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EX-32 - FIRST CITIZENS BANCSHARES INC /TN/ex32-1.htm
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EXCEL - IDEA: XBRL DOCUMENT - FIRST CITIZENS BANCSHARES INC /TN/Financial_Report.xls

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark one)

 

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 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 Number0-11709

 

FIRST CITIZENS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Tennessee   

 62-1180360

(State of Incorporation)

(IRS Employer Id. No.)

 

P. O. Box 370, One First Citizens Place

Dyersburg, TN  38024

(Address of principal executive offices including zip code)

 

731-285-4410

(Registrant’s telephone number including area code)

 

 

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 and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   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). Yes [X]   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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] 

Accelerated filer  [X]

Non-accelerated filer[  ] (Do not check if a smaller reporting company)     

Smaller reporting company [  ]

 

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

 

Of the registrant's only class of common stock (no par value), there were 3,607,854 shares outstanding as of May 3, 2012.

 

 

 

 


 


 

 

 

 

PART I-FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

FIRST CITIZENS BANCSHARES, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2012 AND DECEMBER 31, 2011

(In Thousands)

 

 

 

March 31, 2012

 

December 31, 2011(1)

 

 

(UNAUDITED)

 

 

ASSETS

 

 

 

 

Cash and due from banks

 

$     13,979

 

$     19,460

Federal funds sold

 

32,260

 

14,673

Cash and cash equivalents

 

46,239

 

34,133

Interest bearing deposits in banks

 

35,409

 

40,138

Investment securities:

 

 

 

 

Available-for-Sale, stated at market

 

372,743

 

365,465

Loans (excluding unearned income of $344 at March 31, 2012 and $352 at December 31, 2011)

 

533,405

 

527,699

Less:  allowance for loan losses

 

8,435

 

8,039

Net loans

 

524,970

 

519,660

Loans held-for-sale

 

3,076

 

2,616

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost

 

5,684

 

5,684

Premises and equipment

 

29,400

 

29,553

Accrued interest receivable

 

4,992

 

5,306

Goodwill

 

11,825

 

11,825

Other intangible assets

 

14

 

35

Other real estate owned

 

10,832

 

11,073

Bank owned life insurance policies

 

21,570

 

21,438

Other assets

 

6,703

 

6,623

TOTAL ASSETS

 

$1,073,457

 

$1,053,549

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

Non-interest bearing demand deposits

 

$122,390

 

$119,689

Interest bearing time deposits

 

339,902

 

341,141

Interest bearing savings deposits

 

413,599

 

394,842

Total deposits

 

875,891

 

855,672

Securities sold under agreements to repurchase

 

33,783

 

36,471

Other borrowings

 

47,222

 

47,328

Other liabilities

 

10,148

 

10,610

Total liabilities

 

967,044

 

950,081

 

2


 


 

 

 

 

 

 

FIRST CITIZENS BANCSHARES, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (cont’d)

AS OF MARCH 31, 2012 AND DECEMBER 31, 2011

(In Thousands)

 

 

 

March 31, 2012

 

December 31, 2011(1)

 

 

(UNAUDITED)

 

 

Equity

 

 

 

 

Common stock, no par value - 10,000,000 authorized;
3,717,593 issued and outstanding at March 31,
2012 and  December 31, 2011

 

$       3,718

 

$      3,718

Surplus

 

15,331

 

15,331

Retained earnings

 

79,200

 

76,586

Accumulated other comprehensive income

 

9,132

 

8,801

Total common stock and retained earnings

 

107,381

 

104,436

Less-109,739  treasury shares, at cost as of March 31, 2012 and December 31, 2011

 

3,023

 

3,023

Total shareholders' equity

 

104,358

 

101,413

Noncontrolling (minority) interest in consolidated subsidiary

 

2,055

 

2,055

Total equity

 

106,413

 

103,468

TOTAL LIABILITITES AND EQUITY

 

$1,073,457

 

$1,053,549

 

 

 

(1) Derived from audited financial statements.

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3


 


 

 

 

 

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Dollars in Thousands Except for Per Share Amounts)

 

       

 Three Months Ended

 

 

 

 

March 31, 2012

 

March 31, 2011

Interest income:

 

 

 

 

 

Interest and fees on loans

 

$8,029

 

$8,506

 

Interest income on securities:

 

 

 

 

 

 

Taxable

 

1,778

 

1,580

 

 

Tax-exempt

 

1,129

 

1,073

 

 

Dividends

 

55

 

56

Other interest income

 

36

 

20

 

 

Total interest income

 

11,027

 

11,235

Interest expense:

 

 

 

 

 

Interest expense on deposits

 

1,670

 

2,042

 

Other interest expense

 

383

 

442

 

 

Total interest expense

 

2,053

 

2,484

Net interest income

 

8,974

 

8,751

Provision for loan losses

 

-

 

575

Net interest income after provision

 

8,974

 

8,176

Non-interest income

 

 

 

 

 

Mortgage banking income

 

307

 

163

 

Income for fiduciary activities

 

183

 

187

 

Service charges on deposits accounts

 

1,722

 

1,607

 

Brokerage fees

 

293

 

303

 

Gain on sale of securities

 

401

 

462

 

Loss on sale of foreclosed property

 

(151)

 

(353)

 

Gain on disposition of property

 

0

 

273

 

Earnings on bank owned life insurance

 

160

 

184

 

Income from insurance activities

 

250

 

203

 

Other non-interest income

 

179

 

178

 

 

Total non-interest income

 

3,344

 

3,207

 

 

 

4


 


 

 

 

 

,

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (cont’d)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Dollars in Thousands Except for Per Share Amounts)

 

       

Three Months Ended

       

March 31, 2012

 

March 31, 2011

Non-interest expense

 

 

 

 

 

Salaries and employee benefits

 

$4,380

 

$4,084

 

Net occupancy expense

 

409

 

419

 

Depreciation expense

 

430

 

425

 

Data processing expense

 

403

 

497

 

Legal fees

 

110

 

70

 

Stationary and office supplies

 

62

 

55

 

Amortization of intangibles

 

21

 

21

 

Advertising and promotions

 

182

 

162

 

FDIC insurance premium expense

 

180

 

218

 

Other real estate expense

 

128

 

209

 

Other non-interest expense

 

1,357

 

1,308

 

 

Total non-interest expense

 

7,662

 

7,468

Net income before income taxes

 

4,656

 

3,915

Income taxes

 

1,140

 

919

Net income

 

$3,516

 

$2,996

Earnings per share

 

$0.97

 

$0.83

Weighted average number of shares outstanding

 

3,607,854

 

3,625,826

 

 

 

See accompanying notes to consolidated financial statements.

 

5


 


 

 

 

 

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands)

 

 

 

 

 

 

 

 

 

 

Accum.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

Non-

 

 

 

Common Stock

 

 

 

Retained

 

Compre.

 

Treasury

 

Controlling

 

 

 

Shares

 

Amount

 

Surplus

 

Earnings

 

Income

 

Stock

 

Interests

 

Total

 

(#)

 

($)

 

($)

 

($)

 

($)

 

($)

 

 

 

($)

Balance January 1, 2011

3,718

 

 $3,718

 

 $15,331

 

 $68,696

 

 $1,896

 

 $(2,417)

 

 $2,055

 

 $89,279

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, quarter ended March 31, 2011

 

 

 

 

 

 

2,996

 

 

 

 

 

 

 

2,996

Adjustment of unrealized gain (loss) on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  securities available-for-sale, net of tax

 

 

 

 

 

 

 

 

1,297

 

 

 

 

 

1,297

        Total comprehensive income

 

 

 

 

 

 

2,996

 

1,297

 

 

 

 

 

4,293

Cash dividends paid - $0.20 per share

 

 

 

 

 

 

(725)

 

 

 

 

 

 

 

(725)

Balance March 31, 2011

3,718

 

 $3,718

 

 $15,331

 

 $70,967

 

 $3,193

 

 $(2,417)

 

 $2,055

 

 $97,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2012

3,718

 

 $3,718

 

 $15,331

 

 $76,586

 

 $8,801

 

 $(3,023)

 

 $2,055

 

 $103,468

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, quarter ended March 31, 2012

 

 

 

 

 

 

3,516

 

 

 

 

 

 

 

3,516

Adjustment of unrealized gain (loss) on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  securities available-for-sale, net of tax

 

 

 

 

 

 

 

 

331

 

 

 

 

 

331

        Total comprehensive income

 

 

 

 

 

 

3,516

 

331

 

 

 

 

 

3,847

Cash dividends paid - $0.25 per share

 

 

 

 

 

 

(902)

 

 

 

 

 

 

 

(902)

Balance March 31, 2012

3,718

 

 $3,718

 

 $15,331

 

 $79,200

 

 $9,132

 

 $(3,023)

 

 $2,055

 

$106,413

 

 

See accompanying notes to consolidated financial statements.

