PART I
ITEM 1. BUSINESS.
General
First Citizens Bancshares, Inc. (the Company) is a financial holding
company incorporated in Tennessee in 1982. Through its principal bank
subsidiary, First Citizens National Bank (the Bank), the Company conducts
commercial banking and financial services operations primarily in West
Tennessee. At December 31, 2011, the Company and its subsidiaries had total
assets of $1.053 billion and total deposits of $856 million. The Companys
principal executive offices are located at One First Citizens Place, Dyersburg,
Tennessee 38024 and its telephone number is (731) 285-4410.
The Company,
headquartered in Dyersburg, Tennessee, is the holding company for the Bank and
First Citizens (TN) Statutory Trusts III and IV. These trusts hold the
Companys trust preferred debt and are not consolidated but are accounted for
under the equity method in accordance with accounting principles generally
accepted in the United States (GAAP).
The Bank is a
diversified financial services institution that provides banking and other
financial services to its customers. The Bank provides customary banking
services, such as checking and savings accounts, fund transfers, various types
of time deposits, safe deposit facilities, financing of commercial transactions
and making and servicing both secured and unsecured loans to individuals, firms
and corporations. The Bank is the only community bank in Tennessee recognized
as a preferred lender for the Farm Service Agency of the U.S. Department of
Agriculture (FSA), which provides emergency farm loans to help producers
recover from production and physical losses caused by natural disasters or
quarantine. The Banks agricultural services include operating loans as well
as financing for the purchase of equipment and farmland. The Banks consumer
lending department makes direct loans to individuals for personal, automobile,
real estate, home improvement, business and collateral needs. The Bank
typically sells long-term residential mortgages that it originates to the
secondary market without retaining servicing rights. The Banks commercial
lending operations include various types of credit services for customers.
The Bank has the following
subsidiaries:
-
First Citizens Financial Plus, Inc., a Tennessee bank service
corporation wholly owned by the Bank, provides licensed brokerage services that
allow the Bank to compete on a limited basis with numerous non-bank entities
that provide such services to the Companys customer base. The brokerage firm
operates three locations in West Tennessee.
-
White and Associates/First Citizens Insurance, LLC was chartered
by the State of Tennessee and is a general insurance agency offering a full
line of insurance products including casualty, life and health, and crop
insurance. The Bank holds a 50% ownership in the agency, which is accounted
for using the equity method. The insurance agency operates nine offices in
Northwest Tennessee.
-
First Citizens/White and Associates Insurance Company is organized
and existing under the laws of the State of Arizona. Its principal activity is
credit insurance. The Bank holds a 50% ownership in the agency, which is
accounted for using the equity method in accordance with GAAP.
-
First Citizens Investments, Inc. was organized and exists under
laws of the State of Nevada. The principal activity of this entity is to
acquire and sell investment securities as well as collect income from the
portfolio. First Citizens Investments, Inc. owns the following subsidiary:
-
First Citizens Holdings, Inc. is a Nevada corporation and wholly-owned
subsidiary of First Citizens Investments, Inc., acquires and sells certain
investment securities, collects income from its portfolio, and owns the
following subsidiary:
3
-
First Citizens Properties, Inc. is a real estate investment trust
organized and existing under the laws of the State of Maryland, the principal
activity of which is to invest in participation interests in real estate loans
made by the Bank and provide the Bank with an alternative vehicle for raising
capital. First Citizens Holdings, Inc. owns 100% of the outstanding common
stock and 60% of the outstanding preferred stock of First Citizens Properties,
Inc. Directors, executive officers and certain employees and affiliates of the
Bank own approximately 40% of the preferred stock which is reported as Noncontrolling Interest in Consolidated Subsidiaries in the Consolidated
Balance Sheets of the Company included elsewhere in this Annual Report on 10-K.
The following table sets forth a
comparative analysis of key balance sheet metrics of the Company as of December
31, for the years indicated (in thousands):
|
2011
|
2010
|
2009
|
Total assets
|
$1,053,549
|
$974,378
|
$956,555
|
Total deposits
|
855,672
|
791,845
|
752,146
|
Total net loans
|
519,660
|
539,675
|
578,614
|
Total equity capital
|
103,468
|
89,279
|
84,367
|
The table below
provides a comparison of the Companys performance to industry standards based
on information provided by the Board of Governors of the Federal Reserve (the
Federal Reserve). According to the Bank Holding Company Performance Report as
of September 30, 2011(the most recent report available as of the date of this
Annual Report on Form 10-K), the Companys peer group consisted of 300 bank
holding companies with assets totaling $1 billion to $3 billion. The following
table presents comparisons of the Company with its peers as indicated in Bank
Holding Company Performance Reports for the years ended December 31 for each of
the years indicated:
|
2011
|
2010
|
2009
|
|
Company
|
Peer
(1)
|
Company
|
Peer
(
2)
|
Company
|
Peer
(2)
|
Net interest income to
average assets
|
3.81%
|
3.45%
|
3.77%
|
3.44%
|
3.74%
|
3.33%
|
Net operating income to
average assets
|
1.18%
|
0.63%
|
0.92%
|
0.22%
|
0.89%
|
-0.13%
|
Net loan losses to average
total loans
|
0.45%
|
0.88%
|
1.38%
|
1.12%
|
0.93%
|
1.18%
|
Tier I capital to average
assets
(3)
|
9.15%
|
9.59%
|
8.93%
|
8.85%
|
8.40%
|
8.51%
|
Cash dividends to net income
|
33.54%
|
23.10%
|
40.86%
|
29.04%
|
45.27%
|
38.66%
|
________________
(1)
|
Peer
information is provided for the nine months ended September 30, 2011, which is
the most recent information available.
|
(2)
|
For
the years ended December 31, 2010 and 2009, the Companys peer group consisted
of approximately 450 bank holding companies with total asset size of $500
million to $1 billion.
|
(3)
|
Tier
I capital to average assets is the ratio of core equity capital components to
average total assets.
|
The Company and
the Bank employed a total of 259 full-time equivalent employees as of December
31, 2011. The Company and the Bank are committed to hiring and retaining high
quality employees to execute the Companys strategic plan.
The Companys website address is www.firstcitizens-bank.com. The Company
makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and all amendments to those reports available free of
charge by link on its website on the About Us Investor Relations webpage
under the caption SEC Filings as soon as reasonably practicable after such
materials are electronically filed with, or furnished to, the Securities and
Exchange Commission (the SEC). Shareholders may request a copy of the annual,
quarterly or current reports without charge by contacting Laura Beth Butler,
Secretary, First Citizens Bancshares, Inc., P. O. Box 370, Dyersburg, Tennessee
38025-0370.
Expansion
The Company,
through its strategic planning process, intends to seek profitable
opportunities that utilize excess capital and maximize income in Tennessee. If
the Company decides to acquire other banking institutions, its objective would
be asset growth and diversification into other market areas. Acquisitions and
de novo branches might afford the Company increased economies of scale within
operation functions and better utilization of human resources. The Company
would only pursue an acquisition or open a de novo branch if the Companys
Board of Directors determines it to be in the best interest of the Company and
its shareholders. The Company does not currently have plans to acquire other
banking institutions.
4
The Company owns
two real estate parcels in Jackson, Tennessee which it purchased for
construction of full-service facilities. The lots were purchased in 2007 and
2008, but construction is temporarily on hold because of current economic
conditions. Construction of these facilities is expected to commence in one to
three years.
Competition
The business of
providing financial services is highly competitive. In addition to competing
with other commercial banks in the service area, the Bank competes with savings
and loan associations, insurance companies, savings banks, small loan
companies, finance companies, mortgage companies, real estate investment
trusts, certain governmental agencies, credit card organizations, credit unions
and other enterprises. In 1998, federal legislation allowed credit unions to
expand their membership criteria. Expanded membership criteria coupled with
existing tax-exempt status give credit unions a competitive advantage compared
to banks.
The Bank builds
and implements strategic plans and commitments to address competitive factors
in the various markets it serves. The Banks primary strategic focus is on
obtaining and maintaining profitable customer relationships in all markets it
serves. The markets demand competitive pricing, but the Bank competes on high
quality customer service that will attract and enhance loyal, profitable
customers to the Bank. Industry surveys have consistently revealed that 65-70%
of customers leave banks because of customer service issues. Accordingly, the
Bank is committed to providing excellent customer service in all markets that
it serves as a means of branding and distinguishing itself from other financial
institutions. The Bank utilizes advertising, including both newspaper and
radio, and promotional activities to support its strategic plans.
The Bank offers
a typical mix of interest-bearing transaction, savings and time deposit
products, as well as traditional non-interest bearing deposit accounts. The
Bank is a leader in deposit market share compared to competitors in Dyer,
Fayette, Lauderdale, Obion, Tipton and Weakley Counties of Tennessee. The Bank
has consistently been a leader in market share of deposits in its markets for
several years. The Banks market share has been 18% to 20% in Dyer, Fayette,
Lauderdale, Obion, Tipton and Weakley Counties combined and in excess of 62% in
Dyer County for the last three years. The following market share information
for these counties (banks only, deposits inside of market) is from the Deposit
Market Share Report, as of June 30, 2011, prepared annually by the FDIC
(dollars in thousands):
Bank Name
|
# of Offices
|
Total Deposits
|
Market Share %
|
First State Bank
|
15
|
$ 752,365
|
22.66%
|
First Citizens National Bank
|
13
|
639,329
|
19.25%
|
Regions Bank
|
9
|
256,416
|
7.72%
|
Bank of Fayette County
|
7
|
202,002
|
6.08%
|
Somerville Bank & Trust
Co.
|
5
|
167,444
|
5.04%
|
Bank of Ripley
|
4
|
161,914
|
4.88%
|
BancorpSouth Bank
|
6
|
147,968
|
4.46%
|
Commercial Bank & Trust
|
2
|
118,025
|
3.55%
|
Security Bank
|
6
|
102,991
|
3.10%
|
Reelfoot Bank
|
5
|
100,109
|
3.01%
|
Insouth Bank
|
2
|
92,008
|
2.77%
|
First South Bank
|
2
|
70,544
|
2.12%
|
Farmers Bank of Lynchburg
|
2
|
69,509
|
2.09%
|
Patriot Bank
|
2
|
62,986
|
1.90%
|
Bank of Gleason
|
1
|
62,560
|
1.88%
|
Bank of Halls
|
2
|
55,673
|
1.68%
|
Greenfield Banking Co.
|
2
|
41,337
|
1.24%
|
Brighton Bank
|
2
|
40,144
|
1.21%
|
Lauderdale County Bank
|
2
|
38,902
|
1.17%
|
Gates Banking & Trust
Co.
|
1
|
38,210
|
1.15%
|
Clayton Bank and Trust
|
2
|
33,717
|
1.02%
|
All others
|
8
|
66,794
|
2.02%
|
Total
|
100
|
$3,320,947
|
100.00%
|
5
The Bank also
competes in the Shelby County and Williamson County markets. Because the size
and composition of these two markets is much larger and more diverse than the
other markets in which the Bank operates, Shelby and Williamson Counties are
excluded from the above table. The Banks market share in Shelby County was
0.88% and 0.75%
as of June 30, 2011 and 2010, respectively. The Banks
market share in Williamson County was 0.21% and 0.18% as of June 30, 2011 and
2010, respectively.
Regulation and Supervision
Bank Holding Company Act
The Company is a
financial holding company under the Bank Holding Company Act of 1956, as
amended (the Bank Holding Company Act), and is subject to supervision and
examination by the Federal Reserve. As a financial holding company, the Company
is required to file with the Federal Reserve annual reports and other
information regarding its business obligations and those of its subsidiaries.
Federal Reserve approval must be obtained before the Company may:
-
Acquire ownership or control of any voting securities of a bank
or bank holding company where the acquisition results in the Company owning or
controlling more than 5% of a class of voting securities of that bank or bank
holding company; or
-
Acquire substantially all assets of a bank or bank holding
company or merge with another bank holding company.
Federal Reserve
approval is not required for a bank subsidiary of a bank holding company to
merge with or acquire substantially all assets of another bank if prior
approval of a federal supervisory agency, such as the Office of the Comptroller
of the Currency (OCC), is required under the Bank Merger Act.
The Bank Holding
Company Act provides that the Federal Reserve shall not approve any
acquisition, merger or consolidation that would result in a monopoly or would
be in furtherance of any combination or conspiracy to monopolize or attempt to
monopolize the business of banking in any part of the United States. Further,
the Federal Reserve may not approve any other proposed acquisition, merger, or
consolidation, the effect of which might be to substantially lessen competition
or tend to create a monopoly in any section of the country, or which in any
manner would be in restraint of trade, unless the anti-competitive effect of
the proposed transaction is clearly outweighed in favor of public interest by
the probable effect of the transaction in meeting the convenience and needs of
the community to be served. Further, an application may be denied if the
applicant has failed to provide the Federal Reserve with adequate assurances
that it will make available such information on its operations and activities,
and the operations and activities of any affiliate, deemed appropriate to
determine and enforce compliance with the Bank Holding Company Act and any
other applicable federal banking statutes and regulations. In addition, the
Federal Reserve considers the competence, experience and integrity of the
officers, directors and principal shareholders of the applicant and any
subsidiaries as well as the banks and bank holding companies concerned. The
Federal Reserve also considers the record of the applicant and its affiliates
in fulfilling commitments to conditions imposed by the Federal Reserve in
connection with prior applications.
According to Federal
Reserve policy and the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (the Dodd-Frank Act), a financial holding company must act as a
source of financial strength to its subsidiary banks and commit resources to
support each such subsidiary. This support may be required at times when a
financial holding company may not be able to provide such support.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act
The passage of the Dodd-Frank Act brought about a major overhaul of the
current financial institution regulatory system. Among other things, the
Dodd-Frank Act established a new, independent Consumer Financial Protection
Bureau tasked with protecting consumers from unfair, deceptive and abusive
financial products and practices. The Dodd-Frank Act includes provisions that,
among other things, reorganize bank supervision and strengthen the Federal
Reserve. Further, the Dodd-Frank Act provides that the appropriate federal
regulators must establish standards prohibiting as an unsafe and unsound
practice any compensation plan of a bank holding company or other covered
financial institution that provides an insider or other employee with
excessive compensation or could lead to a material financial loss to such
firm. In June 2010, prior to the enactment of the Dodd-Frank Act, the bank
regulatory agencies promulgated the Interagency Guidance on Sound Incentive
Compensation Policies, which require that financial institutions establish
metrics for measuring the impact of activities to achieve incentive compensation
with the related risk to the financial institution of such behavior. Together,
the Dodd-Frank Act and the recent guidance on compensation could impact
compensation policies of the Bank. The Dodd-Frank Act provides other
restrictions including requiring institutions to retain credit risk when
selling loans to third parties.
6
On June 29, 2011, the Federal Reserve released
its final rule implementing the Durbin Debit Interchange Amendment to the
Dodd-Frank Act (the Durbin Amendment). The
final rule set a base interchange rate of $0.21 per transaction, plus an
additional five basis points of the transaction cost for fraud charges. The
Federal Reserve also approved an interim final rule that allows for an upward
adjustment of no more than $0.01 on the debit interchange fee for implementing
certain fraud prevention standards. Additionally, the Federal Reserve adopted
requirements that issuers include two unaffiliated networks for routing debit
transactions, one that is signature-based and one that is personal
identification number based. The effective date for the final and interim final
rules of the Durbin Amendment was October 1, 2011.
Gramm-Leach-Bliley Act
Among other
things, the Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLBA)
modified financial privacy and community reinvestment laws. The financial
privacy provisions included in GLBA generally prohibit financial institutions
such as the Bank from disclosing non-public personal financial information to third
parties unless customers have the opportunity to opt out of the disclosure.
GLBA also magnifies the consequences of a bank receiving less than a
satisfactory Community Reinvestment Act (CRA) rating, by freezing new
activities until the institution achieves a better CRA rating. As of December
31, 2011, the Company had a satisfactory rating under CRA.
FDIC Insurance Coverage
The Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) provides for a
risk-based deposit insurance premium structure for insured financial
institutions. The FDIC generally provides deposit insurance up to $250,000 per
customer per institution for depository accounts held at insured financial
institutions. Substantially all of the deposits of the Bank are insured up to
applicable limits by the Deposit Insurance Fund (DIF) of the FDIC and are
subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes
a risk-based assessment system that imposes insurance premiums based upon a
risk matrix that takes into account a banks capital level and supervisory
rating. Effective as of the second quarter of 2011, the FDIC bases the deposit
insurance assessment on a redefined assessment base and a new scorecard method
to calculate the assessment rate.
Bank Secrecy Act
Over the past 30
plus years, Congress has passed several laws impacting a financial
institutions responsibilities relating to the Bank Secrecy Act. In 2005, the
Federal Financial Institutions Examination Council and federal banking agencies
released the interagency Bank Secrecy Act Anti-Money Laundering Examination
Manual. The manual emphasizes a banking organizations responsibility to
establish and implement risk-based policies, procedures and processes to comply
with the Bank Secrecy Act and safeguard its operations from money laundering
and terrorist financing. It is a compilation of existing regulatory
requirements, supervisory expectations and sound practices for Bank Secrecy
Act/Anti-Money Laundering (BSA/AML) compliance. An effective BSA/AML
compliance program requires sound risk management; therefore, the manual also
provides guidance on identifying and controlling risk associated with money
laundering and terrorist financing.
The specific
examination procedures performed will depend on the BSA/AML risk profile of the
banking organization, the quality and quantity of independent testing, the
financial institutions history of BSA/AML compliance and other relevant
factors. The Bank has implemented effective risk-based policies and
procedures that reinforce existing practices and encourage a vigilant
determination to prevent the institution from becoming associated with
criminals or being used as a channel for money laundering or terrorist
financing activities.
7
USA Patriot Act
The USA Patriot
Act (the Patriot Act) enhances the powers of the federal government and law
enforcement organizations to combat terrorism, organized crime and money
laundering. The Patriot Act significantly amended and expanded the application
of the Bank Secrecy Act, including enhanced customer identity measures, new
suspicious activity reporting rules and enhanced anti-money laundering
programs. Under the Patriot Act, each financial institution is required to
establish and maintain anti-money laundering 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 Patriot Act
requires the federal banking agencies to consider the record of a bank or
banking holding company in combating money laundering activities in their
evaluation of bank and bank holding company merger or acquisition transactions.
The Bank has implemented policies and procedures in compliance with stated
regulations of the Patriot Act.
Customer Information Security and Customer Financial
Privacy
The Federal
Reserve published guidelines for Customer Information Security and Customer
Financial Privacy with a mandatory effective date of July 1, 2001. The Bank
has established policies in adherence to the published guidelines.
-
The three
principal requirements relating to the Privacy of Consumer Financial
Information in GLBA are as follows:
-
Financial institutions must provide customers with notices
describing their privacy policies and practices, including policies with
respect to disclosure of nonpublic personal information to affiliates and to
nonaffiliated third parties. Notices must be provided at the time the customer
relationship is established and annually thereafter;
-
Subject to specified exceptions, financial institutions may not
disclose nonpublic personal information about consumers to any nonaffiliated
third party unless consumers are given a reasonable opportunity to direct that
such information not be shared (to opt out); and
-
Financial institutions generally may not disclose customer
account numbers to any nonaffiliated third party for marketing purposes.
The Customer
Information Security guidelines implement section 501(b) of GLBA, which
requires agencies to establish standards for financial institutions relating to
administrative, technical and physical safeguards for customer records and
information. The guidelines require financial institutions to establish an
information security program to: identify and assess risks that may threaten
customer information; develop a written plan containing policies and procedures
to manage and control these risks; implement and test the plan; and adjust the
plan on a continuing basis to account for changes in technology, the
sensitivity of customer information, and internal or external threats to
information security.
Each institution
may implement a security program appropriate to its size, complexity, nature
and scope of its operations. The Bank has structured and implemented a
financial security program that complies with all principal requirements of GLBA.
Regulatory
agencies also published the Interagency Guidance on Response Programs for
Unauthorized Access to Customer Information and Customer Notice. Pursuant to
such guidance, each financial institution is required to implement a response
program to address unauthorized access to sensitive customer information
maintained by the institution or its service providers. The Bank has
implemented an appropriate response program, which includes: formation of an
Incident Response Team; properly assessing and investigating any incident;
notifying the OCC of any security breach, if necessary; taking appropriate
steps to contain and control any incident; and notifying affected customers
when required.
Identity Theft Prevention
Program
The Fair and
Accurate Credit Transactions Act (FACT) requires banking institutions to
implement an Identity Theft Prevention Program to detect, prevent and mitigate
identity theft in connection with the opening of certain accounts or certain
existing accounts. Program requirements include incorporating federal
guidelines on investigating customer address discrepancies and identifying
other red flags that may indicate potential identity theft. The Bank has
implemented a comprehensive Identity Theft Prevention Program, which covers all
customer accounts and accomplishes the following standards as set forth in FACT:
(1) identify relevant red flags for covered accounts; (2) detect red flags; (3)
respond appropriately to any red flags detected; and (4) ensure the program is
updated periodically.
8
Federal Legislation on
Banking Products and Services
Following the
economic crises of 2008, Congress and the regulatory agencies issued
legislation, rules and regulations creating or amending numerous requirements
on disclosures, documentation, and procedures in relation to several products
and services offered by financial institutions. Many of these proposals
provide customers with additional disclosure information and protections. The
regulatory changes include, but are not limited to, the Real Estate Settlement
Procedures Act, Federal Reserve Regulation E governing overdraft protection,
the Truth in Lending Act and the Truth in Savings Act. The Banks policies and
procedures are being revised to incorporate recent regulatory requirements and
ensure full compliance.
Federal Monetary Polices
Monetary
policies of the Federal Reserve have a significant effect on operating results
of bank holding companies and their subsidiary banks. The Federal Reserve
regulates the national supply of bank credit by open market operations in U.S.
government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits.
Federal Reserve
monetary policies have materially affected the operating results of commercial
banks in the past and are expected to do so in the future. The nature of
future monetary policies and the effect of such policies on the business and
earnings of the company and its subsidiaries cannot be accurately predicted.
Basel III
In September 2010, the oversight body of the Basel Committee announced a
package of reforms, commonly referred to as Basel III, that will increase
existing capital requirements substantially over the next four years as well as
add additional liquidity requirements for banks. These reforms were endorsed by
the G20 at the summit held in Seoul, South Korea in November 2010. The
short-term and long-term impact of the new Basel III capital standards and the
forthcoming new capital rules to be proposed for U.S. banks is uncertain. As a
result of the recent deterioration in the global credit markets and the
potential impact of increased liquidity risk and interest rate risk, it is
unclear what the short-term impact of the implementation of Basel III may be or
what impact a pending an alternative approach for U.S. banks may have on the
cost and availability of different types of credit and the potential compliance
costs of implementing the new capital standards.
Revisions to Regulation E
On
July 31, 2010, the Federal Reserve implemented revised Regulation E. The effect
of this revision was to allow customers of the Bank to opt out of overdraft
protection programs, and thereby potentially reduce fee income generated by the
Bank. The Bank has taken all steps necessary to be compliant with the revised
Regulation E.
Usury, State Legislation
and Economic Environment
Tennessee usury
laws limit the rate of interest that may be charged by banks. Certain federal
laws provide for preemption of state usury laws.
Tennessee usury
laws permit interest at an annual rate of four percentage points above the
average prime loan rate for the most recent week for which such an average rate
has been published by the Federal Reserve, or 24%, whichever is less. The Most
Favored Lender Doctrine permits national banks to charge the highest rate
permitted by any state lender.
Specific usury
laws may apply to certain categories of loans, such as the limitation placed on
interest rates on single pay loans of $1,000 or less with a term of one year or
less. Rates charged on installment loans, including credit cards as well as
other types of loans, may be governed by the Industrial Loan and Thrift
Companies Act.
Insurance Activities
Subsidiaries of
the Company sell various types of insurance as agents in the State of
Tennessee. Insurance activities are subject to regulation by the states in
which such business is transacted. Although most of such regulation focuses on
insurance companies and their insurance products, insurance agents and their
activities are also subject to regulation by the states, including, among other
things, licensing and marketing and sales practices.
9
ITEM 1A. RISK FACTORS.
Information
contained herein includes forward-looking statements with respect to the
beliefs, plans, risks, goals and estimates of the Company. Forward-looking
statements are necessarily based upon estimates and assumptions that are
inherently subject to significant banking, economic, and competitive
uncertainties, many of which are beyond managements control. When used in
this discussion, the words anticipate, project, expect, believe,
should, will, intend, is likely, going forward, may and other
expressions are intended to identify forward-looking statements. These
forward-looking statements are within the meaning of section 27A of the
Securities Act of 1933, as amended (the Securities Act), and section 21E of
the Securities Exchange Act of 1934, as amended. Such statements may include,
but are not limited to, capital resources, strategic planning, acquisitions or
de novo branching, ability to meet capital guidelines, legislation and
governmental regulations affecting financial services companies, construction
of new branch locations, dividends, critical accounting policies, allowance for
loan losses, fair value estimates, goodwill, occupancy and depreciation
expense, held-to-maturity securities, available-for-sale securities, trading
securities, cash flows, core deposit intangibles, diversification in the real
estate loan portfolio, interest income, maturity of loans, loan impairment,
loan ratings, charge-offs, other real estate owned, maturity and re-pricing of
deposits, borrowings with call features, dividend payout ratio, off-balance
sheet arrangements, the impact of recently issued accounting standards, changes
in funding sources, liquidity, interest rate sensitivity, net interest margins,
debt securities, non-accrual status of loans, contractual maturities of
mortgage-backed securities and collateralized mortgage obligations,
other-than-temporary impairment of securities, amortization expense, deferred tax
assets, independent appraisals for collateral, property enhancement or
additions, efficiency ratio, ratio of assets to employees, net income, changes
in interest rates, loan policies, categorization of loans, maturity of FHLB
borrowings and the effectiveness of internal control over financial reporting.
Forward-looking
statements are based upon information currently available and represent
managements expectations or predictions of the future. As a result of risks
and uncertainties involved, actual results could differ materially from such
forward-looking statements. The potential factors that could affect the
Companys results include but are not limited to:
-
Changes in general economic and business conditions;
-
Changes in market rates and prices of securities, loans, deposits
and other financial instruments;
-
Changes in legislative or regulatory developments affecting
financial institutions in general, including changes in tax, banking,
insurance, securities or other financial service related laws;
-
Changes in government fiscal and monetary policies;
-
The ability of the Company to provide and market competitive
products and services;
-
Concentrations within the loan portfolio;
-
Fluctuations in prevailing interest rates and the effectiveness
of the Companys interest rate hedging strategies;
-
The Companys ability to maintain credit quality;
-
The effectiveness of the Companys risk monitoring systems;
-
The ability of the Companys borrowers to repay loans;
-
The availability of and costs associated with maintaining and/or
obtaining adequate and timely sources of liquidity;
-
Geographic concentration of the Companys assets and
susceptibility to economic downturns in that area;
-
The ability of the Company to attract, train and retain qualified
personnel;
-
Changes in consumer preferences; and
-
Other factors generally understood to affect financial results of
financial services companies.
10
The Company undertakes no obligation to update its
forward-looking statements to reflect events or circumstances that occur after
the date of this Annual Report on Form 10-K.
In addition to the factors listed
above, management believes that the risk factors set forth below should be
considered in evaluating the Companys business. The relevant risk factors
outlined below may be supplemented from time to time in the Companys press
releases and filings with the SEC.
We are
subject to credit quality risks and our credit policies may not be sufficient
to avoid losses.
We are subject
to the risk of losses resulting from the failure of borrowers, guarantors and
related parties to pay interest and principal amounts on loans. Although we
maintain credit policies and credit underwriting, monitoring and collection
procedures that management believes are sufficient to manage this risk, these
policies and procedures may not prevent losses, particularly during periods in
which the local, regional or national economy suffers a general decline. If a
large number of borrowers fail to repay their loans, our financial condition
and results of operations may be adversely affected.
Earnings could be adversely
affected if values of other real estate owned decline.
We are
subject to the risk of losses from the liquidation and/or valuation adjustments
on other real estate owned. We owned over 100 properties totaling $11.1
million in other real estate owned as of December 31, 2011. Other real estate
owned is valued at the lower of cost or fair market value less cost to sell.
Fair market values are based on independent appraisals for properties valued at
$50,000 or greater and appraisals are updated annually. We may incur future
losses on these properties if economic and real estate market conditions result
in further declines in the fair market value of these properties.
If our allowance for loan
losses becomes inadequate, our financial condition and results of operations
could be adversely affected.
We maintain an
allowance for loan losses that we believe is a reasonable estimate of known and
inherent losses in our loan portfolio. Management uses various assumptions and
judgments to evaluate on a quarterly basis the adequacy of the allowance for
loan losses in accordance with GAAP as well as regulatory guidelines. The
amount of future losses is susceptible to changes in economic, operating and
other conditions, changes in interest rates which may be beyond our control,
and these losses may exceed current estimates. Although we believe the
allowance for loan losses is a reasonable estimate of known and inherent losses
in our loan portfolio, we cannot fully predict such losses or that our loan
loss allowance will be adequate in the future. Excessive loan losses could have
an adverse effect on our financial performance.
Federal and
state regulators periodically review our allowance for loan losses and may
require us to increase our provision for loan losses or recognize further loan
charge-offs, based on judgments different than those of our management. Any
increase in the amount of our provision or loans charged-off as required by
these regulatory agencies could have an adverse effect on our results of
operations.
11
Changes in interest rates
could have an adverse effect on our earnings.
Our
profitability is in part a function of interest rate spread, or the difference
between interest rates earned on investments, loans and other interest-earning
assets and the interest rates paid on deposits and other interest-bearing
liabilities. Interest rates are largely driven by monetary policies set by the
Federal Open Market Committee, or FOMC, and trends in the prevailing market
rate of interest embodied by the yield curve. The FOMC establishes target
rates of interest to influence the cost and availability of capital and promote
national economic goals. In January 2012, the FOMC indicated that rates would
most likely remain at the historical low of a range of 0.00% to 0.25% through
the end of 2014. The yield curve is a representation of the relationship
between short-term interest rates to longer-term debt maturity rates.
Currently, the yield curve is fairly steep as short-term rates continue at
historic lows. As of December 31, 2011, the Bank was liability sensitive in
terms of interest rate risk exposure, meaning that the Bank will likely
experience margin compression when federal funds rates increase. In other
words, upward pressure on deposit interest rates will outpace increases in the
interest rates on interest-earning assets. Deposits are currently priced at
historically low levels and are likely to reprice at a faster pace than
interest-earning assets when the rate environment begins rising. The majority
of variable-rate loans are priced at floors that will require significant
increase in federal fund and prime rates before loan yields increase.
Prepayment of
principal cash flows from the investment portfolio is expected to be steady in
2012 as rates continue to be very low. Credit availability has improved
recently because of the actions of the Federal Reserve and U.S. Treasury
Department as described above. Reinvestment rates on the investment portfolio
have dropped significantly (greater than 100 basis points) over the last 12
months.
If the rate of
interest paid on deposits and other borrowings increases more than the rate of
interest earned on loans and other investments, our net interest income and,
therefore, earnings could be adversely affected. Earnings could also be
adversely affected if the rates on loans and other investments fall more
quickly than those on deposits and other borrowings. While management takes
measures to guard against interest rate risk, there can be no assurance that
such measures will be effective in minimizing the exposure to interest rate
risk. A sudden and significant increase in the market rate of interest could
have a material adverse effect on the Companys financial position and
earnings.
We are geographically
concentrated in West Tennessee, and changes in local economic conditions may
impact our profitability.
We operate
primarily in West Tennessee and the majority of all loan customers and most
deposit and other customers live or have operations in this area. Accordingly,
our success depends significantly upon growth in population, income levels,
deposits, housing starts and continued attraction of business ventures to this
area. Our profitability is impacted by changes in general economic conditions
in this market. The residential real estate market in the Shelby County and
surrounding markets continues to be a concern due to elevated inventories and
the negative impact on market values. New and existing home sales have
improved, but remain well below 2006 2007 levels or the level of absorption
required to meaningfully allow the residential real estate market to recover
fully. We also remain concerned about the impact of plant closings (such as Goodyear
and Briggs & Stratton) and their impact to unemployment levels and economic
conditions in our rural markets. Additionally, unfavorable local or national
economic conditions could reduce our growth rate, affect the ability of our
customers to repay their loans and generally affect our financial condition and
results of operations.
We are less able
than larger institutions to spread the risks of unfavorable local economic
conditions across a large number of diversified economies. Moreover, we are unable
to give assurance that we will benefit from any market growth or favorable
economic conditions in our primary market areas if they do occur.
If financial market conditions
worsen or our loan demand increases significantly, our liquidity position could
be adversely affected.
We rely on
dividends from the Bank as our primary source of funds. The Banks primary
sources of funds are client deposits and loan repayments. While scheduled loan
repayments have historically been a relatively stable source of funds, they are
susceptible to the inability of borrowers to repay the loans. The ability of
borrowers to repay loans can be adversely affected by a number of factors,
including changes in economic conditions, adverse trends or events affecting
business industry groups, reductions in real estate values or markets, business
closings or lay-offs, natural disasters and national or international
instability. Additionally, deposit levels may be affected by a number of
factors, including rates paid by competitors, general interest rate levels,
regulatory capital requirements, returns available to clients on alternative
investments and general economic conditions. Accordingly, we may be required
from time to time to rely on secondary sources of liquidity to meet withdrawal
demands or otherwise fund operations. Such sources include Federal Home Loan
Bank advances, sales of securities and loans, and federal funds lines of credit
from correspondent banks, as well as out-of-market time deposits. While we
believe that these sources are currently adequate, there can be no assurance
they will be sufficient to meet future liquidity demands, particularly if we
continue to grow and experience increasing loan demand. We may be required to
slow or discontinue loan growth, capital expenditures or other investments or
liquidate assets should such sources not be adequate.
