with the new law on various occasions since 2002, and additional regulations may be issued in the future. This important law has far reaching impact on corporate affairs, particularly for companies that are listed on public securities exchanges such as the New York Stock Exchange and the NASDAQ. It directly affects how independent public accountants and companies must interact with each other. It limits non-audit services that may be provided by public companies’ independent accountants and the companies that they audit with a view to maintaining or imposing independence on public companies and their independent auditors. It creates an oversight board for all certified public accounting firms that practice before the Securities and Exchange Commission (“SEC”). The Sarbanes-Oxley Act also seeks to enhance both the quality and reliability of financial statements, as well as improving corporate disclosure and the timing of material disclosures. Public companies are also required to improve corporate governance, typically by establishing or reorganizing audit committees to assure audit committee independence and oversight. The law provides for restrictions on loans to officers and directors of public companies, although it appears that most bank loans to such persons are exempt so long as made pursuant to already existing federal restrictions on transactions between financial institutions and their insiders. Finally, the Sarbanes-Oxley Act imposes criminal penalties for certain violations. Obviously, this is a very broad brush and limited description of a very detailed and important new statute.

The impact of new accounting pronouncements are addressed Note 1 to the Company’s Consolidated Financial Statements.

Recently, the deposit limits for FDIC insurance on certain types of accounts, especially individual retirement accounts, were raised to $250,000 from $100,000.

The foregoing list is not intended to be exclusive or exhaustive. Other legislative and regulatory proposals that affect bank holding companies, commercial banks and their competitors, and regarding changes in banking and the regulation of banks, thrifts and other financial institutions and bank and bank holding company powers, are being considered by the executive branch of the Federal government, Congress and various state governments, including Tennessee. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. It cannot be reliably predicted whether any of these proposals will be adopted, and, if adopted, how these proposals will affect the Company.


ITEM 1A.		RISK FACTORS

The following are certain risks that management believes are specific to our business. The following discussion should not be viewed as an all inclusive list or to be prioritized in any particular order. The following discussion is intended to focus on risks that we believe relate to our business as the bank holding company of a community bank in the McMinnville, Warren County, Tennessee market area (the “Market Area”). Each risk factor stands on its own and we have not tried to rank or prioritize them in any way. Also, we have not tried to list every possible risk that can affect an investment but only those risks that we believe are specifically related to our Company and First National Bank at this time. Moreover, we have not tried to list every risk that attends an investment or every possible risk that could be applicable to a financial services or commercial banking business like the one conducted by First McMinnville Corporation through the Bank.

Future loan losses may exceed our allowance for loan losses.

We are subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms. A downturn in the economy or the real estate market in our market areas, or a rapid change in interest rates, could have a negative effect on collateral values and borrowers’ ability to repay. Any significant deterioration in local, regional, national or international economic conditions could result in losses to First National Bank (“our Bank”) in excess of loan loss allowances. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual, thereby reducing interest income. To the extent loan charge-offs exceed our financial models, increased amounts charged to the provision for loan losses would reduce income. Please refer to the Company’s Consolidated Financial Statements for more information about the Bank’s loans, deposits, and other financial information.

Rapidly changing interest rate environments could reduce our net interest margin, net interest income, fee income and net income.

Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a large part of our net income. Interest rates are key components of our net interest margin and subject to many factors beyond the control of management. As interest rates change, net interest income is affected. In general, we plan and budget to anticipate interest rate fluctuations. However, rapid changes or volatility in interest rates in the future could result in interest expense increasing faster than interest income because of mismatches in financial instrument maturities. Further, substantially higher interest rates generally reduce loan demand and could be expected to lead to slower loan growth and increases in troubled loans. Decreases or increases in interest rates could have a negative effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

Economic conditions in Warren County can adversely affect the Company and First National Bank.

We are committed to providing financial services in Warren County, Tennessee, and in surrounding areas. Warren County has experienced plant closings in recent years that have had a significant and negative impact on First National Bank and, therefore, on the Company. The Company is actively involved in attempting to attract new business to Warren County. And, the Bank is actively expanding its market focus to other geographic areas, although such diversification will not necessarily be significant in total volume or income due to regulatory and financial constraints related to any such expansion.

Slower than anticipated growth in new product and service offerings could result in reduced net income.

We rely substantially on providing cost-effective, user-friendly products and services have placed great emphasis on expanding our branch network and product offerings in strategic new locations. Executing this strategy carries risks of slower than anticipated growth both in new branches and new products. New branches and products require a significant investment of both capital and staff. Lower than expected loan and deposit growth in new investments can decrease anticipated revenues and net income generated by those investments, and opening new branches and introducing new products could result in more additional expenses than anticipated and divert resources from current core operations.

The shares of our common stock are not listed or traded on any recognized or established securities market, thus potentially reducing the marketability of the stock.

Our shares are not listed or traded over-the-counter or on any other established securities market. Most transactions in our common stock are privately negotiated trades, and the shares are very thinly traded. These factors can reduce the marketability of our shares and this lack of obvious liquidity can produce downward pressure on the stock price. The Company repurchases some shares of our common stock, but there can be no assurance that the Company would have the interest or funding to purchase every share that might be offered to it, thereby (potentially) further restricting marketability.

The financial services industry is very competitive in general and it is extremely competitive in the Market Area.

In general, we need to attract stable deposits at the lowest possible average cost. We must then lend or invest those deposits at a profit. We face competition in attracting and retaining deposits, making loans, and providing other financial services throughout our market area. In our Market Area, our competitors include other community banks, larger banking institutions, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses. Many of these competitors have substantially greater resources than we have and some may operate with significantly less regulatory

expense or restriction. Banks and other financial institutions that do not have offices in our market area also call upon potential customers, thus further increasing competition.

We have a concentration of our assets in commercial real estate in the Warren County Area.

Our principal customers are generally located in the Warren County and Southern Middle Tennessee area with a concentration in Warren County, Tennessee. A substantial percentage of our loans is secured by real estate, most of which property is located in the Market Area. A downturn or slow down in the market for commercial real estate could significantly and negatively affect the quality of our assets and reduce our anticipated earnings.

Reputational risk is inherent in the financial services business, especially in community banking.

We are dependent on maintaining public respect and trust. It is also important to the Company to demonstrate consistently our commitment to our communities, and to earn our reputation as a trustworthy, community oriented financial institution. Our ability to conduct and grow our businesses, and to obtain and retain customers, is extremely dependent upon external perceptions of our business practices and our financial stability. Our reputation is, therefore, a key asset for us. Our reputation is affected principally by our own practices and how those practices are perceived and understood by others. Derogatory press reports or negative perceptions regarding the practices of our competitors, or the commercial banking industry, also may adversely affect the Company’s and First National Bank’s reputations. In addition, adverse perceptions relating to parties with whom we have important relationships may adversely impact our reputation. Damage to our reputation could hinder our ability to access the capital markets, could hamper our ability to attract new customers and retain existing ones, and could undermine our ability to attract and retain talented employees, among other things. Adverse impacts on our reputation, or the reputation of our industry, may also result in greater regulatory and/or legislative scrutiny, which may lead to laws or regulations that change or constrain our business or operations. Events that result in damage to our reputation also may increase our litigation risk. As with all other risks, we actively devote significant resources to safeguard our reputation. Our executive management is charged with monitoring and safeguarding the reputation of both the Company and our Bank.

An inability to hire or retain certain key professionals, management and staff could adversely affect our revenues and net income.

We rely on key personnel to manage and operate our business, including major revenue generating functions such as our loan and deposit portfolios. The loss of key staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively effect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income.

We are subject to extensive regulatory requirements and restrictions.

Compliance with state and federal banking laws have and will continue to have a material effect on the business and operations of the Company and our Bank. The Company’s and the Bank’s future operation will at all times be subject to state and federal banking laws, rules, regulations and procedures. Consistent with the public policy inherent in those laws to protect the financial stability of the banking system, and consumer and commercial confidence in that system, the Company and the Bank will be required to adhere strictly to all such laws, rules, regulations, and procedures. Depository financial institutions in general, and commercial banks in particular (including our Bank), continue to be heavily regulated as to both the types and quality of the businesses in which they may engage. Although these regulations impose costs on these institutions, including the Company, they should not be assumed to be a protection for any particular shareholder or for shareholders as a group. These regulations may change rapidly and unpredictably. See “Item 1 — Supervision and Regulation.”

The Company’s charter and bylaws contain some “antitakeover” provisions.

The charter and the bylaws of the Company contain certain provisions that may deter an attempt to change or gain control of the Company. As a result, the shareholders of the Company may be deprived of opportunities to sell some or all of their shares at prices that represent a premium over market prices. In addition, the Company has adopted a Shareholders’ Rights Agreement that could have a deterrent impact. See Item 5 — “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” Item 1 — “Supervision and Regulation,” Exhibit 3(i) (Charter of First McMinnville Corporation), and Exhibit 3(ii) (Bylaws of First McMinnville Corporation).

Our charter and bylaws govern voting rights.

The Company’s board of directors is elected by a plurality of a quorum of the voting shares outstanding from time to time. On routine matters, an item of business will generally be adopted if more shares are voted in favor of the item than against it, assuming the existence of a quorum. For non-routine matters, such as mergers, share exchanges, and comparable transactions, the affirmative vote of a majority of the outstanding shares of common stock is the minimum level required by law.

Subject to the Control Share Act provisions of the Company’s bylaws, the holders of common stock are entitled to one vote per share on all matters presented for a shareholder vote. Cumulative voting for the election of members of the board of directors is not authorized. (That type of voting allows shareholders to cumulate their votes in electing of members of the board of directors.) Accordingly, no one shareholder should expect to be able to control the Company or to be able to elect one or more directors.

The Company’s bylaws provide that the Company shall be subject to the Tennessee Control Share Acquisition Act, T.C.A. §§48-103-301, et seq., (the “Control Share Act”) as to the ability of a shareholder or “group” to vote more than 10% of the Company’s common stock. (A “group” is,

essentially, two or more persons or entities acting in concert, in alliance, or tacitly towards a common goal — typically, being the goal of taking control of the board of directors — or certain persons under common control.) This means that a shareholder or group would have to obtain the approval of the shareholders as described in the Control Share Act in order to be permitted to vote the shares in excess of 10% of the Company’s issued and outstanding shares. (Reference must be made to the Control Share Act itself for a complete discussion of its application.)

As a bank holding company, our Company is required to serve as a “source of strength” to First National Bank and our ownership and advances to Bank will be subject to a number of priorities.

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. Because of this policy, the Company might be required to make investments in the Bank or take other actions to support the Bank that might not be in the shareholders’ interest. If we fail to do so, the Federal Reserve Board may deem that failure to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board’s regulations, or both. In addition, we are subject to both the “cross-guarantee” and “depositor preference” policies of the federal banking regulators, as summarized in the section entitled “Supervision and Regulation” in Item 1 of this Annual Report on Form 10-K.

There are legal restrictions on the Company’s and the Bank’s ability to pay dividends.

The holders of common stock are entitled to receive, pro rata, such dividends and other distributions as and when declared by the Company’s board of directors out of the assets and funds legally available therefor. The Bank may legally declare dividends only from its undivided profits account so long as its reserve against deposits is not or will not be impaired beyond certain prescribed limits. Even assuming the availability of net or accumulated earnings (if any), and any assumed capacity to maintain capital at levels required by governmental regulations, the Bank may choose to retain all earnings for the operation of the Bank. Making or retaining an investment in the Bank common stock may be inappropriate for any investor who relies on or needs dividend income.

There are certain limitations under federal law on the payment of dividends by banks and under state law on the payment of dividends by bank holding companies. See Item 1 — “Supervision and Regulation — Payment of Dividends” and Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividends.”

Our shares are not insured by the FDIC.

The shares of the Company’s common stock are not deposits and they are not insured by the FDIC or by any other agency, person, or entity.

Other Risk Factors

Other risks may exist or develop and the above matters are not intended to be a comprehensive or exclusive list.


ITEM 1B.		UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments from the Securities and Exchange Commission.


ITEM 2.		PROPERTIES.

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 four 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. The Bank provides a small amount of office space to its subsidiaries.


Primary Purpose	Type of Ownership	Property Location

Main Office of the Bank	Owned	200 East Main Street McMinnville, Tennessee

Viola Branch	Owned	3 Lynn Street McMinnville, Tennessee

Sparta Street Branch	Owned	1408 Sparta Street McMinnville, Tennessee

Smithville Highway Branch	Owned	917 Smithville Highway McMinnville, Tennessee

Morrison Branch	Building — Owned Land — Leased	9970 Manchester Highway McMinnville, Tennessee

There are no material encumbrances on any of the properties owned by the Company or the Bank. Additional information relating to properties is set forth in Note 5 to the Notes to the Consolidated Financial Statements, which are incorporated herein by reference pursuant to Item 8 of this Annual Report on Form 10-K.


ITEM 3.		LEGAL PROCEEDINGS.

In the ordinary course of business, the Company and its subsidiaries may be named from time to time as defendants in or parties to pending and threatened legal actions and proceedings. There were no material legal proceedings pending at December 31, 2005, against the Company or the Bank other than ordinary routine litigation incidental to their respective businesses, to which the Company or the 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 or the 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 financial position or results of operations.

Additionally, the Company, and certain of its direct and indirect subsidiaries which are regulated by one or more federal and state regulatory authorities, are the subject of regularly conducted and special examinations, reviews and investigations performed by such regulatory authorities and by law enforcement agencies. The Company and/or the Bank may occasionally have disagreements with regulatory authorities and law enforcement agencies resulting from these investigations, examinations and reviews.


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 2005.

PART II


ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

(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 each quarter of fiscal 2005 and 2004. During 2005 the Company redeemed 12,378 shares of its Common Stock with a view toward providing some liquidity in the stock. Customarily, the Company will pay the book value (as calculated by the Company) per share as of the most recent month-end to redeem shares. 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. Bid price information for the Company’s common stock is not available. Certain of the transactions involved, or may have involved, the Company or its principals.


Calendar Quarter	Common Stock

2005

First Quarter	$	80.00	$	48.75

Second Quarter		58.00		49.47

Third Quarter		68.00		50.00

Fourth Quarter		52.00		50.45

2004

First Quarter	$	60.00	$	46.26

Second Quarter		70.00		47.41

Third Quarter		78.00		48.01

Fourth Quarter		68.00		48.51

The last trade known to management prior to March 15, 2006, a convenient cut-off date for the preparation of this Annual Report, occurred at an estimated $53.69 per share for 2,000 shares on March 6, 2006. Because there are so few trades in the Company’s Common Stock, and 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’s securities consist of its common voting stock, no par value, which is the Company’s only class of securities authorized or outstanding. As of March 14, 2006, the Company estimates that it has approximately 596 holders of its common stock and 1,030,771 shares outstanding. In its charter, the Company is authorized to issue 5,000,000 shares of its no par common stock. No shares are reserved for issuance except with respect to the 1997 First McMinnville Corporation Stock Option Plan (the “Stock Option Plan”) and the Rights Agreement described in “Shareholders Rights Agreement.” The number of shares reserved for the Stock Option Plan is 88,665 shares. The number

of shares reserved for the Rights Agreement cannot be accurately calculated but could be as high as 90% of the number of shares of the Company outstanding on the Distribution Date.

Subject to certain limitations specified in this report, each such share is entitled to one vote on all matters. The presence in person or by proxy of at least a majority of the total number of outstanding shares of the common stock entitled to vote is necessary to constitute a quorum at annual and other meetings of the shareholders. A share, once represented for any purpose at a meeting, is deemed present for purposes of determining a quorum for that meeting (unless the meeting is adjourned and a new record date is set for the adjourned meeting and as may be determined by a court in certain specified circumstances), even if the holder of the share abstains from voting with respect to any matter brought before the said meeting. There is no cumulative voting. The Company’s common stock does not carry preemptive rights. A proxy must be dated not more than eleven months before the meeting date. 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. See “Business Combinations” and “Shareholders Rights Agreement,” set forth elsewhere in this report.

The Company’s common stock is registered under Section 12 of the Securities Exchange Act and the Company files periodic and other reports with the United States Securities and Exchange Commission (the “SEC”). Under the Securities Exchange Act, the Company files annual, quarterly and other types of reports, and its common shares are subject to all of the requirements of the Securities Exchange Act.

Classified Board of Directors

The business and affairs of the Company are to be managed by the Board of Directors. Directors must be shareholders of the Company and of legal age. The Company’s by laws provide that the Board shall generally consist of not fewer than five and not more than twenty-five members. Within these parameters, the actual number of directors is to be set by resolution of a majority of the entire Board. The number of directors can be increased by the vote of the Board or the Shareholders and may, under certain circumstances, be decreased by them to the extent of unfilled vacancies. The Board can elect new members to fill vacancies, unless such vacancies are created by removal of one or more directors. Directors are required by the bylaws to retire not later than the first day of the month following their 75^th birthdays.

The Company’s board of directors is divided into three classes, with each class to be as nearly equal in number as possible. The directors in each class serve three-year terms of office. The effect of the Company having a classified board of directors is that only approximately one third of the members of the Company’s board of directors are elected each year, which effectively requires two annual meetings for the Company stockholders to change a majority of the members of the Company’s board of directors.

The purpose of dividing the Company’s board of directors into classes is to facilitate continuity and stability of leadership of the Company by ensuring that experienced personnel familiar with the Company will be represented on the Company’s board of directors at all times, and to permit the

Company’s management to plan for the future for a reasonable time. However, by potentially delaying the time within which an acquirer could obtain working control of the Company’s board of directors, this provision may discourage some potential share exchanges, tender offers, or takeover attempts.

Directors are elected by a plurality of the total votes cast by all stockholders. With cumulative voting, it may be possible for minority stockholders to obtain representation on the board of directors. Without cumulative voting, the holders of more than 50% of the shares of the Company common stock generally have the ability to elect 100% of the directors. As a result, the holders of the remaining shares of Company common stock effectively may not be able to elect any person to the Company’s board of directors. The absence of cumulative voting makes it more difficult for a Company stockholder who acquires less than a majority of the shares of the Company common stock to obtain representation on the Company’s board of directors.

Director Removal and Vacancies

The Company’s charter provides that: (1) a director may be removed by the entire Board of Directors or any number of directors can be removed by the Shareholders with or without cause by a majority vote of the shares represented and entitled to vote at the particular meeting. Directors may also be removed by a vote of the Board at a Board meeting, but only “for cause” by a majority of the entire Board of Directors; and (2) vacancies on the Company’s board of directors may be filled only by the Company’s board of directors or, upon removal of one or more directors by the Shareholders at a meeting of Shareholders. These provisions could have the effect of impeding efforts to gain control of the Company’s board of directors by anyone who obtains a controlling interest in the Company’s common stock. The term of a director appointed to fill a vacancy expires at the next meeting of stockholders at which that Class of directors is elected.