6


 


 

 

 

 

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Dollars in Thousands)

 

     

Three Months Ended

     

March 31, 2012

 

March 31, 2011

 

 

 

 

 

 

Net cash provided by operating activities

$  3,182

 

$  3,441

Investing activities:

 

 

 

 

Decrease (increase) in interest bearing deposits in banks

4,729

 

(23,854)

 

Proceeds of maturities of available-for-sale securities

16,928

 

14,069

 

Proceeds of sales of available-for-sale securities

22,246

 

19,680

 

Purchase of available-for-sale securities

(45,773)

 

(44,993)

 

Decrease (Increase) in loans-net

(6,003)

 

432

 

Proceeds from sale of other real estate

551

 

1,436

 

Proceeds from disposition of property

-

 

328

 

Purchases of premises and equipment

(277)

 

(134)

 

 

Net cash (used) by investing activities

(7,599)

 

(33,036)

Financing activities:

 

 

 

 

Net increase in demand accounts

2,701

 

9,305

 

Net increase in savings accounts

18,757

 

23,862

 

Net (decrease) in time deposits

(1,239)

 

(1,271)

 

Increase (decrease) in other borrowings

(106)

 

(6,623)

 

Cash dividends paid

(902)

 

(725)

 

Net increase (decrease) in securities sold under agreements to repurchase

(2,688)

 

(508)

 

 

Net cash provided by financing activities

16,523

 

24,040

Increase (decrease) in cash and cash equivalents

12,106

 

(5,555)

Cash and cash equivalents at beginning of period

34,133

 

33,691

Cash and cash equivalents at end of period

$46,239

 

$28,136

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

Interest payments, net

$2,020

 

$2,579

 

Income taxes paid, net

-

 

-

 

Transfers from loans to foreclosed assets

580

 

260

 

Transfers from foreclosed assets to loans

121

 

-

 

 

 

See accompanying notes to consolidated financial statements.

7


 


 

 

 

 

FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2012

 

 

Note 1 - Consolidated Financial Statements

 

The consolidated balance sheet as of March 31, 2012, the consolidated statements of income for the three months ended March 31, 2012 and 2011 and the consolidated statements of cash flows for the three-month periods then ended have been prepared by the company without an audit.  The accompanying reviewed condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at March 31, 2012 and for all periods presented have been made. Operating results for the reporting periods presented are not necessarily indicative of results that may be expected for the year ending December 31, 2012.  For further information, refer to the consolidated financial statements and footnotes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2011. 

 

Certain prior year balances have been reclassified to conform to current year presentation.  The consolidated financial statements include all accounts of First Citizens Bancshares, Inc. (the “Company”), and its subsidiary, First Citizens National Bank (the “Bank”).  First Citizens (TN) Statutory Trusts III and IV are reported under the equity method in accordance with generally accepted accounting principles for Variable Interest Entities for all periods presented.  These investments are included in other assets and the proportionate share of income (loss) is included in other non-interest income.  The Bank also has two wholly owned subsidiaries, First Citizens Financial Plus, Inc. and First Citizens Investments, Inc., which are consolidated into its financial statements. 

 

The principal activity of First Citizens Investments, Inc. is to acquire and sell investment securities and collect income from the securities portfolio.  First Citizens Holdings, Inc., a wholly owned subsidiary of First Citizens Investments, Inc., acquires and sells certain investment securities, collects income from its portfolio, and owns First Citizens Properties, Inc., a real estate investment trust.  First Citizens Properties, Inc. is a real estate investment trust organized and existing under the laws of the state of Maryland, the principal activity of which is to invest in participation interests in real estate loans made by the Bank and provide the Bank with an alternative vehicle for raising capital.  First Citizens Holdings, Inc. owns 100% of the outstanding common stock and 60% of the outstanding preferred stock of First Citizens Properties, Inc.  Directors, executive officers and certain employees and affiliates of the Bank own approximately 40% of the preferred stock which is reported as Noncontrolling Interest in Consolidated Subsidiary in the Consolidated Financial Statements of the Company.  Net income (loss) attributable to the noncontrolling interest is included in Other Non-Interest Expense on the Consolidated Statements of Income and is not material for any of the periods presented.

 

The Bank has a 50% ownership interest in two insurance subsidiaries both of which are accounted for using the equity method.  One is White and Associates/First Citizens Insurance, LLC, which is a general insurance agency offering a full line of insurance products.  The other is First Citizens/White and Associates Insurance Company whose principal activity is credit insurance.  The investment in these subsidiaries is included in Other Assets on the Balance Sheets presented in this report and earnings from these subsidiaries are recorded in Other Income on the Income Statements presented in this report. 

 

Note 2 - Organization

 

First Citizens Bancshares, Inc., is a bank holding company chartered December 14, 1982, under the laws of the State of Tennessee. On September 23, 1983, all outstanding shares of common stock of First Citizens National Bank were exchanged for an equal number of shares in First Citizens Bancshares, Inc.

 

 

 

8


 


 

 

 

 

 

Note 3 – Contingent Liabilities

 

There is no material pending or threatened litigation as of the current reportable date that would result in a liability.

 

Note 4 -- Cash Reserves and Interest-Bearing Deposits in Other Banks

 

The Bank maintains cash reserve balances as required by the Federal Reserve Bank.  Average required balances during first quarter ended March 31, 2012 and the year ended December 31, 2011 were approximately $500,000.  Amounts above the required minimum balance are reported as Interest-Bearing Deposits in Other Banks on the Consolidated Balance Sheets.  Balances in excess of required reserves held at the Federal Reserve Bank as of March 31, 2012 and December 31, 2011 were $33.6 million and $38.3 million, respectively.  Interest-bearing deposits in other banks also include short-term certificates of deposit held in increments that are within FDIC insurance limits and totaled $1.8 million and approximately $1.6 million as of March 31, 2012 and December 31, 2011, respectively.

 

Note 5 – Investment Securities

 

The amortized cost and fair value of securities as of March 31, 2012 and December 31, 2011 were as follows:

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Fair Value

As of March 31, 2012:

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government agencies and corporations

$249,056

 

$7,137

 

$     (63)

 

$256,130

Obligations of states and political subdivisions

106,723

 

9,376

 

(5)

 

116,094

All other

2,166

 

21

 

(1,668)

 

519

     Total investment securities

$357,945

 

$16,534

 

$(1,736)

 

$372,743

As of December 31, 2011:

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government agencies and corporations

$242,459

 

$6,793

 

$     (12)

 

$249,240

Obligations of states and political subdivisions

106,554

 

9,083

 

(3)

 

115,634

All other

2,194

 

15

 

(1,618)

 

591

     Total investment securities

$351,207

 

$15,891

 

$(1,633)

 

$365,465

 

There were no securities classified as held-to-maturity or trading as of March 31, 2012 or December 31, 2011.

 

The following table summarizes contractual maturities of debt securities available-for-sale as of March 31, 2012 (in thousands):

 

 

 

Amortized Cost

 

Fair Value

Amounts maturing in:

 

 

 

 

  One year or less

 

$3,200

 

$3,269

  After one year through five years

 

8,415

 

9,070

  After five years through ten years

 

49,815

 

55,818

  After ten years*

 

296,492

 

304,542

       Total debt securities

 

357,922

 

372,699

Equity securities

 

23

 

44

       Total securities

 

$357,945

 

$372,743

 

9


 


 

 

 

 

Sales and gains (losses) on sale of available-for-sale securities for the quarter ended March 31, 2012 and 2011 are presented as follows (in thousands):

 

 

Gross Sales

Gross Gains

 

Gross Losses

 

Net Gains

2012

 

 $22,246

 

 $401

 

$  -

 

$401

2011

 

  19,680

 

  462

 

-

 

  462

 

The following table presents information on securities with gross unrealized losses as of March 31, 2012, aggregated by investment category and the length of time that the individual securities have been in a continuous loss position (in thousands):

 

 

Less Than 12 Months

 

Over 12 Months

 

Total

 

Gross
Unrealized
 Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

U.S. Treasury securities and obligations of U.S. Government agencies and corporations

$(63)

 

$15,296

 

$          -

 

$     -

 

$     (63)

 

$15,296

Obligations of states and political subdivisions

(5)

 

475

 

-

 

-

 

(5)

 

475

Other debt securities

-

 

-

 

(1,668)

 

475

 

(1,668)

 

475

  Total securities with unrealized losses

$(68)

 

$15,771

 

$(1,668)

 

$475

 

$(1,736)

 

$16,246

 

In reviewing the investment portfolio for other-than-temporary impairment of individual securities, consideration is given but not limited to (1) the length of time in which fair value has been less than cost and the extent of the unrealized loss, (2) the financial condition of the issuer, and (3) the positive intent and ability of the Company to maintain its investment in the issuer for a time that would provide for any anticipated recovery in the fair value.

