UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________ to _______________________________________________
Commission file number 000-10972
First Farmers and Merchants Corporation
(Exact name of registrant as specified in its charter)
Tennessee |
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62-1148660 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
816 South Garden Street |
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Columbia, Tennessee |
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38402 1148 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code (931) 388-3145 |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
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Name of each exchange on which registered |
None |
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None |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $10.00 par value per share |
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(Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ]Yes [ X ] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ]Yes [ X ] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[ X ]Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ X ]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] |
Accelerated filer [ X ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) |
Smaller reporting company [ ] |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [ X ]No
The aggregate market value of the registrants common stock held by non-affiliates as of June 30, 2013 was approximately $121,936,983 based on the reported price at which the common stock was last sold in a transaction known to the registrant.
As of March 1, 2014, the registrant had outstanding 5,021,012 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for Fiscal Year Ended December 31, 2013 -- Part I and II of this Report.
Proxy Statement for 2014 Annual Shareholders Meeting to be held on April 15, 2014 -- Part III of this Report.
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PART I
Item 1. Business.
Description of Business
First Farmers and Merchants Corporation (the Corporation) was incorporated on March 31, 1982 as a Tennessee corporation. As of December 31, 2013, the only direct subsidiary of the Corporation was First Farmers and Merchants Bank, a Tennessee state-chartered bank (the Bank). Management evaluates the financial condition of the Corporation in terms of the Banks operations within its service area in Middle Tennessee.
The operations of the Bank are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the general credit needs of small businesses in the Banks service area, competition among lenders, the level of interest rates and the availability of funds. The Banks loan portfolio is comprised of commercial, commercial and residential real estate, and retail installment loans, which primarily originate within the Banks service area. Deposits are the primary source of funds for the Bank. Such deposits consist of checking accounts, regular savings deposits, negotiable order of withdrawal accounts, money market accounts and market rate certificates of deposit. Deposits are solicited from individuals and businesses in the Banks service area, state and local entities and, to a lesser extent, United States government entities and other depository institutions. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Banks service area. All of the Corporations assets are located in the United States and all of its revenues generated from external customers originate within the United States.
The Banks net income is dependent primarily on its net interest income, which is the difference between the interest income earned on its loans, investment assets and other interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. To a lesser extent, the Banks net income also is affected by its noninterest income derived principally from service fees as well as the level of noninterest expenses such as salaries and employee benefits.
For more information regarding the business of the Corporation and the Bank, please refer to Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included in the Corporations 2013 Annual Report to Shareholders (the Annual Report to Shareholders) attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.
Availability of SEC Reports
The Corporations website is www.myfirstfarmers.com. The Corporation makes available free of charge on this website under the About Us - Investor Services link the Corporations annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Corporation electronically files such materials with, or furnishes them to, the Securities and Exchange Commission (the SEC). The SEC maintains a website at www.sec.gov that also contains reports, proxy and information statements and other information about the Corporation that are available free of charge. In addition, copies of our reports are available, without charge, by making a request through the Contact Us link on our website.
Regulation and Supervision
In addition to the generally applicable state and federal laws governing businesses and employers, the Corporation is subject to extensive regulation by federal and state laws and regulations applicable to financial institutions and their parent companies. Nearly all aspects of the business of the Corporation are subject to specific requirements and restrictions and general regulatory oversight. The principal objectives of state and federal laws regulating financial institutions are the maintenance of the safety and soundness of the institutions and the federal deposit insurance system, and the protection of consumers or classes of consumers, rather than the specific protection of shareholders of a bank or the parent company of a bank, such as the Corporation. In addition, the supervision, regulation and examination of the Corporation by the bank regulatory agencies is not intended to protect the Corporations shareholders. Below is a brief summary of the regulatory environment in which the Corporation and its subsidiaries operate, but it is not designed to be a complete discussion of all statutes and regulations affecting the Corporation or its subsidiaries.
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The Corporation is a bank holding company regulated under the Bank Holding Company Act of 1956 (the BHCA) and is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the Federal Reserve). The Corporation is required to file various reports with, and is subject to examination by, the Federal Reserve. The Federal Reserve has the authority to issue orders to bank holding companies to cease and desist from unsound practices and violations of conditions imposed by, or violations of agreements with, the Federal Reserve. The Federal Reserve is also empowered to assess civil money penalties against companies or individuals who violate the BHCA or orders or regulations thereunder.
The Federal Reserve has the authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless a bank holding companys net income is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organizations capital needs, asset quality and overall financial condition. The Bank is also subject to regulatory limitations on the amount of dividends it may declare and pay. This may limit income available to the Corporation, as the Corporation depends in part upon dividends received from the Bank to fund its activities, including the payment of dividends.
According to Federal Reserve policy and the Dodd-Frank Wall Street Reform and Protection Act of 2010 (the Dodd-Frank Act), a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary. This support may be required at times when the bank holding company may not have the resources to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation (the FDIC) can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.
The Corporation owns the Bank, which is chartered under the laws of Tennessee and is a member of the Federal Reserve. The Bank is subject to extensive state regulation and examination by the Tennessee Department of Financial Institutions and the Federal Reserve as the primary regulators, and the FDIC as the secondary regulator that insures the deposits of all banks to the maximum extent permitted by law. The federal and state laws and regulations that are applicable to banks regulate, among other matters, the scope of the Banks business, the Banks investments, the Banks reserves against deposits, the timing of the availability of deposited funds and the amount of loans and the amount of interest that may be charged on loans. Various state consumer laws and regulations also affect the Banks operations.
The Corporation and the Bank are required to comply with capital guidelines issued by the Federal Reserve and with other tests related to capital adequacy that the Federal Reserve adopts from time to time.
The Basel Committee on Banking Supervision (the Basel Committee) has announced revised final frameworks, generally referred to as Basel III, for the regulation of capital and liquidity of internationally active banking organizations. Basel III would require capital to be held in the form of tangible common equity, generally increase the required capital ratios, phase out certain kinds of intangibles treated as capital and certain types of instruments, like trust preferred securities, and change the risk weightings of assets used to determine required capital ratios. Basel III is presently the subject of notices of proposed rulemaking released in June 2012 by federal banking agencies. The comment period for these notices of proposed rulemaking ended on October 22, 2012. In July 2013, the Federal Reserve published final rules (the Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules implement the Basel Committees Basel III capital framework. The Basel III Capital Rules increase minimum requirements for both the quantity and the quality of capital held by banking organizations. The Basel III Capital Rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, and adjust the methodology for calculating risk-weighted assets to enhance risk sensitivity. Beginning January 1, 2015, the Corporation and the Bank must be compliant with revised minimum regulatory capital ratios and will begin the transitional period for definitions of regulatory capital and regulatory capital adjustments and deductions established under the Basel III Capital Rules. Compliance with the risk-weighted asset calculations will be required on January 1, 2015. Management believes the Corporations and the Banks current capital ratios exceed those required under the Basel III Capital Rules.
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The Federal Community Reinvestment Act (the CRA) generally requires insured depository institutions to make loans and investments and provide services that meet the credit needs of the communities they serve. As a part of the CRA program, the Bank is subject to periodic examinations by the Federal Reserve and must maintain comprehensive records of its CRA activities. During these examinations, the Federal Reserve rates such institutions compliance with the CRA as Outstanding, Satisfactory, Needs to Improve or Substantial Noncompliance. As of the last CRA examination on September 12, 2012, the Bank received an Outstanding rating from the Federal Reserve.
Pursuant to the authority granted under various statutes, the federal bank regulatory agencies have adopted guidelines (the Guidelines) for safekeeping confidential, personal customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bank has adopted a customer information security program that has been approved by the Board of Directors of both the Bank and the Corporation.
The Bank is required to pay quarterly FDIC deposit insurance assessments to the Deposit Insurance Fund (DIF). The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund. The FDIC uses a risk-based premium system that imposes insurance premiums based upon a risk matrix that takes into account a banks capital level and supervision rating.
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 the independent Consumer Financial Protection Bureau tasked with protecting consumers from unfair, deceptive and abusive financial products and practices. The Dodd-Frank Act required the implementation of the Volcker Rule for banks and bank holding companies, which prohibits with certain limited exceptions, proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and otherwise limit the relationships with such funds. The Dodd-Frank Act includes provisions that, among other things, reorganize bank supervision and strengthen the Federal Reserve. The Dodd-Frank Act also requires fees charged for debit card transactions, commonly referred to as interchange fees, to be both reasonable and proportional to the cost incurred by the card issuer.
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. Prior to the implementation of the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk of such behavior to the financial institution. The Dodd-Frank Act provides other restrictions, including limiting the ability of financial institutions to utilize trust preferred securities as Tier 1 capital going forward, and requiring institutions to retain credit risk when selling loans to third parties.
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.
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The activities of the Corporation and the Bank are also subject to regulation under other various federal laws including the Gramm-Leach-Bliley Act of 1999, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism USA Patriot Act of 2001, the Truth-in-Lending Act, the Trust-in-Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, , the Home Mortgage Disclosure Act, the National Flood Insurance Act, the Real Estate Settlement Procedures Act, the Bank Secrecy Act, various laws and regulations prohibiting unfair, deceptive or abusive acts and practices, the Houston and Economic Recovery Act, the Fair Credit Reporting Act, the Fair Debt Collection Practice Act, the Electronic Funds Transfer Act and the Currency and Foreign Transactions Reporting Act, among others, as well as various state laws.
Competition
The business of providing financial services is highly competitive. In addition to competing with other commercial banks in the Banks 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. None of these competitors is dominant in the entire area served by the Bank.
In the Tennessee markets it serves, 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 Banks primary market areas for these products are Dickson, Giles, Hickman, Lawrence, Marshall, Maury and Williamson Counties in Tennessee. The Bank will be opening a new branch in Davidson County in 2014.
Employees
The Corporation has no employees. The Bank had approximately 244 full-time employees and 26 part-time employees at December 31, 2013. Four of the Banks officers are also officers of the Corporation. Employee benefit programs provided by the Bank include a deferred profit-sharing plan, an annual profit-sharing plan, lender production incentives, a salary continuation plan, long-term disability insurance, a deferred compensation plan, an executive split-dollar life insurance plan, a post-retirement medical benefits program, a Section 125 cafeteria plan, training programs, group life and accidental death insurance, health and dental insurance and paid vacations.
Item 1A. Risk Factors.
An investment in our common stock involves significant risks. The risks and uncertainties that management believes affect or could affect us are described below. This listing should not be considered as all-inclusive. You should carefully read and consider these risks and uncertainties described below together with all of the other information included or incorporated by reference in this report before you decide to invest in our common stock. References to we, us, and our in this section refer to the Corporation and the Bank, unless otherwise specified or unless the context otherwise requires.
Our business and credit quality may be adversely affected by conditions in the financial market.
Beginning in mid-2007, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the value of nearly all asset classes and by a serious lack of liquidity, and economic conditions affecting the banking industry have not since fully recovered. The global markets have been characterized by substantially increased volatility and short-selling and an overall loss of investor confidence.
Businesses continue to experience serious difficulties resulting from restrained consumer spending and the lack of credit market liquidity. Market conditions have also led to the failure or merger of a number of prominent financial institutions and competition for deposits and high quality loans has increased for those that remain in business.
Overall, during 2013 the business environment continued to be unfavorable for many households and businesses in the United States and worldwide. Although the business environment in middle Tennessee has been better than in the United States generally, our customers continue to be impacted by reduced asset values, a tightening credit environment, securities market volatility and other factors. It is possible that the business environment in middle Tennessee, the United States and worldwide will continue to experience weakness and uncertainty for the foreseeable future. There can be no assurance that conditions will improve in the near term. Such conditions could adversely affect the credit quality of our loans, results of operations and financial condition.
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A reduction of customer deposits or an inability of our borrowers to repay loans could have a material adverse effect on our liquidity.
We rely on dividends from the Bank as our primary source of funds. The primary sources of funds of the Bank are customer deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability 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, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity, such as Federal Home Loan Bank advances, to meet withdrawal demands or otherwise fund operations. While management believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands.
Our allowance for loan losses may be insufficient, which could result in a reduction of net income and capital.
We maintain an allowance for loan and lease losses, which is a reserve established through a provision for loan and lease losses charged to expense, that represents managements best estimate of probable losses that have been incurred within the existing portfolio of loans and leases. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects managements continuing evaluation of:
portfolio quality trends;
changes in the nature and volume of the portfolio;
present and prospective economic and business conditions, locally and nationally;
management review systems and board oversight;
changes in credit policy, credit administration, portfolio management and procedures;
changes in personnel, management and staff; and
the existence and effect of any concentrations of credit.
The determination of the appropriate level of the allowance for loan and lease losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. An increase in the allowance for loan and lease losses results in a decrease in net income, and possibly capital, and may have a material adverse effect on our financial condition and results of operations. For further discussion related to our allowance for loan and lease losses, please refer to Liquidity and Capital Resources Loans and Loan Quality and Critical Accounting Policies Allowance for Loan and Lease Losses in Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.
Our profitability depends significantly on economic conditions in the communities in the States of Tennessee where we do business.
Our success and profitability depend on the general economic conditions in the specific local markets in middle Tennessee where we do business. Local economic conditions have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; natural disasters; or a combination of these or other factors. A significant decline in general economic conditions could impact local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.
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We are subject to extensive government regulation and supervision.
We are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which we conduct business, undertake new investments and activities and obtain financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit our shareholders. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Most recently, the Dodd-Frank Act has implemented sweeping reforms to the financial services industry. A number of provisions of the Dodd-Frank Act remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict what the final form of these rules will be when implemented by the respective agencies, but management believes that certain aspects of the new legislation including, without limitation, the additional cost of higher deposit insurance and the costs of compliance with disclosure and reporting requirements and examinations by the new Consumer Financial Protection Agency, could have a significant impact on our business, financial condition and results of operations. Further, federal monetary policies, particularly as implemented through the Federal Reserve, significantly affect short-term interest rates and credit conditions, and any unfavorable change in these conditions could have a material adverse effect on our financial condition or results of operations.
It is possible that there will be continued changes to the banking and financial institutions regulatory regimes in the 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, among other things. We cannot predict the extent to which the government and governmental organizations may change any of these laws or controls. We also cannot predict how such changes would adversely affect our business and prospects.
We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our securities portfolio and other interest-earning rates received on loans and other investments, our net interest income, and therefore, earnings could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. For further discussion related to our management of interest rate risk, please refer to Liquidity and Capital Resources Interest Rate Risk in Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.
We rely heavily on our management team and on our ability to attract and retain key personnel.
We are a customer-focused and relationship-driven organization. Future growth is expected to be driven in large part by the relationships we maintain with our customers. Additionally, it is important for us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. The market for such people is competitive and there is no assurance that we will be successful in attracting, hiring, motivating or retaining them.
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Competition from other financial services providers could adversely impact our results of operation.
The banking and financial services business is highly competitive. We face competition in making loans, attracting deposits and providing trust services. Increased competition in the banking and financial services business may reduce our market share, impair its growth or cause the prices we charge for our services to decline. For further discussion related to our competition in our market area, please refer to Competition in Item 1 of this Annual Report on Form 10-K.
We obtain a significant portion of our noninterest revenue through service fees on deposit accounts; legislation and regulations impacting service fees could reduce our fee income.
A significant portion of our noninterest revenue is derived from service fee income. One of the components of this service fee income is overdraft-related fees. Management anticipates that changes in banking regulations, and in particular the Federal Reserves rules pertaining to certain overdraft payments on consumer accounts and the FDICs Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance, will continue to have a significant adverse impact on our service fee income and overall results. Additionally, management anticipates that changes in customer behavior as well as increased competition from other financial institutions will result in declines in deposit accounts or in overdraft frequency resulting in a decline in service fee income. A reduction in deposit account fee income could have a material adverse effect on our earnings.
Our ability to declare and pay dividends is limited by law.
We derive our income primarily from dividends received from owning the Banks common stock. Federal and state law limit the Banks ability to declare and pay dividends. In addition, the Federal Reserve may impose restrictions on our ability to declare and pay dividends on our common stock. For further discussion related to restrictions on our ability to declare and pay dividends, please refer to Regulation and Supervision in Item 1 of this Annual Report on Form 10-K.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available on favorable terms when it is needed.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance any acquisitions or we may otherwise elect or be required to raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot provide assurance of our ability to raise additional capital if needed or to be able to do so on terms acceptable to us. If we cannot raise additional capital on favorable terms when needed, it may have a material adverse effect on our financial condition and results of operations.
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 there are 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 the shares are very thinly traded. There is no dealer for our stock and no market maker. These factors can reduce the marketability of our shares and the lack of a liquid market can produce downward pressure on our stock price.
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Maintaining or increasing our market share may depend upon our ability to adapt our products and services to evolving industry standards and consumer preferences.
Our success depends, in part, on our ability to adapt our products and services as well as our distribution of them to evolving industry standards and consumer preferences. Payment methods have evolved with the advancement of technology, such as consumer use of smart phones and PayPal accounts to pay bills, thereby increasing competitive pressure in the delivery of financial products and services. The development and adoption by us of new technologies could require us to make substantial expenditures to modify our existing products and services. Further, we might not be successful in developing or introducing new products and services, adapting to changing consumer preferences and spending and saving habits, achieving market acceptance or regulatory approval, or sufficiently maintaining and growing a loyal customer base. Our inability to adapt to evolving industry standards and consumer preferences could have an adverse impact on our financial condition or results of operations.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
A failure of our operating systems or infrastructure, or those of our third-party vendors, could disrupt our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal and regulatory standards. As processing demands change and our loan portfolios grow in both volume and differing terms and conditions, developing and maintaining our operating systems and infrastructure becomes increasingly challenging and there is no assurance that we can adequately or efficiently develop and maintain such systems.
Our operations rely on the secure processing, storage and transmission of personal, confidential and other information in our computer systems and networks. Although we take protective measures, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses, malicious attacks and other events that could have a security impact beyond our control. If one or more of such events occur, personal, confidential and other information processed and stored in, and transmitted through, our computer systems and networks could be jeopardized or could cause interruptions or malfunctions in our operations that could result in significant losses or reputational damage. We have put in place secure transmission capability, and work to ensure third parties follow similar procedures. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, regulatory action and reputational harm. In the event personal, confidential or other information is jeopardized, intercepted, misused or mishandled, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to fines, penalties, litigation costs and settlements and financial losses that are either not insured against or not fully covered through any insurance maintained by us. Any of these events could have a material adverse effect on our business, financial condition or results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
At December 31, 2013, the Bank maintained a main office in Columbia, Tennessee, 17 other offices and 35 separate automatic teller or cash dispensing machine locations. In addition to the main office in Columbia, the Banks 16 other offices are located in the following locations throughout Middle Tennessee:
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City |
County |
Offices |
Bon Aqua |
Hickman |
1 |
Centerville |
Hickman |
1 |
Columbia |
Maury |
4 |
Franklin |
Williamson |
2 |
Lawrenceburg |
Lawrence |
2 |
Lewisburg |
Marshall |
1 |
Loretto |
Lawrence |
1 |
Mt. Pleasant |
Maury |
1 |
Pulaski |
Giles |
1 |
Spring Hill |
Maury |
2 |
White Bluff |
Dickson |
1 |
|
Total: |
17 |
The Banks office at S. James Campbell Boulevard, Columbia, Tennessee is located on property that is leased and the bank also leases space in a Kroger store in Columbia. The Bank provides only automatic teller machine services at the following locations:
2223 Carmack Blvd (Quik Mart/Shell) |
Columbia, TN |
312 East James Campbell (QuickMart/Shell) |
Columbia, TN |
1120 Hampshire Pike (Quik Mart/Shell) |
Columbia, TN |
1517 Hampshire Pike (Quik Mart/Shell) |
Columbia, TN |
1224 Trobtwood Ave. (Maury Regional) |
Columbia, TN |
147 Bear Creek Pike (Farm Bureau) |
Columbia, TN |
2577 Nashville Highway (Quik Mart/Shell) |
Columbia, TN |
5414 Main Street (Quik Mart/Shell) |
Spring Hill, TN |
9170 new Lawrenceburg Highway (Quik Mart/Shell) |
Mt. Pleasant, TN |
121 2nd Ave. South |
Lewisburg, TN |
1748 Mooresville Rd (Shopping Center) |
Lewisburg, TN |
800 North Ellington Parkway(Quik Mart/Shell) |
Lewisburg, TN |
710 East Gaines (Quik Mart/Shell) |
Lawrenceburg, TN |
2100 North Locust (Quik Mart/Shell) |
Lawrenceburg, TN |
1607 S. Locust Ave. (Crocket Hospital) |
Lawrenceburg, TN |
215 South Military(Quik Mart/Shell) |
Loretto, TN |
For more information on the properties owned and leased by the Corporation and the Bank, please refer to Notes 5 and 7 to the Consolidated Financial Statements, which are included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.
Item 3. Legal Proceedings.
The Corporation, the Bank and the subsidiaries of the Bank are, from time to time, subject to claims or suits arising in the ordinary course of business. The Corporation, the Bank and the subsidiaries of the Bank currently are not a party to any legal proceeding that, in managements opinion, would have a material adverse effect on the Corporations financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
11
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
A discussion of the Corporations common stock and related shareholder matters is set forth in Managements Discussion and Analysis of Financial Condition and Results of Operations and Notes to the Consolidated Financial Statements, each of which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference. There were no sales of unregistered securities of the Corporation during the 12 months ended December 31, 2013.
The following table provides information regarding purchases of the Corporations common stock made by the Corporation during the fourth quarter of 2013:
CORPORATION'S PURCHASES OF EQUITY SECURITIES |
||||
Period |
Total Number of
|
Average Price
|
Total Number of Shares
|
Maximum Number (or
|
|
|
|
|
|
January 1 March 31, 2013 |
44,677 |
$23.00 |
|
$ - |
April 1 June 30, 2013 |
46664 |
$23.00 |
- |
$ - |
July 1 September 30, 2013 |
34838 |
$23.00 |
- |
$ - |
October 1, 2013 - December 31, 2013 |
32,810 |
$25.00 |
- |
$ - |
Total |
158,989 |
$23.50 |
- |
$ - |
*Purchased through negotiated transactions with several third-party sellers.
Item 6. Selected Financial Data.