Director and Officer Indemnification and Limitation on Liability

Under the Tennessee Business Corporation Act, a corporation may indemnify any director against liability if the director:

•		Conducted himself or herself in good faith;

•		Reasonably believed, in the case of conduct in his or her official capacity with the corporation, that his or her conduct was in the best interests of the corporation;

•		Reasonably believed, in all other cases, that his or her conduct was at least not opposed to the corporation’s best interests; and

•		In the case of any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful.

The Company’s charter and bylaws provide for indemnification of its directors, officers, employees and agents against liabilities and expenses incurred in legal proceedings concerning the Company, to the fullest extent permitted under Tennessee corporate law. Indemnification will only apply to persons who act in good faith, in a manner he or she reasonably believed to be in the best interest of the Company, without willful misconduct or recklessness.

The present directors’ and officers’ liability insurance policy is expected to cover the typical errors and omissions liability associated with the activities of the Company and the Bank. The provisions of the insurance policy might not indemnify any of the Company’s or Bank’s officers and directors against liability arising under the Securities Act.

The Company’s charter eliminates a director’s liability to the Company or its shareholders for monetary damages to the maximum extent permitted by law. Section 48-18-301 of the Tennessee Business Corporation Act provides that a director shall not be liable for any action, or failure to take action if he or she discharges his or her duties:

•		In good faith;

•		With the care of an ordinarily prudent person in a like position under similar circumstances; and

•		In a manner the director reasonably believes to be in the best interests of the corporation.

In discharging her or his duties, a director may rely on the information, opinions, reports, or statements, including financial statements, if prepared or presented by officers or employees of the corporation whom the director reasonably believes to be reliable. The director may also rely on such information prepared or presented by legal counsel, public accountants or other persons as to matters that the director reasonably believes are within the person’s competence.

Unless limited by its charter, a Tennessee corporation must indemnify, against reasonable expenses incurred by him or her, a director who was wholly successful, on the merits or otherwise, in defending any proceeding to which he or she was a party because he or she is or was a director of the corporation. Expenses incurred by a director in defending a proceeding may be paid by the corporation in advance of the final disposition of the proceeding if three conditions are met:

•		The director must furnish the corporation a written affirmation of the director’s good faith belief that he or she has met the standard of conduct as set forth above;

•		The director must furnish the corporation a written undertaking by or on behalf of a director to repay such amount if it is ultimately determined that he or she is not entitled to be indemnified by the corporation against such expenses; and

•		A determination must be made that the facts then known to those making the determination would not preclude indemnification.

A director may apply for court-ordered indemnification under certain circumstances. Unless a corporation’s charter provides otherwise,

•		An officer of a corporation is entitled to mandatory indemnification and is entitled to apply for court-ordered indemnification to the same extent as a director,

•		The corporation may indemnify and advance expenses to an officer, employee, or agent of the corporation to the same extent as to a director, and

•		A corporation may also indemnify and advance expenses to an officer, employee, or agent who is not a director to the extent, consistent with public policy, that may be provided by its charter, bylaws, general or specific action of its board of directors, or contract.

The Company’s charter and bylaws provide for the indemnification of its directors and officers to the fullest extent permitted by Tennessee law. Amendment of this provision cannot be effected in such a manner as to adversely affect the rights of existing directors or rights as against existing circumstances.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling the Company under the provisions described above, the Company has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Amendment of Charter and Bylaws

The Company may amend its charter in any manner permitted by Tennessee law. The Tennessee Business Corporation Act provides that a corporation’s charter may be amended by a majority of votes entitled to be cast on an amendment, subject to any condition the board of directors may place on its submission of the amendment to the stockholders. Assuming a quorum is present, the vote of a plurality can change the provisions of the Company’s bylaws and charter. In limited cases, the Board can amend the charter without a vote of the shareholders. One of those cases has to do with changing the par value of the stock.

The Company’s Shareholders may adopt, amend, or repeal the Company’s by laws by the affirmative vote of a majority of the stock represented and entitled to vote at such meeting. The Company’s board of directors may adopt, amend, or repeal the Company’s bylaws by a vote of the majority of a quorum, except that a change in the number of directors requires a majority vote of the entire board of directors.

Special Meetings of Stockholders

Special meetings of the Company’s stockholders may be called for any purpose or purposes, at any time, by the Chairman of the Board of Directors, the President, or Secretary of the Company and shall be called based on a request in writing of a majority of the Board of Directors or of Shareholders owning 10% or more of the outstanding capital stock issued, outstanding, and entitle to vote at such special meeting. The written request must state the purpose or purposes for which the meeting is being called. The written request must also specify the person or persons calling the meeting.

Stockholder Nominations and Proposals

Holders of Company common stock are entitled to submit proposals to be presented at an annual meeting of the Company stockholders. The Company’s charter and bylaws provide that any proposal of a stockholder which is to be presented at any meeting of stockholders must be sent so it is to be received by the Company in advance of the meeting. All such proposals must meet the strict criteria set forth in the Company’s charter and bylaws. Please refer to the Company’s 2006 Proxy Statement for additional information.

Business Combinations

As a Tennessee corporation, the Company is or could be subject to certain restrictions on business combinations under Tennessee law, including, but not limited to, combinations with interested stockholders.

Tennessee has multiple anti-takeover acts that are or may become applicable to the Company. Two of these are the Tennessee Business Combination Act and the Tennessee Greenmail Act.

The Tennessee Business Combination Act. The Tennessee Business Combination Act generally prohibits a “business combination” by the Company or a subsidiary with an “interested stockholder” within 5 years after the stockholder becomes an interested stockholder. But the Company or a subsidiary can enter into a business combination within that period if, before the interested stockholder became such, the Company board of directors approved:

•		The business combination; or

•		The transaction in which the interested stockholder became an interested stockholder.

After that 5 year moratorium, the business combination with the interested stockholder can be consummated only if it satisfies certain fair price criteria or is approved by two-thirds of the other stockholders.

For purposes of the Tennessee Business Combination Act, a “business combination” includes mergers share exchanges, sales and leases of assets, issuances of securities, and similar transactions.

An “interested stockholder” is generally any person or entity that beneficially owns 10% or more of the voting power of any outstanding class or series of the Company stock.

Tennessee law also severely limits the extent to which the Company or any of its officers or directors could be held liable for resisting any business combination. Under the Tennessee Business Corporation Act, neither a Tennessee corporation having any stock registered or traded on a national securities exchange, nor any of its officers or directors, may be held liable for:

•		Failing to approve the acquisition of shares by an interested stockholder on or before the date the stockholder acquired such shares;

•		Seeking to enforce or implement the provisions of Tennessee law;

•		Failing to adopt or recommend any charter or by-law amendment or provision relating to such provisions of Tennessee law; or

•		Opposing any share exchange, exchange, tender offer, or significant asset sale because of a good faith belief that such transaction would adversely affect the corporation’s employees, customers, suppliers, the communities in which the corporation or its subsidiaries operate or any other relevant factor.

But the officers and directors can only consider such factors if the corporation’s charter permits the board to do so in connection with the transaction. The Company’s charter does not, at this time, expressly permit the board to consider these factors.

The Tennessee Greenmail Act. The Tennessee Greenmail Act applies to a Tennessee corporation (like the Company) that has a class of voting stock registered or traded on a national securities exchange or registered with the SEC pursuant to Section 12(g) of the Securities Exchange Act. Under the Tennessee Greenmail Act, the Company may not purchase any of its shares at a price above the market value of such shares from any person who holds more than 3% of the class of securities to be purchased if such person has held such shares for less than two years, unless the purchase has been approved by the affirmative vote of a majority of the outstanding shares of each class of voting stock issued by the Company or the Company makes an offer, of at least equal value per share, to all stockholders of such class.

The laws described above, together with provisions of the Company’s charter and bylaws, regarding business combinations might be deemed to make the Company less attractive as a candidate for acquisition by another company than would otherwise be the case in the absence of such provisions. For example, if another company should seek to acquire a controlling interest of less than a majority of the outstanding shares of the Company’s common stock, the acquirer would not thereby necessarily obtain the ability to replace a majority of the Company board of directors until at least the second annual meeting of stockholders following the acquisition.

As a result, the Company’s stockholders may be deprived of opportunities to sell some or all of their shares at prices that represent a premium over prevailing market prices in a takeover context. The provisions described above also may make it more difficult for the Company’s stockholders to replace the Company board of directors or management, even if the holders of a majority of the Company’s common stock should believe that such replacement is in the interests of the Company. As a result, such provisions may tend to perpetuate the incumbent Company board of directors and management.

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.

General Terms and Provisions Applicable to the Company’s Common Stock

Liquidation. In the event of liquidation, dissolution or winding up of the Company, shareholders are entitled to share ratably in all assets remaining after payment of liabilities.

Liability for Further Assessments. The Company’s shareholders are not subject to further assessments by the Company on their shares.

Sinking Fund Provision. The Company’s shares do not require a “sinking fund” which is a separate capital reserve maintained to pay shareholders with preferential rights for their investment in the event of liquidation or redemption.

Redemption Provision. The Company’s shareholders do not have a right of redemption, which is the right to sell their shares back to the Company.

Calculation of Public Float

First McMinnville Corporation has calculated the public float disclosed on the Cover Page of this Report (a) by including all issued and outstanding shares of the Company’s common stock directly and indirectly attributable to directors and executive officers of the Company and (b) using the price of $50.10 per share as the fair market value of the Company’s common stock at June 30, 2005. (The Bank has no non-voting common equity outstanding.) The public float was $48,983,572 based on the $50.10 per share price and a calculation of 977,716 shares held at that date by non-affiliates.

Management believes that $50.10 closely approximates the fair market value of the shares as of the end of the Company’s second fiscal quarter in 2005. The calculation assumes that all outstanding shares beneficially owned by members of the board of directors and executive officers of the Issuer are owned by “affiliates,” a status that each such director and executive officer individually reserves the right to disclaim. Such determination of affiliate status is not necessarily a conclusive determination for other purposes. Market price is estimated based on reports received by the Company inasmuch as the Company’s stock is not traded over-the-counter or in any other established or recognized securities market.

The Company, has treated as common equity held by affiliates only voting stock owned as of June 30, 2005 by its directors and executive officers; it did not treat, for purposes of responding to the information required by the Cover Page, stock held by any of our subsidiaries as pledgee or in a fiduciary capacity as stock held by our affiliates. The Company’s response to the public float information request is not intended to be an admission that any person is an affiliate of the Company, for any purpose other than this response. Moreover, there is such a limited market for the Company’s shares, and the stock is so thinly traded, that reliance on market price is problematic and should not necessarily be relied upon as a true indication of value.

(b)

Holders

The approximate number of record holders, including those shares held in “nominee” or “street name,” of the Company’s Common Stock at March 14, 2006 was approximately 596.

(c)

Dividends

The Company has paid a cash dividend in every years since it was organized in 1984. The Company declared semi-annual cash dividends on its Common Stock in the aggregate amount of $1.75 per share for 2005, $1.75 per share for 2004, and $1.70 per share for 2003. 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.

However, no dividend or other distribution can be made if the Company is insolvent or would be rendered insolvent by such action. Under the Tennessee Business Corporation Act, the holding company may not pay a dividend if afterwards:

•		The Company would be unable to pay its debts as they become due, or

•		The Company’s total assets would be less than its total liabilities plus an amount needed to satisfy any preferential rights of shareholders.

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. Cash available for dividend distribution to Shareholders must initially come from dividends which the Bank pays the Company. As a result, the legal restrictions on the Bank’s dividend payments also affect the ability of the holding company to pay dividends. See “Payment of Dividends.”

Please refer also to the discussion of dividends and related matters (such as “Capital Adequacy”) and to the discussion of “Payment of Dividends” set forth in Item 1 of this Annual Report on Form 10-K, to Item 7 of this Annual Report on Form 10-K (“Management’s Discussion and Analysis of Financial Condition and Results of Operation”), to Item 5 (“Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”), and to Item 8 (the Consolidated Financial Statements).

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 (Item 8).

(d)

Recent Sales of Unregistered Securities

During the past year, the Company sold 2,013 shares of its common voting stock that were not registered under the Securities Act. This discussion includes sales of reacquired securities (if any), as well as new issues, securities issued in exchange for property, services, or other securities, and new securities resulting from the modification of outstanding securities. All of these shares are believed to be exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. The shares sold in the fourth quarter of 2005 pursuant to the 1997 Stock Option Plan are as follows:


Date of Sale	Number of Shares Sold		Price Paid Per Share

October 13, 2005		30	$	29.08

November 4, 2005		13	$	29.08

December 6, 2005		80	$	29.08

December 6, 2005		40	$	29.08

December 23, 2005		30	$	29.08

December 27, 2005		30	$	29.08

December 27, 2005		60	$	29.08

None of the sales were underwritten. These securities were not publicly offered but, rather, were sold to employees, directors and/or others who qualified to participate in the Company’s 1997 stock option plan described elsewhere in these materials. All of the shares were sold in private transactions. All of the proceeds received from the exercise of the stock options, which totaled $59,000 were paid directly to the Company and were used by the Company for general working capital purposes. There were no payments to underwriters or other persons and there were no deductions or discounts from the purchase price received by the Company. The securities sold by the Company are not convertible or exchangeable into equity securities, and they were not warrants or options representing equity securities.

(e)

Disclosure of Company Repurchases Pursuant to Item 703(a) of Item S-K

The Company repurchased 12,378 shares of its common stock in 2005 in order to provide some liquidity in our thinly traded shares that are not listed or traded on any recognized public trading market. The following disclosures are made pursuant to Rule 10b-18:

(d) Maximum Number

(or Approximate

Shares Purchased as

Dollar Value) of

Part of Publicly

Shares (or Units)

(a) Total Number of

(b) Average Price

Announced Plans or

that May Yet Be

Shares Purchased

Paid Per Share

Programs

Purchased

Period Covered by this Report — Fourth Fiscal Quarter of 2005 (October 1 - December 31)

1,740

51.05

-0-

Total

1,740

51.05

-0-


ITEM 6.		SELECTED FINANCIAL DATA.

The selected financial data required by this part of this Annual Report on Form 10-K are set forth as part of Appendix F. The selected financial data and certain statistical data concerning the Company 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 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 set forth as part of Appendix F. 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 8).


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 for the information called for by this part of the Report.


ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following consolidated financial statements of the Company and subsidiary are included in this Report as part of Appendix F:

	—		Independent Auditors’ Report;

	—		Consolidated Balance Sheets — December 31, 2005 and 2004;

	—		Consolidated Statements of Earnings — Three years ended December 31, 2005;

	—		Consolidated Statements of Comprehensive Earnings — Three years ended December 31, 2005;

	—		Consolidated Statements of Changes in Stockholders’ Equity — Three years ended December 31, 2005;

	—		Consolidated Statements of Cash Flows — Three years ended December 31, 2005; and

	—		Notes to Consolidated Financial Statements.


ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.


ITEM 9A.		CONTROLS AND PROCEDURES.

(a)

Evaluation of disclosure controls and procedures.

Within 90 days prior to the filing date of this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chairman, President, and Chief Executive Officer (CEO) and its Senior Vice President, Chief Financial Officer, and Principal Accounting Officer (CFO) of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 and 15d-14 of the Securities and Exchange Act of 1934 (the “Exchange Act”). Based upon

that evaluation, the CEO and the CFO concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b)

Changes in internal controls.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date on which the Company carried out its evaluation.


ITEM 9B.		OTHER INFORMATION.

Not Applicable.

PART III

Pursuant to General Instruction G of Form 10-K, certain items are incorporated by reference to the Company’s 2006 definitive proxy statement filed with the SEC on or about March 23, 2006, pursuant to Regulation 14A (the “2006 Proxy Statement”). However, the information set forth in the 2006 Proxy Statement under the subheadings “Compensation Committee Report on Executive Compensation” and “Stock Performance Graph,” and any other lawfully excludable section or part, including option repricing, if any, (i) shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or the liabilities of Section 18 of the Exchange Act, and (ii) notwithstanding anything to the contrary that may be contained in any filing by the Company under such Act or the Securities Act of 1933, as amended, shall not be deemed to be incorporated by reference in this or any other filing. No reference to the 2006 Proxy Statement shall be deemed or understood to incorporate such materials into this Annual Report on Form 10-K.


ITEM 10.		DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The types of biographical and other information required by Item 10 of the Annual Report on Form 10-K is incorporated by reference to the Company’s 2006 Proxy Statement, under the captions of “Proposal No. 1 — Election of Directors,” “The Committees of the Board of Directors,” and “Executive Officers.”

Information regarding late filings under Section 16(a) of the Securities Exchange Act of 1934 included in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is hereby incorporated herein by reference.

Further information about the First McMinnville Corporation Audit Committee (which is joint with the audit committee of First National Bank), as well as information concerning the Company’s Code of Ethics, is included below.

Information About the Audit Committee

The Company has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The Audit Committee is more fully described in the Company’s 2006 Proxy Statement under the sections entitled “Audit Committee,” “Report of the Audit Committee,” “Principal Auditor Fees and Services,” and “Proposal No. 2 — Ratification of the Audit Committee’s Selection of Independent Auditors,” which sections are incorporated herein by reference. The members of the audit committee in 2005 were Arthur J. Dyer (Chair), Dean I. Gillespie, and Rufus W. Gonder. The Company’s board of directors has determined that all of these persons are independent within the meaning of NASD Rule 4200(a)(15). The Audit Committee has not at this time designated a “financial expert” as that term is used in the Sarbanes-Oxley Act of 2002. The board of directors is considering the issues related to and the ramifications of such a designation. In addition, rules have only recently been issued by the SEC concerning financial experts, which rules are being studied by the board of directors. The board reserves the right to elect to designate a financial expert at any time.

Information About the Company’s Code of Ethics

The Company has adopted a Code of Ethics that applies to the Company’s officers and employees, including its principal executive officer and senior financial officers, including the principal financial officer, the principal accounting officer and others performing similar functions. The Code of Ethics is posted on the Company’s website at http://www.fnbmt.com (Investor Services). The Company undertakes to provide to any person without charge, upon request, a copy of its Code of Ethics. Requests should be submitted in writing to the attention of Investor Services, 200 East Main Street, McMinnville, Tennessee 37110.


ITEM 11.		EXECUTIVE COMPENSATION.

The types of biographical and other information required by Item 11 of the Annual Report on Form 10-K is incorporated by reference to the Company’s 2006 Proxy Statement, under the captions of “Proposal No. 1 — Election of Directors,” “Benefits,” “Executive Compensation,” and “Executive Officers.”


ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information concerning certain ownership of the Company’s securities required by Item 12 of the Annual Report on Form 10-K is incorporated by reference to the Company’s 2006 Proxy Statement, under the caption of “Stock Ownership of Management and Certain Beneficial Owners.”

