N
ONINTEREST
I
NCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2014
|
|
Percent
Change
|
|
2013
|
|
|
(in thousands, except percentages)
|
|
Service charges on deposit accounts
|
741
|
|
|
0.7
|
%
|
|
736
|
|
|
Point-of-sale (POS) fees
|
401
|
|
|
8.1
|
%
|
|
371
|
|
|
Bank-owned life insurance income
|
351
|
|
|
45.0
|
%
|
|
242
|
|
|
Mortgage loans and related fees
|
180
|
|
|
(39.2
|
)%
|
|
296
|
|
|
Trust fees
|
200
|
|
|
36.1
|
%
|
|
147
|
|
|
Net gains on sales of securities available-for-sale
|
371
|
|
|
100.0
|
%
|
|
—
|
|
|
Other income
|
391
|
|
|
76.9
|
%
|
|
221
|
|
|
Total noninterest income
|
$
|
2,635
|
|
|
30.9
|
%
|
|
$
|
2,013
|
|
Our largest sources of noninterest income are service charges and fees on deposit accounts. Total service charges, including NSF fees, were
$741 thousand
for the three months ended
March 31, 2014
, an increase of $5 thousand, or
0.7%
from the same period in
2013
. While service charges and fees on deposit accounts typically correspond to the level and mix of our customer deposits, the continued implementation of the Dodd-Frank financial reform legislation may directly or indirectly impact the fee structure of our deposit products; therefore, we cannot reasonably estimate deposit fees for future periods.
Point-of-sale fees increased
8.1%
to
$401 thousand
for the
three
months ended
March 31, 2014
compared to the same period in
2013
. POS fees are primarily generated when our customers use their debit cards for retail purchases. We anticipate POS fees to continue to grow as customer trends show increased use of debit cards, although it is unclear if certain provisions affecting interchange fees for card issuers included in the Dodd-Frank financial reform legislation will have a future material impact on this product and its revenue.
Bank-owned life insurance income was
$351 thousand
for the
three
months ended
March 31, 2014
, an increase of $109 thousand or
45.0%
from
2013
levels. The increase was related to a one-time interest bonus for certain policies. The Company is the owner and beneficiary of these contracts. The income generated by the cash value of the insurance policies accumulates on a tax-deferred basis and is tax-free to maturity. In addition, the insurance death benefit will be a tax-free payment to the Company. On a fully tax-equivalent basis, the weighted average interest rate earned on the policies was approximately 7.10% for the three months ended
March 31, 2014
.
Mortgage loan and related fees for the three months ended
March 31, 2014
decreased $116 thousand, or
39.2%
to
$180 thousand
compared to
$296 thousand
in the same period of
2013
. Our process to originate and sell a conforming mortgage in the secondary market typically takes 30 to 60 days from the date of mortgage origination to the date the mortgage is sold to an investor in the secondary market. Due to the normal processing time, we will have a certain amount of held for sale loans at any time. Mortgages originated for sale in the secondary market totaled $4.1 million and $12.7 million as of March 31, 2014 and March 31, 2013, respectively. Mortgages sold in the secondary market totaled $2.7 million and $12.6 million as of March 31, 2014 and March 31, 2013, respectively. We sell these loans with the right to service the loan being released to the purchaser for a fee. During the second half of 2013, we focused on recruiting and retaining mortgage originators with a focus on purchase originations due to the significant declines in refinancing activities. Mortgage fee income for the remainder of 2014 will be dependent on market conditions.
Trust and wealth management fee income improved to $200 thousand, or 36.1%, for the three months ended March 31, 2014 compared to $147 thousand for the same period in 2013. We expect trust fee income to continue increasing during 2014.
Net gains on sales of securities available-for-sale for the three months ended March 31, 2014 increased $371 thousand from zero when compared to the same period in 2013.
Other income for the three months ended
March 31, 2014
was $391 thousand compared to
$221 thousand
for the same period in
2013
. The components of other income primarily consist of ATM fee income, underwriting revenue, safe deposit box fee income, repossessions, leased equipment and premises and equipment.
Noninterest Expense
Noninterest expense decreased $3.6 million or 25.6% to $10.4 million for the three months ended
March 31, 2014
compared to $13.8 million for the same period in
2013
. Total noninterest expense decreased for the three months ended March 31, 2014, primarily due to decreases in regulatory assessments and a decrease in non-performing asset expense.
The following table represents the components of noninterest expense for the
three
month period ended
March 31, 2014
and
2013
.
N
ONINTEREST
E
XPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2014
|
|
Percent
Change
|
|
2013
|
|
|
(in thousands, except percentages)
|
|
Salaries & benefits
|
$
|
5,274
|
|
|
(6.0
|
)%
|
|
$
|
5,609
|
|
|
Occupancy
|
820
|
|
|
0.2
|
%
|
|
818
|
|
|
Furniture and equipment
|
557
|
|
|
1.5
|
%
|
|
549
|
|
|
Professional fees
|
599
|
|
|
(0.3
|
)%
|
|
601
|
|
|
FDIC insurance
|
311
|
|
|
(68.9
|
)%
|
|
1,000
|
|
|
Write-downs on OREO and repossessions
|
309
|
|
|
(76.5
|
)%
|
|
1,315
|
|
|
Losses on other real estate owned, repossessions and fixed assets
|
10
|
|
|
(91.5
|
)%
|
|
117
|
|
|
Non-performing asset expenses
|
221
|
|
|
(88.2
|
)%
|
|
1,877
|
|
|
Data processing
|
588
|
|
|
3.9
|
%
|
|
566
|
|
|
Communications
|
150
|
|
|
17.2
|
%
|
|
128
|
|
|
ATM/Debit Card fees
|
258
|
|
|
18.9
|
%
|
|
217
|
|
|
Intangible asset amortization
|
48
|
|
|
(36.0
|
)%
|
|
75
|
|
|
Printing & supplies
|
207
|
|
|
50.0
|
%
|
|
138
|
|
|
Advertising
|
134
|
|
|
36.7
|
%
|
|
98
|
|
|
Insurance
|
325
|
|
|
(19.6
|
)%
|
|
404
|
|
|
OCC Assessments
|
94
|
|
|
(26.0
|
)%
|
|
127
|
|
|
Other expense
|
540
|
|
|
175.5
|
%
|
|
196
|
|
|
Total noninterest expense
|
$
|
10,445
|
|
|
(24.5
|
)%
|
|
$
|
13,835
|
|
Salaries and benefits for the three months ended
March 31, 2014
decreased
$335 thousand
or
6.0%
compared to the same period in
2013
. The decrease in salaries and benefits is primarily related to a reduction in the number of employees. The total savings provided by the reduction in the total number of employees was partially offset by the hiring of management level, full time equivalent employees to help meet the objectives of our strategic plan. As of
March 31, 2014
, we had
28
full-service banking offices with
275
full-time equivalent employees. As of
March 31, 2013
, we had 30 full-service banking offices with
325
full-time equivalent employees.
Occupancy expense increased
$2 thousand
, or
0.2%
for the three months ended
March 31, 2014
compared to the same period in
2013
, primarily the result of adjustments to lease expenses. As of
March 31, 2014
, First Security leased
six
facilities and the land for
two
branches. As a result, current period occupancy expense is higher than if we owned these facilities, including the real estate, but conversely, we have been able to deploy the capital into earning assets rather than capital expenditures for facilities.
Professional fees decreased $2 thousand for the three months ended
March 31, 2014
compared to the same period in
2013
. Professional fees include fees related to investor relations, outsourcing compliance and a portion of internal audit, as well as external audit, tax services and legal and accounting advice related to, among other things, foreclosures, lending activities, employee benefit programs and regulatory matters.
FDIC deposit premium insurance decreased
$689 thousand
to $311 thousand for the
three
months ended
March 31, 2014
compared to the same period in
2013
. The decrease is a direct result of the bank's improved capital condition at
March 31, 2014
.
Insurance expense decreased $79 thousand to
$325 thousand
for the three months ended
March 31, 2014
, compared to the same period in 2013. The reduction in insurance expense is based on our improved risk profile and applicable reductions to our insurance costs.
At foreclosure or repossession, the fair value of the OREO property or repossession is determined and a charge-off to the allowance is recorded, if applicable. Any decreases in value subsequent to the initial determination of fair value are recorded as a write-down. As a general policy, we re-assess the fair value of OREO and repossessions on at least an annual basis or sooner if there are indicators that deterioration in value has occurred. Write-downs are based on property-specific appraisals or valuations. Additionally, we evaluate on an ongoing basis our realization rate compared to the appraised values. Write-downs have declined due to fewer properties currently in or being transfered into OREO. Write-downs on OREO and repossessions decreased $1.0 million, or
76.5%
, for the
three
month period ended
March 31, 2014
compared to the same period in
2013
. Write-downs for the remainder of
2014
are dependent on multiple factors, including, but not limited to, the assumptions used by the independent appraisers, real estate market conditions, and our ability to liquidate properties.
Net losses on OREO, repossessions and fixed assets decreased
$107 thousand
to
$10 thousand
, or
91.5%
, for the
three
month period ended
March 31, 2014
, compared to the same period in
2013
. As discussed above, we continue to monitor our fair value assumptions and recognize additional write-downs when appropriate. Generally, gains and losses on the sale of OREO should be minimized by our fair value assumptions applied to OREO, as discussed above.
Non-performing asset expenses include, among other items, maintenance, repairs, utilities, taxes and storage costs. These costs decreased
$1.7 million
, or
88.2%
, for the
three
months ended
March 31, 2014
compared to the same period in
2013
. Historically, our holding costs have been commensurate with the level of nonperforming assets. We anticipate continued reductions in this category during
2014
.