The selected financial data, set forth in the Annual Report to Shareholders under the caption Selected Financial Information, is attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Managements Discussion and Analysis of Financial Condition and Results of Operations is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
A discussion of the market risk of the Corporation and the Bank as of December 31, 2013 related to the investment debt and equity securities held by the Corporation and the Bank is set forth in Note 2 to the Consolidated Financial Statements, which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference. A discussion of the market risk in the loan portfolio of the Bank is set forth in Note 3 to the Consolidated Financial Statements and in the section entitled Liquidity and Capital Resources Loans and Loan Quality in Managements Discussion and Analysis of Financial Condition and Results of Operations, each of which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference. A discussion of the rate sensitivity of all earning assets and interest-bearing liabilities of the Corporation and the Bank is set forth in the section entitled Liquidity and Capital Resources Interest Rate Risk in Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.
12
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data are set forth in the Consolidated Financial Statements and Notes to Consolidated Financial Statements, each of which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Corporation with the participation of its management, including the Corporations Chief Executive Officer and Treasurer (principal financial officer), carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities and Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Report.
Based upon that evaluation and as of the end of the period covered by this report, the Corporations Chief Executive Officer and Treasurer (principal financial officer) concluded that the Corporations disclosure controls and procedures were effective in ensuring that information required to be disclosed in the reports that the Corporation files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported on a timely basis.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Corporation has included a report of managements assessment of the design and operating effectiveness of its internal controls as part of this report. BKD, LLC, the independent registered public accounting firm that audited the Consolidated Financial Statements of the Corporation included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2013. The report, which expresses an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2013, along with managements report, are included with the Consolidated Financial Statements in the Annual Report to Shareholders under the captions Management Report on Internal Control Over Financial Reporting and Report of Independent Registered Public Accounting Firm, each of which is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the period ended December 31, 2013, management has been actively engaged in implementing a detailed plan and timetable to remediate a material weakness over financial reporting identified during the period ended December 31, 2012. Remediation efforts included the following: expansion of the review process to include the CFOs review of all significant transactions to ensure that all such transactions are identified and recorded properly, quarterly meetings by the Accounting Management committee to identify new accounting pronouncements and developments and determine the appropriate application to the Companys financial reporting, and the Accounting Departments maintenance of a monthly close log to serve as a transcript of the close process. Management believes that efforts have effectively remediated the material weakness. There are no other changes in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
13
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Reference is made to information in the Corporations Proxy Statement relating to the 2014 Annual Meeting of Shareholders (the Proxy Statement) under the captions Proposal 1: Election of Directors, Executive Officers, Corporate Governance Committees of the Board of Directors, Corporate Governance Code of Ethics, and General Information Section 16 (a) Beneficial Ownership Reporting Compliance, which information is incorporated herein by reference.
Item 11. Executive Compensation.
Reference is made to information in the Proxy Statement under the captions Compensation Discussion and Analysis, Executive Compensation, Compensation of Directors, Compensation Committee Interlocks and Insider Participation and Compensation Committee Report, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Reference is made to information in the Proxy Statement under the captions Security Ownership of Certain Beneficial Owners and Management, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Reference is made to information in the Proxy Statement under the captions Corporate Governance Director Independence and Related Person Transactions, which information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Reference is made to information in the Proxy Statement under the captions Audit Committee Report and Independent Registered Public Accounting Firm, which information is incorporated herein by reference.
14
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) |
|
(1) Financial statements are set forth in the Consolidated Financial Statements and Notes to Consolidated Financial Statements, which are incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K. |
|
|
|
|
(2) |
All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements referenced in Item 15(a)(1). |
|
|
(3) Exhibits: |
|
|
|
3.1 |
|
Charter. (1) |
3.2 |
|
Articles of Amendment to Charter. (1) |
3.3 |
|
Second Amended and Restated Bylaws, as amended. (2) |
4 |
|
Specimen Stock Certificate. (1) |
10.1 |
|
Profit Sharing Plan. (3)* |
10.2 |
|
First Amendment to Profit Sharing Plan. (3)* |
10.3 |
|
Second Amendment to Profit Sharing Plan. (3)* |
10.4 |
|
Executive Salary Continuation Agreement by and between First Farmers and Merchants National Bank and Waymon L. Hickman, dated as of December 1, 1992. (3)* |
10.5 |
|
Benefits Agreement by and between First Farmers and Merchants Bank and Thomas Randall Stevens, the Banks and the Corporations Chairman and Chief Executive Officer, dated as of January 26, 2007. (4)* |
10.6 |
|
Benefits Agreement by and between John P. Tomlinson, III, the Banks and Corporations Chief Administrative Officer, dated as of January 29, 2007. (4)* |
|
|
|
10.7 |
|
Form of First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement.(5)* |
|
|
|
10.8 |
|
First Amendment to the First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)* |
|
|
|
10.9 |
|
Form of First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement. (5)* |
|
|
|
10.10 |
|
First Amendment to the First Farmers and Merchants Bank Director Deferred Compensation Agreement with Thomas Randall Stevens, dated as of January 5, 2007. (5)* |
|
|
|
10.11 |
|
First Amendment to the First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)* |
|
|
|
10.12 |
|
Form of First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)* |
|
|
|
10.13 |
|
Form of Amendment to the First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)* |
|
|
|
10.14 |
|
First Farmers & Merchants Bank Group Term Carve-Out Plan, dated as of March 27, 2007. (5)* |
|
|
|
10.15 |
|
First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)* |
15
10.16 |
|
Amendment to the First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)* |
|
|
|
10.17 |
|
First Farmers & Merchants Bank Life Insurance Endorsement Method Split Dollar Plan Agreement, dated as of January 7, 2008. (5)* |
|
|
|
10.18 |
|
Form of First Farmers and Merchants Corporation Director Deferred Compensation Agreement. (5)* |
|
|
|
10.19 |
|
Form of First Farmers and Merchants Bank Director Deferred Compensation Agreement. (5)* |
|
|
|
10.20 |
|
First Farmers and Merchants Bank Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)* |
|
|
|
10.21 |
|
First Farmers and Merchants Corporation Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)* |
10.22 | Employment Agreement with Barry B. White, dated as of November 18, 2003. * | |
|
|
|
13 |
|
Annual Report to Shareholders. |
|
|
|
21 |
|
List of Subsidiaries. |
|
|
|
31.1 |
|
Certification of the Chief Executive Officer of First Farmers and Merchants Corporation pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification of the Treasurer (principal financial officer) of First Farmers and Merchants Corporation pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32 |
|
Certification of the Chief Executive Officer and Treasurer (principal financial officer) of First Farmers and Merchants Corporation pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101 |
|
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Companys Annual Report on Form 10-K for the year ended December 31, 2013, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) the Consolidated Statements of Income for each of the years ended December 31, 2013, 2012 and 2011; (iii) the Consolidated Statements of Changes in Shareholders Equity for each of the years ended December 31, 2013, 2012 and 2011; (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2013, 2012 and 2011; and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. |
* Indicates a compensatory plan or arrangement.
(1) Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on May 7, 2004 (File Number 000-10972).
(2) Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 13, 2011 (File Number 000-10972).
(3) Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 2 to the Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on July 19, 2004 (File Number 000-10972).
(4) Incorporated by reference to the First Farmers and Merchants Corporation Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 30, 2007 (File Number 000-10972).
16
(5) Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 13, 2009 (File Number 000-10972).
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FARMERS AND MERCHANTS CORPORATION
By /s/ T. Randy Stevens |
T. Randy Stevens |
Chief Executive Officer |
Date: March 5, 2014 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date |
/s / PATRICIA P. BEARDEN |
Treasurer, Chief Financial Officer |
3/5/2014 |
Patricia P. Bearden |
||
/s/ M. DARLENE BAXTER |
Director |
3/5/2014 |
M. Darlene Baxter |
||
/s/ JONATHAN M. EDWARDS |
Director |
3/5/2014 |
Jonathan M. Edwards |
||
/s/ TOM NAPIER GORDON |
Director |
3/5/2014 |
Tom Napier Gordon |
||
/s/ DALTON M. MOUNGER |
Director |
3/5/2014 |
Dalton M. Mounger |
||
/s/ TIMOTHY E. PETTUS |
Director |
3/5/2014 |
Timothy E. Pettus |
||
/s/ PATRICK J. RILEY |
Director |
3/5/2014 |
Patrick J. Riley |
||
/s/ MATTHEW M. SCOGGINS, JR. |
Director |
3/5/2014 |
Matthew M. Scoggins, Jr. |
||
/s/ T. RANDY STEVENS, III |
Director, Chief Executive
|
3/5/2014 |
T. Randy Stevens, III |
||
/s/ W. LACY UPCHURCH |
Director |
3/5/2014 |
W. Lacy Upchurch |
||
/s/ KIMBERLY VELLA |
Director |
3/5/2014 |
Kimberly Vella |
||
/s/ DAVID S. WILLIAMS |
Director |
3/5/2014 |
David S. Williams |
18
EXHIBIT INDEX
FIRST FARMERS AND MERCHANTS CORPORATION
3.1 |
|
Charter. (1) |
3.2 |
|
Articles of Amendment to Charter. (1) |
3.3 |
|
Second Amended and Restated Bylaws, as amended. (2) |
4 |
|
Specimen Stock Certificate. (1) |
10.1 |
|
Profit Sharing Plan. (3)* |
10.2 |
|
First Amendment to Profit Sharing Plan. (3)* |
10.3 |
|
Second Amendment to Profit Sharing Plan. (3)* |
10.4 |
|
Executive Salary Continuation Agreement by and between First Farmers and Merchants National Bank and Waymon L. Hickman, dated as of December 1, 1992. (3)* |
10.5 |
|
Benefits Agreement by and between First Farmers and Merchants Bank and Thomas Randall Stevens, the Banks and the Corporations Chairman and Chief Executive Officer, dated as of January 26, 2007. (4)* |
10.6 |
|
Benefits Agreement by and between John P. Tomlinson, III, the Banks and Corporations Chief Administrative Officer, dated as of January 29, 2007. (4)* |
|
|
|
10.7 |
|
Form of First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement.(5)* |
|
|
|
10.8 |
|
First Amendment to the First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)* |
|
|
|
10.9 |
|
Form of First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement. (5)* |
|
|
|
10.10 |
|
First Amendment to the First Farmers and Merchants Bank Director Deferred Compensation Agreement with Thomas Randall Stevens, dated as of January 5, 2007. (5)* |
|
|
|
10.11 |
|
First Amendment to the First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)* |
|
|
|
10.12 |
|
Form of First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)* |
|
|
|
10.13 |
|
Form of Amendment to the First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)* |
|
|
|
10.14 |
|
First Farmers & Merchants Bank Group Term Carve-Out Plan, dated as of March 27, 2007. (5)* |
|
|
|
10.15 |
|
First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)* |
19
10.16 |
|
Amendment to the First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)* |
|
|
|
10.17 |
|
First Farmers & Merchants Bank Life Insurance Endorsement Method Split Dollar Plan Agreement, dated as of January 7, 2008. (5)* |
|
|
|
10.18 |
|
Form of First Farmers and Merchants Corporation Director Deferred Compensation Agreement. (5)* |
|
|
|
10.19 |
|
Form of First Farmers and Merchants Bank Director Deferred Compensation Agreement. (5)* |
|
|
|
10.20 |
|
First Farmers and Merchants Bank Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)* |
|
|
|
10.21 |
|
First Farmers and Merchants Corporation Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)* |
|
|
|
10.22 | Employment Agreement with Barry B. White, dated as of November 18, 2003. * | |
13 |
|
Annual Report to Shareholders. |
|
|
|
21 |
|
List of Subsidiaries. |
|
|
|
31.1 |
|
Certification of the Chief Executive Officer of First Farmers and Merchants Corporation pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification of the Treasurer (principal financial officer) of First Farmers and Merchants Corporation pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32 |
|
Certification of the Chief Executive Officer and Treasurer (principal financial officer) of First Farmers and Merchants Corporation pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101 |
|
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Companys Annual Report on Form 10-K for the year ended December 31, 2013, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) the Consolidated Statements of Income for each of the years ended December 31, 2013, 2012 and 2011; (iii) the Consolidated Statements of Changes in Shareholders Equity for each of the years ended December 31, 2013, 2012 and 2011; (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2013, 2012 and 2011; and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. |
* Indicates a compensatory plan or arrangement.
(1) Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on May 7, 2004 (File Number 000-10972).
(2) Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 13, 2011 (File Number 000-10972).
(3) Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 2 to the Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on July 19, 2004 (File Number 000-10972).
(4) Incorporated by reference to the First Farmers and Merchants Corporation Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 30, 2007 (File Number 000-10972).
(5) Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 13, 2009 (File Number 000-10972).
20
Set forth below is a graph comparing the yearly change in the cumulative total shareholder return on the common stock of First Farmers and Merchants Corporation (FF&M in the graph) against the cumulative total return of the S&P 500 Index and the Dow Jones Select Regional Bank Index for the five-year period commencing December 31, 2008 and ending December 31, 2013.
VALUE OF $100 INVESTED ON DECEMBER 31, 2008
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
|||||||
FF&M * |
$ |
100.00 |
$ |
91.53 |
$ |
67.52 |
$ |
62.30 |
$ |
51.83 |
$ |
59.19 |
DOW JONES SELECT REGIONAL BANK INDEX ** |
100.00 |
110.47 |
133.61 |
117.13 |
138.77 |
191.75 |
||||||
S & P 500 *** |
100.00 |
126.47 |
145.54 |
148.61 |
172.23 |
227.99 |
||||||
* |
Assumes that the value of the investment in FF&M was $100 on December 31, 2008, with all dividends reinvested. |
** |
Assumes that the value of the investment in the index was $100 on December 31, 2008, with all dividends reinvested. |
*** |
Assumes that the value of the investment in the index was $100 on December 31, 2008, with all dividends reinvested. |
4
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report to Shareholders may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as believes, expects, hopes, may, plans, will, or anticipates, or the negatives of such terms. We caution you not to place undue reliance on such forward-looking statements in this Annual Report to Shareholders because results could differ materially from those anticipated as a result of a variety of factors. These forward-looking statements include, without limitation, those relating to the quality of service provided to customers, reduction in net loans, the effect of fluctuating interest rates on net interest income, the stability of market rates, adequate access to capital to meet liquidity needs, capital expenditures, the completion of our new branch, cash dividends, cash flows on impaired loans, the present value of servicing income, deferred tax assets, potential issuance of shares, the fair value of bonds, impairment of securities, lease commitments, troubled debt restructurings, the Federal Home Loan Bank of Cincinnati (the FHLB) credit line, repayment of loans by borrowers, legal claims, capital adequacy requirements, fair value valuation methodologies, fair value of other assets, valuation of financial instruments, post-retirement benefit payments, interest rate sensitivity and risk, diversification of the loan portfolio, gross interest income, the adequacy of allowance for loan and lease losses, the loan concentration, expected maturity of investment securities, intent of management to hold certain loans until maturity or payoff, the value of underlying collateral and the impact of accounting standards on the financial statements. Factors that could affect our results include, but are not limited to, changes in economic conditions; fluctuations in prevailing interest rates and the effectiveness of our risk monitoring systems; our ability to maintain credit quality; our ability to provide market competitive products and services; laws and regulations affecting financial institutions in general; our ability to operate and integrate new technology; the effectiveness of our interest rate hedging strategies; government fiscal and monetary policies; changes in our operating or expansion strategy; changes in our assumptions or estimation methodologies; the availability of and costs associated with maintaining and/or obtaining adequate and timely sources of liquidity; limitations on our ability to pay dividends and to meet our cash obligations; assumption and judgments about the collectability of our loan portfolio; our ability to compete with other financial services companies and other factors generally understood to affect the financial results of financial services companies.
EXECUTIVE OVERVIEW
General
First Farmers and Merchants Corporation (the Corporation) was incorporated on March 31, 1982 as a Tennessee corporation. As of December 31, 2013, the only direct subsidiary of the Corporation was First Farmers and Merchants Bank (the Bank), which conducts the principal business of the consolidated company. The Bank was organized as a national bank in 1954 as a successor to a state bank that was organized in 1909. The Bank remained a national bank until July 5, 2005, when it converted back to a state-chartered bank and changed its name from First Farmers and Merchants National Bank to First Farmers and Merchants Bank. The Bank has direct and indirect subsidiaries through which it holds F&M West, Incorporated, Maury Tenn, Incorporated and Maury Tenn Properties, Incorporated. The principal executive offices of the Corporation are located at 816 South Garden Street, Columbia, Maury County, Tennessee. Management of the Corporation evaluates the financial condition of the Corporation in terms of the Banks operations within its service area.
All dollar amounts in this Annual Report to Shareholders, other than share and per-share amounts, are in thousands unless otherwise noted.
Financial Condition
The Corporations assets consist primarily of its investment in the Bank and other smaller investments. Its primary activities are conducted through the Bank. The Bank is committed to providing quality services in diverse markets and a changing interest rate environment. Management hopes to provide Bank customers the quality service of a community bank and the safety and strength of a regional bank.
5
All dollar amounts are reported in thousands except share and per share data.
At December 31, 2013, the Corporations consolidated total assets were $1,093,833, its consolidated net loans were $598,171, its total deposits were $957,337 and its total shareholders equity was $102,673. The economic climate in the Corporations market area of middle Tennessee began to stabilize in 2013, as evidenced by the Corporations loan volume, an increase of 7.1% of net loans at December 31, 2013 compared to December 31, 2012. Total deposits increased by 2.6% and total shareholders equity decreased by 10.4% over the same period. The net unrealized loss on securities, which makes up a portion of other comprehensive income, contributed to the decrease in shareholders equity.
Results of Operations
Consolidated net income in 2013 totaled $9,876, a 29.8% increase from 7,608 in 2012 and a 41.2% increase from $6,996 in 2011. Net interest income increased 5.9% from 2012 and increased 4.3% from 2011. With interest rates continuing on a downward trend, loan yields have continued to decrease, while volume has increased. On a per common share basis, net income totaled $1.93 for 2013 versus $1.43 for 2012 and $1.30 for 2011.
The accompanying tables and the discussion and financial information are presented to aid in understanding the Corporations financial position and results of operations. The emphasis of this discussion is on the years ended December 31, 2013, 2012 and 2011; however, financial information for prior years will also be presented where appropriate or required. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders.
The Corporations financial condition is dependent on a variety of factors, including the quality and nature of its assets, its liability and capital structure, the market and economic conditions and the quality of its personnel.
FINANCIAL CONDITION
Net Interest Margin
Net interest margin is defined as the difference between the revenue from earning assets (primarily interest income) and interest expense related to interest bearing liabilities. Net interest margin is a function of the average balances of earning assets and interest bearing liabilities and the yields earned and rates paid on those balances. In order to succeed in the banking industry, it is critical to maintain the net interest margin at a level that, when coupled with noninterest revenues, exceeds additions to the allowance for loan and lease losses, noninterest expenses and income taxes and yields an acceptable profit.
The Corporation plans the Banks operations with the goal of maintaining a satisfactory spread between the yields on earning assets and the related cost of interest bearing funds. The gross interest spread is determined by comparing the taxable equivalent gross interest margin to average earning assets before deducting the allowance for loan losses. This spread reflects the overall profitability of earning assets, including both those funded by interest bearing sources and those that do not generate interest (primarily noninterest bearing demand deposits). This spread is most often used when analyzing a banking institutions overall gross margin profitability compared to that of other financial institutions. Management uses calculations and similar ratios to assist in pricing decisions for interest-related products. Table A below presents the average daily balances, the components of the gross interest margin (on a taxable equivalent basis), the yield or rate, and the incremental and gross interest spread for each of the last three years by major categories of assets and liabilities.
6
TABLE A - Distribution of Assets, Liabilities, Shareholders Equity, Interest Rates and Interest Differential
Notes: |
|
1. |
U.S. government (agency, state and political subdivision), and corporate debt securities plus equity securities in the available-for-sale and held-to-maturity categories are taxable securities. Most municipal debt securities are nontaxable. |
2. |
The taxable equivalent adjustment has been computed based on a 34% federal income tax rate and has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets. Loans include nonaccrual loans for all years presented. |
3. |
The average balances of the amortized cost of available-for-sale securities were used in the calculations in this table. |
7
Table B below sets forth, for the periods indicated, a summary of consolidated changes in interest earned and interest paid, reflected by the interest generated by volume changes and the interest generated by changes in the yield or rate. On a tax equivalent basis, net interest income increased $1,904 for the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily because of an increase in earning assets. Interest paid on interest bearing deposits was down in 2013 compared to 2012 primarily because of lower average interest rates. Interest paid on the FHLB line of credit was $151 in 2013 compared to $426 in 2012.
TABLE B - Volume and Yield/Rate Variances
(Taxable Equivalent Basis)
2013 Compared to 2012 |
2012 Compared to 2011 |
|||||
Net |
|
Net |
||||
Yield |
Increase |
Yield |
Increase |
|||
Volume |
/Rate |
(Decrease) |
Volume |
/Rate |
(Decrease) |
|
Revenue earned on |
||||||
Loans, net |
$ 3,012 |
$ (2,537) |
$ 475 |
$ (946) |
$ (918) |
$ (1,864) |
Bank deposits |
(56) |
315 |
259 |
32 |
13 |
45 |
Investment securities |
||||||
Taxable securities |
292 |
238 |
530 |
1,948 |
(1,285) |
663 |
Tax-free securities |
(354) |
65 |
(289 ) |
(782) |
34 |
(748) |
Other Investments |
- |
- |
- |
- |
4 |
4 |
Federal funds sold |
(5) |
0 |
(5) |
7 |
3 |
10 |
Total interest earning assets |
2,889 |
(1,919) |
970 |
259 |
(2,149) |
(1,890) |
Interest paid on |
||||||
NOW and money market accounts |
54 |
(320) |
(266) |
139 |
(516) |
(377) |
Savings deposits |
8 |
(23) |
(15) |
7 |
(36) |
(29) |
Time deposits up to $100 |
(65) |
(151) |
(216) |
(69) |
(292) |
(361) |
Time deposits over $100 |
10 |
(162) |
(152) |
164 |
(277) |
(113) |
Federal funds purchased and securities |
||||||
sold under agreements to repurchase |
3 |
(13) |
(10) |
33 |
(18) |
15 |
Short term debt |
- |
- |
- |
- |
- |
- |
Long term debt |
(286) |
11 |
(275) |
(247) |
11 |
(236) |
Total interest-bearing funds |
(276) |
(658) |
(934) |
27 |
(1,128) |
(1,101) |
Net interest earnings |
$ 3,165 |
$ (1,261) |
$ 1,904 |
$ 232 |
$ (1,021) |
$ (789) |
Notes: |
|
1. |
The change in interest earned or paid resulting from both volume and rate or yield has been allocated accordingly in proportion to the relationship of the absolute amounts of the change in each. Loans include nonaccrual loans for all years presented. |
2. |
The computation of the taxable equivalent adjustment has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-exempt assets. |
3. |
U.S. government (agency, state and political subdivision), and corporate debt securities plus equity securities in the available-for-sale and held-to-maturity categories are taxable securities. |
8
Assets and Liabilities
Average earning assets increased 4.6% in 2013 compared to 2012 and increased 8.7% in 2012 compared to 2011. As a financial institution, the Corporations primary earning assets are loans made by the Bank. In 2013, average net loans represented 57.4% of average earning assets compared to 54.4% of average earnings assets at December 31, 2012. Average net loans increased 10.6% in 2013 compared to 2012 and decreased 3.1% in 2012 compared to 2011. Management of the Corporation believes that average net loans will increase throughout 2014 because of the increase in demand for loans over the past six months.