The following table provides information required to be disclosed by the securities laws with respect to (1) compensation plans and (2) individual compensation arrangements (of which the Company has none) under which equity securities of the Company are authorized for issuance. The compensation plan is the First McMinnville Corporation 1997 Stock Option Plan, which was approved by the Company’s Shareholder in April of 1997. The Company has no compensation plan (including individual compensation arrangements) that provides for the issuance of securities which has not been approved by the Shareholders.

Number of Securities

Weighted-Average

Number of Securities

to be Issued upon

Exercise Price of

Remaining Available for

Exercise of

Outstanding Options,

Future Issuance Under

Outstanding Options,

Warrants and Rights*

Equity Compensation Plans

Warrants and Rights*

(Excluding Securities

Reflected in Column (a))

(a)

(b)

(c)

Equity Compensation Plan Approved by Security Holders

57,165

30.52

31,500

Equity Compensation Plans Not Approved by Security Holders

None

Not Applicable

None

Total

57,165

30.52

31,500

*The Company currently has no outstanding warrants or rights. Please refer to Notes 19 (Earnings per Share) and 20 (Stock Option Plan) to the Consolidated Financial Statements included in Item 8.


ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information concerning certain business relationships and related transactions required by Item 13 of the Annual Report on Form 10-K is incorporated by reference to the Company’s 2006 Proxy Statement, under the caption of “Certain Transactions.”

Please refer to Item 8 of this Annual Report on Form 10-K, and to Note 2 to the Consolidated Financial Statements for additional information on certain related party transactions (that is, transactions involving the Company’s directors and officers, and their related interests, on the one hand and the Company and the Bank on the other).


ITEM 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The Audit Committee has appointed Maggart & Associates, P.C., as the Company’s independent auditors for the fiscal year ending December 31, 2006. The following table shows the fees paid or accrued by the Company for the audit and other services provided by Maggart & Associates, P.C., for fiscal 2005 and 2004.


Services Performed	2005		2004

Audit Fees⁽¹⁾	$	116,050	$	101,437

Audit-Related Fees⁽²⁾		-0-		-0-

Tax Fees⁽³⁾		8,135		7,900

All Other Fees⁽⁴⁾		-0-		-0-

Total Fees	$	124,185	$	109,337


Notes to Preceding Table

(1)		Audit fees represent fees for professional services provided in connection with the audit of our financial statements and review of our quarterly financial statements and audit services provided in connection with other statutory or regulatory filings.

(2)		Audit-related fees consisted primarily of accounting consultations and services related to assistance with regulatory capital planning.

(3)		For fiscal 2005 and 2004, respectively, tax fees principally included tax preparation, tax advice and tax planning fees.

(4)		All other fees principally would include consulting engagements.

The Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve audit-related and non-audit services not prohibited by law to be performed by the Company’s independent auditors and associated fees, provided that the Chair shall report any decisions to pre-

approve such audit-related or non-audit services and fees to the full Audit Committee at its next regular meeting. The aggregate amount of all such non-audit services provided by the principal accounting firm was no more than five percent of the total amount of revenues paid by the Company to this accounting firm during the fiscal year in which the services were provided. Such services were originally not recognized as being needed at the time of the engagement to be non-audit services.

PART IV


ITEM 15.		EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

	(a)		The following exhibits, financial statements, and financial statement schedules are filed as a part of this report:

	•		The following statements and the Report of Maggart & Associates, P.C., Independent Certified Public Accountants, appear as part of Appendix F:

	•		Consolidated Balance Sheets as of December 31, 2005 and 2004;

	•		Consolidated Statements of Earnings for the three years ended December 31, 2005;

	•		Consolidated Statements of Comprehensive Earnings for the three years ended December 31, 2005;

	•		Consolidated Statements of Changes in Stockholders’ Equity for the three years ended December 31, 2005;

	•		Consolidated Statements of Cash Flows for the three years ended December 31, 2005; and

	•		Notes to the foregoing Consolidated Financial Statements.

	•		Financial Statement Schedules — All schedules have been omitted since the required information is either not applicable, is disclosed in Item 1 of this Annual Report on Form 10-K, or such information is disclosed in the consolidated financial statements or related notes to such financial statements.

	(b)		Exhibits — The exhibits attached hereto or incorporated herein by reference are identified in the Exhibit Index appearing elsewhere in this Report.

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 24, 2006

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.


Signature	Title	Date

/s/ J. G. Brock J. G. Brock	Director	March 24, 2006

/s/ Arthur J. Dyer Arthur J. Dyer	Director	March 24, 2006

/s/ Rufus W. Gonder Rufus W. Gonder	Director	March 24, 2006

/s/ G. B. Greene G. B. Greene	Director	March 24, 2006

/s/ Charles C. Jacobs Charles C. Jacobs	Chairman, President, CEO and Director (Principal Executive Officer)	March 24, 2006

/s/ Robert W. Jones Robert W. Jones	Director	March 24, 2006

EXHIBIT INDEX


Exhibit
Number	Description of Exhibit	Location

3(i)	Charter, as amended.	⁽¹⁾

3(ii)	Amended and Restated Bylaws.	⁽²⁾

4.1	Charter, as amended.	⁽¹⁾

4.2	Amended and Restated Bylaws.	⁽²⁾

4.3	1997 First McMinnville Corporation Stock Option Plan.	⁽³⁾

4.4	Shareholders Rights Agreement dated June 10, 1997.	⁽³⁾

10.1	First National Bank of McMinnville 401(k) Retirement Plan.	⁽⁴⁾

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>	⁽⁵⁾

10.3	Employment Agreement dated the 11^th day of June, 1999, between First McMinnville Corporation and Charles C. Jacobs. <Not renewed; no longer in effect.>	⁽⁶⁾

11	Statement re: computation of per share earnings.	⁽⁷⁾

12	Statements re computation of ratios.	⁽⁸⁾

13	Annual Report to Security Holders.	⁽⁹⁾

14	Code of Ethics.	⁽¹⁰⁾

21	Subsidiaries of the Registrant.	⁽¹¹⁾

31(i)	Certification by Chief Executive Officer.	⁽¹²⁾

31(ii)	Certification by Chief Financial Officer.	⁽¹²⁾

32(a)	Certification of Periodic Report by Chief Executive Officer.	⁽¹²⁾

32(b)	Certification of Periodic Report by Chief Financial Officer.	⁽¹²⁾


Exhibit
Number	Description of Exhibit	Location
	Proxy Statement for 2006 Annual Meeting of Shareholders Scheduled to be held on April 11, 2006.	Filed with the SEC under Regulation 14A


⁽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 Exhibit 3(ii) filed with the Company’s Annual Report on Form 10-K under the Exchange Act for the fiscal year ended December 31, 2003.

⁽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, 1997.

⁽⁴⁾		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.

⁽⁵⁾		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.

⁽⁶⁾		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.

⁽⁷⁾		Incorporated by reference to Note 18 to the Consolidated Financial Statements.

⁽⁸⁾		Incorporated by reference to the “Selected Financial Data and Statistical Information” that appears as part of Item 1 of this Annual Report on Form 10-K.

⁽⁹⁾		No portion of the Annual Report to Security Holders is incorporated by reference into this Annual Report on Form 10-K. Certain copies of the Annual Report to Security Holders have been supplied to the SEC for its information but shall not be deemed to be “filed” for any purpose.

⁽¹⁰⁾		Incorporated herein by reference to Exhibit 14 filed with the Company’s Annual Report on Form 10-K under the Exchange Act for the fiscal year ended December 31, 2003.

⁽¹¹⁾		Incorporated herein by reference to the section “Subsidiary” in Item 1 of the Annual Report.

⁽¹²⁾		Included in this document after the Exhibit Index.

FIRST MCMINNVILLE CORPORATION

SELECTED FINANCIAL DATA (UNAUDITED)

The following schedule presents the results of operations, cash dividends declared, total assets, stockholders’ equity and per share information for the Company for each of the five years ended December 31, 2005.


	In Thousands, Except Per Share Information
	Year Ended December 31,
	2005			2004			2003			2002			2001
Interest income	$	15,448			15,013			15,866			17,574			19,418
Interest expense		5,322			4,282			4,771			6,208			9,787

Net interest income		10,126			10,731			11,095			11,366			9,631

Reduction (provision) for possible loan losses		87			—			(59	)		(180	)		(180	)

Net interest income after provision for possible loan losses		10,213			10,731			11,036			11,186			9,451
Non-interest income		815			727			828			665			625
Non-interest expense		(4,684	)		(4,743	)		(4,796	)		(4,509	)		(4,181	)


Earnings before income taxes		6,344			6,715			7,068			7,342			5,895

Income taxes		1,951			2,065			2,169			2,298			1,748


Net earnings	$	4,393			4,650			4,899			5,044			4,147


Comprehensive earnings	$	3,505			4,130			4,293			5,758			5,403


Cash dividends declared	$	1,806			1,824			1,774			1,665			1,565


Total assets — end of year	$	317,781			308,534			304,399			304,760			283,721


Stockholders’ equity — end of year	$	51,217			50,079			47,960			45,398			41,380


Per share information:

Basic earnings per common share	$	4.24			4.46			4.70			4.85			3.97


Diluted earnings per common share	$	4.16			4.38			4.63			4.80			3.93


Dividends per share	$	1.75			1.75			1.70			1.60			1.50


Book value per share — end of year	$	49.70			48.11			45.96			43.59			39.71


Ratios:
Return on average stockholders’ equity		8.59	%		9.40	%		10.38	%		11.51	%		10.24	%


Return on average assets		1.42	%		1.50	%		1.59	%		1.73	%		1.50	%


Average stockholders’ equity to average assets		16.59	%		15.95	%		15.32	%		14.99	%		14.68	%

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its subsidiaries. This discussion should be read in conjunction with the consolidated financial statements.

FORWARD-LOOKING STATEMENTS

Management’s discussion of the Company, and management’s analysis of the Company’s operations and prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although the Company believes that the assumptions underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as expect, anticipate, forecast, and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations and financial condition affecting the Company’s customers, as well as other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s control, earnings may fluctuate from period to period. The purpose of this type of information is to provide readers 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 is unable to predict the types of circumstances, conditions, and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changes or unanticipated events, circumstances, or results.

General

First McMinnville Corporation is a one bank holding company which owns 100% of First National Bank of McMinnville. First National Bank of McMinnville (“Bank”) is a community bank headquartered in McMinnville, Tennessee serving Warren County, Tennessee as its primary market area. The Company serves as a financial intermediary whereby its profitability is determined to a large degree by the interest spread it achieves and the successful measurement of risks. The Company’s management believes that Warren County offers an environment for continued growth and the Company’s target market is local consumers, professionals and small businesses. The Company offers a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposits, and loans for consumer, commercial and real estate purposes. The Company also offers custodial and trust services. Deposit instruments in the form of demand deposits, money market savings and certificates of deposits are offered to customers to establish the Company’s core deposit base. In 2001, the Bank formed a subsidiary, First Community Title & Escrow Company. The new subsidiary began operations in 2002.

In a market such as Warren County, management believes there is an opportunity to increase the loan portfolio. The Company has targeted commercial business lending, commercial and residential real estate lending, and consumer lending as areas of focus. It is the Company’s intention to limit the size of its loan portfolio to approximately 75% to 80% of deposit balances; however, the quality of lending opportunities as well as the desired loan to deposit ratio will influence the size of the loan portfolio. As a practice, the Company generates substantially all of its own loans and occasionally buys participations from other institutions. The Company attempts, to the extent practical, to maintain a loan portfolio which is capable of adjustment to swings in interest rates. The Company’s policy is to have a diverse loan portfolio. At December 31, 2005, the nursery industry constituted the largest single industry segment and accounted for $12,064,000 (7.86% of the Company’s loan portfolio) as compared to $10,120,000 or 6.79% in 2004. No segment accounted for more than 10% of the portfolio. Management is not aware of any adverse trends or expected losses in respect to the nursery industry.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Critical Accounting Policies

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles to the determination of our allowance for loan losses (ALL), we have made judgments and estimates which have significantly impacted our financial position and results of operations.

Our management assesses the adequacy of the ALL on a regular basis. This assessment includes procedures to estimate the ALL and test the adequacy and appropriateness of the resulting balance. The ALL consists of two portions (1) an allocated amount representative of specifically identified credit exposure and exposures readily predictable by historical or comparative experience, and (2) an unallocated amount representative of inherent loss which is not readily identifiable. Even though the ALL is composed of two components, the entire allowance is available to absorb any credit losses.

Our method of determining the adequacy of the allowance for loan losses begins with the specific review of large credits. This review is performed by the loan review officer who reports to the loan review committee appointed by the Board of Directors. This review includes a review of current financial information to monitor on-going ability to service the credit, a review of the collateral securing the credit and a review of payment history. If during this review it is determined that the potential for loss exists, a specific reserve is established on a loan by loan basis.

We take into consideration industry concentrations, such as the nursery industry, historical and current economic conditions, and discussion with banking regulators when calculating an unallocated amount to the allowance.

The unallocated amount is particularly subjective and does not lend itself to the exact mathematical calculation. We use the unallocated amount to absorb inherent losses which may exist as of the balance sheet date for such matters as changes in the local or national economy, the depth or experience of the lending staff, any concentrations of credit in any particularly industry group, and new banking laws or regulations. After we assess applicable factors, we evaluate the aggregate unallocated amount based on our management’s experience.

We then test the resulting ALL balance by comparing the balance in the allowance account to historical trends and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the ALL in its entirety. The loan review and the finance committee of our board of directors review the assessment prior to the filing of financial information.

Capital Resources, Capital and Dividends

Regulations of the Office of the Comptroller of the Currency (“OCC”) establish required minimum capital levels for the Bank. Under these regulations, national banks must maintain certain capital levels as a percentage of average total assets (leverage capital ratio) and as a percentage of total risk-based assets (risk-based capital ratio). Under the risk-based requirements, various categories of assets and commitments are assigned a percentage related to credit risk ranging from 0% for assets backed by the full faith and credit of the United States to 100% for loans other than residential real estate loans and certain off-balance sheet commitments. Total capital is characterized as either Tier 1 capital — common stockholders’ equity, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred — or total risk-based capital which includes the allowance for loan losses up to 1.25% of risk weighted assets, perpetual preferred stock, subordinated debt and various other hybrid capital instruments, subject to various limits. Goodwill is not includable in Tier 1 or total risk-based capital. The Company and its national bank subsidiary must maintain a Tier 1 capital to risk-based assets of at least 4.0%, a Total risk-based capital to risk-based assets ratio of at least 8.0% and a leverage capital ratio defined as Tier 1 capital to adjusted total average assets for the most recent quarter of at least 4%. The same ratios are also required in order for a national bank to be considered “adequately capitalized” under the OCC’s “prompt corrective action” regulations, which impose certain operating restrictions on institutions which are not adequately capitalized. The Company has a Tier 1 risk based ratio of 30.52%, a total risk-based capital ratio of 31.57% and a leverage capital ratio of 16.87%, and was therefore within the “well capitalized” category under the regulations. The subsidiary bank’s ratios were substantially the same as those setforth for the Company.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Capital Resources, Capital and Dividends, Continued

Dividends of $1,806,000 and $1,824,000 were declared during 2005 and 2004, respectively. Principally because of the high percent of equity capital, the return on equity is lower than banks in the Company’s peer group. Cash dividends are anticipated to be increased in 2006 if profits increase. The dividend payout ratio (dividends declared per share divided by net earnings per share) was 41.3%, 39.2% and 36.2% in 2005, 2004 and 2003, respectively. No material changes in the mix or cost of capital is anticipated in the foreseeable future.

The dividends paid by the Company are funded by dividends received by the Company from the Bank. The Bank is limited by law, regulation and prudence as to the amount of dividends it can pay. At December 31, 2005, under the most restrictive of these regulatory limits, the Bank could declare in 2006 cash dividends in an aggregate amount of up to approximately $8.5 million, plus any 2006 net earnings, without prior approval of the Comptroller of the Currency. Because of sound business considerations and other Regulatory capital requirements, it is unlikely that the Company would ever pay a significant portion of this amount as dividends.

Financial Condition

During 2005, total assets increased $9,247,000 or 3.00% from $308,534,000 at December 31, 2004 to $317,781,000 at December 31, 2005. Loans, net of allowance for possible loan losses, increased from $147,300,000 to $151,750,000 or 3.02% during fiscal year 2005. Increases in mortgage loans, consumer loans and construction loans totaling $5,439,000 offset the decrease in commercial loans of $989,000 resulted in the net increase in loans.

Securities increased 5.87% from $145,325,000 at December 31, 2004 to $153,848,000 at December 31, 2005. The carrying value of securities of U.S. Treasury and other U.S. Government obligations increased $10,988,000, obligations of state and political subdivisions decreased $966,000, corporate and other securities decreased $1,198,000 and there was a decrease in mortgage backed securities of $301,000.

At December 31, 2005 the market value of the Company’s securities portfolio was less than its amortized cost by $1,693,000 (1.10%). At December 31, 2004 the market value of the Company’s securities portfolio was greater than its amortized cost by $824,000 (.56%). The weighted average yield (stated on a tax-equivalent basis, assuming a Federal income tax rate of 34%) of the securities at December 31, 2005 was 4.26% as compared to an average yield of 3.55% at December 31, 2004.

The Company applies the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), “Accounting for Certain Investments in Debt and Equity Securities”. Under the provisions of the Statement, securities are to be classified in three categories and accounted for as follows:

	•		Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.

	•		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and

	•		Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Financial Condition, Continued

The Company’s classification of securities as of December 31, 2005 is as follows:


	Held-To-Maturity				Available-For-Sale
			Estimated				Estimated
	Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value
	(In Thousands)
U.S. Treasury and other U.S. Government agencies and corporations	$	25,356		24,837		94,166		92,103
Obligations of states and political subdivisions		32,806		33,628		1,000		1,010
Corporate and other securities		1,794		1,836		—		—
Mortgage-backed securities		—		—		764		779


	$	59,956		60,301		95,930		93,892

During the year ended December 31, 2003, the net increase in capital included $606,000 decrease which represents the unrealized loss on securities available-for-sale of $982,000 net of applicable taxes of $376,000. During 2004 the net increase in capital included $520,000 which represents the unrealized loss on securities available-for-sale of $843,000 net of applicable taxes of $323,000. During 2005 the net increase in capital included $888,000 which represents the unrealized loss on securities available-for-sale of $1,439,000 net of applicable taxes of $551,000.

