UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark one)
[X] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended
June 30, 2012
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 Numbers:
000-10972
First Farmers and Merchants
Corporation
(Exact name of registrant as specified in its charter)
Tennessee
|
62-1148660
|
(State or other
jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
816 South
Garden Street
|
|
Columbia, Tennessee
|
38402-1148
|
(Address of principal
executive offices)
|
(Zip
Code)
|
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 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 whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See 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 [ ]
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). [ ] Yes [X] No
As of August 6, 2012, the registrant had 5,330,000
shares of common stock outstanding.
1
PART I - FINANCIAL INFORMATIO
N
Item 1. Financial
Statements.
The
following unaudited condensed consolidated financial statements of the
Registrant and its subsidiaries are included in this Report:
Condensed
consolidated balance sheets June 30, 2012 and December 31, 2011.
Condensed
consolidated statements of income - For the three months and six months ended
June 30, 2012 and June 30, 2011.
Condensed
consolidated statements of comprehensive income - For the three months and six months ended June
30, 2012 and June 30, 2011
.
Condensed
consolidated statements of cash flows - For the six months ended June 30, 2012
and June 30, 2011
.
Selected
notes to condensed consolidated financial statements
.
2
FIRST FARMERS AND
MERCHANTS CORPORATION AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
June 30,
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
(Dollars in Thousands, Except Per Share Data)
|
(Unaudited)
|
|
(1)
|
ASSETS
|
Cash and due from banks
|
$ 18,442
|
|
$ 17,927
|
|
Interest-bearing due from banks
|
19,560
|
|
16,500
|
|
Federal funds sold
|
15,000
|
|
38,594
|
|
Total cash and cash equivalents
|
53,002
|
|
73,021
|
|
Securities
|
|
|
|
|
Available-for-sale (amortized cost $360,392
|
|
|
|
|
and $309,374, respectively)
|
364,535
|
|
314,270
|
|
Held-to-maturity (fair market value $34,238
|
|
|
|
|
and $37,275, respectively)
|
32,429
|
|
35,214
|
|
Total securities
|
396,964
|
|
349,484
|
|
Loans, net of deferred fees
|
518,687
|
|
517,802
|
|
Allowance for loan and lease losses
|
(8,772)
|
|
(9,200)
|
|
Net loans
|
509,915
|
|
508,602
|
|
|
|
|
|
|
Bank premises and equipment, net
|
26,947
|
|
25,537
|
|
Other real estate owned
|
8,243
|
|
8,827
|
|
Bank owned life insurance
|
24,742
|
|
23,621
|
|
Goodwill
|
9,018
|
|
9,018
|
|
Other assets
|
17,729
|
|
19,339
|
|
TOTAL ASSETS
|
$ 1,046,560
|
|
$ 1,017,449
|
LIABILITIES
|
Deposits
|
|
|
|
|
Noninterest-bearing
|
$ 150,155
|
|
$ 144,003
|
|
Interest- bearing
|
737,293
|
|
712,427
|
|
Total deposits
|
887,448
|
|
856,430
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
18,670
|
|
16,347
|
|
Accounts payable and accrued liabilities
|
17,071
|
|
16,265
|
|
Federal Home Loan Bank advances
|
10,100
|
|
17,100
|
|
TOTAL LIABILITIES
|
933,289
|
|
906,142
|
SHAREHOLDERS'
|
Common stock - $10 par value per share, 8,000,000
shares
|
|
|
|
EQUITY
|
authorized; 5,330,000 shares issued
|
|
|
|
|
and outstanding as of June 30, 2012 and
|
|
|
|
|
December 31, 2011
|
53,300
|
|
53,300
|
|
Retained earnings
|
57,328
|
|
54,890
|
|
Accumulated other comprehensive income
|
2,548
|
|
3,022
|
|
TOTAL SHAREHOLDERS' EQUITY BEFORE
NONCONTROLLING INTEREST - PREFERRED STOCK OF SUBSIDIARY
|
113,176
|
|
111,212
|
|
Noncontrolling interest - preferred stock of
subsidiary
|
95
|
|
95
|
|
TOTAL SHAREHOLDERS' EQUITY
|
113,271
|
|
111,307
|
|
TOTAL LIABILITIES AND
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
$ 1,046,560
|
|
$ 1,017,449
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
|
|
|
|
(1) Derived from audited financial statements.
|
|
|
|
3
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
(Dollars in Thousand, Except Per Share Data)
|
|
June 30,
|
June 30,
|
|
|
2012
|
|
2011
|
2012
|
2011
|
INTEREST AND
|
Interest and fees on loans
|
|
$
|
6,968
|
|
$
|
7,528
|
$
|
13,948
|
$
|
15,065
|
DIVIDEND INCOME
|
Income on investment securities
|
|
|
|
|
|
|
|
Taxable interest
|
|
1,250
|
|
1,143
|
2,434
|
2,068
|
|
Exempt from federal income tax
|
|
778
|
|
910
|
1,587
|
1,843
|
|
Dividends
|
|
64
|
|
88
|
112
|
136
|
|
Other interest income
|
|
35
|
|
11
|
79
|
29
|
|
Total interest income
|
|
9,095
|
|
9,680
|
18,160
|
19,141
|
INTERST EXPENSE
|
Interest on deposits
|
|
855
|
|
1,077
|
1,759
|
2,242
|
|
Interest on other borrowings
|
|
124
|
|
178
|
291
|
385
|
|
Total interest expense
|
|
979
|
|
1,255
|
2,050
|
2,627
|
|
Net interest income
|
|
8,116
|
|
8,425
|
16,110
|
16,514
|
|
Provision for loan and lease losses
|
|
520
|
|
750
|
1,120
|
1,475
|
|
Net interest income after provision
|
|
7,596
|
|
7,675
|
14,990
|
15,039
|
NONINTEREST
|
Gain on loans sold
|
|
129
|
|
70
|
248
|
243
|
INCOME
|
Trust department income
|
|
500
|
|
498
|
1,036
|
1,024
|
|
Service fees on deposit accounts
|
|
1,642
|
|
1,713
|
3,290
|
3,316
|
|
Brokerage fees
|
|
68
|
|
-
|
110
|
-
|
|
Earnings on bank owned life insurance
|
|
216
|
|
180
|
335
|
357
|
|
Gain on sale of securities
|
|
943
|
|
374
|
2,155
|
434
|
|
Loss on foreclosed property
|
|
(112)
|
|
(237)
|
(526)
|
(457)
|
|
Other non-interest income
|
|
(26)
|
|
96
|
91
|
199
|
|
Total noninterest income
|
|
3,360
|
|
2,694
|
6,739
|
5,116
|
NONINTEREST
|
Salaries and employee benefits
|
|
4,430
|
|
4,144
|
8,703
|
8,278
|
EXPENSE
|
Net occupancy expense
|
|
521
|
|
497
|
989
|
975
|
|
Depreciation expense
|
|
358
|
|
332
|
686
|
638
|
|
Data processing expense
|
|
506
|
|
483
|
981
|
947
|
|
Legal and professional fees
|
|
311
|
|
273
|
499
|
549
|
|
Stationary and office supplies
|
|
72
|
|
90
|
121
|
165
|
|
Advertising and promotions
|
|
292
|
|
344
|
586
|
677
|
|
FDIC insurance premium expense
|
|
356
|
|
383
|
712
|
767
|
|
Other real estate expense
|
|
47
|
|
182
|
158
|
293
|
|
Other noninterest expense
|
|
1,523
|
|
1,316
|
2,735
|
2,671
|
|
Total noninterest expenses
|
|
8,416
|
|
8,044
|
16,170
|
15,960
|
|
Income before provision for income taxes
|
|
2,540
|
|
2,325
|
5,559
|
4,195
|
|
Provision for income taxes
|
|
451
|
|
306
|
1,141
|
631
|
|
Net income before noncontrolling interest -
dividends on preferred stock of subsidiary
|
|
2,089
|
|
2,019
|
4,418
|
3,564
|
|
Noncontrolling interest - dividends on preferred
stock of subsidiary
|
|
8
|
|
8
|
8
|
8
|
|
Net income for common shareholders
|
|
$
|
2,081
|
|
$
|
2,011
|
$
|
4,410
|
$
|
3,556
|
|
Weighted average shares outstanding
|
|
5,330,000
|
|
5,392,760
|
5,330,000
|
5,410,205
|
|
Earnings per share
|
|
$
|
0.39
|
|
$
|
0.37
|
$
|
0.83
|
$
|
0.66
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
|
|
|
|
|
4
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2012
|
2011
|
|
2012
|
2011
|
Net Income
|
$
|
2,081
|
$
|
2,011
|
|
$
|
4,410
|
$
|
3,556
|
Comprehensive Income
|
|
|
|
|
|
Unrealized appreciation (depreciation) on
available-for-sale securities, net of taxes of $953 and $1,210 for 2012 and
2011, respectively for three months and net of taxes of $533 and $1,213 for
six months
|
1,522
|
1,934
|
|
852
|
1,938
|
Less: reclassification adjustment for realized
(gains) losses included in net income, net of taxes of $363 and $144, for
2012 and 2011, respectively for three months and net of taxes of ($830) and
($167) for six months
|
(580)
|
(230)
|
|
(1,325)
|
(267)
|
Net unrealized gain (loss) on available-for-sale
securities
|
942
|
1,704
|
|
(473)
|
1,671
|
Comprehensive Income
|
3,023
|
3,715
|
|
3,937
|
5,227
|
Less: comprehensive income attributable to the
noncontrolling interest
|
-
|
-
|
|
-
|
-
|
Total Comprehensive Income
|
$
|
3,023
|
$
|
3,715
|
|
$
|
3,937
|
$
|
5,227
|
5
FIRST FARMERS AND
MERCHANTS CORPORATION AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
(Dollars in Thousands)
|
Six months ended June 30,
|
|
(unaudited)
|
2012
|
2011
|
OPERATING
|
Net income available for common shareholders
|
$ 4,410
|
$ 3,556
|
ACTIVITIES
|
Adjustments to reconcile net income to net cash
provided
|
|
|
|
by (used in) operating activities
|
|
|
|
Provision for loan losses