Average investment securities, which comprised 39.1% of average earning assets in 2013, increased 2.9% from 2012 compared to a 25.7% increase in 2012 from 2011. This increase in average investments was the result of sluggish loan growth in the half of the year and therefore management grew the investment portfolio during this time. Average total assets increased 3.2% during 2013 compared to an increase of 8.1% between 2012 and 2011.
The Banks average deposits increased 5.0% in 2013 compared to 2012. The increase in average deposits for 2012 was primarily a result of an increase in interest bearing deposits, which also contributed to the Banks 8.9% increase in average deposits in 2012 compared to 2011. Average interest-bearing transaction accounts in 2013 increased 3.8% from 2012. Time deposits up to $100 decreased 5.7% as of December 31, 2013 compared to December 31, 2012 and time deposits over $100 increased 0.8% over the same period. Average savings deposits increased 11.8% in 2013 compared to 2012. Average Negotiable Order of Withdrawal (NOW) and money market accounts increased 6.1% in 2013 compared to 2012. Savings deposits have historically been steady providers of a core, low cost source of funding.
Customer relationship development helped maintain a relatively stable base in noninterest bearing deposits during 2013. The Banks noninterest bearing deposits have remained strong and were 18.5% of average total deposits in 2013, 17.5% of average total deposits in 2012 and 16.5% of average total deposits in 2011. Average noninterest bearing deposits increased 10.8% for 2013 and 15.8% for 2012.
The Bank has a Blanket Agreement for Advances and Security Agreement with the FHLB for term debt or other obligations. For more information, see Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders.
LIQUIDITY AND CAPITAL RESOURCES
The Bank uses a formal asset and liability management process to ensure adequate liquidity and control interest rate risk. The Banks goal of liquidity management is to provide adequate funds to meet loan demand and any potential unexpected deposit withdrawals. The Bank accomplishes this goal by striving for consistent core deposit growth, holding adequate liquid assets and maintaining unused capacity to borrow funds. The Banks objective of interest rate risk management is to maintain reasonable stability in the gross interest margin despite changes in the level of interest rates and the spread among interest rates.
Liquidity
Most of the capital needs of the Bank historically have been financed with retained earnings and deposits received, and the Corporations primary source of liquidity has been dividends declared by the Bank. The Banks Board of Directors has adopted a liquidity policy that outlines specific liquidity target balances. Compliance with this policy is reviewed quarterly by the Banks Asset/Liability Committee and results are reported to the Banks Board of Directors. At December 31, 2013, available liquidity was $271,383 compared to $282,724 as of December 31, 2012.
Management believes that the Corporations traditional sources of cash generated from the Banks operating activities are adequate to meet the Corporations liquidity needs for normal ongoing operations; however, the Bank also has access to additional sources of funds, if necessary, through additional advances from the FHLB or the Cash Management Advance Line of Credit Agreement with the FHLB. In March 2008, the Bank obtained five advances at $7,000 each from the FHLB, and in September 2008, the Bank obtained two additional advances of $3,100 each for a total borrowing in 2009 of $41,200. The first three scheduled repayments of the advances were made in March 2010, March and September 2011, and March 2012. The remaining payments occurred in March and September 2013. The borrowings from the FHLB have been used generally for investment strategies to enhance the Banks portfolio.
9
Interest Rate Risk
The Bank uses an earnings simulation model to evaluate the impact of different interest rate scenarios on the gross margin. Each quarter, the Banks Asset/Liability Committee assesses the relationship of rate sensitive earning assets to rate sensitive interest bearing liabilities (interest rate sensitivity), which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest bearing liabilities are those that can be repriced to current market rates within a defined time period. The Asset/Liability Committee measures near-term risk (within the next 12 and 24 months) to net interest income resulting from changes in interest rates. The model incorporates the Banks assets and liabilities, together with forecasted changes in the balance sheet mix and assumptions that reflect the current interest rate environment, to simulate the effect of possible changes in interest rates on net interest income. The Asset/Liability Committees policy is to conduct a monthly review of budgeted financial goals where the actual dollar change in net interest income is different from interest rate movements. A negative dollar change in net interest income for a 12- and 24- month period of less than 10.0% of net interest income given a 200 basis point shift in interest rates is considered an acceptable rate risk position. At December 31, 2013, if interest rates were to rise 200 basis points (2.0%) over the next 24 months, net interest income would be $385 more than currently projected if rates were to remain stable. This would represent an increase in net interest income of 1.2%. At December 31, 2013, if interest rates were to decline 100 basis points (1.0%) over the next 24 months, net interest income would be $2,498 less than the projection of rates remaining stable. This would represent a decrease in net interest income of 7.5%. The changes in percentages in both cases are within policy guidelines established by the Banks Board of Directors.
Another tool used to monitor the Banks overall interest rate sensitivity is a gap analysis (the difference between the earning asset and interest bearing liability amounts scheduled to be re-priced to current market rates in subsequent periods). Table C below shows the Banks rate-sensitive position at December 31, 2013, as measured by the gap analysis. Non-maturing balances such as money market, savings and NOW accounts have no contractual or stated maturities. Management has attempted to use historical data (pricing history) on these categories to best determine the impact of these non-maturing balances on the net interest margin as interest rates change. Management anticipates that rates will remain steady through most of 2014 and has determined that the Bank is in an acceptable rate risk position. Table A under the heading Net Interest Margin above provides additional information regarding the largest components of interest bearing liabilities.
TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities |
||||||||||
(Dollars in Thousands) |
Three Months |
Three to Six |
Six to 12 |
Over One |
||||||
As of December 31, 2013 |
or Less |
Months |
Months |
Year |
Total |
|||||
Earning assets |
||||||||||
Bank time deposits |
$ |
35,017 |
$ |
- |
$ |
- |
$ |
- |
$ |
35,017 |
Taxable investment securities |
1,104 |
712 |
1,382 |
280,179 |
283,377 |
|||||
Tax-exempt investment securities |
- |
425 |
332 |
73,418 |
74,175 |
|||||
Loans and leases, net of deferred fees |
23,909 |
27,700 |
64,238 |
482,324 |
598,171 |
|||||
Total earning assets |
60,030 |
28,837 |
65,952 |
835,921 |
990,740 |
|||||
Interest-bearing liabilities |
||||||||||
NOW and money market accounts |
141,927 |
- |
- |
304,740 |
446,667 |
|||||
Savings |
- |
- |
- |
92,013 |
92,013 |
|||||
Time up to $100 |
26,437 |
32,278 |
32,032 |
25,310 |
116,057 |
|||||
Time over $100 |
31,514 |
27,309 |
36,120 |
27,834 |
122,777 |
|||||
Other short-term debt |
18,095 |
- |
- |
- |
18,095 |
|||||
FHLB borrowing |
- |
- |
- |
- |
- |
|||||
Total interest bearing liabilities |
217,973 |
59,587 |
68,152 |
449,897 |
795,609 |
|||||
Period gap |
(157,943) |
(30,750) |
(2,200) |
386,024 |
195,131 |
|||||
Cumulative gap |
$ |
(157,943) |
$ |
(188,693) |
$ |
(190,893) |
$ |
195,131 |
|
10
Capital Expenditures
Historically, internal growth has financed the capital needs of the Bank. In 2012, the Bank completed the construction of a new branch in Williamson County, Tennessee. The branch opened in April of 2012. The Bank signed a ground lease to build a branch in Davidson County, Tennessee. The branch is expected to be completed by second quarter 2014.
Contractual Obligations
The following table summarized the Corporations contractual obligations as of December 31, 2013:
Payment due by period |
|||||
Contractual Obligations |
Total |
Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
Operating lease obligations |
$ 5,525 |
$ 336 |
$ 667 |
$ 580 |
$ 3,942 |
Repurchase agreements and time deposits |
256,929 |
203,782 |
40,134 |
13,013 |
- |
Total |
$ 262,454 |
$ 204,118 |
$ 40,801 |
$ 13,593 |
$ 3,942 |
Dividends
Cash dividends declared in 2013 were 37.9% of net income compared to 51.1% of net income for 2012. The Corporation plans to continue an average annual payout ratio over 20% while continuing to maintain a capital to asset ratio reflecting financial strength and adherence to regulatory guidelines.
Regulatory Capital
Under federal regulatory standards, in order to be adequately capitalized the Corporations Tier 1 Risk-Based Capital Ratio (ratio of Tier 1 Capital to risk-weighted assets) must be at least 4%, its Total Risk-Based Capital Ratio (ratio of total capital to risk-weighted assets) must be at least 8%, and its Tier 1 Leverage Capital Ratio (ratio of Tier 1 Capital to average assets) must be at least 4%. Tier 1 Capital generally consists of common stock.
As of December 31, 2013, the Corporations Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio and Tier 1 Leverage Capital Ratio were 14.1%, 15.3% and 9.4%, respectively. At December 31, 2012, the comparable ratios were 14.5%, 15.8% and 9.7% respectively. Please refer to Note 12 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders for more information on the capital strength of the Corporation and the Bank.
Loans and Loan Quality
The Banks loan portfolio is the largest component of earning assets and, therefore, provides the highest amount of revenue. The loan portfolio also contains the highest exposure to risk, as a result of credit quality. When analyzing potential loans, management assesses both interest rate objectives and credit quality objectives in determining whether to authorize a given loan and the appropriate pricing for that loan. The Bank maintains a diversified portfolio in order to spread its risk and reduce its exposure to economic downturns that may occur in different segments of the economy or in particular industries. As of December 31, 2013, total loans maturing and repricing after one year that have predetermined interest rates and floating or adjustable interest rates totaled $482,324. The composition of the loan portfolio is disclosed in detail in Note 4 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders.
11
The following table presents the maturities of the Banks loans by category as of December 31, 2013:
Within One Year |
One to Five Years |
After Five Years |
Total |
|
Commercial, financial and agricultural |
$ 45,366 |
$ 48,421 |
$ 11,488 |
$ 105,275 |
Tax exempt municipal loans |
3,553 |
9,818 |
9,931 |
23,302 |
Real estate |
||||
Construction |
15,495 |
8,831 |
5,612 |
29,938 |
Commercial mortgages |
26,685 |
100,829 |
68,346 |
195,860 |
Residential mortgages |
21,233 |
70,218 |
122,312 |
213,763 |
Other |
3,211 |
12,940 |
6,202 |
22,353 |
Retail loans |
9,198 |
6,942 |
135 |
16,275 |
Total |
$ 124,741 |
$ 257,999 |
$ 224,026 |
$ 606,766 |
The lending activities of the Bank are subject to written underwriting standards and policies established by the Banks Board of Directors and management that include loan review procedures and approvals. Applications for loans are received by designated employees at 15 of the Banks offices. Depending primarily on the dollar amount of the loan, there are various approval levels required, including that of the Executive Committee of the Banks Board of Directors.
The composition of the Banks loan and lease portfolio for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 were as follows:
2013 |
Percentage
of |
2012 |
2011 |
2010 |
2009 |
||||||
Commercial and industrial: |
|||||||||||
Commercial |
$ |
94,702 |
15.6% |
$ |
83,631 |
$ |
60,448 |
$ |
61,192 |
$ |
63,695 |
Other |
10,573 |
1.7% |
11,594 |
2,601 |
5,446 |
2,943 |
|||||
Tax exempt municipal loans |
23,302 |
3.8% |
21,004 |
25,130 |
38,877 |
34,138 |
|||||
Real estate |
|||||||||||
Construction |
30,685 |
5.1% |
37,008 |
33,270 |
37,374 |
38,877 |
|||||
Commercial mortgages |
195,860 |
32.3% |
183,373 |
152,539 |
156,704 |
149,332 |
|||||
Residential mortgages |
214,211 |
35.3% |
196,349 |
196,913 |
221,748 |
238,349 |
|||||
Other |
22,353 |
3.6% |
19,393 |
30,410 |
31,129 |
32,464 |
|||||
Retail loans |
16,275 |
2.6% |
15,651 |
17,027 |
15,753 |
17,124 |
|||||
Lease financing receivables |
- |
- |
- |
- |
- |
274 |
|||||
Net unamortized loan origination fees |
(1,195) |
- |
(844) |
(536) |
(490) |
(541) |
|||||
$ |
606,766 |
100.0% |
$ |
567,159 |
$ |
517,802 |
$ |
559,179 |
$ |
576,655 |
A slight majority of the Banks outstanding loans continue to be housed in the Maury County portfolio in 2013. Maury County housed 47.5% of the Banks outstanding loans at December 31, 2013, including most of its out-of-territory loans and participations purchased. The Maury County portfolio experienced a $3,863 increase in outstanding loans for 2013. The majority of the growth came from commercial lending.
Loan demand showed a marked improvement in the latter part of 2013, mainly due to commercial lending. Commercial loans grew 5.5% from the previous year. Portfolio growth and asset quality remain strong. The bank will continue to diligently review its pricing structure and to seek out new lending opportunities and bank relationships within the seven-county footprint.
12
The Bank has a credit administration function that is responsible for assisting loan officers in underwriting new loans, reviewing problem loans, monitoring the status of problem loans from period to period, and assisting in their resolution. This review process also includes semi-annual reviews by an outside party to assess the quality of the loan portfolio independently. Management has concluded that this independent review has served to strengthen underwriting practices. The analysis and review by the Banks credit administration department also includes a formal review that is prepared quarterly to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan and lease losses (ALLL). Loan reviews of all relationships aggregating $400 and greater are completed on an annual schedule.
Loans that are impaired and not accruing interest were actively monitored in 2013 to determine those for which more aggressive action plans should be taken. The Bank ended 2013 with $214, or 0.04% in net charge-offs. The Banks charge-off level is tracking well under the Banks target level of 0.25% and below its peer group average of 0.27% for 2013. Management believes that the ALLL was adequate at December 31, 2013.
Table D below summarizes average loan balances and reconciles the ALLL for each of the last five years.
Additions or reductions to the allowance, which are included in operating expenses, are also included.
TABLE D - Loan Portfolio
December 31, |
||||||||||
(Dollars In Thousands) |
2013 |
2012 |
2011 |
2010 |
2009 |
|||||
Average amount of gross loans outstanding |
$ |
581,596 |
$ |
526,973 |
$ |
543,203 |
$ |
573,524 |
$ |
588,821 |
Balance of allowance for possible loan |
||||||||||
losses at beginning of year |
8,809 |
9,200 |
9,420 |
8,929 |
8,625 |
|||||
Loans charged off |
||||||||||
Commercial loans |
222 |
1,690 |
3,353 |
2,046 |
2,069 |
|||||
Residential real estate loans |
27 |
176 |
52 |
108 |
134 |
|||||
Loans to individuals |
49 |
19 |
147 |
77 |
101 |
|||||
TOTAL LOANS CHARGED OFF |
298 |
1,885 |
3,552 |
2,231 |
2,304 |
|||||
Recoveries of loans previously charged off |
||||||||||
Commercial loans |
53 |
364 |
103 |
782 |
312 |
|||||
Residential real estate loans |
2 |
2 |
- |
- |
19 |
|||||
Loans to individuals |
29 |
8 |
104 |
44 |
42 |
|||||
TOTAL RECOVERIES |
84 |
374 |
207 |
826 |
373 |
|||||
NET LOANS CHARGED OFF |
214 |
1,511 |
3,345 |
1,405 |
1,931 |
|||||
Provision (reduction) charged (credited) |
||||||||||
to operating expenses |
- |
1,120 |
3,125 |
1,896 |
2,235 |
|||||
BALANCE AT END OF YEAR |
$ |
8,595 |
$ |
8,809 |
$ |
9,200 |
$ |
9,420 |
$ |
8,929 |
Ratio of net charge-offs during the period |
||||||||||
to average gross loans outstanding |
0.04 % |
0.29 % |
0.62 % |
0.24 % |
0.33 % |
In reviewing the Banks loan portfolio, management categorizes certain loans as classified assets, which consist of substandard, doubtful and loss categories of loans, and special mention, which is a less severe category of loans that do not warrant an adverse classification. The Bank closed 2013 with $8,065 in classified assets compared to $14,113 in 2012; of these amounts, $2,325 were classified as doubtful at December 31, 2013 compared to $2,455 as of December 31, 2012, $4,302 and $5,980 were classified as substandard at December 31, 2013 and 2012, respectively, and $1,438 and $5,678 were classified as OREO at December 31, 2013 and 2012, respectively. At December 31, 2013, loans totaling $4,898, or 0.81% of the portfolio, were classified as special mention loans. This compares to loans totaling $1,580 so classified at December 31, 2012, representing an increase of $3,318.
Loans having recorded investments of $9,225 and $8,642 at December 31, 2013 and 2012 have been identified as impaired. Loans amounting to $5,396 and $8,074 at December 31, 2013 and 2012, respectively, were not accruing interest. These loans are considered nonaccrual loans and represented 0.9% and 1.4% of gross loans as of December 31, 2013 and 2012, respectively. Interest received on nonaccrual loans during 2013 was $326, during 2012 was $484, and during 2011 was $959. The Bank had no loans that were 90 days or more past due that were not included in nonaccrual loans as of December 31, 2013 or 2012.
13
The Bank had $3,607 and $4,156 that qualified as troubled debt restructurings as defined in ASC Topic 310-40 as occasion of December 31, 2013 and 2012, respectively. Troubled debt restructurings are loans for which the Bank, for economic or legal reasons related to a borrowers financial difficulties, grants a concession to the borrower which would otherwise not be considered. For a loan to be classified as a troubled debt restructuring, the borrower must be experiencing financial difficulties (even if the borrower is not currently in default on any of its indebtedness), and because of those difficulties the Bank must have made a concession that would otherwise not be granted. These concessions can take many forms, including but not limited to granting temporary payment relief, restructuring a loan to extend the amortization or lower the required payment amount, and forgiveness of principal. Likewise, the financial difficulty being experienced by a borrower can take many forms, including but not limited to:
Being in default on any existing indebtedness;
Declaring, or being in the process of declaring, bankruptcy;
Significant doubt as to whether an existing business can continue to operate as a going concern;
Historically demonstrating, or forecasting, insufficient cash flows with which to service all debt in a timely manner; or
Absent the modification, the borrower cannot continue to keep all indebtedness current.
Once identified as a troubled debt restructuring, the bank will track these loans and periodically report to the Board of Directors the aggregate balances thereof. Please refer to Note 1 and Note 4 in the Notes to Consolidated Financial Statements that are included elsewhere in this Annual Report to Shareholders for more information on the Banks policy regarding loan impairment and troubled debt restructuring.
RESULTS OF OPERATIONS
Interest Income and Expense
Total interest income increased 2.7% during 2013 as a result of an increase in loan volume and slight increase in investment yields. Interest and fees earned on loans totaled 76.7% of gross interest income during 2013 and increased 2.5% from 2012 as a result of an increase in loan volume. Interest earned on securities and other investments totaled 23.3% of total interest income during 2013 and increased 3.3% from 2012 primarily because the investment portfolios yields have increased in same period.
Total interest expense decreased 24.3% in 2013, compared to a 22.3% decrease in 2012 and a 29.4% decrease in 2011. Decreases in the average interest rate paid on interest bearing liabilities contributed to the lower interest expense. The cost of interest bearing deposits is monitored quarterly by the Banks Asset/Liability Committee. The net interest margin (tax equivalent net interest income divided by average earning assets) was 3.69%, 3.66% and 4.07% for years ended December 31, 2013, 2012 and 2011, respectively.
Net interest income on a fully taxable equivalent basis is influenced primarily by changes in: (i) the volume and mix of earning assets and sources of funding; (ii) market rates of interest. The impact of some of these factors can be controlled by management policies and actions. External factors can also have a significant impact on changes in net interest income from one period to another. Some examples of such factors include: (i) the strength of credit demands by customers; (ii) Federal Reserve Board monetary policy; and fiscal and debt management policies of the federal government, including changes in tax laws. For the 12 months ended December 31, 2013, net interest income was $34,454, compared to $32,543 and $33,026 for the 12 months ended December 31, 2012 and 2011, respectively.
Noninterest Income and Expenses
The components of non-interest income were as follows:
14
2013 |
2012 |
2011 |
||||
Trust |
$ |
2,298 |
$ |
2,119 |
$ |
1,999 |
Deposit fees |
6,479 |
6,689 |
6,784 |
|||
Mortgage banking income (gains of loans sold) |
437 |
511 |
469 |
|||
Earnings on bank owned life insurance |
497 |
705 |
717 |
|||
Gain/loss on investment securities |
829 |
2,294 |
1,458 |
|||
Gain/loss on other real estate owned |
(308) |
(1,317) |
(948) |
|||
Other |
884 |
630 |
493 |
|||
$ |
11,116 |
$ |
11,631 |
$ |
10,972 |
Noninterest income decreased 4.4% in 2013 compared to 2012 and increased 6.0% in 2012 compared to 2011. Mortgage banking had a nominal decrease in 2013 compared to 2012. There was an $829 gain on sale of available-for-sale securities in 2013 compared to a $2,294 gain in 2012. Income from service charges on accounts decreased 3.1% in 2013 compared to 2012, representing 58% of total noninterest income. Income from fiduciary services offered in the Banks Trust Department increased 8.4% in 2013 compared to 2012, representing 20.7% of total noninterest income. Stability in the equity and bond markets impacted the market value of the assets managed by the Trust Department and the related investment fees earned by the Bank.