The increase in assets of $9,247,000 in 2005 was due primarily to an increase in earning assets. Total deposits increased from $226,588,000 at December 31, 2004 to $239,088,000 at December 31, 2005 representing an increase of 5.52%. Demand deposits increased 12.60% from $21,956,000 at December 31, 2004 to $24,722,000 at December 31, 2005. Negotiable order of withdrawal accounts, money market and other savings deposits decreased $3,678,000 or 4.80%. Certificates of deposit and individual retirements accounts increased $13,412,000 or 10.48%. The subsidiary bank has unused lines of credit of $15,700,000 and the Company has an unused line of credit of $2,000,000 at December 31, 2005.

The Company’s allowance for loan losses at December 31, 2005 and 2004 was $1,816,000. Non-performing loans amounted to $94,000 at December 31, 2005 compared to $8,000 at December 31, 2004. Non-performing loans are loans which have been placed on non-accrual status, loans 90 days past due plus renegotiated loans. Net recoveries were $87,000 during 2005. Net charge-offs were $93,000 and $58,000 during 2004 and 2003. In 2005, the Bank reduced its provision for loan losses by $87,000 due to an excess balance in the allowance for possible loan losses. A provision for loan losses for 2004 was not necessary. The provision was $59,000 in 2003.

The allowance for possible loan losses, amounting to $1,816,000 at December 31, 2005, represents 1.18% of total loans outstanding. At December 31, 2004, the allowance for possible loan losses represented 1.22% of total loans outstanding. Management has in place a system to identify and monitor problem loans as further discussed under “Critical Accounting Policies”. Management believes the allowance for possible loan losses at December 31, 2005 to be adequate.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Contractual Obligations

The Company has the following contractual obligations as of December 31, 2005:


	Less						More
	Than		1 - 3		3 - 5		than
(In Thousands)	1 Year		Years		Years		5 Years		Total
Long-term debt	$	—		—		1,000		—		1,000

Capital leases		—		—		—		—		—

Operating leases		—		—		—		—		—

Purchases		—		—		—		—		—

Other long-term liabilities		—		—		—		—		—



Total	$	—		—		1,000		—		1,000

Long-term debt contractual obligations consist of advances from the Federal Home Loan Bank.

Off Balance Sheet Arrangements

At December 31, 2005, the Company had unfunded commitments to extend credit of $13.4 million and outstanding standby letters of credit of $2.0 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company has the ability to liquidate Federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase Federal funds from other financial institutions. Additionally, the Company could sell participations in these or other loans to correspondent banks. As mentioned above, the Company has been able to fund its ongoing liquidity needs through its core deposit base, loan payments and its investment security maturities.

Liquidity

Liquidity represents the ability to efficiently and economically accommodate decreases in deposits and other liabilities, as well as fund increases in assets. A Company has liquidity potential when it has the ability to obtain sufficient funds in a timely manner at a reasonable cost. The availability of funds through deposits, the purchase and sales of securities in the investment portfolio, the use of funds for consumer and commercial loans and the access to debt markets affect the liquidity of the Company. The Company’s loan to deposit ratio was approximately 64.23% and 65.81% at December 31, 2005 and December 31, 2004, respectively.

The Company’s investment portfolio, as represented above, consists of earning assets that provide interest income.

Funds management decisions must reflect management’s intent to maintain profitability in both the immediate and long-term earnings. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company meets monthly to analyze the rate sensitivity position of the Bank. These meetings focus on the spread between the subsidiary bank’s cost of funds and interest yields generated primarily through loans and investments.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Liquidity, Continued

The Company presently maintains a liability sensitive position over the next six months and over the next twelve months. Liability sensitivity means that more of the Company’s liabilities are capable of repricing over certain time frames than assets. The interest rates associated with these liabilities may not actually change over this period but are capable of changing. For example, the six month gap is a picture of the possible repricing over a six month period. The following table shows the rate sensitivity gaps for different time periods as of December 31, 2005:


Interest-rate sensitivity													One Year
gaps:	Reprice			1-90			91-180			181-365			and
*(In Thousands)*	Immediately			Days			Days			Days			Longer			Total
Interest-earning assets	$	19,530			18,860			18,366			37,525			214,537			308,818
Interest-bearing liabilities		91,348			34,223			29,503			25,400			58,581			239,055

Interest rate sensitivity	$	(71,818	)		(15,363	)		(11,137	)		12,125			155,956			69,763


Cumulative gap	$	(71,818	)		(87,181	)		(98,318	)		(86,193	)		69,763


Interest rate sensitivity gap as a % of total assets		(22.60	)%		(4.83	)%		(3.51	)%		3.82	%		49.08	%


Cumulative gap as a % of total assets		(22.60	)%		(27.43	)%		(30.94	)%		(27.12	)%		21.95	%

Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal, money market demand, demand deposit and regular savings accounts. Management does not anticipate that there will be significant withdrawals from these accounts in the future.

It is anticipated that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the foreseeable future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity changing in any material way.

Results of Operations

Net earnings for the year ended December 31, 2005 were $4,393,000, a decrease of $257,000 or 5.53% from fiscal year 2004. Net earnings for the year ended December 31, 2004 were $4,650,000 a decrease of $249,000 or 5.08% from fiscal year 2003. Basic earnings per common share was $4.24 in 2005, $4.46 in 2004 and $4.70 in 2003. Diluted earnings per common share were $4.16, $4.38 and $4.63 in 2005, 2004 and 2003, respectively. Average earning assets decreased $2,133,000 for the year ended December 31, 2005 as compared to the year ended December 31, 2004. Average earning assets increased $3,998,000 for the year ended December 31, 2004 as compared to the year ended December 31, 2003. Additionally, the net interest spread decreased from 3.43% in 2004 to 3.10% in 2005. The net interest spread was 3.59% in 2003. Net interest spread is defined as the effective yield on earning assets less the effective cost of deposits and borrowed funds, as calculated on a fully taxable equivalent basis. Average interest bearing liabilities decreased $5,474,000 in 2005. The cost of interest bearing deposits increased 50 basis points from 1.81% to 2.31% while the weighted average yield on earning assets increased 17 basis points from 5.24% to 5.41%. The decrease in the net interest spread in 2005 was primarily attributable to an increase in the cost of funds and a decrease in the return on earning assets. There was an increase in average non-interest bearing demand deposits in 2005 of $1,979,000.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Results of Operations, Continued

Net interest income before provision for loan losses for 2005 totaled $10,126,000 as compared to $10,731,000 for 2004 and $11,095,000 for 2003. In 2005, the Bank had a reduction in the provision for possible loan loses of $87,000 resulting from an excess in the allowance for loan losses created primarily by a recovery during 2005 of a previously charged-off commercial loan. A provision for loan losses was not necessary for 2004. The provision was $59,000 in 2003. Net recoveries in 2005 were $87,000 as compared to net charge-offs of $93,000 in 2004.

Non-interest income increased by 12.10% to $815,000 in 2005 from $727,000 in 2004. Non-interest income totaled $828,000 in 2003.

Non-interest expense decreased 1.24% to $4,684,000 in 2005 from $4,743,000 in 2004. Non-interest expense was $4,796,000 in 2003. Non-interest expense which includes, among other things, salaries and employee benefits, occupancy expenses, furniture and fixtures expenses, data processing, Federal Deposit Insurance premiums, supplies and general operating costs increased commensurate with the continued growth of the Company. Other non-interest expense decreased $41,000 in 2005.

Management is not aware of any current recommendations by the regulatory authorities which, if implemented, would have a material effect on the Company’s liquidity, capital resources or operations.

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company’s performance since they impact both interest revenues and interest costs.

Supervision and Regulation

Bank Holding Company Act of 1956. As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956 (the “Act”), and the regulations adopted by the Board of Governors of the Federal Reserve System (the “Board”) under the Act. The Company is required to file reports with, and is subject to examination by, the Board. The subsidiary bank is a national chartered bank and is therefore subject to the supervision of and is regularly examined by the Officer of the Comptroller of the Currency (the “OCC”). The subsidiary bank is also required to file reports with the Federal Deposit Insurance Corporation (“FDIC”) and is subject to FDIC regulations.

Under the Act, a bank holding company may not directly or indirectly acquire the ownership or control of more than five percent of the voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Board. In addition, bank holding companies are generally prohibited under the Act from engaging in non-banking activities, subject to certain exceptions. Under the Act, the Board is authorized to approve the ownership by a bank holding company of shares of any company whose activities have been determined by the Board to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto.

Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Quantitative and Qualitative Disclosures About Market Risk, Continued

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 on the spread between the cost of funds and interest yields generated primarily through loans and investments.

The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates as of December 31, 2005.


Held for Purposes	Expected Maturity Date -
Other Than Trading	Year Ending December 31,																					Fair
(In Thousands)	2006			2007			2008			2009			2010			Thereafter			Total			Value
Earning assets:

Loans	$	65,023			18,108			26,998			21,319			12,052			10,066			153,566			149,926
Average interest rate		6.88	%		6.80	%		6.56	%		6.37	%		6.86	%		6.50	%		6.72	%

Securities		29,176			31,437			37,931			20,165			13,041			22,098			153,848			154,205
Average interest rate		3.47	%		3.35	%		3.36	%		3.44	%		4.17	%		4.77	%		3.68	%

Interest-bearing liabilities:

Interest-bearing time deposits		83,768			35,513			8,518			10,634			2,916			—			141,349			141,476
Average interest rate		3.39	%		3.90	%		3.90	%		4.16	%		4.42	%		—			3.63	%

Negotiable order of withdrawal accounts		31,438			—			—			—			—			—			31,438			31,438
Average interest rate		.88	%		—			—			—			—			—			.88	%

Money market demand accounts		9,306			—			—			—			—			—			9,306			9,306
Average interest rate		1.83	%		—			—			—			—			—			1.83	%

Savings deposits		32,273			—			—			—			—			—			32,273			32,273
Average interest rate		1.49	%		—			—			—			—			—			1.49	%

Securities sold under repurchase agreements		19,389			—			—			—			—			—			19.389			19,389
Average interest rate		1.80	%		—			—			—			—			—			1.80	%

Federal funds purchased		4,300			—			—			—			—			—			4,300			4,300
Average interest rate		4.56	%		—			—			—			—			—			4.56	%

Advances from Federal Home Loan Bank		—			—			1,000			—			—			—			1,000			1,016
Average interest rate		—			—			5.25	%		—			—			—			5.25	%

MAGGART & ASSOCIATES, P.C.
Certified Public Accountants

150 FOURTH AVENUE, NORTH
SUITE 2150
NASHVILLE, TENNESSEE 37219-2417
Telephone (615) 252-6100
Facsimile (615) 252-6105

INDEPENDENT AUDITOR’S REPORT

The Board of Directors
First McMinnville Corporation:

We have audited the accompanying consolidated balance sheets of First McMinnville Corporation and Subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of earnings, comprehensive earnings, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First McMinnville Corporation and Subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Nashville, Tennessee
January 20, 2006

FIRST MCMINNVILLE CORPORATION

Consolidated Balance Sheets

December 31, 2005 and 2004


	In Thousands
	2005			2004
ASSETS

Loans, less allowance for possible loan losses of $1,816,000 and $1,816,000, respectively	$	151,750			147,300
Securities:
Held-to-maturity, at amortized cost (market value $60,301,000 and $58,547,000, respectively)		59,956			57,126
Available-for-sale, at market (amortized cost $95,930,000 and $88,796,000, respectively)		93,892			88,199

Total securities		153,848			145,325

Federal funds sold		—			6,000
Interest-bearing deposits in financial institutions		45			25
Restricted equity securities		1,359			1,303

Total earning assets		307,002			299,953

Cash and due from banks		5,649			4,220
Premises and equipment, net		1,836			1,782
Accrued interest receivable		1,890			1,713
Deferred tax asset, net		756			267
Foreclosed assets		203			190
Other assets		445			409

Total assets	$	317,781			308,534


LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	239,088			226,588
Securities sold under repurchase agreements		19,389			28,633
Federal funds purchased		4,300			—
Advances from Federal Home Loan Bank		1,000			1,000
Accrued interest and other liabilities		2,787			2,234

Total liabilities		266,564			258,455

Stockholders’ equity:
Common stock, no par value, authorized 5,000,000 shares, issued 1,235,935 and 1,233,922 shares, respectively		3,804			3,745
Retained earnings		53,620			51,033
Net unrealized losses on available-for-sale securities, net of income taxes of $780,000 and $229,000, respectively		(1,257	)		(369	)

		56,167			54,409
Less cost of treasury stock of 205,440 and 193,062 shares, respectively		(4,950	)		(4,330	)

Total stockholders’ equity		51,217			50,079

COMMITMENTS AND CONTINGENT LIABILITIES
Total liabilities and stockholders’ equity	$	317,781			308,534

See accompanying notes to consolidated financial statements.

FIRST MCMINNVILLE CORPORATION

Consolidated Statements of Earnings

Three Years Ended December 31, 2005


	In Thousands,
	Except Per Share Amount
	2005			2004			2003
Interest income:
Interest and fees on loans	$	9,780			9,776			10,449
Interest and dividends on securities:
Taxable securities		3,940			3,476			3,531
Exempt from Federal income taxes		1,446			1,544			1,637
Interest on Federal funds sold		219			163			196
Interest on interest-bearing deposits in financial institutions		1			1			1
Interest and dividends on restricted equity securities		62			53			52

Total interest income		15,448			15,013			15,866


Interest expense:
Interest on negotiable order of withdrawal accounts		228			216			255
Interest on money market demand and savings accounts		512			378			480
Interest on certificates of deposit		4,147			3,317			3,656
Interest on securities sold under repurchase agreements and short-term debt		367			315			324
Interest on advances from Federal Home Loan Bank		56			56			56
Interest on Federal funds purchased		12			—			—

Total interest expense		5,322			4,282			4,771


Net interest income before provision for possible loan losses		10,126			10,731			11,095
Reduction in allowance for (provision for) possible loan losses		87			—			(59	)

Net interest income after provision for possible loan losses		10,213			10,731			11,036

Non-interest income		815			727			828
Non-interest expense		(4,684	)		(4,743	)		(4,796	)


Earnings before income taxes		6,344			6,715			7,068

Income taxes		1,951			2,065			2,169


Net earnings	$	4,393			4,650			4,899


Basic earnings per common share	$	4.24			4.46			4.70


Diluted earnings per common share	$	4.16			4.38			4.63

See accompanying notes to consolidated financial statements.

FIRST MCMINNVILLE CORPORATION

Consolidated Statements of Changes in Stockholders’ Equity

Three Years Ended December 31, 2005


									Net Unrealized
									Gains (Losses)
			Additional						On Available-
	Common		Paid-In			Retained			For-Sale			Treasury
	Stock		Capital			Earnings			Securities			Stock			Total
Balance December 31, 2002	$	1,534		2,001			45,082			757			(3,976	)		45,398

Elimination of par value		2,001		(2,001	)		—			—			—			—

Net earnings		—		—			4,899			—			—			4,899

Issuance of 3,872 shares of common stock		127		—			—			—			—			127

Cash dividends declared ($1.70 per share)		—		—			(1,774	)		—			—			(1,774	)

Cost of 1,837 shares of treasury stock		—		—			—			—			(84	)		(84	)

Net change in unrealized gains (losses) on available-for-sale-securities during the year, net of taxes of $376,000		—		—			—			(606	)		—			(606	)


Balance December 31, 2003		3,662		—			48,207			151			(4,060	)		47,960

Net earnings		—		—			4,650			—			—			4,650

Issuance of 2,900 shares of common stock		83		—			—			—			—			83

Cash dividends declared ($1.75 per share)		—		—			(1,824	)		—			—			(1,824	)

Cost of 5,573 shares of treasury stock		—		—			—			—			(270	)		(270	)

Net change in unrealized gains (losses) on available-for-sale-securities during the year, net of taxes of $323,000		—		—			—			(520	)		—			(520	)


Balance December 31, 2004		3,745		—			51,033			(369	)		(4,330	)		50,079

Net earnings		—		—			4,393			—			—			4,393

Issuance of 2,013 shares of common stock		59					—			—			—			59

Cash dividends declared ($1.75 per share)		—		—			(1,806	)		—			—			(1,806	)

Cost of 12,378 shares of treasury stock		—		—			—			—			(620	)		(620	)

Net change in unrealized gains (losses) on available-for-sale-securities during the year, net of taxes of $551,000		—		—			—			(888	)		—			(888	)


Balance December 31, 2005	$	3,804		—			53,620			(1,257	)		(4,950	)		51,217

See accompanying notes to consolidated financial statements.

FIRST MCMINNVILLE CORPORATION

Consolidated Statements of Cash Flows

Three Years Ended December 31, 2005

Increase (Decrease) in Cash and Cash Equivalents


	In Thousands
	2005			2004			2003
Cash flows from operating activities:
Interest received	$	14,811			15,379			14,057
Fees and commissions received		781			628			637
Interest paid		(4,798	)		(4,340	)		(4,991	)
Cash paid to suppliers and employees		(4,406	)		(4,478	)		(4,515	)
Income taxes paid		(1,921	)		(2,052	)		(2,219	)

Net cash provided by operating activities		4,467			5,137			2,969


Cash flows from investing activities:
Purchase of available-for-sale securities		(21,925	)		(38,960	)		(106,859	)
Proceeds from sales of available-for-sale securities		—			—			4
Proceeds from maturities and calls of available-for-sale securities		14,774			32,760			96,165
Purchase of held-to-maturity securities		(5,615	)		(12,415	)		(27,870	)
Proceeds from maturities and calls of held-to-maturity securities		3,241			11,013			24,749
Loans made to customers, net of repayments		(4,458	)		(688	)		—
Customer loan payments, net of advances		—			—			783
Purchase of premises and equipment		(307	)		(22	)		(369	)
Proceeds from sales of bank premises and equipment		3			—			110
Proceeds from sales of foreclosed assets		96			24			—
Decrease (increase) in interest-bearing deposits in financial institutions		(20	)		61			22

Net cash used in investing activities		(14,211	)		(8,227	)		(13,265	)


Cash flows from financing activities:
Net increase (decrease) in demand, NOW, money market and savings deposit accounts		(912	)		2,343			(1,033	)
Net increase (decrease) in time deposits		13,412			24			(4,010	)
Net increase (decrease) in securities sold under repurchase agreements		(9,244	)		(149	)		2,788
Increase in Federal funds purchased		4,300			—			—
Dividends paid		(1,822	)		(1,805	)		(1,693	)
Payments to acquire treasury stock		(620	)		(270	)		(84	)
Proceeds from issuance of common stock		59			83			127

Net cash provided by (used in) financing activities		5,173			226			(3,905	)


Net decrease in cash and cash equivalents		(4,571	)		(2,864	)		(14,201	)

Cash and cash equivalents at beginning of year		10,220			13,084			27,285


Cash and cash equivalents at end of year	$	5,649			10,220			13,084

See accompanying notes to consolidated financial statements.