Data processing fees increased
3.9%
for the
three
months ended
March 31, 2014
compared to the same period in
2013
. The monthly fees associated with data processing are typically based on transaction volume.
Intangible asset amortization expense declined $26 thousand, or
36.0%
for the
three
months ended
March 31, 2014
compared to the same period in
2013
. Our core deposit intangible assets amortize on an accelerated basis in which the expense recognized declines over the estimated useful life of ten years. We anticipate slight decreases in amortization expense throughout the remainder of
2014
.
Other expense increased $344 thousand for the
three
months ended
March 31, 2014
, respectively, compared to the same period in
2013
. The increase in other expense is associated with several sub-components and was part of the normal course of conducting business.
Income Taxes
We recorded an income tax provision of
$132 thousand
for the
three
months ended
March 31, 2014
compared to an income tax provision of
$119 thousand
for the same period in
2013
. For the
three
months ended
March 31, 2014
, we recorded
$422 thousand
in additional deferred tax valuation allowance to offset the tax benefits generated during the first quarter of 2014, including changes in other comprehensive income.
At
March 31, 2014
, we evaluated our significant uncertain tax positions. Under the “more-likely-than-not” threshold guidelines, we believe we have identified all significant uncertain tax benefits. We evaluate, on a quarterly basis or sooner if necessary, to determine if new or pre-existing uncertain tax positions are significant. In the event a significant uncertain tax position is determined to exist, penalty and interest will be recorded as a component of income tax expense in our consolidated financial statements.
A valuation allowance is required when it is “more likely than not” that the deferred tax assets will not be realized. The evaluation requires significant judgment and extensive analysis of all available positive and negative evidence, the forecasts of future income, applicable tax planning strategies and assessments of the current and future economic and business conditions. We identified as positive evidence the existence of taxes paid in available carryback years. Negative evidence included a cumulative loss in recent years as well as current business trends. As conditions change, we will evaluate the need to increase or decrease the valuation allowance. Currently, we anticipate increasing the valuation allowance to offset any future recorded tax
benefit to result in minimal, if any, income tax expense or benefit. As business and economic conditions change, we will re-evaluate the valuation allowance.
NOL Rights Plan
On October 30, 2012, the Company adopted a Tax Benefits Preservation Plan (the "NOL Rights Plan") and declared a dividend of one preferred stock purchase right (each a “Right” and collectively, the “Rights”) for each outstanding share of the Company's common stock, par value $0.01 per share (the “Common Stock”), payable to holders of record as of the close of business on November 12, 2012 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of one share of Series B Participating Preferred Stock, no par value, of the Company (the “Series B Preferred Stock”), at a purchase price equal to $20.00 per one one-thousandth of a share, subject to adjustment (the “Rights or Series B Purchase Price”). The description and terms of the Rights are set forth in the Plan, dated October 30, 2012, as the same may be amended from time to time, between the Company and Registrar and Transfer Company, as Rights Agent.
The Company has previously experienced substantial net operating losses, which it may carryforward in certain circumstances to offset current and future taxable income and thus reduce its federal income tax liability, subject to certain requirements and restrictions. The purpose of the NOL Rights Plan is to help preserve the value of the Company's deferred tax assets, such as its net operating losses (“Tax Benefits”), for U.S. federal income tax purposes.
These Tax Benefits can be valuable to the Company. However, if the Company experiences an “ownership change,” as defined in Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, its ability to use the Tax Benefits could be substantially limited and/or delayed, which would significantly impair the value of the Tax Benefits. Generally, the Company would experience an “ownership change” under Section 382 if one or more “5 percent shareholders” increase their aggregate percentage ownership by more than 50 percentage points over the lowest percentage of stock owned by such shareholders over the preceding three-year period. As a result, the Company has utilized a 5% “trigger” threshold in the Plan that is intended to act as a deterrent to any person or entity seeking to acquire 5% or more of the outstanding Common Stock without the prior approval of the Board.
On October 30, 2012, in connection with the adoption of the NOL Rights Plan, the Company filed Articles of Amendment to the Charter of Incorporation (the “Articles Amendment”) with the Secretary of State of the State of Tennessee. Further details about the Plan and the Articles Amendment can be found in Exhibits 3.1 and 4.1 to the Current Report on Form 8-K filed with the SEC on October 30, 2012.
FINANCIAL CONDITION
As of
March 31, 2014
, we had total consolidated assets of
$980.5 million
, total loans held-for-investment of
$604.9 million
, loans held-for-sale of $35.5 million, total deposits of
$841.8 million
and shareholders’ equity of
$84.7 million
. As of
December 31, 2013
, we had total consolidated assets of
$977.6 million
, total loans of
$583.1 million
, total deposits of
$857.3 million
and shareholders' equity of
$83.6 million
. As of
March 31, 2013
, we had total assets of
$1.0 billion
, total loans of
$540.3 million
, total deposits of
$1.0 billion
and shareholders' equity of
$21.0 million
.
Loans
As we continue to implement our strategic initiatives and restructure the mix of earning assets, we expect to realize continued growth in our loan portfolio. As of
March 31, 2014
, total loans
increased
by
$21.8 million
, or
3.7%
(1.6% annualized), from
December 31, 2013
and
increased
by
$64.6 million
, or
11.9%
, from
March 31, 2013
.
The following table presents our loan portfolio by type.
L
OAN
P
ORTFOLIO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change from
|
|
|
March 31,
2014
|
|
December 31,
2013
|
|
March 31,
2013
|
|
December 31,
2013
|
|
March 31,
2013
|
|
|
(in thousands, except percentages)
|
|
Loans secured by real estate –
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
$
|
147,672
|
|
|
$
|
181,988
|
|
|
$
|
181,624
|
|
|
(18.9
|
)%
|
|
(18.7
|
)%
|
|
Commercial
|
304,561
|
|
|
261,935
|
|
|
223,737
|
|
|
16.3
|
%
|
|
36.1
|
%
|
|
Construction
|
41,664
|
|
|
39,936
|
|
|
37,894
|
|
|
4.3
|
%
|
|
9.9
|
%
|
|
Multi-family and farmland
|
16,900
|
|
|
17,663
|
|
|
16,530
|
|
|
(4.3
|
)%
|
|
2.2
|
%
|
|
|
510,797
|
|
|
501,522
|
|
|
459,785
|
|
|
1.8
|
%
|
|
11.1
|
%
|
|
Commercial loans
|
63,900
|
|
|
55,337
|
|
|
61,904
|
|
|
15.5
|
%
|
|
3.2
|
%
|
|
Consumer installment loans
|
24,108
|
|
|
21,103
|
|
|
11,880
|
|
|
14.2
|
%
|
|
102.9
|
%
|
|
Leases, net of unearned income
|
—
|
|
|
—
|
|
|
373
|
|
|
—
|
%
|
|
(100.0
|
)%
|
|
Other
|
6,054
|
|
|
5,135
|
|
|
6,346
|
|
|
17.9
|
%
|
|
(4.6
|
)%
|
|
Total loans
|
604,859
|
|
|
583,097
|
|
|
540,288
|
|
|
3.7
|
%
|
|
12.0
|
%
|
|
Allowance for loan and lease losses
|
(9,200
|
)
|
|
(10,500
|
)
|
|
(13,500
|
)
|
|
(12.4
|
)%
|
|
(31.9
|
)%
|
|
Net loans
|
$
|
595,659
|
|
|
$
|
572,597
|
|
|
$
|
526,788
|
|
|
4.0
|
%
|
|
13.1
|
%
|
Loans year-to-date have remained consistent with an increase of approximately
$21.8 million
when compared to December 31, 2013. This is mostly due to an increase in commercial real estate loans of $42.6 million, or 16.3%, and an increase in commercial and industrial loans of $8.6 million, or 15.5%, offset by a decrease in residential 1-4 family real estate loans of $34.3 million, or 18.9%.
Comparing
March 31, 2014
to
March 31, 2013
, loans increased by $64.6 million, or 12.0%. The largest declining loan balance was residential 1-4 family loans of $34.0 million, a decrease of 18.7%. This decrease was offset by increases in commercial real estate loans of $80.8 million, or 36.1%, and consumer loans of $12.2 million, an increase of 102.9%.
As we develop and implement lending initiatives, we will focus on extending prudent loans to creditworthy consumers and businesses. We anticipate solid loan growth to continue during the remainder of 2014. Funding of future loans may be restricted by our ability to raise core deposits, although we may use current cash reserves and wholesale funding, as necessary and appropriate. Loan growth may also be restricted by the necessity to maintain appropriate capital levels.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses reflects our assessment and estimate of the risks associated with extending credit and our evaluation of the quality of the loan portfolio. We regularly analyze our loan portfolio in an effort to establish an allowance that we believe will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, we review the size, quality and risk of loans in the portfolio. We also consider such factors as:
|
|
|
|
•
|
our loan loss experience;
|
|
|
|
|
•
|
the status and amount of past due and non-performing assets;
|
|
|
|
|
•
|
underlying estimated values of collateral securing loans;
|
|
|
|
|
•
|
current and anticipated economic conditions; and
|
|
|
|
|
•
|
other factors which we believe affect the allowance for potential credit losses.
|
The allowance is composed of two primary components: (1) specific impairments for substandard/nonaccrual loans and leases and (2) general allocations for classified loan pools, including special mention and substandard/nonaccrual loans, as well as general allocations for the remaining pools of loans. We accumulate pools based on the underlying classification of the collateral. Each pool is assigned a loss severity rate based on historical loss experience and various qualitative and environmental factors, including, but not limited to, credit quality and economic conditions.