12
Market conditions could
adversely affect our ability to obtain additional capital on favorable terms,
should we need it.
Our business
strategy calls for continued growth. We anticipate that we will be able to
support this growth through the generation of additional deposits at new branch
locations, as well as through returns realized as a result of investment
opportunities. However, we may need to raise additional capital in the future
to support continued growth and maintain capital levels. We may not be able to
obtain additional capital in the amounts or on terms satisfactory to us. Growth
may be constrained if we are unable to raise additional capital as needed.
Failure to remain competitive
in an increasingly competitive industry may adversely affect results of
operations and financial condition.
We encounter
strong competition from other financial institutions in our market areas. In
addition, established financial institutions not already operating in our
market areas may open branches in our market areas at future dates or may
compete in the market via the internet. Certain aspects of our banking business
also compete with savings institutions, credit unions, mortgage banking
companies, consumer finance companies, insurance companies and other
institutions, some of which are not subject to the same degree of regulation or
restrictions imposed on us. Many of these competitors have substantially
greater resources and lending limits and are able to offer services that we do
not provide. While we believe that we compete effectively with these other
financial institutions in our market areas, we may face a competitive
disadvantage as a result of our smaller size, smaller asset base, lack of
geographic diversification and inability to spread our marketing costs across a
broader market. If we have to raise interest rates paid on deposits or lower
interest rates charged on loans to compete effectively, our net interest margin
and income could be negatively affected. Failure to compete effectively to
attract new or to retain existing clients may reduce or limit our margins and
our market share and may adversely affect our results of operations and
financial condition.
We expect the failure of other
banks to increase our expenses.
The failure of
numerous banks as a result of the economic recession may have a negative impact
on our earnings, as premiums required for FDIC insurance may increase in 2012
and beyond.
In 2011 and 2010, FDIC premium expense totaled approximately
$823,000 and $1.2 million, respectively, and was included in non-interest
expense. We cannot give any assurances that the FDIC will not require special
assessments or increase deposit insurance assessments in the future.
Adverse
perceptions about our business could adversely affect our results of operations
and financial condition.
We believe that
our reputational risk increased significantly during the recent economic
recession as a result of the elevated number of bank failures and volume of
negative media headlines related to the banking industry. As a result, the FDIC
implemented various programs to help mitigate such risks, including increasing
deposit insurance limits to $250,000. As part of its strategic initiatives,
management implemented various action plans including communications with and
training sessions for our staff and communications to local customers and civic
groups regarding managements view on stability in the Company as well as most
local community banking institutions.
The public
perception of our ability to conduct business and expand our customer base may
also be affected by practices of the Companys Board of Directors, management
and employees. Significant relationships with vendors, customers and other
external parties may also affect our reputation. Adverse perceptions about our
business practices or the business practices of those with whom we have
significant relationships could adversely impact our results of operations and
financial condition.
We are subject to extensive
government regulation and supervision.
We are subject
to extensive federal and state regulation and supervision. Banking regulations
are primarily intended to protect depositors funds, federal deposit insurance
funds and the banking system as a whole, not our shareholders. These
regulations affect our lending practices, capital structure, investment
practices and dividend policy and growth, among other things. Future changes
to statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could
affect us in substantial and unpredictable ways. Such changes could subject us
to additional costs, limit the types of financial services and products we may
offer and/or increase the ability of non-banks to offer competing financial
services and products, or decrease the flexibility in pricing certain products
and services by the Bank, among other things. Failure to comply with laws,
regulations or policies could result in sanctions imposed by regulatory
agencies, civil money penalties, civil liability and/or reputation damage,
which could have a material adverse effect on our financial condition and
results of operations. While our policies and procedures are designed to deter
and detect any such violations, there can be no assurance that such violations
will not occur.
13
Our common stock is not listed
or traded on any established securities market and is normally less liquid than
securities traded in those markets.
Our common stock
is not listed or traded on any established securities market and we have no
plans to seek to list our common stock on any recognized exchange. Accordingly,
our common stock has substantially less daily trading volume than the average
securities listed on any national securities exchange. Most transactions in our
common stock are privately negotiated trades and our common stock is very
thinly traded. There is no dealer for our stock and no market maker. Our
shares do not have a trading symbol. The lack of a liquid market can produce
downward pressure on our stock price and can reduce the marketability of our common
stock.
Our ability to pay dividends
may be limited.
As a holding
company, the Company is a separate legal entity from the Bank and does not
conduct significant income-generating operations of its own. It currently
depends upon the Banks cash and liquidity to pay dividends to its
shareholders. We cannot provide assurance that the Bank will have the capacity
to pay dividends to the Company in the future. Various statutes and regulations
limit the availability of dividends from the Bank. It is possible that,
depending upon the Banks financial condition and other factors, the Banks
regulators could assert that payment of dividends by the Bank to the Company is
an unsafe or unsound practice. In the event that the Bank is unable to pay
dividends to the Company, we may not be able to pay dividends to our
shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The Bank has 16
full-service bank financial centers, three drive-through only branches, one
loan production office and 28 ATMs spread over nine
Tennessee counties.
A list of available banking locations and hours is maintained on the Banks
website (www.firstcitizens-bank.com) under the Locate Us section. The Bank
owns and occupies the following properties:
-
The Banks main branch and executive offices are located in a
six-story building at One First Citizens Place (formerly 200 West Court),
Dyersburg, Dyer County, Tennessee. This property also includes the Banking
Annex, which has an address of 215-219 Masonic Street. The Banking Annex
houses the Banks operations, information technology, call center, bank security
and mail departments;
-
The Banks downtown drive-through branch is located at 117 South
Church Street, Dyersburg, Dyer County, Tennessee, and is a remote motor bank
with six drive-through lanes and a drive-up ATM lane;
-
The Green Village Financial Center, located at 710 U.S. 51 Bypass
adjacent to the Green Village Shopping Center in Dyersburg, Dyer County,
Tennessee, is a full-service banking facility;
-
The Newbern Financial Center, a full-service facility, is located
at 104 North Monroe Street, Newbern, Dyer County, Tennessee;
-
The Industrial Park Financial Center located at 2211 St. John
Avenue, Dyersburg, Dyer County, Tennessee is a full-service banking facility;
-
The Ripley Financial Center is a full-service facility located at
316 Cleveland Street in Ripley, Lauderdale County, Tennessee;
-
The Troy Financial Center is a full-service banking facility
located at 220 East Harper Street in Troy, Obion County, Tennessee;
14
-
The Union City Financial Center operates one full-service
facility, one motor branch and three ATMs in Obion County. The main office is
located at 100 Washington Avenue in Union City, Tennessee, and the
drive-through branch is located across from the main office at First and
Harrison Streets.
-
The Martin Financial Center is a full-service facility located at
200 University Avenue, Martin, Weakley County, Tennessee;
-
The Munford Financial Center is a full-service facility
located
at 1426 Munford Avenue in Munford, Tipton County, Tennessee. In addition, a
drive-through facility is located at 1483 Munford Avenue, also in Munford;
-
The Atoka Financial Center is a full-service facility
located
at 123 Atoka-Munford Avenue, Atoka, Tipton County, Tennessee;
-
The Millington Financial Center is a full-service branch facility
located at 8170 Highway 51 N., Millington, Shelby County, Tennessee;
-
The Bartlett Financial Center is a full-service facility
located
at 7580 Highway 70, Bartlett, Shelby County, Tennessee;
-
The Arlington Financial Center is a full-service facility located
at 5845 Airline Road, Arlington, Shelby County, Tennessee;
-
The Oakland Financial Center is a full-service facility located
at 7285 Highway 64, Oakland, Fayette County, Tennessee;
-
The Collierville Financial Center is a full-service facility
located at 3668 South Houston Levee in Collierville, Shelby County, Tennessee;
-
The Franklin Financial Center is a full-service facility located
at 1304 Murfreesboro Road in Franklin, Williamson County, Tennessee;
-
A lot located on Christmasville Cove in Jackson, Madison County,
Tennessee, that was purchased in 2007 and on which the Company expects to
construct a full-service branch location in the next three to five years; and
-
A lot located on Union University Drive in Jackson, Madison
County, Tennessee, that was purchased in February 2008 and on which the Company
expects to construct a full-service branch in the next one to three years.
The Bank owns
all properties and there are no liens or encumbrances against any properties
owned by the Bank. All facilities described above are adequate and appropriate
to provide banking services as noted and are adequate to handle growth expected
in the foreseeable future. As growth continues or needs change, individual
property enhancements or additional properties will be evaluated as necessary.
ITEM 3. LEGAL PROCEEDINGS.
The Company and
its subsidiaries are defendants in various lawsuits arising out of the normal
course of business. In the opinion of management, the ultimate resolution of
such matters should not have a material adverse effect on the Companys
consolidated financial condition or results of operations. Litigation is,
however, inherently uncertain, and the Company cannot make assurances that it
will prevail in any of these actions, nor can it estimate with reasonable
certainty the amount of damages that it might incur.
15
PART II
ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Holders and Market Information
As of February
21, 2012, there were 1,071 shareholders of the Companys common stock. The
Companys common stock is not listed or traded on any established public
trading market. The table below shows the quarterly range of high and low sale
prices for the Companys common stock during the fiscal years 2011 and 2010.
These sale prices represent known transactions reported to the Company and do
not necessarily represent all trading transactions for the periods.
Year
|
Quarter
|
|
High
|
|
Low
|
2011
|
First
|
|
$34.00
|
|
$34.00
|
|
Second
|
|
34.00
|
|
32.00
|
|
Third
|
|
34.00
|
|
34.00
|
|
Fourth
|
|
36.00
|
|
34.00
|
2010
|
First
|
|
32.00
|
|
32.00
|
|
Second
|
|
32.00
|
|
32.00
|
|
Third
|
|
32.00
|
|
32.00
|
|
Fourth
|
|
34.00
|
|
32.00
|
Dividends
The Company paid
aggregate dividends per share of the Companys common stock of $1.10 in 2011
and $1.00 in 2010. The following quarterly dividends per share of common stock
were paid for 2011 and 2010:
Quarter
|
|
2011
|
|
2010
|
First Quarter
|
|
$0.20
|
|
$0.15
|
Second Quarter
|
|
0.20
|
|
0.15
|
Third Quarter
|
|
0.20
|
|
0.15
|
Fourth Quarter
(1)
|
|
0.50
|
|
0.55
|
Total
|
|
$1.10
|
|
$1.00
|
________________
(1)
|
On December 15, 2011, the Company paid a special dividend of $0.30 per share,
payable to holders of record as of December 1, 2011, in addition to the fourth
quarter dividend of $0.20 per share payable to holders of record as of November
15, 2011. On December 15, 2010, the Company paid a special dividend of $0.40
per share, payable to holders of record as of November 15, 2010, in addition to
the fourth quarter dividend of $0.15 per share.
|
Future dividends
will depend on the Companys earnings, financial condition, regulatory capital
levels and other factors, which the Companys Board of Directors considers
relevant. See the section above entitled Item 1. Business Regulation and
Supervision and Note 16 to the Companys Consolidated Financial Statements included
elsewhere in this Annual Report on 10-K for more information on restrictions
and limitations on the Companys ability to pay dividends.
Issuer Purchases of Equity
Securities
The Company had
no publicly announced plans or programs for purchase of stock during 2011.
There were no shares of Company common stock repurchased during the quarter
ended December 31, 2011.
16
Unregistered Sale of
Securities
The Company sold
eight shares of its common stock in 2011 at a price of $34.00 per share for an
aggregate price of $272. Sales of these shares occurred in 2011 as follows (in
dollars, except number of shares):
Date
|
No. of Shares
|
|
Aggregate Price
|
July 2, 2011
|
4
|
|
$136
|
July 28, 2011
|
2
|
|
68
|
October 28, 2011
|
2
|
|
68
|
Total
|
8
|
|
$272
|
The Company sold
808 shares of its common stock in 2010 at a price of $32.00 per share for an
aggregate price of $25,856 and 1,519 shares of its common stock in 2009 at a
weighted average price of $27.69 per share for an aggregate price of $42,054. The
Company used proceeds from such sales to pay general expenses of the Company. All
shares of common stock were issued in reliance upon the exemption from the
registration requirements of the Securities Act, as set forth in Section 4(2)
under the Securities Act and, in some cases, Rule 506 of Regulation D
promulgated thereunder relating to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was required.
ITEM 6. SELECTED FINANCIAL DATA.
The following
table presents selected financial data of the Company for the 12 months ended
December 31, for the years indicated (dollars in thousands, except per share
data):
|
2011
|
2010
|
2009
|
2008
|
2007
|
Net interest income
|
$ 36,150
|
$ 34,377
|
$ 33,199
|
$ 29,833
|
$ 27,429
|
Gross interest income
|
45,506
|
46,347
|
49,011
|
52,467
|
54,279
|
Income from continuing
operations
|
11,862
|
8,875
|
8,327
|
7,529
|
9,160
|
Net income per common share
|
3.28
|
2.45
|
2.30
|
2.08
|
2.53
|
Cash dividends declared per
common share
|
1.10
|
1.00
|
1.04
|
1.16
|
1.16
|
Total assets at year-end
|
1,053,549
|
974,378
|
956,555
|
927,502
|
876,156
|
Long-term obligations (1)
|
43,976
|
42,296
|
42,216
|
73,843
|
63,165
|
Allowances for loan losses
as a % of total loans
|
1.52%
|
1.47%
|
1.50%
|
1.22%
|
1.08%
|
Allowances for loan losses
as a % of non-performing loans
|
98.49%
|
76.40%
|
96.87%
|
168.09%
|
336.24%
|
Loans 90 days past due as a
% of total loans
|
1.39%
|
1.12%
|
1.54%
|
0.73%
|
0.32%
|
________________
(1)
Long-term obligations consist of Federal Home Loan Bank
(FHLB) advances that mature after December 31, 2012, and trust-preferred
securities.
17
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Executive Overview
For the year ended December 31,
2011, the Companys stable core earnings streams resulted in a return on equity
(ROE) of 12.2% compared to 9.8% for 2010. Dividends increased to $1.10 per
share in 2011 compared to $1.00 in 2010. Strong net interest margin, reduced
provision for loan losses and managements commitment to efficiency and cost
control served to more than offset challenges presented by the current economic
recession. Net income for 2011 totaled $11.9 million compared to $8.9 million in
2010 and $8.3 million in 2009.
The major drivers of increased
earnings were increased net interest income and reduced provision for loan
losses. Net interest income totaled $36.2 million in 2011 compared to $34.3
million in 2010. Provision for loan losses decreased from $7.0 million in 2010
to $2.4 million in 2011. Gain on sale of available-for-sale securities totaled
approximately $943,000 in 2011 compared to $1.9 million in 2010 and net credit
losses of other-than-temporary impairment realized in earnings totaled
approximately $48,000 compared to approximately $589,000 in 2010. Earnings per
share were $3.28 for the year ended December 31, 2011, compared to $2.45 and
$2.30 for the years ended December 31, 2010 and 2009, respectively.
During 2011, capital growth of 15.9%
outpaced asset growth of 8.1%. Capital growth greater than asset growth was
attributable to a $7.9 million increase in retained earnings and a $6.9 million
increase in accumulated other comprehensive income. Retained earnings increased
11.5% in 2011 as a result of increased undistributed net income and conservative
dividend payout ratio of 34%. Accumulated other comprehensive income increased
due to increase of $6.9 million in unrealized appreciation (net of tax) on the
available-for-sale securities portfolio compared to prior year. Return on
average equity was 12.2% in 2011 compared to 9.8% for 2010 and 10.2% for 2009.
Return on assets (ROA) was 1.22%, 0.92% and 0.89% for 2011, 2010 and 2009,
respectively. For 2011, ROE of 12.2% and ROA of 1.22% exceeded the same
measures for the Southeast Public Bank Peer Report, as produced by Mercer Capitals Financial Institutions Group (the Peer Report), which reported an average ROE of negative 2.8% and average
ROA of 0.01% for 2011. The Peer Report provides market pricing and performance
data on publicly traded banks in Alabama, Arkansas, Georgia, Kentucky,
Louisiana, Mississippi, Missouri, and Tennessee.
In 2011, the Companys dividend
payout ratio was 34% compared to 41% in 2010. The dividend payout ratio has
trended lower over the past three years as part of the Companys strategic
effort to grow and preserve capital during the recent economic recession. Dividend
yield for 2011 was 3.24% compared to 3.13% in 2010 and consistent with
historical dividend yields in excess of 3%. The Peer Report reported an
average dividend payout ratio of 37.2% and an average dividend yield of 1.73% for
2011.
Maintaining and improving net
interest margins continues to be a top priority for many financial
institutions, including the Bank. The Companys net interest margin had been
stable from 2005 to 2008 in the range of 3.75% to 4.00% and increased to 4.20%
in 2009 and 4.28% in 2010 and 2011. As of December 31, 2011, the Companys interest
rate risk position was liability sensitive. Being slightly liability sensitive
over the past three years contributed to the Companys ability to maintain a net
interest margin above 4.0% from 2009 through 2011. For more information, see
Item 7A of this Annual Report on Form 10-K.
The efficiency ratio is a
measure of non-interest expense as a percentage of total revenue. The Company
computes the efficiency ratio by dividing non-interest expense by the sum of
net interest income on a tax equivalent basis and non-interest income. This is
a non-GAAP financial measure, which management believes provides investors with
important information regarding the Companys operational efficiency.
Comparison of the Companys efficiency ratio with those of other companies may
not be possible because other companies may calculate the efficiency ratio
differently. The efficiency ratio for the years ended December 31, 2011, 2010
and 2009 was 60.1%, 59.0%, and 59.8%, respectively.
The tangible common equity ratio
is a non-GAAP measure used by management to evaluate capital adequacy. Tangible
common equity is total equity less net accumulated other comprehensive income,
goodwill and deposit-based intangibles. Tangible assets are total assets less
goodwill and deposit-based intangibles. The tangible common equity ratio was 7.95%
as of year-end 2011 compared to 7.84% at year-end 2010 and 7.20% at year-end 2009.
18
A reconciliation of non-GAAP
measures of efficiency ratio and tangible common equity is provided as follows
(dollars in thousands):
|
At or for the Year Ended December
31,
|
|
2011
|
|
2010
|
|
2009
|
Efficiency ratio:
|
|
|
|
|
|
Net interest income
(1)
|
$38,428
|
|
$36,368
|
|
$34,891
|
Non-interest income
(2)
|
11,625
|
|
12,270
|
|
12,462
|
Total revenue
|
50,053
|
|
48,638
|
|
47,353
|
Non-interest expense
|
30,072
|
|
28,710
|
|
28,309
|
Efficiency ratio
|
60.08%
|
|
59.03%
|
|
59.78%
|
Tangible common equity
ratio:
|
|
|
|
|
|
Total equity capital
|
$103,468
|
|
$89,279
|
|
$84,312
|
Less:
|
|
|
|
|
|
Accumulated other
comprehensive income
|
8,801
|
|
1,896
|
|
4,256
|
Goodwill
|
11,825
|
|
11,825
|
|
11,825
|
Other intangible assets
|
35
|
|
120
|
|
204
|
Tangible common equity
|
$82,807
|
|
$75,438
|
|
$68,027
|
Total assets
|
$1,053,549
|
|
$974,378
|
|
$956,555
|
Less:
|
|
|
|
|
|
Goodwill
|
11,825
|
|
11,825
|
|
11,825
|
Other intangible assets
|
35
|
|
120
|
|
204
|
Tangible assets
|
$1,041,689
|
|
$962,433
|
|
$944,526
|
Tangible common equity ratio
|
7.95%
|
|
7.84%
|
|
7.20%
|
___________________
(1)
|
Net
interest income includes interest and rates on securities that are non-taxable
for federal income tax purposes that are presented on a taxable equivalent
basis based on a federal statutory rate of 34%.
|
(2)
|
Non-interest
income is presented net of any credit losses from other-than-temporary
impairment losses on available-for-sale securities recognized against earnings
for the years presented.
|
Critical Accounting Policies
The accounting
and reporting of the Company and its subsidiaries conform to GAAP and follow
general practices within the industry. Preparation of financial statements
requires management to make estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes. Management
believes that the Companys estimates are reasonable under the facts and
circumstances based on past experience and information supplied from
professionals, regulators and others. Accounting estimates are considered
critical if (i) management is required to make assumptions or judgments about
items that are highly uncertain at the time estimates are made and (ii)
different estimates reasonably could have been used during the current period,
or changes in such estimates are reasonably likely to occur from period to
period, that could have a material impact on presentation of the Companys
Consolidated Financial Statements.
The development,
selection and disclosure of critical accounting policies are discussed and
approved by the Audit Committee of the Banks Board of Directors. Because of
the potential impact on the financial condition or results of operations and
the required subjective or complex judgments involved, management believes its
critical accounting policies consist of the allowance for loan losses, fair
value of financial instruments and goodwill.
19
Allowance For Loan Losses
The allowance
for losses on loans represents managements best estimate of inherent losses in
the existing loan portfolio. Managements policy is to maintain the allowance
for loan losses at a level sufficient to absorb reasonably estimated and
probable losses within the portfolio. Management believes the allowance for
loan loss estimate is a critical accounting estimate because: (i) changes can
materially affect provision for loan loss expense on the income statement, (ii)
changes in the borrowers cash flows can impact the reserve, and (iii) management
makes estimates at the balance sheet date and also into the future in reference
to the reserve. While management uses the best information available to
establish the allowance for loan losses, future adjustments may be necessary if
economic or other conditions change materially. In addition,
as a part of their examination process, federal regulatory agencies
periodically review the Banks loans and allowances for loan losses and may
require the Bank to recognize adjustments based on their judgment about
information available to them at the time of their examination. See Note 1
of the Companys Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K for more information.
Fair Value of Financial Instruments
Certain assets
and liabilities are required to be carried on the balance sheet at fair value.
Further, the fair value of financial instruments must be disclosed as a part of
the notes to the consolidated financial statements for other assets and
liabilities. Fair values are volatile and may be influenced by a number of
factors, including market interest rates, prepayment speeds, discount rates,
the shape of yield curves and the credit worthiness of counterparties.
Fair values for
the majority of the Banks available-for-sale investment securities are based
on observable market prices obtained from independent asset pricing services
that are based on observable transactions but not quoted market prices.
Fair value of derivatives
(if any) held by the Company is determined using a combination of quoted market
rates for similar instruments and quantitative models based on market inputs
including rate, price and index scenarios to generate continuous yield or
pricing curves and volatility factors. Third party vendors are used to obtain
fair value of available-for-sale securities and derivatives (if any). For more
information, see Notes 1 and 20 in the Companys Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K.
Goodwill
The Companys
policy is to review goodwill for impairment at the reporting unit level on an
annual basis unless an event occurs that could potentially impair the goodwill
amount. Goodwill represents the excess of the cost of an acquired entity over
fair value assigned to assets and liabilities. Management believes accounting
estimates associated with determining fair value as part of the goodwill test
are critical because estimates and assumptions are made based on prevailing
market factors, historical earnings and multiples and other contingencies. For
more information, see Notes 1 and 8 in the Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K.
Results of Operations
The Company
reported consolidated net income of $11.9 million for the year ended December
31, 2011, compared to $8.9 million for the year ended December 31, 2010 and $8.3
million in 2009. The 33% increase in net income from 2010 to 2011 was primarily
a result of increased net interest income and reduced provision for loan losses.
Earnings per share were $3.28 for 2011 compared to $2.45 for 2010 and $2.30
for 2009. Return on average assets was 1.22%, 0.92% and 0.89% for the years ended
December 31, 2011, 2010 and 2009, respectively. Return on average equity was 12.2%,
9.8% and 10.2% for 2011, 2010 and 2009, respectively.
During 2011, the
Company achieved the milestone of becoming a community bank with over $1
billion in assets. Asset growth was 8.1% for the year ended December 31, 2011
compared to 1.9% and 3.1% for the years ended December 31, 2010 and 2009,
respectively. Asset growth of $79.1 million was primarily a result of strong
core deposit growth, as savings and demand grew 22.2% and 19.5%, respectively
in 2011. Deposit growth was primarily used for incremental purchases of available-for-sale
investment securities due to weak loan demand in 2011. The majority of
Interest Bearing Deposits in Banks was the excess balance held at the Federal
Reserve Bank which totaled $38.3 million and $5.8 million as of December 31,
2011 and 2010, respectively. Federal funds sold decreased $3.3 million, net loans
decreased $20 million and other real estate owned (OREO) decreased $3.7
million in 2011 compared to 2010. Time deposits decreased 7.5% and other borrowings
decreased 9.4% in 2011.
Key economic
factors including, but not limited to, stressed real estate markets, job losses
and the market interest rate environment put pressure on asset quality during
2009 and 2010 but stabilized somewhat in 2011. Although the Bank has experienced
challenges in asset quality over the past three years because of the downturn
in real estate markets, particularly in and around Shelby County, Tennessee,
asset quality was considered satisfactory at December 31, 2011 and trends are
stabilizing, as evidenced by decreased loans charged off and decreased volume
of loans transferred into OREO in 2011 compared to 2010 and 2009.
20
While many economic
trends remained problematic during 2011 and had a negative impact on the Banks
ability to achieve quality loan growth, the overall trend in asset quality for
the existing portfolio stabilized in 2011 compared to the prior two years. As
a result, provision for loan losses decreased to $2.4 million in 2011 compared to
$7.0 million in each of the prior two years. Net charge-offs were $2.4 million
in 2011 compared to $7.8 million in 2010 and $5.6 million in 2009. The allowance
for loan losses as a percent of total loans was 1.52% as of December 31, 2011
compared to 1.47% at December 31, 2010 and 1.50% at December 31, 2009.
Additions made to the reserve account, as a percent of gross charge-offs, were
90.7%, 85.5% and 118.6% for the years ended December 31, 2011, 2010 and 2009,
respectively.
The allowance
for loan losses was evaluated in accordance with GAAP and was weighted toward
actual historical losses and included factor adjustments for changes in
environmental conditions. The allowance for loan losses was considered
adequate for each of the periods presented to properly account for changes in
the economies of local markets, changes in collateral values, variables in
underwriting methods, levels of charged-off loans and volumes of non-performing
loans. See additional information regarding the allowance for loan losses
in Notes 1 and 4 to the Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K.
Non-performing
loans as a percent of total loans were 1.49% as of December 31, 2011 compared
to 1.12% as of December 31, 2010 and 1.54% as of December 31, 2009.
Non-performing loans and OREO as a percent of total loans plus OREO at December
31, 2011 were 3.51% compared to 3.71% and 3.28% at December 31, 2010 and 2009,
respectively,
while the average of the Banks peer group was 4.04% as
reported in the Uniform Bank
Performance Report for all insured commercial banks having assets between
$1 billion and $3 billion (UBPR) at December 31, 2011. The allowance for
loan losses as a percent of non-performing loans was 98.49%, 130.9% and 96.8%
as of December 31, 2011, 2010 and 2009, respectively. OREO totaled $11.1
million, $14.7 million and $10.5 million as of December 31, 2011, 2010 and
2009, respectively.
In 2011, the
Company had asset quality indicators below certain peer levels in terms of
nonperforming loans to total loans and net-charge-offs to average total loans.
Comparison of certain asset quality indicators between the Company and UBPR peer
group were as follows for the last five years:
|
|
|
|
|
|
|
|
|
Company
|
Peer*
|
Company
|
Peer*
|
Company
|
Peer*
|
Company
|
Peer*
|
Company
|
Peer*
|
Allowance as % of total
loans
|
1.52%
|
2.03%
|
1.47%
|
1.93%
|
1.50%
|
1.82%
|
1.22%
|
1.43%
|
1.08%
|
1.21%
|
Non-performing loans to
total loans
|
1.50%
|
2.83%
|
1.12%
|
3.21%
|
1.54%
|
3.14%
|
0.74%
|
2.07%
|
0.32%
|
1.03%
|
Loans 30-89 days past due to
total
loans
|
0.90%
|
0.87%
|
0.44%
|
1.20%
|
0.93%
|
1.44%
|
1.15%
|
1.43%
|
0.74%
|
1.11%
|
Net charge-offs to average
total
loans
|
0.45%
|
0.92%
|
1.38%
|
0.99%
|
0.93%
|
1.06%
|
0.31%
|
0.51%
|
0.13%
|
0.18%
|
___________________
*
|
Peer data is derived from the UBPR as of December
31 of the year indicated. As of December 31, 2011, the Bank was in Peer Group 2,
which consisted of all insured commercial banks having assets
between $1 billion and $3 billion. For 2007 to 2010, the Bank was in Peer
Group 3, which consisted of all insured commercial banks having assets between
$300 million and $1 billion.
|
Based on the
UBPR, the Companys allowance as a percent of loans was less than peers, as
the Companys non-performing loans (loans 90 days or more past due accruing
interest and non-accrual loans) were also below peers as of year-end 2011.
For more information regarding loans and allowance for loan losses, see the
section below entitled Financial Condition -- Loan Portfolio Analysis and
Note 1 to the Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
Net yield on
average earning assets was 4.28% for both 2011 and 2010 and 4.20% for 2009. Strong
net interest margin over the past three years was attributable to the Companys
ability to reprice interest bearing liabilities at lower rates, primarily time
deposits and other borrowings, in a greater volume than decreases in yields on
interest earning assets. The Bank remained in a liability sensitive position
as of year-end 2011 and could face margin compression when the rate environment
begins rising. For more information about the Companys interest rate
sensitivity, see Item 7A of this Annual Report on Form 10-K.
21
Total
non-interest income for the year ended December 31, 2011 decreased $1.2 million
compared to the year ended December 31, 2010. The net decrease was primarily
attributable to losses recognized on OREO totaling $1.4 million in 2011
compared to $1.2 million in 2010 and reduced gains on sale of
available-for-sale securities totaling approximately $943,000 in 2011 compared
to $1.9 million in 2010. Other-than-temporary credit impairment losses on
available-for-sale securities for the years ended December 31, 2011 and 2010
totaled approximately $48,000 and $589,000, respectively, and related primarily
to pooled trust preferred securities.
The Companys
effective tax rate was 22% in 2011 compared to 19% in 2010 and 2009. The
effective tax rate was impacted by fluctuations in certain factors including,
but not limited to, the volume of and related earnings on tax-free investments
within the Banks investment portfolio, tax-exempt earnings and expenses on bank-owned
life insurance (BOLI), certain tax benefits that result from dividends and
payouts under the Banks Employee Stock Ownership Plan (ESOP), and other
factors incidental to the financial services business. Fluctuations in the
deduction related to the ESOP dividends and payouts and tax-exempt interest
earned in the investment portfolio were the largest contributors to the various
effective rates for the past three years.
Interest earning
assets in 2011 averaged $898 million at an average rate of 5.3% compared to $850
million at an average rate of 5.7% in 2010 and $831 million at an average rate
of 6.1% in 2009. Interest bearing liabilities at December 31, 2011 averaged $797
million at an average cost of 1.2% compared to $772 million at an average cost
of 1.6% at December 31, 2010 and $754 million at an average cost of 2.1% at December
31, 2009.