FIRST MCMINNVILLE CORPORATION

Consolidated Statements of Cash Flows, Continued

Three Years Ended December 31, 2005

Increase (Decrease) in Cash and Cash Equivalents


	In Thousands
	2005			2004			2003
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings	$	4,393			4,650			4,899
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		250			306			273
Amortization and accretion, net		(432	)		324			(1,815	)
Provision for (reduction in) possible loan losses		(87	)		—			59
Provision for deferred taxes		63			66			46
Securities gains		(6	)		(33	)		(23	)
Loss (gain) on sale of foreclosed assets		(14	)		5			—
Gain on sale of bank premises and equipment		—			—			(99	)
FHLB dividend reinvestment		(56	)		(48	)		(47	)
Decrease in taxes payable, net		(33	)		(97	)		(119	)
Decrease (increase) in interest receivable		(177	)		90			53
Increase (decrease) in interest payable		524			(58	)		(220	)
Increase (decrease) in other assets and liabilities, net		42			(68	)		(38	)

Total adjustments		74			487			(1,930	)


Net cash provided by operating activities	$	4,467			5,137			2,969


Supplemental Schedule of Non-Cash Activities:

Non-cash transfers from loans to foreclosed assets	$	190			488			399


Non-cash transfers from foreclosed assets to loans	$	95			489			179


Unrealized gain (loss) in value of securities available-for-sale net of income taxes of $551,000, $323,000 and $376,000, respectively	$	(888	)		(520	)		(606	)

See accompanying notes to consolidated financial statements.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements

December 31, 2005, 2004 and 2003

(1)		Summary of Significant Accounting Policies

		The accounting and reporting policies of First McMinnville Corporation (the “Company”), its wholly-owned subsidiary, the First National Bank of McMinnville (“Bank”) and the Bank’s wholly-owned subsidiary, First Community Title and Escrow Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The following is a brief summary of the significant policies.

	(a)		Principles of Consolidation

			The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, First National Bank of McMinnville and the Bank’s wholly-owned subsidiary, First Community Title and Escrow Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

	(b)		Nature of Operations

			The Company is registered as a one bank holding company under the Bank Holding Company Act of 1956. The Bank operates under a Federal Bank Charter and provides full banking services. As a national bank, the subsidiary bank is subject to regulation by the Office of the Comptroller of the Currency. The principal area served by First National Bank of McMinnville is Warren County, Tennessee and surrounding counties in Middle Tennessee. Services are provided at the main office and four branches.

	(c)		Estimates

			The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for possible loan losses and the valuation of debt and equity securities and the related deferred taxes.

	(d)		Loans

			Loans are stated at the principal amount outstanding. The allowance for possible loan losses is shown as reductions of loans. Loan origination and commitment fees and certain loan-related costs are generally recognized at origination as an adjustment of the related loan’s yield. Interest income on most loans is accrued based on the principal amount outstanding.

			Statement of Financial Accounting Standards (SFAS) No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures” apply to impaired loans except for large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment including residential mortgage and installment loans.

			A loan is impaired when it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company shall recognize an impairment by creating a valuation allowance with a corresponding charge to the provision for possible loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for possible loan losses.

			The Company’s consumer loans are divided into various groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and, thus, are not subject to the provisions of SFAS Nos. 114 and 118. Substantially all other loans of the Company are evaluated for impairment under the provisions of SFAS Nos. 114 and 118.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(1)

Summary of Significant Accounting Policies, Continued

	(d)		Loans, Continued

			The Company considers all loans subject to the provisions of SFAS Nos. 114 and 118 that are on nonaccrual status to be impaired. Loans are placed on nonaccrual status when doubt as to timely collection of principal or interest exists, or when principal or interest is past due 90 days or more unless such loans are well-secured and in the process of collection. Past due status is based on contractual terms of the loan. Delays or shortfalls in loan payments are evaluated along with various other factors to determine if a loan is impaired. Generally, delinquencies under 90 days are considered insignificant unless certain other factors are present which indicate impairment is probable. The decision to place a loan on nonaccrual status is also based on an evaluation of the borrower’s financial condition, collateral, liquidation value, and other factors that affect the borrower’s ability to pay.

			Generally, at the time a loan is placed on nonaccrual status, all interest accrued and uncollected on the loan in the current fiscal year is reversed from income, and all interest accrued and uncollected from the prior year is charged off against the allowance for possible loan losses. Thereafter, interest on nonaccrual loans is recognized as interest income only to the extent that cash is received and future collection of principal is not in doubt. If the collectibility of outstanding principal is doubtful, such cash received is applied as a reduction of principal. A nonaccrual loan may be restored to an accruing status when principal and interest are no longer past due and unpaid and future collection of principal and interest on a timely basis is not in doubt.

			Loans not on nonaccrual status are classified as impaired in certain cases when there is inadequate protection by the current net worth and financial capacity of the borrower or of the collateral pledged, if any. In those cases, such loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company’s criteria for nonaccrual status.

			Generally, the Company also classifies as impaired any loans the terms of which have been modified in a troubled debt restructuring. Interest is generally accrued on such loans that continue to meet the modified terms of their loan agreements.

			The Company’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged off in the month when they are considered uncollectible.

	(e)		Allowance for Possible Loan Losses

			The provision for possible loan losses represents a charge to earnings necessary, after loan charge-offs and recoveries, to maintain the allowance for possible loan losses at an appropriate level which is adequate to absorb estimated losses inherent in the loan portfolio. Such estimated losses arise primarily from the loan portfolio but may also be derived from other sources, including commitments to extend credit and standby letters of credit. The level of the allowance is determined on a quarterly basis using procedures which include: (1) categorizing commercial and commercial real estate loans into risk categories to estimate loss probabilities based primarily on the historical loss experience of those risk categories and current economic conditions; (2) analyzing significant commercial and commercial real estate credits and calculating specific reserves as necessary; (3) assessing various homogeneous consumer loan categories to estimate loss probabilities based primarily on historical loss experience; (4) reviewing unfunded commitments (included in other liabilities, if significant); and (5) considering various other factors, such as changes in credit concentrations, loan mix, and economic conditions which may not be specifically quantified in the loan analysis process.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(1)

Summary of Significant Accounting Policies, Continued

	(e)		Allowance for Possible Loan Losses, Continued

			The allowance for possible loan losses consists of an allocated portion and an unallocated, or general portion. The allocated portion is maintained to cover estimated losses applicable to specific segments of the loan portfolio. The unallocated portion is maintained to absorb losses which probably exist as of the evaluation date but are not identified by the more objective processes used for the allocated portion of the allowance due to risk of errors or imprecision. While the total allowance consists of an allocated portion and an unallocated portion, these terms are primarily used to describe a process. Both portions of the allowance are available to provide for inherent loss in the entire portfolio.

			The allowance for possible loan losses is increased by provisions for possible loan losses charged to expense and is reduced by loans charged off net of recoveries on loans previously charged off. The provision is based on management’s determination of the amount of the allowance necessary to provide for estimated loan losses based on its evaluation of the loan portfolio. Determining the appropriate level of the allowance and the amount of the provision involves uncertainties and matters of judgment and therefore cannot be determined with precision.

	(f)		Securities

			The Company follows the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Under the provisions of the Statement, securities are classified in three categories and accounted for as follows:

	•		Securities Held-to-Maturity

			Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Amortization of premiums and accretion of discounts are recognized by the interest method.

	•		Trading Securities

			Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.

	•		Securities Available-for-Sale

			Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at estimated fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity. Amortization and accretion of discounts are recognized by the interest method.

No securities have been classified as trading securities.

Realized gains or losses from the sale of debt and equity securities are recognized based upon the specific identification method.

	(g)		Premises and Equipment

			Premises and equipment are stated at cost. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the related assets. Gain or loss on items retired and otherwise disposed of is credited or charged to operations and cost and related accumulated depreciation are removed from the asset and accumulated depreciation accounts.

			Expenditures for major renewals and improvements of premises and equipment are capitalized and those for maintenance and repairs are charged to earnings as incurred.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(1)

Summary of Significant Accounting Policies, Continued

	(h)		Long-Term Assets

			Premises and equipment, intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

	(i)		Securities Sold Under Agreements to Repurchase

			Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

	(j)		Foreclosed Assets

			Real estate acquired in settlement of loans is initially recorded at the lower of cost (loan value of real estate acquired in settlement of loans plus incidental expense) or estimated fair value, less estimated cost of disposal. Based on periodic evaluations by management, the carrying values are reduced by a direct charge to earnings when they exceed net realizable value. Costs relating to the development and improvement of the property are capitalized, while holding costs of the property are charged to expense in the period incurred.

	(k)		Stock Options

			The Company uses the fair value method to calculate the compensation reported in the proforma earnings in note 20 to the consolidated financial statements.

	(l)		Income Taxes

			Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax asset and liabilities are expected to be realized or settled as prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

			The Company and its subsidiary file a consolidated Federal income tax return. Each corporation provides for income taxes on a separate-return basis.

	(m)		Benefit Plans

			Net pension expense consists of service costs, interest cost, return on pension assets and amortization of unrecognized initial excess of projected benefits over plan assets and amortization of actuarial gains and losses. Profit sharing and 401(K) plan expense is the amount contributed as determined by the Board of Directors.

	(n)		Advertising Costs

			Advertising costs are expensed when incurred.

	(o)		Cash and Cash Equivalents

			For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and Federal funds sold. Generally, Federal funds sold are purchased and sold for one-day periods. The Company maintains deposits with other financial institutions in excess of the Federal insurance amounts. Management makes deposits only with financial institutions it considers to be financially sound.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(1)

Summary of Significant Accounting Policies, Continued

	(p)		Off-Balance-Sheet Financial Instruments

			In the ordinary course of business the subsidiary bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

	(q)		Reclassifications

			Certain reclassifications have been made to the 2004 and 2003 figures to conform to the presentation for 2005.

	(r)		Impact of New Accounting Standards

			In November, 2002, the FASB issued Interpretation (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others”, which elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The interpretation also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The adoption of FIN 45 did not have a material impact on the consolidated financial statements.

			In October, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 147, “Acquisitions of Certain Financial Institutions”. SFAS No. 147 amends SFAS No. 72 and FASB Interpretation No. 9 to eliminate all acquisitions of financial institutions other than transactions between mutual enterprises from their scope. Accordingly, the excess of the purchase price paid to acquire a financial institution over the fair value of the identifiable tangible and intangible assets and liabilities acquired now must be recorded as goodwill following SFAS No. 141 and assessed for impairment following SFAS No. 142, “Goodwill and Other Intangible Assets”. Furthermore, any previously recognized unidentifiable intangible assets resulting from prior business combinations that do not meet SFAS No. 141’s criteria for separate recognition must be reclassified to goodwill.

			On June 30, 2005, the FASB issued an exposure draft “Business Combinations — a replacement of SFAS No. 141 (141 Revised). The proposed Statement would require the acquirer to measure the fair value of the acquiree, as a whole, as of the acquisition date as opposed to the definitive agreement date. The proposal also requires that contingent consideration be estimated and recorded at the acquisition which is in conflict with SFAS No. 5. SFAS No. 5 would be amended for this exception. Acquisition related costs incurred in connection with the business combination would generally be expensed.

			This proposed Statement would require the acquirer in a business combination in which the acquisition-date fair value of the acquirer’s interest in the acquiree exceeds the fair value of the consideration transferred for that interest (referred to as a bargain purchase) to account for that excess by first reducing the goodwill related to that business combination to zero, and then by recognizing any excess in income. Statement 141 requires that excess to be allocated as a pro rata reduction of the amounts that would have been assigned to particular assets acquired. The proposed Statement is expected to be effective for acquisitions after January 1, 2007.

			In May, 2003, the FASB issued Statement of Financial Accounting Standard (“SFAS” No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position or results of operations.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

	(r)		Impact of New Accounting Standards, Continued

			In June, 2003, the American Institute of Certified Public Accountants issued an exposure draft on a Proposed Statement of Position (“SOP”) on Allowance for Credit Losses. If approved, the Proposed SOP would significantly change the way the allowance for possible loan losses is calculated. Under the Proposed SOP, any loans determined to be impaired, as defined in SFAS No. 114, would be assigned a specific reserve based on facts and circumstances surrounding the particular loan and no loss percentage would be assigned. If a loan is determined not to be impaired, it would be assigned to a pool of similar homogeneous loans. A loss percentage would then be assigned to the pool based on historical charge-offs adjusted for internal or external factors such as the economy, changes in underwriting standards, etc. Management has not yet determined the impact this Proposed SOP would have on their consolidated financial statements. Under the Proposal, any changes resulting from the initial application of this Proposed SOP would be treated as a change in accounting estimate.

			In addition, there is currently outstanding a bank regulatory interagency proposal dated March 28, 2005 related to the methodology for assigning risk factors to loans and other extensions of credit. The policy, if adopted, could effect the calculation of the allowance for possible loan losses. Management has not determined the impact of this policy statement; however, it is not expected to have a material impact on the consolidated financial statements.

			On December 31, 2003, First McMinnville Corporation adopted certain disclosure requirements of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. These disclosures concerned unrealized losses related to investments in debt and marketable equity securities that are accounted for under SFAS No. 115. Disclosures include the length of time investments have been in a loss position and discussion pertaining to the nature of the impairment. In September, 2004, the FASB approved issuance of Staff Position (FSP) EITF 03-1-1, “Effective Date of Paragraphs 10 through 20 of EITF Issue No. 03-1, the Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). FSP EITF 03-1-1 delays the effective date of paragraphs 10 through 20 of EITF 03-1 as they relate to recognition of other-than-temporary impairment for cost method and marketable investments. This deferral will extend until the FASB provides clarification of the guidance presented in paragraphs 10 through 20. Effective July 1, 2004 First McMinnville adopted all remaining provisions of EITF Issue 03-1, including measurement guidance for evaluating whether impairment has occurred for marketable securities and cost method investments. The effect of implementing the final provisions of paragraphs 10 through 20 cannot currently be estimated due to the pending implementation issues. The adoption of all other provisions of EITF Issue No. 03-1 did not have an impact on the results of operations. The required disclosures are included in note 3 to the consolidated financial statements.

			On December 31, 2003, First McMinnville Corporation adopted SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. This standard does not change the measurement or recognition of those plans required by SFAS No. 87 and SFAS No. 106. Additionally, the disclosure requirements of the original SFAS No. 132 have been retained. SFAS No. 132 (revised 2003) requires additional disclosure about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The adoption of SFAS No. 132 (revised 2003) did not have an impact on the results of operations.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

	(r)		Impact of New Accounting Standards, Continued

			In December, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123-R), which requires recognition of expense over the requisite service period for awards of share-based compensation to employees. SFAS No. 123-R must be adopted no later than January 1, 2006 with earlier adoption permitted. As permitted by the original SFAS No. 123, First McMinnville Corporation has accounted for its equity awards under the provisions of APB No. 25. Upon adoption of SFAS No. 123-R, the grant date fair value of an award will be used to measure the compensation expense recognized for the award. For unvested awards granted prior to the adoption of SFAS 123-R, the fair values utilized will equal the values used in preparation of the disclosures required under the original SFAS 123. Compensation expense recognized after adoption of SFAS No. 123-R will incorporate an estimate of awards expected to ultimately vest, which requires estimation of forfeitures as well as projections related to the satisfaction of performance conditions that determine vesting. The substance of the revised statement is to require companies to record as an expense amortization of the fair market value of stock options determined as of the grant date. The offsetting credit is to additional paid-in capital unless there is an obligation to buy back the stock or exchange other assets for the stock. If such an obligation exists the offsetting credit would be to a liability account. Accordingly, the adoption of SFAS 123-R will have an impact on First McMinnville Corporation’s results of operations although it will have no significant impact on First McMinnville Corporation’s overall financial position. The impact of adoption of SFAS 123-R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had First McMinnville Corporation adopted SFAS 123-R in prior periods, the impact on that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in note 20, “Stock-Based Compensation”. Management does not expect the impact to be material on the financial condition or result of operations.

			On June 1, 2005, the SFAS issued Statement No. 154, “Accounting Changes and Error Corrections”, a replacement of APB 20 and Statement 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. In the absence of specific transition requirements to the contrary in the adoption of an accounting principle, SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable for comparability and consistency of financial information between periods. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors occurring in fiscal years beginning after June 1, 2005.

			On July 1, 2004, First McMinnville Corporation adopted FASB Staff Position (FSP) FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”. FSP FAS 106-2 requires a plan sponsor to determine if benefits offered through a postretirement health care plan are actuarially equivalent to Medicare Part D. If benefits are determined to be actuarially equivalent, the resulting effect on the plan’s obligations should be reflected as an actuarial gain in determining the plan’s accumulated postretirement benefit obligation. The impact of adopting FSP FAS 106-2 was immaterial to First McMinnville Corporation.

			On July 14, 2005, the FASB issued an Exposure Draft on Accounting for Uncertain Tax Positions, a proposed interpretation of FASB Statement No. 109. The proposed interpretation requires that only benefits from tax positions that are probable of being sustained under audit should be recognized in the financial statements. These benefits would be recorded at amounts considered to be the best estimates of management. At the time these positions become “more likely than not” to be disallowed under audit, their recognition would be reversed. First McMinnville Corporation is currently reviewing the potential impact of this proposed Interpretation; any cumulative effect associated with the application of the provisions of the proposed Interpretation will be reported as a change in accounting principle in the period in which the Interpretation is adopted.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(2)		Loans and Allowance for Possible Loan Losses

		Loans and allowance for possible loan losses at December 31, 2005 and 2004 are summarized as follows:


	In Thousands
	2005			2004
Commercial, financial and agricultural.	$	20,957			21,946
Real estate — construction		10,154			6,563
Real estate — mortgage		119,587			117,960
Consumer		2,868			2,647

		153,566			149,116
Less allowance for possible loan losses		(1,816	)		(1,816	)

	$	151,750			147,300

In the normal course of business, the Company’s subsidiary has made loans at prevailing interest rates and terms to directors and officers of the Company, and to their affiliates. The aggregate dollar amount of these loans was $5,038,000 and $5,771,000 at December 31, 2005 and 2004, respectively. During 2005, $2,429,000 of such loans were made and repayments totaled $3,162,000. During 2004, $5,268,000 of such loans were made and repayments totaled $5,081,000. As of December 31, 2005, none of these loans were restructured, nor were any related party loans charged off during the past three years.

No loans had been placed on non-accrual status during 2005 and 2004.

Total loans past due ninety days or more and still accruing interest amounted to $94,000 and $8,000 at December 31, 2005 and 2004, respectively.