The following loan portfolio segments have been identified: (1) Real estate: Residential 1-4 family, (2) Real estate: Commercial, (3) Real estate: Construction, (4) Real estate: Multi-family and farmland, (5) Commercial, (6) Consumer, (7) Leases and (8) Other. We evaluate the risks associated with these segments based upon specific characteristics associated with the loan segments. The risk associated with the Real estate: Construction portfolio is most directly tied to the probability of declines in value of the residential and commercial real estate in our market area and secondarily to the financial capacity of the borrower. The risk associated with the Real estate: Commercial portfolio is most directly tied to the lease rates and occupancy rates for commercial real estate in our market area and secondarily to the financial capacity of the borrower. The other portfolio segments have various risk characteristics, including, but not limited to: the borrower’s cash flow, the value of the underlying collateral, and the capacity of guarantors.
An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan and lease losses is prepared jointly by our accounting and credit administration departments and presented to our Board of Directors or the Directors’ Loan Committee on at least a quarterly basis. Based on our analysis, we may determine that our future provision expense needs to increase or decrease in order for us to remain adequately reserved for probable, incurred loan losses. As stated earlier, we make this determination after considering both quantitative and qualitative factors under appropriate regulatory and accounting guidelines.
Our allowance for loan and lease losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance compared to a group of peer banks. During their routine examinations of banks, the regulators may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, their credit evaluations and allowance methodology differ materially from the bank’s methodology. We believe our allowance methodology is in compliance with regulatory inter-agency guidance as well as applicable GAAP guidance.
While it is our policy to charge-off all or a portion of certain loans in the current period when a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because the assessment of these risks includes assumptions regarding local and national economic conditions, our judgment as to the adequacy of the allowance may change from our original estimates as more information becomes available and events change.
Allowance—Loan Pools
As indicated in the
Allowance—Overview
above, we analyze our allowance by segregating our portfolio into two primary categories: impaired loans and non-impaired loans. Impaired loans are individually evaluated, as further discussed below. Non-impaired loans are segregated first by loan risk rating and then into homogeneous pools based on loan type, collateral or purpose of proceeds. We believe our loan pools conform to regulatory and accounting guidelines.
Impaired loans generally include those loan relationships in excess of $500 thousand with a risk rating of substandard/nonaccrual or doubtful. For these loans, we determine the impairment based upon one of the following methods: (1) discounted cash flows, (2) observable market pricing or (3) the fair value of the collateral. The amount of the estimated loss, if any, is then specifically reserved in a separate component of the allowance unless the relationship is considered collateral dependent, in which case the estimated loss is charged-off in the current period.
For non-impaired loans, we first segregate special mention and non-impaired substandard loans into two distinct pools. All remaining loans are further segregated into homogeneous pools based on loan type, collateral or purpose of proceeds. Each of these pools is evaluated individually and is assigned a loss factor based on our best estimate of the loss that potentially could be realized in that pool of loans. The loss factor is the sum of an objectively calculated historical loss percentage and a subjectively calculated risk percentage. The actual annual historical loss factor is typically a weighted average of each period’s loss. For the historical loss factor, we utilize a migration loss analysis. Each period may be assigned a different weight depending on certain trends and circumstances. The subjectively calculated risk percentage is the sum of eight qualitative and environmental risk categories. These categories are evaluated separately for each pool. The eight risk categories are: (1) underlying collateral value, (2) lending practices and policies, (3) local and national economies, (4) portfolio volume and nature, (5) staff experience, (6) credit quality, (7) loan review and (8) competition, regulatory and legal issues.
Allowance—Loan Risk Ratings
A consistent and appropriate loan risk rating methodology is a critical component of the allowance. We classify loans as: pass, special mention, substandard/impaired, substandard/non-impaired, doubtful or loss. The following describes our loan classifications and the various risk indicators associated with each risk rating.
A pass rating is assigned to those loans that are performing as contractually agreed and do not exhibit the characteristics of the criticized and classified risk ratings as defined below. Pass loan pools do not include the unfunded portions of binding commitments to lend, standby letters of credit, deposit secured loans or mortgage loans originated with commitments to sell in the secondary market. Loans secured by segregated deposits held by FSGBank are not required to have an allowance reserve, nor are originated held-for-sale mortgage loans pending sale in the secondary market.
A special mention loan risk rating is considered criticized but is not considered as severe as a classified loan risk rating. Special mention loans contain one or more potential weakness(es), which if not corrected, could result in an unacceptable increase in credit risk at some future date. These loans may be characterized by the following risks and/or trends:
Loans to Businesses:
|
|
|
|
•
|
Downward trend in sales, profit levels and margins
|
|
|
|
|
•
|
Impaired working capital position compared to industry
|
|
|
|
|
•
|
Cash flow strained in order to meet debt repayment schedule
|
|
|
|
|
•
|
Technical defaults due to noncompliance with financial covenants
|
|
|
|
|
•
|
Recurring trade payable slowness
|
|
|
|
|
•
|
High leverage compared to industry average with shrinking equity cushion
|
|
|
|
|
•
|
Questionable abilities of management
|
|
|
|
|
•
|
Weak industry conditions
|
|
|
|
|
•
|
Inadequate or outdated financial statements
|
Loans to Businesses or Individuals:
|
|
|
|
•
|
Loan delinquencies and overdrafts may occur
|
|
|
|
|
•
|
Original source of repayment questionable
|
|
|
|
|
•
|
Documentation deficiencies may not be easily correctable
|
|
|
|
|
•
|
Loan may need to be restructured
|
|
|
|
|
•
|
Collateral or guarantor offers adequate protection
|
|
|
|
|
•
|
Unsecured debt to tangible net worth is excessive
|
A substandard loan risk rating is characterized as having specifically identified weaknesses and deficiencies typically resulting from severe adverse trends of a financial, economic, or managerial nature, and may warrant non-accrual status. Substandard loans have a greater likelihood of loss and may require a protracted work-out plan. Substandard/impaired loans are relationships in excess of $500 thousand and are individually reviewed. In addition to the factors listed for special mention loans, substandard loans may be characterized by the following risks and/or trends:
Loans to Businesses:
|
|
|
|
•
|
Sustained losses that have severely eroded equity and cash flows
|
|
|
|
|
•
|
Concentration in illiquid assets
|
|
|
|
|
•
|
Serious management problems or internal fraud
|
|
|
|
|
•
|
Chronic trade payable slowness; may be placed on COD or collection by trade creditor
|
|
|
|
|
•
|
Inability to access other funding sources
|
|
|
|
|
•
|
Financial statements with adverse opinion or disclaimer; may be received late
|
|
|
|
|
•
|
Insufficient documented cash flows to meet contractual debt service requirements
|
Loans to Businesses or Individuals:
|
|
|
|
•
|
Chronic or severe delinquency or has met the retail classification standards which is generally past dues greater than 90 days
|
|
|
|
|
•
|
Likelihood of bankruptcy exists
|
|
|
|
|
•
|
Serious documentation deficiencies
|
|
|
|
|
•
|
Reliance on secondary sources of repayment which are presently considered adequate
|
|
|
|
|
•
|
Litigation may have been filed against the borrower
|
Loans with a risk rating of doubtful are individually analyzed to determine our best estimate of the loss based on the most recent assessment of all available sources of repayment. Doubtful loans are considered impaired and placed on nonaccrual. For
doubtful loans, the collection or liquidation in full of principal and/or interest is highly questionable or improbable. We estimate the specific potential loss based upon an individual analysis of the relationship risks, the borrower’s cash flow, the borrower’s management and any underlying secondary sources of repayment. The amount of the estimated loss, if any, is then either specifically reserved in a separate component of the allowance or charged-off. In addition to the characteristics listed for substandard loans, the following characteristics apply to doubtful loans:
Loans to Businesses:
|
|
|
|
•
|
Normal operations are severely diminished or have ceased
|
|
|
|
|
•
|
Seriously impaired cash flow
|
|
|
|
|
•
|
Numerous exceptions to loan agreement
|
|
|
|
|
•
|
Outside accountant questions entity’s survivability as a “going concern”
|
|
|
|
|
•
|
Financial statements may be received late, if at all
|
|
|
|
|
•
|
Material legal judgments filed
|
|
|
|
|
•
|
Collection of principal and interest is impaired
|
|
|
|
|
•
|
Collateral/Guarantor may offer inadequate protection
|
Loans to Businesses or Individuals:
|
|
|
|
•
|
Original repayment terms materially altered
|
|
|
|
|
•
|
Secondary source of repayment is inadequate
|
|
|
|
|
•
|
Asset liquidation may be in process with all efforts directed at debt retirement
|
|
|
|
|
•
|
Documentation deficiencies not correctable
|
The consistent application of the above loan risk rating methodology ensures we have the ability to track historical losses and appropriately estimate potential future losses in our allowance. Additionally, appropriate loan risk ratings assist us in allocating credit and special asset personnel in the most effective manner. Significant changes in loan risk ratings can have a material impact on the allowance and thus a material impact on our financial results by requiring significant increases or decreases in provision expense.
The following table presents an analysis of the changes in the allowance for loan and lease losses for the
three
months ended
March 31, 2014
and
2013
. The provision for loan and lease losses in the table below does not include our provision for losses on unfunded commitments of
$6 thousand
for the
three
month period ended
March 31, 2014
and
2013
, respectively. The reserve for unfunded commitments totaled
$288 thousand
and
$264 thousand
as of
March 31, 2014
and
2013
, respectively, and is included in other liabilities in the accompanying consolidated balance sheets.