|
1,120
|
1,475
|
|
Provision for depreciation and amortization of
|
|
|
|
premises and equipment
|
686
|
639
|
|
Deferred tax expense
|
(50)
|
102
|
|
Net securities gains
|
(2,155)
|
(434)
|
|
Gains on loans sold
|
(248)
|
(243)
|
|
Proceeds from sale of mortgage loans held for
sale
|
14,165
|
-
|
|
Funding of mortgage loans held for sale
|
(12,597)
|
-
|
|
Gain on sale of OREO
|
526
|
457
|
|
Gain on sale of assets
|
(10)
|
-
|
|
Amortization of deposit base intangibles
|
-
|
18
|
|
Amortization of investment security premiums,
|
|
|
|
net of accretion of discounts
|
2,128
|
718
|
|
Increase in cash surrender value of life
insurance contracts
|
(335)
|
(615)
|
|
(Increase) decrease in
|
|
|
|
Other assets
|
814
|
3891
|
|
Increase (decrease) in
|
|
|
|
Other liabilities
|
637
|
648
|
|
Total adjustments
|
4,681
|
6,656
|
|
Net cash provided by operating
activities
|
9,091
|
10,212
|
INVESTING
|
Proceeds from sales of available-for-sale securities
|
339,076
|
83,446
|
ACTIVITIES
|
Proceeds from maturities and calls of
available-for-sale securities
|
35,045
|
-
|
|
Proceeds from maturities and calls of
held-to-maturity securities
|
2,770
|
2,655
|
|
Purchases of investment securities
|
|
|
|
available-for-sale
|
(425,115)
|
(107,025)
|
|
Net (increase) decrease in loans
|
(3,698)
|
10,713
|
|
Proceeds from sale of OREO
|
1,323
|
-
|
|
Purchase of life insurance premium
|
(786)
|
-
|
|
Purchases of premises and equipment
|
(2,086)
|
(2,463)
|
|
Net cash used in investing activities
|
(53,471)
|
(12,674)
|
FINANCING
|
Net increase in deposits
|
31,018
|
22,662
|
ACTIVITIES
|
Net increase in securities sold under agreements to
repurchase
|
2,323
|
5,985
|
|
Payments to FHLB borrowings
|
(7,000)
|
(7,000)
|
|
Repurchase of common stock
|
-
|
(1,511)
|
|
Cash dividends paid on preferred stock
|
(8)
|
(8)
|
|
Cash dividends paid on common stock
|
(1,972)
|
-
|
|
Net cash provided by financing
activities
|
24,361
|
20,128
|
|
Increase (decrease) in cash and cash equivalents
|
(20,019)
|
17,666
|
|
Cash and cash equivalents at beginning of period
|
73,021
|
32,499
|
|
Cash and cash equivalents at end of period
|
$
53,002
|
$ 50,165
|
|
Supplemental disclosures of cash flow information
|
|
|
|
Cash paid during the period for expenses
|
|
|
|
Interest on deposits and borrowed funds
|
$ 1,993
|
$ 7,107
|
|
Income Taxes
|
1,563
|
1,607
|
|
Loans to facilitate sale
|
74
|
-
|
|
Real estate acquired in settlement of taxes
|
1,191
|
1,375
|
The accompanying notes are an integral part of
the consolidated financial statements.
|
|
|
6
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated
financial statements reflect all adjustments that are in the opinion of First
Farmers and Merchants Corporations (the Corporation) management, necessary
to fairly present the financial position, results of operations and cash flows
of the Corporation. Those adjustments consist only of normal recurring
adjustments.
The accompanying condensed consolidated financial
statements are presented in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosures normally required by
accounting principles generally accepted in the United States of America or
those normally made in the Registrants
annual report on Form 10-K. Accordingly, the reader of the Form 10-Q should
refer to the Registrants Form 10-K
for the year ended December 31, 2011 for further information in this regard.
The condensed consolidated balance sheet of the Corporation as of December 31,
2011 has been derived from the audited consolidated balance sheet of the
Corporation as of that date. The results of operations for the period are not
necessarily indicative of the results to be expected for the full year.
Reclassifications:
Certain reclassifications considered to be
immaterial have been made in the prior year condensed consolidated financial
statements to conform to current year presentation. These reclassifications
had no effect on net income.
NOTE 2 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:
-
Level 1 Inputs
- Unadjusted quoted prices
in active markets for identical assets or liabilities.
-
Level 2 Inputs
- Inputs other than quoted
prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. These might include quoted prices for
similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, market consensus,
prepayment speeds, credit risks, etc.) or inputs that are derived
principally from or corroborated by market data by correlation or other
means.
-
Level 3 Inputs
- Unobservable inputs for
determining the fair values of assets or liabilities that reflect an
entitys own assumptions about the assumptions that market participants
would use in pricing the assets or liabilities.
Transfers between levels of the fair value hierarchy
are recognized on the actual date of the event or circumstances that caused the
transfer, which generally coincides with the Corporations monthly and/or
quarterly valuation process.
7
Recurring Measurements
The following table summarizes
financial assets measured at fair value on a recurring basis as of June 30,
2012 and December 31, 2011, and by the level within the fair value hierarchy
utilized to measure fair value (dollars in thousands):
Assets measured at fair value on a recurring basis
as of June 30, 2012
|
|
|
|
Available-For-Sale Securities
|
Level 1
|
Level 2
|
Level 3
|
Total
|
U.S. Government agencies
|
$
|
-
|
$
|
79,893
|
$
|
-
|
$
|
79,893
|
U.S. government sponsored agency mortgage backed
securities
|
-
|
213,796
|
-
|
213,796
|
States and political subdivisions
|
-
|
51,972
|
-
|
51,972
|
Corporate bonds
|
-
|
18,874
|
-
|
18,874
|
Total assets at fair value
|
$
|
-
|
$
|
364,535
|
$
|
-
|
$
|
364,535
|
Assets measured at fair value on a recurring basis
as of December 31, 2011
|
|
|
|
Available-For-Sale Securities
|
Level 1
|
Level 2
|
Level 3
|
Total
|
U.S.Government agencies
|
$
|
-
|
$
|
59,001
|
$
|
-
|
$
|
59,001
|
U.S.Government sponsored agency mortgage backed
securities
|
-
|
176,050
|
-
|
176,050
|
States and political subdivisions
|
-
|
59,946
|
-
|
59,946
|
Corporate bonds
|
-
|
19,273
|
-
|
19,273
|
Total assets at fair value
|
$
|
-
|
$
|
314,270
|
$
|
-
|
$
|
314,270
|
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 three months ended June 30, 2012.
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 June 30,
2012 and December 31, 2011, and by the level within the fair value hierarchy
utilized to measure fair value (dollars in thousands):
Assets measured at fair value on a nonrecurring basis
as of June 30, 2012
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Impaired loans (collateral dependent)
|
$
|
-
|
$
|
-
|
$
|
6,721
|
$
|
7,265
|
Other real estate owned
|
-
|
-
|
905
|
905
|
Assets measured at fair value on a nonrecurring basis
as of December 31, 2011
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Impaired loans (collateral dependent)
|
$
|
-
|
$
|
-
|
$
|
13,604
|
$
|
13,604
|
Other real estate owned
|
-
|
-
|
8,827
|
8,827
|
8
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 for the six
months ended June 30, 2012 and 2011 were $1.4 million and approximately
$448,000, respectively, and $1.2 million for the year ended December 31, 2011.
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
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 for the six months ended June 30, 2012 and 2011 were approximately
$454,000 and $473,000, respectively, and $1.1 million for the year ended
December 31, 2011.
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 (dollars in thousands).
|
Quantitative Information about Level 3 Fair Value
Measurements
|
|
Fair Value at
June 30, 2012
|
Valuation
Technique(s)
|
Unobservable
Input
|
Range
(Weighted
Average)
|
Impaired loans (collateral-dependent)
|
$ 7,265
|
Market
comparable
properties
|
Marketability
discount
|
5.0% -
10.0% (7%)
|
Other real estate/assets owned
|
$ 905
|
Market
comparable
properties
|
Marketability
discount
|
5.0% -
10.0% (7%)
|
9
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.
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.
10
The
following table presents estimated fair values of the Corporations financial
instruments as of June 30, 2012 and indicates the level within the fair value
hierarchy of the valuation techniques (dollars in thousands).