The principal maturities on loans at December 31, 2005 are as follows:


	In Thousands
	Commercial,
	Financial
	and		Real Estate -		Real Estate-
	Agricultural		Construction		Mortgage		Consumer		Total
3 months or less	$	2,420		4,947		8,624		152		16,143
3 to 12 months		6,547		3,304		25,293		460		35,604
1 to 5 years		5,814		1,903		71,617		2,187		81,521
Over 5 Years		6,176		—		14,053		69		20,298

	$	20,957		10,154		119,587		2,868		153,566

At December 31, 2005, variable rate and fixed rate loans totaled approximately $21,535,000 and $132,031,000, respectively. At December 31, 2004, variable rate and fixed rate loans totaled approximately $24,531,000 and $124,585,000, respectively.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(2)		Loans and Allowance for Possible Loan Losses, Continued

		Transactions in the allowance for possible loan losses for the years ended December 31, 2005, 2004 and 2003 are summarized as follows:


	In Thousands
	2005			2004			2003
Balance, beginning of year	$	1,816			1,909			1,908
Provision charged (reduction) to operating expense		(87	)		—			59

		1,729			1,909			1,967


Loans charged off		(45	)		(159	)		(78	)
Recoveries on losses		132			66			20

Net recoveries (charge-offs)		87			(93	)		(58	)


Balance, end of year	$	1,816			1,816			1,909

		The Company’s principal customers are basically in the Middle Tennessee area with a concentration in Warren County, Tennessee. At December 31, 2005, the Company had loans to customers in the nursery industry totaling approximately $12,064,000 as compared to $10,120,000 at December 31, 2004. Credit is extended to businesses and individuals and is generally evidenced by promissory notes. The terms and conditions of the loans including collateral vary depending upon the purpose of the credit and the borrower’s financial condition.

		Impaired loans and related loan loss reserve amounts at December 31, 2005 and 2004 were as follows:


	In Thousands
	2005		2004
Recorded investment	$	1,055		1,097
Loan loss reserve	$	370		357

		The average recorded investment in impaired loans for the years ended December 31, 2005 and 2004 was $976,000 and $2,358,000, respectively.

		The related total amount of interest income recognized on the accrual basis for the period that such loans were impaired was $81,000 and $115,000 for 2005 and 2004, respectively.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(3)		Securities

		Securities have been classified in the balance sheet according to management’s intent. The Company’s classification of securities at December 31, 2005 is as follows:


	Securities Held-To-Maturity (In Thousands)
	2005
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
U.S. Treasury and other U.S. Government agencies and corporations	$	25,356		—		519		24,837
Obligations of states and political subdivisions		32,806		929		107		33,628
Corporate and other securities		1,794		42		—		1,836

	$	59,956		971		626		60,301


	Securities Available-For-Sale (In Thousands)
	2005
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
U.S. Treasury and other U.S. Government agencies and corporations	$	94,166		—		2,063		92,103
Obligations of states and political subdivisions		1,000		10		—		1,010
Mortgage-backed securities		764		15		—		779

	$	95,930		25		2,063		93,892

Securities at December 31, 2004 consist of the following:


	Securities Held-To-Maturity (In Thousands)
	2004
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
U.S. Treasury and other U.S. Government agencies and corporations	$	20,612		2		153		20,461
Obligations of states and political subdivisions		33,522		1,479		35		34,966
Corporate and other securities		2,992		128		—		3,120

	$	57,126		1,609		188		58,547


	Securities Available-For-Sale (In Thousands)
	2004
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
U.S. Treasury and other U.S. Government agencies and corporations	$	86,506		110		757		85,859
Obligations of states and political subdivisions		1,250		10		—		1,260
Mortgage-backed securities		1,040		40		—		1,080

	$	88,796		160		757		88,199

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(3) Securities, Continued

The amortized cost and estimated market value of debt securities at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	In Thousands
			Estimated
	Amortized		Market
Securities Held-To-Maturity	Cost		Value
Due in one year or less	$	6,455		6,408
Due after one year through five years.		29,554		29,210
Due after five years through ten years		15,827		16,236
Due after ten years		6,326		6,611
Corporate and other securities		1,794		1,836

	$	59,956		60,301


	In Thousands
			Estimated
	Amortized		Market
Securities Available-For-Sale	Cost		Value
Due in one year or less	$	20,564		20,361
Due after one year through five years.		73,142		71,291
Due after five years through ten years		1,500		1,502
Due after ten years		724		738

	$	95,930		93,892

Results from sales and early calls of securities are as follows:


	In Thousands
	For the Year Ended December 31,
	2005		2004		2003
Gross proceeds	$	436		1,593		1,268


Gross realized gains	$	6		33		23
Gross realized losses		—		—		—

Net realized gains	$	6		33		23

		Securities with approximate carrying values of $64,923,000 (approximate market value of $64,860,000) and $60,697,000 (approximate market value of $60,934,000) at December 31, 2005 and 2004, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes required or permitted by law.

		Included in the securities at December 31, 2005, are approximately $11,518,000 at amortized cost (approximate market value of $11,607,000) in obligations of political subdivisions located within the State of Tennessee. Management purchases only obligations of such political subdivisions it considers to be financially sound.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(3) Securities, Continued

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005:


	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
					Number						Number
					of						of
	Fair		Unrealized		Securities		Fair		Unrealized		Securities		Fair		Unrealized
	Value		Losses		Included		Value		Losses		Included		Value		Losses
U.S. Treasury and other U.S. Government agencies and corporations	$	41,961		479		40	$	74,978		2,104		73	$	116,939		2,583

Obligations of states and political sub- divisions		5,021		55		20		1,384		51		5		6,405		106


Total temporarily impaired securities.	$	46,982		534		60	$	76,362		2,155		78	$	123,344		2,689

		The impaired securities are considered high quality investments in line with normal industry investing practices. The unrealized losses are primarily the result of changes in the interest rate and sector environments. Consistent with the original classification, as available-for-sale or held-to-maturity securities, the Company intends and has the ability to hold the above securities until the value is realized.

		The Company may sell the above or other securities in the ordinary course of business in response to unexpected and significant changes in liquidity needs, unexpected and significant increases in interest rates and/or sector spreads that significantly extend the security’s holding period, or conducting a small volume of security transactions.

(4)		Restricted Equity Securities

		Restricted equity securities consists of stock of the Federal Home Loan Bank and the Federal Reserve Bank amounting to $1,268,000 and $91,000, respectively at December 31, 2005 and $1,212,000 and $91,000, respectively at December 31, 2004. The stock can be sold back only at par or a value as determined by the issuing institution and only to the Federal Home Loan Bank, the Federal Reserve Bank or to another member institution. These securities are reported at cost. The increase in the Federal Home Loan Bank during the year ended December 31, 2005 results from stock dividends totaling $56,000

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(5)		Premises and Equipment

		The detail of premises and equipment at December 31, 2005 and 2004 is as follows:


	In Thousands
	2005			2004
Land	$	389			389
Buildings		2,474			2,468
Furniture and equipment		2,384			2,102

		5,247			4,959
Less accumulated depreciation		(3,411	)		(3,177	)

	$	1,836			1,782

Depreciation expense for the years ended December 31, 2005, 2004 and 2003, amounted to $250,000, $306,000 and $273,000, respectively.

(6)

Deposits

Deposits at December 31, 2005 and 2004 are summarized as follows:


	In Thousands
	2005		2004
Demand deposits	$	24,722		21,956
Negotiable order of withdrawal accounts		31,438		34,073
Money market demand accounts		9,306		10,051
Savings deposits		32,273		32,571
Certificates of deposit $100,000 or greater		62,417		50,319
Other certificates of deposit		61,169		61,665
Individual retirement accounts $100,000 or greater		6,224		5,401
Other individual retirement accounts		11,539		10,552

	$	239,088		226,588

Principal maturities of certificates of deposit and individual retirement accounts at December 31, 2005 are as follows:


Maturity	In Thousands
2006	$	83,768
2007		35,513
2008		8,518
2009		10,634
2010		2,916

	$	141,349

At December 31, 2005, certificates of deposit and individual retirement accounts in denominations of $100,000 or more amounted to $68,641,000 as compared to $55,720,000 at December 31, 2004.

The aggregate amount of overdrafts reclassified as loans receivable was $5,000 and $30,000 at December 31, 2005 and 2004, respectively.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(6)		Deposits, Continued

		The Bank is required to maintain cash balances or balances with the Federal Reserve Bank or other correspondent banks based on certain percentages of deposit types. The average required amounts at December 31, 2005 and 2004 were approximately $2,060,000 and $2,086,000, respectively.

(7)		Securities Sold Under Repurchase Agreements

		The maximum amounts of outstanding repurchase agreements during 2005 and 2004 were $30,713,000 and $35,446,000, respectively. The average daily balance outstanding during 2005 and 2004 was $24,859,000 and $30,129,000, respectively. The weighted average interest rate at December 31, 2005 and 2004 was 1.80% and 1.20%, respectively. The underlying securities are typically held by other financial institutions and are designated as pledged.

(8)		Advances from Federal Home Loan Bank

		The advances from Federal Home Loan Bank (FHLB) at December 31, 2005 and 2004 consists of the following:

Initial

In Thousands

Original

Fixed Rate

2005

2004

Note Date

Maturity Date

Rate

Period

Amount

April 30, 1998

April 30, 2008

5.60

24 Months

1,000

The FHLB has the right to convert the fixed rate on these advances at the end of the initial fixed rate period and on a quarterly basis thereafter with a one business day notice. If the conversion option is exercised, the advance will be converted to a three month LIBOR-based advance at a spread of zero basis points to the LIBOR index.

(9)		Non-Interest Income and Non-Interest Expense

		The significant components of non-interest income and non-interest expense for the years ended December 31 are presented below:


	In Thousands
	2005		2004		2003
Non-interest income:
Service charges on deposits	$	489		459		462
Other fees and commissions		95		92		87
Commissions on fiduciary activities		126		77		82
Security gains, net		6		33		23
Gain on sale of premises and equipment		—		—		99
Other income		99		66		75

Total non-interest income	$	815		727		828


Non-interest expense:
Salaries and employee benefits	$	3,137		3,116		3,122
Occupancy expenses, net		208		200		205
Furniture and equipment expenses		355		399		331
FDIC insurance		31		34		36
Other operating expenses		953		994		1,102

Total non-interest expense	$	4,684		4,743		4,796

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(10)		Income Taxes

		The components of the net deferred tax asset (liability) are as follows:


	In Thousands
	2005			2004
Deferred tax asset:
Federal	$	1,073			643
State		219			131

		1,292			774


Deferred tax liability:
Federal		(445	)		(421	)
State		(91	)		(86	)

		(536	)		(507	)


	$	756			267

The tax effects of each type of significant item that gave rise to deferred taxes at December 31 are:


	In Thousands
	2005			2004
Financial statement allowance for possible loan losses in excess of tax allowance	$	512			545
Excess of depreciation deducted for tax purposes over the amounts deducted in the financial statements		(169	)		(157	)
Book pension expense under the allowable tax deduction		(124	)		(129	)
Unrealized loss on investment securities available-for-sale		780			229
FHLB stock dividends excluded for tax purposes		(243	)		(221	)

	$	756			267

The components of income tax expense are summarized as follows:


	In Thousands
	Federal		State		Total
2005
Current	$	1,495		393		1,888
Deferred		52		11		63

Total	$	1,547		404		1,951


2004
Current	$	1,576		423		1,999
Deferred		55		11		66

Total	$	1,631		434		2,065


2003
Current	$	1,671		452		2,123
Deferred		38		8		46

Total	$	1,709		460		2,169

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(10)		Income Taxes, Continued

		A reconciliation of actual income tax expense of $1,951,000, $2,065,000 and $2,169,000 for the years ended December 31, 2005, 2004 and 2003, respectively, to the “expected” tax expense (computed by applying the statutory rate of 34% to earnings before income taxes) is as follows:


	In Thousands
	2005			2004			2003
Computed “expected” tax expense	$	2,157			2,283			2,403
State income taxes, net of Federal income tax benefit		268			284			306
Tax exempt interest, net of interest expense exclusion		(459	)		(495	)		(524	)
Other, net		(15	)		(7	)		(16	)

Actual tax expense	$	1,951			2,065			2,169

		Total income tax expense for 2005, 2004 and 2003 includes income tax expense of $3,000, $13,000 and $9,000, respectively, related to gains on securities called.

(11)		Employee Benefit Plans

		The subsidiary bank has in effect a defined benefit noncontributory pension plan which covers substantially all employees over 21 years of age after they have been employed one year.

		The minimum required contribution for the plan years ending December 31, 2005 and 2004 was zero and $87,429, respectively. The Company contributed $124,000 and $223,000 in 2005 and 2004, respectively.

		Reconciliation of the benefit obligation and the fair value of plan assets is as follows:


	In Thousands
	2005			2004
Change in benefit obligation:
Obligation at January 1 (revalued in 2005 at 6%)	$	4,365			3,988
Service costs		139			129
Interest costs		261			254
Benefit payments		(274	)		(253	)
Actuarial gains (losses)		(20	)		(59	)

Obligation at December 31	$	4,471			4,059


Change in fair value of plan assets:
Fair value of plan assets at January 1	$	3,789			3,488
Actual (loss) return on plan assets		194			331
Employer contributions, net of refunds		124			223
Benefit payments		(274	)		(253	)

Fair value of plan assets at December 31	$	3,833			3,789

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(11)		Employee Benefit Plans, Continued

		The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance sheet at December 31, 2005 and 2004:


	In Thousands
	2005			2004
Actuarial present value of benefit obligations:
Accumulated benefit obligation	$	3,831			3,308


Actuarial present value of projected benefits obligation (PBO)	$	4,471			4,059
Plan assets at fair market value		3,833			3,789

Funded status		(638	)		(270	)
Unamortized net transition asset		242			264
Unrecognized prior service cost		(9	)		(14	)
Unrecognized net loss		730			357

Net pension asset recognized in the consolidated balance sheets	$	325			337

The unamortized net transition asset is being amortized over 30 years using the straight line method. Eleven years remain at December 31, 2005. The unrecognized prior service cost is being amortized by the straight-line method and has two years remaining at December 31, 2005. The unrecognized net gain or loss is being amortized over 11.1 years which is the expected future working lifetime as of January 1, 2005. The market value of plan assets is the market value of the assets plus accruals.

The following weighted-average assumptions were used to determine benefit obligations at December 31, 2005 and 2004:


	In Thousands
	2005			2004
Discount rate		6.0	%		6.5	%

Rate of compensation increase		3.5	%		3.5	%

Net periodic benefit cost amounted to $136,000 in 2005, $124,000 in 2004 and $223,000 in 2003 and is comprised of the following components:


	In Thousands
	2005			2004			2003
Service cost-benefits earned during the period	$	139			129			167
Interest cost on projected benefit obligation		261			254			234
Expected return on plan assets		(301	)		(278	)		(226	)
Amortization of net transition asset		22			22			22
Amortization of prior service cost		(5	)		(5	)		(5	)
Recognized actuarial (gain) or loss		20			2			31

	$	136			124			223

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(11)		Employee Benefit Plans, Continued

		The following weighted-average assumptions were used to determine net periodic pension cost for the years ended December 31, 2005, 2004 and 2003:


	2005			2004			2003
Discount rate		6.0	%		6.5	%		6.5	%

Expected long-term returns on plan assets		8.0	%		8.0	%		8.0	%

Rate of compensation increase		3.5	%		3.5	%		3.5	%

The following table gives the weighted-average plan asset allocations as of December 31, 2005 and 2004:


	2005			2004
Equity securities		59.0	%		55.8	%

Debt securities		41.0			44.2

Real estate		—			—

Other		—			—


		100.0	%		100.0	%

The Plan’s assets are currently invested at the discretion of the plan sponsor. No formal investment targets are maintained for different classes of assets due to the relative small size of the plan.

The Company’s best estimate of contribution for the year ended December 31, 2005 range between $100,000 and $250,000.

The benefits expected to be paid in the years subsequent to December 31, 2005 assuming no lump sum payments are as follows:


	(In Thousands)
	Pension
Year	Benefits
2006	$	146
2007		160
2008		186
2009		201
2010		196
2011 – 2015		1,331

	$	2,220

The expected benefits are estimated based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2005.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(11)		Employee Benefit Plans, Continued

		The Bank has adopted a 401(k) plan which covers eligible employees. To be eligible, an employee must have obtained the age of 21 and must have completed one year of service. The provisions of the plan provide for both employee and employer contributions. For the years ended December 31, 2005, 2004 and 2003, the Bank contributed $61,000, $57,000 and $58,000, respectively, to the plan.

(12)		Regulatory Matters and Restrictions on Dividends

		The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

		Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005 and 2004, that the Company and the Bank meets all capital adequacy requirements to which they are subject. The actual ratios of the Company and the Bank were as follows:


	Company						Bank						Minimum
	2005			2004			2005			2004			Requirement
Tier I ratio		30.52	%		29.79	%		30.45	%		29.73	%		4	%

Total risk-based ratio		31.57	%		30.86	%		31.51	%		30.80	%		8	%

Leverage ratio		16.87	%		16.17	%		16.84	%		16.14	%		4	%

		As of December 31, 2005, the most recent notification from the banking regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.

(13)		Commitments and Contingent Liabilities

		The Company has an unsecured $2,000,000 line of credit with another financial institution. The subsidiary Bank has lines of credit with other financial institutions totaling $20,000,000. At December 31, 2005 the subsidiary Bank had a balance under these lines of credit of $4,300,000. At December 31, 2005 there was no outstanding balance under these lines of credit.

(14)		Concentration of Credit Risk

		Substantially all of the Company’s loans, commitments, and commercial and standby letters of credit have been granted to customers in the Company’s market area. Virtually all such customers are depositors of the Bank. Investment in state and municipal securities also include governmental entities within the Company’s market area. The concentrations of credit by type of loan are set forth in note 2 to the consolidated financial statements.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(14)		Concentration of Credit Risk, Continued

		At December 31, 2005, the Company’s cash and due from banks included commercial bank deposit accounts aggregating $3,404,000 in excess of the Federal Deposit Insurance Corporation limit of $100,000 per institution.

(15)		Financial Instruments with Off-Balance-Sheet Risk

		The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

		The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.


	In Thousands
	Contract or Notional Amount
	2005		2004
Financial instruments whose contract amounts represent credit risk:
Unused commitments to extend credit	$	13,440		13,124
Standby letters of credit		1,976		2,216

Total	$	15,416		15,340

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterpart. Collateral normally consists of real property.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to three years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The maximum potential amount of future payments that the Company could be required to make under the guarantees totaled $1,976,000 at December 31, 2005.