The components of noninterest expense were as follows:
2013 |
2012 |
2011 |
||||
Personnel |
$ |
17,901 |
$ |
19,406 |
$ |
18,836 |
Occupancy |
2,581 |
2,528 |
2,488 |
|||
Equipment |
1,397 |
1,334 |
1,224 |
|||
Other |
10,934 |
10,246 |
10,569 |
|||
$ |
32,813 |
$ |
33,514 |
$ |
33,117 |
Noninterest expenses decreased 2.1% in 2013 compared to 2012. A 7.8% decrease in salaries and benefits was the primary contributor to this increase, due mainly to less insurance expense for the year. Furniture and equipment increased $53 in 2013, which was included in the 2013 budget. Noninterest expenses increased 1.2% in 2012 compared to 2011.
Income Tax Expense
Applicable income taxes on 2013 earnings amounted to $2,865, resulting in an effective tax rate of 22.5% compared to $1,916, or 20.1% in 2012. The effective tax rate for 2013 and 2012 is a function of the net income earned and the effect of having a real estate investment trust structure, which results in having no Tennessee excise tax expense and the effects of interest earned on tax-exempt loans and securities.
Net Income
Net income was 29.8% higher in 2013 than in 2012. No provision for loan losses was expensed in 2013, which was the primary reason for the increase in net income. The Banks annualized charge-offs ended the year at 0.04%, an improvement from 0.27% in 2012. Classified assets declined $7,192, or 40.2% from 2013 to 2012. Based on these improving trends, the allowance for loan losses was adequate for our loan portfolio. Net income was 8.7% higher in 2012 than in 2011 primarily because of the 64.2% decrease in the provision for loan losses from 2012 to 2011.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2013, the Bank was 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 included commitments to extend credit and standby letters of credit. Please refer to Note 11 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders for more information on the Banks commitments and contingencies. Please refer to Table C above under the heading "Liquidity and Capital Resources" for a summary of the Corporations earning assets and interest bearing liabilities by maturities.
CRITICAL ACCOUNTING POLICIES
15
The accounting and reporting policies followed by the Corporation conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In connection with the application of those principles, the Corporations management has made judgments and estimates that, in the case of determining the ALLL and the recognition of deferred income tax assets has been critical to the determination of the Corporations financial position, results of operations and cash flows.
Allowance for Loan and Lease Losses
The adequacy of the allowance for loan and lease losses is evaluated quarterly in conjunction with loan review reports and evaluations that are discussed in meetings with loan officers, credit administration and the Corporations Board of Directors. The Banks past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrowers ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors are considered in this evaluation. This process is inherently subjective as it requires material estimates that are susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the loan portfolio.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the groups historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Management has implemented procedures that give detailed historical data by segment of retail and commercial credit and performance characteristics to broaden the analysis and improve monitoring of potential credit risk.
Criteria considered and processes utilized in evaluating the adequacy of the ALLL are:
Portfolio quality trends;
Changes in the nature and volume of the portfolio;
Present and prospective economic and business conditions, locally and nationally;
Management review systems and board oversight, including external loan review processes;
Changes in credit policy, credit administration, portfolio management and procedures;
Changes in personnel, management and staff; and
Existence and effect of any concentrations of credit.
In assessing the adequacy of the ALLL, the risk characteristics of the entire loan portfolio are evaluated. This process includes the judgment of management, input from independent loan reviews and reviews that may have been conducted by bank regulators as part of their usual examination process. Refer to notes 1, 4 and 5 in the consolidated financial statements for more information on the allowance for loan losses.
The following table gives a breakdown of the ALLL for each loan category:
December 31, |
||||
2013 |
2012 |
|||
Balance at End of Period Applicable to: |
Amount |
Percent of ALLL |
Amount |
Percent of ALLL |
Commercial |
$ 7,359 |
85.62% |
$ 7,528 |
85.46% |
Residential real estate |
1,084 |
12.61% |
1,109 |
12.59% |
Consumer and other retail |
152 |
1.77% |
172 |
1.95% |
Total loans |
$ 8,595 |
100.00% |
$ 8,809 |
100.00% |
16
Deferred Income Tax Assets
Deferred income tax assets consist mainly of the tax effect of excess provisions for loan and lease losses over actual losses incurred, the unrealized loss on available-for-sale securities and deferred compensation. The Corporation and the Bank have paid taxes for many years. Management believes that it is more likely than not that these assets will be realized in future years.
SHAREHOLDER INFORMATION
The 5,021,012 shares of common stock of the Corporation outstanding at December 31, 2013 had an estimated market value of $125,525 and were held by 2,054 shareholders located primarily in the Corporations market area. A small number of shareholders are not identified individually because some bank nominees, including the Banks Trust Department, are listed as record owners when, in fact, these holdings represent more than one beneficial owner. No single shareholders ownership exceeded 5% at year end.
There is no established public trading market for shares of the Corporations common stock. The table below shows the high and low price of the Corporations common stock taken from reported prices by those buyers and sellers willing to disclose this information. This table also shows the semi-annual dividend declared per share of common stock, in each of the last two years. In 2013, the Corporation repurchased 158,988 shares of its common stock in several privately negotiated transactions.
High |
Low |
Dividend |
||
2013 |
First Quarter |
$ 27.50 |
$ 18.52 |
$ - |
Second Quarter |
25.00 |
19.00 |
0.370 |
|
Third Quarter |
22.50 |
20.00 |
- |
|
Fourth Quarter |
25.00 |
23.00 |
0.370 |
|
2012 |
First Quarter |
$ 30.00 |
$ 27.00 |
$ - |
Second Quarter |
28.00 |
20.00 |
0.370 |
|
Third Quarter |
45.00 |
21.00 |
- |
|
Fourth Quarter |
23.00 |
22.48 |
0.370 |
ADDITIONAL FINANCIAL DATA
The following table presents consolidated comparative data for the Corporation for the years shown:
COMPARATIVE DATA |
|||||||||||||||||
(Dollars In Thousands) |
|||||||||||||||||
2013 |
2012 |
2011 |
2010 |
2009 |
2008 |
2007 |
|||||||||||
Total Assets |
$ |
1,093,833 |
$ |
1,090,363 |
$ |
1,017,808 |
$ |
941,625 |
$ |
935,009 |
$ |
911,137 |
$ |
823,046 |
|||
Average assets |
$ |
1,087,487 |
$ |
1,054,316 |
$ |
975,671 |
$ |
953,155 |
$ |
922,549 |
$ |
855,278 |
$ |
797,239 |
|||
Average loans (net) |
$ |
572,913 |
$ |
518,158 |
$ |
534,841 |
$ |
564,388 |
$ |
579,998 |
$ |
534,441 |
$ |
484,308 |
|||
Average deposits |
$ |
938,032 |
$ |
893,486 |
$ |
820,250 |
$ |
795,786 |
$ |
760,315 |
$ |
701,428 |
$ |
673,728 |
|||
Return on |
|||||||||||||||||
average assets |
0.91% |
0.72% |
0.72% |
0.76% |
0.87% |
1.08% |
1.08% |
||||||||||
Return on |
|||||||||||||||||
average equity |
8.90% |
6.65% |
6.21% |
6.84% |
7.50% |
8.60% |
8.36% |
||||||||||
Tier 1 capital |
|||||||||||||||||
to average assets |
9.03% |
9.67% |
10.24% |
10.38% |
10.55% |
10.93% |
12.22% |
17
Selected Financial Information |
||||||||||||
(Dollars in Thousands, Except Per Share Data) |
||||||||||||
2013 |
2012 |
2011 |
2010 |
2009 |
2008 |
|||||||
|
|
|
|
|
|
|||||||
Interest Income |
||||||||||||
Interest and fees on loans |
$ |
28,653 |
$ |
27,951 |
$ |
29,838 |
$ |
31,925 |
$ |
31,815 |
$ |
32,901 |
Income on investment securities |
||||||||||||
Taxable interest |
5,501 |
4,967 |
4,219 |
3,857 |
4,894 |
6,649 |
||||||
Exempt from federal income tax |
2,913 |
3,106 |
3,616 |
3,575 |
3,761 |
3,866 |
||||||
Dividends |
197 |
207 |
197 |
194 |
204 |
194 |
||||||
8,611 |
8,280 |
8,032 |
7,626 |
8,859 |
10,709 |
|||||||
Other interest income |
97 |
153 |
98 |
58 |
66 |
271 |
||||||
Total Interest Income |
37,361 |
36,384 |
37,968 |
39,609 |
40,740 |
43,881 |
||||||
Interest Expense |
||||||||||||
Interest on deposits |
2,694 |
3,343 |
4,223 |
6,029 |
7,916 |
11,626 |
||||||
Interest on other short term borrowings |
213 |
498 |
719 |
972 |
1,156 |
831 |
||||||
Total Interest Expense |
2,907 |
3,841 |
4,942 |
7,001 |
9,072 |
12,457 |
||||||
Net Interest Income |
34,454 |
32,543 |
33,026 |
32,608 |
31,668 |
31,424 |
||||||
Provision For Possible Loan Losses |
- |
1,120 |
3,125 |
1,896 |
2,235 |
1,687 |
||||||
Net Interest Income After |
||||||||||||
Provision for Loan Losses |
34,454 |
31,423 |
29,901 |
30,712 |
29,433 |
29,737 |
||||||
Noninterest Income |
||||||||||||
Trust department income |
2,298 |
2,119 |
1,999 |
1,965 |
1,924 |
2,463 |
||||||
Service fees on deposit accounts |
6,479 |
6,689 |
6,784 |
6,781 |
7,231 |
7,705 |
||||||
Other service fees, commissions, and fees |
563 |
610 |
584 |
708 |
431 |
393 |
||||||
Other operating income |
947 |
(81) |
147 |
(1,300) |
793 |
974 |
||||||
Securities gains |
829 |
2,294 |
1,458 |
1,614 |
2,482 |
1,351 |
||||||
Total Noninterest Income |
11,116 |
11,631 |
10,972 |
9,768 |
12,861 |
12,886 |
||||||
Noninterest Expense |
||||||||||||
Salaries and employee benefits |
17,901 |
19,406 |
18,836 |
15,811 |
17,137 |
16,562 |
||||||
Net occupancy expense |
2,581 |
2,528 |
2,488 |
2,116 |
2,662 |
2,620 |
||||||
Furniture and equipment expense |
1,397 |
1,334 |
1,224 |
1,076 |
1,120 |
1,007 |
||||||
Other operating expenses |
10,950 |
10,262 |
10,585 |
13,191 |
12,148 |
11,259 |
||||||
Total Noninterest Expense |
32,829 |
33,530 |
33,133 |
32,194 |
33,067 |
31,448 |
||||||
Income Before Provision |
||||||||||||
For income Taxes |
12,741 |
9,524 |
7,740 |
8,286 |
9,227 |
11,175 |
||||||
Provision For Income Taxes |
2,865 |
1,916 |
744 |
1,043 |
1,187 |
1,967 |
||||||
Net Income |
$ |
9,876 |
$ |
7,608 |
$ |
6,996 |
$ |
7,243 |
$ |
8,040 |
$ |
9,208 |
Earnings Per Common Share |
$ |
1.93 |
$ |
1.43 |
$ |
1.30 |
$ |
1.32 |
$ |
1.45 |
$ |
1.63 |
Weighted Average Shares Outstanding |
5,110,849 |
5,315,634 |
5,400,063 |
5,486,183 |
5,537,611 |
5,635,060 |
||||||
(See Note 1 of Notes to Consolidated Financial Statements) |
18
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of DirectorsWe have audited First Farmers and Merchants Corporations (Corporation) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on the Corporations internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe our audit provides a reasonable basis for our opinion.
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 Corporation, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporations assets that could have a material effect on the financial statements.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.
Audit Committee, Board of Directors
and Shareholders
First Farmers and Merchants Corporation
Columbia, Tennessee
Page 2
//s//BKD, LLP
Louisville, Kentucky
March 6, 2014
FIRST FARMERS AND MERCHANTS CORPORATION
COLUMBIA, TENNESSEE
Management Report on Internal Control Over Financial Reporting.
The management of First Farmers and Merchants Corporation is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in its annual report. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and, as such, include amounts based on informed judgments, assumptions and estimates made by management.
The management of First Farmers and Merchants Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporations internal control system was designed to provide reasonable assurance to the Corporations management and board of directors regarding the preparation and fair presentation of published financial statement. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Corporations management assessed the effectiveness of the Corporations internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992). Based on our assessment we believe that, as of December 31, 2013, the Corporations internal control over financial reporting is effective based on those criteria.
BKD, LLP, the independent registered public
accounting firm that audited the consolidated financial statements of the
Corporation included in this annual report, has issued an attestation report on
the effectiveness of the Corporation's internal control over financial reporting
as of December 31, 2013. The report, which expresses an unqualified opinion on
the effectiveness of the Corporation's internal control over financial reporting
as of December 31, 2013, is included in this annual report.
2
All dollar amounts are reported in thousands except share and per share data.
3
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of DirectorsWe have audited the accompanying consolidated balance sheets of First Farmers and Merchants Corporation (Corporation) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income (loss), changes in shareholders equity and cash flows for each of the years in the two-year period ended December 31, 2013. The Corporations management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits 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. We believe our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporations internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2014, expressed an unqualified opinion on the effectiveness of the Corporations internal control over financial reporting.
//s//BKD, LLP
Louisville, Kentucky
3
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES |
||||||
CONDENSED CONSOLIDATED BALANCE SHEETS |
||||||
December 31, |
December 31, |
|||||
2013 |
2012 |
|||||
|
(Dollars in Thousands, Except Per Share Data) |
|
|
|
||
ASSETS |
Cash and due from banks |
$ |
20,391 |
$ |
23,443 |
|
Interest-bearing due from banks |
25,167 |
31,953 |
||||
Federal funds sold |
9,850 |
15,000 |
||||
Total cash and cash equivalents |
55,408 |
70,396 |
||||
Securities |
||||||
Available-for-sale (amortized cost $346,892 |
||||||
and
$339,971 as of December 31, 2013 and December 31, 2012, |
329,714 |
345,718 |
||||
Held-to-maturity (fair market value $28,595 |
||||||
and
$33,420 as of December 31, 2013 and December 31, 2012, |
27,839 |
31,755 |
||||
Total securities |
357,553 |
377,473 |
||||
Loans, net of deferred fees |
606,766 |
567,159 |
||||
Allowance for loan and lease losses |
(8,595) |
(8,809) |
||||
Net loans |
598,171 |
558,350 |
||||
Bank premises and equipment, net |
24,868 |
26,417 |
||||
Other real estate owned |
1,438 |
5,678 |
||||
Bank owned life insurance |
25,867 |
25,112 |
||||
Goodwill |
9,018 |
9,018 |
||||
Deferred tax asset |
10,905 |
3,884 |
||||
Other assets |
10,605 |
14,035 |
||||
|
TOTAL ASSETS |
$ |
1,093,833 |
|
$ |
1,090,363 |
LIABILITIES |
Deposits |
|||||
Noninterest-bearing |
$ |
179,823 |
$ |
169,136 |
||
Interest-bearing |
777,514 |
763,713 |
||||
Total deposits |
957,337 |
932,849 |
||||
Securities sold under agreements to repurchase |
18,095 |
17,068 |
||||
Accounts payable and accrued liabilities |
15,728 |
15,755 |
||||
Federal Home Loan Bank (FHLB) advances |
- |
10,100 |
||||
|
TOTAL LIABILITIES |
991,160 |
|
975,772 |
||
SHAREHOLDERS' |
Common stock - $10 par value per share, 8,000,000 shares |
|||||
EQUITY |
authorized; 5,021,012 and 5,180,000 shares issued |
|||||
and outstanding as of December 31, 2013 and |
||||||
December 31, 2012, respectively |
50,210 |
51,800 |
||||
Retained earnings |
61,369 |
57,366 |
||||
Accumulated other comprehensive income (loss) |
(9,001) |
5,330 |
||||
TOTAL
SHAREHOLDERS' EQUITY BEFORE |
102,578 |
114,496 |
||||
Noncontrolling interest - preferred stock of subsidiary |
95 |
95 |
||||
TOTAL SHAREHOLDERS' EQUITY |
102,673 |
114,591 |
||||
TOTAL LIABILITIES AND |
||||||
|
SHAREHOLDERS' EQUITY |
$ |
1,093,833 |
|
$ |
1,090,363 |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
4
All dollar amounts are reported in thousands except share and per share data.
CONSOLIDATED STATEMENTS OF INCOME |
|||||||
Years Ended December 31, |
|||||||
|
2013 |
2012 |
2011 |
||||
INTEREST AND |
Interest and fees on loans |
$ |
28,653 |
27,951 |
29,838 |
||
DIVIDEND |
Income on investment securities |
||||||
INCOME |
Taxable interest |
5,501 |
4,967 |
4,219 |
|||
Exempt from federal income tax |
2,913 |
3,106 |
3,616 |
||||
Dividends |
294 |
360 |
295 |
||||
|
Total interest income |
37,361 |
36,384 |
37,968 |
|||
INTEREST |
Interest on deposits |
2,694 |
3,343 |
4,223 |
|||
EXPENSE |
Interest on other borrowings |
213 |
498 |
719 |
|||
Total interest expense |
2,907 |
3,841 |
4,942 |
||||
Net interest income |
34,454 |
32,543 |
33,026 |
||||
Provision for loan and lease losses |
- |
1,120 |
3,125 |
||||
|
Net interest income after provision |
34,454 |
31,423 |
29,901 |
|||
NONINTEREST |
Gain on loans sold |
437 |
511 |
469 |
|||
INCOME |
Trust department income |
2,298 |
2,119 |
1,999 |
|||
|
Service fees on deposit accounts |
6,479 |
6,689 |
6,784 |
|||
Brokerage fees |
361 |
231 |
36 |
||||
Earnings on bank owned life insurance |
497 |
705 |
717 |
||||
Gain on sale of securities |
829 |
2,294 |
1,458 |
||||
Loss on foreclosed property |
(308) |
(1,317) |
(948) |
||||
Other non-interest income |
523 |
399 |
457 |
||||
|
Total noninterest income |
11,116 |
11,631 |
10,972 |
|||
NONINTEREST |
Salaries and employee benefits |
17,901 |
19,406 |
18,836 |
|||
EXPENSE |
Net occupancy expense |
2,581 |
2,528 |
2,488 |
|||
Furniture and equipment expense |
1,397 |
1,334 |
1,224 |
||||
Data processing expense |
2,288 |
2,007 |
1,867 |
||||
Legal and professional fees |
1,037 |
943 |
997 |
||||
Stationary and office supplies |
293 |
279 |
286 |
||||
Advertising and promotions |
1,090 |
1,179 |
1,217 |
||||
FDIC Insurance premium expense |
728 |
703 |
875 |
||||
Other real estate expense |
128 |
309 |
640 |
||||
Other noninterest expense |
5,370 |
4,826 |
4,687 |
||||
Total noninterest expenses |
32,813 |
33,514 |
33,117 |
||||
Income before provision for income taxes |
12,757 |
9,540 |
7,756 |
||||
|
Provision for income taxes |
2,865 |
1,916 |
744 |
|||
Net
income before noncontrolling interest - dividends on |
9,892 |
7,624 |
7,012 |
||||
Noncontrolling
interest-dividends on preferred stock |
16 |
16 |
16 |
||||
|
Net income for common shareholders |
$ |
9,876 |
$ |
7,608 |
$ |
6,996 |
PER SHARE |
Weighted Average Shares Outstanding |
5,110,849 |
5,315,634 |
5,393,765 |
|||
|
Earnings per share |
$ |
1.93 |
$ |
1.43 |
$ |
1.30 |
The accompanying notes are an integral part of the consolidated financial statements. |
5
All dollar amounts are reported in thousands except share and per share data.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, |
||||||||
2013 |
|
2012 |
|
2011 |
||||
Net Income for common shareholders |
$ |
9,876 |
$ |
7,608 |
$ |
6,996 |
||
Other Comprehensive Income (Loss) |
||||||||
Unrealized appreciation (depreciation) on available-for-sale securities, net of tax (benefit) expenses of ($8,507), $1,204, and $2,960 |
(13,589) |
1,923 |
4,728 |
|||||
Reclassification adjustment for realized gains included in net income, net of taxes of ($319), ($883), and ($561), respectively |
(510) |
(1,411) |
(897) |
|||||
Change in unfunded portion of postretirement benefit obligations, net of tax of ($146), $1,008 and $1,214, respectively |
(232) |
1,610 |
1,940 |
|||||
Other Comprehensive Income (Loss) |
(14,331) |
2,122 |
5,771 |
|||||
Total Comprehensive Income (Loss) |
$ |
(4,455) |
$ |
9,730 |
$ |
12,767 |
||
The accompanying notes are an integral part of the consolidated financial statement |
6
All dollar amounts are reported in thousands except share and per share data.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES |
|||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
|||||||||||
Accumulated |
|||||||||||
Other |
|||||||||||
Shares of |
Preferred |
Common |
Retained |
Comprehensive |
|||||||
Years Ended December 31, 2013, 2012 and 2011 |
stock |
Stock |
Stock |
Earnings |
Income (Loss) |
Total |
|||||
Balance at December 31, 2010 |
5,430,000 |
$ |
95 |
$ |
54,300 |
$ |
54,524 |
$ |
(2,563) |
$ |
106,356 |
Net income before dividends on preferred stock of subsidiary |
7,012 |
7,012 |
|||||||||
Other comprehensive income |
5,771 |
5,771 |
|||||||||
Repurchase of common stock |
(100,000) |
(1,000) |
(2,011) |
(3,011) |
|||||||
Cash dividends declared, $0.74 per share |
(3,963) |
(3,963) |
|||||||||
Cash dividends - preferred stock of subsidiary |
|
|
|
(16) |
|
(16) |
|||||
Balance at December 31, 2011 |
5,330,000 |
95 |
53,300 |
55,546 |
3,208 |
112,149 |
|||||
Net income before dividends on preferred stock of subsidiary |
7,624 |
7,624 |
|||||||||
Other comprehensive income |
2,122 |
2,122 |
|||||||||
Repurchase of common stock |
(150,000) |
(1,500) |
(1,900) |
(3,400) |
|||||||
Cash dividends declared, $0.74 per share |
(3,888) |
(3,888) |
|||||||||
Cash dividends - preferred stock of subsidiary |
|
|
|
(16) |
|
(16) |
|||||
Balance at December 31, 2012 |
5,180,000 |
95 |
51,800 |
57,366 |
5,330 |
114,591 |
|||||
Net income before dividends on preferred stock of subsidiary |
9,892 |
9,892 |
|||||||||
Other comprehensive loss |
(14,331) |
(14,331) |
|||||||||
Repurchase of common stock |
(158,988) |
(1,590) |
(2,132) |
(3,722) |
|||||||
Cash dividends declared, $0.74 per share |
(3,741) |
(3,741) |
|||||||||
Cash dividends - preferred stock of subsidiary |
(16) |
(16) |
|||||||||
Balance AT December 31, 2013 |
5,021,012 |
$ |
95 |
$ |
50,210 |
$ |
61,369 |
$ |
(9,001) |
$ |
102,673 |
The accompanying notes are an integral part of the consolidated financial statements. |
7
All dollar amounts are reported in thousands except share and per share data.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES |
|||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
|||||||
Years Ended December 31, |
|||||||
|
(unaudited) |
2013 |
2012 |
2011 |
|||
OPERATING |
Net income available for common shareholders |
$ |
9,876 |
$ |
7,608 |
$ |
6,996 |
ACTIVITIES |
Adjustments to reconcile net income to net cash provided |
||||||
by (used in) operating activities |
|||||||
Provision for loan losses |
- |
1,120 |
3,125 |
||||
Provision for depreciation and amortization of |
|||||||
premises and equipment |
1,543 |
1,412 |
1,270 |
||||
Deferred tax benefit (expense) |
1,950 |
(340) |
(1,216) |
||||
Net securities gains |
(829) |
(2,294) |
(1,458) |
||||
Gains on loans sold |
(437) |
(511) |
(417) |
||||
Proceeds from sale of mortgage loans held for sale |
21,047 |
28,625 |
24,402 |
||||
Funding of mortgage loans held for sale |
(18,481) |
(28,065) |
(23,985) |
||||
Loss on other real estate owned |
308 |
1,317 |
948 |
||||
Gain (loss) on sale of premises and equipment |
38 |
(10) |
- |
||||
Amortization of investment security premiums, |
|||||||
net of accretion of discounts |
1,312 |
3,526 |
2,094 |
||||
Increase in cash surrender value of life insurance contracts |
(497) |
(705) |
(717) |
||||
(Increase) decrease in |
|||||||
Other assets |
1,243 |
741 |
1,177 |
||||
Increase (decrease) in |
|||||||
Other liabilities |
(287) |
2,647 |
534 |
||||
Total adjustments |
6,910 |
7,463 |
5,757 |
||||
|
Net cash provided by operating activities |
16,786 |
15,071 |
12,753 |
|||
INVESTING |
Proceeds from sales of available-for-sale securities |
137,150 |
421,346 |
140,580 |
|||
ACTIVITIES |
Proceeds from maturities and calls of available-for-sale securities |
44,908 |
68,673 |
106,270 |
|||
Proceeds from maturities and calls of held-to-maturity securities |
3,890 |
3,430 |
4,725 |
||||
Purchases of investment securities |
|||||||
available-for-sale |
(189,436) |
(521,837) |
(323,222) |
||||
Net (increase) decrease in loans |
(38,267) |
(50,846) |
38,031 |
||||
Proceeds from sale of other real estate owned |
2,378 |
1,810 |
1,683 |
||||
Proceeds from sale of premises and equipment |
799 |
- |
- |
||||
Purchases of premises and equipment |
(831) |
(786) |
(263) |
||||
Purchase of life insurance policies |
(258) |
(2,282) |
(2,799) |
||||
|
Net cash used in investing activities |
(39,667) |
(80,492) |
(34,995) |
|||
FINANCING |
Net increase in deposits |
24,488 |
76,419 |
64,604 |
|||
ACTIVITIES |
Net increase in securities sold under agreements to repurchase |
1,027 |
721 |
10,162 |
|||
Payments to FHLB borrowings |
(10,100) |
(7,000) |
(7,000) |
||||
Repurchase of common stock |
(3,722) |
(3,400) |
(3,011) |
||||
Cash dividends paid on common stock |
(3,800) |
(3,944) |
(1,991) |
||||
|
Net cash provided by financing activities |
7,893 |
62,796 |
62,764 |
|||
Increase (decrease) in cash and cash equivalents |
(14,988) |
(2,625) |
40,522 |
||||
Cash and cash equivalents at beginning of period |
70,396 |
73,021 |
32,499 |
||||
|
Cash and cash equivalents at end of period |
$ |
55,408 |
$ |
70,396 |
$ |
73,021 |
Supplemental disclosures of cash flow information |
|||||||
Cash paid during the period for expenses |
|||||||
Interest on deposits and borrowed funds |
$ |
2,816 |
$ |
3,717 |
$ |
5,235 |
|
Income taxes |
2,072 |
860 |
1,143 |
||||
Loans to facilitate sale of other real estate owned |
1,905 |
1,774 |
- |
||||
|
Real estate acquired in settlement of loans |
312 |
1,355 |
1,375 |
|||
The accompanying notes are an integral part of the consolidated financial statements. |
8
All dollar amounts are reported in thousands except share and per share data.