22
The following
table presents the annual average balance sheet and net interest income
analysis for the years ended December 31, 2011, 2010 and 2009 (dollars in
thousands):
|
AVERAGE BALANCES AND RATES
|
|
2011
|
|
2010
|
|
2009
|
|
Balance
|
Interest
|
Rate
|
|
Balance
|
Interest
|
Rate
|
|
Balance
|
Interest
|
Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2)(3)
|
$541,255
|
$34,159
|
6.31%
|
|
$561,964
|
$36,085
|
6.42%
|
|
$589,528
|
$38,402
|
6.51%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
215,458
|
6,832
|
3.17%
|
|
171,024
|
6,262
|
3.66%
|
|
148,140
|
7,260
|
4.90%
|
Tax exempt (4)
|
107,760
|
6,700
|
6.22%
|
|
94,185
|
5,970
|
6.34%
|
|
75,752
|
4,977
|
6.57%
|
Interest earning deposits
|
25,537
|
65
|
0.25%
|
|
1,056
|
6
|
0.57%
|
|
914
|
16
|
1.75%
|
Federal funds sold
|
8,403
|
28
|
0.33%
|
|
21,705
|
55
|
0.25%
|
|
16,392
|
48
|
0.29%
|
Total interest earning assets
|
898,413
|
47,784
|
5.32%
|
|
849,934
|
48,378
|
5.69%
|
|
830,726
|
50,703
|
6.10%
|
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
14,122
|
|
|
|
17,802
|
|
|
|
14,989
|
|
|
Premises and equipment
|
29,758
|
|
|
|
30,498
|
|
|
|
31,143
|
|
|
Other assets
|
66,707
|
|
|
|
67,067
|
|
|
|
56,178
|
|
|
Total assets
|
$1,009,000
|
|
|
|
$965,301
|
|
|
|
$933,036
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
$351,221
|
$2,981
|
0.85%
|
|
$304,605
|
$ 2,972
|
0.98%
|
|
$265,055
|
$ 3,007
|
1.13%
|
Time deposits
|
362,313
|
4,711
|
1.30%
|
|
360,634
|
5,738
|
1.59%
|
|
374,469
|
8,722
|
2.33%
|
Federal funds purchased and other
interest bearing
liabilities
|
83,217
|
1,664
|
2.00%
|
|
107,208
|
3,300
|
3.08%
|
|
114,624
|
4,083
|
3.56%
|
Total interest bearing liabilities
|
796,751
|
9,356
|
1.17%
|
|
772,447
|
12,010
|
1.55%
|
|
754,148
|
15,812
|
2.10%
|
Non-interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
107,792
|
|
|
|
97,294
|
|
|
|
89,819
|
|
|
Other liabilities
|
7,351
|
|
|
|
4,997
|
|
|
|
7,367
|
|
|
Total liabilities
|
911,894
|
|
|
|
874,738
|
|
|
|
851,334
|
|
|
Total shareholders' equity
|
97,106
|
|
|
|
90,564
|
|
|
|
81,702
|
|
|
Total liabilities and shareholders' equity
|
$1,009,000
|
|
|
|
$965,302
|
|
|
|
$933,036
|
|
|
Net interest income
|
|
$38,428
|
|
|
|
$36,368
|
|
|
|
$34,891
|
|
Net yield on average earning assets
|
|
|
4.28%
|
|
|
|
4.28%
|
|
|
|
4.20%
|
___________________
|
(1)
|
Loan
totals are loans held for investments and net of unearned income and loan loss
reserves.
|
(2)
|
Fee
income on loans held for investment is included in interest income and
computations of the yield.
|
(3)
|
Includes
loans on non-accrual status.
|
(4)
|
Interest
and rates on securities that are non-taxable for federal income tax purposes
are presented on a taxable equivalent basis based on the Companys statutory
federal tax rate of 34%.
|
23
Volume/Rate
Analysis
The following table provides an analysis of the impact of changes in
balances and rates on interest income and interest expense changes from 2011 to
2010 and 2010 to 2009 (in thousands):
|
2011 Compared to 2010
|
|
2010 Compared to 2009
|
|
Due to Changes in:
|
|
Due to Changes in:
|
|
Average Volume
|
|
Average Rate
|
|
Total Increase (Decrease)
|
|
Average Volume
|
|
Average Rate
|
|
Total Increase (Decrease)
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$(1,307)
|
|
$(619)
|
|
$(1,926)
|
|
$(1,770)
|
|
$ (547)
|
|
$(2,317)
|
Taxable securities
|
1,409
|
|
(839)
|
|
570
|
|
838
|
|
(1,836)
|
|
(998)
|
Tax-exempt securities
|
844
|
|
(114)
|
|
730
|
|
1,169
|
|
(176)
|
|
993
|
Interest bearing deposits with other banks
|
61
|
|
(2)
|
|
59
|
|
1
|
|
(11)
|
|
(10)
|
Federal funds sold and securities purchased
under
agreements to sell
|
(44)
|
|
17
|
|
(27)
|
|
13
|
|
(6)
|
|
7
|
Total interest earning assets
|
963
|
|
(1,557)
|
|
(594)
|
|
251
|
|
(2,576)
|
|
(2,325)
|
Interest expense on:
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
396
|
|
(387)
|
|
9
|
|
388
|
|
(423)
|
|
(35)
|
Time deposits
|
22
|
|
(1,049)
|
|
(1,027)
|
|
(220)
|
|
(2,764)
|
|
(2,984)
|
Federal funds purchased and securities sold
under
agreements to repurchase and other
borrowings
|
(480)
|
|
(1,156)
|
|
(1,636)
|
|
(228)
|
|
(555)
|
|
(783)
|
Total interest bearing liabilities
|
(62)
|
|
(2,592)
|
|
(2,654)
|
|
(60)
|
|
(3,742)
|
|
(3,802)
|
Net interest earnings
|
$1,025
|
|
$1,035
|
|
$2,060
|
|
$311
|
|
$1,166
|
|
$1,477
|
Non-Interest Income
The following
table compares non-interest income for the years ended December 31, 2011, 2010
and 2009 (dollars in thousands):
|
Total
2011
|
|
Increase (Decrease)
|
|
Total
2010
|
|
Increase (Decrease)
|
|
Total
2009
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
Mortgage banking income
|
$ 830
|
|
$ (286)
|
|
25.63%
|
|
$1,116
|
|
$ 5
|
|
0.45%
|
|
$1,111
|
Income from fiduciary
activities
|
803
|
|
18
|
|
2.29%
|
|
785
|
|
(21)
|
|
(2.61)%
|
|
806
|
Service charges on
deposit accounts
|
6,634
|
|
(289)
|
|
(4.17)%
|
|
6,923
|
|
(18)
|
|
(0.26)%
|
|
6,941
|
Brokerage fees
|
1,263
|
|
183
|
|
16.94%
|
|
1,080
|
|
(237)
|
|
(18.00)%
|
|
1,317
|
Earnings on bank owned
life insurance
|
736
|
|
59
|
|
8.71%
|
|
677
|
|
(155)
|
|
(18.63)%
|
|
832
|
Gain (loss) on sale of
foreclosed property
|
(1,374)
|
|
(218)
|
|
18.86%
|
|
(1,156)
|
|
(686)
|
|
145.96%
|
|
(470)
|
Gain on sale of
available-for-sale securities
|
943
|
|
(941)
|
|
(49.95)%
|
|
1,884
|
|
688
|
|
57.53%
|
|
1,196
|
Income from insurance
activities
|
899
|
|
(14)
|
|
(1.53)%
|
|
913
|
|
79
|
|
9.47%
|
|
834
|
Other non-interest income
|
939
|
|
302
|
|
47.41%
|
|
637
|
|
91
|
|
16.67%
|
|
546
|
Total non-interest
income
|
$11,673
|
|
$(1,186)
|
|
(9.22)%
|
|
$12,859
|
|
$(254)
|
|
(1.94)%
|
|
$13,113
|
Total
non-interest income decreased 9.2% in 2011 compared to 2010. As residential
real estate values remained depressed, the Banks mortgage activity declined as
the prevailing environment made it difficult for many borrowers to refinance
even though mortgage rates remain at or near historically low levels. Mortgage
banking income decreased to approximately $830,000 in 2011 compared to $1.1
million in each of 2010 and 2009. Income from fiduciary activities increased
2.3% or approximately $18,000 in 2011 compared to 2010. Service charges on
deposits decreased 4.2% in 2011 compared to 2010. Brokerage fees increased
approximately $183,000 or 16.9% in 2011 compared to 2010.
24
Loss on sale
of foreclosed property includes write downs of OREO subsequent to foreclosure
and has had a negative trend over the past three years due to elevated volumes
of OREO and declining real estate values. For more information regarding OREO,
see the section below entitled Financial Condition Other Real Estate
Owned and Note 9 in the Companys Consolidated Financial Statements included
elsewhere this Annual Report on Form 10-K. Earnings on BOLI assets increased
approximately $59,000 or 8.7% in 2011 compared to 2010. Gain on sale of
available-for-sale securities decreased approximately $941,000 in 2011 compared
to 2010 as a result of strategies designed to realize appreciation in the
investment portfolio. See additional information regarding sale of securities
in Note 3 of the Companys Consolidated Financial Statements included elsewhere
in this Annual Report on Form 10-K. In 2011, total non-interest income
(excluding impairment losses on available-for-sale securities) contributed 20.41%
of total revenue in 2011 compared to 21.7% and 19.6% for 2010 and 2009,
respectively. Other non-interest income totaling approximately $939,000 for
2011 included gain on disposition of property of approximately $273,000
resulting from the sale of the Banks real property in Union City, Tennessee.
The Union City property previously served as a limited service facility for the
Bank through January 2009.
Income from White and Associates/First Citizens Insurance, LLC, a
full-service insurance agency (WAFCI), was included in Income from Insurance
Activities in the Consolidated Statements of Income and increased approximately
$18,000 or 2% in 2011 compared to 2010. Non-interest income generated by WAFCI
for 2011, 2010 and 2009 totaled approximately $813,000, $795,000 and $735,000,
respectively. Income from insurance activities also includes commissions from
sale of credit life policies and the Companys proportionate share of income from
the Banks other 50% owned insurance agency, First Citizens/White and Associates
Insurance Company.
Non-Interest Expense
The following
table compares non-interest expense for the years ended December 31, 2011, 2010
and 2009 (dollars in thousands):
|
Total
2011
|
|
Increase (Decrease)
|
|
Total
2010
|
|
Increase (Decrease)
|
|
Total
2009
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
Salaries and employee benefits
|
$16,700
|
|
$1,283
|
|
8.32%
|
|
$15,417
|
|
$ 132
|
|
0.86%
|
|
$15,285
|
Net occupancy expense
|
1,676
|
|
(83)
|
|
(4.72)%
|
|
1,759
|
|
(45)
|
|
(2.49)%
|
|
1,804
|
Depreciation
|
1,780
|
|
(12)
|
|
(0.67)%
|
|
1,792
|
|
(60)
|
|
(3.24)%
|
|
1,852
|
Data processing expense
|
1,741
|
|
150
|
|
9.43%
|
|
1,591
|
|
399
|
|
33.47%
|
|
1,192
|
Legal and professional
fees
|
653
|
|
212
|
|
48.07%
|
|
441
|
|
136
|
|
44.59%
|
|
305
|
Stationary and office
supplies
|
217
|
|
(4)
|
|
(1.81)%
|
|
221
|
|
(33)
|
|
(12.99)%
|
|
254
|
Amortization of
intangibles
|
85
|
|
|
|
%
|
|
85
|
|
|
|
%
|
|
85
|
Advertising and
promotions
|
662
|
|
(41)
|
|
(5.83)%
|
|
703
|
|
81
|
|
13.02%
|
|
622
|
Premiums for FDIC
insurance
|
823
|
|
(377)
|
|
(31.42)%
|
|
1,200
|
|
(471)
|
|
(28.19)%
|
|
1,671
|
Expenses related to other real estate owned
|
682
|
|
(206)
|
|
(23.20)%
|
|
888
|
|
246
|
|
38.32%
|
|
642
|
ATM related fees and
expenses
|
915
|
|
131
|
|
16.71%
|
|
784
|
|
301
|
|
62.32%
|
|
483
|
Other expenses
|
4,138
|
|
309
|
|
8.07%
|
|
3,829
|
|
(285)
|
|
(6.93)%
|
|
4,114
|
Total non-interest
expense
|
$30,072
|
|
$1,362
|
|
4.74%
|
|
$28,710
|
|
$401
|
|
1.42%
|
|
$28,309
|
Total
non-interest expense increased 4.7% in 2011 compared to 2010. Non-interest
expense was dominated by salaries and employee benefits expense, which
comprised 56% of total non-interest expense in 2011 compared to 54% in 2010 and
53% in 2009. Salary and employee benefits expense increased 8.3% or $1.3
million in 2011 compared to 2010. The majority of the Companys employees
receive performance-based incentives based on factors designed to achieve
strategic goals and are balanced for risk and reward. Such factors are aligned
with strategic objectives and include achievement of a certain ROE level,
accomplishing annual budget goals, and attainment of business development
goals, asset quality goals, and other metrics applicable to the individuals
job responsibilities. Incentive pay totaled 11.5% of salaries and benefits in
2011 compared to 8.9% in 2010 and 8.3% in 2009. The Company also increased its
allocation to retirement plans from 5% of compensation in 2010 to 9% in 2011.
For additional information regarding the Companys retirement plans and
contributions, see Note 21 in the Companys Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K. Significant expense
associated with salaries and benefits is consistent with the Companys
strategic plan to hire and retain high quality employees to provide outstanding
customer service and strive for exceptional shareholder returns.
25
The following
table compares assets per employee for the Company compared to its peers, based
on information obtained from UBPR for the years ended December 31 (in
thousands):
Year
|
Company
|
|
Peer
*
|
2011
|
$4,050
|
|
$4,970
|
2010
|
3,760
|
|
4,540
|
2009
|
3,680
|
|
4,600
|
2008
|
3,465
|
|
4,310
|
2007
|
3,210
|
|
4,060
|
___________________
*
|
As of December 31, 2011, the Bank was in Peer
Group 2, which consisted of all insured commercial banks having assets between $1
billion and $3 billion. For 2007 to 2010, the Bank was in Peer Group 3, which
consisted of all insured commercial banks having assets between $300 million and
$1 billion in assets.
|
Comparison of
assets per employee for the Company and its peers revealed that the Company
improved in each of the last five years but continued to be more heavily
staffed than its peers. The trend of less assets per employee than peers was
consistent with historical trends and employees necessary to support the
Companys non-interest income streams including brokerage, mortgage and trust
divisions. The Companys ratio of assets per employee steadily improved over
the past five years as newer branches became profitable and as a result improved
the overall efficiency of operations within the Company. In an effort to
provide a high level of customer service and strategic efforts to continue
growth of non-interest income streams, management expects the trend of lower
assets per employees compared to peers to continue in future periods.
Net occupancy
expense decreased by approximately $83,000 or 4.7% in 2011 compared to 2010 as
a result of strategic efforts to control expenditures in 2011. Depreciation was
flat in 2011 compared to 2010. Data processing expense increased 9.4% in 2011
because of increased expenses associated with upgrading certain systems and
outsourcing certain portions of the information technology functions of the Bank.
While outsourcing of functions such as item processing resulted in increased
data processing expense, this initiative also decreased other categories of
other non-interest expense such as postage, stationary and supplies and certain
salaries and employee benefits expenses. Also, upgrades of certain systems
were required in order to achieve efficiency strategies and/or in order to
comply with changes in regulation. The Company continues to strive for
efficiencies in the areas of expansion, data integrity/security and customer
service. However, strategies adopted by the Companys Board of Directors to
provide superior customer service will continue to exert pressure on occupancy,
depreciation and other non-interest expenses going forward.
In 2011, expense
related to FDIC insurance premiums decreased approximately $377,000 as a result
of the FDICs change in how premium assessments are calculated. The change in
calculations had a favorable impact and reduced premium expense in 2011 compared
to 2010 and 2009. The 2009 total included the special assessment as of June
30, 2009 (paid September 30, 2009) in the amount of approximately $425,000 paid
to the FDIC to help offset increased costs incurred by the fund caused by an
increased number of failed banks. In December 2009, the FDIC required the Bank
to pre-pay projected assessments for 2010 through 2012 totaling $4.2 million.
The prepaid assessment is reflected in Other Assets in the Companys
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K and totaled $2.1 million and $2.9 million as of December 31, 2011 and
2010, respectively.
Legal and
professional fees increased in 2011 compared to 2010 as a result of legal
expenses related to pursuit of deficiencies on loans charged off and
foreclosures as well as consulting projects necessary to comply with increased
regulatory burdens and to execute certain efficiency strategies. Stationary
and office supplies were essentially flat and decreased less than 2% in 2011
compared to 2010 as a result of increased cost of supplies offset by reduced usage
of papers and other products. Reduction in use of paper and other supplies was
due to increased utilization of electronic rather than paper documents.
Advertising and promotions expense decreased approximately $41,000 in 2011
compared to 2010. Advertising and promotion costs are expensed as incurred and
totaled approximately $662,000 in 2011, approximately $703,000 in 2010 and approximately
$622,000 in 2009.
26
Expenses related
to OREO totaled approximately $682,000 in 2011 compared to approximately $888,000
in 2010 and approximately $642,000 in 2009. The reduction in expense was primarily
attributable to decreased volume of OREO acquired in 2011. In 2011, loans
totaling $3.6 million were transferred to OREO as compared to $11.7 million in
2010. For more information regarding OREO, see the section below entitled
Financial Condition Other Real Estate Owned and Note 9 in the Companys
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Expenses
associated with the Companys ATM and debit card program totaled approximately
$915,000 in 2011 compared to approximately $784,000 in 2010. Increased
expenses for the ATM and debit card program were primarily related to costs of
regulatory compliance, data integrity and fraud prevention and control. Other
non-interest expense increased approximately $309,000 in 2011 compared to 2010 due
to the combined effect of small increases in, among other things, education,
various fees (such as to correspondent banks), directors fees, minority
interest expense and franchise tax expenses.
No impairment of
goodwill was recognized in any of the periods presented in this report.
Goodwill was 1.12% and 1.21% of total assets and 11.66% and 13.56% of total
capital as of December 31, 2011 and 2010, respectively. Amortization of core
deposit intangibles was flat at approximately $85,000 in each of the past three
years. Core deposit intangibles will be fully amortized in 2012.
Financial Condition
Changes in the statement of financial
condition for the years ended December 31, 2011 and 2010 reflected the
Companys strategic efforts to focus on quality asset growth and capital
preservation during the economic recession. Asset growth in 2011 was 8.1% and
was primarily driven by growth of 19.5% in demand deposits and 22.2% in savings
deposits. Funds from deposit growth were primarily invested in
available-for-sale securities, which increased 24.0% in 2011. The continued impact
of the recent economic recession was evident in negative loan growth of 3.7% for
the year ended December 31, 2011.
As evidenced in the cash flow
statements, the Companys deployment of capital for purchases of premises and
equipment totaled $1.1 million in 2011 compared to $1.5 million in 2010 and approximately
$631,000 in 2009. Premises and equipment purchases in 2009 through 2011 consisted
primarily of upgrading and replacing computer hardware and software as well as renovations
to various branch facilities.
Investment Securities Analysis
The following
table presents the composition of total investment securities as of December 31
for the last five years (in thousands):
|
|
|
|
|
|
U.S. Treasury and government
agencies
|
$249,240
|
$191,443
|
$ 158,458
|
$ 148,269
|
$ 134,460
|
State and political
subdivisions
|
115,634
|
102,450
|
89,211
|
59,588
|
51,037
|
All other
|
|
|
|
|
|
Total investment
securities
|
|
|
|
|
|
In 2011, total investment
securities portfolio growth of $70.6 million consisted of $57.8 million
increase in agency mortgage-backed securities (MBS) and collateralized
mortgage obligations (CMO) and $13.2 million increase in municipal
securities. Growth in the overall portfolio of $70.6 million was primarily
driven by incremental purchases of new agency and municipal debt securities as
well as an increase of $11.2 million in net unrealized appreciation (pre-tax)
on the portfolio.
The allocation
to tax-exempt municipal securities as a percent of the total portfolio was 32%
as of December 31, 2011 compared to 35% and 36% as of December 31, 2010 and
2009, respectively. This range of ratios is consistent with recent
allocations, as the Company has maintained approximately one-third of its
portfolio in the tax-exempt municipal sector for many years.
Maturity
and Yield on Securities
Contractual
maturities on investment securities are generally ten years. However, the
expected remaining lives of such bonds are expected to be much shorter due to
anticipated payments from U. S. Treasury and government agency securities.
These securities comprised 68% of the portfolio at December 31, 2011 and are
primarily amortizing payments that provide stable monthly cash inflows of
principal and interest payments. The following table presents contractual
maturities and yields by category for debt securities as of December 31, 2011
(dollars in thousands):
27
|
|
Maturing
After One
Year Within
Five Years
|
Maturing
After Five
Years Within
Ten Years
|
|
Total
|
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
U. S. Treasury and government agencies
(1)
|
$ -
|
-%
|
$ 558
|
4.08%
|
$34,831
|
2.73%
|
$213,851
|
3.11%
|
$249,240
|
State and political subdivisions
(2)
|
2,992
|
7.12%
|
8,786
|
6.79%
|
36,593
|
6.04%
|
67,263
|
6.42%
|
115,634
|
All other
|
|
|
-
|
|
|
|
|
5.44%
|
|
Total debt securities
|
2,992
|
|
9,344
|
|
71,424
|
|
281,667
|
|
365,427
|
Equity securities
|
-
|
|
-
|
|
-
|
|
38
|
1.05%
|
38
|
Total
|
$2,992
|
|
$ 9,344
|
|
$ 71,424
|
|
$281,705
|
|
$ 365,465
|
________________
(1)
|
Of this category, 98% of the total consisted
of MBS and CMO which are presented based on contractual maturities (with 86% of
the total for this category in the Maturing After Ten Years category).
However, the remaining lives of such securities are expected to be much shorter
due to anticipated payments.
|
(2)
|
Yields are presented on
a tax-equivalent basis using a federal statutory rate of 34%.
|
Held-To-Maturity and
Available-For-Sale Securities
The Company held
no securities in the held-to-maturity or trading categories as of December 31, 2011
or 2010. The following table presents amortized cost and fair value of
available-for-sale securities as of December 31, 2011 (in thousands):
|
Amortized
|
|
Fair
|
|
Cost
|
|
Value
|
U.S. government agencies and
corporate obligations
|
$242,459
|
|
$249,240
|
Obligations of states and
political subdivisions
|
106,554
|
|
115,634
|
U.S. securities:
|
|
|
|
Other debt securities
|
2,171
|
|
553
|
Equity securities
|
23
|
|
38
|
Total
|
$351,207
|
|
$365,465
|
In addition to amounts presented
above, the Bank had $5.7 million in FHLB and Federal Reserve Bank stock at both
December 31, 2011 and 2010, recorded at cost. Equity securities listed above
consisted primarily of shares of Fannie Mae and Freddie Mac perpetual preferred
stock.
Total investment
securities at December 31, 2011, 2010 and 2009 were $365 million, $295 million and
$250 million, respectively. Available-for-sale investments increased $70.6
million or 24.0% from December 31, 2010 to December 31, 2011, as a result of
interest cash flows reinvested into new securities and additional incremental
funds allocated to the portfolio during the year. Objectives of the Banks
investment portfolio management are to provide safety of principal, adequate
liquidity, insulate GAAP capital against excessive changes in market value,
insulate earnings from excessive change and optimize investment performance.
Investments also serve as collateral for government, public funds and large
deposit accounts that exceed FDIC-insured limits. Pledged investments at December
31, 2011 had a fair market value of $197 million. The average expected life of
the investment securities portfolio was 4.4 years, 5.1 years and 5.0 years as
of December 31, 2011, 2010 and 2009, respectively. Portfolio yields (on a tax
equivalent basis) were 4.1% as of December 31, 2011 compared to 4.7% as of December
31, 2010 and 5.2% as of December 31, 2009.
The Company
classifies investments, based on intent, into trading, available-for-sale and
held-to-maturity categories in accordance with GAAP. The Company held no
securities in the trading category for any of the last five years and does not
expect to hold any such securities in 2012. The Companys investment strategy
is to classify most of the securities portfolio as available-for-sale, which
are carried on the balance sheet at fair market value. Classification of
available-for-sale investments allows flexibility to actively manage the
portfolio under various market conditions.
28
U.S. Treasury
securities and government agencies and corporate obligations consisted
primarily of MBS and CMO and accounted for 68% and 63% of the investment portfolio
for years ended December 31, 2011 and 2010, respectively. Credit quality of
the Companys MBS and CMO portfolio was considered strong and reflected a net
unrealized gain of $6.8 million as of December 31, 2011. Credit quality
factors on the bonds and related underlying mortgages are evaluated at the time
of purchase and on a periodic basis thereafter. These factors typically
include, but are not limited to, average loan-to-value ratios, average FICO
credit score, payment seasoning (how many months of payment history),
geographic dispersion, average maturity and average duration. Management
believes that this level of amortizing securities provides steady cash flows,
as evidenced by the Consolidated Statement of Cash Flows included elsewhere in
the Annual Report on Form 10-K. Principal cash flows for 2012 are projected to
be $50-60 million.
As of December
31, 2011, approximately 32% of the investment portfolio was invested in
municipal securities, which were geographically diversified, compared to 36% as
of December 31, 2010. Fair value of municipal securities totaled $116 million
($114.2 million were tax-exempt and $1.4 million taxable) at December 30, 2011.
Approximately 67% of municipal securities were general obligation municipal
bonds and the remaining 33% were revenue bonds at December 31, 2011. The
revenue bonds are primarily essential services bonds such as for water and
sewer, school systems and other public improvement projects. Overall credit
quality of the municipal portfolio was considered strong and reflected a net
unrealized gain of $9.1 million as of year-end 2011.
As of December
31, 2011, less than 1% of the investment portfolio consisted of three
collateralized debt obligation securities that are backed by trust-preferred
securities (TRUP CDOs) issued by banks, thrifts and insurance companies.
These three debt securities reflected a net unrealized loss of $1.6 million as
of year-end 2011. The market for TRUP CDOs has been inactive since 2008 and as
a result, quoted market values have been significantly below amortized cost since
that time. These securities are evaluated for other-than-temporary impairment
on a quarterly basis. Charges for credit loss portion of other-than-temporary
impairment totaling approximately $48,000 and $589,000 were recognized against
earnings for the years ended December 31, 2011 and 2010, respectively. For
more information, see Note 3 in the Companys Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K.
The following
table indicates by category gross unrealized gains and losses within the
available-for-sale portfolio as of December 31, 2011 (in thousands):
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Net
|
U.S. Treasury securities and obligations of U.S.
government agencies and corporations
|
$ 6,793
|
|
$(12)
|
|
$ 6,781
|
|
|
Obligations of states and
political subdivisions
|
9,083
|
|
(3)
|
|
9,080
|
All other
|
15
|
|
(1,618)
|
|
(1,603)
|
Total
|
$15,891
|
|
$(1,633)
|
|
$14,258
|
Unrealized gains and losses noted above were included in
Accumulated Other Comprehensive Income, net of tax.
Loan Portfolio Analysis
The following
table compares the portfolio mix of loans held for investment as of December 31
for each of the last five years (in thousands):
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Commercial, financial and agricultural
|
$ 72,174
|
|
$ 66,297
|
|
$ 71,301
|
|
$ 80,317
|
|
$ 80,509
|
Real estate-construction
|
39,964
|
|
49,148
|
|
66,414
|
|
97,340
|
|
106,695
|
Real estate-mortgage
|
383,934
|
|
395,256
|
|
407,058
|
|
375,714
|
|
353,655
|
Installment loans to individuals
|
28,027
|
|
31,593
|
|
34,071
|
|
36,220
|
|
37,106
|
Other loans
|
3,600
|
|
5,409
|
|
8,554
|
|
7,167
|
|
6,674
|
Total loans
|
$527,699
|
|
$547,703
|
|
$587,398
|
|
$596,758
|
|
$584,639
|
29
For purposes of the
table above, loans do not include loans that are sold in the secondary mortgage
market. The Company classifies loans to be sold in the secondary mortgage
market separately in its consolidated financial statements. Secondary market
mortgages totaled $2.6 million, $2.8 million and $2.7 million as of December
31, 2011, 2010 and 2009, respectively. For more information, see Notes 4, 5
and 6 in the Companys Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K. Interest and fees earned on secondary
mortgage loans were included in mortgage banking income as reported in other
non-interest income in the Companys Consolidated Financial Statements.
Changes In Loan Categories
Total loans at
December 31, 2011 were $528 million compared to $548 million at December 31, 2010
and $587 million at December 31, 2009. Downward loan trends were a result of
overall decreased loan demand as well as managements strategic efforts to
reduce exposures in certain loan categories such as construction and
development loans. Loans decreased 3.7% in 2011 and 6.7% in 2010. The
following table details the breakdown of changes by category for the year ended
December 31, 2011 (dollars in thousands):
|
|
Increase (Decrease)
|
|
Percent Change
|
|
Commercial, financial and
agricultural
|
|
$ 5,877
|
|
8.86%
|
|
Real estate-construction
|
|
(9,184)
|
|
(18.69%)
|
|
Real estate-mortgage
|
|
(11,322)
|
|
(2.86%)
|
|
Installment loans to
individuals
|
|
(3,566)
|
|
(11.29%)
|
|
Other loans
|
|
(1,809)
|
|
(33.44%)
|
|
Net
change in loans
|
|
$(20,004)
|
|
(3.65%)
|
|
The loan
portfolio remains heavily weighted in real estate loans, which accounted for $424
million or 80% of total loans as of December 31, 2011 compared to $444 million
or 81% of total loans as of December 31, 2010. Commercial and residential construction
loans accounted for $40 million of the $424 million invested in real estate
loans. Construction loans have trended downward steadily over the past five
years, consistent with the effects on that sector from the recent economic
recession. Although the portfolio was heavily weighted in real estate, the
Bank does not invest in sub-prime or non-traditional mortgages. Within real
estate loans, residential mortgage loans (including residential construction)
was the largest category, comprising 35% of total loans as of December 31, 2011
compared to 36% as of December 31, 2010. Diversification of the real estate
portfolio is a necessary and desirable goal of the Companys real estate loan
policy. In order to achieve and maintain a prudent degree of diversity, given
the composition of the market area and the general economic state of the market
area, the Company will strive to maintain real estate loan portfolio
diversification. Risk monitoring of commercial real estate concentrations is
performed in accordance with regulatory guidelines and includes assessment of
risk levels of various types of commercial real estate and review of ratios of
various concentrations of commercial real estate as a percentage of capital. During
2011, loans decreased 3.7% and capital increased 15.9%. Therefore, real estate
loans as a percent of capital decreased. The following table presents real
estate loans as a percent of total risk based capital as of December 31 for
each of the last five years:
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
As a percent of total
risk based capital*:
|
|
|
|
|
|
|
|
|
|
Construction and development
|
40.06%
|
|
53.05%
|
|
77.40%
|
|
120.68%
|
|
135.33%
|
|
Residential (one-to-four
family)
|
163.40%
|
|
184.50%
|
|
206.82%
|
|
203.75%
|
|
193.71%
|
|
Other real estate loans
|
224.04%
|
|
245.15%
|
|
270.74%
|
|
265.31%
|
|
257.64%
|
|
Total
real estate loans
|
427.50%
|
|
482.70%
|
|
554.96%
|
|
589.74%
|
|
586.68%
|
|
________________
*
|
Total risk based capital is a non-GAAP
measure used by regulatory authorities and reported on quarterly regulatory
filings. Total risk based capital for the Bank was $99.8 million, $92.6
million, $85.8 million, $80.7 million and $78.8 million as of December 31, 2011,
2010, 2009, 2008 and 2007, respectively.
|
30
Negative loan
growth in 2011 occurred across all loan categories except commercial, financial
and agricultural loans with weak overall loan demand as a result of distressed
real estate markets, job losses and other factors resulting from the economic
recession. Growth of $5.9 million in commercial, financial and agricultural
loans in 2011 was primarily concentrated in the agricultural sector.
Agriculture was a strong sector in the local economies and markets served by
the Bank, as crop yields and prices had favorable trends in 2011. Also, the
Bank has strategically reduced its concentration of one-to-four family residential
construction and non-owner occupied commercial real estate loans since 2007 as
focus shifted to lower-risk owner-occupied commercial real estate. As a
result, the ratios of total construction and development loans as a percent of
total risk based capital (as reflected in the table above) and one-to-four
family residential construction loans as a percent of total risk based capital
trended downward from 2007 to 2011. As of December 31, 2011, the ratio of one-to-four
family residential construction loans to total risk based capital was 11.77%
compared to 19.75%, 33.21%, 55.88% and 76.02% as of December 31, 2010, 2009,
2008 and 2007, respectively.
As of December 31, 2011, the ratio of
non-owner occupied commercial real estate loans as a percent of total risk
based capital also trended downward to 127.12% compared to 148.89%, 188.55%,
232.68% and 243.53% as of December 31, 2010, 2009, 2008 and 2007, respectively.
Average Loan Yields
The average
yield on loans of the Bank has trended downward over the past five years, as
loans have repriced during the historically low interest rate environment.
Average yield on loans for the years indicated were as follows:
2011 - 6.32%
|
2010 - 6.42%
|
2009 - 6.51%
|
2008 - 6.99%
|
2007 - 7.98%
|
The aggregate
amount of unused guarantees, commitments to extend credit and standby letters
of credit was $80.2 million at year-end 2011. For more information regarding
commitments and standby letters of credit, see Note 18 in the Companys Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K.
Loan Maturities
As of December
31, 2011, contractual maturities of loans were as follows (in thousands):
|
Due in One
Year or Less
|
|
Due After
One Year but
Within Five Years
|
|
Due After
Five Years
|
Real estate
|
$107,941
|
|
$253,070
|
|
$62,887
|
Commercial, financial and
agricultural
|
40,299
|
|
31,442
|
|
4,033
|
All other loans
|
8,003
|
|
18,716
|
|
1,308
|
Total
|
$156,243
|
|
$303,228
|
|
$68,228
|
As of December
31, 2011, loans with a remaining maturity of more than one year consisted of
the following (in thousands):
Loans with maturities after
one year for which:
|
|
|
Interest
rates are fixed or predetermined
|
$311,793
|
|
Interest
rates are floating or adjustable
|
59,663
|
|
The degree of interest rate risk
to which a bank is subjected can be controlled through a well-defined funds
management program. The Company controls interest rate risk by matching
interest sensitive assets and liabilities. At year-end 2011, the Company was liability-sensitive,
meaning that liabilities reprice at a faster rate than assets. Therefore, in a
rising rate environment (with a normal yield curve) net interest income would
decline. The majority of the Banks loan portfolio will reprice or mature in
less than five years. Approximately $161 million or 31% of total loans will
either reprice or mature over the next 12 months, while $159 million or 30% of
total loans will mature or reprice after one year but less than three years.
Approximately $150 million or 28% of total loans will mature or reprice after
three years but in less than five years. The remaining 11% or $58 million reprices
or matures in greater than five years.