(16)		Stock Split and Elimination of Par Value

		In December of 2002, the Company’s Board of Directors declared a two-for-one stock split effective February 1, 2003. As a result, shareholders as of the record date received an additional share for each share owned. Accordingly, the number of outstanding shares doubled from 520,749 shares to 1,041,498 shares. In addition, the Board authorized a charter amendment to eliminate “par value”, which was deemed as unnecessary accounting convention. All share and option per share amounts in this Report have been restated to reflect the stock split.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(17)		First McMinnville Corporation -

		Parent Company Financial Information

FIRST MCMINNVILLE CORPORATION
(Parent Company Only)

Balance Sheets

December 31, 2005 and 2004


	In Thousands
	2005			2004
ASSETS

Cash	$	1,395	*	$	1,418	*
Investment in commercial bank subsidiary		51,104	*		49,980	*
Due from commercial bank subsidiary		78	*		57	*

Total assets	$	52,577		$	51,455


LIABILITIES AND STOCKHOLDERS’ EQUITY

Dividend payable	$	1,360		$	1,376


Stockholders’ equity:
Common stock, no par value authorized 5,000,000 shares, issued 1,235,935 and 1,233,922 shares, respectively		3,804			3,745
Retained earnings		53,620			51,033
Net unrealized losses on available-for-sale securities, net of income taxes of $780,000 and $229,000, respectively		(1,257	)		(369	)

		56,167			54,409
Less cost of treasury stock of 205,440 and 193,062 shares, respectively		(4,950	)		(4,330	)

Total stockholders’ equity		51,217			50,079


Total liabilities and stockholders’ equity	$	52,577		$	51,455


*		Eliminated in consolidation.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(17)		First McMinnville Corporation -

		Parent Company Financial Information, Continued

FIRST MCMINNVILLE CORPORATION
(Parent Company Only)

Statements of Earnings and Comprehensive Earnings

For the Three Years Ended December 31, 2005


	In Thousands
	2005			2004			2003
Income:
Dividends from commercial bank subsidiary	$	2,415	*	$	1,943	*		1,822	*

Other expenses		55			48			71


Earnings before income tax benefits and equity in undistributed earnings of commercial bank subsidiary		2,360			1,895			1,751

Income tax benefits		21			18			27

		2,381			1,913			1,778

Equity in undistributed earnings of commercial bank subsidiary		2,012	*		2,737	*		3,121	*


Net earnings		4,393			4,650			4,899

Other comprehensive earnings, net of tax:
Unrealized gains (losses) on available-for-sale securities arising during the year, net of taxes of $551,000, $323,000 and $377,000, respectively		(888	)		(520	)		(603	)
Less: reclassification adjustment for gains included in net earnings, net of taxes of $1,000 in 2003		—			—			(3	)

Other comprehensive loss		(888	)		(520	)		(606	)


Comprehensive earnings	$	3,505		$	4,130			4,293


*		Eliminated in consolidation.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(17) First McMinnville Corporation -

Parent Company Financial Information, Continued

FIRST MCMINNVILLE CORPORATION
(Parent Company Only)

Statements of Stockholders’ Equity

For the Three Years Ended December 31, 2005


	In Thousands
									Net
									Unrealized
									Gains (Losses)
			Additional						On Available-
	Common		Paid-In			Retained			For-Sale			Treasury
	Stock		Capital			Earnings			Securities			Stock			Total
Balance December 31, 2002	$	1,534		2,001			45,082			757			(3,976	)		45,398
Elimination of par value		2,001		(2,001	)		—			—			—			—
Net earnings		—		—			4,899			—			—			4,899
Issuance of 3,872 shares of common stock		127		—			—			—			—			127
Cash dividends declared ($1.70 per share)		—		—			(1,774	)		—			—			(1,774	)
Cost of 1,837 shares of treasury stock		—		—			—			—			(84	)		(84	)
Net change in unrealized gains (losses) on available-for-sale securities during the year, net of taxes of $376,000		—		—			—			(606	)		—			(606	)

Balance December 31, 2003		3,662		—			48,207			151			(4,060	)		47,960
Net earnings		—		—			4,650			—			—			4,650
Issuance of 2,900 shares of common stock		83		—			—			—			—			83
Cash dividends declared ($1.75 per share)		—		—			(1,824	)		—			—			(1,824	)
Cost of 5,573 shares of treasury stock		—		—			—			—			(270	)		(270	)
Net change in unrealized gains (losses) on available-for-sale securities during the year, net of taxes of $323,000		—		—			—			(520	)		—			(520	)

Balance December 31, 2004		3,745		—			51,033			(369	)		(4,330	)		50,079
Net earnings		—		—			4,393			—			—			4,393
Issuance of 2,013 shares of common stock		59					—			—			—			59
Cash dividends declared ($1.75 per share)		—		—			(1,806	)		—			—			(1,806	)
Cost of 12,378 shares of treasury stock		—		—			—			—			(620	)		(620	)
Net change in unrealized gains (losses) on available-for-sale securities during the year, net of taxes of $551,000		—		—			—			(888	)		—			(888	)

Balance December 31, 2005	$	3,804		—			53,620			(1,257	)		(4,950	)		51,217

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(17) First McMinnville Corporation -

Parent Company Financial Information, Continued

FIRST MCMINNVILLE CORPORATION
(Parent Company Only)

Statements of Cash Flows

For the Three Years Ended December 31, 2005

Increase (Decrease) in Cash and Cash Equivalents


	In Thousands
	2005			2004			2003
Cash flows from operating activities:
Dividend received from commercial bank subsidiary	$	2,415			1,943			1,822
Cash paid to suppliers		(55	)		(48	)		(71	)

Net cash provided by operating activities		2,360			1,895			1,751


Cash flows from financing activities:
Dividends paid		(1,822	)		(1,805	)		(1,693	)
Payments made to acquire treasury stock		(620	)		(270	)		(84	)
Proceeds from issuance of common stock		59			83			127

Net cash used in financing activities		(2,383	)		(1,992	)		(1,650	)


Net increase (decrease) in cash and cash equivalents		(23	)		(97	)		101

Cash and cash equivalents at beginning of year		1,418			1,515			1,414


Cash and cash equivalents at end of year	$	1,395			1,418			1,515


Reconciliation of net earnings to net cash provided by operating activities:
Net earnings	$	4,393			4,650			4,899

Adjustments to reconcile net earnings to net cash provided by operating activities:
Dividend received from commercial bank subsidiary		2,415			1,943			1,822
Equity in earnings of commercial bank subsidiary		(4,427	)		(4,680	)		(4,943	)
Increase in other assets, net		(21	)		(18	)		(27	)

Total adjustments		(2,033	)		(2,755	)		(3,148	)


Net cash provided by operating activities	$	2,360			1,895			1,751

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(18)		Disclosures About Fair Value of Financial Instruments

		Statement of Financial Accounting Standards (SFAS) No. 107, “Disclosures about Fair Value of Financial Instruments” requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments.

		Cash and short-term investments

		For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

		Investments and Mortgage-Backed Securities

		The carrying amounts for short-term securities approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of longer-term securities and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.

		SFAS No. 107 specifies that fair values should be calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. Accordingly, these considerations have not been incorporated into the fair value estimates.

		Loans

		Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, credit card and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms.

		The fair value of the various categories of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining average estimated maturities.

		The estimated maturity for mortgages is modified from the contractual terms to give consideration to management’s experience with prepayments. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented below would be indicative of the value negotiated in an actual sale.

		The value of the loan portfolio is also discounted in consideration of the credit quality of the loan portfolio as would be the case between willing buyers and sellers. Particular emphasis has been given to loans on the subsidiary bank’s internal watch list. Valuation of these loans is based upon borrower performance, collateral values (including external appraisals), etc.

		Deposit Liabilities

		The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Under the provision of SFAS No. 107 the fair value estimates for deposits does not include the benefit that results from the low cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

		Securities Sold Under Repurchase Agreements

		The securities sold under repurchase agreements are payable upon demand. For this reason the carrying amount is a reasonable estimate of fair value.

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(18)		Disclosures About Fair Value of Financial Instruments, Continued

		Federal Funds Purchased

		For the Federal funds purchased, the carrying amount is a reasonable estimate of fair value.

		Advances from FHLB

		The fair value of advances from the FHLB is based on information received from the FHLB.

		Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees Written

		Loan commitments are made to customers generally for a period not to exceed one year and at the prevailing interest rates in effect at the time the loan is closed. Commitments to extend credit related to construction loans are made for a period not to exceed six months with interest rates at the current market rate at the date of closing. In addition, standby letters of credit are issued for periods up to three years with rates to be determined at the date the letter of credit is funded. Fees are only charged for the construction loans and the standby letters of credit and the amounts unearned at December 31, 2005 and 2004 are insignificant. Accordingly, these commitments have no carrying value and management estimates the commitments to have no significant fair value.

		The carrying value and estimated fair values of the Company’s financial instruments at December 31, 2005 and 2004 are as follows:


	In Thousands
	2005					2004
	Carrying					Carrying
	Amount			Fair Value		Amount			Fair Value
Financial assets:
Cash and short-term investments	$	5,649			5,649		10,245			10,245
Securities		153,848			154,193		145,325			146,746
Loans		153,566					149,116
Less: allowance for loan losses		(1,816	)				(1,816	)

Loans, net of allowance		151,750			148,110		147,300			145,236

Restricted equity securities		1,359			1,359		1,303			1,303


Financial liabilities:
Deposits		239,088			239,216		226,588			226,441
Securities sold under repurchase agreements		19,389			19,389		28,633			28,633
Federal funds purchased		4,300			4,300		—			—
Advances from FHLB		1,000			1,016		1,000			1,057

Unrecognized financial instruments:
Commitments to extend credit		—			—		—			—
Standby letters of credit		—			—		—			—

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(18)		Disclosures About Fair Value of Financial Instruments, Continued

		Limitations

		Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

		Fair value estimates are based on estimating on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a mortgage department that contributes net fee income annually. The mortgage department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities and property, plant and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

(19)		Earnings Per Share (EPS)

		Statement of Financial Accounting Standards (SFAS) No. 128 “Earnings Per Share” established uniform standards for computing and presenting earnings per share. The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share for the Company begins with the basic earnings per share plus the effect of common shares contingently issuable from stock options.

		The following is a summary of components comprising basic and diluted earnings per share (EPS):


(In Thousands, except share amounts)	2005		2004		2003

Basic EPS Computation:
Numerator — income available to common shareholders	$	4,393	$	4,650		4,899

Denominator — weighted average number of common shares outstanding		1,036,638		1,043,233		1,043,124

Basic earnings per common share	$	4.24	$	4.46		4.70


Diluted EPS Computation:
Numerator	$	4,393	$	4,650		4,899


Denominator:
Weighted average number of common shares outstanding		1,036,638		1,043,233		1,043,124
Dilutive effect of stock options		19,211		18,343		15,947

		1,055,849		1,061,576		1,059,071


Diluted earnings per common share	$	4.16	$	4.38		4.63

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(20)		Stock Option Plan

		In April, 1997, the stockholders of the Company approved the First McMinnville Corporation 1997 Stock Option Plan (The “Stock Option Plan”). The Stock Option Plan provides for the granting of stock options and authorizes the issuance of common stock upon the exercise of such options for up to 115,000 shares of common stock to directors and employees of the Company.

		Under the Stock Option Plan awards may be granted in the form of incentive stock options or nonstatutory stock options, and are exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the common stock on the grant date.

		SFAS No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, sets forth the method for recognition of cost of plans similar to those of the Company. As is permitted, management has elected to continue accounting for the plan under APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the stock option plan. However, under SFAS No. 123, the Company is required to make proforma disclosures as if cost had been recognized in accordance with the pronouncement. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, the Company’s net earnings and basic earnings per common share and diluted earnings per common share would have been reduced to the proforma amounts indicated below:


(In Thousands)	2005		2004		2003

Net earnings:
As Reported	$	4,393		4,650		4,899
Proforma	$	4,376		4,634		4,880

Basic earnings per common share:
As Reported	$	4.24		4.46		4.70
Proforma	$	4.22		4.44		4.68

Diluted earnings per common share:
As Reported	$	4.16		4.38		4.63
Proforma	$	4.14		4.37		4.61

A summary of the stock option activity for 2005, 2004 and 2003 is as follows:


	2005					2004					2003
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		59,178		$	30.48		63,178		$	30.42		69,050		$	30.93
Granted		—			—		—			—		—			—
Exercised		(2,013	)		29.08		(2,900	)		29.08		(3,872	)		32.85
Forfeited		—			—		(1,100	)		30.56		(2,000	)		43.67

Outstanding at end of year		57,165		$	30.52		59,178		$	30.48		63,178		$	30.42

Options exercisable at year end		48,725					47,038					45,938

FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements, Continued

December 31, 2005, 2004 and 2003

(20)		Stock Option Plan, Continued

		The following table summarizes information about fixed stock options at December 31, 2005:


Options Outstanding							Options Exercisable
						Weighted
				Weighted		Average			Weighted
Range of		Number		Average		Remaining	Number		Average
Exercise		Outstanding		Exercise		Contractual	Exercisable		Exercise
Prices		at 12/31/05		Price		Life	at 12/31/05		Price
$	29.08		45,765	$	29.08	2.7 years		38,845	$	29.08
	34.93		9,000		34.93	5.1 years		9,000		34.93
	37.15		800		37.15	5.6 years		400		37.15
	43.67		1,600		43.67	7.8 years		480		43.67

			57,165					48,725

(21)		Quarterly Financial Data (Unaudited)

		Selected quarterly results of operations for the four quarters ended December 31 are as follows:


	(In Thousands, except per share data)
	2005									2004
	Fourth			Third		Second		First		Fourth		Third		Second		First
	Quarter			Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter

Interest income	$	3,986			3,921		3,800		3,741		3,794		3,773		3,728		3,718
Net interest income		2,486			2,530		2,537		2,573		2,681		2,689		2,687		2,674
Provision for (reduction in) possible loan losses		(87	)		—		—		—		—		—		—		—
Earnings before income taxes		1,513			1,670		1,514		1,647		1,732		1,707		1,564		1,712
Net earnings		1,102			1,149		1,005		1,137		1,211		1,195		1,059		1,185
Basic earnings per common share		1.07			1.11		.97		1.09		1.16		1.15		1.01		1.14
Diluted earnings per common share		1.05			1.09		.95		1.07		1.13		1.13		1.00		1.12

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005

I.		Distribution of Assets, Liabilities and Stockholders’ Equity:

		Interest Rates 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 prior year. Changes in interest income and expense not due solely to volume or rate changes have been allocated to the “changes due to volume” and “change due to rate” in proportion to the relationship of the absolute dollar amounts of the changes in each category.

		Non-accrual loans, if any, have been included in their respective loan category. Loan fees of $331,000, $324,000 and $362,000 for 2005, 2004 and 2003, respectively, are included in loan income and represent an adjustment of the yield on these loans.

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005


	*In Thousands, Except Interest Rates*
	2005								2004								2005/2004 Change
	Average			Interest			Income/		Average			Interest			Income/		Due to			Due to
	Balance			Rate			Expense		Balance			Rate			Expense		Volume			Rate		Total
Loans, net of unearned interest	$	144,884			6.75	%		9,780		147,981			6.61	%		9,776		(203	)		207		4

Investment securities — taxable		114,104			3.45			3,940		104,804			3.32			3,476		322			142		464


Investment securities - tax exempt		32,108			4.50			1,446		34,275			4.50			1,544		(98	)		—		(98	)

Taxable equivalent adjustment		—			2.32			745		—			2.32			795		(50	)		—		(50	)

Total tax-exempt investment securities		32,108			6.82			2,191		34,275			6.82			2,339		(148	)		—		(148	)


Total investment securities		146,212			4.19			6,131		139,079			4.18			5,815		302			14		316


Restricted equity securities		1,337			4.64			62		1,284			4.13			53		2			7		9

Federal funds sold		7,220			3.03			219		13,436			1.21			163		(102	)		158		56

Interest-bearing deposits in financial institutions		39			2.56			1		45			2.22			1		—			—		—


Total earning assets		299,692			5.40			16,193		301,825			5.24			15,808		(109	)		494		385


Cash and due from banks		5,839								5,771

Allowance for possible loan losses		(1,864	)							(1,897	)

Bank premises and equipment		1,752								1,932

Other assets		2,984								2,535


Total assets	$	308,403								310,166

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005


	*In Thousands, Except Interest Rates*
	2005							2004							2005/2004 Change
	Average		Interest			Income/		Average		Interest			Income/		Due to			Due to
	Balance		Rate			Expense		Balance		Rate			Expense		Volume			Rate		Total
Deposits:
Negotiable order of withdrawal accounts	$	33,327		.68	%		228		34,716		.62	%		216		(9	)		21		12
Money market demand accounts		9,420		1.49			140		9,629		1.19			115		(2	)		27		25
Other savings accounts		32,818		1.13			372		33,961		.77			263		(9	)		118		109
Certificates of deposit $100,000 and over		44,418		3.23			1,436		41,316		2.86			1,182		93			161		254
Certificates of deposit under $100,000		68,173		3.18			2,165		70,495		2.46			1,736		(59	)		488		429
Individual retirement accounts		17,022		3.21			546		15,542		2.57			399		41			106		147

Total interest-bearing deposits		205,178		2.38			4,887		205,659		1.90			3,911		(9	)		985		976


Federal funds purchased		277		4.33			12		—		—			—		12			—		12
Securities sold under repurchase agreements and short-term debt		24,859		1.48			367		30,129		1.08			315		(61	)		113		52

Advances from Federal Home Loan Bank		1,000		5.60			56		1,000		5.60			56		—			—		—


Total interest-bearing deposits and borrowed funds		231,314		2.30			5,322		236,788		1.81			4,282		(101	)		1,141		1,040


Demand deposits		24,396							22,417

Other liabilities		1,536							1,486

Stockholders’ equity		51,157							49,475


Total liabilities and stockholders’ equity	$	308,403							310,166


Net interest income							10,871							11,526							(655	)


Net yield on earning assets				3.63	%						3.82	%


Net interest spread				3.10	%						3.43	%

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005


	*In Thousands, Except Interest Rates*
	2004								2003								2004/2003 Change
	Average			Interest			Income/		Average			Interest			Income/		Due to			Due to
	Balance			Rate			Expense		Balance			Rate			Expense		Volume			Rate			Total
Loans, net of unearned interest	$	147,981			6.61	%		9,776		148,547			7.03	%		10,449		(41	)		(632	)		(673	)

Investment securities — taxable		104,804			3.32			3,476		93,750			3.77			3,531		392			(447	)		(55	)


Investment securities - tax exempt		34,275			4.50			1,544		35,462			4.63			1,637		(52	)		(41	)		(93	)

Taxable equivalent adjustment		—			2.32			795		—			2.38			843		(30	)		(18	)		(48	)

Total tax-exempt investment securities		34,275			6.82			2,339		35,462			6.99			2,480		(82	)		(59	)		(141	)


Total investment securities		139,079			4.18			5,815		129,212			4.65			6,011		438			(634	)		(196	)


Restricted equity securities		1,284			4.13			53		1,237			4.20			52		2			(1	)		1

Federal funds sold		13,436			1.21			163		18,715			1.05			196		(60	)		27			(33	)

Interest-bearing deposits in financial institutions		45			2.22			1		116			.86			1		(1	)		1			—


Total earning assets		301,825			5.24			15,808		297,827			5.61			16,709		220			(1,121	)		(901	)


Cash and due from banks		5,771								7,651

Allowance for possible loan losses		(1,897	)							(1,942	)

Bank premises and equipment		1,932								2,163

Other assets		2,535								2,484


Total assets	$	310,166								308,183

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005


	*In Thousands, Except Interest Rates*
	2004							2003							2004/2003 Change
	Average		Interest			Income/		Average		Interest			Income/		Due to			Due to
	Balance		Rate			Expense		Balance		Rate			Expense		Volume			Rate			Total

Deposits:
Negotiable order of withdrawal accounts	$	34,716		.62	%		216		34,474		.74	%		255		2			(41	)		(39	)
Money market demand accounts		9,629		1.19			115		10,121		1.24			126		(5	)		(6	)		(11	)
Other savings accounts		33,961		.77			263		33,073		1.07			354		10			(101	)		(91	)
Certificates of deposit, $100,000 and over		41,316		2.86			1,182		40,574		2.99			1,214		22			(54	)		(32	)
Certificates of deposit under $100,000		70,495		2.46			1,736		73,980		2.71			2,002		(90	)		(176	)		(266	)
Individual retirement accounts		15,542		2.57			399		15,191		2.90			440		10			(51	)		(41	)

Total interest-bearing deposits		205,659		1.90			3,911		207,413		2.12			4,391		(36	)		(444	)		(480	)


Federal funds purchased and securities sold under repurchase agreements		30,129		1.08			315		28,263		1.15			324		20			(29	)		(9	)

Advances from Federal Home Loan Bank		1,000		5.60			56		1,000		5.60			56		—			—			—


Total interest-bearing deposits and borrowed funds		236,788		1.81			4,282		236,676		2.02			4,771		2			(491	)		(489	)


Demand deposits		22,417							22,411

Other liabilities		1,486							1,896

Stockholders’ equity		49,475							47,200


Total liabilities and stockholders’ equity	$	310,166							308,183


Net interest income							11,526							11,938								(412	)


Net yield on earning assets				3.82	%						4.01	%


Net interest spread				3.43	%						3.59	%

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005

II.