|
Fair Value Measurements at June 30, 2012 Using
|
|
Carrying
Amount
|
Quoted
Prices in
Active
Markets for
Identical Assets
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Financial assets
|
|
|
|
|
Cash and cash equivalents
|
$ 18,442
|
$ 18,442
|
$ -
|
$ -
|
Interest-bearing deposits in other banks
|
19,560
|
19,560
|
|
|
Federal funds sold
|
15,000
|
15,000
|
|
|
Federal Home Loan Bank and Federal Reserve
bank stock
|
3,879
|
|
3,879
|
|
Securities available-for-sale
|
364,535
|
|
364,535
|
|
Securities held-to-maturity
|
32,429
|
|
34,238
|
|
Loans held for sale
|
1,185
|
|
1,185
|
|
Loans, net
|
509,915
|
|
|
525,568
|
Accrued interest receivable
|
4,141
|
|
4,141
|
|
Financial liabilities
|
|
|
|
|
Non-interest bearing deposits
|
150,155
|
152,968
|
|
|
Interest bearing deposits
|
737,293
|
|
739,626
|
|
Repurchase agreements
|
18,670
|
|
18,670
|
|
Advances from Federal Home Loan Bank
|
10,100
|
|
10,337
|
|
Accrued interest payable
|
821
|
|
821
|
|
Off-balance sheet credit related instruments:
|
|
|
|
|
Commitments to extend credit
|
|
|
119
|
|
|
|
|
|
|
The estimated fair values of
financial instruments as of December 31, 2011 were as follows (dollars in
thousands):
|
December 31, 2011
|
|
Carrying
|
Fair
|
|
Amount
|
Value
|
Financial assets
|
|
|
Cash and due from banks
|
$
|
17,927
|
$
|
17,927
|
Interest-bearing deposits in banks
|
38,594
|
38,594
|
Federal funds sold
|
16,500
|
16,500
|
Securities available-for-sale
|
318,166
|
318,166
|
Securities held-to-maturity
|
35,214
|
37,276
|
Loans, net
|
508,602
|
523,847
|
Accrued interest receivable
|
4,095
|
4,095
|
Financial liabilities
|
|
|
Deposits
|
856,430
|
858,775
|
Federal funds purchased and
|
|
|
securities sold under agreements
|
|
|
to repurchase
|
16,347
|
16,347
|
Other short term liabilities
|
-
|
-
|
Advances from FHLB
|
17,100
|
17,521
|
Accrued interest payable
|
878
|
878
|
Off-balance sheet credit related instruments:
|
|
|
Commitments to extend credit
|
-
|
109
|
11
NOTE
3 SECURITIES
The
amortized cost and estimated fair value of securities at June 30, 2012 and
December 31, 2011 were as follows (dollars in thousands):
|
Amortized
|
Gross Unrealized
|
Fair
|
June 30, 2012
|
Cost
|
Gains
|
Losses
|
Value
|
Available-for-sale securities
|
|
|
|
|
U.S. Government agencies
|
$
|
79,780
|
$
|
226
|
$
|
113
|
$
|
79,893
|
U.S. Government sponsored agency mortgage backed
securities
|
213,438
|
801
|
443
|
213,796
|
States and political subdivisions
|
48,824
|
3,148
|
-
|
51,972
|
Corporate bonds
|
18,350
|
537
|
13
|
18,874
|
|
$
|
360,392
|
$
|
4,712
|
$
|
569
|
$
|
364,535
|
Held-to-maturity securities
|
|
|
|
|
States and political subdivisions
|
$
|
32,429
|
$
|
1,809
|
$
|
-
|
$
|
34,238
|
|
|
|
|
|
|
Amortized
|
Gross Unrealized
|
Fair
|
December 31, 2011
|
Cost
|
Gains
|
Losses
|
Value
|
Available-for-sale securities
|
|
|
|
|
U.S. Government agencies
|
$
|
58,793
|
$
|
214
|
$
|
6
|
$
|
59,001
|
U.S. Government sponsored agency mortgage backed
securities
|
175,352
|
843
|
145
|
176,050
|
States and political subdivisions
|
56,452
|
3,494
|
-
|
59,946
|
Corporate bonds
|
18,741
|
582
|
68
|
19,273
|
|
$
|
309,338
|
$
|
5,133
|
$
|
219
|
$
|
314,270
|
Held-to-maturity securities
|
|
|
|
|
States and political subdivisions
|
$
|
35,214
|
$
|
2,061
|
$
|
-
|
$
|
37,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2012 and December 31, 2011, was approximately $130,636 and
$85,009, which was approximately 33% and 24%, 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 June 30, 2012 and December 31, 2011
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 June 30, 2012 and December 31, 2011 (dollars
in thousands):
June 30, 2012
|
Less than 12 months
|
12 months or Greater
|
Total
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Type of Security
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
U.S. Government agencies
|
$
|
29,972
|
$
|
113
|
$
|
-
|
$
|
-
|
$
|
29,972
|
$
|
113
|
U.S. Government sponsored agency mortgage
|
98,560
|
443
|
-
|
-
|
98,560
|
443
|
backed securities
|
|
|
|
|
|
|
Corporate bonds
|
1,960
|
9
|
144
|
4
|
2,104
|
13
|
|
$
|
130,,492
|
$
|
565
|
$
|
144
|
$
|
4
|
$
|
130,636
|
$
|
569
|
12
|
|
|
|
|
|
|
December 30, 2011
|
Less than 12 months
|
12 months or Greater
|
Total
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Type of Security
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
U.S. Government agencies
|
$
|
15,063
|
$
|
7
|
$
|
-
|
$
|
-
|
$
|
15,063
|
$
|
7
|
U.S. Government sponsored agency mortgage
|
40,792
|
145
|
|
|
40,792
|
145
|
backed securities
|
|
|
|
|
|
67
|
Corporate bonds
|
29,154
|
67
|
-
|
-
|
29,154
|
-
|
|
$
|
85,009
|
$
|
219
|
$
|
-
|
$
|
-
|
$
|
85,009
|
$
|
219
|
The
amortized cost and fair value of available-for-sale securities and
held-to-maturity securities at June 30, 2012, 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
|
June 30, 2012
|
Amortized
|
Estimated
|
|
Amortized
|
Estimated
|
|
Cost
|
Fair Value
|
|
Cost
|
Fair Value
|
Within one year
|
$ 9,138
|
$ 9,229
|
|
$ 2,325
|
$ 2,357
|
One to five years
|
24,198
|
24,821
|
|
8,503
|
8,945
|
Five to ten years
|
82,061
|
82,929
|
|
11,371
|
12,093
|
After ten years
|
31,557
|
33,760
|
|
10,230
|
10,843
|
Mortgage-backed securities
|
213,438
|
213,796
|
|
-
|
-
|
Total
|
$ 360,392
|
$ 364,535
|
|
$ 32,429
|
$ 34,238
|
The carrying value of securities pledged as collateral
to secure public deposits and for other purposes was $222.7 million at June 30,
2012 and $196.1 million at December 31, 2011.
The book value of
securities sold under agreements to repurchase amounted to $26.5 million and
$22.2 million at June 30, 2012 and December 31, 2011, respectively.
Gross gains of
approximately $943,000, $374,000, $2.2 million and $434,000 resulting from
sales of available-for-sale securities were realized for the three months and
six month periods ended June 30, 2012 and 2011, respectively.
NOTE 4 LOANS
The
following table presents the Corporations loans by class as of June 30, 2012
and December 31, 2011 (dollars in thousands):
|
June 30, 2012
|
December 31, 2011
|
Commercial
|
|
|
Commercial and industrial
|
$ 64,875
|
$ 60,448
|
Non-farm, non-residential real estate
|
146,697
|
140,147
|
Construction and development
|
30,884
|
29,042
|
Commercial loans secured by real estate
|
9,578
|
6,161
|
Other commercial
|
39,190
|
45,630
|
|
291,224
|
281,428
|
Retail
|
|
|
Consumer
|
12,656
|
14,297
|
Single family residential
|
194,830
|
196,913
|
Other retail
|
19,977
|
25,700
|
|
$ 227,463
|
$ 236,910
|
Total
|
$ 518,687
|
$ 518,338
|
13
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 credit 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 a borrowers ability to operate profitably and
expand its business prudently. 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
generally 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 June 30, 2012,
approximately half of the outstanding principal balance of the Corporations
commercial real estate loans were secured by owner-occupied properties.
With respect to loans to developers and builders (construction
and development) 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 consumer retail loans
utilizing a computer-based credit scoring analysis to supplement the
underwriting process. To monitor and manage consumer retail 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.
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.
14
The goal of the Corporation 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% or more of the Corporation's
capital structure. The Board of Directors recognizes that the Corporation's
geographic trade area imposes some limitations regarding loan diversification
if the Corporation is to perform the function for which it has been chartered.
Specifically, lending to qualified borrowers within the Corporation's trade
area will naturally cause concentrations of real estate loans in the primary
communities served by the Corporation and loans to employees of major employers
in the area.
All closed-end commercial loans (excluding loans
secured by real estate) are charged off no later than 90 days delinquent. If a
loan is considered uncollectable, it is charged off earlier than 90 days
delinquent. When a commercial loan secured by real estate is 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 with a specific reserve equal to the difference between book value
and fair value assigned to the credit until such time as the property has been
foreclosed. 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.
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 (five 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.
Non-Accrual and Past Due Loans
. Loans are considered past due if the required
principal and interest payments have not been received as of the date such
payments were due. Loans are placed on non-accrual status when, (i) principal
or interest has been in default for a period of 90 days or more, or (ii) full
payment of principal and interest is not expected. Loans may be placed on
non-accrual status regardless of whether or not such loans are considered past
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income on non-accrual loans is recognized only to the extent
that cash payments are received in excess of principal due. A loan may be
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future principal and interest amounts
contractually due are reasonably assured, which is typically evidenced by a
sustained period (three to six months) of repayment performance by the borrower.
The Corporation had no loans that were 90 days or more past due that were not
included in nonaccrual loans as of June 30, 2012.