 

As of March 31, 2012, the Company had eight debt securities with unrealized losses, with 3 of those securities having been in an unrealized loss position for greater than 12 months.  The Company did not intend to sell any such securities in unrealized loss position and it was more likely than not that the Company would not be required to sell the securities prior to recovery of costs.  Of the eight securities, three corporate debt securities accounted for approximately 96% of the unrealized gross losses as of March 31, 2012.  The remaining bonds had unrealized loss positions for less than 12 months and consisted of two municipal bonds and three agency MBSs or CMOs.  Securities in an unrealized loss position as of March 31, 2012 have been evaluated for other-than-temporary impairment.  In analyzing reasons for the unrealized losses, management considers various factors including, but not limited to, whether the securities are issued by the federal government or its agencies, whether downgrades of bond ratings have occurred, and also reviews any applicable industry analysts’ reports.  With respect to unrealized losses on municipal and agency and the analysis performed relating to the securities, management believes that declines in market value were not other-than-temporary as of March 31, 2012.  The unrealized losses on the agency and municipal securities are considered immaterial on an individual basis and in the aggregate and have not been recognized for other-than-temporary impairment. 

 

Three corporate debt securities accounted for $1.67 million of the $1.74 million unrealized loss as of March 31, 2012 and consist of pooled collateralized debt obligation securities that are backed by trust-preferred securities (“TRUP CDOs”) issued by banks, thrifts and insurance companies.  These three bonds were rated below investment grade (BBB) by Moody’s and/or S&P as of March 31, 2012. 

 

The three TRUP CDOs have an aggregate book value of $2.1 million and fair market value of approximately $475,000 and each of the three are the mezzanine or “B” class tranches.  The unrealized loss of $1.7 million as of March 31, 2012 is reflected in accumulated other comprehensive income.  The following table provides the book and market values of each security as well as information regarding the levels of excess subordination in the securities as of March 31, 2012 (dollars in thousands):

 

 

10


 


 

 

 

 

 

Description

Class

 

Book Value

 

Market
 Value

 

Actual Over
 Collateral Ratio (2)

 

Required Over
 Collateral Ratio (3)

 

Actual
Over
 (Under)

Pretsl I

Mezzanine

 

$839(1)

 

$258

 

77.78%

 

103.0%

 

-30.25%

Pretsl X

B-2

 

304(1)

 

  6

 

55.49%

 

n/a (4)

 

-80.21%

I-Prestsl IV

B-1

 

1,000

 

211

 

106.4%

 

106.0%

 

6.04%

_________________

(1)

Book values reflect principal only and do not include interest capitalized or payment-in-kind (“PIK”) to the bond according to contractual terms of the bond if applicable.  The Company does not recognize PIK interest for book purposes and has these bonds on non-accrual status.

(2)

The Over Collateral (“OC”) Ratio reflects the ratio of performing collateral to a given class of notes and is calculated by dividing the performing collateral by the sum of the current balance of a given class of notes plus all senior classes.

(3)

The Required OC Ratio for a particular class of bonds reflects the required overcollateralization ratio such that cash distributions may be made to lower classes of bonds.  If the OC Ratio is less than the Required OC ratio, cash is diverted from the lower classes of bonds to the senior bond classes.

(4)

The Required OC Ratio is not applicable in this case, as interest on Pretsl X for B-2 class is capitalized to the bond or PIK.

 

 

Security-specific collateral is used in the assumptions to project cash flows each quarter.  Issuers in default are assumed at zero recovery.  Issuers in deferral are assumed at a 15% recovery beginning two years from deferral date.  Forward interest rates are used to project future principal and interest payments allowing the model to indicate impact of over or undercollateralization for each transaction.  Higher interest rates generally increase credit stress on undercollateralized transactions by reducing excess interest (calculated as the difference between interest received from underlying collateral and interest paid on the bonds).  The discount rate is based on the original discount margin calculated at the time of purchase based on the purchase price.  The original discount margin is then added to the three-month LIBOR to determine the discount rate.  The discount rate is then used to calculate the present value for the then-current quarter’s projected cash flows.  If the present value of the then-current quarter’s projected cash flows is less than the prior quarter or less than the then-current book value of the security, that difference is recorded against earnings as the credit component of other-than-temporary impairment.  No additional credit losses were incurred during the quarter ended March 31, 2012 and therefore no losses were recognized against earnings during first quarter 2012.

 

See also discussion of valuation techniques and hierarchy for determining fair value of these securities at Note 11.

                                                                               

The Company held no derivative transactions as of March 31, 2012 or December 31, 2011. 

 

Note 6 -- Loans

 

Performing and non-performing loans by category were as follows as of March 31, 2012 and December 31, 2011 (in thousands):

 

 

Performing

 

Non- Performing*

 

Total

March 31, 2012:

         

Commercial, financial and agricultural

$73,312

 

$701

 

$74,013

Real estate – construction

38,449

 

673

 

39,122

Real estate – mortgage

380,105

 

8,398

 

388,503

Installment loans to individuals

26,690

 

249

 

26,939

All other loans

4,828

 

0

 

4,828

Total

$523,384

 

$10,021

 

$533,405

December 31, 2011:

 

 

 

 

 

Commercial, financial and agricultural

 $71,465

 

 $709

 

 $ 72,174

Real estate – construction

38,946

 

1,018

 

39,964

Real estate – mortgage

378,006

 

5,928

 

383,934

Installment loans to individuals

27,766

 

261

 

28,027

All other loans

3,600

 

-  

 

3,600

Total

 $ 519,783

 

 $7,916

 

 $527,699

 

_________________

*Non-Performing loans consist of loans that are on non-accrual status and loans 90 days past due and still accruing interest.

 

 

 

11


 


 

 

 

 

 

 

An aging analysis of loans outstanding by category as of March 31, 2012 and December 31, 2011 was as follows (in thousands):

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

Greater Than
90 Days

 

Total
Past Due

Current

Total Loans

Recorded
Investment >
90 Days and
Accruing

As of March 31, 2012:

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

     $   175

 

      $   65

 $    534

 

  $    774

  $   73,239

 $   74,013

               $     35

Real estate – construction

234

 

0

0

 

234

38,888

39,122

0

Real estate – mortgage

3,830

 

151

4,780

 

8,761

379,742

388,503

2,717

Installment loans to individuals

180

 

5

12

 

197

26,742

26,939

9

All other loans

0

 

0

0

 

0

4,828

4,828

0

Total

$4,419

 

$221

$5,326

 

$9,966

$523,439

$533,405

$2,761

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011:

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 $     72

 

 $     72

 $   538

 

 $    682

$  71,492

$   72,174

 $  34

Real estate – construction

539

 

47

345

 

931

 39,033

39,964

 -

Real estate – mortgage

1,481

 

2,727

2,353

 

6,561

 377,373

383,934

 570

Installment loans to individuals

81

 

30

41

 

152

 27,875

28,027

 2

All other loans

-

 

-

-

 

-

 3,600

3,600

 -

Total

 $2,173

 

 $2,876

 $3,277

 

 $8,326

$519,373

$527,699

 $606

 

Loans on non-accrual status as of March 31, 2012 and December 31, 2011 by category were as follows (in thousands):

 

 

March 31, 2012

 

December 31, 2011

Commercial, financial and agricultural

 $   667

 

 $   675

Real estate – construction

 673

 

1,018

Real estate – mortgage

 5,680

 

 5,358

Installment loans to individuals

 240

 

 259

All other loans

        -

 

 -

Total

 $7,260

 

 $7,310

 

Credit risk management procedures include assessment of loan quality through use of an internal loan rating system.  Each loan is assigned a rating upon origination and the rating may be revised over the life of the loan as circumstances warrant.  The rating system utilizes eight major classification types based on risk of loss with Grade 1 being the lowest level of risk and Grade 8 being the highest level of risk.  Loans internally rated Grade 1 to Grade 4 are considered “Pass” grade loans with low to average level of risk of credit losses.  Loans rated Grade 5 are considered “Special Mention” and generally have one or more circumstances that require additional monitoring but do not necessarily indicate a higher level of probable credit losses.  Loans rated Grade 6 or higher are loans with circumstances that generally indicate an above average level of risk for credit losses.  Loans by internal risk rating by category as of March 31, 2012 and December 31, 2011 were as follows (in thousands): 

 

12


 


 

 

Grades 1-4

 

Grade 5

 

Grades 6-8

 

Total

March 31, 2012:

 

 

 

 

 

 

 

Commercial, financial and agricultural

        $    72,295

 

           $      609

 

            $     1,109

 

    $   74,013

Real estate – construction

               36,161

 

                1,254

 

                   1,707

 

         39,122

Real estate – mortgage

             365,961

 

                4,862

 

                 17,680

 

       388,503

Installment loans to individuals

               26,594

 

                       7

 

                      338

 

         26,939

All other loans

                 4,828

 

                      -  

 

                        -  

 

           4,828

Total

         $ 505,839

 

            $ 6,732

 

              $20,834

 

    $533,405

 

 

 

 

 

 

 

 

December 31, 2011:

 

 

 

 

 

 

 

Commercial, financial and agricultural

 $  70,399

 

 $   423

 

 $  1,352

 

 $  72,174

Real estate – construction

36,972

 

 1,113

 

1,879

 

39,964

Real estate – mortgage

362,686

 