Investment Portfolio, Continued:

The following schedule details the estimated maturities and weighted average yields of securities of the Company at December 31, 2005.


			Estimated		Weighted
	Amortized		Market		Average
Held-To-Maturity Securities	Cost		Value		Yields
	(In Thousands, Except Yields)
Obligations of U.S. Treasury and other U.S. Government agencies and corporations:
Less than one year	$	5,114		5,075		3.24	%
One to five years		20,242		19,762		3.52
Five to ten years		—		—		—
More than ten years		—		—		—

Total securities of U.S. Treasury and other U.S. Government agencies and corporations		25,356		24,837		3.46


Mortgage-backed securities:
Less than one year		—		—		—
One to five years		—		—		—
Five to ten years		—		—		—
More than ten years		—		—		—

Total mortgage-backed securities		—		—		—


Obligations of states and political subdivisions (tax-exempt)*:
Less than one year		1,341		1,333		6.84
One to five years		9,312		9,448		6.10
Five to ten years		15,482		15,868		6.68
More than ten years		6,326		6,611		7.13

Total obligations of states and political subdivisions (tax-exempt)		32,461		33,260		6.61


Obligations of states and political subdivisions (taxable):
Less than one year		—		—		—
One to five years		—		—		—
Five to ten years		345		368		6.88
More than ten years		—		—		—

Total obligations of states and political subdivisions (taxable)		345		368		6.88


Corporate and other securities		1,794		1,836		6.94


Total held-to-maturity securities	$	59,956		60,301		5.36	%


*		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, 2005

II.

Investment Portfolio, Continued:

Continued


			Estimated		Weighted
	Amortized		Market		Average
Available-For-Sale Securities	Cost		Value		Yields
	(In Thousands, Except Yields)
Obligations of U.S. Treasury and other U.S. Government agencies and corporations:
Less than one year	$	20,564		20,361		3.26	%
One to five years		73,100		71,249		3.55
Five to ten years		500		492		4.00
More than ten years		—		—		—

Total securities of U.S. Treasury and other U.S. Government agencies and corporations		94,164		92,102		3.49	%


Mortgage-backed securities:
Less than one year		—		—		—
One to five years		42		42		5.50
Five to ten years		—		—		—
More than ten years		724		738		6.04

Total mortgage-backed securities		766		780		6.01


Obligations of states and political subdivisions (tax-exempt)*:
Less than one year		—		—		—
One to five years		—		—		—
Five to ten years		—		—		—
More than ten years		—		—		—

Total obligations of states and political subdivisions (tax-exempt)		—		—		—


Obligations of states and political subdivisions (taxable):
Less than one year		—		—		—
One to five years		—		—		—
Five to ten years		1,000		1,010		6.92
More ten years		—		—		—

Total obligations of states and political subdivisions (taxable)		1,000		1,010		6.92


Total available-for-sale securities	$	95,930		93,892		3.55	%


*		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, 2005

III.

Loan Portfolio, Continued:

	C.		Risk Elements

			The following schedule details selected information as to non-performing loans of the Company at December 31, 2005, 2004, 2003, 2002 and 2001.


	In Thousands, Except Percentages
	2005			2004			2003			2002			2001
Non-accrual loans:
Commercial, financial and agricultural	$	—			—			—			—			—
Real estate — construction		—			—			—			—			—
Real estate — mortgage		—			—			—			—			—
Consumer		—			—			—			—			—
Lease financing receivable		—			—			—			—			—

Total non-accrual	$	—			—			—			—			—


Loans 90 days past due:
Commercial, financial and agricultural	$	—			—			—			—			17
Real estate — construction		—			—			—			—			—
Real estate — mortgage		72			—			289			57			133
Consumer		22			8			23			12			2
Lease financing receivable		—			—			—			—			—

Total loans 90 days past due	$	94			8			312			69			152


Renegotiated loans:
Commercial, financial and agricultural	$	—			—			—			—			—
Real estate — construction		—			—			—			—			—
Real estate — mortgage		—			—			—			—			—
Consumer		—			—			—			—			—
Lease financing receivable		—			—			—			—			—

Total renegotiated loans past due	$	—			—			—			—			—


Loans current — considered uncollectible	$	—			—			—			—			—


Total non-performing loans	$	94			8			312			69			152


Total loans, net of unearned interest	$	153,566			149,116			148,520			149,581			140,731


Percent of total loans outstanding, net of unearned interest		.06	%		.01	%		0.21	%		.05	%		0.11	%


Foreclosed assets	$	203			190			220			—			100

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005

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, 2005, 2004, 2003, 2002 and 2001.

			At December 31, 2005, loans totaling $9,161,000 were included in the Company’s internal classified loan list. Of these loans, $3,319,000 are real estate, $5,759,000 are commercial and $83,000 are consumer. Management estimates collateral valuations relating to these loans to be approximately $21,190,000 ($4,657,000 related to real estate, $16,445,000 related to commercial and $88,000 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, 2005 and 2004, there were loans to customers in the nursery industry totaling approximately $12,064,000 and $10,120,000, respectively, which represents an industry concentration of approximately 7.86% and 6.79% of total loans for 2005 and 2004, respectively. 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, 2005, foreclosed assets totaled $203,000. This balance consists of three pieces of residential real estate with an estimated market value of $138,000 and one tract of vacant land with an estimated market value of $65,000.

			At December 31, 2004, foreclosed assets totaled $190,000. This balance consists of four pieces of residential real estate with an estimated market value of $125,000 and one tract of vacant land with an estimated market value of $65,000.

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005

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, 2005, 2004, 2003, 2002 and 2001 and the years then ended.


	In Thousands, Except Percentages
	2005			2004			2003			2002			2001
Allowance for loan losses at beginning of period	$	1,816			1,909			1,908			1,804			1,711


Charge-offs:
Commercial, financial and agricultural		(1	)		(76	)		—			(88	)		(85	)
Real estate construction		—			—			—			—			—
Real estate – mortgage		(24	)		(67	)		(56	)		(15	)		(47	)
Consumer		(20	)		(16	)		(22	)		(30	)		(19	)
Lease financing		—			—			—			—			—

		(45	)		(159	)		(78	)		(133	)		(151	)


Recoveries:
Commercial, financial and agricultural		101			24			10			34			23
Real estate construction		—			—			—			—			—
Real estate — mortgage		26			27			—			13			17
Consumer		5			15			10			10			24
Lease financing		—			—			—			—			—

		132			66			20			57			64


Net loan recoveries (charge-offs)		87			(93	)		(58	)		(76	)		(87	)



Reduction in allowance for (provision for) loan losses charged (credited) to expense		(87	)		—			59			180			180


Allowance for loan losses at end of period	$	1,816			1,816			1,909			1,908			1,804


Total loans, net of unearned interest, at end of year	$	153,566			149,116			148,520			149,581			140,731


Average total loans out- standing, net of unearned interest, during year	$	144,884			147,981			148,547			143,911			136,168


Net charge-offs (recoveries) as a percentage of average total loans outstanding, net of unearned interest, during year		(.06	)%		.06	%		.04	%		.05	%		0.06	%


Ending allowance for possible loan losses as a percentage of total loans outstanding net of unearned interest, at end of year		1.18	%		1.22	%		1.29	%		1.28	%		1.28	%

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005

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:


	December 31, 2005					December 31, 2004
			Percent of					Percent of
			Loans In					Loans In
	In		Each Category			In		Each Category
	Thousands		To Total Loans			Thousands		To Total Loans
Commercial, financial and agricultural	$	759		14	%	$	843		15	%
Real estate construction		25		7			16		4
Real estate mortgage		982		78			914		79
Consumer		50		1			43		2

	$	1,816		100	%	$	1,816		100	%


	December 31, 2003					December 31, 2002
			Percent of					Percent of
			Loans In					Loans In
	In		Each Category			In		Each Category
	Thousands		To Total Loans			Thousands		To Total Loans
Commercial, financial and agricultural	$	1,079		17	%	$	1,264		19	%
Real estate construction		14		4			14		4
Real estate mortgage		762		77			581		76
Consumer		54		2			49		1

	$	1,909		100	%	$	1,908		100	%


	December 31, 2001
			Percent of
			Loans In
	In		Each Category
	Thousands		To Total Loans
Commercial, financial and agricultural	$	1,217		15	%
Real estate construction		14		4
Real estate mortgage		537		79
Consumer		36		2

	$	1,804		100	%

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005

V.		Deposits:

		The average amounts and average interest rates for deposits for 2005, 2004 and 2003 are detailed in the following schedule:


	2005					2004					2003
	Average					Average					Average
	Balance					Balance					Balance
	In		Average			In		Average			In		Average
	Thousands		Rate			Thousands		Rate			Thousands		Rate
Non-interest bearing deposits	$	24,396		—	%		22,417		—	%		22,411		—	%
Negotiable order of withdrawal accounts		33,327		.68			34,716		.62			34,474		.74
Money market demand accounts		9,420		1.49			9,629		1.19			10,121		1.24
Other savings		32,818		1.13			33,961		.77			33,073		1.07
Certificates of deposit $100,000 and over		44,418		3.23			41,316		2.86			40,574		2.99
Certificates of deposit under $100,000		68,173		3.18			70,495		2.46			73,980		2.71
Individual retirement savings accounts		17,022		3.21			15,542		2.57			15,191		2.90


	$	229,574		2.38	%		228,076		1.71	%		229,824		1.91	%

The following schedule details the maturities of certificates of deposit and individual retirement accounts of $100,000 and over at December 31, 2005:


	In Thousands
	Certificates		Individual
	of		Retirement
	Deposit		Accounts		Total
Less than three months	$	13,462		568		14,030

Three to six months		18,006		756		18,762

Six to twelve months		8,931		1,150		10,081

More than twelve months		22,018		3,750		25,768


	$	62,417		6,224		68,641

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005

VI.		Return on Equity and Assets:

		The following schedule details selected key ratios of the Company at December 31, 2005, 2004 and 2003.


	2005			2004			2003
Return on assets		1.42	%		1.50	%		1.59	%
(Net income divided by average total assets)

Return on equity		8.59	%		9.40	%		10.38	%
(Net income divided by average equity)

Dividend payout ratio		41.27	%		39.24	%		36.17	%
(Dividends declared per share divided by net income per share)

Equity to asset ratio		16.59	%		15.95	%		15.32	%
(Average equity divided by average total assets)

Leverage capital ratio		16.87	%		16.17	%		15.46	%
(Equity divided by fourth quarter average total assets, excluding the net unrealized gain or loss on available-for-sale- securities)

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, 2005

VI.		Return on Equity and Assets, Continued:

		The following schedule details the Company’s risk-based capital at December 31, 2005, excluding the net unrealized loss on available-for-sale securities which is shown as a deduction in stockholders’ equity in the consolidated financial statements:


	In Thousands,
	Except
	Percentages
Tier I capital:
Stockholders’ equity, excluding the net unrealized loss on available-for-sale securities	$	52,474

Tier II capital:
Allowable allowance for loan losses (limited to 1.25% of risk-weighted assets)		1,816


Total risk-based capital	$	54,290


Risk-weighted assets	$	171,959


Risk-based capital ratios:
Tier I capital ratio		30.52	%


Total risk-based capital ratio		31.57	%

The Company is required to maintain a total risk-based capital to risk weighted asset ratio of 8% and a Tier I capital to risk weighted asset ratio of 4%. At December 31, 2005, the Company and its subsidiary bank were in compliance with these requirements.

FIRST MCMINNVILLE CORPORATION

Form 10-K

December 31, 2005

VI.		Return on Equity and Assets, Continued:

		The following schedule details the Company’s interest rate sensitivity at December 31, 2005:


	Repricing Within
(In Thousands)	Total		0-30 Days			31-90 Days			91-180 Days			181-365 Days			Over 1 Year
Earning assets:
Loans	$	153,566		24,506			8,770			14,187			17,610			88,493
Securities		153,848		2,089			1,621			4,179			19,915			126,044
Interest-bearing deposits		45		45			—			—			—			—
Federal funds sold		—		—			—			—			—			—
Restricted equity securities		1,359		1,359			—			—			—			—

Total earning assets		308,818		27,999			10,391			18,366			37,525			214,537


Interest-bearing liabilities:
Negotiable order of withdrawal accounts		31,438		31,438			—			—			—			—
Money market demand accounts		9,306		9,306			—			—			—			—
Savings deposits		32,273		31,215			1,058			—			—			—
Certificates of deposit, $100,000 and over		62,417		6,498			6,964			18,006			8,931			22,018
Certificates of deposit, under $100,000		61,169		3,998			7,927			9,139			12,996			27,109
Individual retirement accounts		17,763		2,256			1,222			2,358			3,473			8,454
Securities sold under repurchase agreements		19,389		19,389			—			—			—			—
Federal funds purchased		4,300		4,300			—			—			—			—
Advances from FHLB		1,000		—			—			—			—			1,000


Total interest- bearing liabilities		239,055		108,400			17,171			29,503			25,400			58,581


Interest-sensitivity gap	$	69,763		(80,401	)		(6,780	)		(11,137	)		12,125			155,956


Cumulative gap				(80,401	)		(87,181	)		(98,318	)		(86,193	)		69,763


Interest-sensitivity gap as % of total assets				(25.62	)%		(2.13	)%		(3.51	)%		3.82	%		49.08	%


Cumulative gap as % of total assets				(25.62	)%		(27.43	)%		(30.94	)%		(27.12	)%		21.95

The Company presently maintains a liability sensitive position over the next six months and over the next twelve months. 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, 2005

VI.		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 on the spread between the cost of funds and interest yields generated primarily through loans and investments.


PART I		1

Cautionary Warning Regarding Forward-Looking Statements		1

Item 1.	Business	1

Item 1A.	Risk Factors.	31

Item 1B.	Unresolved Staff Comments.	36

Item 2.	Properties.	36

Item 3.	Legal Proceedings.	37

Item 4.	Submission of Matters to a Vote of Security Holders	37

PART II		37

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37

Item 6.	Selected Financial Data.	51

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	51

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	52

Item 8.	Financial Statements and Supplementary Data.	52

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	52

Item 9A.	Controls and Procedures.	52

Item 9B.	Other Information.	53
Ex-31(i) Section 302 Certification of the CEO
Ex-31(ii) Section 302 Certification of the CFO
Ex-32(a) Section 906 Certification of the CEO
Ex-32(b) Section 906 Certification of the CFO


PART III		53

Item 10.	Directors and Executive Officers of the Registrant	53

Item 11.	Executive Compensation.	54

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	55

Item 13.	Certain Relationships and Related Transactions.	56

Item 14.	Principal Accountant Fees and Services.	56

PART IV		57

Item 15.	Exhibits, Financial Statement Schedules	57

Signatures		58

Exhibit Index		60

	A.		Loan Types

			The following schedule details the loans of the Company at December 31, 2005, 2004, 2003, 2002 and 2001.


Note: Amounts for 2004, 2003, 2002 and 2001 have been reclassified to conform to the classifications for 2005.

	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, 2005.


	In Thousands
			1 Year to
	Less Than		Less Than		After 5
	1 Year *		5 Years		Years		Total
Maturity Distribution:
Commercial, financial and agricultural	$	8,967		5,814		6,176		20,957
Real estate — construction		8,251		1,903		—		10,154

	$	17,218		7,717		6,176		31,111

Interest-Rate Sensitivity:
Fixed interest rates	$	14,020		7,602		4,305		25,927
Floating or adjustable interest rates		3,198		115		1,871		5,184

Total commercial, financial and agricultural loans and real estate - construction loans	$	17,218		7,717		6,176		31,111


*	Includes demand loans, bankers acceptances, commercial paper and deposit notes.

	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, 2005 which would be required to be disclosed as past due, non-accrual, restructured or potential problem loans, if such interest-bearing assets were loans.

VII.		Short-Term Borrowings

		Information related to securities sold under repurchase agreements which are due upon demand is as follows:


	Average										Maximum
	Amounts		Weighted					Year End			Borrowing
	Outstanding		Average			Amount		Weighted			Outstanding
	During		Interest Rate			Outstanding		Average			At Any
Year Ended	The Year		For The Year			At Year End		Interest Rate			Month End
	(In Thousands)					(In Thousands)					(In Thousands)
December 31, 2005	$	24,859		1.48	%	$	19,389		1.80	%	$	30,713
December 31, 2004	$	30,129		1.05	%	$	28,633		1.20	%	$	35,446
December 31, 2003	$	28,263		1.15	%	$	28,782		1.01	%	$	32,352