NOTE 1 GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies
The accounting principles followed and the methods of applying those principles conform with accounting principles generally accepted in the United States (GAAP) and to general practices in the banking industry. The significant accounting policies applicable to First Farmers and Merchants Corporation (the Corporation) are summarized as follows.
Nature of Operations
The Corporation is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, First Farmers and Merchants Bank (the Bank). The Bank is primarily engaged in providing a full range of banking and financial services, including lending, investing of funds, obtaining deposits, trust and wealth management operations, and other financing activities to individual and corporate customers in the middle Tennessee area. The Bank is subject to competition from other financial institutions. The Corporation and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.
Basis of Presentation
The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, First Farmers and Merchants Bank. The Bank has the following direct and indirect subsidiaries: F & M West, Inc., Maury Tenn, Inc., and Maury Tenn Properties, Inc. Noncontrolling interests consist of preferred shares in Maury Tenn Properties, Inc. that are owned by third parties and Maury Tenn, Inc. The preferred shares in Maury Tenn Properties, Inc. receive dividends, which are included in the consolidated statements of income. Intercompany accounts and transactions have been eliminated in consolidation.
Certain items in prior financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on net income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management of the Corporation and the Bank to make estimates and assumptions that affect the reported amounts of assets and liabilities. Those estimates and assumptions also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan and lease losses, the fair value of financial instruments, the valuation of foreclosed real estate, valuation of goodwill, valuation of deferred tax assets and the liability related to post-retirement benefits.
Concentrations of Credit Risk
The Corporations banking activities include granting commercial, residential, and consumer loans to customers primarily located in central and south central Tennessee and Northern Alabama. The Corporation is continuing to manage all components of its portfolio mix in a manner to reduce risk from changes in economic conditions. Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus allowance for loan losses and total capital are not exceeded. At December 31, 2013 our concentrations of commercial real estate, rental and leasing loans were 119.6% of Tier 1 Capital plus the allowance for loan and lease losses, respectively. Health care and social assistance loans were 46.3%. Manufacturing and construction loans were 25.4%. Wholesale trade credits were 25.2%. These percentages are within our internally established limits regarding concentrations of credit.
9
All dollar amounts are reported in thousands except share and per share data.
Loans secured by non-farm, non-residential real estate comprised 29.0% of the loan portfolio at December 31, 2013. Management remains comfortable with the real estate exposure levels within the commercial loan portfolio. Management believes the commercial real estate portion remains well diversified across several different property types and several different geographic markets, stretching primarily from Davidson County, Tennessee to northern Alabama.
Cash and Due From Banks
Included in cash and due from banks are reserve amounts that are required to be maintained in the form of cash and balances due from the Federal Reserve Bank and other banks. At December 31, 2013, the Banks required reserve was $2,560 at the Federal Reserve. From time to time throughout the year, the Banks balances due from other financial institutions exceeded Federal Deposit Insurance Corporation (FDIC) insurance limits. The Bank had one account over the limit at December 31, 2013 and it was $261. Furthermore, federal funds sold are essentially uncollateralized loans to other financial institutions.
Cash Equivalents
The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents include cash on hand, cash due from banks and federal funds sold. Federal funds are sold for one-day periods.
Securities
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
For debt securities with fair value below amortized cost when the Corporation does not intend to sell a debt security, and it is more likely than not the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security based on cash flow projections.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
10
All dollar amounts are reported in thousands except share and per share data.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Discounts and premiums on purchased commercial loans are amortized to income using the interest method over the remaining period to contractual maturity and adjusted for anticipated prepayments.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through provisions for loan and lease losses charged against income. Loan losses are charged against the allowance when management determines that the uncollectibility of a loan has been confirmed. Subsequent recoveries, if any, are credited to the allowance account in the period received.
The adequacy of the allowance for loan and lease losses is evaluated quarterly in conjunction with loan review reports and evaluations that are discussed in meetings with loan officers, credit administration and the Corporations Board of Directors. The Banks past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrowers ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors are considered in this evaluation. This process is inherently subjective as it requires material estimates that are susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the loan portfolio.
A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the 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 of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record and the amount of the shortfall in relation to the 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 the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the groups historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made. If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed. When the foreclosed collateral has been legally assigned to the Corporation, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell the collateral then transferred to other real estate owned or other repossessed assets. When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.
11
All dollar amounts are reported in thousands except share and per share data.
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (4 monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual and foreclosure proceedings are initiated. When the foreclosed property has been legally assigned to the Corporation, a charge-off is taken with the remaining balance, reflecting the fair value less estimated costs to sell, transferred to other real estate owned.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income. The Corporation does not retain servicing rights on loans sold. Loans held for sale at December 31, 2013 and 2012 totaled $327 and $2,456, respectively.
Other Real Estate
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.
When foreclosed properties are acquired current appraisals are obtained on the properties. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected selling costs. Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 24 months.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on an accelerated method over the estimated useful life of an asset, which ranges from 15 to 39 years for buildings and from three to 25 years for equipment. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.
Federal Reserve and Federal Home Loan Bank Stock
Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment. At December 31, 2013 and 2012 Federal Reserve and Federal Home Loan Bank stock totaled $3,879.
Goodwill
Goodwill is evaluated annually for impairment. Quantitative and qualitative assessments are performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
12
All dollar amounts are reported in thousands except share and per share data.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporationput presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Income Taxes
The Corporation files consolidated income tax returns with its subsidiaries. The Corporation accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to managements judgment. With a few exceptions, the Corporation is no longer subject to U.S. federal tax examinations for years before 2010, and state and local tax examinations by tax authorities for years before 2010.
The Corporation recognizes interest and penalties on income taxes as a component of income tax expense.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction
Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements. See Note 13 Fair Value Measurement. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as input, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Corporations creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
13
All dollar amounts are reported in thousands except share and per share data.
Shareholders Equity and Earnings Per Share
Basic earnings per share represent income available to shareholders divided by the weighted average number of shares of Corporation common stock outstanding during the period. Diluted earnings per share reflect additional shares of common stock that would have been outstanding if potentially dilutive shares of common stock had been issued, as well
as any adjustment to income that would result from the assumed conversion. For the years ended December 31, 2013, 2012 and 2011, there were no potentially dilutive shares of common stock issuable.
In 2013, the Corporation adopted a plan to repurchase shares of its common stock. The plan allowed the purchase of up to 200,000 shares. The Corporation purchased 158,988 shares in 2013. In 2012, the Corporation adopted a plan to repurchase up to 150,000 shares of common stock . The Corporation repurchased 150,000 shares in 2012. For 2011, the Corporation adopted a similar plan allowing it to repurchase up to 100,000 shares of common stock. The Corporation repurchased 100,000 shares in 2011.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income tax expenses or benefits. Other comprehensive (loss) income includes unrealized appreciation or depreciation on available-for-sale securities and changes in the net actuarial gain or loss of the postretirement benefit obligation.
The components of accumulated other comprehensive income (loss), included in shareholders equity, are as follows as of December 31, 2013, 2012 and 2011:
Years Ended December 31, |
|||||||||
2013 |
2012 |
2011 |
|||||||
Net unrealized gains (losses) |
|||||||||
on available-for-sale securities |
$ |
(17,178) |
$ |
5,747 |
$ |
4,914 |
|||
Net actuarial gain on unfunded portion |
|||||||||
of postretirement benefit obligation |
2,542 |
2,920 |
302 |
||||||
(14,636) |
8,667 |
5,216 |
|||||||
Tax effect - (expense) benefit |
5,635 |
|
(3,337) |
|
(2,008) |
||||
Other comprehensive income (loss) |
|
$ |
(9,001) |
|
$ |
5,330 |
|
$ |
3,208 |
Transfers Between Fair Value Hierarchy Levels
Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period end date.
Segment Reporting
Management analyzes the operations of the Corporation assuming one operating segment, community lending services.
Recent Accounting Pronouncements
ASU 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Corporation on January 1, 2013 and did not have a significant impact on the Corporations financial statements. See Note 2 Other Comprehensive Income (Loss).
14
All dollar amounts are reported in thousands except share and per share data.
ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax loss, or a Tax Credit Carryforward Exists (Topic 740-10) a consensus of the FASB Emerging Issues Task Force. ASU 2013-11 provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. The objective is to eliminate diversity in practice resulting from a lack of guidance on this topic. ASU 2013-11 will be effective for the Corporation after December 15, 2013 and is not expected to have a significant impact on the Corporations financial statements.
ASU 2013-12, Definition of a Public Business Entity An Addition to the Master Glossary amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in U.S. GAAP. The definition of a public business entity will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to business entities. The amendment does not affect existing requirements, but instead improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance. There is no actual effective date for the amendment in this Update. However, the term public business entity will be used beginning with ASU 2014-01. ASU 2013-12 is not expected to have a significant impact on the Corporations financial statements.
ASU 2014-04, Receivables Troubled Debt Restructurings by Creditors (Subtopic 310-40) clarifies when an in substance repossession or foreclosure occurs that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The new update requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The update is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014 and is not expected to have a significant impact on the Corporations financial statements.
NOTE 2 ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI) BY COMPONENT
Amounts reclassified from AOCI and the affected line items in the statements of income during the periods ended December 31, 2013, 2012 and 2011, were as follows:
Affected Line Item in the |
|||||||||||||
Amounts Reclassified from AOCI |
|||||||||||||
Years Ended |
|||||||||||||
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||||||
Unrealized gains (losses) on available-for-sale securities |
$ |
829 |
$ |
2,294 |
$ |
1,458 |
Realized gain (loss) on sale of securities |
||||||
(319) |
(883) |
(561) |
Tax (expense) benefit |
||||||||||
$ |
510 |
$ |
1,411 |
$ |
897 |
Net reclassified amount | |||||||
Amortization of defined benefit pension items |
|||||||||||||
Actuarial gains (losses) |
$ |
(190) |
$ |
- |
$ |
205 |
|||||||
73 |
- |
(79) |
Tax (expense) benefit |
||||||||||
$ |
(117) |
$ |
- |
$ |
126 |
Net reclassified amount |
|||||||
Total reclassifications out of AOCI |
$ |
393 |
$ |
1,411 |
$ |
1,023 |
|||||||
NOTE 3 SECURITIES
15
All dollar amounts are reported in thousands except share and per share data.
The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2013 and 2012 are summarized as follows:
Amortized |
Gross Unrealized |
Fair |
|||||||
December 31, 2013 |
Cost |
Gains |
Losses |
Value |
|||||
Available-for-sale securities |
|||||||||
U.S. Government agencies |
$ |
112,863 |
$ |
- |
$ |
7,791 |
$ |
105,072 |
|
U.S. Government sponsored agency mortgage backed securities |
168,045 |
27 |
10,649 |
157,423 |
|||||
States and political subdivisions |
45,237 |
1,240 |
140 |
46,337 |
|||||
Corporate bonds |
20,747 |
280 |
145 |
20,882 |
|||||
|
$ |
346,892 |
$ |
1,547 |
$ |
18,725 |
$ |
329,714 |
|
Held-to-maturity securities |
|||||||||
States and political subdivisions |
$ |
27,839 |
$ |
756 |
$ |
- |
$ |
28,595 |
|
|
|
|
|
||||||
Amortized |
Gross Unrealized |
Fair |
|||||||
December 31, 2012 |
Cost |
Gains |
Losses |
Value |
|||||
Available-for-sale securities |
|||||||||
U.S. Government agencies |
$ |
143,897 |
$ |
400 |
$ |
280 |
$ |
144,017 |
|
U.S. Government sponsored agency mortgage backed securities |
131,917 |
1,856 |
55 |
133,718 |
|||||
States and political subdivisions |
47,273 |
3,306 |
- |
50,579 |
|||||
Corporate bonds |
16,884 |
529 |
9 |
17,404 |
|||||
|
$ |
339,971 |
$ |
6,091 |
$ |
344 |
$ |
345,718 |
|
Held-to-maturity securities |
|||||||||
States and political subdivisions |
$ |
31,755 |
$ |
1,665 |
$ |
- |
$ |
33,420 |
|
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2013 and 2012 was approximately $269,691 and $83,579, which was approximately 75% and 22%, respectively, of the Corporations available-for-sale and held-to-maturity investment portfolio. The Corporation evaluates its investment portfolio on a quarterly basis for impairment. The analysis performed as of December 31, 2013 and December 31, 2012 indicated that all impairment was considered temporary, market driven due primarily to fluctuations in market interest rates and not credit-related.
The following table shows the Corporations investments gross unrealized losses and fair value of the Corporations investments with unrealized losses that were not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities had been in a continuous unrealized loss position at December 31, 2013 and 2012:
Less than 12 months |
12 months or Greater |
Total |
|||||
December 31, 2013 |
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|
Type of Security |
Value |
Losses |
Value |
|
Losses |
Value |
Losses |
US Government agencies |
$ 100,533 |
$ 7,330 |
$ 4,539 |
$ 461 |
$ 105,072 |
$ 7,791 |
|
US Government sponsored agency mortgage |
|||||||
backed securities |
144,134 |
10,073 |
8,698 |
576 |
152,832 |
10,649 |
|
States and political subdivisions |
2,615 |
140 |
- |
- |
2,615 |
140 |
|
Corporate bonds |
8,590 |
121 |
582 |
24 |
9,172 |
145 |
|
$ 255,872 |
$ 17,664 |
$ 13,819 |
|
$ 1,061 |
$ 269,691 |
$ 18,725 |
|
Less than 12 months |
12 months or Greater |
Total |
|||||
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
||
Type of Security |
Value |
Losses |
Value |
|
Losses |
Value |
Losses |
US Government agencies |
$ 68,979 |
$ 280 |
$ - |
$ - |
$ 68,979 |
$ 280 |
|
US Government sponsored agency mortgage |
|||||||
backed securities |
12,881 |
55 |
- |
- |
12,881 |
55 |
|
Corporate bonds |
1,719 |
9 |
- |
- |
1,719 |
9 |
|
$ 83,579 |
$ 344 |
$ - |
|
$ - |
$ 83,579 |
$ 344 |
16
All dollar amounts are reported in thousands except share and per share data.
The unrealized losses on the Corporations investments in direct obligation of U.S. government agencies and U.S. government sponsored agency mortgage backed securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2013.
The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale |
|
Held-to-Maturity |
|||
December 31, 2013 |
Amortized |
Estimated |
Amortized |
Estimated |
|
Cost |
Fair Value |
|
Cost |
Fair Value |
|
Within one year |
$ 5,841 |
$ 5,920 |
$ 3,135 |
$ 3,208 |
|
One to five years |
26,404 |
26,489 |
7,043 |
7,305 |
|
Five to ten years |
131,468 |
124,308 |
16,554 |
16,953 |
|
After ten years |
15,134 |
15,574 |
1,107 |
1,129 |
|
Mortgage-backed securities |
168,045 |
157,423 |
- |
- |
|
Total |
$ 346,892 |
$ 329,714 |
|
$ 27,839 |
$ 28,595 |
The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $210,494 at December 31, 2013 and $210,800 at December 31, 2012.
The book value of securities sold under agreements to repurchase amounted to $34,978 and $26,500 at December 31, 2013 and 2012, respectively.
Gross gains of $1,026, $2,455and $1,509 resulting from sales of available-for-sale securities were realized for at December 31, 2013, 2012 and 2011, respectively. A loss of $197 was included in the net gain of $829 for December 31, 2013. A loss of $161 was included in the net gain of $2,294 for December 31, 2012. Losses of $51 were included in the net gain of $1,458 for December 31, 2011.
NOTE 4 LOANS
The following table presents the Banks loans by category as of December 31, 2013 and 2012:
December 31, 2013 |
December 31, 2012 |
|||
Commercial |
||||
Commercial and industrial |
$ |
94,702 |
$ |
83,631 |
Non-farm, nonresidential real estate |
176,213 |
167,565 |
||
Construction and development |
29,938 |
36,323 |
||
Commercial loans secured by real estate |
26,940 |
23,983 |
||
Other commercial |
26,582 |
24,423 |
||
Total commercial |
354,375 |
335,925 |
||
Residential |
||||
Consumer loans |
10,957 |
11,621 |
||
Single family residential |
213,763 |
196,349 |
||
Other retail |
27,671 |
23,264 |
||
Total residential and consumer |
252,391 |
231,234 |
||
$ |
606,766 |
$ |
567,159 |
|
Less: |
||||
Allowance for possible loan losses |
(8,595) |
(8,809) |
||
Total net loans |
$ |
598,171 |
$ |
558,350 |
17
All dollar amounts are reported in thousands except share and per share data.
Loan Origination/Risk Management. The Corporation has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Commercial and industrial loans are underwritten after evaluating and understanding the borrowers ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrowers management possesses sound ethics and solid business acumen, the Corporations management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Corporation avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Corporation also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2013, approximately seventy percent of the outstanding principal balance of the Corporations commercial real estate loans was secured by owner-occupied properties, compared to eighty percent at December 31, 2012.
With respect to loans to developers and builders that are secured by non-owner occupied properties that the Corporation may originate from time to time, the Corporation generally requires the borrower to have had an existing relationship with the Corporation and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
The Corporation originates residential and consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.
18
All dollar amounts are reported in thousands except share and per share data.
The Corporation contracts with a third party vendor to perform loan reviews. The Corporation reviews and validates the credit risk program on an annual basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporations policies and procedures.
The goal of the bank is to diversify loans to avoid a concentration of credit in a specific industry, person, entity, product, service, or any area vulnerable to a tax law change or an economic event. A concentration of credit occurs when obligations, direct or indirect, of the same or affiliated interests represent 15 percent or more of the Banks capital structure. Commercial real estate rental and leasing represented the highest concentration at 120% of tier 1 capital. The Board of Directors recognizes that the Banks geographic trade area imposes some limitations regarding loan diversification if the bank is to perform the function for which it has been chartered. Specifically, lending to qualified borrowers within the banks trade area will naturally cause concentrations of real estate loans in the primary communities served by the bank and loans to employees of major employers in the area.