A
NALYSIS
OF
C
HANGES
IN
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31,
|
|
|
2014
|
|
2013
|
|
|
(in thousands, except percentages)
|
|
Allowance for loan and lease losses –
|
|
|
|
|
Beginning of period
|
$
|
10,500
|
|
|
$
|
13,800
|
|
|
(Credit) Provision for loan and lease losses
|
(972
|
)
|
|
678
|
|
|
Sub-total
|
9,528
|
|
|
14,478
|
|
|
Charged-off loans:
|
|
|
|
|
Real estate – residential 1-4 family
|
194
|
|
|
651
|
|
|
Real estate – commercial
|
176
|
|
|
126
|
|
|
Real estate – construction
|
—
|
|
|
468
|
|
|
Real estate – multi-family and farmland
|
—
|
|
|
—
|
|
|
Commercial loans
|
6
|
|
|
25
|
|
|
Consumer installment and other loans
|
129
|
|
|
184
|
|
|
Leases, net of unearned income
|
29
|
|
|
—
|
|
|
Other loans
|
|
|
—
|
|
|
Total charged-off
|
534
|
|
|
1,454
|
|
|
Recoveries of charged-off loans:
|
|
|
|
|
Real estate – residential 1-4 family
|
82
|
|
|
111
|
|
|
Real estate – commercial
|
8
|
|
|
37
|
|
|
Real estate – construction
|
61
|
|
|
40
|
|
|
Real estate – multi-family and farmland
|
4
|
|
|
6
|
|
|
Commercial loans
|
17
|
|
|
122
|
|
|
Consumer installment and other loans
|
86
|
|
|
104
|
|
|
Leases, net of unearned income
|
47
|
|
|
55
|
|
|
Other
|
1
|
|
|
1
|
|
|
Total recoveries
|
306
|
|
|
476
|
|
|
Net charged-off loans
|
228
|
|
|
978
|
|
|
Decrease from transfer of loans held-for-investment to loans held-for-sale
|
(100
|
)
|
|
—
|
|
|
Allowance for loan and lease losses – end of period
|
$
|
9,200
|
|
|
$
|
13,500
|
|
|
Total loans – end of period
|
$
|
604,859
|
|
|
$
|
540,288
|
|
|
Average loans
|
$
|
604,298
|
|
|
$
|
554,204
|
|
|
Net loans charged-off to average loans, annualized
|
0.15
|
%
|
|
0.71
|
%
|
|
Provision (credit) for loan and lease losses to average loans, annualized
|
(0.64
|
)%
|
|
0.16
|
%
|
|
Allowance for loan and lease losses as a percentage of:
|
|
|
|
|
Period end loans
|
1.52
|
%
|
|
2.50
|
%
|
|
Nonperforming loans
|
133.70
|
%
|
|
117.76
|
%
|
The following table presents the allocation of the allowance for loan and lease losses for each respective loan category with the corresponding percentage of loans in each category to total loans. The comprehensive allowance analysis developed by our financial reporting and credit administration group enables us to allocate the allowance based on risk elements within the portfolio.
A
LLOCATION
OF
THE
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
As of December 31, 2013
|
|
As of March 31, 2013
|
|
|
Amount
|
|
Percent
of
Portfolio
1
|
|
Amount
|
|
Percent
of
Portfolio
1
|
|
Amount
|
|
Percent
of
Portfolio
1
|
|
|
(in thousands, except percentages)
|
|
Real estate – residential 1-4 family
|
$
|
3,423
|
|
|
24.4
|
%
|
|
$
|
4,063
|
|
|
31.2
|
%
|
|
$
|
5,979
|
|
|
33.6
|
%
|
|
Real estate – commercial
|
2,882
|
|
|
50.4
|
%
|
|
3,299
|
|
|
44.9
|
%
|
|
3,412
|
|
|
41.4
|
%
|
|
Real estate – construction
|
857
|
|
|
6.9
|
%
|
|
899
|
|
|
6.8
|
%
|
|
962
|
|
|
7.0
|
%
|
|
Real estate – multi-family and farmland
|
731
|
|
|
2.8
|
%
|
|
916
|
|
|
3.1
|
%
|
|
1,106
|
|
|
3.1
|
%
|
|
Commercial loans
|
754
|
|
|
10.6
|
%
|
|
970
|
|
|
9.5
|
%
|
|
1,818
|
|
|
11.5
|
%
|
|
Consumer installment loans
|
545
|
|
|
4.0
|
%
|
|
342
|
|
|
3.6
|
%
|
|
189
|
|
|
2.2
|
%
|
|
Leases, net of unearned income
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
11
|
|
|
0.1
|
%
|
|
Other
|
8
|
|
|
1.0
|
%
|
|
11
|
|
|
0.9
|
%
|
|
23
|
|
|
1.1
|
%
|
|
Total
|
$
|
9,200
|
|
|
100.0
|
%
|
|
$
|
10,500
|
|
|
100.0
|
%
|
|
$
|
13,500
|
|
|
100.0
|
%
|
__________________
1
Represents the percentage of loans in each category to total loans.
Throughout the economic downturn, the ratio of the allowance to total loans was significantly increased largely because of the level of nonperforming loans, the associated decline in real estate values, and the excessive level of charge-offs. These factors contributed to elevated levels of classified loans, which is a driving component of the allowance. Since March 31, 2013, we have experienced a significant decline in the level of non-performing loans. Nonperforming loans were
$6.9 million
,
$8.1 million
and
$11.5 million
at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. When comparing March 2014 to December 2013, non-performing loans decreased $1.2 million, and when compared to March 31, 2013, non-performing loans have decreased $4.6 million. During the fourth quarter of 2012, we identified approximately $36.2 million of under- and non-performing loans and recorded a $13.9 million charge-off to reduce the balance to the estimated net proceeds. These loans were sold in the first quarter of 2013. Our ratio of non-performing loans to total loans was
1.14%
as of
March 31, 2014
as compared to
1.39%
as of
December 31, 2013
and
2.12%
as of
March 31, 2013
. Additionally, our minimal level of net charge-offs during the first quarter of
2014
have further supported our improving asset quality. Specifically, net charges-offs for the
first
quarter of
2014
were only
$228 thousand
, or
0.15%
of average loans on an annualized basis compared to $978 thousand for the same period in 2013.
The combination of positive asset quality trends as well as low loss rates for the prior year resulted in a reduction in our allowance to loans ratio to
1.52%
, compared to 1.80% at December 31, 2013 and 2.50% at March 31, 2013. We anticipate that our allowance model may support a lower allowance to loans ratio with continuation of the current asset quality and charge-off trends, however, we may need to provide additional provision expense in the future due to the expected loan growth.
We utilize a risk rating system to evaluate the credit risk of our loan portfolio. We classify loans as: pass, special mention, substandard, doubtful or loss. We assign a pass rating to loans that are performing as contractually agreed and do not exhibit the characteristics of heightened credit risk. A special mention risk rating is assigned to loans that are criticized but not considered to have weaknesses as serious as those of a classified loan. Special mention loans generally contain one or more potential weaknesses, which if not corrected, could result in an unacceptable increase in the credit risk at some future date. A substandard risk rating is assigned to loans that have specifically identified weaknesses and deficiencies typically resulting from severe adverse trends of a financial, economic or managerial nature and may require nonaccrual status. Substandard loans have a greater likelihood of loss. We assign a doubtful risk rating to loans that the collection or liquidation in full of principal and/or interest is highly questionable or improbable. Any loans that are assigned a risk rating of loss are fully charged-off in the period of the downgrade.
We segregate substandard loans into two classifications based on our allowance methodology for impaired loans. An impaired loan is defined as a substandard loan relationship in excess of
$500 thousand
that is also on nonaccrual status. These relationships are individually reviewed on a quarterly basis to determine the required allowance or loss, as applicable.
For the allowance analysis, the primary categories are: pass, special mention, substandard – non-impaired, and substandard – impaired. Loans in the substandard and doubtful loan categories are combined and impaired loans are segregated from non-impaired loans.