The following
table provides details regarding the aging of the Corporations loan portfolio
as of June 30, 2012 and December 31, 2011 (dollars in thousands):
June 30, 2012
|
30 - 89 Days
Past Due
|
90 Days and
Greater Past
Due*
|
Total Past Dues
|
Current
|
Total Loans
|
Retail
|
|
|
|
|
|
Consumer
|
$
|
28
|
$
|
43
|
$
|
71
|
$
|
12,585
|
$
|
12,656
|
Single family residential
|
613
|
2,789
|
3,402
|
191,428
|
194,830
|
Other retail
|
17
|
329
|
346
|
19,631
|
19,977
|
Retail total
|
$
|
658
|
$
|
3,161
|
$
|
3,819
|
$
|
223,644
|
$
|
227,463
|
Commercial
|
|
|
|
|
|
Commercial and industrial
|
$
|
209
|
$
|
3,922
|
$
|
4,131
|
$
|
60,744
|
$
|
64,875
|
Non-farm, non-residential real estate
|
384
|
1,632
|
2,016
|
144,681
|
146,697
|
Construction and development
|
|
2,253
|
2,253
|
28,631
|
30,884
|
Commercial loans secured by real estate
|
-
|
-
|
-
|
9,578
|
9,578
|
Other commercial
|
-
|
-
|
-
|
39,190
|
39,190
|
Commercial total
|
$
|
593
|
$
|
7,807
|
$
|
8,400
|
$
|
282,824
|
$
|
291,224
|
TOTAL
|
$
|
1,251
|
$
|
10,968
|
$
|
12,219
|
$
|
506,468
|
$
|
518,687
|
|
|
|
|
|
|
15
December 31, 2011
|
30 - 89 Days
Past Due
|
90 Days and
Greater Past Due*
|
Total Past Due
|
Current
|
Total Loans
|
Retail
|
|
|
|
|
|
Consumer
|
$
|
73
|
$
|
4
|
$
|
77
|
$
|
14,220
|
$
|
14,297
|
Single Family Residential
|
5,131
|
1,002
|
6,133
|
190,780
|
196,913
|
Other retail
|
1
|
-
|
1
|
25,699
|
25,700
|
Retail total
|
$
|
5,205
|
$
|
1,006
|
$
|
6,211
|
$
|
230,699
|
$
|
236,910
|
Commercial
|
|
|
|
|
|
Commercial and industrial
|
$
|
3,858
|
$
|
1,419
|
$
|
5,277
|
$
|
55,171
|
$
|
60,448
|
Non-farm, non-residential real estate
|
2,166
|
320
|
2,486
|
137,661
|
140,147
|
Construction and development
|
44
|
-
|
44
|
28,998
|
29,042
|
Other commercial
|
1,441
|
159
|
1,600
|
50,191
|
51,791
|
Commercial total
|
$
|
7,509
|
$
|
1,898
|
$
|
9,407
|
$
|
272,021
|
$
|
281,428
|
TOTAL
|
$
|
12,714
|
$
|
2,904
|
$
|
15,618
|
$
|
502,720
|
$
|
518,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Includes all loans on non-accrual status and all bankruptcies. Loans
are automatically placed on non-accrual status once they reach 90 days past due;
therefore ,the Corporation has no loans greater than 90 days past due were
still accruing interest.
The following table summarizes the impaired loans by
loan type as of June 30, 2012 and December 31, 2011 (dollars in thousands):
|
|
|
|
|
|
Average Recorded Investment
|
June 31, 2012
|
Unpaid
Contractual
Principal Balance
|
Recorded
Investment with
no allowance
|
Recorded
Investment with
allowance
|
Total
Recorded
Investment
|
Related
Allowance
|
Quarter
To Date
|
Year
to Date
|
Commercial
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
4,795
|
$
|
374
|
$
|
3,436
|
$
|
3,810
|
$
|
167
|
$
|
3,792
|
$
|
4,318
|
Non-farm, non-residential real estate
|
3,203
|
1,219
|
-
|
1,219
|
-
|
1,215
|
1,978
|
Construction & development
|
719
|
-
|
719
|
719
|
53
|
719
|
670
|
Other Commercial
|
1,379
|
-
|
1,379
|
1,379
|
-
|
3,107
|
1,379
|
Commercial total
|
$
|
10,096
|
$
|
1,593
|
$
|
5,534
|
$
|
7,127
|
$
|
220
|
$
|
8,833
|
$
|
8,345
|
Residential
|
|
|
|
|
|
|
|
Consumer loans
|
$
|
-
|
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Single Family Residential
|
3,418
|
2,344
|
637
|
2,981
|
105
|
1,249
|
3,018
|
Other retail
|
-
|
-
|
|
-
|
|
-
|
-
|
Retail total
|
$
|
3,418
|
$
|
2,344
|
$
|
637
|
$
|
2,981
|
$
|
105
|
$
|
1,249
|
$
|
3,018
|
Total
|
$
|
13,514
|
$
|
3,937
|
$
|
6,171
|
$
|
10,108
|
$
|
325
|
$
|
10,082
|
$
|
11,363
|
16
|
|
|
|
|
|
Average Recorded Investment
|
December 31, 2011
|
Unpaid
Contractual
Principal Balance
|
Recorded
Investment
with
no allowance
|
Recorded Investment
with
allowance
|
Total
Recorded
Investment
|
Related
Allowance
|
Quarter
To Date
|
Year to
Date
|
Commercial
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
5,839
|
$
|
738
|
$
|
5,678
|
$
|
5,446
|
$
|
601
|
$
|
5,069
|
$
|
5,069
|
Non-farm, non-residential real estate
|
4,378
|
2,986
|
2,115
|
4,573
|
307
|
5,232
|
5,232
|
Construction & development
|
870
|
-
|
870
|
870
|
203
|
941
|
941
|
Other Commercial
|
3,238
|
-
|
-
|
1,498
|
-
|
1,527
|
1,527
|
Commercial total
|
$
|
14,325
|
$
|
3,724
|
$
|
8,663
|
$
|
12,387
|
$
|
1,111
|
$
|
12,769
|
$
|
12,769
|
Residential
|
|
|
|
|
|
|
|
Consumer loans
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Single Family Residential
|
1,388
|
142
|
1,075
|
1,217
|
131
|
1,269
|
1,269
|
Other retail
|
-
|
-
|
|
-
|
-
|
-
|
-
|
Retail total
|
$
|
1,388
|
$
|
142
|
$
|
1,075
|
$
|
1,217
|
$
|
131
|
$
|
1,269
|
$
|
1,269
|
Total
|
$
|
15,713
|
$
|
3,866
|
$
|
9,738
|
$
|
13,604
|
$
|
1,242
|
$
|
14,038
|
$
|
14,038
|
June 31, 2011
|
Unpaid
Contractual
Principal Balance
|
Recorded
Investment
with
no allowance
|
Recorded Investment
with
allowance
|
Total
Recorded
Investment
|
Related
Allowance
|
Average
Recorded
Investment
|
Commercial
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
11,505
|
$
|
4,032
|
$
|
995
|
$
|
10,038
|
$
|
340
|
$
|
8,703
|
Non-farm, non-residential real estate
|
7,685
|
13,143
|
-
|
3,212
|
-
|
6,384
|
Construction & development
|
1,725
|
-
|
208
|
1,894
|
108
|
1,548
|
Other Commercial
|
3,309
|
-
|
400
|
3,634
|
-
|
3,200
|
Commercial total
|
$
|
24,224
|
$
|
17,175
|
$
|
1,603
|
$
|
18,778
|
$
|
448
|
$
|
19,835
|
Residential
|
|
|
|
|
|
|
Consumer loans
|
$
|
-
|
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Single Family Residential
|
1,328
|
457
|
668
|
1,125
|
103
|
1,275
|
Other retail
|
-
|
-
|
|
-
|
|
-
|
Retail total
|
$
|
1,328
|
$
|
457
|
$
|
668
|
$
|
1,125
|
$
|
103
|
$
|
1,275
|
Total
|
$
|
25,552
|
$
|
17,632
|
$
|
2,271
|
$
|
19,903
|
$
|
551
|
$
|
21,110
|
Impaired
Loans
. Loans are considered impaired
when, based on current information and events, it is probable the Corporation
will be unable to collect all amounts due in accordance with the original
contractual terms of the loan agreement, including scheduled principal and
interest payments. Impairment is evaluated in total for smaller-balance loans
of a similar nature and on an individual loan basis for other loans. If a loan
is impaired, a specific valuation allowance is allocated, if necessary, so that
the loan is reported net, at the present value of estimated future cash flows
using the loans existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Interest payments on impaired loans are
typically applied to principal unless collectability of the principal amount is
reasonably assured, in which case interest is recognized on a cash basis.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Interest income recognized on impaired loans (which approximates cash
basis interest received on impaired loans) was approximately $225,000 and
$578,000 for the six-month periods ended June 30, 2012 and 2011,
respectively. The average balance of impaired loans for the six-month
period ending June 30, 2012 was $8.4 million for commercial loans and $3.0
million for residential real estate loans, totaling $11.4 million.
17
Troubled Debt Restructurings.
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 June 30, 2012,
the Corporation did not have any commitments to extend additional funds to
borrowers with loans modified and included as a troubled debt restructuring.
During 2012, 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 six months and three
months ended June 30, 2012 (dollars in thousands):
|
Three Months Ended June 30, 2012
|
|
|
Post-
|
|
|
|
Modification
|
Net Charge-offs
|
|
Number of
|
Outstanding
|
Resulting from
|
|
Loans
|
Balance
|
Modifications
|
Retail:
|
|
|
|
Single family residential
|
2
|
$ 158
|
$ -
|
Total trouble debt restructurings
|
2
|
$ 158
|
$ -
|
|
Six Months Ended June 30, 2012
|
|
|
Post-
|
|
|
|
Modifications
|
Net Charge-offs
|
|
Number of
|
Outstanding
|
Resulting from
|
|
Loans
|
Balance
|
Modifications
|
Commercial:
|
|
|
|
Commercial and industrial
|
3
|
$ 554
|
$ 197
|
Non-farm non-residential real estate
|
1
|
-
|
222
|
Retail:
|
|
|
|
Single family residential
|
2
|
158
|
|
Total trouble debt restructurings
|
6
|
$ 712
|
$ 419
|
|
|
|
|
|
18
Loans retain their accrual status at the time of their
modification. As a result, if a loan is on non-accrual status at the time it
is modified, it stays as non-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 June 30, 2012,
the Corporation did not have any loans that were modified in troubled debt
restructurings that have subsequently defaulted.
Credit Quality Indicators.
As part of the ongoing 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 commercial loans. Loans are graded on a scale of 1 through
8. A description of the general characteristics of the eight risk grades is as
follows:
Risk Rating 1 Minimal Risk
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 borrowers 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.
-
A 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 the Corporation or a guaranty from the federal government also
warrants this risk rating.
Risk Rating 2
Modest Risk
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 Corporations position.
-
Borrowers 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.
Risk Rating 3
Average Risk
General Characteristics:
19
-
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.