The following table provides details regarding the aging of the Banks loan portfolio:
December 31, 2013 |
30 - 89 Days
|
90 Days and Greater
|
Total
|
Current |
Total Loans |
|||||
Retail |
||||||||||
Consumer |
$ |
182 |
$ |
3 |
$ |
185 |
$ |
10,772 |
$ |
10,957 |
Single family residential |
3,805 |
83 |
3,876 |
209,887 |
213,763 |
|||||
Other retail |
319 |
28 |
359 |
27,312 |
27,671 |
|||||
Retail total |
$ |
4,306 |
$ |
114 |
$ |
4,420 |
$ |
247,971 |
$ |
252,391 |
Commercial |
||||||||||
Commercial and industrial |
$ |
428 |
$ |
1,328 |
$ |
1,756 |
$ |
92,946 |
$ |
94,702 |
Non-farm, non-residential real estate |
393 |
- |
393 |
175,820 |
176,213 |
|||||
Construction and development |
- |
28 |
28 |
29,910 |
29,938 |
|||||
Commercial loans secured by real estate |
38 |
178 |
216 |
26,724 |
26,940 |
|||||
All other commercial |
- |
1,249 |
1,249 |
25,333 |
26,582 |
|||||
Commercial total |
$ |
859 |
$ |
2,783 |
$ |
3,642 |
$ |
350,733 |
$ |
354,375 |
Total |
$ |
5,165 |
$ |
2,897 |
$ |
8,062 |
$ |
598,704 |
$ |
606,766 |
December 31, 2012 |
30 - 89 Days
|
90 Days and Greater
|
90 Days and Greater
|
Current |
Total Loans |
|||||
Retail |
||||||||||
Consumer |
$ |
112 |
$ |
7 |
$ |
119 |
$ |
11,502 |
$ |
11,621 |
Single family residential |
3,543 |
387 |
3,930 |
192,419 |
196,349 |
|||||
Other retail |
193 |
- |
193 |
23,071 |
23,264 |
|||||
Retail total |
$ |
3,848 |
$ |
394 |
$ |
4,242 |
$ |
226,992 |
$ |
231,234 |
Commercial |
||||||||||
Commercial and industrial |
$ |
618 |
$ |
1,457 |
$ |
2,075 |
$ |
81,556 |
$ |
83,631 |
Non-farm, non-residential real estate |
666 |
448 |
1,114 |
166,451 |
167,565 |
|||||
Construction and development |
160 |
- |
160 |
36,163 |
36,323 |
|||||
Commercial loans secured by real estate |
22 |
193 |
215 |
23,768 |
23,983 |
|||||
All other commercial |
741 |
1,379 |
2,120 |
22,303 |
24,423 |
|||||
Commercial total |
$ |
2,207 |
$ |
3,477 |
$ |
5,684 |
$ |
330,241 |
$ |
335,925 |
Total |
$ |
6,055 |
$ |
3,871 |
$ |
9,926 |
$ |
557,233 |
$ |
567,159 |
19
All dollar amounts are reported in thousands except share and per share data.
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Corporation will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings.
The following table summarizes the impaired loans by loan type as of December 31, 2013 and 2012:
December 31, 2013 |
Unpaid Contractual |
Recorded investment |
Recorded Investment with allowance |
Total Recorded |
Related |
Average Recorded Investment |
Interest |
Interest A |
||||||||||||||
Commercial |
||||||||||||||||||||||
Commercial and industrial |
$ |
2,190 |
$ |
1,338 |
$ |
234 |
$ |
1,572 |
$ |
16 |
$ |
1,620 |
$ |
23 |
$ |
134 |
||||||
Non-farm, non-residential real estate |
3,236 |
1,155 |
1,551 |
2,706 |
282 |
2,819 |
157 |
168 |
||||||||||||||
Construction and development |
461 |
461 |
- |
461 |
44 |
556 |
30 |
30 |
||||||||||||||
Other commercial |
3,834 |
3,310 |
178 |
3,488 |
- |
3,704 |
225 |
241 |
||||||||||||||
Commercial total |
9,721 |
6,264 |
1,963 |
8,227 |
342 |
8,699 |
435 |
573 |
||||||||||||||
Retail |
||||||||||||||||||||||
Single family residential |
1,121 |
568 |
419 |
987 |
118 |
1044 |
52 |
55 |
||||||||||||||
Other retail |
11 |
- |
11 |
11 |
11 |
11 |
|
|
||||||||||||||
Retail total |
1,132 |
568 |
430 |
998 |
129 |
1,097 |
52 |
55 |
||||||||||||||
Total |
$ |
10,853 |
$ |
6,382 |
$ |
2,393 |
$ |
9,225 |
$ |
471 |
$ |
9,796 |
$ |
487 |
$ |
628 |
||||||
December 31, 2012 |
Unpaid Contractual |
Recorded investment |
Recorded Investment with allowance |
Total Recorded |
Related |
Average Recorded Investment |
Interest |
Interest |
||||||||||||||
Commercial |
||||||||||||||||||||||
Commercial and industrial |
$ |
2,036 |
$ |
1,076 |
$ |
328 |
$ |
1,404 |
$ |
103 |
$ |
3,483 |
$ |
74 |
$ |
259 |
||||||
Non-farm, non-residential real estate |
3,613 |
2,417 |
- |
2,417 |
- |
1,606 |
83 |
78 |
||||||||||||||
Construction and development |
682 |
- |
682 |
682 |
118 |
682 |
35 |
40 |
||||||||||||||
Other commercial |
3,124 |
3,124 |
- |
3,124 |
|
3,520 |
126 |
279 |
||||||||||||||
Commercial total |
9,455 |
6,617 |
1,010 |
7,627 |
221 |
9,291 |
318 |
656 |
||||||||||||||
Retail |
||||||||||||||||||||||
Single family residential |
1,237 |
402 |
613 |
1,015 |
82 |
638 |
39 |
64 |
||||||||||||||
Retail total |
1,237 |
402 |
613 |
1,015 |
82 |
|
39 |
64 |
||||||||||||||
Total |
$ |
10,692 |
$ |
7,019 |
$ |
1,623 |
$ |
8,642 |
$ |
303 |
$ |
9,291 |
$ |
357 |
$ |
720 |
||||||
December 31, 2011 |
Unpaid Contractual |
Recorded investment with no allowance |
Recorded Investment with allowance |
Total Recorded |
Related |
Average Recorded Investment |
Interest |
Interest |
||||||||||||||
Commercial |
||||||||||||||||||||||
Commercial and industrial |
$ |
5,839 |
$ |
738 |
$ |
5,678 |
$ |
5,446 |
$ |
601 |
$ |
5,069 |
$ |
193 |
$ |
337 |
||||||
Non-farm, non-residential real estate |
4,378 |
2,986 |
2,115 |
4,573 |
307 |
5,232 |
35 |
70 |
||||||||||||||
Construction and development |
870 |
- |
870 |
870 |
203 |
941 |
39 |
45 |
||||||||||||||
Other commercial |
3,238 |
- |
- |
1,498 |
- |
1,527 |
190 |
310 |
||||||||||||||
Commercial total |
14,325 |
3,724 |
8,663 |
12,387 |
1,111 |
12,769 |
457 |
762 |
||||||||||||||
Retail |
||||||||||||||||||||||
Single family residential |
1,388 |
142 |
1,075 |
1,217 |
131 |
1,269 |
44 |
68 |
||||||||||||||
Retail total |
1,388 |
142 |
1,075 |
1,217 |
131 |
1,269 |
44 |
68 |
||||||||||||||
Total |
$ |
15,713 |
$ |
3,866 |
$ |
9,738 |
$ |
13,604 |
$ |
1,242 |
$ |
14,038 |
$ |
501 |
$ |
830 |
||||||
* Interest income received is recognized interest income and approximates cash basis.
20
All dollar amounts are reported in thousands except share and per share data.
Non-accrual loans, segregated by class of loans, were as follows at December 31, 2013 and 2012:
2013 |
2012 |
|||
Commercial and industrial |
$ |
1,649 |
$ |
1,595 |
Nonfarm, nonresidential real estate |
737 |
1,372 |
||
Construction and development |
68 |
50 |
||
Commercial real estate |
6 |
126 |
||
Other commercial |
1,248 |
1,379 |
||
Consumer |
21 |
11 |
||
Single family residential |
1,667 |
3,541 |
||
Total |
$ |
5,396 |
$ |
8,074 |
Included in certain loan categories of impaired loans are certain loans that have been modified in a troubled debt restructuring where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of the modification. All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower. In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future with the modification. This evaluation is performed under the Corporations internal underwriting policy.
When the Corporation modifies loans in a troubled debt restructuring, the Corporation evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If the corporation determined that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Corporation evaluates all troubled debt restructuring, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.
As of December 31, 2013, the Corporation did not have any commitments to extend additional funds to borrowers with loans modified and included as a troubled debt restructuring.
During 2013, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances. Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the year ended December 31, 2013 and 2012:
2013 |
2012 |
||||||||||
Post - Modification |
Net Charge-offs |
Post -Modification |
Net Charge-offs |
||||||||
Number of |
Outstanding |
Resulting from |
Number of |
Outstanding |
Resulting from |
||||||
(dollars in thousands) |
Loans |
Balance |
Modifications |
Loans |
Balance |
Modifications |
|||||
Commercial: |
|||||||||||
Commercial and industrial |
- |
$ |
- |
$ |
- |
1 |
$ |
8 |
$ |
- |
|
Nonfarm nonresidential |
- |
- |
- |
1 |
361 |
- |
|||||
Retail: |
|||||||||||
Consumer |
3 |
8 |
- |
1 |
3 |
- |
|||||
Single family residential |
3 |
167 |
6 |
3 |
237 |
- |
|||||
|
|
|
|
|
|
|
|||||
Total trouble debt restructurings |
6 |
$ |
175 |
$ |
6 |
6 |
$ |
609 |
$ |
- |
21
All dollar amounts are reported in thousands except share and per share data.
Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual status at the time it is modified, it stays as no-accrual status, and if a loan is on accrual status at the time of the modification, it generally stays on accrual status. Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a troubled debt restructuring subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. The Corporation considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.
As of December 31, 2013 and 2012, the Corporation did not have any loans that were modified in troubled debt restructurings during the past twelve months that have subsequently defaulted.
Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Corporations loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) non-performing loans and (v) the general economic conditions in the State of Tennessee.
The Corporation uses a risk grading matrix to assign a risk grade to each of its commercials loans. Loans are graded on a scale of 1 8. A description of the general characteristics of the 8 risk grades is as follows:
General Characteristics:
Substantially risk free.
Federal, state, or municipal subdivisions with acceptable investment grade credit rating.
Large national, regional, or local entity with proven access to capital markets.
Diversity in its line of business with stable and diversified sales base.
Borrower is considered to be an industry leader with many consecutive years of strong profits and exhibits a financial condition, equity position, liquidity, and debt service capacity far exceeding industry norms.
Borrower has an abundance of unpledged financeable assets coupled with superior cash generation capabilities.
Industry conditions and trends are positive and strong.
Borrower has strong management with evidence of management succession.
Credit rating by Moodys, Standard & Poor, or other qualified rating agency that is grade A or higher.
A cash secured loan with the cash on deposit in our bank or a guaranty from the Federal government also warrants this risk rating.
General Characteristics:
Borrower shows strong profitability, liquidity, and capitalization better than industry norms and a strong market position in the region.
Borrower may have limited access to public markets for short-term needs or capital requirements, but has ready access to alternative financing.
Loans may be unsecured based on the financial strength of the borrower or secured by collateral that is considered liquid and marketable.
Borrower has a proven history of profitability and financial stability.
Borrower has a strong market position in its industry and has an abundance of financeable assets available to protect the banks position.
Proven and steady management with good management succession.
Borrower can withstand major market instabilities of short duration.
Credit rating by Moodys, Standard & Poor, or other qualified rating agency that is grade BAA or higher.
22
All dollar amounts are reported in thousands except share and per share data.
General Characteristics:
Borrower shows a stable earnings history and financial condition in line with industry norms with indications that these trends will continue.
The credit extension is considered sound, however elements may be present which suggest the borrower may not be free from temporary impairments in the future.
Liquidity and leverage is in line with industry norms.
Good management with acceptable management succession.
Under most economic and business conditions has access to alternative financing but limited or no access to capital markets for short-term or capital needs.
Borrower may be an individual with a sound financial condition and liquidity with proven historical income to repay the debt as scheduled.
Credit extensions are generally secured by acceptable collateral.
General Characteristics:
Credit is to a borrower with smaller margins of debt service coverage and with some elements of reduced financial strength.
Borrower is generally in a lower average market position in its industry.
Borrower shows satisfactory asset quality and liquidity, good debt capacity and coverage, and good management in critical positions.
Management is of unquestioned character but management succession may be questionable.
Borrower can obtain similar financing from other financial institutions.
Interim losses or moderately declining earnings trends may occur, but the borrower has sufficient strength and financial flexibility to offset these issues.
Credit may be to individuals with a moderately leveraged financial condition, but with satisfactory liquidity and income to cover debt repayment requirements.
Business borrowers may have moderate leverage, but must have historically consistent cash flow to cover debt service and other operating needs.
Business borrowers may also have erratic or cyclical operating performances but should demonstrate strong equity positions to support these profitability swings.
Asset-based loans that have stabilized and proven performance with the financial capacity to provide for annual clean up may qualify for this rating.
Borrower has no access to capital markets, but would be financeable by another financial institution or finance company.
Credit extensions are generally secured by acceptable collateral.
General Characteristics:
Loans considered for this risk rating require a heightened level of supervision.
A) Transitional, Event Driven This category of risk rated 5 loans captures responses to early warning signals from a relationship and, therefore, signifies a specific, event-driven, transitional credit grade. The event is generally something unplanned or unexpected such as a death, a disaster, the loss of a major client, product line, or key employee; divorce, or health condition of the owner or key management person. The Risk Rating 5 category may be used in transitional upgrades as well as transitional downgrades of credit relationships. Under these criteria, the risk rating 5 necessitates a plan of action to either upgrade the credit to a Pass rating (Risk Rating 1-4), downgrade the credit to a criticized asset, or exit the relationship within six months.
23
All dollar amounts are reported in thousands except share and per share data.
B) Ongoing Supervision Warranted - This risk rating may also be utilized to identify loans having inherent characteristics which warrant more than the normal level of supervision. Loans meeting these criteria may include larger, more complex loans with unusual structures. Loans, which, due to structure or nature of the collateral require above average servicing, may also be considered for this risk rating. Unlike other criteria listed previously for the Pass / Watch risk rating, these particular characteristics tend not to be one-time or transitional in nature; therefore, these loans may be expected to remain in this risk rating category longer than six months. A loan might remain in this risk rating category for its life or until the characteristic warranting the Pass / Watch rating can be eliminated or effectively mitigated.
Borrowers may exhibit declining earnings, strained cash flow, increasing leverage, or weakening market positions that indicate a trend toward an unacceptable risk.
Borrowers liquidity, leverage, and earnings performance is below or trending below industry norms.
Interim losses and other adverse trends may occur, but not to the level that would impair the banks position.
Borrower may be a newly formed company or in a new line of business or may be an established business with new or unproven management. Borrower should be adequately capitalized, but may not yet have achieved stabilized cash flow.
Borrower generally has a small market position in its industry.
Borrower may be engaged in an industry that is experiencing an economic downturn or is particularly susceptible to uncontrollable external factors.
Management is of good character although some management weakness may exist, including lack of depth or succession.
Borrowers generally have limited additional debt capacity and modest coverage, and average or below-average asset quality, margins, and market share.
Borrowers ability to obtain financing from other financial institutions may be impaired.
Credit to individuals with marginal financial condition and liquidity, but with income still sufficient to service the debt.
A special mention asset has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institutions credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
General Characteristics:
Cash flow may not be sufficient to fund anticipated cash needs.
Sufficiently or modestly sufficiently financeable assets are available to protect the banks position.
Adverse trends in operations/profits or unbalanced position in the balance sheet, but not to the point where repayment is in jeopardy.
Borrower generally shows limited liquidity or high leverage.
Borrowers financial position is in the lower quartile of industry norms.
Business exhibits a deteriorating market position in the industry.
Management lacks depth and succession.
Business is unable to withstand temporary setbacks without affecting repayment capability.
Borrower is not financeable by another bank but possibly by a finance company or specialized lender.
A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
24
All dollar amounts are reported in thousands except share and per share data.
General Characteristics:
The primary source of repayment no longer provides satisfactory support and repayment is dependent on secondary sources.
A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.
Normal repayment from the borrower is impaired although no loss of principal is envisioned.
A partial loss of interest or principal will occur if the deficiencies are not corrected.
Cash flow is generally not sufficient to fund anticipated cash needs.
Financeable assets may not be sufficient to protect the banks position.
Adverse trends in operations that jeopardized debt repayment may require the borrower to undertake a significant reorganization of financing or the business.
Borrower shows poor liquidity and high leverage impairing the repayment of the debt in accordance with agreed upon terms.
Management lacks depth and succession; may be inexperienced or of questionable character.
Borrowers market position in the industry is deteriorating.
Borrower is not financeable by another bank or finance company.
Risk Rating 8: Doubtful
An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
General Characteristics:
Inadequate primary source of repayment. Assumes a less than satisfactory secondary source of repayment on a most-likely case basis. There may be an adequate secondary source of repayment on a best-case basis.
Borrowers have the same weaknesses found in Substandard borrowers.
Loss probability is extremely high but because of certain important and reasonably specific factors that may work to strengthen the loan, its classification as an estimated loss is deferred until a more exact status may be determined.
Pending factors may include proposed merger or acquisition; liquidation procedures; capital injections; perfecting liens on additional collateral; and refinancing plans.
Cash flow is insufficient to fund cash needs.
Financeable assets are insufficient to protect the banks position.
Source of debt repayment is dependent on liquidation of assets with a probable loss.
Borrower may no longer be a going concern, or may not exist as a going concern for the foreseeable future.
No alternative financing sources exist.
The following table presents risk grades and classified loans by class for year ending December 31, 2013 and 2012:
December 31, 2013 |
||||||||||||
Commercial Loan Portfolio: Credit risk profile by internally assigned grade |
Commercial
|
Non-Farm,
Non- |
Construction
|
Commercial
Loans |
All
Other |
Commercial
|
||||||
Pass |
$ |
92,155 |
$ |
170,585 |
$ |
29,463 |
$ |
26,516 |
$ |
24,131 |
$ |
342,850 |
Special Mention |
836 |
3,883 |
- |
- |
179 |
4,898 |
||||||
Substandard |
635 |
1,745 |
475 |
424 |
1,023 |
4,302 |
||||||
Doubtful |
1,076 |
- |
- |
- |
1,249 |
2,325 |
||||||
TOTALS |
$ |
94,702 |
$ |
176,213 |
$ |
29,938 |
$ |
26,940 |
$ |
26,582 |
$ |
354,375 |
25
All dollar amounts are reported in thousands except share and per share data.
Retail Loan Portfolio: Credit risk profiles based on delinquency status classification |
Consumer
|
Single-Family
|
All
Other |
Retail
|
|||||||||
Performing |
$ |
10,9366 |
$ |
212,096 |
$ |
27,643 |
$ |
250,675 |
|||||
Nonperforming* |
21 |
1,667 |
28 |
1,716 |
|||||||||
TOTALS |
$ |
10,957 |
$ |
213,763 |
$ |
27,671 |
$ |
252,391 |
|||||
December 31, 2012 |
|||||||||||||
Commercial Loan Portfolio: Credit risk profile by internally assigned grade |
Commercial |
Non-Farm,
Non- |
Construction
|
Commercial
Loans |
All
Other |
Commercial
|
|||||||
Pass |
$ |
81,560 |
$ |
164,290 |
$ |
35,543 |
$ |
21,660 |
$ |
22,857 |
$ |
325,910 |
|
Special Mention |
269 |
815 |
98 |
398 |
- |
1,580 |
|||||||
Substandard |
726 |
2,460 |
682 |
1,925 |
187 |
5,980 |
|||||||
Doubtful |
1,076 |
- |
- |
- |
1,379 |
2,455 |
|||||||
TOTALS |
$ |
83,631 |
$ |
167,565 |
$ |
36,323 |
$ |
23,983 |
$ |
24,423 |
$ |
335,925 |
|
Retail Loan Portfolio: Credit risk profiles based on delinquency status classification |
Consumer
|
Single-Family
|
All
Other |
Retail
|
|||||||||
Performing |
$ |
11,610 |
$ |
192,808 |
$ |
23,131 |
$ |
227,549 |
|||||
Nonperforming* |
11 |
3,541 |
133 |
3,685 |
|||||||||
TOTALS |
$ |
11,621 |
$ |
196,349 |
$ |
23,264 |
$ |
231,234 |
|||||
*Loans are classified as nonperforming loans and are automatically placed on nonaccrual status once they reach 90 days past due. For purposes of this table all loans graded substandard or below are including in nonperforming.
**Single-family residential loans includes primary liens, closed-end secondary liens, residential construction loans, and home equity lines of credit.
NOTE 5 ALLOWANCE FOR LOAN AND LEASE LOSSES
Allowance for Possible Loan Losses. The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents managements best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Corporations allowance for possible loan
loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, Receivables and allowance allocations calculated in accordance with ASC Topic 450, Contingencies. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Corporations process for determining the
appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.
26
All dollar amounts are reported in thousands except share and per share data.
The level of the allowance reflects managements continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in managements judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Corporations control, including, among other things, the performance of the Corporations loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Corporations allowance for possible loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Commercial loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligors ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 7 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for possible loan losses to the loan. Specific valuation allowances are determined by analyzing the borrowers ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrowers industry, among other things.
Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Corporation calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off
experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Corporations pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.
The components of the general valuation allowance include (i) the additional reserves allocated to specific loan portfolio segments as a result of applying an environmental risk adjustment factor to the base historical loss allocation and (ii) the additional reserves that are not allocated to specific loan portfolio segments including allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management.
There is an inherent imprecision in calculating the specific portion of the allowance for loan and lease losses (ALLL). Therefore, a factor has been added to the allocation of each of the identified segments of the loan portfolio to account for the imprecision.
Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.