The following tables present our internal risk rating by loan classification as utilized in the allowance analysis as of
March 31, 2014
,
December 31, 2013
and
March 31, 2013
:
As of March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special
Mention
|
|
Substandard –
Non-impaired
|
|
Substandard –
Impaired
|
|
Total
|
|
|
(in thousands)
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
$
|
130,545
|
|
|
$
|
8,705
|
|
|
$
|
7,653
|
|
|
$
|
769
|
|
|
$
|
147,672
|
|
|
Real estate: Commercial
|
290,717
|
|
|
3,552
|
|
|
8,429
|
|
|
1,863
|
|
|
304,561
|
|
|
Real estate: Construction
|
38,477
|
|
|
2,235
|
|
|
952
|
|
|
—
|
|
|
41,664
|
|
|
Real estate: Multi-family and farmland
|
16,056
|
|
|
160
|
|
|
684
|
|
|
—
|
|
|
16,900
|
|
|
Commercial
|
59,870
|
|
|
2,098
|
|
|
1,632
|
|
|
300
|
|
|
63,900
|
|
|
Consumer
|
23,765
|
|
|
65
|
|
|
278
|
|
|
—
|
|
|
24,108
|
|
|
Leases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
|
6,008
|
|
|
—
|
|
|
46
|
|
|
—
|
|
|
6,054
|
|
|
Total Loans
|
$
|
565,438
|
|
|
$
|
16,815
|
|
|
$
|
19,674
|
|
|
$
|
2,932
|
|
|
$
|
604,859
|
|
As of
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special
Mention
|
|
Substandard –
Non-impaired
|
|
Substandard –
Impaired
|
|
Total
|
|
|
(in thousands)
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
$
|
162,444
|
|
|
$
|
9,490
|
|
|
$
|
8,726
|
|
|
$
|
1,328
|
|
|
$
|
181,988
|
|
|
Real estate: Commercial
|
247,096
|
|
|
3,873
|
|
|
9,054
|
|
|
1,912
|
|
|
261,935
|
|
|
Real estate: Construction
|
37,565
|
|
|
1,596
|
|
|
775
|
|
|
—
|
|
|
39,936
|
|
|
Real estate: Multi-family and farmland
|
17,236
|
|
|
173
|
|
|
254
|
|
|
—
|
|
|
17,663
|
|
|
Commercial
|
49,799
|
|
|
2,798
|
|
|
2,420
|
|
|
320
|
|
|
55,337
|
|
|
Consumer
|
20,741
|
|
|
71
|
|
|
291
|
|
|
—
|
|
|
21,103
|
|
|
Leases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
|
5,088
|
|
|
1
|
|
|
46
|
|
|
—
|
|
|
5,135
|
|
|
Total Loans
|
$
|
539,969
|
|
|
$
|
18,002
|
|
|
$
|
21,566
|
|
|
$
|
3,560
|
|
|
$
|
583,097
|
|
As of
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special
Mention
|
|
Substandard –
Non-impaired
|
|
Substandard –
Impaired
|
|
Total
|
|
|
(in thousands)
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
$
|
158,350
|
|
|
$
|
8,544
|
|
|
$
|
13,575
|
|
|
$
|
1,155
|
|
|
$
|
181,624
|
|
|
Real estate: Commercial
|
211,196
|
|
|
4,006
|
|
|
7,825
|
|
|
710
|
|
|
223,737
|
|
|
Real estate: Construction
|
37,018
|
|
|
93
|
|
|
757
|
|
|
26
|
|
|
37,894
|
|
|
Real estate: Multi-family and farmland
|
14,609
|
|
|
818
|
|
|
1,103
|
|
|
—
|
|
|
16,530
|
|
|
Commercial
|
52,903
|
|
|
801
|
|
|
6,158
|
|
|
2,042
|
|
|
61,904
|
|
|
Consumer
|
11,386
|
|
|
105
|
|
|
389
|
|
|
—
|
|
|
11,880
|
|
|
Leases
|
—
|
|
|
88
|
|
|
—
|
|
|
285
|
|
|
373
|
|
|
Other
|
6,241
|
|
|
—
|
|
|
105
|
|
|
—
|
|
|
6,346
|
|
|
Total Loans
|
$
|
491,703
|
|
|
$
|
14,455
|
|
|
$
|
29,912
|
|
|
$
|
4,218
|
|
|
$
|
540,288
|
|
We classify a loan as impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans were
$2.9 million
at
March 31, 2014
,
$3.6 million
at
December 31, 2013
and
$4.2 million
at
March 31, 2013
. For impaired loans, any payments made by the borrower are generally applied directly to principal.
The allowance associated with specific impaired loans totaled
$560 thousand
as of
March 31, 2014
, compared to
$450 thousand
as of
December 31, 2013
and $57 thousand as of March 31, 2013. General reserves totaled
$8.6 million
as of
March 31, 2014
, compared to $10.0 million as of
December 31, 2013
and $13.4 million as of March 31, 2013. Specific reserves are based on our evaluation of each impaired relationship. The general reserve is determined by applying the historical loss factor and qualitative and environmental factors to the applicable loan pools. Our allowance as a percentage of total loans has decreased mostly due to a credit to our provision for loan and lease loses and a decrease in non-performing loans. The ratio of the general reserves to the applicable loan pools has declined from 2.48% as of March 31, 2013 and 1.71% as of
December 31, 2013
to 1.4% as of
March 31, 2014
.
We believe that the allowance for loan and lease losses as of
March 31, 2014
is sufficient to absorb probable incurred losses in the loan portfolio based on our assessment of the information available, including the results of extensive internal and independent reviews of our loan portfolio, as discussed in the Asset Quality and Non-Performing Assets section below. Our assessment involves uncertainty and judgment; therefore, the level of the allowance as compared to total loans may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examinations, may require additional charges to the provision for loan losses in future periods if the results of their reviews warrant.
Asset Quality and Non-Performing Assets
Asset Quality Strategic Initiatives
As of
March 31, 2014
, our loan portfolio was 61.7% of total assets. Over the past four years, we have implemented a number of significant strategies to further address our asset quality, with the sale of under- and non-performing loans being a significant component of those strategies. The implementation of these strategies has assisted our ability to reduce our total non-performing loans as of March 31, 2014 by $628 thousand, or 24.5%, and $1.3 million, or 30.5%, respectively, and reduce our total nonperforming assets as of March 31, 2014 by $1.1 million, or 13.8%, and $5.6 million, or 44.4%, respectively, when compared to December 31, 2013 and March 31, 2013. As of
March 31, 2014
, our asset quality is consistent with or better than our peer group. We believe our continued implementation of these and related strategies will enable us to show further improvement in our asset quality in
2014
.
The key initiatives we have implemented over the last four years include the restructuring and centralization of our credit administration department, outsourcing the marketing and sales process of our OREO properties, and adding depth and expertise in credit administration, at both the senior and the analyst levels.
Loan reviews are performed by a third party. The reviews are risk-based and historically targets
60% to 70%
of our portfolio over an 18-month cycle. During 2013, we achieved the
60% to 70%
review of our portfolio over a 12-month cycle, focusing on a risk-based approach. We anticipate similar coverage during 2014.
Asset Quality and Non-Performing Assets Analysis and Discussion
As of
March 31, 2014
, our allowance for loan and lease losses as a percentage of total loans was 1.52%, which is a decrease from the 1.80% as of
December 31, 2013
and
a decrease
from the 2.50% as of
March 31, 2013
. Net charge-offs as a percentage of average loans (annualized) decreased to
0.15%
for the
three
months ended
March 31, 2014
compared to 0.71% for the same period in
2013
. As of
March 31, 2014
, non-performing assets decreased to
$14.0 million
, or
1.42%
of total assets, from
$16.3 million
, or
1.67%
of total assets as of
December 31, 2013
and decreased from
$24.2 million
, or
2.32%
of total assets as of
March 31, 2013
. The allowance as a percentage of total non-performing loans was 133.7% as of
March 31, 2014
compared to 129.14% at December 31, 2013 and 117.8% at
March 31, 2013
.
We believe that overall asset quality will continue to improve. From
December 31, 2013
to
March 31, 2014
, we have seen positive results in improving our asset quality. Special mention loans decreased
$1.2 million
, or
6.6%
, from $18.0 million as of
December 31, 2013
to $16.8 million as of
March 31, 2014
. Comparing
March 31, 2014
to
March 31, 2013
, special mention loans increased by $2.4 million, or 16.3%. Substandard loans decreased $2.5 million, or 10.0%, from $25.1 million at December 31, 2013 to $22.6 million at March 31, 2014. Comparing
March 31, 2014
to
March 31, 2013
, substandard loans decreased by $11.5 million, or 33.8%. Even though our special mention loans are up slightly from previous periods, we believe based on the trends in substandard loans, there is minimal additional migration to nonperforming loans from the performing loans. We have also achieved steady reductions in other real estate owned. OREO declined by $1.1 million, or 13.8%, from
$8.2 million
as of
December 31, 2013
to $7.1 million as of
March 31, 2014
. Comparing
March 31, 2014
to
March 31, 2013
, OREO declined by $5.6 million, or 44.4%. This is a direct result of our increased efforts to liquidate and sell our OREO properties.
Nonperforming assets include nonaccrual loans, loans past-due over ninety days and still accruing, restructured loans, OREO and repossessed assets. We place loans on non-accrual status when we have concerns relating to our ability to collect the loan principal and interest, and generally when such loans are 90 days or more past due. The following table, which includes both loans held-for-sale and loans held-for-investment, presents our non-performing assets and related ratios.
NON-PERFORMING ASSETS BY TYPE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
|
March 31,
2013
|
|
|
(in thousands, except percentages)
|
|
Nonaccrual loans
|
$
|
6,027
|
|
|
$
|
7,203
|
|
|
$
|
10,194
|
|
|
Loans past due 90 days and still accruing
|
854
|
|
|
928
|
|
|
1,270
|
|
|
Total nonperforming loans, including loans 90 days and still accruing
|
$
|
6,881
|
|
|
$
|
8,131
|
|
|
$
|
11,464
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
$
|
7,067
|
|
|
$
|
8,201
|
|
|
$
|
12,706
|
|
|
Repossessed assets
|
8
|
|
|
12
|
|
|
16
|
|
|
Total nonperforming assets
|
$
|
13,956
|
|
|
$
|
16,344
|
|
|
$
|
24,186
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percentage of total loans
|
1.14
|
%
|
|
1.39
|
%
|
|
2.12
|
%
|
|
Nonperforming assets as a percentage of total assets
|
1.42
|
%
|
|
1.67
|
%
|
|
2.32
|
%
|
The following table provides the classifications for nonaccrual loans and other real estate owned as of
March 31, 2014
,
December 31, 2013
and
March 31, 2013
.