-
Borrowers liquidity and leverage
is in line with industry norms.
-
Borrower has good management with
acceptable management succession.
-
Under most economic and business
conditions, borrower 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.
Risk Rating 4
Acceptable
Risk
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.
-
Borrowers 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.
Risk Rating 5
Pass /
Watch
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. This category may be used in
transitional upgrades as well as transitional downgrades of credit
relationships. Under these criteria, this category necessitates a plan of
action to either upgrade the credit to a Pass rating (i.e., Risk Rating 1-4),
downgrade the credit to a criticized asset, or exit the relationship within six
months.
20
B) Ongoing Supervision Warranted
-
This category 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 this category, 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 rating can be eliminated or effectively mitigated.
-
Borrower 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 Corporations
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.
-
Borrower management is of good
character although some management weakness may exist, including lack of depth
or succession.
-
Borrower generally has 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.
Risk Rating 6
Special Mention
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:
-
Borrowers cash flow may not be
sufficient to fund anticipated cash needs.
-
Sufficient or modestly sufficient
financeable assets are available to protect the Corporations position.
-
Adverse trends in borrowers operations/profits
or unbalanced position in borrowers 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.
-
Borrowers business exhibits a
deteriorating market position in the industry.
-
Borrowers 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.
Risk Rating 7
Substandard
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 Corporation will sustain some loss if the deficiencies are
not corrected.
21
General Characteristics:
-
The primary source of borrowers
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 borrowers deficiencies are not corrected.
-
Borrowers cash flow is generally
not sufficient to fund anticipated cash needs.
-
Borrowers financeable assets may
not be sufficient to protect the Corporations position.
-
Adverse trends in borrowers 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.
-
Borrowers 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 as 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 adequate secondary source of repayment on a best-case basis.
-
Borrower has 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 a proposed
merger or acquisition; liquidation procedures; capital injections; perfecting
liens on additional collateral; and refinancing plans.
-
Borrowers cash flow is
insufficient to fund cash needs.
-
Borrowers financeable assets are
insufficient to protect the Corporations position.
-
Borrowers 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 for borrower.
The following tables present risk grades and
classified loans by class of commercial loan in the Corporations portfolios as
of June 30, 2012 (dollars in thousands):
22
June 30, 2012
|
|
|
|
|
|
|
Commercial Loan Portfolio: Credit risk profile by
internally assigned grade
|
Commercial
& Industrial
|
Non-Farm,
Non-Residential
Real Estate
|
Construction
& Development
|
Commercial Loans
Secured by
Real Estate
|
Other
Commercial
|
Commercial
Loan Totals
|
|
|
|
|
|
|
|
Pass
|
$
|
57,934
|
$
|
143,470
|
$
|
29,509
|
$
|
8,402
|
$
|
36,335
|
$
|
275,650
|
Special Mention
|
2,749
|
1,350
|
601
|
409
|
-
|
5,109
|
Substandard
|
1,124
|
1,877
|
774
|
767
|
1,476
|
6,018
|
Doubtful
|
3,068
|
-
|
-
|
-
|
1,379
|
4,447
|
TOTALS
|
$
|
64,875
|
$
|
146,697
|
$
|
30,884
|
$
|
9,578
|
$
|
39,190
|
$
|
291,224
|
|
|
|
|
|
|
|
Retail Loan Portfolio: Credit risk profiles based
on delinquency status classification
|
Consumer
|
Single-Family
Residential**
|
Other Retail
|
Retail Loan
Totals
|
|
|
Performing
|
$
|
12,588
|
$
|
190,757
|
$
|
19,623
|
$
|
222,968
|
|
|
Non-performing*
|
68
|
4,073
|
354
|
4,495
|
|
|
TOTALS
|
$
|
12,656
|
$
|
194,830
|
$
|
19,977
|
$
|
227,463
|
|
|
*Loans are classified as non-performing loans and are
automatically placed on non-accrual status once they reach 90 days past due.
For the purposes of this calculation, all loans rated at or below Substandard
(RR7) are classified as non-performing.
|
**Single-family residential loans includes first
mortgages, closed-end second mortgages, residential construction loans, and
home equity lines of credit (HELOC's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Commercial Loan Portfolio: Credit risk profile by
internally assigned grade
|
Commercial
& Industrial
|
Non-Farm,
Non-Residential
Real Estate
|
Construction
& Development
|
Commercial Loans
Secured by
Real Estate
|
Other
Commercial
|
Commercial
Loan Totals
|
|
|
|
|
|
|
|
Pass
|
$
|
50,163
|
$
|
132,291
|
$
|
27,613
|
$
|
2,979
|
$
|
44,837
|
$
|
257,883
|
Special Mention
|
4,137
|
4,232
|
504
|
439
|
-
|
9,312
|
Substandard
|
1,692
|
2,033
|
925
|
677
|
1,480
|
6,807
|
Doubtful
|
4,456
|
1,591
|
-
|
-
|
1,379
|
7,426
|
TOTALS
|
$
|
60,448
|
$
|
140,147
|
$
|
29,042
|
$
|
4,095
|
$
|
47,696
|
$
|
281,428
|
Retail Loan Portfolio: Credit risk profiles based
on delinquency status classification
|
Consumer
|
Single-Family
Residential**
|
Other Retail
|
Retail Loan
Totals
|
|
|
Performing
|
$
|
14,225
|
$
|
193,784
|
$
|
25,368
|
$
|
233,377
|
|
|
Non-performing*
|
72
|
3,129
|
332
|
3,533
|
|
|
TOTALS
|
$
|
14,297
|
$
|
196,913
|
$
|
25,700
|
$
|
236,910
|
|
|
*Loans are classified as non-performing loans and are
automatically placed on non-accrual status once they reach 90 days past due.
For the purposes of this calculation, all loans rated at or below Substandard
(RR7) are classified as non-performing.
|
**Single-family residential loans include first
mortgages, closed-end second mortgages, residential construction loans, and
home equity lines of credit (HELOC's).
|
23
Allowance for Loan Losses.
The allowance for loan losses is a reserve established
through a provision for 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 loan loss methodology includes
allowance allocations calculated in accordance with ASC Topic 310,
Receivables (ASC Topic 310), and allowance allocations calculated in
accordance with ASC Topic 450, Contingencies (ASC Topic 450), 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 loan losses is designed to account for credit deterioration as it occurs.
The provision for loan losses reflects loan quality trends, including the
levels of and trends related to non-accrual loans, past due loans, potential
problem loans, criticized loans and net charge-offs or recoveries, among other
factors. The provision for loan losses also reflects the totality of actions
taken on all loans for a particular period. Therefore, the amount of the
provision reflects not only the necessary increases in the allowance for 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.
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,
and changes in interest.
The Corporations allowance for 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 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.
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 an assigned risk rating of 8 (Doubtful) 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 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
updated quarterly 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 average balance 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 may be added to the allocation of each of the identified segments of
the loan portfolio to account for the imprecision.
24
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. During the first quarter of 2012, as part of the
quantitative analysis of the adequacy of the allowance for loan losses,
management adjusted its projection of probable loan losses. In prior years,
the Corporation used a historic loss period of four quarters for all segments
when estimating the historic charge off rates calculated in accordance with ASC
Topic 450. During the first quarter 2012, the Corporation changed the historic
period to a rolling eight quarter historic look back period to better reflect
the risk related to each individual segment of loans. This change did not have
a significant impact on the recorded amount of the allowance for loan losses.
The following table summarizes the allocation in the
allowance for loan losses by loan segment for the six months ended June 30,
2012 and June 30, 2011 and the year ended December 31, 2011 (dollars in
thousands):
|
|
Residential
|
Consumer &
|
|
|
Three Months Ended
|
Commercial
|
real estate
|
other retail
|
Unallocated
|
Totals
|
Beginning ALLL balance - 3/31/12
|
$
|
6,648
|
$
|
1,521
|
$
|
170
|
$
|
360
|
$
|
8,699
|
Less: Charge-offs
|
(516)
|
(41)
|
-
|
-
|
(557)
|
Add: Recoveries
|
108
|
1
|
1
|
-
|
110
|
Add: Provisions
|
437
|
83
|
(12)
|
12
|
520
|
Ending ALLL balance - 06/30/12
|
$
|
6,677
|
$
|
1,564
|
$
|
159
|
$
|
372
|
$
|
8,772
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
Beginning ALLL balance - 12/31/11
|
$
|
5,957
|
$
|
2,113
|
$
|
192
|
$
|
938
|
$
|
9,200
|
Less: Charge-offs
|
(1,532)
|
(147)
|
(5)
|
-
|
(1,684)
|
Add: Recoveries
|
131
|
2
|
3
|
-
|
136
|
Add: Provisions
|
2,121
|
(404)
|
(31)
|
(566)
|
1,120
|
Ending ALLL balance - 06/30/12
|
$
|
6,677
|
$
|
1,564
|
$
|
159
|
$
|
372
|
$
|
8,772
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Beginning ALLL balance - 3/31/11
|
$
|
5,594
|
$
|
1,723
|
$
|
279
|
$
|
98
|
$
|
7,694
|
Less: Charge-offs
|
(464)
|
(14)
|
(31)
|
-
|
(509)
|
Add: Recoveries
|
35
|
1
|
33
|
-
|
69
|
Add: Provisions
|
273
|
235
|
(16)
|
258
|
750
|
Ending ALLL balance - 06/30/11
|
$
|
5,438
|
$
|
1,945
|
$
|
265
|
$
|
356
|
$
|
8,004
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
Beginning ALLL balance - 12/31/10
|
$
|
6,915
|
$
|
2,001
|
$
|
408
|
$
|
96
|
$
|
9,420
|
Less: Charge-offs
|
(2,621)
|
(258)
|
(127)
|
-
|
(3,006)
|
Add: Recoveries
|
73
|
1
|
40
|
-
|
114
|
Add: Provisions
|
1,071
|
201
|
(56)
|
260
|
1,476
|
Ending ALLL balance - 06/30/11
|
$
|
5,438
|
$
|
1,945
|
$
|
265
|
$
|
356
|
$
|
8,004
|
|
|
|
|
|
|
Beginning ALLL balance - 1/1/11
|
$
|
6,915
|
$
|
2,001
|
$
|
408
|
$
|
96
|
$
|
9,420
|
Less: Charge-offs
|
(3,353)
|
(52)
|
(147)
|
-
|
(3,552)
|
Add: Recoveries
|
103
|
-
|
104
|
-
|
207
|
Add: Provisions
|
2,292
|
164
|
(173)
|
842
|
3,125
|
Ending ALLL balance - 12/31/11
|
$
|
5,957
|
$
|
2,113
|
$
|
192
|
$
|
938
|
$
|
9,200
|
25
The following table details the amount of the allowance for
loan losses allocated to each portfolio segment as of June 30, 2012, June 30,
2011 and December 31, 2011, disaggregated on the basis of the Corporations
impairment methodology (dollars in thousands).