The allowance for loan losses is maintained at a level considered adequate to provide for the losses that can be reasonably anticipated. Managements periodic evaluation of the adequacy of the allowance is based on the Corporations past loan loss experience, know and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change. The Corporation uses a rolling eight quarters historic loss period for all segments when estimating the historic charge off rates calculated in accordance with ASC Topic 450 and incorporates environmental factors for various components such as economic conditions, trends in delinquencies, loan review assessments, credit concentrations and level of underperforming ratios.
27
All dollar amounts are reported in thousands except share and per share data.
General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Corporation. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the banks lending management and staff; (ii) the effectiveness of the Corporations loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan
portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of changes to interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a general allocation matrix to determine an appropriate general valuation allowance.
Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.
Loans identified as losses by management and internal loan review are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.
The following table summarizes the allocation in the allowance for loan losses by loan segment for the years ended December 31, 2013, 2012 and 2011:
December 31, 2013 |
Commercial |
Residential
|
Consumer
and |
Totals |
Beginning Balance |
$ 7,528 |
$ 1,109 |
$ 172 |
$ 8,809 |
Less: Charge-offs |
222 |
27 |
49 |
298 |
Add: Recoveries |
53 |
2 |
29 |
84 |
Add: Provisions |
- |
- |
- |
- |
Ending Balance |
$ 7,359 |
$ 1,084 |
$ 152 |
$ 8,595 |
December 31, 2012 |
Commercial |
Residential
|
Consumer
and |
Totals |
Beginning Balance |
$ 6,895 |
$ 2,113 |
$ 192 |
$ 9,200 |
Less: Charge-offs |
1,690 |
176 |
19 |
1,885 |
Add: Recoveries |
364 |
2 |
8 |
374 |
Add: Provisions |
1,959 |
(830) |
(9) |
1,120 |
Ending Balance |
$ 7,528 |
$ 1,109 |
$ 172 |
$ 8,809 |
December 31, 2011 |
Commercial |
Residential
|
Consumer
and |
Totals |
Beginning Balance |
$ 7,011 |
$ 2,001 |
$ 408 |
$ 9,420 |
Less: Charge-offs |
3,353 |
52 |
147 |
3,552 |
Add: Recoveries |
103 |
- |
104 |
207 |
Add: Provisions |
3,134 |
164 |
(173) |
3,125 |
Ending Balance |
$ 6,895 |
$ 2,113 |
$ 192 |
$ 9,200 |
The following tables detail the amount of the ALLL allocated to each portfolio segment as of December 31, 2013, 2012 and 2011, disaggregated on the basis of the Corporations impairment methodology:
28
All dollar amounts are reported in thousands except share and per share data.
December 31, 2013 |
Commercial |
Residential
|
Consumer
and |
Totals |
Loans individually evaluated for impairment |
$ 342 |
$ 118 |
$ 11 |
$ 471 |
Loans collectively evaluated for impairment |
7,017 |
966 |
141 |
8,124 |
Ending Balance |
$ 7,359 |
$ 1,084 |
$ 152 |
$ 8,595 |
December 31, 2012 |
Commercial |
Residential
|
Consumer
and |
Totals |
Loans individually evaluated for impairment |
$ 221 |
$ 82 |
$ - |
$ 303 |
Loans collectively evaluated for impairment |
7,307 |
1,027 |
172 |
8,506 |
Ending Balance |
$ 7,528 |
$ 1,109 |
$ 172 |
$ 8,809 |
December 31, 2011 |
Commercial |
Residential
|
Consumer
and |
Totals |
Loans individually evaluated for impairment |
$ 1,111 |
$ 131 |
$ - |
$ 1,242 |
Loans collectively evaluated for impairment |
5,784 |
1,982 |
192 |
7,958 |
Ending Balance |
$ 6,895 |
$ 2,113 |
$ 192 |
$ 9,200 |
The following table shows loans as of December 31, 2013, 2012 and 2011 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Banks impairment methodology:
December 31, 2013 |
Commercial |
Residential
|
Consumer
& |
Totals |
|||||
Loans individually evaluated for impairment |
$ |
8,227 |
$ |
987 |
$ |
11 |
$ |
9,225 |
|
Loans collectively evaluated for impairment |
346,148 |
212,776 |
38,617 |
597,541 |
|||||
Ending Balance |
$ |
354,375 |
$ |
213,763 |
$ |
38,628 |
$ |
606,766 |
|
December 31, 2012 |
Commercial |
Residential
|
Consumer
& |
Totals |
|||||
Loans individually evaluated for impairment |
$ |
7,627 |
$ |
1,015 |
$ |
- |
$ |
8,642 |
|
Loans collectively evaluated for impairment |
328,298 |
195,334 |
34,885 |
558,517 |
|||||
Ending Balance |
$ |
335,925 |
$ |
196,349 |
$ |
34,885 |
$ |
567,159 |
|
December 31, 2011 |
Commercial |
Residential
|
Consumer
& |
Totals |
|||||
Loans individually evaluated for impairment |
$ |
12,387 |
$ |
1,217 |
$ |
- |
$ |
13,604 |
|
Loans collectively evaluated for impairment |
268,536 |
221,365 |
14,297 |
504,198 |
|||||
Ending Balance |
$ |
280,923 |
$ |
222,582 |
$ |
14,297 |
$ |
517,802 |
|
NOTE 6 PREMISES AND EQUIPMENT
The following table presents the Corporations assets by category at December 31, 2013 and 2012:
2013 |
2012 |
|||||
Land |
$ |
8,223 |
$ |
9,003 |
||
Premises |
22,765 |
22,717 |
||||
Furniture and equipment |
9,367 |
9,401 |
||||
Leasehold improvements |
1,095 |
1,319 |
||||
41,450 |
42,440 |
|||||
Less allowance for depreciation and amortization |
(16,582) |
(16,023) |
||||
|
|
$ |
24,868 |
|
$ |
26,417 |
29
All dollar amounts are reported in thousands except share and per share data.
NOTE 7 RELATED PARTY TRANSACTIONS
Certain related parties (primarily directors and senior officers of the Corporation or the Bank, including their affiliates, families and companies in which they hold 10% or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. An analysis of the activity with respect to such loans for
the years ended December 31, 2013 and 2012 is shown in the table below (dollars in thousands). These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank had a relationship other than the association of one of its directors in the capacity of officer or director. These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons. They did not involve more than the normal risk of collectability or present other unfavorable features. No related party loans were charged off in 2013 or 2012.
Activity for related party transactions during 2013 and 2012 is as follows (dollars in thousands):
2013 |
2012 |
|||
Related party extensions of credit, beginning of period |
$ |
3,831 |
$ |
3,829 |
New loans |
1,116 |
745 |
||
Repayments |
(1,125) |
(743) |
||
Related party extension of credit, end of period |
$ |
3,822 |
$ |
3,831 |
The aggregate balances of related party deposits at December 31, 2013 and 2012 were $15,724 and $15,984, respectively.
The aggregate balances of related party repurchase agreements at December 31, 2013 and 2012 were $9,079 and $8,694, respectively.
The Corporation and Bank utilize various services and purchased good provided by certain related parties. Significant services provided by a director during 2013 totaled $38, which was for consulting services. For 2012, these services totaled $1,105, which was for building contractor services.
NOTE 8 LEASES
Real property for four of the Banks office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2028. In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms. In addition, various items of office equipment are leased under cancelable operating leases. Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to approximately $18, $12 and $13 for equipment leases and approximately $264, $283 and $236 for building leases in 2013, 2012 and 2011, respectively. Future minimum lease commitments as of December 31, 2013 under all noncancelable operating leases with initial terms of one year or more are shown in the following table:
Year |
Lease Payments |
2014 |
$ 336 |
2015 |
347 |
2016 |
320 |
2017 |
290 |
2018 |
290 |
Thereafter |
3,942 |
Total |
$ 5,525 |
NOTE 9 FEDERAL AND STATE INCOME TAXES
30
All dollar amounts are reported in thousands except share and per share data.
The following table presents components of income tax expense attributable to continuing operations for the years ended December 31, 2013, 2012 and 2011:
2013 |
2012 |
2011 |
||||
Current |
$ |
915 |
$ |
2,256 |
$ |
1,960 |
Deferred |
1,950 |
(340) |
(1,216) |
|||
Total provision for income taxes |
2,865 |
1,916 |
744 |
|||
|
|
|
|
|||
Deferred Tax Effects of Principal Temporary Differences |
2013 |
2012 |
2011 |
|||
Allowance for possible loan losses |
$ |
3,309 |
$ |
3,392 |
$ |
3,519 |
Deferred compensation |
2,516 |
2,420 |
2,234 |
|||
Write down of other real estate |
314 |
1,152 |
1,621 |
|||
Deferred gain on OREO sale |
188 |
202 |
- |
|||
Amortization of core deposit intangible |
(272) |
423 |
575 |
|||
Recognition of nonaccrual loan income |
111 |
152 |
66 |
|||
Unrealized gains (losses) on available-for-sale securities |
6,613 |
(2,212) |
(1,892) |
|||
Post retirement benefit obligation |
1,849 |
1,733 |
1,643 |
|||
Accelerated depreciation |
(822) |
(630) |
(562) |
|||
Amortization of goodwill |
(2,591) |
(2,376) |
(2,152) |
|||
Alternative Minimum Tax |
- |
402 |
422 |
|||
Dividend Income - F&M West |
(372) |
(219) |
(241) |
|||
Prepaid Expenses |
(178) |
(185) |
- |
|||
Other |
(304) |
(368) |
(360) |
|||
Net deferred tax asset |
$ |
10,905 |
$ |
3,884 |
$ |
4,872 |
|
|
|
|
|||
Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed at the |
||||||
Federal Statutory Rate (34% Each Year) |
2013 |
2012 |
2011 |
|||
Tax expense at statutory rate |
$ |
4,332 |
$ |
3,238 |
$ |
2,632 |
Increase (decrease) in taxes resulting from: |
||||||
Tax exempt interest |
(1,144) |
(1,275) |
(1,533) |
|||
Nondeductible interest expense |
18 |
29 |
45 |
|||
Employee benefits |
(196) |
(240) |
(244) |
|||
Other nondeductible expenses |
||||||
(nontaxable income) - net |
11 |
32 |
55 |
|||
State income taxes net of federal tax benefit |
- |
41 |
(40) |
|||
Dividend income exclusion |
- |
(1) |
(52) |
|||
Other |
(156) |
92 |
(119) |
|||
Total provision for income taxes |
$ |
2,865 |
$ |
1,916 |
$ |
745 |
|
|
|
|
|||
Effective tax rate |
22.4% |
20.1% |
9.6% |
31
All dollar amounts are reported in thousands except share and per share data.
The Corporation and one of its subsidiaries file consolidated income tax returns with the Internal Revenue Service and State of Tennessee. The Corporation is not subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2010. There was no valuation allowance for deferred tax assets at December 31, 2013 and 2012. Management believes it is more-likely-than-not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years.
NOTE 10 BORROWED FUNDS
The Bank is a party to the Blanket Agreement for Advances and Security Agreement (the Blanket Agreement) with the Federal Home Loan Bank of Cincinnati (the FHLB). Advances made to the Bank under the Blanket Agreement are collateralized by the FHLB stock and qualifying residential mortgage loans totaling 150% of the outstanding amount borrowed. These collateralization matters are outlined in the Blanket Agreement dated June 20, 2006 between the Bank and the FHLB. Outstanding advances at December 31, 2013 and 2012 were $0 and $10,100, respectively.
Stock held in the FHLB totaling $3,009 at December 31, 2013 is carried at cost. The stock is restricted and can only be sold back to the FHLB at par.
The Bank has a Cash Management Advance Line of Credit Agreement (the CMA) dated June 21, 2010, with the Federal Home Loan Bank. The CMA is a component of the Blanket Agreement. The purpose of the CMA is to assist with short-term liquidity management. Under the terms of the CMA, the Bank may borrow a maximum of $40 million selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. There were no borrowings outstanding under the CMA as of December 31, 2013.
Short-term borrowings included the following at December 31:
|
2013 |
2012 |
|
|
|
Securities sold under repurchase agreements |
$ 18,095 |
$ 17,068 |
Securities sold under agreements to repurchase consist of obligations of the Bank to other parties. The obligations are secured by investment securities and such collateral is held by in safekeeping by a third party. The maximum amount of outstanding agreements at any month end during 2013 and 2012 totaled $22,359 and $22,598, respectively, and the monthly average of such agreements totaled $19,052 and $18,657 for 2013 and 2012, respectively. The agreements at December 31, 2013, mature January 2, 2014.
NOTE 11 SIGNIFICANT ESTIMATES, COMMITMENTS AND CONTINGENCIES
Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loansOther significant estimates and concentrations not discussed in those footnotes include:
General Litigation
The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Corporation.
Pension and Other Postretirement Benefit Obligations
32
All dollar amounts are reported in thousands except share and per share data.
The Corporation has a noncontributory defined benefit postretirement health care plan whereby it agrees to provide certain postretirement benefits to eligible employees. The benefit obligation is the actuarial present value of all benefits attributed to service rendered prior to the valuation date based on the projected unit credit cost method. It is reasonably possible that events could occur that would change the estimated amount of this liability materially in the near term.
Current Economic Conditions
The current protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans.
The accompanying financial statements have been prepared using values and information currently available to the Corporation.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Corporations ability to meet regulatory capital requirements and maintain sufficient liquidity. Furthermore, the Corporations regulators could require material adjustments to asset values or the allowance for loan losses for regulatory capital purposes that could affect the Corporations measurement of regulatory capital and compliance with the capital adequacy guidelines under the regulatory framework for prompt corrective action.
Commitments and Credit Risk
The Corporation grants agribusiness, commercial and residential loans to customers throughout the state. 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. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customers creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on managements credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
Mortgage loans in the process of origination represent amounts that the Corporation plans to fund within a normal period of 30 to 90 days, and which are intended for sale to investors in the secondary market. Total mortgage loans in process of origination were $407and $9,488, at December 31, 2013 and 2012, respectively. Total mortgage loans held for sale amounted to $327 and $2,456, at December 31, 2013 and 2012, respectively.
Standby Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under nonfinancial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should the Corporation be obligated to perform under the standby letters of credit, the Corporation may seek recourse from the customer for reimbursement of amounts paid.
The Corporation had total outstanding standby letters of credit amounting to $11,384 and $9,070, at December 31, 2013 and 2012, respectively, with terms ranging from seven days to 23 years.
33
All dollar amounts are reported in thousands except share and per share data.
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customers creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on managements credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
At December 31, 2013, the Corporation had granted unused lines of credit to borrowers aggregating approximately $79,150 and $44,318 for commercial lines and open-end consumer lines, respectively. At December 31, 2012, unused lines of credit to borrowers aggregated approximately $64,455 for commercial lines and $45,302 for open-end consumer lines.
NOTE 12 REGULATORY MATTERS
The Corporation and the Bank are subject to federal regulatory risk-adjusted capital adequacy standards. Failure to meet capital adequacy requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that could have a material adverse effect on the operating results and financial condition of the Corporation and the Bank. The applicable regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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 Corporation and the Bank to maintain minimum amounts and ratios of Total Capital and Tier I Capital to risk-weighted assets and of Tier I Capital to average assets. Actual capital amounts and ratios are presented in the table below (dollars in thousands). Management believes, as of December 31, 2013, that the Corporation and the Bank met all capital adequacy requirements to which they were subject.
For Minimum Capital |
For Minimum Regulatory |
||||||||
(Dollars in Thousands) |
Actual |
Adequacy Purposes |
Compliance Purposes |
||||||
As of December 31, 2013 |
Amount |
Ratio |
Amount |
Ratio > or = |
Amount |
Ratio > or = |
|||
Total Capital (to Risk Weighted |
|||||||||
Assets) Consolidated |
$ |
110,276 |
15.3 % |
$ |
57,632 |
8.0 % |
$ |
- |
- |
Bank |
107,392 |
15.0 % |
57,248 |
8.0 % |
71,560 |
10.0% |
|||
Tier I Capital (to Risk Weighted |
|||||||||
Assets) Consolidated |
101,681 |
14.1 % |
28,816 |
4.0 % |
- |
- |
|||
Bank |
98,797 |
13.8 % |
28,624 |
4.0 % |
42,936 |
6.0% |
|||
Tier I Capital (to Average |
|||||||||
Assets) Consolidated |
101,681 |
9.4 % |
43,358 |
4.0 % |
- |
- |
|||
Bank |
98,797 |
9.1 % |
43,358 |
4.0 % |
54,198 |
5.0% |
|||
As of December 31, 2012 |
|||||||||
Total Capital (to Risk Weighted |
|||||||||
Assets) Consolidated |
$ |
109,011 |
15.8 % |
$ |
55,265 |
8.0 % |
$ |
- |
- |
Bank |
106,075 |
15.5 % |
54,890 |
8.0 % |
68,613 |
10.0% |
|||
Tier I Capital (to Risk Weighted |
|||||||||
Assets) Consolidated |
100,338 |
14.5 % |
27,603 |
4.0 % |
- |
- |
|||
Bank |
97,402 |
14.2 % |
27,418 |
4.0 % |
41,127 |
6.0% |
|||
Tier I Capital (to Average |
|||||||||
Assets) Consolidated |
100,338 |
9.7 % |
41,505 |
4.0 % |
- |
- |
|||
Bank |
97,402 |
9.4 % |
41,492 |
4.0 % |
51,865 |
5.0% |
34
All dollar amounts are reported in thousands except share and per share data.
The Corporation is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2013, approximately $15,022 of retained earnings were available for dividend declaration without prior approval.
NOTE 13 FAIR VALUE MEASUREMENT
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. Fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. In estimating fair value, the Corporation utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC Topic 820) establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Recurring Measurements
The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2013 and 2012, and by the level within the fair value hierarchy utilized to measure fair value:
December 31, 2013
Available-For-Sale Securities |
Level 1 |
Level 2 |
Level 3 |
Total |
||||
U.S. Government agencies |
$ |
- |
$ |
105,072 |
$ |
- |
$ |
105,072 |
U.S. government sponsored agency mortgage backed securities |
- |
157,423 |
- |
157,423 |
||||
States and political subdivisions |
- |
46,337 |
- |
46,337 |
||||
Corporate bonds |
- |
20,882 |
- |
20,882 |
||||
Total assets at fair value |
$ |
- |
$ |
329,714 |
$ |
- |
$ |
329,714 |
December 31, 2012 |
||||||||
Available-For-Sale Securities |
Level 1 |
Level 2 |
Level 3 |
Total |
||||
U.S. Government agencies |
$ |
- |
$ |
144,017 |
$ |
- |
$ |
144,017 |
U.S. government sponsored agency mortgage backed securities |
- |
133,718 |
- |
133,718 |
||||
States and political subdivisions |
- |
50,579 |
- |
50,579 |
||||
Corporate bonds |
- |
17,404 |
- |
17,404 |
||||
Total assets at fair value |
$ |
- |
$ |
345,718 |
$ |
- |
$ |
345,718 |
The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the year ended December 31, 2013.
35
All dollar amounts are reported in thousands except share and per share data.
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, the Corporation obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement. The Corporation reviews the pricing quarterly to verify the reasonableness of the pricing. The fair value measurements consider observable data that may include 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 the bonds terms and conditions, among other factors. U.S. government agencies, state and political subdivisions, U.S. government sponsored agency mortgage-backed securities and corporate bonds are classified as Level 2 inputs.
Nonrecurring Measurements
The following table summarizes financial assets measured at fair value on a nonrecurring basis as of December 31, 2013 and December 31, 2012, by the level within the fair value hierarchy utilized to measure fair value:
Assets measured at fair value on a nonrecurring basis as of December 31, 2013 |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
||||
Impaired loans (collateral-dependent) |
$ |
- |
$ |
- |
$ |
2,214 |
$ |
2,214 |
Other real estate owned |
- |
- |
208 |
208 |
||||
Assets measured at fair value on a nonrecurring basis as of December 31, 2012 |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
||||
Impaired loans (collateral-dependent) |
$ |
- |
$ |
- |
$ |
4,840 |
$ |
4,840 |
Other real estate owned |
- |
- |
3,385 |
3,385 |
Impaired Loans (Collateral-Dependent)
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
The Corporation considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Chief Credit Officer by comparison to historical results. Fair value adjustments were approximately $79 at December 31, 2013 and $3,300 at December 31, 2012.
Loans considered impaired under ASC 310-35, Impairment of a Loan, are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect (1) subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral or (2) the full charge-off of the loan carrying value.
Other Real Estate Owned
36
All dollar amounts are reported in thousands except share and per share data.
Other real estate owned (OREO) is initially recorded at fair value at the time of acquisition, as determined by independent appraisal or evaluation by the Corporation, less costs to sell when the real estate is acquired in settlement of loans. Quarterly evaluations of OREO are performed to determine if there has been any subsequent decline in the value of OREO properties. Estimated fair value of OREO is based on appraisals or evaluations, less costs to sell. OREO is classified within Level 3 of the fair value hierarchy. OREO assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral. Fair value adjustments were approximately $395 at December 31, 2013 and $1,200 at December 31, 2012.
Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Chief Credit Officer. Appraisals are required annually and reviewed for accuracy and consistency by the Chief Credit Officer. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell. Appraisers are selected from the list of approved appraisers maintained by management.
Unobservable (Level 3) Inputs
The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements as of December 31, 2013 and 2012:
Quantitative Information about Level 3 Fair Value Measurements |
|||||
December 31, 2013 |
Fair Value |
Valuation |
Unobservable |
Range |
|
Impaired loans (collateral-dependent) |
$ |
2,214 |
Market |
Marketability |
5.0% - 10.0% (7%) |
Other real estate/assets owned |
$ |
208 |
Market |
Marketability |
5.0% - 10.0% (7%) |
Quantitative Information about Level 3 Fair Value Measurements |
|||||
December 31, 2012 |
Fair Value |
Valuation |
Unobservable Input |
Range (Weighted Average) |
|
Impaired loans (collateral-dependent) |
$ |
4,840 |
Market |
Marketability |
5.0% - 10.0% (7%) |
Other real estate/assets owned |
$ |
3,385 |
Market |
Marketability |
5.0% - 10.0% (7%) |
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks The carrying amount approximates fair value.
Interest bearing deposits in other banks The carrying amount approximates fair value.
Federal funds sold The carrying amount approximates fair value.