31
Loan Policy Guidelines
Management has
established policies approved by the Companys Board of Directors regarding
portfolio diversification and underwriting standards. Loan policy also includes
Board-approved guidelines for collateralization, loans in excess of loan to
value (LTV) limits, maximum loan amount and maximum maturity and amortization
period for each loan type. Policy guidelines for LTV ratios and maturities
related to various types of collateral at December 31, 2011, were as follows:
|
|
|
Real estate
|
Various (see discussion below)
|
Various (see discussion below)
|
Equipment
*
|
5 Years
|
75%
|
Inventory
|
5 Years
|
50%
|
Accounts receivable
|
5 Years
|
75%
|
Livestock
|
5 Years
|
75%
|
Crops
|
1 Year
|
50%
|
Securities
**
|
10 Years
|
75%(Listed), 50% (Unlisted)
|
___________________________
*
|
New farm equipment can be amortized over
seven years with a guaranty by the FSA. Farm irrigation systems may be
amortized over seven years without an FSA guaranty.
|
**
|
When proceeds are used to purchase or
carry securities not listed on a national exchange, maximum LTV shall be 50%.
|
The Companys
policy manages risk in the real estate portfolio by adherence to regulatory
limits in regards to LTV percentages, as designated by the following
categories:
Loan Category
|
Maximum LTV
|
Raw land
|
65%
|
Farmland
|
80%
|
Real estate-construction:
|
|
Commercial acquisition and development
|
70%
|
Commercial, multi-family
*
and other non-residential
|
80%
|
One-to-four family residential owner occupied
|
80%
|
One-to-four family residential non-owner occupied
|
75%
|
Commercial (existing property):
|
|
Owner occupied improved property
|
85%
|
Non-owner occupied improved property
|
80%
|
Residential (existing property):
|
|
Home equity lines
|
80%
|
Owner occupied one-to-four family residential
|
90%
|
Non-owner occupied one-to-four
family residential
|
75%
|
____________________
* Multi-family
construction loans include loans secured by cooperatives and condominiums.
Loans may be
approved in excess of the LTV limits, provided that they are approved on a case
by case basis pursuant to the Banks loan policy as follows:
-
The request is fully documented to support the fact that other
credit factors justify the approval of that particular loan as an exception to
the LTV limit;
-
The loan, if approved, is designated in the Banks records and
reported as an aggregate number with all other such loans approved by the full
Board of Directors on at least a quarterly basis;
-
The aggregate total of all loans so approved, including the
extension of credit then under consideration, shall not exceed 65% of the
Banks total capital; and
32
-
The aggregate portion of these loans in excess of the LTV limits
that are classified as commercial, agricultural, multi-family or
non-one-to-four family residential property shall not exceed 30% of the Banks
total capital.
The Banks loan
policy additionally requires every loan to have a documented repayment
arrangement. While reasonable flexibility is necessary to meet credit needs of
customers, in general, real estate loans are to be repaid within the following
time frames:
Loan Category
|
Amortization Period
|
Raw land
|
10 years
|
Real estate- construction
|
1.5 years
|
Real estate-commercial,
multi-family, and other non-residential
|
20 years
|
Real estate-one-to-four
family residential
|
25-30 years
|
Home equity
|
10 years
|
Farmland
|
20 years
|
Credit Risk Management and Allowance
for Loan Losses
Loan portfolio
quality stabilized in 2011 compared to 2010 and 2009 and remains manageable
relative to prevailing market conditions. The ratio of net charge-offs to
average net loans outstanding was 0.44%, 1.38% and 0.95% for the years ended
December 31, 2011, 2010 and 2009, respectively. The aggregate of
non-performing loans and OREO as a percent of total loans plus OREO at December
31, 2011 totaled 3.52% compared to 3.71% at December 31, 2010 and 3.28% at December
31, 2009. The decrease from December 31, 2010 to December 31, 2011 was primarily
as a result of decreased volume of OREO. The volume of OREO decreased $3.7
million and loans charged off decreased $5.2 million in 2011 compared to 2010
but the total non-performing loans increased $1.8 million from 2010 to 2011. Management
believes, however, that the Banks strong credit risk management practices
provide a means for timely identification and assessment of problem credits in
order to minimize losses.
Credit risk management
procedures include assessment of loan quality through use of an internal loan
rating system. Each loan is assigned a rating upon origination and the rating
may be revised over the life of the loan as circumstances warrant. The rating
system utilizes eight major classification types based on risk of loss with
Grade 1 being the lowest level of risk and Grade 8 being the highest level of
risk. Loans rated Grades 1 to 4 are the general pass grade loans with low to
average levels of credit risk. Loans rated Grade 5 are special mention loans
that may have one or more circumstances that warrant additional monitoring but
do not necessarily indicate probable credit losses or above average levels of
credit risk. Loans rated Grade 6 or higher are considered internally
criticized and have above average levels of credit risk. For additional
information regarding the Companys loans by internal risk rating, see Note 4 in
the Companys Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
Credit risk management practices
also include a loan review function that is independent of the lending process
itself. Results of loan review are reported to the Banks Board of Directors
and serve to validate the Banks internal loan rating process. Results of loan
review, as well as current portfolio mix by rating, are incorporated into the
process for quarterly evaluations of the allowance for loan losses and impaired
loans.
Examples of factors taken into
consideration during assessment of loan quality for rating purposes, for
independent loan review and for evaluation of the adequacy of the allowance for
loan losses include, but are not limited to, the following:
33
-
Debt service coverage ratios;
-
Financial condition of borrower(s) and/or guarantor(s);
-
Deposit relationship;
-
Payment history;
-
Collateral values; and
-
Adherence to loan policy and adherence to loan documentation
requirements.
Loans internally
classified at a Grade 6 or higher are those loans that have certain
characteristics or circumstances that warrant additional credit quality
monitoring and may meet the definition of an impaired loan described below. Loans
or borrowing relationships with an outstanding balance greater than $250,000 that
are also rated Grade 6 or higher are reviewed on an individual basis for
impairment as part of the quarterly evaluation of the adequacy of the allowance
for loan losses. Loan impairment of internally criticized loans, if any, is
measured using either the present value of expected future cash flows
discounted at the loans effective interest rate or the fair value of the collateral
if the loan is collateral-dependent. The majority of the Companys impaired
loans is secured by real estate and considered collateral-dependent. Therefore,
impairment losses are primarily based on the fair value of the underlying
collateral (usually real estate). Specific allocations to the allowance for
loan losses are made for loans found to be collateral- or cash flow-deficient.
Loans less than $250,000 are generally evaluated on a pooled basis for impairment
unless the loan is identified as a troubled debt restructuring (TDR).
Specific allocations on impaired
loans are typically the difference between the book value or cost of the loan
and the estimated fair market value of the collateral, less cost to sell. An
additional provision for loan losses necessary for specific allocations on
impaired loans is typically made in the quarter that the loan becomes
internally criticized or rated Grade 6 or higher. At the time a loan with a
balance of $250,000 or greater becomes rated Grade 6 or higher, an updated
independent third party appraisal is ordered. If an appraisal for a property
securing a loan greater than $250,000 is not received prior to the evaluation
date, management estimates the specific allocation for that quarter in a manner
similar to that used for loans with a balance of less than $250,000 and makes
adjustments if necessary in the subsequent quarter when the independent third
party appraisal is received.
An analysis of
the allocation of the allowance for loan losses is made each fiscal quarter at
the end of the second month (i.e., February, May, August, and November) and
reported to the Banks Board of Directors at its meeting preceding
quarter-end. The allowance for loan losses is estimated using methods
consistent with GAAP as well as regulatory guidance on allowance for loan
losses. For additional information regarding the Companys accounting policy
on the allowance for loan losses, see Note 1 in the Companys Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K.
The evaluation
of the adequacy of the allowance for loan losses includes identification of
impaired loans and allocation of specific reserves if considered necessary on a
case-by-case basis for loans meeting the Companys criteria for individual
impairment analysis. A loan is deemed impaired when it is probable that the
Bank will be unable to collect all amounts of principal and interest due
according to the original contractual terms of the loan. Impairment occurs when
(i) the present value of expected future cash flows discounted at the loans
effective interest rate impede full collection of the contract and (ii) fair
value of the collateral, if the loan is collateral-dependent, indicates unexpected
collection of full contract value. Specific reserve allocations are made for
loans found to be collateral- or interest cash flow-deficient. In addition, an
allowance is determined for loans evaluated on a pooled basis. Income
recognition from impaired loans is determined in accordance with GAAP, as well
as financial institution regulatory guidance.
Impaired loans were
primarily collateral-dependent and totaled $6.8 million as of December 31, 2011
compared to $9.3 million and $10.0 million as of December 31, 2010 and 2009,
respectively. The decreasing trend in impaired loans was attributable to
stabilization in the portfolio and consistent with decreasing trend of loans
transferred into OREO in 2011 compared to 2010 and 2009. For additional information
on impaired loans, see Note 4 in the Companys Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K.
34
The following
table summarizes the change in the allowance for loan losses for the past five
years (dollars in thousands):
|
Year Ended December 31,
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Average net loans
outstanding
|
$541,255
|
|
$561,964
|
|
$589,528
|
|
$606,014
|
|
$606,015
|
Allowance for loan
losses:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of
period
|
$8,028
|
|
$8,784
|
|
$7,300
|
|
$6,328
|
|
$6,211
|
Loans charged off
|
(2,675)
|
|
(8,187)
|
|
(5,951)
|
|
(2,274)
|
|
(1,096)
|
Recovery of loans
previously charged off
|
261
|
|
431
|
|
375
|
|
388
|
|
379
|
Net
loans charged off
|
(2,414)
|
|
(7,756)
|
|
(5,576)
|
|
(1,886)
|
|
(717)
|
Provision for loan losses
charged to expense
|
2,425
|
|
7,000
|
|
7,060
|
|
2,858
|
|
834
|
Balance at end of period
|
$8,039
|
|
$8,028
|
|
$8,784
|
|
$7,300
|
|
$6,328
|
Ratio of net charged off loans to average net loans
outstanding
|
0.44%
|
|
1.38%
|
|
0.95%
|
|
0.31%
|
|
0.12%
|
Changes to the allowance
for loan losses for 2011 consisted of (i) loans charged off of $2.7 million,
(ii) recovery of loans previously charged off of approximately $261,000, and
(iii) provision for loan losses totaling $2.4 million. Charge-offs in 2011
occurred in all markets served.
The following
table identifies charge-offs and recoveries by category for the years ended
December 31 (in thousands):
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
Commercial, financial
and agricultural
|
$ (850)
|
|
$ (953)
|
|
$ (874)
|
|
$ (638)
|
|
$ (227)
|
Real estate-construction
|
(646)
|
|
(4,462)
|
|
(1,824)
|
|
(569)
|
|
(107)
|
Real estate-mortgage
|
(994)
|
|
(2,565)
|
|
(2,812)
|
|
(655)
|
|
(406)
|
Installment loans to
individuals and credit cards
|
(185)
|
|
(207)
|
|
(441)
|
|
(412)
|
|
(356)
|
Total charge-offs
|
(2,675)
|
|
(8,187)
|
|
(5,951)
|
|
(2,274)
|
|
(1,096)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
Commercial, financial
and agricultural
|
81
|
|
121
|
|
68
|
|
141
|
|
124
|
Real estate-construction
|
50
|
|
52
|
|
130
|
|
23
|
|
22
|
Real estate-mortgage
|
68
|
|
180
|
|
64
|
|
82
|
|
148
|
Installment loans to
individuals and credit cards
|
62
|
|
78
|
|
113
|
|
142
|
|
85
|
Total recoveries
|
261
|
|
431
|
|
375
|
|
388
|
|
379
|
Net loans
charged off
|
$(2,414)
|
|
$(7,756)
|
|
$(5,576)
|
|
$(1,886)
|
|
$(717)
|
For additional
information regarding the allowance for loan losses including allocation of the
allowance by category, see Note 5 in the Companys Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K.
Charge-offs of impaired loans
with specific allocations generally occur at the time of foreclosure, typically
when the loan is 60-120 days past due. On occasion, however, a loan is
considered collateral-dependent and impaired but is not past due. In this
case, a partial charge-off is made at the time the updated appraisal is
received to adjust the loan to fair value of the collateral, less cost to sell.
Partially charged-off loans continue to be reported as impaired. These loans
are also reported in non-performing loan totals if such loans fit criteria for
non-performing assets as discussed below.
35
Non-Performing Assets
Non-performing assets consist of
non-performing loans, OREO and non-accrual debt securities. Non-performing
loans consist of non-accrual loans, loans 90 days or more past due and still
accruing interest and restructured loans. Categorization of a loan as
non-performing is not in itself a reliable indicator of impairment. A loan may
be deemed impaired prior to becoming 90 days past due, restructured or put on
non-accrual status. The Banks policy is to not accrue interest or discount on
(i) any asset which is maintained on a cash basis because of deterioration in
the financial position of the borrower, (ii) any asset for which payment in
full of interest or principal is not expected or (iii) any asset upon which
principal or interest has been in default for a period of 90 days or more
unless it is both well-secured and in the process of collection. For purposes
of applying the 90 days past due test for non-accrual of interest discussed
above, the date on which an asset reaches non-accrual status is determined by
its contractual term. A debt is well-secured if it is secured by collateral in
the form of liens or pledges of real or personal property, including securities
that have a realizable value sufficient to discharge the debt (including
accrued interest) in full, considered to be proceeding in due course either
through legal action, including judgment enforcement procedures or, in
appropriate circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the debt or in
the loans restoration to a current status. Loans that represent probable
losses are recognized as impaired and adequately reserved for in the allowance
for loan losses. Valuation of non-performing loans are subject to the same
process described above for internally criticized loans in regards to obtaining
new appraisals and timing of specific allocations and subsequent charge-off. There
have been no significant time lapses in the years ended December 31, 2011, 2010
or 2009 between the identification and recognition of impairment and subsequent
charge-off of non-performing or impaired loans. The following table summarizes
non-performing assets at December 31 for the past five years (dollars in
thousands):
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
Commercial, financial
and agricultural
|
$ 675
|
|
$ 500
|
|
$ 639
|
|
$ 425
|
|
$ 133
|
Real estate-construction
|
1,018
|
|
854
|
|
1,171
|
|
662
|
|
354
|
Real estate-mortgage
|
5,358
|
|
2,545
|
|
1,927
|
|
2,496
|
|
1,123
|
Installment loans to
individuals
|
259
|
|
249
|
|
64
|
|
90
|
|
68
|
Total
non-accrual loans
|
7,310
|
|
4,148
|
|
3,801
|
|
3,673
|
|
1,678
|
Loans 90 days past due
accruing interest:
|
|
|
|
|
|
|
|
|
|
Commercial, financial
and agricultural
|
34
|
|
500
|
|
106
|
|
-
|
|
25
|
Real estate-construction
|
-
|
|
35
|
|
1,472
|
|
-
|
|
53
|
Real estate-mortgage
|
570
|
|
1,441
|
|
3,660
|
|
722
|
|
126
|
Installment loans to
individuals
|
2
|
|
10
|
|
34
|
|
25
|
|
-
|
Total
loans 90 days past due accruing interest
|
606
|
|
1,986
|
|
5,272
|
|
747
|
|
204
|
Total non-current loans
|
$7,916
|
|
$6,134
|
|
$9,073
|
|
$4,420
|
|
$1,882
|
Total non-current loans as %
of total loans
|
1.50%
|
|
1.12%
|
|
1.54%
|
|
0.74%
|
|
0.32%
|
Troubled debt
restructuring:
|
|
|
|
|
|
|
|
|
|
Commercial, financial
and agricultural
|
$ 643
|
|
$ 15
|
|
$ 11
|
|
$ 14
|
|
$ -
|
Real estate-construction
|
680
|
|
-
|
|
-
|
|
-
|
|
-
|
Real estate-mortgage
|
5,571
|
|
2,770
|
|
1,117
|
|
1,138
|
|
1,568
|
Installment loans to
individuals
|
201
|
|
68
|
|
122
|
|
92
|
|
53
|
Total
troubled debt restructuring
|
$7,095
|
|
$2,853
|
|
$1,250
|
|
$1,244
|
|
$1,621
|
Total troubled debt
restructuring as a % of total loans
|
1.34%
|
|
0.52%
|
|
0.21%
|
|
0.21%
|
|
0.28%
|
OREO and other repossessed
property
|
$11,073
|
|
$14,734
|
|
$10,527
|
|
$5,446
|
|
$2,302
|
Non-accrual debt securities
|
352
|
|
241
|
|
520
|
|
-
|
|
-
|
Total
other non-performing assets
|
$11,425
|
|
$14,975
|
|
$11,047
|
|
$5,446
|
|
$2,302
|
Total other non-performing
assets as % of total assets
|
1.08%
|
|
1.54%
|
|
1.15%
|
|
0.59%
|
|
0.26%
|
Other non-performing assets decreased $3.5
million from December 31, 2010 to December 31, 2011 primarily as a result of decreased
OREO. For more information about OREO, see the section below entitled Other
Real Estate Owned.
36
Interest income
on loans is recorded on an accrual basis. The accrual of interest is
discontinued on all loans, except consumer loans, which become 90 days past
due, unless the loan is well secured and in the process of collection. Consumer
loans which become past due 90 to 120 days are charged to the allowance for
loan losses. The gross interest income that would have been recorded for the
12 months ended December 31, 2011 if all loans reported as non-accrual had been
current in accordance with their original terms and had been outstanding
throughout the period was approximately $404,000 for 2011 compared to
approximately $209,000, $216,000, $178,000 and $103,000 for the same periods in
2010, 2009, 2008 and 2007, respectively. Loans on which terms have been
modified to provide for a reduction of either principal or interest as a result
of deterioration in the financial position of the borrower are considered to be
restructured loans. The Company had TDRs totaling $7.1 million, of which $4.7
million were on non-accrual status as of December 31, 2011. The Company had
restructured loans totaling $3.2 million, of which approximately $393,000 was
on non-accrual status as of December 31, 2010. The Company had restructured
loans totaling $2.8 million, of which $1.4 million was on non-accrual status as
of December 31, 2009. For additional discussion regarding TDRs, see Note 4 in
the Companys Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
Certain loans internally
rated Grade 5 or higher may not meet the criteria and therefore are not included
in the non-accrual, past due or restructured loan totals. Management is confident
that, although certain of these loans may pose credit issues, any probable loss
has been provided for by specific allocations to the loan loss reserve
account. Loan officers are required to develop a plan of action for each
problem loan within their portfolio. Adherence to each established plan is
monitored by the Banks loan administration and re-evaluated at regular
intervals for effectiveness.
Other
Real Estate Owned
The book value
of OREO was $11.1 million as of December 31, 2011, compared to $14.7 million and
$10.5 million as of December 31, 2010 and 2009, respectively. As of December
31, 2011, there were over 150 properties accounted for as OREO consisting
primarily of newly constructed single-family homes and residential lots.
Approximately 83% of the $11.1 million accounted for as OREO was located in
Shelby County and surrounding counties. Approximately 13% of the $11.1 million
in OREO was located in and around Williamson County and surrounding counties in
Middle Tennessee. While management continues efforts to liquidate OREO, Shelby,
Williamson and their surrounding counties have been under stress with declining
home sales and declining market values. According to MarketGraphics Research
Group, Inc. and the Memphis Area Association of Realtors for the 12 months
ended November 30, 2011 (the most recent data available), new home inventory
was down 15.3% and new home permits were down 12.4% in Shelby County, Tennessee.
Also, new home sales volumes in Shelby County declined 34.1% and new home
average price was flat with modest 1% decline for the 12 months ended November
30, 2011. All home sales volumes in Shelby County were down about 12% and
average price of all home sales was also near flat with a decrease of less than
2% for the same period.
Activity in OREO
for the years ended December 31, 2011, 2010, and 2009 was as follows (in
thousands):
|
|
2011
|
|
2010
|
|
2009
|
Beginning balance
|
|
$14,734
|
|
$10,527
|
|
$ 5,424
|
Acquisitions
|
|
3,565
|
|
11,691
|
|
9,983
|
Capitalized costs
|
|
284
|
|
500
|
|
424
|
Dispositions
|
|
(6,136)
|
|
(6,828)
|
|
(4,834)
|
Valuation adjustments
through earnings
|
|
(1,374)
|
|
(1,156)
|
|
(470)
|
Ending balance
|
|
$11,073
|
|
$14,734
|
|
$10,527
|
Capitalized
costs consist of costs to complete construction of homes partially complete at
the time of foreclosure or to complete certain phases of a development project
for raw land. Capitalized costs were incurred in order to improve
marketability of certain properties. Valuation adjustments through earnings
reflected above includes write down of properties subsequent to foreclosure and
realized gains and losses on sale of OREO.
OREO is recorded
at the time of foreclosure at the lesser of its appraised value or the loan
balance. Any reduction in value at the time of foreclosure is charged to the
allowance for loan losses. All other real estate parcels are appraised at least
annually and carrying values adjusted to reflect the decline, if any, in their
realizable value. Such adjustments made subsequent to foreclosure are charged
against earnings. Net losses on sale and write down of OREO values subsequent
to foreclosure totaled $1.4 million in 2011 compared to $1.2 million in 2010 and
approximately $470,000 in 2009.
Other
non-interest expenses for property taxes, maintenance and other costs related
to acquisition or maintenance of OREO totaled approximately $682,000, $888,000 and
$642,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
The positive trend in other non-interest expense related to OREO from 2010 to
2011 was attributable to the reduced volume of OREO acquired.
37
Composition of Deposits
The average balance
of deposits and average interest rates paid on such deposits are summarized in
the following table for the years ended December 31, 2011, 2010 and 2009
(dollars in thousands):
|
2011
|
|
2010
|
|
2009
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
Non-interest bearing demand
deposits
|
$107,792
|
|
%
|
|
$ 97,294
|
|
%
|
|
$ 89,819
|
|
%
|
Savings deposits
|
351,221
|
|
0.85%
|
|
304,605
|
|
0.98%
|
|
265,055
|
|
1.13%
|
Time deposits
|
362,313
|
|
1.30%
|
|
360,634
|
|
1.59%
|
|
374,469
|
|
2.33%
|
Total deposits
|
$821,326
|
|
0.94%
|
|
$762,533
|
|
1.14%
|
|
$729,343
|
|
1.61%
|
The decrease in
average cost of deposits for the year ended December 31, 2011 compared to the
prior year was a result of the continued historically low interest rate
environment and as a result of the impact of the Federal Open Market Committee
(FOMC) decision to maintain federal funds rates low until at least mid-2013.
Subsequent to December 31, 2011, the FOMC declared that federal fund rates
would most likely remain at the current range of 0.00% to 0.25% through the end
of 2014. During 2011, the prevailing market and competitive environment
continued to yield strong competition in pricing of interest-bearing deposit
products but overall pricing remained very low compared to long-term historical
trends. The Bank does not compete solely on price, as strategies are focused
more on customer relationships that attract and retain core deposit customers
rather than time deposits.
Total deposits
grew $64 million or 8.1% during the year ended December 31, 2011. Savings
deposit growth was $72 million or 22.2% and demand deposit balances grew $20
million or 19.5% during 2011. Growth in savings and demand deposits was partially
offset by time deposits, which declined $27 million or 7.5% in 2011. Savings
deposit growth was primarily attributable to growth in the Banks interest
bearing savings accounts, including the Wall Street, e-Solutions and First Rate
accounts, which carry competitive attractive rates compared to other options
available to customers in time deposits and other brokerage or investment
products.
The Bank
participates in the Certificate of Deposit Account Registry Service (CDARS),
a deposit placement service that allows the Bank to accept very
large-denomination certificates of deposit (CDs) (up to $50,000,000) from
customers and ensures that 100% of those CDs are FDIC-insured. Participating
in this network enhances the Banks ability to attract and retain
large-denomination depositors without having to place funds in a Sweep or
Repurchase Agreement. The CDARS network provides a means to place reciprocal
deposits for the Banks customers, purchase time deposits (referred to as
One-Way Buy deposits) or to sell excess deposits (referred to as One-Way Sell
deposits). One-Way Buy deposits are structured similarly to traditional
brokered deposits. The Bank held reciprocal deposits and One-Way Buy
deposits in the CDARS program totaling $25 million at year-end 2011 compared to
$24 million at year-end 2010 and $25 million at year-end 2009. CDARS accounts
are classified as brokered time deposits for regulatory reporting purposes.
Brokered deposits including CDARS totaled $25 million or 3% of total deposits as
of December 31, 2011, $26 million or 3% of total deposits as of December 31,
2010 and $36 million or 4% of total deposits as of December 31, 2009.
Time deposits
over $100,000 plus brokered time deposits comprised 53.3% of total time
deposits as of December 31, 2011 compared to 56.1% as of year-end 2010 and 55.1%
as of year-end 2009. As of December 31, 2011, approximately 90% of time
deposits including brokered time deposits will mature or reprice over the next
12 months as the prevailing competitive market and rate environment continued
to exhibit strong demand for shorter terms during 2011.
Maturity Distribution of Time
Deposits in Amounts of $100,000 and Over
Deposits over
$100,000 decreased $21.9 million or 10.3% from December 31, 2010 to December
31, 2011. This was primarily a result of increased demand for the Banks
interest bearing savings and transaction accounts. Of the $192 million in time
deposits as of December 31, 2011, $86 million were for deposits in an amount
greater than $250,000. Of the $213.7 million in time deposits as of December
31, 2010, $110.2 million were for deposits in an amount greater than $250,000. Public
fund time deposits totaled $70.3 million at year-end 2011 compared to $82.9
million at year-end 2010.
38
The following
table sets forth the maturity distribution of CDs and other time deposits of
$100,000 or more outstanding at December 31, 2011 and 2010 (dollars in
thousands):
|
2011
|
|
2010
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Maturing in:
|
|
|
|
|
|
|
|
Three Months or less
|
$ 49,208
|
|
25.67%
|
|
$ 75,610
|
|
35.39%
|
Over three months less than six months
|
64,346
|
|
33.56%
|
|
43,045
|
|
20.14%
|
Over six months less than 12 months
|
60,692
|
|
31.65%
|
|
66,526
|
|
31.13%
|
Over 12 months
|
17,490
|
|
9.12%
|
|
28,496
|
|
13.34%
|
Total
|
$191,736
|
|
100.00%
|
|
$213,677
|
|
100.00%
|
Other Borrowings
In addition to
deposits, the Company uses a combination of short-term and long-term borrowings
to supplement its funding needs. Short-term borrowings consisted of a demand
note under the Federal Reserves Treasury, Tax and Loan Service (TT&L),
federal funds purchased and short-term advances from the FHLB. There was a
zero balance on the TT&L demand note as of December 31, 2011 because the
Federal Reserve ended the TT&L program as of December 31, 2011. The
short-term borrowings table below provides the maximum amount of borrowings at
any month end during the years presented. Short-term borrowings are used to
manage fluctuations in liquidity based on seasonality of agricultural
production loans and other factors. Short-term borrowings were used on a very
limited basis during the most recent three years because of the Companys
strategic efforts to maintain a strong liquidity position, slow loan demand,
and steady growth in core deposits over the past three years. The following
table presents short-term borrowing balances at year end, maximum borrowings at
month end during the year and average cost for the years ended December 31,
2011, 2010 and 2009 (dollars in thousands):
|
2011
|
2010
|
2009
|
Amount outstanding at end of
year
|
$
|
$1,000
|
$ 748
|
Weighted average interest
rate at end of year
|
%
|
%
|
%
|
Maximum outstanding at any
month end
|
$5,000
|
$1,000
|
$1,000
|
Average outstanding during
year
|
$1,666
|
$ 667
|
$1,029
|
Weighted average interest
rate during year
|
0.05%
|
%
|
%
|
For more
information about short-term borrowings, see Note 12 in the Companys
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Other borrowings
at the holding company level carried a variable rate and consisted of trust-preferred
debt in 2011 and 2010.
The Banks other
borrowings consist of advances from the FHLB. Average volume of FHLB advances
for 2011 was $37.6 million at an average rate of 2.73% compared to $60.9
million at an average rate of 4.26% in 2010 and $65.1 million at an average
rate of 4.84% in 2009.
Strong core deposit growth coupled with weak
loan demand have allowed the Bank to reduce its reliance on wholesale
borrowings and, therefore, average FHLB advances decreased from 2009 to 2011.
The average remaining maturity for FHLB long-term borrowings was approximately three
years at December 31, 2011. FHLB borrowings were comprised primarily of fixed
rate positions ranging from 0.62% to 7.05% as of December 31, 2011. The Bank
also had one LIBOR based advance totaling $2.5 million, which had a rate of 0.34%
as of year-end 2011. Most of the FHLB borrowings have quarterly call features
and maturities ranging from 2012 to 2019. Approximately 8% or $3.1 million
will mature on or before December 31, 2012. As of December 31, 2011, advances
totaling $16 million require repayment if the call feature was exercised.
Under the existing and forecasted rate environments, borrowings with call
features in place are not likely to be called in the next 12 months and,
therefore, were not included in current liabilities. For more information
about liquidity, see the section below entitled Liquidity.
The following
table presents average volumes, rates, maturities and re-pricing frequencies
for other borrowings for the year ended December 31, 2011 (dollars in
thousands):
39
|
Average
Volume
|
Average
Rate
|
Average
Maturity
|
Repricing
Frequency
|
FHLB advances
|
$37,568
|
2.73%
|
3 years
|
Fixed
|
Trust preferred debt
|
10,310
|
2.11%
|
25 years
|
Variable
|
Aggregate Contractual
Obligations
At December 31, 2011,
contractual obligations were due as follows (in thousands):
|
Total
|
|
Less than
One Year
|
|
One-
Three
Years
|
|
Three-
Five
Years
|
|
Greater
than Five
Years
|
Unfunded loan commitments
|
$ 77,861
|
|
$77,861
|
|
$ -
|
|
$ -
|
|
$ -
|
Standby letters of credit
|
2,410
|
|
2,410
|
|
-
|
|
-
|
|
-
|
Other borrowings*
|
47,328
|
|
3,351
|
|
17,270
|
|
2,171
|
|
24,536
|
Capital lease obligations
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Operating lease obligations
|
346
|
|
119
|
|
193
|
|
34
|
|
-
|
Purchase obligations
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Other long-term liabilities
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Total
|
$127,945
|
|
$83,741
|
|
$17,463
|
|
$2,205
|
|
$24,536
|
________________________
* Other
borrowings presented as principal only, excluding interest.
For more information about
long-term obligations, see Notes 13 and 18 in the Companys Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
Except for unfunded loan
commitments and standby letters of credit, the Bank does not materially engage
in off-balance sheet activities and does not anticipate material changes in
volume going forward.
For more
information about off-balance sheet risk, see Notes 13 and 18 in the Companys
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Capital Resources
The following
table presents key capital and earnings ratios for the years ended December 31:
|
2011
|
2010
|
2009
|
2008
|
2007
|
Net income to average total
assets
|
1.18%
|
0.92%
|
0.89%
|
0.83%
|
1.08%
|
Net income to average
shareholders equity
|
12.22%
|
9.80%
|
10.19%
|
10.07%
|
12.79%
|
Dividends declared to net
income
|
33.54%
|
40.86%
|
45.27%
|
55.85%
|
45.93%
|
Average equity to average
assets
|
9.62%
|
9.38%
|
8.76%
|
8.21%
|
8.45%
|
Total equity to total assets
|
9.82%
|
9.16%
|
8.81%
|
8.30%
|
8.56%
|
Total capital
increased 15.9% to $103.5 million at year-end 2011 compared to $89.3 million at
year-end 2010 and $84.4 million at year-end 2009. Growth in capital during 2011
was from undistributed net income from the Bank totaling $7.9 million. In
addition, accumulated Other Comprehensive Income increased $6.9 million at
December 31, 2011 compared to December 31, 2010, as market values of
available-for-sale securities increased during 2011.
40
The Company has historically
maintained capital in excess of minimum levels established by regulation. The total
risk-based capital ratios of 16.9% as of December 31, 2011 compared to 15.3% as
of December 31, 2010 were significantly in excess of the 8% mandated by regulation.
This ratio has steadily increased during the past three years as loans trended
lower and asset growth was primarily in investments and interest bearing
deposits at other banks. Total capital as a percentage of total assets was 9.8%,
9.2%, and 8.8% at December 31, 2011, 2010 and 2009, respectively.
Risk-based
capital focuses primarily on broad categories of credit risk and incorporates
elements of transfer, interest rate and market risks. The calculation of
risk-based capital ratio is accomplished by dividing qualifying capital by
weighted risk assets in accordance with financial institution regulatory
guidelines. The minimum risk-based capital ratio is 8.00%. At least one-half
of this ratio or 4.00% must consist of core capital (Tier I), and the remaining
4.00% may be in the form of core (Tier I) or supplemental capital (Tier II).
Tier I capital or core capital consists of common shareholders equity,
qualified perpetual preferred stock and minority interests in consolidated
subsidiaries. Tier II capital or supplementary capital may consist of the
allowance for loan and lease losses, perpetual preferred stock,
term-subordinated debt and other debt and stock instruments.
Dividend
payments totaled $1.10 per share in 2011 compared to $1.00 per share in 2010 and
$1.04 per share in 2009. The Companys strategy continues to be to pay
dividends at a level that provides dividend payout ratio and dividend yield in
excess of average for peers as reported in the Peer Report. The dividend
payout ratio was 33.5% in 2011 compared to 40.86% in 2010 and 45.27% in 2009.