|
|
Residential
|
Consumer &
|
|
|
Ending ALLL balance - 6/30/12
|
Commercial
|
Real Estate
|
Other Retail
|
Unallocated
|
Total
|
Loans individually evaluated for impairment
|
$
|
219
|
$
|
106
|
$
|
-
|
$
|
-
|
$
|
325
|
Loans collectively evaluated for impairment
|
6,458
|
1,458
|
159
|
372
|
8,447
|
Balance
|
$
|
6,677
|
$
|
1,564
|
$
|
159
|
$
|
372
|
$
|
8,772
|
Ending ALLL balance 6/30/11
|
|
|
|
|
|
Loans individually evaluated for
impairment
|
$
|
345
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
345
|
Loans collectively evaluated for impairment
|
5,093
|
1,945
|
265
|
356
|
7,659
|
Balance
|
$
|
5,438
|
$
|
1,945
|
$
|
265
|
$
|
356
|
$
|
8,004
|
Ending ALLL balance - 12/31/11
|
$
|
1,111
|
$
|
131
|
$
|
-
|
$
|
|
-
|
$
|
|
1,242
|
Loans individually evaluated for impairment
|
|
4,846
|
|
1,982
|
|
192
|
|
938
|
|
7,958
|
Loans collectively evaluated for impairment
|
$
|
5,957
|
$
|
2,113
|
$
|
192
|
$
|
|
938
|
$
|
|
9,200
|
Balance
The following table shows loans related to each
balance in the allowance for loan losses by portfolio segment and disaggregated
on the basis of the Corporations impairment methodology (dollars in
thousands):
|
|
Residential
|
Consumer &
|
Other
|
|
June 30, 2012
|
Commercial
|
Real Estate
|
Other Retail
|
|
Totals
|
Loans individually evaluated for impairment
|
$
|
2,662
|
$
|
1,274
|
$
|
-
|
$
|
-
|
$
|
3,936
|
Loans collectively evaluated for impairment
|
$
|
288,887
|
$
|
211,389
|
13,637
|
838
|
514,751
|
Balance
|
$
|
291,549
|
$
|
212,663
|
$
|
13,637
|
$
|
838
|
$
|
518,687
|
June 30, 2011
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
17,653
|
$
|
1,125
|
$
|
-
|
$
|
-
|
$
|
18,778
|
Loans collectively evaluated for impairment
|
280,511
|
230,309
|
$
|
14,838
|
$
|
1,139
|
526,797
|
Balance
|
$
|
298,164
|
$
|
231,434
|
$
|
14,837
|
$
|
1,139
|
$
|
545,575
|
December 31, 2011
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
12,625
|
$
|
1,217
|
$
|
-
|
$
|
-
|
$
|
13,842
|
Loans collectively evaluated for impairment
|
268,796
|
219,881
|
14,055
|
1,228
|
503,960
|
Balance
|
$
|
281,421
|
$
|
221,098
|
$
|
14,055
|
$
|
1,228
|
$
|
517,802
|
NOTE 5 BORROWED FUNDS
The Corporation
is a party to the Blanket Agreement for Advances and Security Agreement (the
Blanket Agreement) with the FHLB of
Cincinnati. Advances made to the Corporation 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 Corporation
and the FHLB. The advances mature at varying dates throughout 2013 at interest
rates ranging from 2.61% - 3.76%.
26
Scheduled annual principal maturities and interest rate terms of
borrowings under this credit line as of June
30, 2012 for the next year were as follows (dollars in thousands):
FHLB stock totaling
$3,009,000 at June 30, 2012 was carried at cost. The stock is restricted and can only be sold back to the FHLB at par value.
The Corporation also has a Cash Management Advance Line of Credit
Agreement (the CMA), dated June 21,
2010, with the Federal Home Loan Corporation. 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 Corporation 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 June 30, 2012.
NOTE 6
POST-RETIREMENT BENEFIT PLAN
|
Six months ended
|
(dollars in thousands)
|
June 30, 2012
|
June 30, 2011
|
Service cost
|
$ 46
|
$ 12
|
Interest cost
|
192
|
78
|
Expected return on plan assets
|
-
|
-
|
Amortization of prior service cost
|
(8)
|
(120)
|
Amortization of net loss
|
-
|
-
|
Net periodic pension cost
|
$ 230
|
$ (30)
|
The
Corporation currently expects to contribute approximately $472,000 to its post
retirement benefit plan during the year ending December 31, 2012, of which
approximately $78,000 was contributed in the first six months of 2012.
NOTE 7 RECENT ACCOUNTING PRONOUNCEMENTS
ASU No. 2011-03, Transfers and Servicing (Topic 860)
- Reconsideration of Effective Control for Repurchase Agreements.
ASU 2011-03 is intended to improve financial reporting
of repurchase agreements and other agreements that both entitle and obligate a
transferor to repurchase or redeem financial assets before their maturity. ASU
2011-03 removes from the assessment of effective control (i) the criterion
requiring the transferor to have the ability to repurchase or redeem the
financial assets on substantially the agreed terms, even in the event of
default by the transferee, and (ii) the collateral maintenance guidance related
to that criterion. ASU 2011-03 was adopted on January 1, 2012 and did not have
a significant impact on the Corporations financial statements.
ASU 2011-04, Fair Value Measurement (Topic 820) -
Amendments to Achieve Common Fair Value Measurements and Disclosure
Requirements in U.S. GAAP and IFRSs.
ASU 2011-04 amends ASC Topic 820, to converge the fair value measurement
guidance in U.S. generally accepted accounting principles (GAAP) and
International Financial Reporting Standards. ASU 2011-04 clarifies the
application of existing fair value
measurement requirements, changes certain principles in ASC Topic 820
and requires additional fair value disclosures. ASU 2011-04 was effective for interim
and annual periods beginning after December 15, 2011, and the adoption of this
ASU did not have a significant impact on the Corporations financial
statements.
27
ASU 2011-05, Comprehensive Income (Topic 220) -
Presentation of Comprehensive Income.
ASU 2011-05 amends Topic 220, Comprehensive Income, to require that all
non-owner changes in stockholders equity be presented in either a single
continuous statement of comprehensive income or in two separate but consecutive
statements. Additionally, ASU 2011-05 requires entities to present, on the face
of the financial statements, reclassification adjustments for items that are
reclassified from other comprehensive income to net income in the statement or
statements where the components of net income and the components of other
comprehensive income are presented. The option to present components of other
comprehensive income as part of the statement of changes in stockholders
equity was eliminated. ASU 2011-05 is effective for interim and annual periods
beginning after December 15, 2011 and the adoption of this ASU did not have a
significant impact on the Corporations financial statements.
ASU 2011-08, Intangibles - Goodwill and Other (Topic
350) - Testing Goodwill for Impairment.
ASU 2011-08 amends Topic 350, Intangibles Goodwill and Other, to
give entities the option to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that
it is more likely than not that the fair value of a reporting unit is less than
its carrying amount. If, after assessing the totality of events or
circumstances, an entity determines it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, then
performing the two-step impairment test is unnecessary. However, if an entity
concludes otherwise, then it is required to perform the first step of the
two-step impairment test by calculating the fair value of the reporting unit
and comparing the fair value with the carrying amount of the reporting unit.
ASU 2011-08 is effective for annual and interim impairment tests beginning after
December 15, 2011, and is not expected to have a significant impact on the
Corporations financial statements.
ASU 2011-11,
Balance Sheet (Topic 210) -
Disclosures about Offsetting Assets and Liabilities.
ASU 2011-11 amends
Topic 210, Balance Sheet, to require an entity to disclose both gross and net
information about financial instruments, such as sales and repurchase
agreements and reverse sale and repurchase agreements and securities
borrowing/lending arrangements, and derivative instruments that are eligible
for offset in the statement of financial position and/or subject to a master
netting arrangement or similar agreement. ASU 2011-11 is effective for annual
and interim periods beginning on or after January 1, 2013, and is not expected
to have a significant impact on the Corporations financial statements.
ASU 2011-12
Comprehensive Income (Topic 220) -
Deferral of the Effective Date for Amendments to the presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05.
ASU 2011-12 defers changes in ASU
No. 2011-05 that relate to the presentation of reclassification adjustments to
allow the FASB time to deliberate whether to require presentation of such
adjustments on the face of the financial statements to show the effects of
reclassifications out of accumulated other comprehensive income on the components
of net income and other comprehensive income. ASU 2011-12 allows entities to
continue to report reclassifications out of accumulated other comprehensive
income consistent with the presentation requirements in effect before ASU No.
2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No.
2011-12. ASU 2011-12 became effective for the Corporation on January 1, 2012
and did not have a significant impact on the Corporations financial
statements.