N
ON
-P
ERFORMING
A
SSETS
– C
LASSIFICATION
AND
N
UMBER
OF
U
NITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
|
March 31,
2013
|
|
|
Amount
|
|
Units
|
|
Amount
|
|
Units
|
|
Amount
|
|
Units
|
|
|
(dollar amounts in thousands)
|
|
Nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/development loans
|
$
|
364
|
|
|
3
|
|
|
$
|
365
|
|
|
3
|
|
|
$
|
462
|
|
|
6
|
|
|
Residential real estate loans
|
1,884
|
|
|
43
|
|
|
2,727
|
|
|
45
|
|
|
5,065
|
|
|
59
|
|
|
Commercial real estate loans
|
2,319
|
|
|
11
|
|
|
2,653
|
|
|
13
|
|
|
1,560
|
|
|
12
|
|
|
Commercial and industrial loans
|
1,201
|
|
|
17
|
|
|
1,137
|
|
|
17
|
|
|
2,484
|
|
|
21
|
|
|
Commercial leases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
313
|
|
|
28
|
|
|
Consumer and other loans
|
259
|
|
|
10
|
|
|
321
|
|
|
11
|
|
|
310
|
|
|
11
|
|
|
Total
|
$
|
6,027
|
|
|
84
|
|
|
$
|
7,203
|
|
|
89
|
|
|
$
|
10,194
|
|
|
137
|
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/development loans
|
$
|
3,321
|
|
|
194
|
|
|
$
|
3,806
|
|
|
242
|
|
|
$
|
5,391
|
|
|
241
|
|
|
Residential real estate loans
|
1,219
|
|
|
21
|
|
|
1,905
|
|
|
50
|
|
|
1,830
|
|
|
30
|
|
|
Commercial real estate loans
|
2,221
|
|
|
16
|
|
|
2,490
|
|
|
30
|
|
|
4,372
|
|
|
24
|
|
|
Multi-family and farmland
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
840
|
|
|
2
|
|
|
Commercial and industrial loans
|
306
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
273
|
|
|
1
|
|
|
Total
|
$
|
7,067
|
|
|
232
|
|
|
$
|
8,201
|
|
|
322
|
|
|
$
|
12,706
|
|
|
298
|
|
Nonaccrual loans totaled
$6.0 million
,
$7.2 million
and
$10.2 million
as of
March 31, 2014
,
December 31, 2013
and
March 31, 2013
, respectively. Loans held-for-sale as of March 31, 2014, December 31, 2013 and March 31, 2013 did not include any non-accrual or loans past due ninety days and still accruing. We place loans on nonaccrual when we have concerns related to our ability to collect the loan principal and interest, and generally when loans are 90 or more days past due. As of
March 31, 2014
, we are not aware of any additional material loans that we have doubts as to the collectability of principal and interest that are not classified as nonaccrual. As previously described, we have individually reviewed each nonaccrual loan in excess of $500 thousand for possible impairment. We measure impairment by adjusting loans to either the present value of expected cash flows, the fair value of the collateral or observable market prices.
As of
March 31, 2014
, nonaccrual loans
decreased
by $1.2 million, or 16.3%, compared to December 31, 2013. Comparing
March 31, 2014
to
December 31, 2013
, nonaccrual residential real estate loans
decreased
by $843 thousand and commercial real estate loans
decreased
by $334 thousand. The decreases were primarily due to the loan sale that closed in February of 2013 as well as charge-offs and principal payments. We continue to actively pursue appropriate strategies to reduce the current level of nonaccrual loans.
OREO
decreased
$1.1 million
from
December 31, 2013
to
March 31, 2014
. As previously mentioned, we have outsourced the marketing and sales process of our OREO properties to market-leading real estate firms. During the
three months ended
March 31, 2014
, we sold 15 properties for $1.2 million. We expect continued OREO resolutions during 2014 due to marketing strategies and general stabilization in the real estate markets in our footprint.
Loans 90 days past due and still accruing decreased $74 thousand for the quarter ending March 31, 2014 when compared to December 31, 2013. As of
March 31, 2014
, the
$854 thousand
in loans 90 days past due and still accruing was composed of
$850 thousand
in residential real estate loans and $4 thousand of consumer loans.
Loans 90 days past due and still accruing were $928 thousand as of December 31, 2013. Of these past due loans as of December 31, 2013, residential real estate loans totaled $773 thousand, $68 thousand in commercial and industrial loans, $76 thousand in consumer loans and the remainder in other categories.
For the quarter ending March 31, 2014, loans 90 days past due and still accruing decreased $416 thousand when compared to the same period in 2013. As of March 31, 2013, the $1.3 million in loans 90 days past due and still accruing was composed of $369 thousand in residential real estate loans, $565 thousand in commercial real estate loans, $189 thousand in commercial loans, and the remainder in other categories.
Total non-performing assets as of the
first
quarter of
2014
were
$14.0 million
compared to
$16.3 million
at
December 31, 2013
and
$24.2 million
at
March 31, 2013
.
As of March 31, 2014, our asset quality ratios are consistent with or more favorable than our peer group. As previously stated, we monitor our asset quality against our peer group, as defined by all commercial banks with $1 billion to $3 billion in total assets as presented in the UBPR. The following table provides our asset quality ratios and our UBPR peer group ratios as of December 31, 2013, which is the latest available information.
N
ONPERFORMING
A
SSET
R
ATIOS
|
|
|
|
|
|
|
|
|
|
|
First Security
Group, Inc.
|
|
UBPR
Peer Group
|
|
Nonperforming loans
1
as a percentage of gross loans
|
1.14
|
%
|
|
1.61
|
%
|
|
Nonperforming loans
1
as a percentage of the allowance
|
74.79
|
%
|
|
91.79
|
%
|
|
Nonperforming loans
1
as a percentage of equity capital
|
8.13
|
%
|
|
9.17
|
%
|
|
Nonperforming loans
1
plus OREO as a percentage of gross loans plus OREO
|
2.28
|
%
|
|
2.31
|
%
|
__________________
1
Nonperforming loans are nonaccrual loans plus loans 90 days past due and still accruing
Investment Securities and Other Earning Assets
The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of our consolidated balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. Currently, our investments are classified as either available-for-sale or held-to-maturity. During the fourth quarter of 2013 and the first quarter of 2014 we sold approximately $57.0 million and $48.5 million of investments to redeploy the funds into loans. There may be additional sales of securities classified as available-for-sale in 2014 as deemed appropriate.
Available-for-sale securities totaled
$120.1 million
at
March 31, 2014
, $172.8 million at
December 31, 2013
and $258.2 million at
March 31, 2013
. Held-to-maturity securities totaled $131.8 million at March 31, 2014 and $132.6 million at December 31, 2013. The held-to-maturity securities were transferred from the available-for-sale securities in the third and fourth quarter of 2013. The transfer to the held-to-maturity classification was to minimize any further unrealized losses due to an increase in interest rates, which does not impact regulatory capital, but does impact total shareholders' equity and book value. We maintain a level of securities to provide an appropriate level of liquidity and to provide a proper balance to our interest rate and credit risk in our loan portfolio. The decrease in securities of $53.5 million at March 31, 2014 from December 31, 2013, reflects the sale of securities noted above. At
March 31, 2014
, December 31, 2013 and March 31, 2013, the available-for-sale securities portfolio had gross unrealized gains of approximately $1.1 million, $2.0 million and $4.5 million, and gross unrealized losses of approximately $1.5 million, $2.7 million and $569 thousand, respectively. At March 31, 2014 and December 31, 2013, the held-to maturity securities had gross unrecognized gains of approximately $1.6 million and $656 thousand and gross unrecognized losses of approximately $710 thousand and $1.1 million, respectively. Our securities portfolio at
March 31, 2014
consisted of tax-exempt municipal securities, federal agency bonds, federal agency issued Real Estate Mortgage Investment Conduits (REMICs), federal agency issued pools, collateralized loan obligations and corporate bonds.
The following tables provides the amortized cost of our available-for-sale and held-to-maturity securities by their stated maturities (this maturity schedule excludes security prepayment and call features), as well as the tax equivalent yields for each maturity range.
M
ATURITY
OF
AFS I
NVESTMENT
S
ECURITIES
– A
MORTIZED
C
OST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than One
Year
|
|
One to
Five
Years
|
|
Five to
Ten
Years
|
|
More Than
Ten Years
|
|
Totals
|
|
|
(in thousands, except percentages)
|
|
Municipal - tax exempt
|
$
|
1,410
|
|
|
$
|
10,468
|
|
|
$
|
3,727
|
|
|
$
|
3,466
|
|
|
$
|
19,071
|
|
|
Municipal - taxable
|
197
|
|
|
639
|
|
|
222
|
|
|
541
|
|
|
1,599
|
|
|
Agency bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Agency issued REMICs
|
533
|
|
|
29,321
|
|
|
5,238
|
|
|
—
|
|
|
35,092
|
|
|
Agency issued mortgage pools
|
—
|
|
|
28,485
|
|
|
14,874
|
|
|
—
|
|
|
43,359
|
|
|
Other
|
—
|
|
|
4,425
|
|
|
16,934
|
|
|
—
|
|
|
21,359
|
|
|
Total
|
$
|
2,140
|
|
|
$
|
73,338
|
|
|
$
|
40,995
|
|
|
$
|
4,007
|
|
|
$
|
120,480
|
|
|
Tax Equivalent Yield
|
3.14
|
%
|
|
2.29
|
%
|
|
1.95
|
%
|
|
2.75
|
%
|
|
2.22
|
%
|
M
ATURITY
OF
HTM I
NVESTMENT
S
ECURITIES
– A
MORTIZED
C
OST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than One
Year
|
|
One to
Five
Years
|
|
Five to
Ten
Years
|
|
More Than
Ten Years
|
|
Totals
|
|
|
(in thousands, except percentages)
|
|
Municipal - tax exempt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,314
|
|
|
$
|
8,314
|
|
|
Municipal - taxable
|
—
|
|
|
—
|
|
|
14,299
|
|
|
4,478
|
|
|
18,777
|
|
|
Agency bonds
|
—
|
|
|
10,042
|
|
|
45,531
|
|
|
8,253
|
|
|
63,826
|
|
|
Agency issued REMICs
|
—
|
|
|
24,811
|
|
|
2,557
|
|
|
—
|
|
|
27,368
|
|
|
Agency issued mortgage pools
|
—
|
|
|
1,741
|
|
|
2,265
|
|
|
9,528
|
|
|
13,534
|
|
|
Total
|
$
|
—
|
|
|
$
|
36,594
|
|
|
$
|
64,652
|
|
|
$
|
30,573
|
|
|
$
|
131,819
|
|
|
Tax Equivalent Yield
|
—
|
%
|
|
1.59
|
%
|
|
1.82
|
%
|
|
2.65
|
%
|
|
1.94
|
%
|
We currently have the ability and intent to hold our available-for-sale investment securities to maturity. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. All securities held are historically traded in liquid markets, except for one bond, which is valued utilizing Level 3 inputs. The Level 3 security was a pooled trust preferred security with a book value of
$61 thousand
.