The projected payout ratio for 2012 is in the range of 30% to 45%. Average dividend
payout in the Peer Report for 2011 was 37.20%. The Companys dividend yield in
2011 was 3.24% compared to 3.13% in 2010 and 3.35% in 2009. The average dividend
yield in the Peer Report was 1.73% for 2011.
As of year-end
2011, there were approximately $16 million of retained earnings available for
the payment of future dividends from the Bank to the Company. Banking
regulations require certain capital levels to be maintained and may limit
dividends paid by the Bank to the Company or by the Company to its
shareholders. Historically, these restrictions have posed no practical limit
on the ability of the Bank or the Company to pay dividends.
Over the past 16
years, the Company has repurchased approximately 109,739 shares of its common
stock; treasury stock had weighted average cost basis of $27.54 per share at
December 31, 2011. During 2011, the Company repurchased 17,980 shares of its
own common stock for an aggregate cost of $607,758 and weighted average per
share cost of $33.81. The Company sold eight shares of its common stock in
2011 at a price of $34.00 per share for an aggregate price of $272. During
2010, the Company did not repurchase any shares of its common stock and sold
808 shares of its common stock at a price of $32.00 per share for an aggregate
price of $25,856. There are currently no publicly announced plans or programs
to repurchase shares in place.
Liquidity
The Company manages liquidity in
a manner to ensure the availability of ample funding to satisfy loan demand,
fund investment opportunities and fund large deposit withdrawals. Primary
funding sources for the Company include customer core deposits, and FHLB
borrowings as well as correspondent bank and other borrowings. The Companys
liquidity position is further strengthened by ready access to a diversified
base of wholesale borrowings, which includes lines of credit with the FHLB, federal
funds purchased, securities sold under agreements to repurchase, brokered CDs
and others.
The turmoil and events in
financial markets and across the banking industry during the recent economic
recession serve as proof that adequate liquidity is critical to the Companys
success and survival, especially during times of market turbulence. Therefore,
management maintains and regularly updates its strategic action plans related
to liquidity, including crisis and contingency liquidity plans to defend against
any material downturn in the Banks liquidity position.
As of December 31, 2011, deposits
accounted for 90% of total liabilities compared to 89% as of December 31, 2010 and
86% as of December 31, 2009. Borrowed funds from the FHLB totaled 3.9% ($37
million) of total liabilities as of December 31, 2011 compared to 4.7% ($42
million) as of December 31, 2010 and 7.5% ($65 million) at December 31, 2009.
The Bank had additional borrowing capacity of $115.5 million with the FHLB as
of December 31, 2011. The Bank also has federal fund lines of credit with four
correspondent banks with lines totaling $54.5 million as of December 31, 2011.
In each of the years ended December 31, 2011 and 2010, the Bank held $23 million
in short-term CDs with the State of Tennessee. Brokered time deposits were $25
million and $26 million as of year-end 2011 and 2010, respectively. During
2011, weak loan demand and strong core deposit growth resulted in a reduced
reliance on wholesale funding sources such as FHLB advances. Brokered deposits
include reciprocal and one-way buy deposits in the CDARS program. For more
information about CDARS, see the section above entitled Financial Condition
Composition of Deposits.
41
When evaluating
liquidity, funding needs are compared against the current level of liquidity,
plus liquidity that would likely be available from other sources. This
comparison provides a means for determining whether funds management practices
are adequate. Management should be able to manage unplanned changes in funding
sources, as well as react to changes in market conditions that could hinder the
Banks ability to quickly liquidate assets with minimal loss. Funds management
practices are designed and implemented to ensure that the Company does not maintain
liquidity by paying above market prices for funds or by relying unduly on
wholesale or credit-sensitive funding sources. The OCC has established
benchmarks to be used as guidelines in managing liquidity. The following areas
are considered liquidity red flags:
-
Significant increases in reliance on wholesale funding;
-
Significant increases in large CDs, brokered deposits or deposits
with interest rates higher than the market;
-
Mismatched funding funding long-term assets with short-term
liabilities or short-term assets with long-term liabilities;
-
Significant increases in borrowings;
-
Significant increases in dependence on funding sources other than
core deposits;
-
Reduction in borrowing lines by correspondent banks;
-
Increases in cost of funds;
-
Declines in levels of core deposits; and
-
Significant decreases in short-term investments.
Although
liquidity has steadily improved during the past three years, liquidity remains
a strategic focus of the Banks Funds Management Committee, which strives to
maintain diverse funding sources conducive to net interest margin strategies.
The following table reflects the liquidity position of the Bank as of December
31, 2011, 2010 and 2009 in comparison to the OCC Liquidity Benchmarks:
OCC Liquidity Benchmark
|
2011
|
|
2010
|
|
2009
|
Short Term Liabilities/
Total Assets > 20%
|
14.85%
|
|
17.00%
|
|
20.13%
|
On Hand Liquidity to Total
Liabilities < 8%
|
19.50%
|
|
10.76%
|
|
5.93%
|
Loan to Deposits < 80%
|
60.71%
|
|
68.14%
|
|
76.94%
|
Wholesale Funds/Total
Sources > 15%
|
7.00%
|
|
9.13%
|
|
13.22%
|
Non-Core Funding Dependence
> 20%
|
22.20%
|
|
30.13%
|
|
30.82%
|
The above
comparison is one quantitative means of monitoring liquidity levels. However,
other quantitative and qualitative factors are considered in the overall risk
management process for liquidity. Such other factors evaluated by management
include, but are not limited to, forecasting and stress testing capital levels,
diversification of funding sources, degree of reliance on short-term volatile
funding sources, deposit volume trends and stability of deposits. There are no
known trends or uncertainties that are likely to have a material effect on the
Companys liquidity or capital resources. There currently exist no
recommendations by regulatory authorities, which, if implemented, would have
such an effect.
Recently
Issued Accounting Standards
Troubled
Debt Restructurings
In January 2011,
the Financial Accounting Standards Board (FASB) issued Accounting Standards
Codification Update (ASU) 2011-01 Receivables (Topic 310): Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No.
2010-20. This update postponed the effective date to periods ending after June
15, 2011 for certain required disclosures related to TDRs that were included in
ASC Update No. 2010-20.
42
In April 2011,
the FASB issued ASU No. 2011-02, A Creditors Determination of Whether a
Restructuring is a Troubled Debt Restructuring (ASU 2011-02). ASU 2011-02
amends previous guidance with respect to TDRs and is designed to assist
creditors with determining whether or not a restructuring constitutes a TDR. In
particular, additional guidance has been added to help creditors determine
whether a concession has been granted and whether a debtor is experiencing
financial difficulties. Both of these conditions are required to be met for a
restructuring to constitute a TDR. The amendments in ASU 2011-02 are effective
for the first interim period beginning on or after June 15, 2011, and should be
applied retrospectively to the beginning of the annual period of adoption. ASU
2011-02 did not have a material impact on the Companys financial position, results
of operations or cash flows.
Repurchase Agreements
In April 2011,
the FASB issued ASU No. 2011-03, Transfers and Servicing: Reconsideration of
Effective Control for Repurchase Agreements (ASU 2011-03). ASU 2011-03
removes the transferors ability criterion from the consideration of effective
control for repurchase agreements and other agreements that both entitle and
obligate the transferor to repurchase or redeem financial assets before their
maturity. ASU 2011-03 removes from the assessment of effective control (1) the
criterion requiring the transferor to have the ability to repurchase or redeem
the financial assets on substantially the agreed terms, even in the event of
default by the transferee, and (2) the collateral maintenance implementation
guidance related to that criterion. The effective date for ASU 2011-03 is the
first interim or annual period beginning on or after December 15, 2011. ASU
2011-03 is not expected to have a material impact on the Companys financial
position, results of operations or cash flows.
Fair Value Measurements
In May 2011, the
FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
(ASU 2011-04). Amendments in ASU 2011-04 do not require additional fair
value measurements and are not intended to establish valuation standards or
affect valuation practices outside of financial reporting, but serve to improve
the comparability of fair value measurements presented and disclosed in
financial statements prepared in accordance with GAAP and international
financial reporting standards. Some amendments clarify FASBs intent about the
application of existing fair value measurement requirements, while others
change a particular principle or requirement for measuring fair value or for
disclosing information about fair value measurements. ASU 2011-04 is effective
during interim and annual periods beginning after December 15, 2011. ASU
2011-04 is not expected to have a material impact on the Companys financial
position, results of operations or cash flows.
Comprehensive Income
In June 2011,
the FASB issued ASU No. 2011-05, Comprehensive Income: Presentation of
Comprehensive Income (ASU 2011-05). The objective of ASU 2011-05 is to
improve the comparability, consistency and transparency of financial reporting
and to increase the prominence of items reported in other comprehensive
income. FASB eliminated the option to present components of other
comprehensive income as part of the statement of changes in shareholders
equity, among other amendments in ASU 2011-05. The amendments require that all
nonowner changes in shareholders equity be presented either in a single
continuous statement of comprehensive income or in two separate but consecutive
statements.
In December
2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out of Accumulated
Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU
2011-12). ASU 2011-12 was issued in order to defer only those changes in ASU
2011-05 that relate to the presentation of reclassification adjustments, and
ASU 2011-05 supersedes certain pending paragraphs in ASU 2011-05. The
amendments are being made to allow FASB time to redeliberate whether to present
on the face of the financial statements the effects of reclassifications out of
accumulated other comprehensive income on the components of net income and
other comprehensive income for all periods presented. While FASB is considering
the operational concerns about the presentation requirements for
reclassification adjustments and the needs of financial statement users for
additional information about reclassification adjustments, entities will
continue to report reclassifications out of accumulated other comprehensive
income consistent with the presentation requirements in effect before ASU
2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12,
including the requirement to report comprehensive income either in a single
continuous financial statement or in two separate but consecutive financial
statements. These requirements are applicable for fiscal years, and interim
periods within those years, beginning after December 15, 2011. ASU 2011-12 is not
expected to have a material impact on the Companys financial position, results
of operations or cash flows.
43
Goodwill
In September
2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic
350) (ASU 2011-08). The objective of ASU 2011-08 is to simplify how public
and private entities test goodwill for impairment. Under the amendments of ASU
2011-08, an entity has the option to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing the
totality of events or circumstances, an entity determines it is not more likely
than not that the fair value of a reporting unit is less than its carrying
amount, then performing the two-step impairment test is unnecessary. However,
if an entity concludes otherwise, then it is required to perform the first step
of the two-step impairment test by calculating the fair value of the reporting
unit and comparing the fair value with the carrying amount of the reporting unit.
If the carrying amount of a reporting unit exceeds its fair value, then the
entity is required to perform the second step of the goodwill impairment test
to measure the amount of the impairment loss. Under the amendments in ASU
2011-08, an entity has the option to bypass the qualitative assessment for any
reporting unit in any period and proceed directly to performing the first step
of the two-step goodwill impairment test. An entity may resume performing the
qualitative assessment in any subsequent period. The amendments are effective
for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. ASU 2011-08 is not expected to have a
material impact on the Companys financial statements.
Disclosures about Offsetting Assets and Liabilities
In December 2011,
the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and
Liabilities (ASU 2011-11), as an amendment to require entities to provide
enhanced disclosures about offsetting and related arrangements to enable users
of financials statements to understand effects of those arrangements on its
financial position. Entities are required to apply the amendments for annual
reporting periods beginning on or after January 1, 2013, and interim periods
within those annual periods. Entities should provide the disclosures required
by those amendments retrospectively for all comparative periods presented.
Adoption of ASU 2011-11 is not expected to have a material impact on the
Companys financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Interest Rate Sensitivity
Interest rate
sensitivity varies with different types of interest-earning assets and
interest-bearing liabilities. Overnight federal funds, on which rates change
daily, and loans which are tied to the prime rate are much more sensitive than
long-term investment securities and fixed rate loans. The shorter-term interest
sensitive assets and liabilities are key to measurement of the interest sensitivity
gap. Minimizing this gap is a continual challenge and a primary objective of
the asset/liability management program.
The Company
monitors and employs multiple strategies to manage interest rate risk and
liquidity continuously at acceptable levels. Such strategies include but are
not limited to use of FHLB borrowings, floors on variable rate loans, use of
interest rate swaps and investments in mortgage-backed investments that enable
the Company to have steady cash inflows.
Overall, the
Company maintained net interest margins above 4% from 2009 through 2011 after maintaining
net interest margins in the range of 3.7% to 4.0% from 2005 to 2008. Margins
steadily improved in 2009 to 4.2% for the first time in over five years and
held at 4.28% for each of the years ended December 31, 2010 and 2011. Strong
net interest margins over the past three years were a result of the Companys
ability to keep interest earning asset yields declining at a pace slower than
the decline of interest bearing liabilities. The Companys quarterly net
interest margin was 4.27%, 4.35%, 4.35% and 4.09% for the four calendar quarters
of 2011. The downward trend to 4.09% in the fourth quarter was primarily the
result of a shift in the balance sheet mix as loans decreased while lower
yielding cash and investment securities increased. The Companys quarterly net
interest margin was 4.34%, 4.30%, 4.18% and 4.26% for the four calendar
quarters of 2010.
Interest rate
risk is separated and analyzed according to the following categories of risk:
(1) re-pricing; (2) yield curve; (3) option risk; (4) price risk; and (5) basis
risk. Trading assets are utilized infrequently and are addressed in the
investment policy. Unfavorable trends reflected in interest rate margins will
cause an immediate adjustment to the Banks gap position or asset/liability
management strategies. The data schedule below reflects a summary of the
Companys interest rate risk using simulations. The projected 12-month
exposure is based on different rate movements (flat, rising or declining).
44
The following
condensed gap reports provide an analysis of interest rate sensitivity of
earning assets and costing liabilities in a flat rate environment at December
31, 2011 and 2010 (dollars in thousands):
CONDENSED
GAP REPORT
CURRENT BALANCES
DECEMBER 31, 2011
|
One
|
Three
|
Six
|
12
|
Two
|
Three
|
Five
|
More than Five
|
Non-
|
|
|
Month
|
Months
|
Months
|
Months
|
Years
|
Years
|
Years
|
Years
|
Sensitive
|
|
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Total cash and due from banks
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 19,430
|
$ 19,430
|
Total investments
|
4,867
|
14,084
|
14,501
|
28,070
|
51,975
|
42,358
|
62,349
|
133,183
|
14,078
|
365,465
|
Total fed funds sold
(1)
|
54,811
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
54,811
|
Total net loans
|
102,253
|
45,847
|
50,804
|
80,481
|
107,117
|
87,032
|
53,993
|
-
|
(7,867)
|
519,660
|
Total other assets
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
94,183
|
94,183
|
Total assets
|
$161,931
|
$59,931
|
$65,305
|
$108,551
|
$159,092
|
$129,390
|
$116,342
|
$133,183
|
$119,824
|
$1,053,549
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Total demand
|
$ -
|
$ -
|
$ -
|
$ 12,004
|
$ 6,002
|
$ 6,002
|
$ -
|
$ 95,681
|
$ -
|
$ 119,689
|
Total savings
|
81,087
|
-
|
-
|
-
|
32,306
|
32,306
|
85,220
|
163,923
|
-
|
394,842
|
Total time
|
38,709
|
59,025
|
101,027
|
107,501
|
19,923
|
2,837
|
11,804
|
310
|
5
|
341,141
|
Total deposits
|
119,796
|
59,025
|
101,027
|
119,505
|
58,231
|
41,145
|
97,024
|
259,914
|
5
|
855,672
|
Total borrowings
|
19,125
|
24,536
|
489
|
5,653
|
8,834
|
6,669
|
2,493
|
16,000
|
-
|
83,799
|
Other liabilities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
10,610
|
10,610
|
Total other liabilities
|
19,125
|
24,536
|
489
|
5,653
|
8,834
|
6,669
|
2,493
|
16,000
|
10,610
|
94,409
|
Total liabilities
|
138,921
|
83,561
|
101,516
|
125,158
|
67,065
|
47,814
|
99,517
|
275,914
|
10,615
|
950,081
|
Equity
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
103,468
|
103,468
|
Total liabilities and equity
|
$138,921
|
$83,561
|
$101,516
|
$125,158
|
$67,065
|
$47,814
|
$99,517
|
$275,914
|
$114,083
|
$1,053,549
|
|
|
|
|
|
|
|
|
|
|
|
Period gap
|
$23,010
|
$(23,630)
|
$(36,211)
|
$(16,607)
|
$92,027
|
$81,576
|
$16,825
|
$(142,731)
|
$5,741
|
$ -
|
Cumulative gap
|
5,089
|
(18,541)
|
(54,752)
|
(71,359)
|
20,668
|
102,244
|
119,069
|
(23,662)
|
(17,921)
|
(17,921)
|
RSA/RSL
(2)
|
116.56%
|
71.72%
|
64.33%
|
86.73%
|
237.22%
|
270.61%
|
116.91%
|
48.27%
|
105.03%
|
-%
|
_______________
(1)
|
Includes balance in excess reserves held at Federal
Reserve Bank that are interest bearing and priced similarly to federal funds
sold held at other correspondent banks.
|
(2)
|
RSA/RSL is the ratio of rate-sensitive assets to
rate-sensitive liabilities.
|
45
CONDENSED GAP REPORT
CURRENT BALANCES
DECEMBER 31, 2010
|
One
|
Three
|
Six
|
12
|
Two
|
Three
|
Five
|
More than Five
|
Non-
|
|
|
Month
|
Months
|
Months
|
Months
|
Years
|
Years
|
Years
|
Years
|
Sensitive
|
|
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Total cash and due from banks
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$21,899
|
$21,899
|
Total investments
|
5,136
|
8,847
|
8,806
|
19,292
|
33,714
|
30,437
|
48,272
|
137,332
|
2,987
|
294,823
|
Total fed funds sold
|
18,063
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
18,063
|
Total net loans
|
120,208
|
39,821
|
45,949
|
71,745
|
130,285
|
87,591
|
52,051
|
-
|
(7,975)
|
539,675
|
Total other assets
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
99,918
|
Total assets
|
$143,407
|
$ 48,668
|
$ 54,755
|
$ 91,037
|
$163,999
|
$118,028
|
$100,323
|
$137,332
|
$16,911
|
$974,378
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Total demand
|
$ -
|
$ -
|
$ -
|
$ 10,040
|
$ 5,020
|
$ 5,020
|
$ -
|
$80,050
|
$ -
|
$100,130
|
Total savings
|
67,698
|
-
|
-
|
-
|
26,169
|
26,169
|
69,242
|
133,801
|
-
|
323,079
|
Total time
|
37,423
|
89,940
|
79,020
|
112,696
|
39,840
|
5,514
|
4,131
|
72
|
-
|
368,636
|
Total deposits
|
105,121
|
89,940
|
79,020
|
122,736
|
71,029
|
36,703
|
73,373
|
213,923
|
-
|
791,845
|
Total borrowings
|
33,204
|
14,226
|
489
|
5,653
|
8,834
|
6,669
|
2,493
|
16,000
|
-
|
87,568
|
Other liabilities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5,686
|
5,686
|
Total other liabilities
|
33,204
|
14,226
|
489
|
5,653
|
8,834
|
6,669
|
2,493
|
16,000
|
5,686
|
93,254
|
Total liabilities
|
138,325
|
104,166
|
79,509
|
128,389
|
79,863
|
43,372
|
75,866
|
229,923
|
5,686
|
885,099
|
Equity
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
89,279
|
89,279
|
Total liabilities and equity
|
$138,325
|
$104,166
|
$79,509
|
$128,389
|
$79,863
|
$ 43,372
|
$ 75,866
|
$229,923
|
$ 94,965
|
$974,378
|
|
|
|
|
|
|
|
|
|
|
|
Period gap
|
$(85,980)
|
$(55,498)
|
$(24,754)
|
$(37,352)
|
$84,136
|
$74,656
|
$24,457
|
$(92,591)
|
$11,225
|
$ -
|
Cumulative gap
|
5,089
|
(50,409)
|
(75,163)
|
(112,515)
|
(28,379)
|
46,277
|
70,734
|
(21,857)
|
(10,632)
|
(10,632)
|
RSA/RSL
*
|
37.84%
|
46.72%
|
68.87%
|
70.91%
|
205.35%
|
272.13%
|
132.24%
|
23.00%
|
17.81%
|
-%
|
_______________
*
RSA/RSL is the ratio of rate-sensitive assets to
rate-sensitive liabilities.
Notes to the Gap Reports:
-
The gap report reflects the interest sensitivity positions during a flat
rate environment. Time frames could change depending on whether rates rise or
fall.
-
Re-pricing overrides maturities in various time frames.
-
Demand deposits are considered to be core and are spread among the
one-year, two-year, three-year and greater than five-year categories for gap
analysis.
-
Savings accounts, also considered core, are split into various time
frames based on characteristics of the various accounts and pricing strategies
related to those accounts. Regular savings accounts are the least sensitive
type of interest bearing account based on the Companys most recent
non-maturity deposit study, which was completed as of September 30, 2011. First
Rate, E-Solutions and Wall Street deposit products are more sensitive to rate
changes and, therefore, are repriced more aggressively than regular savings and
other less sensitive type deposit accounts.
-
Simulations are utilized to reflect the impact of multiple rate scenarios
on net interest income at risk, net income at risk and economic value of equity
at risk. Strategies are implemented to increase net interest income, while
always considering the impact on interest rate risk. Overall, the Bank manages
the gap between interest rate sensitive liabilities to expand and contract with
the rate cycle phase. The Banks Funds Management Committee is responsible for
implementing and monitoring procedures to improve net interest income through
volume increases and better pricing techniques.
46
The Companys
interest rate risk position was liability sensitive at year-end 2011.
Therefore, net interest margins would be diluted slightly by increases in rates
over the next 12 months under a normal interest rate environment. As of
December 2011, federal funds rates continue at the historical low range of
0.00% to 0.25%. Federal funds rates at this level do not have the capacity to
decrease even 100 basis points. Therefore, in the interest rate risk models,
the rates on federal funds and prime hit a floor of zero and 3.0%,
respectively. The prime rate floor of 3% assumes that the normal spread
between federal funds rates and prime is maintained and remains fixed at 300
basis points. While prime rate in the model reaches a floor of 3%, the Banks
variable rate loan pricing carries an average floor in the range of 5.0 to 5.5%.
As rates in the model are shocked, loans will decrease only until the floor
position is reached while some liabilities continue to reprice downward. However,
the variance between the flat rate scenario and the down rate shocks are negative
as the current pricing of liabilities is historically low and has little room
to trend downward beyond its current position. With federal funds rates
currently between 0.00% to 0.25%, the down 100 basis points and down 200 basis
point scenarios are the most unlikely scenarios. Scenarios for exposure in the
up 100 basis points and up 200 basis points are considered more realistic.
However, recent statements by the FOMC indicate that federal funds rates will
mostly remain flat through 2014.
These rate shock
scenarios also indicate a negative variance because the upward scenarios
indicate that deposits will reprice faster than loans and investments,
especially given that most of the loans are currently at a floor and will
require a more than 200-basis point increase in federal funds rates and prime rate
before loan floors will increase.
The Companys
exposure to interest rate risk is within established policy limits. The
following table presents net interest income at risk as of December 31, 2011
projected over a 12-month exposure period and compared to the Companys
internal policy limits (dollars in thousands):
Scenarios:
|
|
Rate
Moves in
Basis
Points
|
|
Current
Position
|
|
Possible
Results
|
|
Variance
|
|
As % of
Net
Interest
Income*
|
|
Policy
Limit
|
Declining 3%
|
|
(300)
|
|
$34,602
|
|
$33,080
|
|
$(1,522)
|
|
(4.4%)
|
|
(20.0%)
|
Declining 2%
|
|
(200)
|
|
34,602
|
|
33,096
|
|
(1,506)
|
|
(4.4%)
|
|
(15.0%)
|
Declining 1%
|
|
(100)
|
|
34,602
|
|
34,040
|
|
(562)
|
|
(1.6%)
|
|
(7.0%)
|
Most Likely-Base
|
|
|
|
34,602
|
|
33,110
|
|
(1,492)
|
|
%
|
|
%
|
Rising 1%
|
|
100
|
|
34,602
|
|
33,485
|
|
(1,117)
|
|
(3.2%)
|
|
(7.0%)
|
Rising 2%
|
|
200
|
|
34,602
|
|
32,068
|
|
(2,534)
|
|
(7.3%)
|
|
(15.0%)
|
Rising 3%
|
|
300
|
|
34,602
|
|
30,528
|
|
(4,074)
|
|
(11.8%)
|
|
(20.0%)
|
____________________________
*
Net interest income assumes that interest rates would
change immediately within the total portfolio, a scenario which would reflect a
worst case position and is unlikely to happen.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Managements Annual Report on Internal Control Over Financial Reporting
Management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting. The Companys internal control system is designed to
provide reasonable assurance to management and the Companys Board of Directors
regarding the preparation and fair presentation of the Companys annual
financial statements in accordance with GAAP.
Inherent
limitations exist in the effectiveness of any internal control structure,
including the possibility of human error and circumvention of controls.
Accordingly, even effective internal control can only provide reasonable
assurance with respect to financial statement preparation.
Management
assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2011, based on criteria for effective internal
control over financial reporting described in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that, as of December
31, 2011, the Companys internal control over financial reporting was
effective.
Alexander
Thompson Arnold, PLLC, the Companys independent registered public accounting
firm, has audited the Companys consolidated financial statements and issued an
attestation report on the Companys internal control over financial reporting.
This report appears beginning on page 48 of this Annual Report on Form 10-K.
48
|
185 North Church Street
Dyersburg, TN 38024
|
Telephone: (731) 285-7900
(800) 608-5612
Fax: (731)
285-6221
|
|
www.atacpa.net
|
Members of
American Institute of Certified Public Accountants
AICPA Center for Public Company Audit Firms
AICPA Governmental Audit Quality Center
AICPA Employee Benefit Plan Audit Quality Center
Tennessee Society of Certified Public Accountants
Kentucky Society of Certified Public Accountants
|
Report of Independent Registered Public
Accounting Firm
Board of Directors and Shareholders of
First Citizens Bancshares, Inc. and Subsidiaries
Dyersburg, Tennessee 38024
We have audited the accompanying consolidated balance sheets
of First Citizens Bancshares, Inc., and subsidiaries as of December 31, 2011
and 2010, and the related consolidated statements of income, shareholders
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2011. We also have audited First Citizens
Bancshares, Inc. and subsidiaries internal control over financial reporting as
of December 31, 2011, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). First Citizens Bancshares,
Inc. and subsidiaries management is responsible for these financial
statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on these financial
statements and an opinion on the companys internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (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 and
whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.
Dyersburg, TN
|
McKenzie, TN
|
Union City, TN
|
Milan, TN
|
Henderson, TN
|
Murray, KY
|
Jackson, TN
|
Paris, TN
|
Martin, TN
|
Trenton, TN
|
49
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of First
Citizens Bancshares, Inc., and subsidiaries as of December 31, 2011, and 2010,
and the results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 2011, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, First Citizens Bancshares, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of December
31, 2011, based on criteria established in
Internal Control-Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Alexander Thompson Arnold PLLC
Dyersburg, Tennessee
February 28, 2012
50
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
(Dollars in
thousands)
|
2011
|
|
2010
|
|
ASSETS
|
|
|
|
|
Cash and due from banks
|
$ 19,460
|
|
$ 15,628
|
|
Federal funds sold
|
14,673
|
|
18,063
|
|
Cash and cash equivalents
|
34,133
|
|
33,691
|
|
Interest bearing deposits in banks
|
40,138
|
|
6,271
|
|
Investment securities:
|
|
|
|
|
Available-for-Sale, stated at market
|
365,465
|
|
294,823
|
|
Loans
(excluding unearned income of $334 at December 31, 2011 and $352 at December
31, 2010)
|
527,699
|
|
547,703
|
|
Less: Allowance for loan losses
|
8,039
|
|
8,028
|
|
Net loans
|
519,660
|
|
539,675
|
|
Loans held-for-sale
|
2,616
|
|
2,777
|
|
Federal Home
Loan Bank and Federal Reserve Bank stocks, at cost
|
5,684
|
|
5,684
|
|
Premises and equipment
|
29,553
|
|
30,268
|
|
Accrued interest receivable
|
5,306
|
|
5,215
|
|
Goodwill
|
11,825
|
|
11,825
|
|
Other intangible assets
|
35
|
|
120
|
|
Other real estate owned
|
11,073
|
|
14,734
|
|
Bank-owned life insurance policies
|
21,438
|
|
21,656
|
|
Other assets
|
6,623
|
|
7,639
|
|
TOTAL ASSETS
|
$1,053,549
|
|
$974,378
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
Non-interest bearing demand deposits
|
$119,689
|
|
$100,130
|
|
Interest bearing time deposits
|
341,141
|
|
368,636
|
|
Interest bearing savings deposits
|
394,842
|
|
323,079
|
|
Total deposits
|
855,672
|
|
791,845
|
|
Securities sold under agreements to repurchase
|
36,471
|
|
34,309
|
|
Federal funds purchased and other short-term borrowings
|
|
|
1,000
|
|
Other borrowings
|
47,328
|
|
52,259
|
|
Other liabilities
|
10,610
|
|
5,686
|
|
Total liabilities
|
950,081
|
|
885,099
|
|
51
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (contd)
DECEMBER 31, 2011 AND 2010
(Dollars in
thousands)
|
2011
|
|
2010
|
Equity
|
|
|
|
Common stock,
no par value - 10,000,000 authorized; 3,717,593 issued and outstanding at
December 31, 2011 and 3,717,593 issued and outstanding at December 31, 2010
|
$ 3,718
|
|
$ 3,718
|
Surplus
|
15,331
|
|
15,331
|
Retained
earnings
|
76,586
|
|
68,696
|
Accumulated
other comprehensive income
|
8,801
|
|
1,896
|
Total common stock and retained
earnings
|
104,436
|
|
89,641
|
Less-109,739
treasury shares, at cost as of December 31, 2011 and 91,767 treasury shares,
at
cost as of December 31, 2010
|
3,023
|
|
2,417
|
Total shareholders' equity
|
101,413
|
|
87,224
|
Non-controlling
(minority) interest in consolidated subsidiary
|
2,055
|
|
2,055
|
Total equity
|
103,468
|
|
89,279
|
TOTAL LIABILITIES AND EQUITY
|
$1,053,549
|
|
$974,378
|
Note: See
accompanying notes to consolidated financial statements.
52
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In thousands,
except per share data)
|
|
2011
|
|
2010
|
|
2009
|
Interest income
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$34,159
|
|
$36,085
|
|
$38,402
|
Interest and dividends on investment securities:
|
|
|
|
|
|
|
Taxable
|
|
6,622
|
|
6,038
|
|
7,029
|
Tax-exempt
|
|
4,422
|
|
3,940
|
|
3,285
|
Dividends
|
|
210
|
|
224
|
|
231
|
Other interest income
|
|
93
|
|
60
|
|
64
|
Total interest income
|
|
45,506
|
|
46,347
|
|
49,011
|
Interest expense
|
|
|
|
|
|
|
Interest on deposits
|
|
7,692
|
|
8,710
|
|
11,729
|
Interest on borrowings
|
|
1,241
|
|
2,815
|
|
3,428
|
Other interest expense
|
|
423
|
|
485
|
|
655
|
Total interest expense
|
|
9,356
|
|
12,010
|
|
15,812
|
Net interest income
|
|
36,150
|
|
34,337
|
|
33,199
|
Provision for loan losses
|
|
2,425
|
|
7,000
|
|
7,060
|
Net interest income after provision for loan losses
|
|
33,725
|
|
27,337
|
|
26,139
|
Non-interest income
|
|
|
|
|
|
|
Mortgage banking income
|
|
830
|
|
1,116
|
|
1,111
|
Income from fiduciary activities
|
|
803
|
|
785
|
|
806
|
Service charges on deposit accounts
|
|
6,634
|
|
6,923
|
|
6,941
|
Brokerage fees
|
|
1,263
|
|
1,080
|
|
1,317
|
Earnings on bank owned life insurance
|
|
736
|
|
677
|
|
832
|
Loss on sale of other real estate owned
|
|
(1,374)
|
|
(1,156)
|
|
(470)
|
Gain on sale of available-for-sale securities
|
|
943
|
|
1,884
|
|
1,196
|
Gain on disposition of property
|
|
273
|
|
|
|
|
Income from insurance activities
|
|
899
|
|
913
|
|
834
|
Other non-interest income
|
|
666
|
|
637
|
|
546
|
Total non-interest income
|
|
11,673
|
|
12,859
|
|
13,113
|
Total other-than temporary impairment losses
|
|
347
|
|
1,567
|
|
1,357
|
Portion of loss
recognized in other comprehensive income (before taxes)
|
|
(299)
|
|
(978)
|
|
(706)
|
Net impairment losses recognized in earnings
|
|
48
|
|
589
|
|
651
|
53
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (contd)
YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In thousands,
except per share data)
|
|
2011
|
|
2010
|
|
2009
|
Other non-interest expense:
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$16,700
|
|
$15,417
|
|
$15,285
|
Net occupancy expense
|
|
1,676
|
|
1,759
|
|
1,804
|
Depreciation
|
|
1,780
|
|
1,792
|
|
1,852
|
Data processing expense
|
|
1,741
|
|
1,591
|
|
1,192
|
Legal and professional fees
|
|
653
|
|
441
|
|
305
|
Stationary and office supplies
|
|
217
|
|
221
|
|
254
|
Amortization of intangibles
|
|
85
|
|
85
|
|
85
|
Advertising and promotions
|
|
662
|
|
703
|
|
622
|
Premiums for FDIC insurance
|
|
823
|
|
1,200
|
|
1,671
|
Expenses related to other real estate owned
|
|
682
|
|
888
|
|
642
|
ATM related fees and expenses
|
|
915
|
|
784
|
|
483
|
Other non-interest expense
|
|
4,138
|
|
3,829
|
|
4,114
|
Total other non-interest
expense
|
|
30,072
|
|
28,710
|
|
28,309
|
Net income before income taxes
|
|
15,278
|
|
10,897
|
|
10,292
|
Provision for income tax expense
|
|
3,416
|
|
2,022
|
|
1,965
|
Net income
|
|
$11,862
|
|
$8,875
|
|
$8,327
|
Earnings per common share:
|
|
|
|
|
|
|
Net income per common share
|
|
$3.28
|
|
$2.45
|
|
$2.30
|
Weighted average shares outstanding
|
|
3,614
|
|
3,626
|
|
3,625
|
Note: See
accompanying notes to consolidated financial statements.