 4,715

 

16,533

 

383,934

Installment loans to individuals

27,701

 

 9

 

317

 

28,027

All other loans

3,600

 

-  

 

-  

 

3,600

Total

 $501,358

 

 $6,260

 

 $20,081

 

 $527,699

 

 

 

 

 

 

 

 

 

Information regarding the Company’s impaired loans for the quarter ended March 31, 2012 and 2011 is as follows (in thousands):

 

 

 

Recorded
 Investment

Unpaid
Principal
Balance

Specific
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

March 31, 2012:

 

 

 

 

 

With no specific allocation recorded:

 

 

 

 

 

Commercial, financial and agricultural

         $      -

             $       -

 N/A

        $       4

                $    -

Real estate – construction

                 -

                      -

 N/A

                  -

                      -

Real estate – mortgage

                -

                      -

 N/A

          1,109

                      -

Installment loans to individuals

                -

                      -

 N/A

                 -

                      -

All other loans

                -

                      -

 N/A

                 -

                      -

With allocation recorded:

 

 

 

 

 

Commercial, financial and agricultural

       $    648

              $    648

      $    130

         $  568

                  $ 2

Real estate – construction

             887

                    887

            330

          1,179

                      -

Real estate – mortgage

          7,406

                 7,406

         1,497

          5,973

                     3

Installment loans to individuals

             160

                    160

              33

             174

                    -

All other loans

                -  

                      -  

               -  

                -  

                    -

Total:

 

 

 

 

 

Commercial, financial and agricultural

        $   648

               $   648

       $   130

        $   572

                  $ 2

Real estate – construction

             887

                    887

            330

          1,179

                      -

Real estate – mortgage

          7,406

                 7,406

         1,497

          7,082

                     3

Installment loans to individuals

             160

                    160

              33

             174

                      -

All other loans

                  -

                        -

               -  

                  -

                      -

 

 

 

 

 

 

March 31, 2011:

 

 

 

 

 

With no specific allocation recorded:

 

 

 

 

 

Commercial, financial and agricultural

         $       -

               $       -

 N/A

        $        -

               $     -

Real estate – construction

                  -

                        -

 N/A

             420

                      -

Real estate – mortgage

          2,346

                 2,346

 N/A

          2,596

                   38

Installment loans to individuals

                  -

                        -

 N/A

                  -

                      -

All other loans

                  -

                        -

 N/A

                  -

                      -

With allocation recorded:

 

 

 

 

 

Commercial, financial and agricultural

         $  609

                $  609

          $160

        $   555

                 $  8

Real estate – construction

          1,834

                 1,834

            460

          1,288

                   16

Real estate – mortgage

          5,967

                 5,967

            953

          5,089

                   63

Installment loans to individuals

             218

                    218

              42

             209

                    -

All other loans

                -

                      -

               -

                -

                    -

Total:

 

 

 

 

 

Commercial, financial and agricultural

        $   609

                $  609

          $160

         $  555

               $    8

Real estate – construction

          1,834

                 1,834

            460

          1,708

                   16

Real estate – mortgage

          8,313

                 8,313

            953

          7,685

                 101

Installment loans to individuals

             218

                    218

              42

             209

                      -

All other loans

                  -

                        -

               -  

                  -

                      -

 

 

13


 


 

 

 

 

 

 

The Company adopted amendments in Accounting Standards Codification Update (“ASU”) No. 2011-01 “Receivables (Topic 310)” (“ASU 2011-01”) as of September 30, 2011.  As a result, the Company reviewed loans classified as troubled debt restructurings (“TDRs”) that had been restructured during the year ended December 31, 2011 and confirmed that TDRs with a balance greater than or equal to $250,000 deemed to be impaired were properly identified as such and reviewed individually for impairment as reported in the impaired loan table above.  Loans meeting the criteria to be classified as TDRs with a balance less than $250,000 have historically been reviewed on a collective basis by risk code and loan category.  Reassessment of these loans on an individual basis upon adoption of the ASU 2011-01 for impairment did not result in a significant difference in the required allowance, as the aggregate balance of loans reviewed was less than $20,000. 

 

Generally, loans are appropriately risk rated and identified for individual impairment review prior to when the restructure occurs.  Thus, in the normal life cycle of a loan, any specific allocations are usually made prior to a formal restructuring or at least at the time of restructuring rather than subsequent to modification.  Therefore, adoption of these amendments did not have a material impact on the volume of loans classified as TDRs or the related allowance for loan losses associated with TDRs as of December 31, 2011 or March 31, 2012.  Also, TDRs are included in non-accrual loans as reported in the above tables unless the loan has performed according to the modified terms for a length of time sufficient to support placing the loan on accrual status (generally six months). 

 

Loans that were restructured as of March 31, 2012 consisted of the following (dollars in thousands):

 

 

Number of
Contracts

 

Pre-Modification
Outstanding Recorded
Investment

 

Post-Modification
Outstanding Recorded
Investment

Troubled debt restructurings:

 

 

 

 

 

   Commercial, financial and agricultural

6

 

$372

 

$330

   Real estate – construction

9

 

1,604

 

1,591

   Real estate – mortgage

13

 

3,648

 

3,614

   Installment loans to individuals

18

 

205

 

194

   All other loans

0

 

0

 

0

Total

46

 

$5,829

 

$5,729

 

14


 


 

 

 

 

Modification of the terms of the TDRs reported in the above table did not have a material impact on the consolidated financial statements or to the overall risk profile of the loan portfolio.  There were no TDRs that were modified during the year ended December 31, 2011 that re-defaulted in the quarter ended March 31, 2012.  The allowance for loan losses associated with the TDRs totaled approximately $1.1 million as of March 31, 2012. 

 

Note 7 – Allowance for Loan Losses

 

The following table presents the breakdown of the allowance for loan losses by category and the percentage of each category in the loan portfolio to total loans as of March 31, 2012 and December 31, 2011 (dollars in thousands):

 

 

March 31, 2012

December 31, 2011

 

Amount

% to Total Loans

Amount

% to Total Loans

Commercial, financial and agricultural

$1,585

13.88%

$1,469

13.68%

Real estate – construction

1,973

7.33%

1,614

7.57%

Real estate – mortgage

4,485

72.83%

4,534

72.76%

Installment loans to individuals

351

5.05%

381

5.31%

All other loans

41

0.91%

41

0.68%

    Total

$8,435

100.00%

$8,039

100.00%

 

An analysis of the allowance for loan losses by loan category for the quarter ended March 31, 2012 is as follows (in thousands):

 

 

Beginning
Balance

 

Charge-offs

 

Recoveries

 

Provision

 

Ending
Balance

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

$1,469

 

($28)

 

$144

 

$-

 

$1,585

Real estate – construction

1,614

 

(120)

 

479

 

-

 

1,973

Real estate – mortgage

4,534

 

(53)

 

4

 

-

 

4,485

Installment loans to individuals

381

 

(33)

 

3

 

-

 

351

All other loans

41

 

-

 

-

 

-

 

41

Total

$8,039

 

($234)

 

$630

 

$-

 

$8,435

 

The allowance for loan losses is comprised of allocations for loans evaluated individually and loans evaluated collectively for impairment.  The allocations of the allowance for loan losses for outstanding loans by category evaluated individually and collectively were as follows as of March 31, 2012 and December 31, 2011 (in thousands):

 

 

 

 

 

15


 


 

 

 

 

 

 

Evaluated

 

Evaluated

 

 

 

Individually

 

Collectively

 

Total

As of March 31, 2012:

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

Commercial, financial and agricultural

$    130

 

$1,455

 

$1,585

Real estate – construction

330

 

1,643

 

1,973

Real estate – mortgage

1,497

 

2,988

 

4,485

Installment loans to individuals

33

 

318

 

351

All other loans

0

 

41

 

41

Total

$1,990

 

$6,445

 

$8,435

Loans

 

 

 

 

 

Commercial, financial and agricultural

        $   648

 

$73,365

 

$74,013

Real estate – construction

          887

 

38,235

 

39,122

Real estate – mortgage

          7,405

 

381,097

 

388,503

Installment loans to individuals

             160

 

26,779

 

26,939

All other loans

                  -

 

4,828

 

4,828

Total

 $9,101

 

$524,304

 

$533,405

As of December 31, 2011:

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

Commercial, financial and agricultural

 $   50

 

 $   1,419

 

 $ 1,469

Real estate – construction

350

 

1,264

 

1,614

Real estate – mortgage

427

 

 4,107

 

4,534

Installment loans to individuals

33

 

 348

 

381

All other loans

-  

 

 41

 

41

Total

 $860

 

 $7,179

 

 $8,039

Loans

 

 

 

 

 

Commercial, financial and agricultural

 $   500

 

 $71,674

 

$72,174

Real estate – construction

 1,007

 

 38,957

 

39,964

Real estate – mortgage

  5,132

 

 378,802

 

383,934

Installment loans to individuals

     158

 

 27,869

 

28,027

All other loans

        -

 

   3,600

 

3,600

Total

 $6,797

 

 $520,902

 

$527,699

 

 

Note 8 – Goodwill and Intangible Assets

 

Goodwill is not amortized and is tested for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.  The goodwill impairment test is conducted in first quarter annually and is a two-step test.  The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill.  Currently the Company has one reporting unit and does not meet the tests to segment under generally accepted accounting standards.  If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

 

 

 

                                                              

16


 


 

 

 

 

If required, the second step involves calculating an implied fair value of goodwill which is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment.  If the carrying value of goodwill exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.  An impairment loss cannot exceed the carrying value of goodwill.