28
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
FORWARD-LOOKING STATEMENTS
Certain
statements contained in this report 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 (the Exchange Act). These forward-looking statements
may be identified by, among other things, the use of forward-looking
terminology such as could, would, expect, believe, intend, may,
will, can, or should or future or conditional verb tenses, and variations
or negatives of such terms. These forward-looking statements include, without
limitation, those relating to the Corporations valuation methodologies,
contributions to the Corporations post-retirement benefit plan and returns on
the plans assets, characterization of accrual and non-accrual loans,
concessions granted for troubled debt restructurings, impairment of securities,
repayment of loans, loan portfolio concentrations, fair value of impaired
loans, satisfaction of capital adequacy requirements, payments on advances from
the FHLB, risk rating classifications of loans, calculation of our allowance
for loan losses, adequacy of traditional sources of cash generated from
operating activities to meet liquidity needs and the realization of deferred
income tax assets. We caution you not to place undue reliance on such
forward-looking statements in this report because results could differ
materially from those anticipated due to a variety of factors. These factors
include, but are not limited to, conditions in the financial market, liquidity
needs, the sufficiency of our allowance for loan losses, economic conditions
in the communities in the State of Tennessee where the Corporation does
business, the impact of government regulation and supervision, interest rate risk,
including changes in monetary policy and fluctuating interest rates, the
Corporations ability to attract and retain key personnel, competition from
other financial services, other factors generally understood to affect the
financial results of financial services companies and other factors detailed
from time to time in our filings with the Securities and Exchange Commission
(the SEC). We undertake no obligation to update these forward-looking
statements to reflect events or circumstances that occur after the date of this
report.
EXECUTIVE OVERVIEW
At
June 30, 2012, the consolidated total assets of the Corporation
were $1.1 billion, its consolidated net loans were $509.9 million, its total
deposits were $887.4 million and its total shareholders' equity was $113.2
million. The Corporations loan portfolio at June 30, 2012 reflected an
increase of approximately $400,000, or .06%, compared to December 31, 2011.
Total deposits increased $31.0 million, or 3.6%, and shareholders equity
increased by 1.8% during the first six months of 2012. Total shareholders
equity includes an unrealized gain, net of tax, on available-for-sale
securities of $2.5 million.
FINANCIAL
CONDITION
Average
earning assets for the quarter ended June
30, 2012 were up 7.8%, or $68.0 million, from average earning assets for the quarter
ended December 31, 2011. Average overnight investments for the quarter ended June 30, 2012
were up 19.3% compared to the quarter ended December 31, 2011. Average
investment securities for the quarter ended June
30, 2012 were up 25.9% compared to the
quarter ended December 31, 2011. Average total assets were up 7.3% or $71.4
million, from $975.3 million for the quarter
ended December 31, 2011 to $1.047 billion for the quarter ended June 30, 2012.
Securities
Available-for-sale
securities are an integral part of the asset/liability management process of
the Corporation. Accordingly, they represent an important source of liquidity
available to fund loans and accommodate asset reallocation strategies dictated
by changes in the Corporations operating and tax plans, shifting yield spread
relationships and changes in configuration of the yield curve. At June 30, 2012,
the Corporation's investment securities portfolio had $364.5 million of
available-for-sale securities, which are valued at fair market value, and $32.4
million of held-to-maturity securities, which
are valued at cost on the balance sheet. These compare to $314.2 million of
available-for-sale securities and $35.2 million of held-to-maturity securities
as of December 31, 2011.
29
Loans and Loan Losses
The loan portfolio is the largest component of earning
assets for the Corporation and,
consequently, provides the largest amount of revenue for the Corporation. The
loan portfolio also contains the highest
exposure to risk as a result of the possibility of unexpected deterioration in
the credit quality of borrowers. When analyzing potential loans, management of
the Corporation assesses both interest rate objectives and credit quality objectives
in determining whether to make a given loan and the appropriate pricing for
that loan. All loans are expected to be repaid from cash flow or proceeds from
the sale of selected assets of the borrowers. Collateral requirements for the
loan portfolio are based on credit evaluation of the borrowers.
Loan
volume was up in the second quarter of 2012, with total loans increasing by approximately
$885,000, or 0.2% during the six month period. Commercial loans increased by $9.8
million, or 3.5%, in the second quarter, and the retail portfolio declined by $9.5
million, or 3.8%. At $518.7 million, total loans outstanding were down by $26.9
million for the six months ended June 30, 2012 compared to the same period in
2011. Loan demand remains weak across all segments of the portfolio, while
competition for top quality commercial credit is high.
The Corporation continues to reserve more heavily
against its construction and development portfolio than any other segment of
the commercial portfolio, given the comparatively high level of losses that
have been incurred within this segment of the portfolio over the previous
year. Additionally, higher reserves are being placed against property types
which are believed to be higher risk, such as retail and multi-family real
estate.
Loans identified with losses by management, internal
loan review and/or Corporation examiners are charged off. Furthermore, consumer
loan accounts are charged off automatically based on regulatory requirements.
The allowance for loan losses is a reserve established
through a provision for 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 loan loss methodology includes
allowance allocations calculated in accordance with ASC Topic 310, and
allowance allocations calculated in accordance with ASC Topic 450. 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 loan losses is designed to account for credit deterioration as it occurs.
The provision for loan losses reflects loan quality trends, including the
levels of and trends related to non-accrual loans, past due loans, potential
problem loans, classified and criticized loans and net charge-offs or
recoveries, among other factors. The provision for 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 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. The unallocated portion of the allowance for loan
losses represents general valuation allowances that are not allocated to
specific loan portfolio segments. See Note 4 - Loans in the accompanying notes
to consolidated financial statements included elsewhere in this report for
further details regarding the Corporations methodology for estimating the
appropriate level of the allowance for loan losses.
30
Collectability.
A formal process is in place to
enhance control over the underwriting of loans and to monitor loan
collectability. This process includes education and training of personnel
about the Corporation's loan policies and procedures, assignment of credit
analysts to support lenders, timely identification of loans with adverse
characteristics, control of corrective actions and objective monitoring of loan
reviews. The Special Assets Department of the Corporation identifies and
monitors assets that need special attention. At June 30, 2012, this process
identified loans totaling $5.1 million that were classified as other assets
especially mentioned compared to loans totaling $9.3 million at December 31,
2011. Loans totaling $6.0 million were classified as substandard at June 30, 2012,
compared to loans totaling $6.8 million at December 31, 2011. Loans totaling $4.4
million were classified as doubtful at June
30, 2012, compared to loans totaling $7.4
million at December 31, 2011.
Loans having average recorded investments of $11.4 million
and $14.0 million at June 30, 2012 and December 31, 2011, respectively, have
been identified as impaired. Nonaccrual loans amounting to $11.0 million and $11.5
million at June 30, 2012 and December 31, 2011, respectively, were not accruing
interest. Interest received on these loans during the second quarter of 2012
was approximately $225,000, compared to approximately $255,000 over the same
period in 2011. The gross interest income that would have been recorded if the
loans had been current in accordance with their original terms and had been
outstanding throughout the period or since origination, if held for part of the
period, was approximately $392,000, and $326,000 for the six-month period ended
June 30, 2012 and the six-month period ended June 30, 2011, respectively. The Corporation
had no loans that were 90 days or more past due that were not included in
nonaccrual loans as of June 30, 2012.
Deposits
The Corporation does not have any foreign offices and all
deposits are serviced in its 18 domestic offices. The Corporation's average
deposits increased 8.2% during the first six months of 2012 compared to an
increase of 1.5% in the first six months of 2011. Average total
noninterest-bearing deposits were 16.8% of total deposits at June 30, 2012,
contributing to the Corporation's low cost of deposits, compared to 16.5% at December
31, 2011.
Regulatory
Requirements for Capital
The
Corporation and First Farmers and merchants Bank, the Corporations sole direct
subsidiary (the Bank), are subject to federal regulatory capital adequacy
standards. Failure to meet capital adequacy requirements could result in
certain mandatory, and possibly additional discretionary, actions by regulators
that could have a direct material adverse effect on the financial condition of
the Corporation and the Bank. Federal regulations require the Corporation and
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.
Under federal regulatory standards, to be
well-capitalized, the Corporations and the Banks Tier 1 Risk-Based Capital
Ratio (ratio of Tier 1 Capital to risk-weighted assets) must be at least 6%,
its Total Risk-Based Capital Ratio (ratio of total capital to risk-weighted
assets) must be at least 10%, and its Tier 1 Leverage Capital Ratio (ratio of
Tier 1 Capital to average assets) must be at least 5%. Equity capital (net of
certain adjustments for intangible assets and investments in non-consolidated
subsidiaries and certain classes of preferred stock) and other certain equity
like instruments are considered Tier 1 Capital. Tier 2 Capital consists of
core capital plus supplementary or temporary capital such as
subordinated debt, some types of preferred stock, and a defined percentage of
the allowance for loan losses.
As of June 30, 2012,
the Bank's Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio and
Tier 1 Leverage Capital Ratios were 15.4%, 16.6%, and 9.5%, respectively,
compared to 15.2%, 16.5%, and 9.7% at December 31, 2011. At June 30, 2012,
the Corporation's Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital
Ratio and Tier 1 Leverage Capital Ratios were 15.7%, 17.0% and 9.8%,
respectively. The ratios were 15.6%, 16.8% and 10.0%, respectively, at December
31, 2011. Management believes, as of June
30, 2012, that the Corporation and the
Bank each met all capital adequacy requirements to which they are subject.
LIQUIDITY
AND CAPITAL
RESOURCES
Most of the
capital needs of the Corporation historically have been financed with retained
earnings and deposits received.
31
The Corporation
and subsidiary Bank is subject to Tennessee statutes and regulations that
impose restrictions on the amount of dividends that may be declared.
Furthermore, any dividend payments are subject to the continuing ability of the
Corporation to maintain its compliance with minimum federal regulatory capital
requirements and to retain its characterization under federal regulations as a
well-capitalized institution. The Corporations Board of Directors has
adopted a liquidity policy that outlines specific liquidity target balances.