54
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED
DECEMBER 31, 2011, 2010 AND 2009
(In thousands)
|
|
2011
|
|
2010
|
|
2009
|
Net income
|
|
$11,862
|
|
$8,875
|
|
$ 8,327
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
Net change in unrealized gains on cash flow hedge
|
|
-
|
|
69
|
|
44
|
Net change in unrealized gains (losses) on
available-for-sale securities
|
|
6,905
|
|
(2,429)
|
|
2,687
|
Total other comprehensive income (loss), net of
tax
|
|
6,905
|
|
(2,360)
|
|
2,730
|
Total comprehensive income
|
|
$18,767
|
|
$6,515
|
|
$11,058
|
Related tax effects allocated to each component of other
comprehensive income were as follows:
|
|
Before-tax
|
|
Tax Expense
|
|
Net-of-tax
|
|
|
Amount
|
|
Or Benefit
|
|
Amount
|
Year ended December 31, 2011:
|
|
|
|
|
|
|
Unrealized
gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
Unrealized gains arising during the period
|
|
$12,084
|
|
$(4,627)
|
|
$7,457
|
Reclassification adjustments for net gains
included in net income
|
(895)
|
|
343
|
|
(552)
|
Net unrealized gains (losses)
|
|
$11,189
|
|
$(4,284)
|
|
$6,905
|
|
|
|
|
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedge
|
|
$ 111
|
|
$ (42)
|
|
$ 69
|
Unrealized gains (losses) on available-for-sale
securities:
|
|
|
|
|
|
|
Unrealized (losses) gains arising during the
period
|
|
(2,641)
|
|
1,011
|
|
(1,630)
|
Reclassification adjustments for net gains
included in net income
|
(1,295)
|
|
496
|
|
(799)
|
Unrealized (losses) gains on available-for-sale
securities, net
|
|
(3,936)
|
|
1,507
|
|
(2,429)
|
Net unrealized losses
|
|
$(3,825)
|
|
$1,465
|
|
$(2,360)
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedge
|
|
$ 71
|
|
$ (27)
|
|
$ 44
|
Unrealized gains (losses) on available-for-sale
securities:
|
|
|
|
|
|
|
Unrealized gains arising during the period
|
|
4,901
|
|
(1,879)
|
|
3,022
|
Reclassification adjustments for net gains
included in net income
|
(545)
|
|
209
|
|
(336)
|
Unrealized gains losses on available-for-sale
securities, net
|
|
4,356
|
|
(1,670)
|
|
2,686
|
Net unrealized gains (losses)
|
|
$4,427
|
|
$(1,697)
|
|
$2,730
|
Note: See
accompanying notes to consolidated financial statements.
55
FIRST CITIZENS
BANCSHARES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED
DECEMBER 31, 2011, 2010 AND 2009
(In thousands,
except per share data)
|
Common Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Treasury
Stock
|
Non-
Controlling
Interests
|
Total
|
|
Shares
|
Amount
|
|
(#)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
Balance January 1, 2009
|
3,718
|
$ 3,718
|
$ 15,331
|
$ 58,890
|
$ 1,526
|
$ (2,457)
|
$ 55
|
$ 77,063
|
Net income, year ended December 31,
2009
|
|
|
|
8,327
|
|
|
|
8,327
|
Adjustment of unrealized gain on
securities
available-for-sale, net of
tax
|
|
|
|
|
2,686
|
|
|
2,686
|
Adjustment of unrealized gain on cash flow
hedge, net
of tax
|
|
|
|
|
44
|
|
|
44
|
Cash dividends paid - $1.04 per share
|
|
|
|
(3,769)
|
|
|
|
(3,769)
|
Treasury stock transitions net
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, year ended December 31,
2010
|
|
|
|
8,875
|
|
|
|
8,875
|
Adjustment of unrealized loss on
securities
available-for-sale, net of
tax
|
|
|
|
|
(2,429)
|
|
|
(2,429)
|
Adjustment of unrealized gain on cash
flow hedge, net
of tax
|
|
|
|
|
69
|
|
|
69
|
Cash dividends paid - $1.00 per share
|
|
|
|
(3,627)
|
|
|
|
(3,627)
|
Treasury stock transitions net
|
|
|
|
|
|
24
|
|
24
|
Sale of subsidiary preferred shares to
noncontrolling
interest
|
|
|
|
|
|
|
|
|
Balance December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, year ended December 31,
2011
|
|
|
|
11,862
|
|
|
|
11,862
|
Adjustment of unrealized gain on
securities
available-for-sale, net of
tax
|
|
|
|
|
6,905
|
|
|
6,905
|
Cash dividends paid - $1.10 per share
|
|
|
|
(3,972)
|
|
|
|
(3,972)
|
Treasury stock transitions net
|
|
|
|
|
|
|
|
|
Balance December 31, 2011
|
|
|
|
|
|
|
|
|
Note: See
accompanying notes to consolidated financial statements.
56
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS ENDED
DECEMBER 31, 2011, 2010 AND 2009
(In thousands)
|
|
2011
|
|
2010
|
|
2009
|
Operating activities
|
|
|
|
|
|
|
Net income
|
|
$11,862
|
|
$ 8,875
|
|
$ 8,327
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
Provision for loan losses
|
|
2,425
|
|
7,000
|
|
7,060
|
Provision for depreciation
|
|
1,780
|
|
1,792
|
|
1,852
|
Provision for amortization of intangibles
|
|
85
|
|
85
|
|
85
|
Deferred income taxes
|
|
(10)
|
|
65
|
|
(789)
|
Gains on sale or call of investment securities
|
|
(943)
|
|
(1,884)
|
|
(1,196)
|
Impairment losses on securities recorded in earnings
|
|
48
|
|
589
|
|
651
|
Net losses on sale or write down of other real estate
owned
|
|
1,374
|
|
1,156
|
|
470
|
(Gain) on disposition of property
|
|
(273)
|
|
0
|
|
0
|
Net increase (decrease) in loans held-for-sale
|
|
161
|
|
(36)
|
|
(109)
|
(Increase) decrease in accrued interest receivable
|
|
(91)
|
|
190
|
|
176
|
Decrease in accrued interest payable
|
|
(60)
|
|
(244)
|
|
(980)
|
Increase (decrease) in cash surrender value of
bank-owned life insurance policies
|
|
218
|
|
(540)
|
|
(489)
|
Net decrease (increase) in other assets
|
|
884
|
|
375
|
|
(5,174)
|
Net increase (decrease) in other liabilities
|
|
1,364
|
|
71
|
|
(1,500)
|
NET CASH PROVIDED BY OPERATING
ACTIVITIES
|
|
18,824
|
|
17,494
|
|
8,384
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
Increase in interest-bearing deposits in other banks
|
|
(33,867)
|
|
(2,496)
|
|
(793)
|
Proceeds of maturities of held-to-maturity investment
securities
|
|
-
|
|
-
|
|
115
|
Proceeds of paydowns and maturities of
available-for-sale investment securities
|
|
52,408
|
|
69,296
|
|
36,943
|
Proceeds of sales of available-for-sale investment
securities
|
|
38,523
|
|
62,304
|
|
41,041
|
Purchases of available-for-sale investment securities
|
|
(150,045)
|
|
(178,964)
|
|
(111,550)
|
(Increase) decrease in loans net
|
|
14,502
|
|
23,224
|
|
(4,040)
|
Proceeds from sale of other real estate owned
|
|
5,409
|
|
5,043
|
|
2,600
|
Proceeds from disposition of premises and equipment
|
|
328
|
|
-
|
|
-
|
Proceeds from sales of premises and equipment
|
|
(1,120)
|
|
(1,535)
|
|
(631)
|
NET CASH USED BY INVESTING
ACTIVITIES
|
|
(73,862)
|
|
(23,128)
|
|
(36,315)
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
Net increase (decrease) in demand deposits
|
|
19,559
|
|
(375)
|
|
(8,258)
|
Net increase in savings accounts
|
|
71,763
|
|
27,880
|
|
61,887
|
Net increase (decrease) in time deposits
|
|
(27,495)
|
|
12,194
|
|
(36,398)
|
Net increase (decrease) in short-term borrowings
|
|
1,162
|
|
(2,320)
|
|
3,864
|
Issuance of other borrowings
|
|
9,000
|
|
10,000
|
|
2,000
|
Payment of principal on other borrowings
|
|
(13,931)
|
|
(33,023)
|
|
(561)
|
Cash dividends paid
|
|
(3,972)
|
|
(3,627)
|
|
(3,769)
|
Treasury stock transactions net
|
|
(606)
|
|
24
|
|
16
|
NET CASH PROVIDED BY FINANCING
ACTIVITIES
|
|
55,480
|
|
10,753
|
|
18,781
|
57
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS (contd)
YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In thousands)
|
|
2011
|
|
2010
|
|
2009
|
Increase (decrease) in cash and cash equivalents
|
|
$ 442
|
|
$ 5,119
|
|
$(9,150)
|
Cash and cash equivalents at beginning of year
|
|
33,691
|
|
28,572
|
|
37,722
|
Cash and cash equivalents at end of year
|
|
$34,133
|
|
$33,691
|
|
$28,572
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
Interest paid
|
|
$9,356
|
|
$12,234
|
|
$16,792
|
Income taxes paid
|
|
2,900
|
|
2,816
|
|
3,788
|
Supplemental noncash disclosures:
|
|
|
|
|
|
|
Transfers from loans to other real estate owned
|
|
3,565
|
|
11,691
|
|
9,493
|
Transfers from other real estate owned to loans
|
|
727
|
|
1,785
|
|
1,940
|
Note: See
accompanying notes to consolidated financial statements.
58
FIRST CITIZENS BANCSHARES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011
AND 2010
NOTE 1 SUMMARY OF
SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting
and reporting policies of First Citizens Bancshares, Inc., and subsidiaries
(the Company) conform to generally accepted accounting principles (GAAP).
The significant policies are described as follows:
Basis of Presentation
The Consolidated
Financial Statements include all accounts of the Company and its subsidiary, First
Citizens National Bank (the Bank). First Citizens (TN) Statutory Trusts III
and IV are reported under the equity method in accordance with GAAP for
Variable Interest Entities for all periods presented. These investments are
included in Other Assets and the proportionate share of income (loss) is
included in other non-interest income. The Bank also has two wholly-owned
subsidiaries, First Citizens Financial Plus, Inc. and First Citizens
Investments, Inc., which are consolidated into its financial statements. The
Companys investment in these subsidiaries is reflected on the Companys
condensed balance sheet. See Note 22 for more information.
The Bank has a
50% ownership in two insurance subsidiaries, both of which are accounted for
using the equity method. White and Associates/First Citizens Insurance, LLC is
a general insurance agency offering a full line of insurance products. First
Citizens/White and Associates Insurance Companys principal activity is credit
insurance. The investment in these subsidiaries is included in Other Assets on
the Consolidated Balance Sheets presented in this report and earnings from
these subsidiaries are recorded in Other Income on the Consolidated Statements
of Income.
The principal
activity of First Citizens Investments, Inc. is to acquire and sell investment
securities and collect income from the securities portfolio. First Citizens
Holdings, Inc., a wholly owned subsidiary of First Citizens Investments, Inc.,
acquires and sells certain investment securities, collects income from its
portfolio, and owns First Citizens Properties, Inc., a real estate investment
trust. First Citizens Properties, Inc. is a real estate investment trust
organized and existing under the laws of the state of Maryland, the principal activity
of which is to invest in participation interests in real estate loans made by
the Bank and provide the Bank with an alternative vehicle for raising capital.
First Citizens Holdings, Inc. owns 100% of the outstanding common stock and 60%
of the outstanding preferred stock of First Citizens Properties, Inc.
Directors, executive officers and certain employees and affiliates of the Bank
own approximately 40% of the preferred stock which is reported as
Noncontrolling Interest in Consolidated Subsidiary in the Consolidated
Financial Statements of the Company. Net income attributable to the
noncontrolling interest is included in Other Non-Interest Expense on the
Consolidated Statements of Income and is not material for any of the periods
presented.
The Company has
two additional wholly owned subsidiaries, First Citizens (TN) Statutory Trust
III and First Citizens (TN) Statutory Trust IV. The purpose and activities of
these trusts are further discussed in Note 13.
All significant
inter-company balances and transactions are eliminated in consolidation.
Certain balances have been reclassified to conform to current year
presentation.
Nature of Operations
The Company and
its subsidiaries provide a wide variety of commercial banking services to
individuals and corporate customers in the mid-southern United States with a
concentration in West Tennessee. The Companys primary products are checking
and savings deposits and residential, commercial and consumer lending.
Basis of Accounting
The Consolidated
Financial Statements are presented using the accrual method of accounting.
59
Use of Estimates
The preparation
of financial statements in conformity with GAAP 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 periods. Actual results could differ from those
estimates.
Material estimates
that are particularly susceptible to significant change relate to the fair
value of investment securities, determination of the allowance for losses on
loans, the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans, and determination of fair values associated with
impairment testing of goodwill. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties. Estimates and assumptions
used in goodwill impairment testing are made based on prevailing market
factors, historical earnings and multiples and other factors.
Cash Equivalents
Cash equivalents
include amounts due from banks which do not bear interest and federal funds
sold. Generally, federal funds are purchased or sold for one-day periods.
Interest-Bearing Deposits in Other
Banks
Interest-bearing
deposits in other banks consist of excess balances above the minimum required
balance at the Federal Reserve Bank and short-term certificates of deposits
(CDs) held at other banks. The CDs at other banks are held in increments of
less than $250,000 and, therefore, are covered by FDIC insurance. Interest
income on deposits in banks is reported as Other Interest Income on the
Consolidated Statements of Income.
Securities
Investment
securities are classified as follows:
-
Held-to-maturity, which includes those investment securities
which the Company has the intent and the ability to hold until maturity;
-
Trading securities, which include those investments that are held
for short-term resale; and
-
Available-for-sale, which includes all other investment
securities.
Held-to-maturity
securities are reflected at cost, adjusted for amortization of premiums and
accretion of discounts using methods which approximate the interest method.
Available-for-sale securities are carried at fair value, and unrealized gains
and losses are recognized as direct increases or decreases to accumulated other
comprehensive income except for other-than-temporary impairment losses that are
required to be charged against earnings. The credit portion of
other-than-temporary impairment losses is recorded against earnings and is
separately stated on the Consolidated Statements of Income. Trading
securities, where applicable, are carried at fair value, and unrealized gains
and losses on these securities are included in net income.
Realized gains
and losses on sale or call of investment securities transactions are determined
based on the specific identification method and are included in net income.
Loans Held for Sale
Mortgage loans
originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or market, as determined by outstanding commitments
from investors. Net unrealized losses, if any, are recorded as a valuation
allowance and charged to earnings. Servicing rights are not retained when
mortgage loans are sold. Income from loans held for sale is reported in
Mortgage Banking Income, which is included in Non-Interest Income in the
Consolidated Financial Statements.
60
Loans
Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reflected on the Consolidated Balance Sheets at the
unpaid principal amount less the allowance for loan losses and unearned
interest and fees. Interest on loans is recorded on an accrual basis unless it
meets criteria to be placed on non-accrual status. The Banks policy is to not
accrue interest or discount on (i) any asset which is maintained on a cash
basis because of deterioration in the financial position of the borrower, (ii)
any asset for which payment in full of interest or principal is not expected or
(iii) any asset upon which principal or interest has been in default for a
period of 90 days or more unless it is both well-secured and in the process of
collection. For purposes of applying the 90 days past due test for non-accrual
of interest, the date on which an asset reaches non-accrual status is
determined by its contractual term. A debt is deemed well-secured if it is
secured by collateral in the form of liens or pledges of real or personal
property, including securities that have a realizable value sufficient to
discharge the debt (including accrued interest) in full, considered to be
proceeding in due course either through legal action, including judgment
enforcement procedures or, in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in its restoration to a current status. Unpaid
interest on loans placed on non-accrual status is reversed from income and
further accruals of income are not usually recognized. Subsequent collections
related to impaired loans are usually credited first to principal and then to
previously uncollected interest.
Allowance
for Loan Losses
The allowance
for loan losses is established as losses are estimated to have occurred through
a provision for loan losses charged to earnings. Loan losses are charged
against the allowance when management believes the uncollectability of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance
for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectability of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrowers ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation
is inherently subjective, as it requires estimates that are susceptible to
significant revision as more information becomes available.
The allowance consists of specific and general components. The specific
component relates to loans evaluated on an individual basis for impairment.
For each loan evaluated individually that is determined to be impaired, a
specific allocation to the allowance is established when the discounted cash
flows (or collateral value or observable market price) of the loan is lower
than the carrying value of that loan. The general component of the allowance is
determined based on loans evaluated on a pooled basis which consist of non-impaired
loans and pools of loans with similar characteristics that are not evaluated
individually for impairment.
Loans that meet the criteria for individual impairment analysis are those
loans or borrowing relationships with current outstanding principal balance
greater than or equal to $250,000 at the measurement date and have an internal rating
of Grade 6 or higher (generally characterized as Substandard or worse).
Once identified for individual analysis, then a loan is considered impaired
when, based on current information and events, it is probable that the Bank
will be unable to collect scheduled payments of principal or interest when due
according to contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral value,
and the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all circumstances surrounding the loan and the
borrower, including the length of delay, reasons for the delay, the borrowers
prior payment record, and the amount of the shortfall in relation to principal
and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans
obtainable market price, or fair value of the collateral if the loan is
collateral dependent. The majority of the Companys impaired loans is secured
by real estate and considered collateral-dependent. Therefore, impairment
losses are primarily based on the fair value of the underlying collateral
(usually real estate).
61
The general component of the allowance for loan losses is based on
historical loss experience adjusted for qualitative factors. Loans are pooled
together based on the type of loans and internal risk ratings. Risk factors
for each pool are developed using historical charge-offs for the past three
years. The risk factors are then adjusted based on current conditions of the
loan portfolio and lending environment that may result in future losses
differing from historical patterns. Such factors include, but are not limited
to:
-
Changes in underlying collateral securing the loans;
-
Changes in lending policies and procedures including changes in
underwriting, collection, charge-off and recovery practices;
-
Changes in economic and business conditions that affect the collectability of the portfolio;
-
Changes in the nature and volume of the portfolio;
-
Changes in the experience, ability and depth of lending management
and other related staff;
-
Changes in the volume and severity of past due loans, volume of
non-accruals, and/or problem loans;
-
Changes in the quality of the Companys loan review system;
-
Existence and effects of any concentration of credit and changes in
the level of concentrations; and
-
The effects of other external factors such as competition, legal
or regulatory requirements.
The risk factors
for loans evaluated collectively are also adjusted based on the level of risk
associated with the internal risk ratings of the loans. Loans rated Grade 1
are considered low risk and have the lowest risk factors applied. Loans rated
Grades 2 and 3 have an average level of risk. Loans rated Grade 4 and 5 have a
marginal level of risk slightly higher than Grades 2 and 3. Loans rated Grade
6 or higher have above average risk and therefore have higher risk factors
applied to that portion of the portfolio.
Premises and Equipment
Bank premises
and equipment are stated at cost less accumulated depreciation. The provision
for depreciation is computed using straight-line and accelerated methods for
both financial reporting and income tax purposes. Expenditures for maintenance
and repairs are charged against income as incurred. Cost of major additions and
improvements are capitalized and depreciated over the estimated useful life of
the addition or improvement.
Other Real Estate Owned
Real estate
acquired through foreclosure is separately stated on the Consolidated Balance
Sheets as Other Real Estate Owned and recorded at the lower of cost or fair
value less cost to sell. Adjustments made at the date of foreclosure are
charged to the allowance for loan losses. Expenses incurred in connection with
ownership, subsequent adjustments to book value, and gains and losses upon
disposition are included in other non-interest expenses. Adjustments to net
realizable value subsequent to acquisition are made at least annually if
necessary based on appraisal.
Securities Sold under
Agreements to Repurchase
Securities sold
under agreements to repurchase are accounted for as collateralized financing
transactions, represent the purchase of interests in securities by banking
customers and are recorded at the amount of cash received in connection with
the transaction. Daily repurchase agreements are settled on the following
business day and fixed repurchase agreements have various fixed terms. All
securities sold under agreements to repurchase are collateralized by certain
pledged securities, generally U.S. government and federal agency securities,
and are held in safekeeping by the purchasing financial institution. These
transactions are not deposits and, therefore, are not covered by FDIC
insurance. Securities sold under agreements to repurchase are reported
separately on the Companys Consolidated Balance Sheets and interest expense
related to these transactions is reported on the Companys Consolidated Statements
of Income as Other Interest Expense.
62
Income
Taxes
The Company uses
the accrual method of accounting for federal and state income tax reporting.
Deferred tax assets or liabilities are computed for significant differences in
financial statement and tax bases of assets and liabilities, which result from
temporary differences in financial statement and tax accounting. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized. Provision for income taxes is made on a separate income tax return
basis for each entity included in the Consolidated Financial Statements.
Interest
Income and Fees on Loans
Interest income
on commercial and real estate loans is computed on the basis of daily principal
balance outstanding using the accrual method. Interest on installment loans is
credited to operations by the level-yield method. Interest income on loans is
discontinued at the time the loan is 90 days delinquent unless the loan is well
secured and in process of collection. Loans may be placed on non-accrual
status at an earlier date if collection of principal or interest is considered
doubtful. All interest accrued but not received for loans placed on
non-accrual status is reversed against interest income. Interest received on
such loans is accounted for on the cash-basis or cost-recovery method until
qualifying to return to accrual status. Loans are returned to accrual status
when all principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
Fees on loans
are generally recognized in earnings at the time of origination as they are generally
offset by related expenses also incurred at origination. Certain fees such as
commitment fees are deferred and amortized over the life of the loan using the
interest method.
Net Income per Share of Common
Stock
Net income per
share of common stock is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period, after
giving retroactive effect to stock dividends and stock splits.
Income from Fiduciary
Activities
Income from
fiduciary activities is recorded on an accrual basis.
Advertising and Promotions
The Companys
policy is to charge advertising and promotions to expenses as incurred.
Fair Value
Fair value
measurements are used to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. The Company measures fair
value under guidance provided by the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value
Measurements and Disclosures (ASC 820). ASC 820 defines fair value,
establishes a framework for measuring fair value and expands disclosure
requirements regarding fair value measurements. ASC 820 does not expand the
use of fair value in any new circumstances but clarifies the principle that
fair value should be based on assumptions that market participants would use
when pricing the asset or liability. ASC 820 outlines the following three
acceptable valuation techniques may be used to measure fair value:
-
Market approachThe market
approach uses prices and other relevant information generated by market
transactions involving identical or similar assets or liabilities. This
technique includes matrix pricing that is a mathematical technique used
principally to value debt securities without relying solely on quoted
prices for specific securities but rather by relying on securities
relationship to other benchmark quoted securities.
-
Income approachThe income
approach uses valuation techniques to convert future amounts such as earnings
or cash flows to a single present discounted amount. The measurement is
based on the value indicated by current market expectations about those
future amounts. Such valuation techniques include present value
techniques, option-pricing models (such as the Black-Scholes formula or a
binomial model), and multi-period excess earnings method (used to measure
fair value of certain intangible assets).
63
-
Cost approachThe cost approach is based on current replacement cost which
is the amount that would currently be required to replace the service
capacity of an asset.
Valuation
techniques are selected as appropriate for the circumstances and for which
sufficient data is available. Valuation techniques are to be consistently
applied, but a change in a valuation technique or its application may be made
if the change results in a measurement that is equally or more representative
of fair value under the circumstances. Revisions resulting from a change in
valuation technique or its application are accounted for as a change in
accounting estimate which does not require the change in accounting estimate to
be accounted for by restating or retrospectively adjusting amounts reported in
financial statements of prior periods or by reporting pro forma amounts for prior
periods.
ASC 820 also
establishes a hierarchy that prioritizes information used to develop those
assumptions. The level in the hierarchy within which the fair value
measurement in its entirety falls is determined based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company
considers an input to be significant if it drives more than 10% of the total
fair value of a particular asset or liability. The hierarchy is as follows:
Level 1
Inputs
(Highest ranking): Unadjusted quoted prices in active markets
for identical assets or liabilities that the entity has the ability to access
at the measurement date.
Level 2
Inputs
: Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. Such
inputs may include quoted prices for similar assets or liabilities in active
markets, and inputs other than quoted market prices that are observable for the
assets and liabilities such as interest rates and yield curves that are
observable at commonly quoted intervals.
Level 3
Inputs
(Lowest ranking): Unobservable inputs for determining fair
values of assets and liabilities that reflect an entitys own assumptions about
the assumptions that market participants would use in pricing the assets and
liabilities.
Assets and
liabilities may be measured for fair value on a recurring basis (daily, weekly,
monthly or quarterly) or on a non-recurring basis in periods subsequent to
initial recognition. Recurring valuations are measured regularly for
investment securities and derivatives (if any). Loans held for sale, OREO and
impaired loans are measured at fair value on a non-recurring basis and do not
necessarily result in a change in the amount recorded on the Consolidated
Balance Sheets. Generally, these assets have non-recurring valuations that are
the result of application of other accounting pronouncements that require the
assets be assessed for impairment or at the lower of cost or fair value. Fair
values of loans held for sale are considered Level 2. Fair values for OREO and
impaired loans are considered Level 3. See Note 20 for more information.
The Company obtains fair value
measurements for securities and derivatives (if any) from a third party vendor.
The Companys cash flow hedge and the majority of the available-for-sale
securities are valued using Level 2 inputs. Collateralized debt obligation
securities that are backed by trust preferred securities and account for less
than 1% of the available-for-sale securities portfolio are valued using Level 3
inputs. The fair value measurements reported in Level 2 are primarily matrix
pricing that considers observable data (such as dealer quotes, market spreads,
cash flows, the U.S. Treasury yield curve, live trading levels, trade execution
data, market consensus prepayment speeds, credit information and terms and
conditions of bonds, and other factors). Fair value measurements for pooled
trust-preferred securities are obtained through the use of valuation models
that include unobservable inputs which are considered Level 3. See additional
discussion of valuation techniques and inputs in Note 20.
Certain non-financial assets and
non-financial liabilities measured at fair value on a recurring basis include
reporting units measured at fair value in the first step of a goodwill
impairment test. Certain non-financial assets measured at fair value on a
non-recurring basis include non-financial assets and non-financial liabilities
measured at fair value in the second step of a goodwill impairment test, as
well as intangible assets and other non-financial long-lived assets measured at
fair value for impairment assessment.
64
The Company utilizes ASC 820,
which permits the Company to choose to measure eligible items at fair value at
specified election dates. Unrealized gains and losses on items for which the
fair value measurement option has been elected are reported in earnings at each
subsequent reporting date. The fair value option (i) may be applied instrument
by instrument, with certain exceptions enabling the Company to record identical
financial assets and liabilities at fair value or by another measurement basis
permitted under GAAP, (ii) is irrevocable (unless a new election date occurs)
and (iii) is applied only to entire instruments and not to portions of
instruments.
Subsequent Events
The Company has reviewed subsequent
events through February 28, 2012.
NOTE 2 CASH RESERVES AND
INTEREST-BEARING DEPOSITS IN OTHER BANKS
The Bank
maintains cash reserve balances as required by the Federal Reserve Bank.
Average required balances during both 2011 and 2010 were approximately
$500,000. Amounts above the required minimum balance are reported as Interest-Bearing
Deposits in Other Banks on the Consolidated Balance Sheets. Balances in excess
of required reserves held at the Federal Reserve Bank as of December 31, 2011
and 2010 were $38.3 million and $5.3 million, respectively. Interest-bearing
deposits in other banks also include short-term CDs held in increments that are
within FDIC insurance limits and totaled $1.6 million as of December 31, 2011
and $1.7 million as of December 31, 2010.
NOTE 3 INVESTMENT SECURITIES
The following
tables reflect amortized cost, unrealized gains, unrealized losses and fair
value of available-for-sale investment securities for the dates presented (in
thousands):
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
As of December 31, 2011:
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S.
government
agencies and corporations
|
$242,459
|
|
$6,793
|
|
$ (12)
|
|
$249,240
|
Obligations of states and
political subdivisions
|
106,554
|
|
9,083
|
|
(3)
|
|
115,634
|
All other
|
2,194
|
|
15
|
|
(1,618)
|
|
591
|
Total investment
securities
|
$351,207
|
|
$15,891
|
|
$(1,633)
|
|
$365,465
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S.
government
agencies and corporations
|
$189,280
|
|
$3,721
|
|
$(1,558)
|
|
$191,443
|
Obligations of states and
political subdivisions
|
99,774
|
|
3,073
|
|
(397)
|
|
102,450
|
All other
|
2,698
|
|
22
|
|
(1,790)
|
|
930
|
Total investment
securities
|
$291,752
|
|
$6,816
|
|
$(3,745)
|
|
$294,823
|
There were no
securities categorized as trading or held-to-maturity as of December 31, 2011
or 2010. At December 31, 2011 and 2010, investment securities were pledged to
secure government, public and trust deposits as follows (in thousands):
|
|
Amortized Cost
|
|
Fair Value
|
2011
|
|
$189,728
|
|
$196,675
|
2010
|
|
177,598
|
|
180,943
|
The following table summarizes
contractual maturities of available-for-sale securities as of December 31, 2011
(in thousands):
65
|
|
Amortized Cost
|
|
Fair Value
|
|
Amounts maturing in:
|
|
|
|
|
|
One year or less
|
|
$ 2,942
|
|
$ 2,992
|
|
After one year through five years
|
|
8,666
|
|
9,344
|
|
After five years through ten years
|
|
68,054
|
|
71,424
|
|
After ten years*
|
|
271,522
|
|
281,667
|
|
Total debt securities
|
|
351,184
|
|
365,427
|
|
Equity securities
|
|
23
|
|
38
|
|
Total securities
|
|
$351,207
|
|
$365,465
|
|
_______________
*
|
Of the $271 million in this category, $214 million
consisted of mortgage-backed securities (MBS) and collateralized mortgage
obligations (CMO), which are presented based on contractual maturities.
However, the remaining lives of such securities are expected to be much shorter
due to anticipated payments.
|
Sales and realized
gains on sales of available-for-sale securities for the years ended December
31, 2011, 2010 and 2009 are presented as follows (in thousands):
|
Gross Sales
|
Gross Gains
|
|
Gross Losses
|
|
Net Gains
|
|
2011
|
|
$38,523
|
|
$ 943
|
|
$ -
|
|
$ 943
|
|
2010
|
|
62,304
|
|
1,884
|
|
-
|
|
1,884
|
|
2009
|
|
41,041
|
|
1,196
|
|
-
|
|
1,196
|
|
The following
table presents information on available-for-sale securities with gross
unrealized losses at December 31, 2011, aggregated by investment category and
the length of time that the individual securities have been in a continuous
loss position (in thousands):
|
Less Than 12 Months
|
|
Over 12 Months
|
|
Total
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
U.S. Treasury securities and obligations of
U.S.
Government agencies and
corporations
|
$(12)
|
|
$7,659
|
|
$
-
|
|
$ -
|
|
$ (12)
|
|
$7,659
|
Obligations of states and political subdivisions
|
(3)
|
|
867
|
|
-
|
|
-
|
|
(3)
|
|
867
|
Other debt securities
|
-
|
|
-
|
|
(1,618)
|
|
553
|
|
(1,618)
|
|
553
|
Total securities with
unrealized losses
|
$(15)
|
|
$8,526
|
|
$(1,618)
|
|
$553
|
|
$(1,633)
|
|
$9,079
|
In reviewing the
investment portfolio for other-than-temporary impairment of individual
securities, consideration is given but not limited to (1) the length of time in
which fair value has been less than cost and the extent of the unrealized loss,
(2) the financial condition of the issuer, and (3) the positive intent and
ability of the Company to maintain its investment in the issuer for a time that
would provide for any anticipated recovery in the fair value.
As of December
31, 2011, the Company had eight debt securities with unrealized losses. The
Company did not intend to sell any such securities in an unrealized loss
position and it was more likely than not that the Company would not be required
to sell the debt securities prior to recovery of costs. Of the eight debt
securities, three were other debt securities that had been in an unrealized
loss position for greater than 12 months and accounted for 99% of the
unrealized gross losses as of December 31, 2011. The remaining five bonds had
been in an unrealized loss position for less than 12 months and consisted of three
obligations of state and political subdivisions and two agency MBS. The
securities in an unrealized loss position as of December 31, 2011, were
evaluated for other-than-temporary impairment. In analyzing reasons for the
unrealized losses, management reviews any applicable industry analysts reports
and considers various factors including, but not limited to, whether the
securities are issued by the federal government or its agencies, and whether
downgrades of bond ratings have occurred. With respect to unrealized losses on
municipal and agency securities and the analysis performed relating to the
securities, management believes that declines in market value were not
other-than-temporary at December 31, 2011. The unrealized losses on the agency
and municipal securities have not been recognized for other-than-temporary
impairment.