 

The Company’s stock price has historically traded above its book value per common share and tangible book value per common share and was trading above its book value per common share and tangible book value per common share as of March 31, 2012.  In the event the stock price were to trade below its book value per common share and tangible book value per common share, an evaluation of the carrying value of goodwill would be performed as of the reporting date.  Such a circumstance would be one factor in an evaluation that could result in an eventual goodwill impairment charge. Additionally, should future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may also be required.

 

No impairment of goodwill is recorded in the current or prior reportable periods.  Total goodwill as of the reportable date is $11.8 million or 1.10% of total assets or 11.33% of total capital. 

 

Amortization expense of the other identifiable intangibles was approximately $21,000 for each of first quarters in 2012 and 2011.

 

Note 9 – Borrowings

 

In March 2005, the Company formed a wholly owned subsidiary -- First Citizens (TN) Statutory Trust III.  The trust was created as a Delaware statutory trust for the sole purpose of issuing and selling trust preferred securities and using proceeds from the sale to acquire long-term subordinated debentures issued by the Company.  The debentures are the sole assets of the trust.  The Company owns 100% of the common stock of the trust.

 

On March 17, 2005, the Company, through First Citizens (TN) Statutory Trust III, sold 5,000 of its floating rate trust preferred securities at a liquidation amount of $1,000 per security for an aggregate amount of $5.0 million.  For the period beginning on (and including) the date of original issuance and ending on (but excluding) June 17, 2005, the rate per annum was 4.84%.  For each successive period beginning on (and including) June 17, 2005, and each succeeding interest payment date, interest accrues at a rate per annum equal to the three-month LIBOR plus 1.80%.  Interest payment dates are March 17, June 17, September 17, and December 17 during the 30-year term.  The entire $5.0 million in proceeds was used to reduce other debt at the Company.  The Company’s obligation under the debentures and related documents constitute a full and unconditional guarantee by the Company of the trust issuer’s obligations under the trust preferred securities. 

 

In March 2007, the Company formed a wholly owned subsidiary -- First Citizens (TN) Statutory Trust IV.  The trust was created as a Delaware statutory trust for the sole purpose of issuing and selling trust preferred securities and using proceeds from the sale to acquire long-term subordinated debentures issued by the Company.  The debentures are the sole assets of the trust.  The Company owns 100% of the common stock of the trust. 

 

In March 2007, the Company, through First Citizens (TN) Statutory Trust IV, sold 5,000 of its floating rate trust preferred securities at a liquidation amount of $1,000 per security for an aggregate amount of $5.0 million.  For the period beginning on (and including) the date of original issuance and ending on (but excluding) June 15, 2007, the rate per annum was 7.10%.  For each successive period beginning on (and including) June 15, 2007, and each succeeding interest payment date, interest accrues at a rate per annum equal to the three-month LIBOR plus 1.75%.  Interest payment dates are March 15, June 15, September 15, and December 15 during the 30-year term.  The purpose of proceeds was to refinance the debt issued through First Citizens (TN) Statutory Trust II at a lower spread to LIBOR and results in savings of approximately $92,500 annually.  First Citizens (TN) Statutory Trust II was dissolved as a result of this transaction.  The Company’s obligation under the debentures and related documents constitute a full and unconditional guarantee by the Company of the trust issuer’s obligations under the trust preferred securities. 

 

 

 

 

17


 


 

 

 

 

Although for accounting presentation the trust preferred securities are presented as debt, the outstanding balance qualifies as Tier I capital subject to the limitation that the amount of the securities included in Tier I Capital cannot exceed 25% of total Tier I capital.

 

The Company is dependent on the profitability of its subsidiaries and their ability to pay dividends in order to service its long-term debt.

 

The Bank had secured advances from the FHLB totaling $36.9 million as of March 31, 2012 and $37.1 million as of December 31, 2011.  FHLB borrowings are comprised primarily of advances with principal due at call date or maturity date with fixed interest rates ranging from 0.62% to 7.05%.  Some of these FHLB borrowings have quarterly call features and maturities ranging from 2012 to 2019.  Advances totaling $16 million require repayment if the call feature is exercised.  Under the existing and forecasted rate environments, borrowings with call features in place are not likely to be called in the next 12 months.  The Bank had one London Interbank Offered Rate (“LIBOR”) based variable rate advance totaling $2.5 million with a rate of 0.34% as of March 31, 2012 and December 31, 2011.  Also included in the FHLB borrowings total reported above is a pool of smaller balance amortizing advances that totaled approximately $912,000 as of March 31, 2012 and $1.0 million as of year-end 2011.  These smaller balance advances have rates ranging from 3.34% to 7.05% and maturities range from 2012 to 2019.  Obligations are secured by loans totaling $368 million consisting of the Bank’s entire portfolio of fully disbursed, one-to-four family residential mortgages, commercial mortgages, farm mortgages, second mortgages and multi-family residential mortgages.    The Bank had additional borrowing capacity of $119.8 million as of March 31, 2012.

 

Note 10 – Bank Owned Life Insurance and Imputed Income Tax Reimbursement Agreements

 

The Bank has a significant investment in bank-owned life insurance policies (“BOLI”) and provides the associated fringe benefit to certain employees in the position of Vice President and higher after one year of service.  The cash surrender values of BOLI were $21.6 million and $21.4 million as of March 31, 2012 and December 31, 2011, respectively.  BOLI are initially recorded at the amount of premiums paid and are adjusted to current cash surrender values.  Changes in cash surrender values are recorded in other non-interest income and are based on premiums paid less expenses plus accreted interest income.  Earnings on BOLI resulted in non-interest income of approximately $160,000 and $184,000 for first quarters ended March 31, 2012 and 2011, respectively. 

 

Expense related to these post-retirement death benefit accruals is reflected in Salaries and Employee Benefits on the Consolidated Income Statements and was approximately $42,000 for the quarter ended March 31, 2012 and approximately $49,000 for the quarter ended March 31, 2011.   The accrual for the post-retirement death benefits is included in Other Liabilities on the Consolidated Balance Sheet and totaled $2.5 million as of March 31, 2012 and $2.4 million as of December 31, 2011.   

Executive Management Life Insurance Death Benefit Only Salary Continuation Plans provided for in the employment agreements for certain officers of the Bank were replaced in December 2007 with Endorsement Split Dollar Life Insurance Plans and Amended and Restated Split Dollar Agreements.  The new agreements combine the death benefits from the Bank’s larger group plan with the death benefits established in the Executive Management Life Insurance Death Benefit Only Salary Continuation Plans.  The new agreements did not change the total after-tax death benefit provided to each participant.  Imputed Income Tax Reimbursement Agreements for each participant became effective January 1, 2008 and were entered into in order to keep the participants at the same after-tax benefit under the Amended and Restated Split Dollar Agreements.  These Imputed Income Tax Reimbursement Agreements provide for annual cash payments to the participants until death beginning in March 2009 for the 2008 tax year in amounts equal to the portion of the amount of federal and state income taxes attributable to the income imputed to the participant on the benefit under the Amended and Restated Split Dollar Agreement. 

 

 

 

 

18


 


 

 

 

 

Because the Endorsement Split Dollar Life Insurance Plans created imputed income to each participant without generating cash to pay the tax expense associated with the imputed income, and in order to provide participants the same after-tax benefit provided under the previous plans, effective January 1, 2008 the Bank entered into Imputed Income Tax Reimbursement Agreements with the applicable officers under the Amended and Restated Split Dollar Agreements. The Imputed Income Tax Reimbursement Agreements provide for annual cash payments to the participants until death beginning in March 2009 for the previous tax year in amounts equal to a portion of federal income taxes attributable to (i) the income imputed to the participant on the benefit under the Amended and Restated Split Dollar Agreement and (ii) the additional cash payments under the Imputed Income Tax Reimbursement Agreement.

 

Each participant was 100% vested in benefits provided under Imputed Income Tax Reimbursement Agreements as of January 1, 2008. Therefore, 100% of the principal (or service) cost of the plan was accrued for as of January 1, 2008 and expensed through earnings in the year ended December 31, 2008. Service costs are based on the net present value of the sum of payments in accordance with each participant’s agreement.   Interest accrues monthly at a rate of 7.0%. 

 

Net other post-retirement benefits expense for Imputed Income Tax Reimbursement Agreements is included in Salaries and Employee Benefits on the Consolidated Statements of Income and totaled approximately $7,000 per quarter for the quarters ended March 31, 2012 and 2011.  Benefit payments are made annually in March and totaled approximately $18,000 and $17,000 for the three months ended March 31, 2012 and 2011, respectively. 