Compliance with this policy is reviewed quarterly by the Corporations
Asset/Liability Committee and results are reported to the Corporations Board
of Directors.
The
Corporations formal asset and liability management process is used to manage
interest rate risk and assist management in maintaining reasonable stability in
the gross interest margin as a result of changes in the level of interest rates
and/or the spread relationships among interest rates. The Corporation uses an
earnings simulation model to evaluate the impact of different interest rate
scenarios on the gross margin. Each quarter, the Corporations Asset/Liability
Committee monitors 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 financial instruments that can be repriced to
current market rates within a defined time period.
Management
believes that the Corporations traditional sources of cash generated from
operating activities are adequate to meet the liquidity needs for normal
ongoing operations; however, the Corporation also has access to additional
liquidity, if necessary, through additional advances from the FHLB or the CMA
with the FHLB. The borrowings from the FHLB have been used generally for
investment strategies to enhance the Corporations portfolio. At June 30, 2012,
the Corporation had $64.7 million in borrowing capacity.
CRITICAL
ACCOUNTING POLICIES
The
accounting principles the Corporation follows and the methods of applying these
principles conform with GAAP and with general practices within the banking
industry. In connection with the application of those principles, the
Corporations management has made judgments and estimates that with respect to
the determination of the ALLL and the recognition of deferred income tax
assets, have been critical to the determination of the Corporations financial
position, results of operations and cash flows.
Allowance for Loan
Losses
The Corporations
management assesses the adequacy of the ALLL prior to the end of each month and
prepares a more formal review quarterly to assess the risk in the Corporation's
loan portfolio. This assessment includes procedures to estimate the allowance
and test the adequacy and appropriateness of the resulting balance. The ALLL
represents calculated amounts for specifically identified credit exposure and
exposures readily predictable by historical or comparative experience. Even
though this calculation considers specific credits, the entire allowance is
available to absorb any credit losses.
These calculated
amounts are determined by assessing loans identified as not in compliance with
loan agreements. These loans are generally in two different risk groups. One
group is unique loans (commercial loans, including those loans considered
impaired). The second group consists of pools of homogenous loans (generally
retail and mortgage loans). The calculation for unique loans is based
primarily on risk rating grades assigned to each of these loans as a result of
the Corporations loan management and review processes. Each risk-rating grade
is assigned a loss ratio, which is determined based on the experience of
management, discussions with banking regulators and the independent loan review
process. The amount allocated for an impaired loan is based on estimated cash
flows discounted at the loan's original effective interest rate or the
underlying collateral value. Historical data, including actual loss experience
on specific types of homogenous loans, is used to allocate amounts for loans or
groups of loans meeting the specified criteria. Management has implemented
procedures that give more detailed historical data by category of retail and
consumer 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:
32
-
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 the Corporations management,
input from independent loan reviews and reviews that may have been conducted by
Corporation regulators as part of their usual examination process.
Results
of Operations
Total
interest income for the six months ended June 30, 2012 was $18.2 million
compared to $19.1 million for the six months ended June 30, 2011 and $9.1
million for the three months ended June 30, 2012 compared to $9.7 million for
the three months ended June 30, 2011. Interest and fees earned on loans and
investments are the primary components of total interest income. Interest and
fees earned on loans were $14.0 million, a decrease of $1.1 million, or 7.4%,
during the six months ended June 30, 2012 compared to the six months ended June
30, 2011 and $7.0 million for the three months ended June 30, 2012 compared to
$7.5 million for the three months ended June 30, 2011. Nominal interest earned
on investment securities and other earning assets was $4.2 million, an increase
of approximately $136,000, or 3.3%, during the six months ended June 30, 2012
compared to the six months ended June 30, 2011 and $2.1 million for the three
months ended June 30, 2012 compared to $2.2 million for the three months ended
June 30, 2011.
Total interest
expense in the six months ended June 30, 2012 was $2.1 million, a decrease of
approximately $577,000, or 22.0%, compared to the six months ended June 30,
2011 and approximately $980,000 for the three months ended June 30, 2012
compared to $1.3 million for the three months ended June 30, 2011. The lower
interest rates for certificates of deposits and public funds during the second
quarter of 2012 were the primary reason for the lower expense. As a policy,
budgeted financial goals are monitored on a quarterly basis by the
Corporations Asset/Liability Committee, which reviews the actual dollar change
in net interest income for different interest rate movements. A negative
dollar change in net interest income for a 12-month and 24-month period of less
than 10.0% of net interest income given a 100 to 200 basis point shift in interest rates is considered an acceptable
rate risk position. The rate risk analysis for the 24-month period beginning July
1, 2012 and ending June 30, 2014 showed a worst-case potential change to net
interest income, in the very unlikely event of a negative 100 basis point shift
in interest rates, of 6.9%, or a decrease in net interest income of $2.2
million by the end of the period.
Net interest
income of the Corporation on a fully taxable equivalent basis is influenced
primarily by changes in:
(1) the volume and mix of earning
assets and sources of funding;
(2) market rates of interest; and
(3) income tax rates.
The impact of
some of these factors can be controlled by management policies and actions. External
factors also can have a significant impact on changes in net interest income
from one period to another. Some examples of such factors are:
(1) the strength of credit demands by
customers;
(2) Federal Reserve Board monetary
policy; and
(3) fiscal and debt management
policies of the federal government, including changes in tax laws.
The net
interest margin, on a tax equivalent basis, at June 30, 2012, March 31, 2012,
and December, 31, 2011 was 3.65%, 3.66% and 4.07%, respectively. The decline
is due, in part, to lower yields on earnings assets and a declining loan
portfolio.
33
Additions of
approximately $520,000 were made to the provision for loan losses in the second
quarter of 2012, compared to $750,000 in the second quarter of 2011. The 2012
additions were lower because of the net charge-off ratios trending down.
Noninterest
income was $6.7 million, an increase of $1.6 million, or 31.7%, during the six
months ended June 30, 2012 compared to the six months ended June 30, 2011 and $3.4 million for the three months ended June 30,
2012 compared to $2.7 million for the three months ended June 30, 2011. The gain on sales of securities for the six months
ended June 30, 2012 was $2.2 million, an increase of $1.7 million compared to
the gain on sales for the six months ended June 30, 2011, and accounted for most
of the increase in noninterest income over the periods, but was somewhat offset
by an increase of approximately $70,000 in losses of other real estate owned.
Noninterest expense, excluding the provision for loan
losses, was $16.2 million in the six months ended June 30, 2012, an increase of
approximately $210,000, or 1.3%, as compared to the interest expense for the six months ended June 30, 2011 and $8.4 million for the three months ended June 30,
2012 compared to $8.0 million for the three months ended June 30, 2011. An
increase in salary benefits contributed to the higher noninterest expense.
Net
income for the six months ended June 30,
2012 was $4.4 million, compared to $3.6
million for the six months ended June 30, 2011 and $2.1 million for the three
months ended June 30, 2012 compared to $2.0 million for the three months ended
June 30, 2011. The gain on sales of
securities contributed to the increases.
The Corporation earned $0.83 per share for the six months ended in June 30,
2012, compared to $0.66 per share for the six months ended June 30, 2011.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Corporation 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 stand-by
letters of credit. These 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 Corporation has in those financial instruments. Loan
commitments are agreements to lend to a customer as long as there is not a
violation of any condition established in the loan commitment contract.
Stand-by letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in making a loan.
The
total outstanding balance of loan commitments and stand-by letters of credit in
the normal course of business at June 30,
2012 were $118.9 million and $8.5
million, respectively.
At
June 30, 2012, the Corporation and the Bank did not have any
off-balance sheet arrangements other than commitments to extend credit and
stand-by letters of credit.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
During
the three months ended June 30, 2012,
there were no material changes in the quantitative and qualitative disclosures
about market risk presented in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2011.
Item 4. Controls and
Procedures.
(a)
Evaluation 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-15e and 15d-15e under 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 its reports that the Corporation
files or submits to the SEC under the Exchange Act is recorded, processed,
summarized and reported on a timely basis.
34
(b)
Changes in Internal
Control Over Financial Reporting
. There has been no change in the
Corporation's internal control over financial reporting that occurred during
the second quarter of 2012 that has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
35
PART II - OTHER INFORMATION
Item
1A. Risk Factors.
There
have been no material changes in the risk factors previously disclosed in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2011.
Item 6. Exhibits.
EXHIBIT
|
|
NUMBER
|
DESCRIPTION
|
3.1
|
Charter. (1)
|
3.2
|
Articles of Amendment to Charter. (1)
|
3.3
|
Second Amended and Restated By-laws. (2)
|
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.
|
(1) Incorporated by
reference from 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 from the First Farmers and Merchants Corporation
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission on March 15, 2011 (File Number 000-10972).
35
SIGNATURES
Pursuant
to the requirements 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
(Registrant)
Date
August
21, 2012
|
/s/ T.
Randy Stevens
|
|
T. Randy Stevens,
Chief Executive Officer
|
|
|
|
|
|
|
|
|
Date
August
21, 2012
|
/s/ Patricia P.
Bearden
|
|
Patricia
P. Bearden, Treasurer (principal financial officer and principal
accounting officer)
|
36
EXHIBIT
|
|
NUMBER
|
DESCRIPTION
|
3.1
|
Charter. (1)
|
3.2
|
Articles of Amendment to Charter. (1)
|
3.3
|
Second Amended and Restated By-laws. (2)
|
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.INS
|
XBRL Instance Document.
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.
|
101.CAL
|
XBRL Taxonomy Calculation Linkbase Document.
|
101.DEF
|
XBRL Taxonomy Definition Linkbase Document.
|
101.LAB
|
XBRL Taxonomy Label Linkbase Document.
|
101.PRE
|
XBRL Taxonomy Presentation Linkbase Document.
|
(1) Incorporated by
reference from 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 from the First Farmers and Merchants Corporation
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission on March 15, 2011 (File Number 000-10972).
37
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