66
The Companys three
corporate bonds with gross unrealized loss totaling $1.6 million as of December
31, 2011 are pooled collateralized debt obligation securities that are backed
by trust-preferred securities (TRUP CDOs) issued by banks, thrifts and
insurance companies. These three bonds were rated below investment grade (BBB)
by Moodys Investors Services and/or Standard and Poors Ratings Services at
December 31, 2011.
At December 31,
2011, the three TRUP CDOs had an aggregate book value of $2.2 million and fair
market value of approximately $553,000 and each of the three are the mezzanine
or B class tranches. One of the three bonds referred to as I-Pretsl IV had a
book value of $1 million and a fair value of approximately $200,000 with the
unrealized loss reflected in accumulated other comprehensive income as of
December 31, 2011. This bond had experienced deferrals totaling 8.4% of performing
collateral and no defaults as of December 31, 2011 compared to 11.6% as of
December 31, 2010. This bond has not experienced an adverse change in
projected cash flows as quarterly testing to date for this bond yielded present
value of projected cash flows above book value. Therefore, no
other-than-temporary impairment has been recognized to date on this bond.
The second of
the three TRUP CDOs is referred to as Pretsl I and had a market value of
approximately $348,000 and book value of approximately $862,000 as of December
31, 2011. Prestl I was recognized for other-than-temporary impairment during
2010 but did not have additional impairment recognized against earnings during
2011. In 2010, the credit component of other-than-temporary impairment on this
security recognized against earnings totaled approximately $425,000. The
portion of unrealized loss related to factors other than credit that were
included in accumulated other comprehensive income net of applicable income
taxes totaled approximately $514,000 and $709,000 as of December 31, 2011 and
2010, respectively. As of December 31, 2011, Pretsl I had deferrals and
defaults totaling 34.6% of performing collateral compared to 36.2% as of
December 31, 2010. Pretsl I was on non-accrual status as of December 31, 2011
and 2010.
The third of the
TRUP CDOs is referred to as Pretsl X and had a market value of approximately
$5,000 and book value of approximately $304,000 as of December 31, 2011.
Pretsl X was recognized for other-than-temporary impairment because of adverse
changes in present value of projected cash flows during each of the past three
years. The credit component of other-than-temporary impairment on this bond
reflected in earnings totaled approximately $48,000, $158,000 and $651,000 for
the years ended December 31, 2011, 2010 and 2009, respectively. The gross
unrealized loss related to factors other than credit that was reflected in
accumulated other comprehensive income net of applicable taxes totaled
approximately $299,000 and $269,000 as of December 31, 2011 and 2010,
respectively. Pretsl X had deferrals and defaults totaling 50.0% of performing
collateral as of December 31, 2011 compared to 45.5% as of December 31, 2010.
Pretsl X was on non-accrual status as of December 31, 2011 and 2010.
The credit
component of unrealized losses (if any) for a given period was determined based
on the difference between the book value of the security and the present value
of projected cash flows at current period end compared to the prior period end.
The following
table provides additional information regarding the Companys three investments
in TRUP CDOs as of December 31, 2011:
|
|
Actual Over
Collateral Ratio
(1)
|
Required Over
Collateral Ratio
(2)
|
|
Pretsl I
|
Mezzanine
|
76.4%
|
N/A
(3)
|
N/A
|
Pretsl X
|
B-2
|
55.5%
|
N/A
(3)
|
N/A
|
I-Pretsl IV
|
B-1
|
111.7%
|
106.0%
|
5.7%
|
_________________
(1)
|
The Over Collateral (OC) Ratio
reflects the ratio of performing collateral to a given class of bonds and is
calculated by dividing the performing collateral by the sum of the current
balance of a given class of bonds plus all senior classes.
|
(2)
|
The Required OC Ratio for a
particular class of bonds reflects the required overcollateralization ratio
such that cash distributions may be made to lower classes of bonds. If the OC
Ratio is less than the Required OC ratio, cash is diverted from the lower
classes of bonds to the senior bond classes. For example, if the OC Ratio for
Class B is lower than the Class B Required OC Ratio in the transaction, all
cash payments will be diverted to the Class B and Class A bonds until such time
that he OC Ratio exceeds the Required OC Ratio. The lower class bonds will
capitalize interest or pay-in-kind (PIK).
|
67
(3)
|
The Required OC Ratio is not applicable in this case, as interest
on these bonds for the applicable tranche is capitalized to the bond or PIK. The Company does not recognize PIK interest
for book purposes and has these bonds on non-accrual status.
|
Security-specific
collateral is used in the assumptions to project cash flows each quarter.
Issuers in default are assumed at zero recovery. Issuers in deferral are
assumed at a 15% recovery beginning two years from deferral date. Forward
interest rates are used to project future principal and interest payments
allowing the model to indicate impact of over- or under-collateralization for
each transaction. Higher interest rates generally increase credit stress on
undercollateralized transactions by reducing excess interest (calculated as the
difference between interest received from underlying collateral and interest
paid on the bonds). The discount rate is based on the original discount margin
calculated at the time of purchase based on the purchase price. The original
discount margin is then added to the three-month LIBOR to determine the
discount rate. The discount rate is then used to calculate the present value
for the then-current quarters projected cash flows. If the present value of
the then-current quarters projected cash flows is less than the prior quarter or
less than the then-current book value of the security, that difference is
recorded against earnings as the credit component of other-than-temporary
impairment.
The Companys
equity securities consist primarily of Fannie Mae and Freddie Mac perpetual preferred
stock. No impairment charges were recognized on these securities in 2009 or
2011 and approximately $6,000 in other-than-temporary impairment losses were
recognized in 2010.
The following is
a tabular rollforward of the amount related to the pre-tax credit loss
component recognized in earnings on debt securities (in thousands) for the
years ended December 31, 2011 and 2010:
|
2011
|
|
2010
|
Balance of credit losses on
available-for-sale securities
|
$ -
|
|
$ -
|
Additions for credit losses
for which an OTTI loss was not previously recognized
|
-
|
|
-
|
Additions for credit losses
for which an OTTI loss was previously recognized
|
48
|
|
589
|
Balance of credit losses on
available-for-sale securities
|
$48
|
|
$589
|
See also
discussion of valuation techniques and hierarchy for determining fair value of
these securities at Note 20.
GAAP includes
accounting and reporting standards for derivative financial instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. These standards require that derivatives be reported either
as assets or liabilities on the Consolidated Balance Sheets and be reflected at
fair value. The accounting for changes in the fair value of a derivative
instrument depends on the intended use of the derivative and the resulting
designation.
68
NOTE 4 LOANS
Performing
and non-performing loans by category were as follows as of December 31, 2011
and 2010 (in thousands):
|
Performing
|
|
Non- Performing*
|
|
Total
|
|
December 31, 2011:
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$71,465
|
|
$709
|
|
$ 72,174
|
|
Real estate construction
|
38,946
|
|
1,018
|
|
39,964
|
|
Real estate mortgage
|
378,006
|
|
5,928
|
|
383,934
|
|
Installment loans to individuals
|
27,766
|
|
261
|
|
28,027
|
|
All other loans
|
3,600
|
|
-
|
|
3,600
|
|
Total
|
$ 519,783
|
|
$7,916
|
|
$527,699
|
|
|
|
|
|
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 65,428
|
|
$869
|
|
$66,297
|
|
Real estate construction
|
48,259
|
|
889
|
|
49,148
|
|
Real estate mortgage
|
391,270
|
|
3,986
|
|
395,256
|
|
Installment loans to individuals
|
31,334
|
|
259
|
|
31,593
|
|
All other loans
|
5,278
|
|
131
|
|
5,409
|
|
Total
|
$541,569
|
|
$6,134
|
|
$547,703
|
|
_________________
* Non-Performing loans consist of loans that are on
non-accrual status and loans 90 days past due and still accruing interest.
An aging analysis
of loans outstanding by category as of December 31, 2011 and 2010 was as
follows (in thousands):
|
30-59
Days Past
Due
|
|
60-89
Days Past
Due
|
|
Greater
Than 90
Days
|
|
Total
Past Due
|
|
Current
|
|
Total Loans
|
|
Recorded
Investment > 90
Days and
Accruing
|
As of
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and
agricultural
|
$ 72
|
|
$ 72
|
|
$ 538
|
|
$ 682
|
|
$ 71,492
|
|
$ 72,174
|
|
$ 34
|
Real estate
construction
|
539
|
|
47
|
|
345
|
|
931
|
|
39,033
|
|
39,964
|
|
-
|
Real estate
mortgage
|
1,481
|
|
2,727
|
|
2,353
|
|
6,561
|
|
377,373
|
|
383,934
|
|
570
|
Installment
loans to individuals
|
81
|
|
30
|
|
41
|
|
152
|
|
27,875
|
|
28,027
|
|
2
|
All other loans
|
-
|
|
-
|
|
-
|
|
-
|
|
3,600
|
|
3,600
|
|
-
|
Total
|
$2,173
|
|
$2,876
|
|
$3,277
|
|
$8,326
|
|
$519,373
|
|
$527,699
|
|
$606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and
agricultural
|
$ 405
|
|
$167
|
|
$ 716
|
|
$1,288
|
|
$ 65,009
|
|
$ 66,297
|
|
$ 500
|
Real estate
construction
|
368
|
|
117
|
|
35
|
|
520
|
|
48,628
|
|
49,148
|
|
35
|
Real estate
mortgage
|
1,093
|
|
349
|
|
2,238
|
|
3,680
|
|
391,576
|
|
395,256
|
|
1,441
|
Installment
loans to individuals
|
210
|
|
81
|
|
13
|
|
304
|
|
31,289
|
|
31,593
|
|
10
|
All other loans
|
-
|
|
-
|
|
-
|
|
-
|
|
5,409
|
|
5,409
|
|
-
|
Total
|
$2,076
|
|
$714
|
|
$3,002
|
|
$5,792
|
|
$541,911
|
|
$547,703
|
|
$1,986
|
69
Non-accrual loans
as of December 31, 2011 and 2010 by category were as follows (in thousands):
|
2011
|
|
2010
|
Commercial, financial and agricultural
|
$ 675
|
|
$ 369
|
Real estate construction
|
1,018
|
|
854
|
Real estate mortgage
|
5,358
|
|
2,545
|
Installment loans to individuals
|
259
|
|
249
|
All other loans
|
-
|
|
131
|
Total
|
$7,310
|
|
$4,148
|
Credit risk
management procedures include assessment of loan quality through use of an
internal loan rating system. Each loan is assigned a rating upon origination
and the rating may be revised over the life of the loan as circumstances
warrant. The rating system utilizes eight major classification types based on
risk of loss with Grade 1 being the lowest level of risk and Grade 8 being the
highest level of risk. Loans internally rated Grade 1 to Grade 4 are
considered Pass grade loans with low to average level of risk of credit
losses. Loans rated Grade 5 are considered Special Mention and generally
have one or more circumstances that require additional monitoring but do not
necessarily indicate a higher level of probable credit losses. Loans rated
Grade 6 or higher are loans with circumstances that generally indicate an above
average level of risk for credit losses. Loans by internal risk rating by
category as of December 31, 2011 and 2010 were as follows (in thousands):
|
Grades 1-4
|
|
Grade 5
|
|
Grades 6-8
|
|
Total
|
December 31,
2011:
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$ 70,399
|
|
$ 423
|
|
$ 1,352
|
|
$ 72,174
|
Real estate
construction
|
36,972
|
|
1,113
|
|
1,879
|
|
39,964
|
Real estate
mortgage
|
362,686
|
|
4,715
|
|
16,533
|
|
383,934
|
Installment
loans to individuals
|
27,701
|
|
9
|
|
317
|
|
28,027
|
All other loans
|
3,600
|
|
-
|
|
-
|
|
3,600
|
Total
|
$501,358
|
|
$6,260
|
|
$20,081
|
|
$527,699
|
|
|
|
|
|
|
|
|
December 31,
2010
:
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$ 64,297
|
|
$ 71
|
|
$ 1,929
|
|
$ 66,297
|
Real estate
construction
|
45,931
|
|
820
|
|
2,397
|
|
49,148
|
Real estate
mortgage
|
373,025
|
|
4,912
|
|
17,319
|
|
395,256
|
Installment
loans to individuals
|
31,136
|
|
14
|
|
443
|
|
31,593
|
All other loans
|
5,278
|
|
-
|
|
131
|
|
5,409
|
Total
|
$519,667
|
|
$5,817
|
|
$22,219
|
|
$547,703
|
|
|
|
|
|
|
|
|
Information regarding the
Companys impaired loans for the years ended December 31, 2011 and 2010 is as
follows (in thousands):
70
|
Recorded
Investment
|
Unpaid
Principal
Balance
|
Specific
Allowance
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
December 31, 2011:
|
|
|
|
|
|
With no specific allocation recorded:
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ -
|
$ -
|
N/A
|
$ 4
|
$ -
|
Real estate construction
|
-
|
-
|
N/A
|
168
|
-
|
Real estate mortgage
|
-
|
-
|
N/A
|
1,677
|
-
|
Installment loans to individuals
|
-
|
-
|
N/A
|
-
|
-
|
All other loans
|
-
|
-
|
N/A
|
-
|
-
|
With allocation recorded:
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 500
|
$ 500
|
$ 50
|
$ 538
|
$ -
|
Real estate construction
(1)
|
1,007
|
1,227
|
350
|
1,150
|
-
|
Real estate mortgage
(2)
|
5,132
|
5,132
|
427
|
5,333
|
31
|
Installment loans to individuals
(3)
|
158
|
158
|
33
|
182
|
-
|
All other loans
|
-
|
-
|
-
|
-
|
-
|
Total:
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 500
|
$ 500
|
$ 50
|
$ 542
|
$ -
|
Real estate construction
|
1,007
|
1,227
|
350
|
1,318
|
-
|
Real estate mortgage
|
5,132
|
5,132
|
427
|
7,011
|
31
|
Installment loans to individuals
|
158
|
158
|
33
|
182
|
-
|
All other loans
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
December 31, 2010:
|
|
|
|
|
|
With no specific allocation recorded:
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ -
|
$ -
|
N/A
|
$ 234
|
$ -
|
Real estate construction
|
841
|
841
|
N/A
|
1,799
|
34
|
Real estate mortgage
|
2,846
|
2,846
|
N/A
|
3,642
|
206
|
Installment loans to individuals
|
-
|
-
|
N/A
|
-
|
-
|
All other loans
|
-
|
-
|
N/A
|
-
|
-
|
With allocation recorded:
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 500
|
$ 500
|
$ 50
|
$ 436
|
$ 20
|
Real estate construction
|
742
|
742
|
375
|
4,743
|
-
|
Real estate mortgage
|
4,210
|
4,210
|
853
|
7,058
|
96
|
Installment loans to individuals
|
200
|
200
|
37
|
185
|
-
|
All other loans
|
-
|
-
|
-
|
265
|
-
|
Total:
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 500
|
$ 500
|
$ 50
|
$ 670
|
$ 20
|
Real estate construction
|
1,583
|
1,583
|
375
|
6,542
|
34
|
Real estate mortgage
|
7,056
|
7,056
|
853
|
10,700
|
302
|
Installment loans to individuals
|
200
|
200
|
37
|
185
|
-
|
All other loans
|
-
|
-
|
-
|
265
|
-
|
(1)
|
Impaired total for this
category includes troubled debt restructurings with recorded investment
totaling approximately $678,000 and a specific allowance of approximately $350,000.
|
(2)
|
Impaired total for this
category includes troubled debt restructurings with recorded investment
totaling $3.2 million and specific allowance of approximately $392,000.
|
(3)
|
Impaired total for this
category includes troubled debt restructurings with recorded investment
totaling approximately $146,000 and a specific allowance of approximately
$28,000.
|
|
|
71
The Company
adopted amendments in Accounting Standards Codification Update (ASU) No. 2011-01
Receivables (Topic 310) (ASU 2011-01) as of September 30, 2011. As a
result, the Company reviewed loans classified as troubled debt restructurings
(TDRs) that had been restructured during the year ended December 31, 2011 and
confirmed that TDRs with a balance greater than or equal to $250,000 deemed to be
impaired were properly identified as such and reviewed individually for
impairment as reported in the impaired loan table above. Loans meeting the
criteria to be classified as TDRs with a balance less than $250,000 have
historically been reviewed on a collective basis by risk code and loan
category. Reassessment of these loans on an individual basis upon adoption of
the ASU 2011-01 for impairment did not result in a significant difference in
the required allowance, as the aggregate balance of loans reviewed was less
than $20,000.
Generally, loans
are appropriately risk rated and identified for individual impairment review
prior to when the restructure occurs. Thus, in the normal life cycle of a
loan, any specific allocations are usually made prior to a formal restructuring
or at least at the time of restructuring rather than subsequent to
modification. Therefore, adoption of these amendments did not have a material
impact on the volume of loans classified as TDRs or the related allowance for
loan losses associated with TDRs as if December 31, 2011. Also, TDRs are
included in non-accrual loans as reported in the above tables unless the loan
has performed according to the modified terms for a length of time sufficient
to support placing the loan on accrual status (generally six months). Loans
that were restructured during the year ended December 31, 2011 consisted of the
following (dollars in thousands):
|
2011
|
|
Number of
Contracts
|
|
Pre-Modification
Outstanding Recorded
Investment
|
|
Post-Modification
Outstanding Recorded
Investment
|
Troubled debt
restructurings:
|
|
|
|
|
|
Commercial,
financial and agricultural
|
4
|
|
$ 695
|
|
$ 643
|
Real estate
construction
|
3
|
|
774
|
|
680
|
Real estate
mortgage
|
14
|
|
5,841
|
|
5,571
|
Installment
loans to individuals
|
25
|
|
276
|
|
201
|
All other
loans
|
-
|
|
-
|
|
-
|
Total
|
46
|
|
$7,586
|
|
$7,095
|
Modification of
the terms of the TDRs reported in the above table did not have a material
impact on the consolidated financial statements or to the overall risk profile
of the loan portfolio. There were no TDRs that were modified during the year
ended December 31, 2010 that re-defaulted in the year ended December 31, 2011.
The allowance for loan losses associated with the TDRs totaled approximately
$770,000 as of December 31, 2011.
NOTE 5 ALLOWANCE FOR LOAN
LOSSES
The following
table presents the breakdown of the allowance for loan losses by category and
the percentage of each category in the loan portfolio to total loans at
December 31 for the years indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 1,469
|
13.68%
|
$ 944
|
12.10%
|
$ 959
|
12.14%
|
$ 864
|
13.46%
|
$ 750
|
13.77%
|
Real estate construction
|
1,614
|
7.57%
|
1,295
|
8.97%
|
1,148
|
11.31%
|
1,399
|
16.31%
|
1,340
|
18.25%
|
Real estate mortgage
|
4,534
|
72.76%
|
5,299
|
72.17%
|
5,811
|
69.30%
|
4,537
|
62.96%
|
3,747
|
60.49%
|
Installment loans to individuals
|
381
|
5.31%
|
462
|
5.77%
|
694
|
5.80%
|
431
|
6.07%
|
459
|
6.35%
|
All other loans
|
41
|
0.68%
|
28
|
0.99%
|
172
|
1.45%
|
69
|
1.20%
|
32
|
1.14%
|
Total
|
$8,039
|
100.0%
|
$8,028
|
100.0%
|
$8,784
|
100.0%
|
$7,300
|
100.0%
|
$6,328
|
100.0%
|
An analysis of
the allowance for loan losses during the years ended December 31 is as follows
(in thousands):
72
|
|
2011
|
|
2010
|
|
2009
|
Balance - beginning of year
|
|
$ 8,028
|
|
$ 8,784
|
|
$ 7,300
|
Provision for loan losses
|
|
2,425
|
|
7,000
|
|
7,060
|
Loans charged to allowance
|
|
(2,675)
|
|
(8,187)
|
|
(5,951)
|
Recovery of loans previously
charged off
|
|
261
|
|
431
|
|
375
|
Net charge-offs
|
|
(2,414)
|
|
(7,756)
|
|
(5,576)
|
Balance - end of year
|
|
$ 8,039
|
|
$ 8,028
|
|
$ 8,784
|
An analysis of
the activity in the allowance for loan losses by category for the year ended
December 31, 2011 is as follows:
|
Beginning Balance
|
|
Charge-offs
|
|
Recoveries
|
|
Provision
|
|
Ending Balance
|
Allowance for
loan losses:
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$ 944
|
|
$ (837)
|
|
$ 81
|
|
$1,281
|
|
$1,469
|
Real estate
construction
|
1,295
|
|
(646)
|
|
50
|
|
915
|
|
1,614
|
Real estate
mortgage
|
5,299
|
|
(994)
|
|
68
|
|
161
|
|
4,534
|
Installment
loans to individuals
|
462
|
|
(185)
|
|
62
|
|
42
|
|
381
|
All other loans
|
28
|
|
(13)
|
|
-
|
|
26
|
|
41
|
Total
|
$8,028
|
|
$(2,675)
|
|
$261
|
|
$2,425
|
|
$8,039
|
The allowance
for loan losses is comprised of allocations for loans evaluated individually
and loans evaluated collectively for impairment. The allocations of the allowance
for loan losses for outstanding loans by category evaluated individually and
collectively were as follows as of December 31, 2011 and 2010 (in thousands):
73
|
Evaluated
|
|
Evaluated
|
|
|
|
Individually
|
|
Collectively
|
|
Total
|
As of December 31, 2011:
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 50
|
|
$ 1,419
|
|
$ 1,469
|
Real estate construction
|
350
|
|
1,264
|
|
1,614
|
Real estate mortgage
|
427
|
|
4,107
|
|
4,534
|
Installment loans to individuals
|
33
|
|
348
|
|
381
|
All other loans
|
-
|
|
41
|
|
41
|
Total
|
$860
|
|
$7,179
|
|
$8,039
|
Loans
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 500
|
|
$71,674
|
|
$72,174
|
Real estate construction
|
1,007
|
|
38,957
|
|
39,964
|
Real estate mortgage
|
5,132
|
|
378,802
|
|
383,934
|
Installment loans to individuals
|
158
|
|
27,869
|
|
28,027
|
All other loans
|
-
|
|
3,600
|
|
3,600
|
Total
|
$6,797
|
|
$520,902
|
|
$527,699
|
As of December 31, 2010:
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 50
|
|
$ 894
|
|
$ 944
|
Real estate construction
|
375
|
|
920
|
|
1,295
|
Real estate mortgage
|
853
|
|
4,446
|
|
5,299
|
Installment loans to individuals
|
37
|
|
425
|
|
462
|
All other loans
|
-
|
|
28
|
|
28
|
Total
|
$1,315
|
|
$6,713
|
|
$8,028
|
Loans
|
|
|
|
|
|
Commercial, financial and agricultural
|
$500
|
|
$65,797
|
|
$ 66,297
|
Real estate construction
|
1,583
|
|
47,565
|
|
49,148
|
Real estate mortgage
|
7,056
|
|
388,200
|
|
395,256
|
Installment loans to individuals
|
200
|
|
31,393
|
|
31,593
|
All other loans
|
-
|
|
5,409
|
|
5,409
|
Total
|
$ 9,339
|
|
$538,364
|
|
$547,703
|
NOTE 6 SECONDARY MORTGAGE
MARKET ACTIVITIES
Mortgage loans originated and
intended for sale in the secondary market are carried at the lower of aggregate
cost or market, as determined by outstanding commitments from investors. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings. There were no such losses for any of the years ended December 31, 2011,
2010 or 2009. There have been no material differences between cost and fair
market values of loans held for sale for any of the periods presented.
Servicing rights
are not retained on any mortgage loans held for sale. Mortgage banking income
included in non-interest income was approximately $830,000 for the year ended
December 31, 2011 and $1.1 million for each of the years ended December 31, 2010
and 2009.
NOTE 7 PREMISES AND
EQUIPMENT
Premises and
equipment used in the ordinary course of business at December 31 are summarized
as follows (dollars in thousands):
74
|
|
Useful Lives in Years
|
|
2011
|
|
2010
|
Land
|
|
|
|
$ 8,479
|
|
$ 8,479
|
Buildings
|
|
5 to 50
|
|
28,748
|
|
28,444
|
Furniture and equipment
|
|
3 to 20
|
|
14,903
|
|
14,264
|
Total premises and equipment
|
|
|
|
52,130
|
|
51,187
|
Less: accumulated depreciation
|
|
|
|
22,577
|
|
20,919
|
Net premises and equipment
|
|
|
|
$29,553
|
|
$30,268
|
NOTE 8 GOODWILL AND OTHER
INTANGIBLE ASSETS
Goodwill is not amortized but
tested at least annually for impairment. No impairment charges were recorded
for any periods presented in the Consolidated Financial Statements. There was
no activity in goodwill during the years ended December 31, 2011, 2010 and 2009.
Total goodwill as of December 31, 2011 was $11.8 million or 1.12% of total
assets and 11.7% of total capital.
Other
identifiable intangibles consisted of core deposit intangibles being amortized
over a ten-year period as of December 31 as follows (in thousands):
|
|
2011
|
|
2010
|
Core deposit intangible
|
|
$845
|
|
$845
|
Accumulated amortization
|
|
(810)
|
|
(725)
|
Net core deposit
intangible
|
|
$ 35
|
|
$120
|
Amortization
expense was approximately $84,500 per year for 2011, 2010 and 2009. The
remaining core deposit intangible totaling approximately $35,000 will be fully
amortized in 2012.
NOTE 9 OTHER REAL ESTATE OWNED
The carrying
value of other real estate owned on the Consolidated Balance Sheets was $11.1
million as of December 31, 2011 and $14.7 million as of December 31, 2010. The
value of OREO is based on the lower of cost or fair value less cost to sell.
Fair value is based on independent appraisals for significant properties and
may be adjusted by management as discussed in Note 20.
NOTE 10 BANK-OWNED LIFE INSURANCE
AND IMPUTED INCOME TAX REIMBURSEMENT AGREEMENTS
The Bank has a
significant investment in bank-owned life insurance policies (BOLI) and
provides endorsement split dollar life insurance to certain employees in the
position of Vice President and higher after one year of service. The cash
surrender values of BOLI were $21.4 million and $21.7 million as of December
31, 2011 and 2010, respectively. BOLI are initially recorded at the amount of
premiums paid and are adjusted to current cash surrender values. Changes in
cash surrender values are recorded in other non-interest income and are based
on premiums paid less expenses plus accreted interest income. Earnings on BOLI
resulted in non-interest income of approximately $736,000, $677,000 and $832,000
for the years ended December 31, 2011, 2010 and 2009, respectively.
The Company
adopted guidance in FASB ASC Subtopic 715-60, Compensation Retirement
Benefits Defined Benefit Plans Postretirement effective January 1, 2008.
The cumulative effective adjustment to retained earnings for the change in
accounting principle was recorded January 1, 2008, in the amount of $1.9
million to accrue the post-retirement death benefits for endorsement split
dollar life insurance plans. Expense related to these accruals is reflected in
Salaries and Employee Benefits on the Consolidated Statements of Income and was
approximately $61,000, $175,000, and $164,000 for the years ended December 31, 2011,
2010 and 2009, respectively. The accrual for the post-retirement death
benefits is included in Other Liabilities on the Consolidated Balance Sheet and
totaled $2.4 million as of December 31, 2011 and 2010.
75
Because the endorsement
split dollar life insurance plans create imputed income to each applicable participant
without generating cash to pay the tax expense associated with the imputed
income, the Bank entered into Imputed Income Tax Reimbursement Agreements with the
applicable officers. The Imputed Income Tax Reimbursement Agreements provide
for annual cash payments to the participants until death for the previous tax
year in amounts equal to a portion of federal income taxes attributable to (i)
the income imputed to the applicable participant on the benefit under the
Amended and Restated Split Dollar Agreement and (ii) the additional cash
payments under the Imputed Income Tax Reimbursement Agreement. Each participant
was 100% vested in benefits provided under Imputed Income Tax Reimbursement
Agreements as of January 1, 2008. Service costs are based on the net present
value of the sum of payments in accordance with each participants agreement.
Interest accrues monthly at a rate of 7.0%.
Net other
post-retirement benefits expense for Imputed Income Tax Reimbursement
Agreements was as follows for the years ended December 31 (in thousands):
|
2011
|
|
2010
|
Service cost
|
$ -
|
|
$ -
|
Interest cost
|
26
|
|
25
|
Net other post-retirement
benefits expense
|
$26
|
|
$25
|
The
accumulated post-retirement defined benefit obligation for Imputed Income Tax
Reimbursement Agreements was as follows for the years ended December 31 (in
thousands):
Accumulated other
post-retirement benefit obligation:
|
2011
|
|
2010
|
Beginning balance
|
$392
|
|
$382
|
Service cost
|
-
|
|
-
|
Interest cost
|
26
|
|
25
|
Benefit payments
|
(15)
|
|
(15)
|
Ending balance
|
$403
|
|
$392
|
The
accumulated post-retirement benefit obligation was included in Other
Liabilities as of December 31, 2011 and 2010 and was equal to the funded status
of the plan as of each applicable year-end, as there were no related assets
recognized on the Consolidated Balance Sheet for the Imputed Income Tax
Reimbursement Agreements.
NOTE 11 DEPOSITS
Included in
deposits shown at December 31 was the following time and savings deposits in denominations
of $100,000 to $250,000 and greater than $250,000 (in thousands):
|
2011
|
|
2010
|
Time deposits
|
|
|
|
Greater than $100,000 but
less than $250,000
|
$105,503
|
|
$103,518
|
Greater than $250,000
|
86,234
|
|
110,159
|
Savings deposits
|
|
|
|
Greater than $100,000 but
less than $250,000
|
$ 81,087
|
|
$ 69,064
|
Greater than $250,000
|
197,442
|
|
141,600
|
NOW accounts, included in
savings deposits on the Consolidated Balance Sheets, totaled $76.7 million as
of December 31, 2011 and $59.8 million as of December 31, 2010. Demand deposit
balances reclassified as loans consisted of overdrafts totaling approximately $607,000
and $423,000 as of December 31, 2011 and 2010, respectively.
76
Time deposits were
maturing as follows at December 31, 2011 (in thousands):
On or before December 31, 2012
|
|
$306,328
|
On or during year ended December 31, 2013
|
|
20,168
|
On or during year ended December 31, 2014
|
|
2,841
|
On or during year ended December 31, 2015
|
|
2,565
|
During or after year ended December 31, 2016
|
|
9,239
|
|
|
$341,141
|
NOTE 12 FEDERAL FUNDS
PURCHASED AND OTHER SHORT-TERM BORROWINGS
The Bank has various
sources of short-term borrowings, which consist primarily of cash management
advances from the FHLB and federal funds purchased from correspondent banks.
Short-term borrowings are used to manage seasonal fluctuations in liquidity.
The Bank was an Option
B bank in regards to the Federal Reserves Treasury, Tax and Loan Service
(TT&L) and up to $1 million in TT&L payments collected are retainable
as a short-term option note. The TT&L program ended as of December 31,
2011 and there was a zero balance on the demand note as of year-end 2011. The
balance of this line was $1 million as of December 31, 2010.
Cash management
advances from FHLB are secured by one-to-four family first mortgages under the
blanket collateral pledge agreement that also collateralizes long-term advances
from FHLB and have maturities of 90 days or less. See Note 13 for more
information about maximum borrowing capacity with FHLB. There were no
short-term borrowings outstanding against this line as of December 31, 2011 or
2010.
The Bank has
federal fund lines of credit available with four correspondent banks totaling $54.5
million. There were no federal funds purchased as of December 31, 2011 or 2010.
The following tabular analysis
presents short-term borrowing year-end balance, maximum month-end balance, annual
average and weighted average interest rates for the years ended December 31, 2011,
2010 and 2009 (dollars in thousands):
|
2011
|
2010
|
2009
|
Amount outstanding at end of
year
|
$ -
|
$1,000
|
$ 748
|
Weighted average interest
rate at end of year
|
%
|
%
|
%
|
Maximum outstanding at any
month end
|
$5,000
|
$1,000
|
$1,000
|
Average outstanding during
year
|
$1,666
|
$667
|
$1,029
|
Weighted average interest
rate during year
|
%
|
%
|
%
|
NOTE 13 OTHER BORROWINGS
In March 2005,
the Company formed a wholly owned subsidiary -- First Citizens (TN) Statutory
Trust III. The trust was created as a Delaware statutory trust for the sole
purpose of issuing and selling trust preferred securities and using proceeds
from the sale to acquire long-term subordinated debentures issued by the
Company. The debentures are the sole assets of the trust. The Company owns
100% of the common stock of the trust.