As of
March 31, 2014
, we performed an impairment assessment of the available-for-sale securities in the portfolio and the held-to-maturity portfolio that had an unrealized losses to determine whether the decline in the fair value of these securities below their cost was other-than-temporary. Under authoritative accounting guidance, impairment is considered other-than-temporary if any of the following conditions exists: (1) we intend to sell the security, (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (3) we do not expect to recover the security’s entire amortized cost basis, even if we do not intend to sell. Additionally, accounting guidance requires that for impaired available-for-sale securities that we do not intend to sell and/or that it is not more-likely-than-not that we will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. Losses related to held-to-maturity securities are not recorded, as these securities are carried at their amortized cost. If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the individual available-for-sale or held-to-maturity security is written down to fair value, which then becomes the new cost basis. The new cost basis would not be adjusted in future periods for subsequent recoveries in fair value, if any.
In evaluating the recovery of the entire amortized cost basis, we consider factors such as (1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or deferrals of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.
As of
March 31, 2014
, gross unrealized losses in our available-for-sale portfolio totaled
$1.5 million
, compared to
$2.6 million
as of
December 31, 2013
and
$569 thousand
as of
March 31, 2013
. As of
March 31, 2014
, gross unrecognized losses in our held-to-maturity portfolio totaled
$710 thousand
compared to
$1.1 million
as of
December 31, 2013
. As of
March 31, 2014
, the available-for-sale securities unrealized losses in mortgage-backed securities (consisting of
twenty-three
securities), municipals (consisting of
nine
securities) and the held-to-maturity unrecognized losses in mortgage-backed securities (consisting of
twelve
securities), municipals (consisting of
two
securities) and federal agencies (consisting of
seventeen
securities) are primarily due to widening credit spreads and changes in interest rates subsequent to purchase. Between
March 31, 2013
and
March 31, 2014
, the rate on the 10-year U.S. Treasury increased from approximately
1.87%
to
2.73%
. As this represented a substantive increase in interest rates, the market valuation of our securities adjusted accordingly. The unrealized loss in other available-for-sale securities relates to
nine
corporate notes and
one
pooled trust preferred security. The unrealized loss in the corporate notes is primarily due to changes in interest rates subsequent to purchase. The unrealized loss in the pooled trust preferred security is primarily due to widening credit spreads subsequent to purchase and a lack of demand for trust preferred securities. We do not intend to sell the available-for-sale investments with unrealized losses and it is not more likely than not that we will be required to sell the available-for-sale investments before recovery of their amortized cost basis, which may be maturity. Based on results of our impairment assessment, the unrealized losses related to the available-for-sale securities and the unrecognized losses related to the held-to-maturity securities at
March 31, 2014
are considered temporary.
As of
March 31, 2014
and
December 31, 2013
, we identified approximately
$11.3 million
of collateralized loan obligations ("CLOs") within our investment security portfolio that may be impacted by the Volcker Rule. If these securities are deemed to be prohibited bank investments, we would have to sell the securities prior to the compliance date of
July 21, 2017
. At this time, we continue to evaluate the additional regulatory guidance on the subject as well as the specific terms of the CLOs in our portfolio to determine whether such CLOs will remain permitted investments. The unrealized loss as of
March 31, 2014
for the CLOs totaled
$78 thousand
.
As of
March 31, 2014
, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 5% of our shareholders’ equity. The following table presents the amortized cost and market value of the securities from each such issuer as of
March 31, 2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Market
Value
|
|
|
(in thousands)
|
|
Federal National Mortgage Association (FNMA)
|
$
|
60,652
|
|
|
$
|
59,749
|
|
|
Federal Home Loan Mortgage Corporation (FHLMC)
|
$
|
26,928
|
|
|
$
|
26,846
|
|
|
Government National Mortgage Association (GNMA)
|
$
|
33,549
|
|
|
$
|
32,675
|
|
We held no federal funds sold as of
March 31, 2014
,
December 31, 2013
or
March 31, 2013
. As of
March 31, 2014
, we held
$11.5 million
in interest bearing deposits, primarily at the Federal Reserve Bank of Atlanta, compared to
$10.1 million
at
December 31, 2013
and
$157.9 million
as of
March 31, 2013
. The yield on our account at the Federal Reserve Bank is approximately 25 basis points.
As of
March 31, 2014
, we held approximately $3.0 million in certificates of deposit at FDIC insured financial institutions. At
March 31, 2014
, we held
$28.6 million
in bank-owned life insurance, compared to $28.3 million at
December 31, 2013
and
$27.8 million
at
March 31, 2013
.
Deposits and Other Borrowings
As of
March 31, 2014
, total deposits decreased by
1.8%
(7.2% annualized) from
December 31, 2013
and decreased by
15.0%
from
March 31, 2013
, principally because of planned reductions in brokered deposits and reductions in our retail and jumbo certificates of deposit. Excluding brokered deposits, our deposits decreased by
1.7%
(6.6% annualized) from
December 31, 2013
and decreased
9.6%
from
March 31, 2013
. In the first
three
months of
2014
, noninterest bearing demand and interest bearing demand deposits increased slightly by 4.0% and 5.2%, respectively, compared to December 31, 2013. Retail and jumbo certificates of deposit had the biggest decreases as of March 31, 2014 of 5.6% and 7.5%, respectively. We define our core deposits to include interest bearing and noninterest bearing demand deposits, savings and money market accounts, as well as retail certificates of deposit with denominations less than $100,000. Core deposits decreased by $1.4 million, or 0.23% (1.0% annualized), from December 31, 2013. We consider our retail certificates of deposit to be a stable
source of funding because they are in-market, relationship-oriented deposits. Core deposit growth is an important tenet of our business strategy.
Prior to the termination of the Bank's Order on March 10, 2014, the presence of a capital requirement restricted the rates that we could offer on deposit products. Currently, we have no restrictions on the rates that we can offer, although we believe that we can raise sufficient low-cost deposits without pricing above the prevailing market rates
Brokered certificates of deposits decreased $67.2 million from
March 31, 2013
to
March 31, 2014
and decreased $2.5 million from December 31, 2013 to March 31, 2014 due to scheduled and called maturities. In addition to brokered certificates of deposits, we are a member bank of the Certificate of Deposit Account Registry Service (CDARS) network. CDARS is a network of banks that allows customers’ CDs to receive full FDIC insurance of up to $50 million. Additionally, members have the opportunity to purchase or sell one-way time deposits. As of
March 31, 2014
, our CDARS balance consists of $375 thousand in purchased time deposits and no reciprocal customer accounts.
Brokered deposits at
March 31, 2014
,
December 31, 2013
and
March 31, 2013
were as follows:
B
ROKERED
D
EPOSITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
|
March 31,
2013
|
|
|
(in thousands)
|
|
Brokered certificates of deposits
|
$
|
72,184
|
|
|
$
|
74,688
|
|
|
$
|
139,343
|
|
|
CDARS®
|
375
|
|
|
374
|
|
|
372
|
|
|
Total
|
$
|
72,559
|
|
|
$
|
75,062
|
|
|
$
|
139,715
|
|
Prior to the termination of the Bank's Order on March 10, 2014, and as discussed in Note 2 of our consolidated financial statements, the presence of a capital requirement in our Order previously restricted our ability to accept, renew, or roll over brokered deposits without prior approval of the FDIC. The excess liquidity over the last two years was in part to ensure we have adequate funding to meet our short-term contractual obligations as long as the Order remained in place. While our desire is to fund loan growth with customer deposits, we anticipate supplementing with a certain level of brokered deposits or other wholesale funding. The table below is a maturity schedule for our brokered CDs as of
March 31, 2014
.
B
ROKERED
D
EPOSITS
–
BY
M
ATURITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than three
months
|
|
Three
months
to six
months
|
|
Six
months
to twelve
months
|
|
One to
two
years
|
|
Greater
than two
years
|
|
|
(in thousands)
|
|
Brokered certificates of deposit
|
$
|
6,472
|
|
|
$
|
27,856
|
|
|
$
|
17,182
|
|
|
$
|
10,799
|
|
|
$
|
9,875
|
|
|
CDARS®
|
—
|
|
|
—
|
|
|
375
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
6,472
|
|
|
$
|
27,856
|
|
|
$
|
17,557
|
|
|
$
|
10,799
|
|
|
$
|
9,875
|
|
As of
March 31, 2014
,
December 31, 2013
and
March 31, 2013
, we had
no
Federal funds purchased.
Securities sold under agreements to repurchase with commercial checking customers were
$12.7 million
as of
March 31, 2014
, compared to
$12.5 million
and $13.0 million as of
December 31, 2013
and
March 31, 2013
, respectively.
As a member of the Federal Home Loan Bank of Cincinnati ("FHLB"), we have the ability to acquire short and long-term advances through a blanket agreement secured by our unencumbered qualifying 1-4 family first mortgage loans and by pledging investment securities or individual, qualified loans, subject to approval of the FHLB. At March 31, 2014 and December 31, 2013, we had FHLB advances of $37.6 million and $20.0 million, respectively. We had no FHLB advances as of March 31, 2013.