 

The accumulated post-retirement defined benefit obligation for Imputed Income Tax Reimbursement Agreements is included in Other Liabilities on the Consolidated Balance Sheet totaled approximately $390,000 as of March 31, 2012 and approximately $403,000 as of December 31, 2011.  The accumulated post-retirement benefit obligation was equal to the funded status of the plan as of each applicable period-end as there were no related assets recognized on the Consolidated Balance Sheets for the Imputed Income Tax Reimbursement Agreements.

 

Note 11Fair Value Measurements

 

Fair value measurements are used to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The Company measures fair value under guidance provided by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”).  ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements.  ASC 820 does not expand the use of fair value in any new circumstances but clarifies the principle that fair value should be based on assumptions that market participants would use when pricing the asset or liability. ASC 820 outlines the following three acceptable valuation techniques may be used to measure fair value: 

 

a.

Market approach—The market approach uses prices and other relevant information generated by market transactions involving identical or similar assets or liabilities.  This technique includes matrix pricing that is a mathematical technique used principally to value debt securities without relying solely on quoted prices for specific securities but rather by relying on securities’ relationship to other benchmark quoted securities. 

 

 

b.

Income approach—The income approach uses valuation techniques to convert future amounts such as earnings or cash flows to a single present discounted amount.  The measurement is based on the value indicated by current market expectations about those future amounts.  Such valuation techniques include present value techniques, option-pricing models (such as the Black-Scholes-Merton formula or a binomial model), and multi-period excess earnings method (used to measure fair value of certain intangible assets).

 

 

c.

Cost approach—The cost approach is based on current replacement cost which is the amount that would currently be required to replace the service capacity of an asset. 

 

 

19


 


 

 

 

 

Valuation techniques are selected as appropriate for the circumstances and for which sufficient data is available.  Valuation techniques are to be consistently applied, but a change in valuation technique or its application may be made if the change results in a measurement that is equally or more representative of fair value under the circumstances.  Revisions resulting from a change in valuation technique or its application are accounted for as a change in accounting estimate which does not require the change in accounting estimate to be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods. 

 

ASC 820 also establishes a hierarchy that prioritizes information used to develop those assumptions.  The level in the hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company considers an input to be significant if it drives more than 10% of the total fair value of a particular asset or liability.  The hierarchy is as follows:

 

  • Level 1 Inputs (Highest ranking):      Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

 

  • Level 2 Inputs:      Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Such inputs may include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted market prices that are observable for the assets and liabilities such as interest rates and yield curves that are observable at commonly quoted intervals.

 

  • Level 3 Inputs (Lowest ranking):       Unobservable inputs for determining fair values of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets and liabilities.

 

Assets and liabilities may be measured for fair value on a recurring basis (daily, weekly, monthly or quarterly) or on a non-recurring basis in periods subsequent to initial recognition.  Recurring valuations are measured regularly for investment securities and the cash flow hedge.  Loans held for sale, other real estate and impaired loans are measured at fair value on a non-recurring basis and do not necessarily result in a change in the amount recorded on the Consolidated Balance Sheets.  Generally, these assets have non-recurring valuations that are the result of application of other accounting pronouncements that require the assets be assessed for impairment or at the lower of cost or fair value.  Fair values of loans held for sale are considered Level 2.  Fair values for other real estate and impaired loans are considered Level 3. 

 

The Company obtains fair value measurements for securities and the cash flow hedge from a third party vendor.  The cash flow hedge and the majority of the available-for-sale securities are valued using Level 2 inputs.  Collateralized debt obligation securities that are backed by trust preferred securities and account for less than 1% of the available-for-sale securities portfolio are valued using Level 3 inputs.  The fair value measurements reported in Level 2 are primarily matrix pricing that considers observable data (such as dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and terms and conditions of bonds, and other factors).  Fair value measurements for pooled trust-preferred securities are obtained through the use of valuation models that include unobservable inputs which are considered Level 3. 

 

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. 

 

 

 

 

20


 


Recurring Basis

 

 

 

 

The following are descriptions of valuation methodologies used for assets and liabilities measured at fair value on a recurring basis.

 

Available for Sale Securities

 

Fair values for available-for-sale securities are obtained from a third party vendor and are valued using Level 2 inputs, except for TRUP CDOs which are accounted for using Level 3 inputs.  TRUP CDOs accounted for less than 1% of the portfolio at March 31, 2012 and December 31, 2011. 

 

The markets for TRUP CDOs and other similar securities were not active at March 31, 2012 or December 31, 2011.  The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels.  The new issue market has also been relatively inactive. 

               

The market values for TRUP CDOs and other securities except for those issued or guaranteed by the U.S. Treasury have been very depressed relative to historical levels.  For example, the yield spreads for the broad market of investment grade and high yield corporate bonds reached all-time levels versus Treasuries at the end of November 2008 and remained close to those levels at March 31, 2012.  Therefore, low market prices for a particular bond may only have provided evidence of stress in credit markets in general rather than being an indicator of credit problems with a particular issuer over the past three years. 

 

Given conditions in debt markets for this type of security at March 31, 2012 and December 31, 2011 and the relative inactivity in the secondary and new issue markets, the Company determined:

 

  • Few observable transactions existed and market quotations that were available were not reliable for purposes of determining fair value as of March 31, 2012 or December 31, 2011;

 

  • An income valuation approach technique (present value technique) that maximized the use of relevant observable inputs and minimized the use of unobservable inputs were equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and

 

  • The Company’s TRUP CDOs should be classified within Level 3 of the fair value hierarchy because significant adjustments were required to determine fair value at the measurement date.

 

The Company’s TRUP CDO valuations were prepared by an independent third party. The third party’s approach to determining fair value involved these steps as of March 31, 2012 and December 31, 2011:

 

  • The credit quality of the collateral was calibrated by assigning default probabilities to each issuer;

  • Asset defaults were generated taking into account both the probability of default of the asset and an assumed level of correlation among the assets;

  • A 50% level of correlation was assumed among assets from the same industry (e.g., banks with other banks) while a lower (30%) correlation level is assumed among those from different industries;

  • The loss given default was assumed to be 100% (i.e., no recovery);

  • The cash flows were forecast for the underlying collateral and applied to each TRUP CDO tranche to determine the resulting distribution among the securities;

  • The calculations were modeled in 10,000 scenarios using a Monte Carlo engine;

21


 


 

 

 

 

  • The expected cash flows for each scenario were discounted using a discount rate that the third party calculates for each bond that represents an estimate of the yield that would be required in today’s market for a bond with a similar credit profile as the bond in question; and

  • The prices were aggregated and the average price was used for valuation purposes.

 

The Company recalculated the overall effective discount rates for these valuations.  The overall discount rates ranged from .5% to 16% and were highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the TRUP CDO and the prepayment assumptions.

 

A summary of assets and liabilities as of March 31, 2012 and December 31, 2011 measured at estimated fair value on a recurring basis is as follows (in thousands):

 

 

Level 1

 

Level 2

 

Level 3

 

Total Fair

 

Inputs

 

Inputs

 

Inputs

 

Value

March 31, 2012:

             

Financial assets:

 

 

 

 

 

 

 

     Securities available-for-sale

$     -

 

 $372,268

 

 $475

 

 $372,743

December 31, 2011:

             

Financial assets:

 

 

 

 

 

 

 

     Securities available-for-sale

$     -

 

 $364,912

 

 $553

 

 $365,465

 

The following table presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2012 and 2011 (in thousands):

 

 

2012

 

2011

Available-for-sale securities

     

Beginning balance

$553

 

$439

   Total unrealized gains (losses) included in:

 

 

 

         Net income

 -

 

 -

         Other comprehensive income

(55)

 

 (73)

   Purchases, sales, issuances and settlements, net

    (23)

 

       -

   Transfers in and (out) of Level 3

       -

 

       -

Ending balance

$475

 

$366

 

 

Non-Recurring Basis

 

Certain assets are measured at fair value on a non-recurring basis as described below.

 

Impaired Loans

 

Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or fair value.  Fair value is measured based on the value of the collateral securing these loans.  Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable.  Independent appraisals for collateral are obtained and may be discounted by management based on historical experience, changes in market conditions from time of valuation and/or management’s knowledge of the borrower and the borrower’s business.  As such discounts may be significant, these inputs are considered Level 3 in the hierarchy for determining fair value.  Values of impaired loans are reviewed on at least a quarterly basis to determine if specific allocations in the allowance for loan losses are adequate. 

 

 

22


 


 

Loans Held for Sale

 

Loans held for sale are recorded at the lower of cost or fair value.  Fair value of loans held for sale are based upon binding contracts and quotes from third party investors that qualify as Level 2 inputs for determining fair value.  Loans held for sale did not have an impairment charge for first quarters ended March 31, 2012 or 2011.