Securities held-to-maturity Fair values are based on quoted market prices, if available. If a quoted price is not available, fair value is estimated using quoted prices for similar securities. The fair value estimate is provided to management from a third party using modeling assumptions specific to each type of security that are reviewed and approved by management. Quarterly sampling of fair values provided by additional third parties supplement the fair value review process.
Loans held for sale The fair value is predetermined at origination based on sale price.
37
All dollar amounts are reported in thousands except share and per share data.
Loans (net of the allowance for loan losses) The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For other variable rate loans, the carrying amount approximates fair value.
Federal Home Loan Bank stock The carrying value of Federal Home Loan Bank (FHLB) stock approximates fair value based on the redemption provisions of the FHLB.
Federal Reserve Bank stock The carrying value of Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal Reserve Bank.
Accrued interest receivable The carrying amount approximates fair value.
Deposits The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. For deposits including demand deposits, savings accounts, NOW accounts, and certain money market accounts, the carrying value approximates fair value.
Repurchase agreements The fair value is estimated by discounting future cash flows using current rates.
Advances from FHLB The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently offered for advances of similar remaining maturities.
Accrued interest payable The carrying amount approximates fair value.
Commitments to extend credit and letters of credit The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair values of these commitments are not material.
The following tables present estimated fair values of the Corporations financial instruments as of December 31, 2013 and 2012, and indicate the levels within the fair value hierarchy of the valuation techniques:
Fair Value Measurements at December 31, 2013 Using |
||||||||
|
Carrying
|
Quoted
Prices |
Significant
|
Significant
|
||||
Financial assets |
||||||||
Cash and due from banks |
$ |
20,391 |
$ |
20,391 |
$ |
- |
$ |
- |
Interest-bearing deposits in other banks |
25,167 |
25,167 |
- |
- |
||||
Federal funds sold |
9,850 |
9,850 |
- |
- |
||||
Federal Home Loan Bank and Federal Reserve Bank stock |
3,879 |
- |
3,879 |
- |
||||
Securities available-for-sale |
329,714 |
- |
329,714 |
- |
||||
Securities held-to-maturity |
27,839 |
- |
28,595 |
- |
||||
Loans held for sale |
327 |
327 |
- |
- |
||||
Loans, net |
598,171 |
- |
- |
607,113 |
||||
Accrued interest receivable |
4,183 |
- |
4,183 |
- |
||||
Financial liabilities |
||||||||
Non-interest bearing deposits |
179,823 |
179,823 |
- |
- |
||||
Interest bearing deposits |
777,514 |
- |
778,682 |
- |
||||
Repurchase agreements |
18,095 |
- |
18,095 |
- |
||||
Accrued interest payable |
663 |
- |
663 |
- |
||||
Off-balance sheet credit related instruments: |
||||||||
Commitments to extend credit and letters of credit |
|
- |
- |
- |
||||
38
All dollar amounts are reported in thousands except share and per share data.
Fair Value Measurements at December 31, 2012 Using |
||||||||
|
Carrying
|
Quoted
Prices |
Significant
O |
Significant
|
||||
Financial assets |
||||||||
Cash and due from banks |
$ |
23,443 |
$ |
23,443 |
$ |
- |
$ |
- |
Interest-bearing deposits in other banks |
31,953 |
31,953 |
- |
- |
||||
Federal funds sold |
15,000 |
15,000 |
- |
- |
||||
Federal Home Loan Bank and Federal Reserve Bank stock |
3,879 |
- |
3,879 |
- |
||||
Securities available-for-sale |
345,718 |
- |
345,718 |
- |
||||
Securities held-to-maturity |
31,755 |
- |
33,420 |
- |
||||
Loans held for sale |
2,456 |
2,456 |
- |
- |
||||
Loans, net |
558,350 |
- |
- |
572,277 |
||||
Accrued interest receivable |
4,060 |
- |
4,060 |
- |
||||
Financial liabilities |
||||||||
Non-interest bearing deposits |
169,136 |
169,136 |
- |
- |
||||
Interest bearing deposits |
763,713 |
- |
766,043 |
- |
||||
Repurchase agreements |
17,068 |
- |
17,068 |
- |
||||
Advances from Federal Home Loan Bank |
10,100 |
- |
10,215 |
- |
||||
Accrued interest payable |
754 |
- |
754 |
- |
||||
Off-balance sheet credit related instruments: |
||||||||
Commitments to extend credit and letters of credit |
|
- |
- |
- |
||||
NOTE 14 QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following table presents unaudited quarterly interim financial information for the Corporation for the years ended December 31, 2013 and 2012:
First |
Second |
Third |
Fourth |
||
2013 |
Quarter |
Quarter |
Quarter |
Quarter |
Total |
Interest income |
$ 9,223 |
$ 9,523 |
$ 9,328 |
$ 9,287 |
$ 37,361 |
Interest expense |
834 |
751 |
679 |
643 |
2,907 |
Net interest income |
8,389 |
8,772 |
8,649 |
8,644 |
34,454 |
Provision for possible loan losses, net |
- |
- |
- |
- |
- |
Noninterest income |
3,329 |
2,620 |
2,509 |
2,658 |
11,116 |
Noninterest expenses |
8,105 |
8,165 |
8,322 |
8,237 |
32,829 |
Income before income taxes |
3,613 |
3,227 |
2,836 |
3,065 |
12,741 |
Income taxes |
557 |
842 |
779 |
687 |
2,865 |
Net income |
$ 3,056 |
$ 2,385 |
$ 2,057 |
$ 2,378 |
$ 9,876 |
Basic earnings per share |
0.59 |
0.46 |
0.40 |
0.47 |
1.93 |
Weighted average shares outstanding per quarter |
5,178,759 |
5,133,051 |
5,086,469 |
5,046,833 |
5,110,849 |
|
|
|
|
|
|
First |
Second |
Third |
Fourth |
||
2012 |
Quarter |
Quarter |
Quarter |
Quarter |
Total |
Interest income |
$ 9,065 |
$ 9,095 |
$ 9,114 |
$ 9,110 |
$ 36,384 |
Interest expense |
1,071 |
979 |
917 |
874 |
3,841 |
Net interest income |
7,994 |
8,116 |
8,197 |
8,236 |
32,543 |
Provision for possible loan losses, net |
600 |
520 |
- |
- |
1,120 |
Noninterest income |
3,379 |
3,360 |
2,276 |
2,616 |
11,631 |
Noninterest expenses |
7,754 |
8,424 |
8,145 |
9,207 |
33,530 |
Income before income taxes |
3,019 |
2,532 |
2,328 |
1,645 |
9,524 |
Income taxes |
690 |
451 |
373 |
402 |
1,916 |
Net income |
$ 2,329 |
$ 2,081 |
$ 1,955 |
$ 1,243 |
$ 7,608 |
Basic earnings per share |
0.44 |
0.39 |
0.37 |
0.23 |
1.43 |
Weighted average shares outstanding per quarter |
5,330,000 |
5,330,000 |
5,328,002 |
5,332,893 |
5,315,634 |
39
All dollar amounts are reported in thousands except share and per share data.
NOTE 15 DEPOSITS
The Bank does not have any foreign offices and all deposits are serviced in its 16 domestic offices. Maturities of time deposits of $100 or more at December 31, 2013 and 2012 are as follows:
2013 |
2012 |
|
Under 3 months |
$ 31,514 |
$ 28,504 |
3 to 12 months |
$ 63,429 |
64,639 |
Over 12 months |
$ 27,834 |
27,018 |
Total |
$ 122,777 |
$ 120,161 |
|
|
|
The following table presents maturities of interest-bearing time deposits as of December 31, 2013:
2014 |
$ 185,687 |
2015 |
$ 25,422 |
2016 |
$ 14,712 |
2017 |
$ 7,120 |
2018 |
$ 5,893 |
Thereafter |
$ - |
Total |
$ 238,834 |
|
|
NOTE 16 CONDENSED FINANCIAL INFORMATION OF THE CORPORATION
The following tables present the condensed balance sheets, statements of income, comprehensive income, and cash flows of the Corporation as of December 31, 2013 and 2012:
CONDENSED BALANCE SHEETS
As of December 31, |
||||
2013 |
2012 |
|||
Cash |
$ |
23 |
$ |
61 |
Investment in bank subsidiary |
99,695 |
111,655 |
||
Investment in credit life insurance company |
54 |
54 |
||
Investment in other securities |
17 |
17 |
||
Dividends receivable from bank subsidiary |
2,058 |
1,917 |
||
Cash surrender value - life insurance |
4,409 |
4,395 |
||
Total assets |
$ |
106,256 |
$ |
118,099 |
Liabilities |
||||
Accrued liabilities |
$ |
1,820 |
$ |
1,686 |
Dividends payable |
1,858 |
1,917 |
||
Total liabilities |
3,678 |
3,603 |
||
Shareholders' equity |
|
|
||
Common stock - $10 par value, 8,000,000 shares authorized; |
||||
5,021,012 and 5,180,000 shares issued and outstanding, |
||||
as of December 31, 2013 and December 31, 2012, respectively |
50,210 |
51,800 |
||
Retained earnings |
61,369 |
57,366 |
||
Accumulated other comprehensive income (loss) |
(9,001) |
5,330 |
||
Total shareholders' equity |
102,578 |
114,496 |
||
Total liabilities and shareholders' equity |
$ |
106,256 |
$ |
118,099 |
40
All dollar amounts are reported in thousands except share and per share data.
CONDENSED STATEMENTS OF INCOME
Years ended December 31, |
||||||
2013 |
2012 |
2011 |
||||
Operating income |
||||||
Dividends from bank subsidiary |
$ |
7,663 |
$ |
7,289 |
$ |
6,974 |
Other dividend income |
15 |
18 |
15 |
|||
Other |
65 |
135 |
130 |
|||
Operating expenses |
(238) |
(218) |
(199) |
|||
Income before equity in undistributed net |
||||||
income of bank subsidiary |
7,505 |
7,224 |
6,920 |
|||
Equity in undistributed net income of bank subsidiary |
2,371 |
384 |
76 |
|||
Net Income |
$ |
9,876 |
$ |
7,608 |
$ |
6,996 |
CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, |
||||||||
2013 |
|
2012 |
|
2011 |
||||
Net Income for common shareholders |
$ |
9,876 |
$ |
7,608 |
$ |
6,996 |
||
Other Comprehensive Income (Loss) |
||||||||
Unrealized appreciation (depreciation) on available-for-sale securities, net of tax expense (benefit) of ($8,507), $1,204, and $2,960 |
(13,589) |
1,923 |
4,728 |
|||||
Reclassification
adjustment for realized gains included in net income, net of taxes of |
(510) |
(1,411) |
(897) |
|||||
Change
in unfunded portion of postretirement benefit obligations, net of tax of ($146),
|
(232) |
1,610 |
1,940 |
|||||
Other Comprehensive Income (Loss) |
(14,331) |
2,122 |
5,771 |
|||||
Total Comprehensive Income (Loss) |
$ |
(4,455) |
$ |
9,730 |
$ |
12,767 |
41
All dollar amounts are reported in thousands except share and per share data.
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, |
||||||
2013 |
2012 |
2011 |
||||
Operating activities |
||||||
Net income for the year |
$ |
9,876 |
$ |
7,608 |
$ |
6,996 |
Adjustments to reconcile net income to net cash |
||||||
provided by operating activities |
||||||
Equity in undistributed net income of bank subsidiary |
(2,371) |
(384) |
(76) |
|||
Increase in cash surrender value of life insurance contracts |
(65) |
(135) |
(130) |
|||
(Increase) decrease in other assets |
(90) |
56 |
(1,972) |
|||
Decrease in payables |
84 |
127 |
126 |
|||
Total adjustments |
(2,442) |
(336) |
(2,052) |
|||
Net cash provided by operating activities |
7,434 |
7,272 |
4,944 |
|||
Investing activities |
||||||
Purchase of single premium life insurance policy |
- |
(310) |
- |
|||
Net cash used by investing activities |
- |
(310) |
- |
|||
Financing activities |
||||||
Payment to repurchase common stock |
(3,722) |
(3,400) |
(3,011) |
|||
Cash dividends paid |
(3,800) |
(3,944) |
(1,991) |
|||
Advance from subsidiary |
50 |
- |
- |
|||
Net cash used by financing activities |
(7,472) |
(7,344) |
(5,002) |
|||
Decrease in cash |
(38) |
(382) |
(58) |
|||
Cash at beginning of year |
61 |
443 |
501 |
|||
Cash at end of year |
$ |
23 |
$ |
61 |
$ |
443 |
NOTE 17 EMPLOYEE BENEFIT PLANS
The Bank contributes to a qualified profit-sharing plan covering employees who meet participation requirements. To be eligible to participate, employees must complete 1,000 hours of service within the twelve month time period following their date of hire. Employees must be age twenty or older. The amount of the contribution is at the discretion of the Banks Board of Directors, up to the maximum deduction allowed for federal income tax purposes. Contributions to the plan, which amounted to approximately $1,596, $1,019 and $874 in 2013, 2012 and 2011, respectively, are included in salaries and employee benefits expense.
The Bank formalized a nonqualified salary continuation plan for certain key officers. In connection with this plan, the value of the single premium universal life insurance policies (approximately $975 at December 31, 2013 and approximately $963 at December 31, 2012) purchased in 1993 to fund the plan and the related liability (approximately $49 at December 31, 2013 and $59 at December 31, 2012) were included in other assets and other liabilities, respectively. The principal cost of the plan is accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit.
The Corporation and Bank implemented a deferred compensation plan that permits directors to defer their directors fees and earn interest on the deferred amount in the amount of the wall street journal prime rate plus three percent. The agreements provide for a lump sum payment or 120 month payments of deferred fees plus accrued interest after retirement, separation from service, or death. The liability accrued for this plan totaled $6,487 and $6,226 at December 30, 2013 and 2012, respectively. The charge to expense for the agreements was $722, $853 and $711 for the years ended December 31 2013, 2012 and 2011, respectively.
42
All dollar amounts are reported in thousands except share and per share data.
NOTE 18 POST RETIREMENT BENEFIT PLAN
Effective July 1, 2013, the Corporation revised its retiree medical benefit plan for employees who were hired before March 27, 2007. Newly retiring employees will no longer be offered medical, dental or life insurance coverage. Instead, qualified retirees will receive a post retirement bonus. The Corporation will pay a post retirement bonus equal to $20,000 to employees (i) who were hired prior to March 20, 2007; (ii) who retire on or after July 1, 2013; (iii) who are at least age 59 ½ at the time of retirement; and (iv) who have at least twenty-five years of service to the Corporation as of retirement. The bonus will be paid in a lump sum cash payment (subject to applicable tax withholding requirements) within 60 days after the employees retirement, provided such retirement constitutes a separation from service under section 409A of the Internal Revenue Code. The Corporation still sponsors a defined benefit post-retirement health care plan for retirees who retired prior to July 1, 2007. Under this plan, premiums paid by retirees and spouses depend on date of retirement, age and coverage election.
The Corporation funding policy is to make the minimal annual contribution that is required by applicable regulations, plus such amounts as the Corporation may determine to be appropriate from time to time. The Corporation expects to contribute $145 to the plan in 2014.
The following table provides further information about the plan:
Post-Retirement Benefits |
|||||
2013 |
2012 |
||||
|
|
||||
Change in benefit obligation |
|||||
Benefit obligation at beginning of year |
$ |
7,421 |
$ |
4,572 |
|
Service cost |
138 |
91 |
|||
Interest cost |
292 |
351 |
|||
Plan participants contribution |
77 |
(81) |
|||
Expected benefits paid |
(343) |
(128) |
|||
Actuarial (gain) loss |
(5,220) |
2,616 |
|||
Amendments |
(52) |
- |
|||
Benefit obligation at end of year |
$ |
2,313 |
$ |
7,421 |
|
Change in fair value of assets |
|||||
Fair value of plans assets at beginning of year |
$ |
- |
$ |
- |
|
Employer contribution |
77 |
(209) |
|||
Plan participants' contributions |
266 |
(105) |
|||
Benefits paid |
(343) |
(314) |
|||
Fair value of plan assets at end of year |
$ |
- |
$ |
- |
|
Reconciliation of funded status to benefit costs recognized |
|||||
Projected benefit obligation, end of year |
$ |
(2,313) |
$ |
(7,421) |
|
Fair value of assets, end of year |
- |
- |
|||
Funded status, end of year |
(2,313) |
(7,421) |
|||
Unrecognized prior service cost |
(52) |
- |
|||
Unrecognized net loss/(gain) |
(2,490) |
2,920 |
|||
Prepaid/(accrued) benefit cost |
(4,855) |
(4,501) |
Amounts recognized in accumulated other comprehensive income not yet recognized as components of net periodic benefit cost consist of:
2013 |
2012 |
||||
Unrecognized net actuarial gain/loss |
$ |
2,490 |
$ |
2,920 |
|
Unrecognized prior service cost |
52 |
- |
|||
$ |
2,542 |
$ |
2,920 |
Amounts recognized in statement of financial position are as follows:
2013 |
2012 |
||||
Current Liability |
$ |
183 |
$ |
266 |
|
Noncurrent liability |
4,672 |
4,235 |
|||
Total |
$ |
4,855 |
$ |
4,501 |
A reconciliation of other comprehensive income is as follows:
43
All dollar amounts are reported in thousands except share and per share data.
Post-Retirement Benefits |
||||||||
2013 |
2012 |
2011 |
||||||
Accumulated other comprehensive income beginning of year |
$ |
2,920 |
$ |
305 |
$ |
(2,849) |
||
Less: loss/(gain) recognized in current year |
(190) |
- |
205 |
|||||
Plus: loss/(gain) incurred in current year |
(136) |
2,615 |
- |
|||||
Plus: prior service cost established in current year |
(52) |
- |
- |
|||||
Other comprehensive income/(loss) |
(378) |
2,615 |
2,950 |
|||||
Ending balance (before tax effects) |
$ |
2,542 |
$ |
2,920 |
$ |
305 |
||
Post-Retirement Benefits |
||||||||
Components of net periodic benefit cost: |
2013 |
2012 |
2011 |
|||||
|
|
|
||||||
Service cost |
$ |
138 |
$ |
91 |
$ |
24 |
||
Interest cost |
292 |
351 |
139 |
|||||
Recognized net actuarial (gain) loss |
190 |
- |
(205) |
|||||
Net periodic benefit cost (income) |
$ |
620 |
$ |
442 |
$ |
(42) |
||
The estimated net gain for the defined benefits postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $188.
Post-Retirement Benefits |
|||
Weighted-average assumption used to determine benefit obligation: |
2013 |
2012 |
|
Discount rate |
5% |
4% |
|
Rate of compensation increase |
NA |
NA |
Post-Retirement Benefits |
|||
Weighted-average assumptions used to determine benefit costs: |
2013 |
2012 |
|
Discount rate |
4% |
8% |
The following table gives the Health Care Cost Trend, which is applied to gross charges, net claims and retiree paid premiums to reflect the Corporations past practice and stated ongoing intention to maintain relatively constant cost sharing between the Corporation and retirees:
Health care trend rate |
2013 |
2012 |
|
Initial |
|||
Pre-65 |
11% |
11% |
|
Post-65 |
7.50% |
8% |
|
Ultimate (pre and post-65 |
5.00% |
5% |
|
Years to ultimate |
|||
Pre-65 |
6 |
6 |
|
Post-65 |
5 |
6 |
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid, net of participant contributions:
44
All dollar amounts are reported in thousands except share and per share data.
FYE |
Company Benefits |
2014 |
$ 183 |
2015 |
167 |
2016 |
178 |
2017 |
169 |
2018 |
191 |
2019-2025 |
935 |
|
$ 1,823 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage-Point
|
1-Percentage-Point
|
|
Effect on total of service and interest cost |
$ 29 |
$ (16) |
Effect on postretirement benefit obligation |
212 |
(109) |
45
All dollar amounts are reported in thousands except share and per share data.
EXHIBIT 21
List of Subsidiaries
(Direct and Indirect Ownership)
Name |
State of Incorporation |
First Farmers and Merchants Bank |
Tennessee |
F & M West, Inc. |
Tennessee |
Maury Tenn, Inc. |
Nevada |
Maury Tenn Properties, Inc. |
Maryland |
EXHIBIT 31.1
FIRST FARMERS AND MERCHANTS CORPORATION
CERTIFICATION PURSUANT TO RULE 13a-14 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, T. Randy Stevens, certify that:
1) |
I have reviewed this annual report on Form 10-K of First Farmers and Merchants Corporation; |
|
2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4) |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
|
c. |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and |
|
d. |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
|
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date March 5, 2014 |
\s\ T. Randy Stevens |
|
T. Randy Stevens, Chief Executive Officer |
Exhibit 31.2
FIRST FARMERS AND MERCHANTS CORPORATION
CERTIFICATION PURSUANT TO RULE 13a-14 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Patricia P. Bearden, certify that:
1) |
I have reviewed this annual report on Form 10-K of First Farmers and Merchants Corporation; |
|
2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4) |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
|
c. |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and |
|
d. |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
|
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date March 5, 2014 |
\s\ Patricia P. Bearden |
|
Patricia P. Bearden, Treasurer (principal financial officer) |
EXHIBIT 32.1
FIRST FARMERS AND MERCHANTS CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First Farmers and Merchants Corporation (the Company) on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date March 5, 2014 |
\s\ T. Randy Stevens |
|
T. Randy Stevens, Chief Executive Officer |
Date March 5, 2014 |
\s\ Patricia P. Bearden |
|
Patricia P. Bearden, Treasurer (principal financial officer) |
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Schedule of Capital Adequacy Requirements (Table)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2013
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Schedule of Capital Adequacy Requirements (Table): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations | Management believes, as of December 31, 2013, that the Corporation and the Bank met all capital adequacy requirements to which they were subject.
|
Non-accrual loans, segregated by class of loans, were as follows (Details) (USD $)
|
Dec. 31, 2013
|
Dec. 31, 2012
|
---|---|---|
Non-accrual loans, segregated by class of loans, were as follows | ||
Commercial and industrial Non-accrual loans | $ 1,649 | $ 1,595 |
Nonfarm, nonresidential real estate Non-accrual loans | 737 | 1,372 |
Construction and development Non-accrual loans | 68 | 50 |
Commercial real estate Non-accrual loans | 6 | 126 |
Other commercial Non-accrual loans | 1,248 | 1,379 |
Consumer Non-accrual loans | 21 | 11 |
Single family residential Non-accrual loans | 1,667 | 3,541 |
Total Non-accrual loans | $ 5,396 | $ 8,074 |
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