On March 17,
2005, the Company, through First Citizens (TN) Statutory Trust III, sold 5,000
of its floating rate trust preferred securities at a liquidation amount of
$1,000 per security for an aggregate amount of $5.0 million. For the period
beginning on (and including) the date of original issuance and ending on (but
excluding) June 17, 2005, the rate per annum was 4.84%. For each successive
period beginning on (and including) June 17, 2005, and each succeeding interest
payment date, interest accrues at a rate per annum equal to the three-month
LIBOR plus 1.80%. Interest payment dates are March 17, June 17, September 17,
and December 17 during the 30-year term. The entire $5.0 million in proceeds
was used to reduce other debt at the Company. The Companys obligation under
the debentures and related documents constitute a full and unconditional guarantee
by the Company of the trust issuers obligations under the trust preferred
securities.
77
In March 2007,
the Company formed a wholly owned subsidiary -- First Citizens (TN) Statutory
Trust IV. The trust was created as a Delaware statutory trust for the sole
purpose of issuing and selling trust preferred securities and using proceeds
from the sale to acquire long-term subordinated debentures issued by the
Company. The debentures are the sole assets of the trust. The Company owns
100% of the common stock of the trust.
In March 2007,
the Company, through First Citizens (TN) Statutory Trust IV, sold 5,000 of its
floating rate trust preferred securities at a liquidation amount of $1,000 per
security for an aggregate amount of $5.0 million. For the period beginning on
(and including) the date of original issuance and ending on (but excluding)
June 15, 2007, the rate per annum was 7.10%. For each successive period
beginning on (and including) June 15, 2007, and each succeeding interest
payment date, interest accrues at a rate per annum equal to the three-month
LIBOR plus 1.75%. Interest payment dates are March 15, June 15, September 15,
and December 15 during the 30-year term. The purpose of proceeds was to
refinance the debt issued through First Citizens (TN) Statutory Trust II at a
lower spread to LIBOR and results in savings of approximately $92,500
annually. First Citizens (TN) Statutory Trust II was dissolved as a result of
this transaction. The Companys obligation under the debentures and related
documents constitute a full and unconditional guarantee by the Company of the
trust issuers obligations under the trust preferred securities.
Although for
accounting presentation the trust preferred securities are presented as debt,
the outstanding balance qualifies as Tier I capital subject to the limitation
that the amount of the securities included in Tier I Capital cannot exceed 25%
of total Tier I capital.
The Company is
dependent on the profitability of its subsidiaries and their ability to pay
dividends in order to service its long-term debt.
The Bank had
secured advances from the FHLB totaling $37.1 million as of December 31, 2011
and $41.9 million as of December 31, 2010. FHLB borrowings are comprised
primarily of advances with principal due at call date or maturity date with
fixed interest rates ranging from 0.62% to 7.05%. Some of these FHLB
borrowings have quarterly call features and maturities ranging from 2012 to 2019.
Advances totaling $16 million require repayment if the call feature is
exercised. Under the existing and forecasted rate environments, borrowings
with call features in place are not likely to be called in the next 12 months.
The Bank had one London Interbank Offered Rate (LIBOR) based variable rate
advance totaling $2.5 million with a rate of 0.34% as of December 31, 2011. Also
included in the FHLB borrowings total reported above is a pool of smaller
balance amortizing advances that totaled $1.0 million as of year-end 2011 and $1.4
million as of year-end 2010. These smaller balance advances have rates ranging
from 3.34% to 7.05% and maturities range from 2012 to 2019. Obligations are
secured by loans totaling $363 million consisting of the Banks entire
portfolio of fully disbursed, one-to-four family residential mortgages,
commercial mortgages, farm mortgages, second mortgages and multi-family
residential mortgages. The Bank had additional borrowing capacity with the
FHLB of $115.5 million as of December 31, 2011.
Annual average
volume, rates and maturities of other borrowings for the years ended December
31, 2011 and 2010 were as follows (dollars in thousands):
|
|
Average
|
|
Average
|
|
Average
|
|
|
Volume
|
|
Interest Rate
|
|
Maturity
|
2011
|
|
|
|
|
|
|
First Citizens Bancshares,
Inc.
|
|
$10,310
|
|
2.11%
|
|
25 years
|
First Citizens National Bank
|
|
37,568
|
|
2.50%
|
|
3 years
|
2010
|
|
|
|
|
|
|
First Citizens Bancshares,
Inc.
|
|
$10,310
|
|
2.14%
|
|
25 years
|
First Citizens National Bank
|
|
60,902
|
|
4.26%
|
|
3 years
|
Maturities of
principal of other borrowings for the following five years were as follows as
of December 31, 2011 (in thousands):
78
2012
|
|
$ 3,351
|
2013
|
|
15,165
|
2014
|
|
2,105
|
2015
|
|
2,083
|
2016
|
|
88
|
Thereafter
|
|
24,536
|
|
|
$47,328
|
NOTE 14 INCOME TAXES
Provision for income taxes was
comprised of the following for the years ended December 31 (in thousands):
|
|
2011
|
|
2010
|
|
2009
|
Income tax expense
(benefit):
|
|
|
|
|
|
|
Current
|
|
$3,426
|
|
$1,957
|
|
$2,754
|
Deferred
|
|
(10)
|
|
65
|
|
(789)
|
State income tax expense
(benefit of operating loss carryforwards)
|
84
|
|
(164)
|
|
41
|
Change in valuation
allowance
|
|
(84)
|
|
164
|
|
(41)
|
|
|
$3,416
|
|
$2,022
|
|
$1,965
|
Effective tax
rates for the years ended December 31, 2011, 2010 and 2009 differed from
federal statutory rate of 34% applied to income before income taxes as a result
of the following (in thousands):
|
2011
|
|
2010
|
|
2009
|
Tax expenses at statutory
rate
|
$5,195
|
|
$3,705
|
|
$3,499
|
(Decrease) increase
resulting from:
|
|
|
|
|
|
Tax exempt interest income
|
(1,598)
|
|
(1,340)
|
|
(1,207)
|
Net earnings on bank-owned
life insurance
|
(207)
|
|
(171)
|
|
(193)
|
ESOP dividend
|
(109)
|
|
(261)
|
|
(265)
|
Other items
|
135
|
|
89
|
|
131
|
|
$3,416
|
|
$2,022
|
|
$1,965
|
In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefit of these deductible differences. However,
the amount of deferred tax assets considered realizable could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced. Deferred tax assets and liabilities were comprised of the
following as of December 31 for the years indicated (in thousands):
79
|
|
2011
|
|
2010
|
|
2009
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$2,734
|
|
$2,714
|
|
$2,987
|
Impairment loss on equity securities
|
|
618
|
|
618
|
|
615
|
Impairment loss on debt securities
|
|
436
|
|
419
|
|
221
|
Net unrealized loss on cash flow hedge
|
|
-
|
|
-
|
|
43
|
Deferred loan fees
|
|
83
|
|
94
|
|
111
|
State income tax benefit for net operating loss carryforwards
|
|
1,475
|
|
1,559
|
|
1,395
|
Imputed income tax reimbursement plan
|
|
137
|
|
133
|
|
130
|
Unrealized loss on other real estate owned
|
|
843
|
|
498
|
|
119
|
Other
|
|
59
|
|
41
|
|
73
|
Total deferred tax assets
|
|
6,385
|
|
6,076
|
|
5,694
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Depreciation
|
|
(2,386)
|
|
(2,240)
|
|
(2,046)
|
FHLB stock dividends
|
|
(742)
|
|
(742)
|
|
(748)
|
Net unrealized gain on available-for-sale debt securities
|
|
(5,461)
|
|
(1,177)
|
|
(2,684)
|
Prepaid expenses
|
|
(126)
|
|
(121)
|
|
(113)
|
Other
|
|
(252)
|
|
-
|
|
-
|
Total deferred tax liabilities
|
|
(8,967)
|
|
(4,280)
|
|
(5,591)
|
Valuation allowance for state income tax benefit
|
|
(1,475)
|
|
(1,559)
|
|
(1,395)
|
Net deferred tax
assets (liabilities)
|
|
$(4,057)
|
|
$ 237
|
|
$(1,292)
|
At year-end 2011,
the Company had a net operating loss carryforward for state tax purposes of $2.6
million expiring in 2020, $6.1 million expiring in 2021, $8.2 million expiring
in 2022, $3.4 million expiring in 2023 and an estimated $2.3 million expiring
in 2025. As of December 31, 2011 and 2010, the Company had no unrecognized tax
benefits. The Companys policy is to recognize penalties and interest on
unrecognized tax benefits in Provision for Income Tax Expense in the
Consolidated Statements of Income. There were no amounts related to interest
and penalties recognized for each of the years ended December 31, 2011, 2010
and 2009. The tax years subject to examination by federal and state taxing
authorities are the years ended December 31, 2011, 2010, 2009 and 2008.
NOTE 15 REGULATORY MATTERS
The Company is
subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company and the
Consolidated Financial Statements. The regulations require the Bank to meet
specific capital adequacy guidelines that involve quantitative measures of the
Banks assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks capital classification is
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of Tier I
capital (as defined in the regulations) to total average assets (as defined),
and minimum ratios of Tier I and total risk-based capital (as defined) to
risk-weighted assets (as defined). To be considered adequately capitalized (as
defined) under the regulatory framework for prompt corrective action, the Bank
must maintain minimum Tier I leverage, Tier I risk-based and total risk-based
ratios as set forth in the table. The Banks actual capital amounts and ratios
are presented in the table below.
As of December
31, 2011, the most recent notification from the Banks primary regulatory
authorities categorized the Bank and the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since notification that management believes have changed
the institutions category.
80
The Companys
and the Banks actual and minimum capital amounts and ratios are presented in
the following table (dollars in thousands):
December 31, 2011:
|
Actual
|
For Capital
Adequacy Purposes
|
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Total capital to risk weighted assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
$100,456
|
17.0%
|
$47,218
|
8.0%
|
N/A
|
10.0%
|
First Citizens National Bank
|
99,771
|
16.9%
|
47,201
|
8.0%
|
$59,001
|
10.0%
|
Tier I capital to risk weighted assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
93,063
|
15.8%
|
23,605
|
4.0%
|
N/A
|
6.0%
|
First Citizens National Bank
|
92,407
|
15.7%
|
23,603
|
4.0%
|
35,405
|
6.0%
|
Tier I capital to average assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
93,063
|
9.2%
|
40,418
|
4.0%
|
N/A
|
5.0%
|
First Citizens National Bank
|
92,407
|
9.2%
|
40,397
|
4.0%
|
50,496
|
5.0%
|
December 31, 2010:
|
|
|
|
|
|
|
Total capital to risk weighted assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
$93,301
|
15.4%
|
$48,563
|
8.0%
|
N/A
|
10.0%
|
First Citizens National Bank
|
92,643
|
15.3%
|
48,568
|
8.0%
|
$60,710
|
10.0%
|
Tier I capital to risk weighted assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
85,695
|
14.1%
|
24,293
|
4.0%
|
N/A
|
6.0%
|
First Citizens National Bank
|
85,080
|
14.0%
|
24,291
|
4.0%
|
36,437
|
6.0%
|
Tier I capital to average assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
85,695
|
8.9%
|
38,385
|
4.0%
|
N/A
|
5.0%
|
First Citizens National
Bank
|
85,080
|
8.9%
|
38,368
|
4.0%
|
47,959
|
5.0%
|
NOTE 16 CAPITAL
The Company is
subject to capital adequacy requirements imposed by the Federal Reserve. In
addition, the Bank is restricted by the Office of the Comptroller of the
Currency from paying dividends in an amount in excess of the net earnings of
the current year plus retained profits of the preceding two years. As of December
31, 2011, $15.9 million of retained earnings were available for future
dividends from the Bank to the Company.
Accumulated
Other Comprehensive Income as of December 31, 2011 and 2010 was as follows (in
thousands):
|
2011
|
|
2010
|
Unrealized gains on
available-for-sale securities without other-than-temporary impairment, net of
tax
|
$9,614
|
|
$2,501
|
Unrealized losses on
available-for-sale securities with other-than-temporary impairment, net of
tax
|
(813)
|
|
(605)
|
Total accumulated
other comprehensive income
|
$8,801
|
|
$1,896
|
NOTE 17 RELATED PARTY
TRANSACTIONS
The Company has
loans and deposits with certain executive officers, directors and their
affiliates. The Company also enters into contracts with certain related
parties from time to time such as for construction of a branch. All related
party transactions are entered into under substantially the same terms as
unrelated third-party transactions. All material contracts are awarded based
on competitive bids.
Activity in
loans to executive officers, directors and their affiliates was as follows for
the years ended December 31, 2011, 2010 and 2009 (in thousands):
81
|
|
2011
|
|
2010
|
|
2009
|
Balance at beginning of period
|
|
$11,645
|
|
$10,575
|
|
$16,076
|
New loans
|
|
5,463
|
|
4,569
|
|
6,369
|
Repayments
|
|
(10,619)
|
|
(3,499)
|
|
(11,870)
|
Balance at end of period
|
|
$6,489
|
|
$11,645
|
|
$10,575
|
There were no
charged-off, restructured or non-current loans to related parties for any of
the periods presented. Loans to related parties are made on substantially the
same terms as third-party transactions.
Indebtedness
shown represents amounts owed by directors and executive officers of the
Company and the Bank and by entities in which such persons are general partners
or have at least 10% or greater interest and trust and estates in which they
have a substantial beneficial interest. All loans have been made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others and do not
involve other than normal risks of collectibility.
The Bank routinely enters into
deposit relationships with its directors, officers and employees in the normal
course of business. These deposits bear the same terms and conditions as those
prevailing at the time for comparable transactions with unrelated parties.
Balances of executive officers and directors on deposit as of December 31, 2011
and 2010 were $21.0 million and $14.8 million, respectively.
Contracts for certain
construction projects such as renovations for branch facilities were awarded on
a competitive bid basis to related parties. Contract payments paid to related
parties totaled less than $40,000 in 2011, less than $155,000 in 2010 and less
than $50,000 in 2009.
NOTE 18
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a
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 include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk not
recognized in the statement of financial position.
The Bank's
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. The
same policies are utilized in making commitments and conditional obligations as
are used for creating on-balance sheet instruments. Ordinarily, collateral or
other security is not required to support financial instruments with
off-balance sheet risk.
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. Loan commitments generally have
fixed expiration dates or other termination clauses and may require payment of
a fee. Since many commitments are expected to expire without being drawn upon,
total commitment amounts do not necessarily represent future cash requirements.
Each customer's credit-worthiness is evaluated on a case-by-case basis,
including the collateral required, if deemed necessary by the Bank upon
extension of credit, and is based on management's credit evaluation of the
counter party. At December 31, 2011 and 2010, the Bank had outstanding loan commitments
of $77.9 million and $78.1 million, respectively. As of year-end 2011,
variable rate commitments were $41.3 million and fixed rate commitments were
$36.6
million. As of year-end 2010, variable rate commitments were $52.0 million and
fixed rate commitments were $26.1 million. Of these commitments, none had an
original maturity in excess of one year.
Standby letters
of credit and financial guarantees are conditional commitments issued by the
Bank to guarantee performance of a customer to a third party. Those guarantees
are issued primarily to support public and private borrowing arrangements, and
the credit risk involved is essentially the same as that involved in extending
loans to customers. The Bank requires collateral to secure these commitments
when deemed necessary. At December 31, 2011 and 2010, outstanding standby
letters of credit totaled $2.4 million and $2.8 million, respectively.
In the normal
course of business, the Bank extends loans, which are subsequently sold to
other lenders, including agencies of the U.S. government. Certain of these
loans are conveyed with recourse creating off-balance sheet risk with regard to
the collectibility of the loan. At December 31, 2011 and 2010, the Bank had no
loans sold with recourse.
82
NOTE 19 SIGNIFICANT
CONCENTRATIONS OF CREDIT RISK
The Bank grants
agribusiness, commercial, residential and personal loans to customers
throughout a wide area of the mid-southern United States. A large majority of
the Bank's loans, however, are concentrated in the immediate vicinity of the
Bank, primarily in West Tennessee. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
obligations is dependent upon the agribusiness and industrial economic sectors
of that geographic area.
NOTE 20 FAIR VALUE
MEASUREMENTS
Recurring Basis
The following
are descriptions of valuation methodologies used for assets and liabilities
measured at fair value on a recurring basis.
Available-for-Sale
Securities
Fair values for available-for-sale
securities are obtained from a third party vendor and are valued using Level 2
inputs, except for TRUP CDOs which are accounted for using Level 3 inputs.
TRUP CDOs accounted for less than 1% of the portfolio at December 31, 2011 and
2010.
The markets for
TRUP CDOs and other similar securities were not active at December 31, 2011 or
2010. The inactivity was evidenced first by a significant widening of the
bid-ask spread in the brokered markets in which these securities trade and then
by a significant decrease in the volume of trades relative to historical
levels. The new issue market has also been relatively inactive.
The market
values for TRUP CDOs and other securities except for those issued or guaranteed
by the U.S. Treasury have been very depressed relative to historical levels.
For example, the yield spreads for the broad market of investment grade and
high yield corporate bonds reached all-time levels versus Treasuries at the end
of November 2008 and remained close to those levels at December 31, 2011.
Therefore, during 2011 and 2010, a low market price for a particular bond may
only have provided evidence of stress in credit markets in general rather than
being an indicator of credit problems with a particular issuer.
Given market
conditions for TRUP CDOs at December 31, 2011 and 2010 and the relative
inactivity in the secondary and new issue markets, the Company determined:
-
Few observable transactions existed and market quotations that
were available were not reliable for purposes of determining fair value as of
December 31, 2011 and 2010;
-
An income valuation approach (present value technique) that
maximized the use of relevant observable inputs and minimized the use of
unobservable inputs was equally or more representative of fair value than the
market approach valuation technique used at prior measurement dates; and
-
The Companys TRUP CDOs should be classified within Level 3 of
the fair value hierarchy because significant adjustments were required to
determine fair value at the measurement date.
The third
partys methodology and the approach to determining fair value as of December
31, 2011 and 2010 involved these steps:
-
The credit quality of the collateral was calibrated by assigning
default probabilities to each issuer;
-
Asset defaults were generated taking into account both the
probability of default of the asset and an assumed level of correlation among
the assets;
83
-
A 50% level of correlation was assumed among assets from the same
industry (e.g., banks with other banks) while a lower (30%) correlation level
is assumed among those from different industries;
-
The loss given default was assumed to be 100% (i.e., no
recovery);
-
The cash flows were forecast for the underlying collateral and
applied to each TRUP CDO tranche to determine the resulting distribution among
the securities;
-
The calculations were modeled in 10,000 scenarios using a Monte
Carlo engine;
-
The expected cash flows for each scenario were discounted using a
discount rate that the third party calculates for each bond that represents an
estimate of the yield that would be required in todays market for a bond with
a similar credit profile as the bond in question; and
-
The prices were aggregated and the average price was used for
valuation purposes.
The Company
recalculated the overall effective discount rates for these valuations. The
overall discount rates ranged from 0.50% to 21.87% and were highly dependent
upon the credit quality of the collateral, the relative position of the tranche
in the capital structure of the TRUP CDO and the prepayment assumptions.
Assets and
liabilities as of December 31, 2011 and 2010 measured at estimated fair value
on a recurring basis were as follows (in thousands):
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
|
|
Inputs
|
|
Inputs
|
|
Inputs
|
|
Value
|
December 31, 2011:
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
$ -
|
|
$364,912
|
|
$553
|
|
$365,465
|
December 31, 2010:
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
$ -
|
|
$294,384
|
|
$439
|
|
$294,823
|
The following
table presents a reconciliation and income statement classification of gains
and losses for all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the years ended December 31, 2011
and 2010 (in thousands):
|
2011
|
|
2010
|
|
Available-for-sale
securities
|
|
|
|
|
Beginning balance
|
$439
|
|
$1,727
|
|
Total unrealized gains
(losses) included in:
|
|
|
|
|
Net income
|
(48)
|
|
(583)
|
|
Other comprehensive
income
|
167
|
|
(705)
|
|
Purchases, sales,
issuances and settlements, net
|
(5)
|
|
-
|
|
Transfers in and (out) of
Level 3
|
-
|
|
-
|
|
Ending balance
|
$553
|
|
$439
|
|
Non-Recurring Basis
Certain assets
are measured at fair value on a non-recurring basis as described below.
84
Impaired
Loans
Impaired loans
are evaluated and valued at the time the loan is identified as impaired at the
lower of cost or fair value. Fair value is measured based on the value of the
collateral securing these loans. Collateral may be real estate and/or business
assets including equipment, inventory and/or accounts receivable. Independent
appraisals for collateral are obtained and may be discounted by management
based on historical experience, changes in market conditions from the time of
valuation and/or managements knowledge of the borrower and the borrowers
business. As such discounts may be significant, these inputs are considered
Level 3 in the hierarchy for determining fair value. Values of impaired loans
are reviewed on at least a quarterly basis to determine if specific allocations
in the reserve for loan losses are adequate.
Loans Held for Sale
Loans held for
sale are recorded at the lower of cost or fair value. Fair value of loans held
for sale are based upon binding contracts and quotes from third party investors
that qualify as Level 2 inputs for determining fair value. Loans held for sale
did not have an impairment charge in 2011 or 2010.
Other Real Estate Owned
OREO is recorded
at the lower of cost or fair value. Fair value is measured based on
independent appraisals and may be discounted by management based on historical
experience and knowledge and changes in market conditions from time of
valuation. As such discounts may be significant, these inputs are considered
Level 3 in the hierarchy for determining fair value. Values of OREO are
reviewed at least annually or more often if circumstances require more frequent
evaluations.
Assets as of
December 31, 2011 and 2010 measured at estimated fair value on a non-recurring
basis were as follows:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
|
|
Inputs
|
|
Inputs
|
|
Inputs
|
|
Value
|
December 31, 2011:
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Impaired loans
|
$ -
|
|
$ -
|
|
$ 6,797
|
|
$ 6,797
|
Loans held for sale
|
-
|
|
2,616
|
|
-
|
|
2,616
|
Other real estate owned
|
-
|
|
-
|
|
11,073
|
|
11,073
|
December 31, 2010:
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Impaired loans
|
$ -
|
|
$ -
|
|
$ 9,339
|
|
$ 9,339
|
Loans held for sale
|
-
|
|
2,777
|
|
-
|
|
2,777
|
Other real estate owned
|
-
|
|
-
|
|
14,734
|
|
14,734
|
Fair
Value Estimates
ASC 820 requires
disclosure of the estimated fair value of financial instruments for interim and
annual periods. The following assumptions were made and methods applied to
estimate the fair value of each class of financial instruments not measured at
fair value on the Consolidated Balance Sheets:
Cash and Cash Equivalents
For instruments
that qualify as cash equivalents, as described in Note 1, the carrying amount
is assumed to be fair value.
Interest Bearing Deposits in Other
Banks
Interest
bearing deposits in other banks consist of excess balances held at the Federal
Reserve Bank and short term CDs and the carrying amount is assumed to be fair
value.
85
Loans
Fair value of
variable-rate loans with no significant change in credit risk subsequent to
loan origination is based on carrying amounts. For other loans, such as fixed
rate loans, fair values are estimated utilizing discounted cash flow analyses,
applying interest rates currently offered for new loans with similar terms to
borrowers of similar credit quality. Fair values of loans that have
experienced significant changes in credit risk have been adjusted to reflect
such changes.
Accrued Interest Receivable
The fair values
of accrued interest receivable and other assets are assumed to be the carrying
value.
Federal Home Loan Bank and
Federal Reserve Bank Stock
Carrying amounts
of capital stock of the FHLB of Cincinnati and Federal Reserve Bank of St.
Louis approximate fair value.
Bank Owned Life Insurance
Carrying amount
of bank owned life insurance is the cash surrender value as of the end of the
periods presented and approximates fair value.
Deposit Liabilities
Demand Deposits
The fair values
of deposits which are payable on demand, such as interest bearing and
non-interest bearing checking accounts, passbook savings, and certain money
market accounts are equal to the carrying amount of the deposits.
Variable-Rate Deposits
The fair value
of variable-rate money market accounts and CDs approximate their carrying value
at the balance sheet date.
Fixed-Rate Deposits
For fixed-rate CDs,
fair values are estimated utilizing discounted cash flow analyses, which apply
interest rates currently being offered on CDs to a schedule of aggregated
monthly maturities on time deposits.
Other Borrowings
For securities
sold under repurchase agreements payable upon demand, the carrying amount is a
reasonable estimate of fair value. For securities sold under repurchase
agreements for a fixed term, fair values are estimated using the same
methodology as fixed rate time deposits discussed above. The fair value of the
advances from the FHLB and other long-term borrowings are estimated by
discounting the future cash outflows using the current market rates.
Other Liabilities
Fair value of other liabilities is
assumed to be the carrying values.
The carrying
amount and fair value of assets and liabilities as of December 31, 2011 and 2010
were as follows (in thousands):
86
|
2011
|
|
2010
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Financial assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$ 34,133
|
|
$ 34,133
|
|
$ 33,691
|
|
$ 33,691
|
Interest bearing deposits in other banks
|
40,138
|
|
40,138
|
|
6,271
|
|
6,271
|
Investment securities
|
365,465
|
|
365,465
|
|
294,823
|
|
294,823
|
Loans
|
527,699
|
|
|
|
547,703
|
|
|
Less: allowance for loan losses
|
(8,039)
|
|
|
|
(8,028)
|
|
|
Loans, net of allowance
|
519,660
|
|
519,269
|
|
539,675
|
|
540,479
|
Loans held for sale
|
2,616
|
|
2,616
|
|
2,777
|
|
2,777
|
Accrued interest receivable
|
5,306
|
|
5,306
|
|
5,215
|
|
5,215
|
Federal Reserve Bank and Federal
Home Loan Bank Stock
|
5,684
|
|
5,684
|
|
5,684
|
|
5,684
|
Other real estate owned
|
11,073
|
|
11,073
|
|
14,734
|
|
14,734
|
Bank owned life insurance
|
21,438
|
|
21,438
|
|
21,656
|
|
21,656
|
Financial liabilities
|
|
|
|
|
|
|
|
Deposits
|
855,672
|
|
857,299
|
|
$791,845
|
|
$793,978
|
Short-term borrowings
|
36,471
|
|
36,550
|
|
35,309
|
|
35,402
|
Other borrowings
|
47,328
|
|
49,230
|
|
52,259
|
|
52,359
|
Other liabilities
|
10,610
|
|
10,610
|
|
5,686
|
|
5,686
|
Off-balance sheet arrangements
|
|
|
|
|
|
|
|
Commitments to extend credit
|
$ 77,861
|
|
$ 77,861
|
|
$ 78,107
|
|
$ 78,107
|
Standby letters of credit
|
2,410
|
|
2,410
|
|
2,752
|
|
2,752
|
NOTE 21 EMPLOYEE STOCK
OWNERSHIP AND 401(k) PLANS
The Bank maintains the First
Citizens National Bank of Dyersburg Employee Stock Ownership Plan (the ESOP)
and the First Citizens National Bank 401(k) Plan (the 401(k) Plan) as
employee benefits. The plans provide for a contribution annually not to exceed
25% of the total compensation of all participants and afford eligibility for participation
to all full-time employees who have completed at least one year of service and
are age 21 or older.
The Company annually contributes
amounts equal to 3% of total eligible compensation to the 401(k) Plan and a
discretionary percentage of total eligible compensation to the ESOP. The
discretionary percentage of total eligible compensation was 6% for 2011 and 2%
for 2010. Total eligible compensation for both plans consists of total
compensation subject to income tax. Total eligible compensation includes any
salary deferrals made through the 401(k) Plan and Section 125 Cafeteria Plan
and is subject to maximum limits set annually by the IRS. Each participant may
also elect to defer up to 75% of his or her pay into the 401(k) Plan, subject
to dollar limitations imposed by law.
Employer cash contributions to
the 401(k) Plan totaled approximately $365,000 in 2011, $364,000 in 2010 and $362,000
in 2009. Cash contributions to the ESOP totaled approximately $735,000 in 2011,
$239,000 in 2010 and $243,000 in 2009. Cash contributions to the 401(k) Plan
and ESOP are reported in Salaries and Employee Benefits in Non-Interest
Expenses on the Consolidated Statements of Income.
The ESOP is a non-leveraged plan
and all shares of Company common stock owned by the ESOP were allocated to participants
as of December 31, 2011. As of December 31, 2010, all shares owned by the ESOP
were allocated to participants except for 8,691 shares which were allocated in
2011. Cash dividends paid by the Company on common stock held by the ESOP are
charged to retained earnings. All shares owned by the ESOP are considered
outstanding for earnings per share computations. In the event a terminated or
retired ESOP participant desires to sell his or her shares of Company common stock,
or if certain employees elect to diversify their account balances, the Company
may be required to purchase the shares from the participant at their fair
market value. The ESOP owned 750,798 shares of Company common stock with an
estimated fair value of $27.0 million as of December 31, 2011 and 779,984
shares of Company common stock with an estimated fair value of $26.5 million as
of December 31, 2010.
87
NOTE 22 CONDENSED FINANCIAL INFORMATION
FIRST CITIZENS
BANCSHARES, INC.
(Parent Company
Only)
Balance Sheets
December 31, 2011 and 2010
(In thousands)
|
|
2011
|
|
2010
|
Assets
|
|
|
|
|
Cash
|
|
$ 380
|
|
$ 304
|
Investment in
subsidiaries
|
|
111,378
|
|
97,231
|
Other assets
|
|
39
|
|
26
|
Total
assets
|
|
$111,797
|
|
$97,561
|
Liabilities and shareholders'
equity
|
|
|
|
|
Liabilities
|
|
|
|
|
Long term debt
|
|
$ 10,310
|
|
$10,310
|
Accrued expenses
|
|
74
|
|
25
|
Total
liabilities
|
|
10,384
|
|
10,335
|
Shareholders' equity
|
|
101,413
|
|
87,226
|
Total
liabilities and shareholders' equity
|
|
$111,797
|
|
$97,561
|
FIRST CITIZENS
BANCSHARES, INC.
(Parent Company
Only)
Condensed
Statements of Income
Years Ended
December 31, 2011 and 2010
(In thousands)
|
|
2011
|
|
2010
|
Income
|
|
|
|
|
Dividends from bank
subsidiary
|
|
$ 4,950
|
|
$4,050
|
Other income
|
|
7
|
|
7
|
Total
income
|
|
4,957
|
|
4,057
|
Expenses
|
|
|
|
|
Interest expense
|
|
218
|
|
221
|
Other expenses
|
|
286
|
|
204
|
Total
expenses
|
|
504
|
|
425
|
Income before income taxes and equity in
undistributed net income of bank subsidiary
|
|
4,453
|
|
3,632
|
Income tax benefit
|
|
(167)
|
|
(144)
|
|
|
4,620
|
|
3,776
|
Equity in undistributed net
income of bank subsidiary
|
|
7,242
|
|
5,099
|
Net
income
|
|
$11,862
|
|
$8,875
|
88
FIRST
CITIZENS BANCSHARES, INC.
(Parent
Company Only)
Condensed
Statements of Cash Flows
Years
ended December 31, 2011 and 2010
(In
thousands)
|
|
2011
|
|
2010
|
Operating activities
|
|
|
|
|
Net income
|
|
$11,862
|
|
$8,875
|
Adjustments to reconcile net income to
net cash provided by operating activities:
|
|
|
|
|
Undistributed income of subsidiary
|
|
(7,242)
|
|
(5,099)
|
Increase in other assets
|
|
(15)
|
|
(26)
|
Increase (decrease) in other liabilities
|
|
49
|
|
(49)
|
Net cash provided by operating activities
|
|
4,654
|
|
3,698
|
Financing activities
|
|
|
|
|
Payment of dividends
|
(3,972)
|
|
(3,770)
|
Treasury stock transactions net
|
|
(606)
|
|
24
|
Net cash used by financing activities
|
|
(4,578)
|
|
(3,600)
|
Increase in cash
|
|
76
|
|
98
|
Cash at beginning of year
|
|
304
|
|
206
|
Cash at end of year
|
|
$ 380
|
|
$ 304
|
NOTE 23 QUARTERLY SELECTED FINANCIAL DATA (UNAUDITED)
The following table presents quarterly selected financial
data (unaudited) for 2011 and 2010 (in thousands, except per share data):
|
|
Interest
|
|
Net Interest
|
|
Net
|
|
EPS
|
|
EPS
|
|
|
Income
|
|
Income
|
|
Income
|
|
Basic
|
|
Diluted
|
2011
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$11,235
|
|
$8,751
|
|
$ 2,996
|
|
$0.83
|
|
$0.83
|
Second Quarter
|
|
11,549
|
|
9,145
|
|
2,872
|
|
0.79
|
|
0.79
|
Third Quarter
|
|
11,619
|
|
9,323
|
|
3,218
|
|
0.89
|
|
0.89
|
Fourth Quarter
|
|
11,103
|
|
8,931
|
|
2,776
|
|
0.77
|
|
0.77
|
Total
|
|
$45,506
|
|
$36,150
|
|
$11,862
|
|
$3.28
|
|
$3.28
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$11,872
|
|
$ 8,681
|
|
$2,169
|
|
$0.60
|
|
$0.60
|
Second Quarter
|
|
11,675
|
|
8,584
|
|
2,021
|
|
0.56
|
|
0.56
|
Third Quarter
|
|
11,439
|
|
8,452
|
|
2,234
|
|
0.61
|
|
0.61
|
Fourth Quarter
|
|
11,361
|
|
8,620
|
|
2,451
|
|
0.68
|
|
0.68
|
Total
|
|
$46,347
|
|
$34,337
|
|
$8,875
|
|
$2.45
|
|
$2.45
|
89