 

Other Real Estate

 

Other real estate is recorded at the lower of cost or fair value.  Fair value is measured based on independent appraisals and may be discounted by management based on historical experience and knowledge and changes in market conditions from time of valuation.  As such discounts may be significant, these inputs are considered Level 3 in the hierarchy for determining fair value.  Values of other real estate are reviewed at least annually or more often if circumstances require more frequent evaluations. 

 

A summary of assets as of March 31, 2012 and December 31, 2011 measured at estimated fair value on a non-recurring basis were as follows:

 

 

Level 1

 

Level 2

 

Level 3

 

Total Fair

 

Inputs

 

Inputs

 

Inputs

 

Value

March 31, 2012:

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

     Impaired loans

 $    -

 

 $        -

 

 $  9,101

 

$  9,101

     Loans held for sale

      -

 

 3,076

 

       -

 

   3,076

     Other real estate owned

      -

 

          -

 

 10,831

 

 10,831

December 31, 2011:

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

     Impaired loans

 $    -

 

 $        -

 

 $  6,797

 

$  6,797

     Loans held for sale

      -

 

 2,616

 

       -

 

   2,616

     Other real estate owned

      -

 

          -

 

 11,073

 

 11,073

 

Fair Value Estimates

 

ASC 820 requires disclosure of the estimated fair value of financial instruments for interim and annual periods.  The following assumptions were made and methods applied to estimate the fair value of each class of financial instruments not measured at fair value on the Consolidated Balance Sheets:

 

Cash and Cash Equivalents

 

For instruments that qualify as cash equivalents, as described in Note 1, the carrying amount is assumed to be fair value.

 

Loans

 

Fair value of variable-rate loans with no significant change in credit risk subsequent to loan origination is based on carrying amounts.  For other loans, such as fixed rate loans, fair values are estimated utilizing discounted cash flow analyses, applying interest rates currently offered for new loans with similar terms to borrowers of similar credit quality.  Fair values of loans that have experienced significant changes in credit risk have been adjusted to reflect such changes.

 

Accrued Interest Receivable

 

The fair values of accrued interest receivable and other assets are assumed to be the carrying value.

 

 

 

23


 


 

 

 

 

Federal Home Loan Bank and Federal Reserve Bank Stock

 

Carrying amounts of capital stock of the FHLB of Cincinnati and Federal Reserve Bank of St. Louis approximate fair value.

 

Bank-Owned Life Insurance

 

Carrying amount of bank-owned life insurance is the cash surrender value as of the end of the periods presented and approximates fair value.

 

Deposit Liabilities

 

Demand Deposits

 

The fair values of deposits which are payable on demand, such as interest-bearing and non-interest-bearing checking accounts, passbook savings, and certain money market accounts are equal to the carrying amount of the deposits.

 

Variable-Rate Deposits

 

The fair value of variable-rate money market accounts and certificates of deposit approximate their carrying value at the balance sheet date.

 

Fixed-Rate Deposits

               

For fixed-rate certificates of deposit, fair values are estimated utilizing discounted cash flow analyses, which apply interest rates currently being offered on certificates of deposits to a schedule of aggregated monthly maturities on time deposits.

 

Short Term and Other Borrowings

 

For securities sold under repurchase agreements payable upon demand, the carrying amount is a reasonable estimate of fair value.  For securities sold under repurchase agreements for a fixed term, fair values are estimated using the same methodology as fixed rate time deposits discussed above.  The fair value of the advances from the FHLB and other long-term borrowings are estimated by discounting the future cash outflows using the current market rates.

 

Other Liabilities

 

Fair value of other liabilities is assumed to be the carrying values.

 

The carrying amount and fair value of assets and liabilities as of March 31, 2012 and December 31, 2011 were as follows (in thousands):

 

 

 

 

24


 


 

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Amount

 

Value

 

Amount

 

Value

Financial assets

 

 

 

 

 

 

 

   Cash and cash equivalents

 $  46,239

 

 $  46,239

 

 $  34,133

 

 $  34,133

   Interest bearing deposits in other banks

35,409

 

35,409

 

40,138

 

40,138

   Investment securities

372,743

 

372,743

 

365,465

 

365,465

   Loans

533,405

 

 

 

527,699

 

 

   Less: allowance for loan losses

(8,435)

 

 

 

(8,039)

 

 

        Loans, net of allowance

524,970

 

523,588

 

519,660

 

519,269

   Loans held for sale

3,076

 

3,076

 

2,616

 

2,616

   Accrued interest receivable

4,992

 

4,992

 

5,306

 

5,306

    Federal Reserve Bank and Federal Home Loan Bank Stock

5,684

 

5,684

 

5,684

 

5,684

   Other real estate owned

10,832

 

10,832

 

11,073

 

11,073

   Bank owned life insurance

21,570

 

21,570

 

21,438

 

21,438

Financial liabilities

 

 

 

 

 

 

 

   Deposits

 875,891

 

 877,279

 

 855,672

 

 857,299

   Short-term borrowings

33,783

 

33,858

 

36,471

 

36,550

   Other borrowings

47,222

 

48,969

 

47,328

 

49,230

   Other liabilities

10,148

 

10,148

 

10,610

 

10,610

Off-balance sheet arrangements

 

 

 

 

 

 

 

   Commitments to extend credit

 $  64,675

 

 $  64,675

 

 $  77,861

 

 $  77,861

   Standby letters of credit

2,184

 

2,184

 

2,410

 

2,410

 

 

Note 12 –  Comprehensive Income

 

The components of comprehensive income for the quarters ended March 31, 2012 and 2011 are as follows:

 

 

 

2012

 

2011

Net income for quarter

 

 $3,516

 

 $2,996

Other comprehensive income, net of tax:

 

 

 

 

    Net change in unrealized gains (losses) on available-for-sale securities

331

 

1,297

         Total other comprehensive income, net of tax

 

331

 

1,297

  Total comprehensive income

 

 $3,847

 

 $4,293

 

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The tax effects of each component of other comprehensive income for the quarters ended March 31, 2012 and 2011 are as follows: 

 

 

 

Before-tax

 

Tax (Expense)

 

After-tax

 

 

Amount

 

or Benefit

 

Amount

Quarter ended March 31, 2012

 

 

 

 

 

 

  Unrealized gains (losses) on available-for-sale securities:

 

 

 

 

 

 

           Unrealized gains (losses) arising during the period

 

 $ 937

 

 $ (359)

 

 $578

           Reclassification adjustments for net gains included in net income

 (401)

 

 154

 

 (247)

                  Net unrealized gains (losses)

 

 $536

 

 $ (205)

 

 $331

Quarter ended March 31, 2011

 

 

 

 

 

 

  Unrealized gains (losses) on available-for-sale securities:

 

 

 

 

 

 

           Unrealized gains (losses) arising during the period

 

 $2,564

 

 $ (982)

 

 $1,582

           Reclassification adjustments for net gains included in net income

 (462)

 

177

 

 (285)

                 Net unrealized gains (losses)

$2,102

 

 $ (805)

 

$1,297

 

 

Note 13 Subsequent Events

 

The Company has reviewed subsequent events through May 3, 2012, the date the financial statements were available to be issued. 

 

 

 

 

 

 

 

 

26


 


 

 

 

 

 

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Net income increased approximately $520,000 or 17.4% and earnings per share increased $0.15 or 17.9% when comparing the first quarters of 2012 and 2011.  For the first three months of 2012, net income totaled $3.5 million compared to $3.0 million in first quarter 2011.  Increased earnings in 2012 were primarily the result of decreased provision for loan losses.  The Company recorded no provision for loan losses during first quarter 2012 compared to approximately $575,000 in first quarter 2011.  No provision for loan losses was necessary due to modest loan growth of 1%, stability in overall quality of the loan portfolio, and net recoveries in excess of loans charged off totaling approximately $396,000.   Allowance for losses on loans as a percent of total loans was 1.58% as of March 31, 2012 compared to 1.52% as of March 31, 2011 and 1.52% as of December 31, 2011.

 

The Company also remains steadfast in its commitment to quality growth balanced with strong liquidity and capital positions.  Deposits increased $20.2 million or 2.4% from December 31, 2011 to March 31, 2012.  Other borrowings consisting primarily of advances from the Federal Home Loan Bank (“FHLB”) were flat from December 31, 2011 to March 31, 2012.  Capital increased $2.9 million or 2.9% from December 31, 2011 to March 31, 2012 as a result of undistributed net income of $2.6 million and increase of approximately $331,000 in accumulated other comprehensive income due to overall appreciation of the investment portfolio in the most recent quarter.  Strong deposit growth resulted in total assets growth of $19.9 million or 1.9% in first quarter 2012 compared to year-end 2011.  Deposit growth was used to fund an increase of $18 million in the fed funds sold, an increase of $7.3 million in available-for-sale securities, and an increase of $5.7 million in loans. 

 

Key performance metrics for the Company reflect preservation of capital and the impact of increased net income in first quarter 2012 compared to first quarter of prior years.  Such key metrics are as follows: 

 

 

2012

2011

2010

2009

2008

Net income to average total assets

1.34%

1.22%

0.92%

0.78%

0.97%

Net income to average shareholders’ equity

13.36%

13.37%

10.22%

9.14%

11.65%

Dividends declared to net income

25.77%

24.20%

25.08%

59.08%

49.32%

Average equity to average assets

10.02%

10.11%

9.77%

9.30%

8.45%

Total equity to total assets

9.91%

9.26%

9.11%

8.54%

8.49%

 

The efficiency ratio is a measure of non-interest expense as a percentage of total revenue.  The Company computes the efficiency ratio by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income.  This is a non-GAAP financial measure, which we believe provides investors with important information regarding our operational efficiency.  Comparison of our efficiency ratio with those of other companies may not be possible because other companies may calculate the efficiency ratio differently.  The efficiency ratios for first quarter ended March 31, 2012, 2011 and 2010 were 59.65%, 59.96%, and 58.22%, respectively. 

 

The tangible common equity ratio is a non-GAAP measure used by management to evaluate capital adequacy. Tangible common equity is total equity less net accumulated other comprehensive income ("OCI"), goodwill and deposit-based intangibles. Tangible assets are total assets less goodwill and deposit-based intangibles.  The tangible common equity ratio is 8.05% for first quarter ended March 31, 2012 compared to 7.85% and 7.39% for first quarter ended March 31, 2011 and 2010, respectively.

 

A reconciliation of non-GAAP measures of efficiency ratio and tangible common equity is provided as follows for the quarter ended March 31, 2012, 2011 and 2010:

 

 

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At or for the Quarter Ended March 31,

 

2012

 

2011

 

2010

Efficiency ratio:

 

 

 

 

 

Net interest income(1)

 $9,501

 

 $9,248

 

 $9,182

Non-interest income(2)

3,344

 

3,207

 

3,218

      Total revenue

12,845

 

12,455

 

12,400

Non-interest expense

7,662

 

7,468

 

7,219

Efficiency ratio

59.65%

 

59.96%

 

58.22%

Tangible common equity ratio:

 

 

 

 

 

Total equity capital

$106,413

 

$     92,847

 

  $87,018

Less:

 

 

 

 

 

Accumulated other comprehensive income

9,132

 

3,193

 

5,311

Goodwill

11,825

 

11,825

 

11,825

Other intangible assets

14

 

99

 

183

Tangible common equity

 $85,442

 

 $77,730

 

 $69,699

Total assets

$1,073,457

 

$1,002,619

 

$954,969

Less:

 

 

 

 

 

Goodwill

11,825

 

11,825

 

11,825

Other intangible assets

14

 

99

 

  183

Tangible assets

$1,061,618

 

$990,695

 

$942,961

Tangible common equity ratio

8.05%

 

7.85%

 

7.39%

___________________

(1)

Net interest income includes interest and rates on securities that are non-taxable for federal income tax purposes that are presented on a taxable equivalent basis based on federal statutory rate of 34%.

(2)

Non-interest income is presented net of any credit component of other-than-temporary impairment on available-for-sale securities recognized against earnings for the years presented. 

 

 

Expansion

 

The Company, through its strategic planning process, intends to seek profitable opportunities that utilize excess capital and maximize income in Tennessee.  If the Company decides to acquire other banking institutions, its objective would be for asset growth and diversification into other market areas. Acquisitions and de novo branches might afford the Company increased economies of scale within the operation functions and better utilization of human resources. The Company would only pursue an acquisition or de novo branch if the board of directors determines it to be in the best interest of the Company and its shareholders.  The Company does not currently have plans to acquire other banking institutions.

 

The Company owns two lots in Jackson, Tennessee, that are intended for construction of full service branches but construction has been temporarily on hold because of current economic conditions.  Construction for the site near Union University is expected to commence within the next year and construction for the other site is expected to commence within the next two to three years.

 

Forward-Looking Statements

 

Information contained herein includes forward-looking statements with respect to the beliefs, plans, risks, goals and estimates of the Company.  Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant banking, economic, and competitive uncertainties, many of which are beyond management’s control.  When used in this discussion, the words “anticipate,” “project,” “expect,” “believe,” “should,” “will,” “intend,” “is likely,” “going forward,” “may” and other expressions are intended to identify forward-looking statements.  These forward-looking statements are within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended.  Such statements may include, but are not limited to, capital resources, strategic planning, acquisitions or de novo branching, ability to meet capital guidelines, legislation and governmental regulations affecting financial services companies, construction of new branch locations, dividends, critical accounting policies, allowance for loan losses, fair value estimates, goodwill, occupancy and depreciation expense, held-to-maturity securities, available-for-sale securities, trading securities, cash flows, core deposit intangibles, diversification in the real estate loan portfolio, interest income, maturity of loans, loan impairment, loan ratings, charge-offs, other real estate owned, maturity and re-pricing of deposits, borrowings with call features, dividend payout ratio, off-balance sheet arrangements, the impact of recently issued accounting standards, changes in funding sources, liquidity, interest rate sensitivity, net interest margins, debt securities, non-accrual status of loans, contractual maturities of mortgage-backed securities and collateralized mortgage obligations, other-than-temporary impairment of securities, amortization expense, deferred tax assets, independent appraisals for collateral, property enhancement or additions, efficiency ratio, ratio of assets to employees, net income, changes in interest rates, loan policies, categorization of loans, maturity of FHLB borrowings and the effectiveness of internal control over financial reporting.

 

28


 


 

 

 

 

 

Forward-looking statements are based upon information currently available and represent management’s expectations or predictions of the future. As a result of risks and uncertainties involved, actual results could differ materially from such forward-looking statements. The potential factors that could affect the Company’s results include but are not limited to:

  • Changes in general economic and business conditions;

  • Changes in market rates and prices of securities, loans, deposits and other financial instruments;

  • Changes in legislative or regulatory developments affecting financial institutions in general, including changes in tax, banking, insurance, securities or other financial service related laws;

  • Changes in government fiscal and monetary policies;

  • The ability of the Company to provide and market competitive products and services;

  • Concentrations within the loan portfolio;

  • Fluctuations in prevailing interest rates and the effectiveness of the Company’s interest rate hedging strategies;

  • The Company’s ability to maintain credit quality;

  • The effectiveness of the Company’s risk monitoring systems;

  • The ability of the Company’s borrowers to repay loans;

  • The availability of and costs associated with maintaining and/or obtaining adequate and timely sources of liquidity;

  • Geographic concentration of the Company’s assets and susceptibility to economic downturns in that area;

  • The ability of the Company to attract, train and retain qualified personnel;

  • Changes in consumer preferences; and

  • Other factors generally understood to affect financial results of financial services companies.

 

 

 

29


 


 

 

 

 

The Company undertakes no obligation to update its forward-looking statements to reflect events or circumstances that occur after the date of this quarterly report on Form 10-Q.

 

Critical Accounting Policies

 

The accounting and reporting of the Company and its subsidiaries conform to accounting principles generally accepted in the United States (“GAAP”) and follow general practices within the industry.  Preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Management believes that the Company’s estimates are reasonable under the facts and circumstances based on past experience and information supplied from professionals, regulators and others.  Accounting estimates are considered critical if (i) management is required to make assumptions or judgments about items that are highly uncertain at the time estimates are made and (ii) different estimates reasonably could have been used during the current period, or changes in such estimates are reasonably likely to occur from period to period, that could have a material impact on presentation of the Company’s Consolidated Financial Statements. 

 

The development, selection and disclosure of critical accounting policies are discussed and approved by the Audit Committee of the Bank’s Board of Directors.  Because of the potential impact on the financial condition or results of operations and the required subjective or complex judgments involved, management believes its critical accounting policies consist of the allowance for loan losses, fair value of financial instruments and goodwill.

 

Allowance for Loan Losses

 

The allowance for losses on loans represents management’s best estimate of inherent losses in the existing loan portfolio.  Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb reasonably estimated and probable losses within the portfolio.  Management believes the allowance for loan loss estimate is a critical accounting estimate because:  (i) changes can materially affect provision for loan loss expense on the income statement, (ii) changes in the borrower’s cash flows can impact the allowance, and (iii) management makes estimates at the balance sheet date and also into the future in reference to the allowance.  While management uses the best information available to establish the allowance for loan losses, future adjustments may be necessary if economic or other conditions change materially.  In addition, federal regulatory agencies as a part of their examination process periodically review the Bank’s loans and allowances for loan losses and may require the Bank to recognize adjustments based on their judgment about information available to them at the time of their examination.  See Note 1 of the Company’s Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information.

 

Fair Value of Financial Instruments

 

Certain assets and liabilities are required to be carried on the balance sheet at fair value.  Further, the fair value of financial instruments must be disclosed as a part of the notes to the consolidated financial statements for other assets and liabilities.  Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, the shape of yield curves and the credit worthiness of counter parties. 

 

Fair values for the majority of the Bank’s available-for-sale investment securities are based on observable market prices obtained from independent asset pricing services that are based on observable trans