The terms of the FHLB advance as of March 31, 2104 and December 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2014
|
|
Maturity Year
|
|
Origination Date
|
|
Type
|
|
Principal
(in thousands)
|
|
Rate
|
|
Maturity
|
|
2014
|
|
3/24/2014
|
|
FHLB fixed rate advance
|
|
$
|
17,300
|
|
|
0.12
|
%
|
|
4/3/2014
|
|
2014
|
|
3/31/2014
|
|
FHLB fixed rate advance
|
|
20,285
|
|
|
0.12
|
%
|
|
4/7/2014
|
|
|
|
|
|
|
|
$
|
37,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
Maturity Year
|
|
Origination Date
|
|
Type
|
|
Principal
(in thousands)
|
|
Rate
|
|
Maturity
|
|
2014
|
|
12/19/2013
|
|
FHLB fixed rate advance
|
|
$
|
20,000
|
|
|
0.15
|
%
|
|
1/17/2014
|
Liquidity
Liquidity refers to our ability to adjust future cash flows to meet the needs of our daily operations. We rely primarily on the operations and cash balance of FSGBank to fund the liquidity needs of our daily operations. Our cash balance on deposit with FSGBank, which totaled approximately $957 thousand as of
March 31, 2014
, is available for funding activities for which FSGBank will not receive direct benefit, such as shareholder relations and holding company operations. These funds should adequately meet our cash flow needs. As discussed in Note 2 to our consolidated financial statements, the Agreement with the Federal Reserve requires prior written authorization for any payment to First Security that reduces the equity of FSGBank, including management fees. If we determine that our cash flow needs will be satisfactorily met, we may deploy a portion of the funds into FSGBank.
The liquidity of FSGBank refers to the ability or financial flexibility to adjust its future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost effective basis. The primary sources of funds for FSGBank are cash generated by repayments of outstanding loans, interest payments on loans and new deposits. Additional liquidity is available from the maturity and earnings on securities and liquid assets, as well as the ability to liquidate available-for-sale securities.
As of
March 31, 2014
, our interest bearing account at the Federal Reserve Bank of Atlanta totaled approximately $8.4 million. This liquidity is available to fund our contractual obligations and prudent investment opportunities.
As of March 31, 2014, FSGBank had $178.2 million of total borrowing capacity at FHLB with all 1-4 family residential mortgages and investment securities pledged as collateral as well as the amount of FHLB stock we own. The available borrowing capacity at December 31, 2013 totaled $125.2. FSGBank had no borrowing capacity with the FHLB as of March 31, 2013.
Another source of funding is loan participations sold to other commercial banks (in which we retain the servicing rights). As of quarter-end, we had approximately $2.4 million in loan participations sold. FSGBank may sell loan participations as a source of liquidity. An additional source of short-term funding would be to pledge investment securities against a line of credit at a commercial bank. As of quarter-end, FSGBank had
$159.5 million
in investment securities pledged for repurchase agreements, treasury tax and loan deposits, and public-fund deposits attained in the ordinary course of business. As of
March 31, 2014
, our unpledged available-for-sale and held-to-maturity securities totaled $48.4 million and 44.0 million, respectively.
Additionally, we had a $34.5 million in unsecured fed lines of credit as of March 31, 2014, that were fully available.
Historically, we have utilized brokered deposits to provide an additional source of funding. As of
March 31, 2014
, we had
$72.2 million
in brokered CDs outstanding with a weighted average remaining life of approximately
11
months, a weighted average coupon rate of
2.78%
and a weighted average all-in cost (which includes fees paid to deposit brokers) of
2.78%
. Our CDARS product had
$375 thousand
at
March 31, 2014
, with a weighted average coupon rate of
2.70%
and a weighted average remaining life of approximately
7
months. Our certificates of deposit greater than $100 thousand were generated in our communities and are considered relatively stable. Prior to the termination of the Bank's Order, we were restricted in our ability to accept, renew or roll over brokered deposits without prior approval of the FDIC.
Management believes that our liquidity sources are adequate to meet our current operating needs. We continue to study our contingency funding plans and update them as needed paying particular attention to the sensitivity of our liquidity and deposit base to positive and negative changes in our asset quality.
We also have contractual cash obligations and commitments, which include certificates of deposit, other borrowings, operating leases and loan commitments. Unfunded loan commitments and standby letters of credit totaled
$133.6 million
at
March 31, 2014
. The following table illustrates our significant contractual obligations at
March 31, 2014
by future payment period.
C
ONTRACTUAL
O
BLIGATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
One Year
|
|
One to
Three
Years
|
|
Three to
Five
Years
|
|
More
than
Five
Years
|
|
Total
|
|
|
|
(in thousands)
|
|
Certificates of deposit
1
|
|
$
|
244,448
|
|
|
$
|
64,295
|
|
|
$
|
5,953
|
|
|
$
|
—
|
|
|
$
|
314,696
|
|
|
Brokered certificates of deposit
1
|
|
51,510
|
|
|
15,938
|
|
|
4,736
|
|
|
—
|
|
|
72,184
|
|
|
CDARS®
1
|
|
375
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
375
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
2
|
|
12,661
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,661
|
|
|
FHLB borrowings
3
|
|
37,585
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,585
|
|
|
Operating lease obligations
3
|
|
832
|
|
|
2,183
|
|
|
1,524
|
|
|
2,215
|
|
|
6,754
|
|
|
Total
|
|
$
|
347,411
|
|
|
$
|
82,416
|
|
|
$
|
12,213
|
|
|
$
|
2,215
|
|
|
$
|
444,255
|
|
__________________
|
|
|
|
1.
|
Time deposits give customers rights to early withdrawal which may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal. For more information regarding certificates of deposit, see “Deposits and Other Borrowings.”
|
|
|
|
|
2.
|
We expect securities repurchase agreements to be re-issued and, as such, do not necessarily represent an immediate need for cash.
|
|
|
|
|
3.
|
Operating lease obligations include existing and future property and equipment non-cancelable lease commitments.
|
Net cash used by operations during the first
three
months of
2014
totaled
$2.5 million
compared to net cash
used in
operations of
$4.6 million
for the same period in
2013
. The decrease in net cash used by operations was primarily due to the change in other assets and liabilities. Net cash
used in
investing activities totaled $1.2 million for the three months ended March 31, 2014, compared to net cash
provided by
investing activities of
$16.0 million
for the same period in
2013
. The decrease in cash used is primarily associated with proceeds in the prior period of $22.3 million related to the sale of loans to a third party. Net cash
provided by
financing activities was
$2.3 million
for the first
three
months of
2014
compared to net cash
used in
financing activities of
$16.6 million
in the comparable
2013
period. The
increase
in cash
provided by
financing activities is primarily related to the increase in FHLB borrowings.
Off-Balance Sheet Arrangements
We are party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
Our exposure to credit loss is represented by the contractual amount of these commitments. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.
The following table discloses our maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
March 31, 2014
|
|
December 31, 2013
|
|
March 31, 2013
|
|
|
(in thousands)
|
|
Commitments to extend credit - fixed rate
|
$
|
38,163
|
|
|
$
|
36,273
|
|
|
$
|
17,319
|
|
|
Commitments to extend credit - variable rate
|
92,082
|
|
|
94,857
|
|
|
90,322
|
|
|
Total Commitments to extend credit
|
$
|
130,245
|
|
|
$
|
131,130
|
|
|
$
|
107,641
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
$
|
3,389
|
|
|
$
|
3,208
|
|
|
$
|
2,761
|
|
Commitments to extend credit are agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, we obtain on an extension of credit is based on our credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The OCC and the Federal Reserve, the primary federal regulators for FSGBank and First Security, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. Prior to the termination of the Consent Order on March 10, 2014, and as described in Note 2 to our consolidated financial statements, the OCC previously required FSGBank to achieve and maintain total capital to risk adjusted assets of at least 13% and a leverage ratio of at least 9%. We believe that the elevated ratios were required due to the risk profile of FSGBank when the Order was issued in April 2010. We believe our current capital levels are sufficient and appropriate for our risk profile and asset level. Subsequent to the Recapitalization, we have improved our leverage ratio through reductions in our balance sheet.
On April 11, 2013, we completed a restructuring of the Company's Preferred Stock with the Treasury by issuing $14.9 million of new common stock for $1.50 per share for the full satisfaction of the Treasury's 2009 investment in the Company. Pursuant to the Exchange Agreement, as previously included in a Current Report on Form 8-K filed on February 26, 2013, we restructured the Company's Preferred Stock issued under the Capital Purchase Program by issuing new shares of common stock equal to 26.75% of the $33 million value of the Preferred Stock plus 100% of the accrued but unpaid dividends in exchange for the Preferred Stock, all accrued but unpaid dividends thereon, and the cancellation of stock warrants granted in connection with the CPP investment. Immediately after the issuance of the common stock to the Treasury, the Treasury sold all of the Company's common stock to investors previously identified by the Company at the same $1.50 per share price.
On April 12, 2013, we completed the issuance of an additional $76.2 million of new common stock in a private placement to accredited investors. The private placement was previously announced on a Current Report on Form 8-K filed on February 26, 2013, in which we announced the execution of definitive stock purchase agreements with institutional investors as part the Recapitalization. In total, we issued 60,735,000 shares of common stock at $1.50 per share for gross proceeds of $91.1 million. See Note 2 to our Consolidated Financial Statements for additional information.
On September 27, 2013, we completed the issuance of an additional $5.0 million of new common stock through the Rights Offering. The Rights Offering was previously announced on a Current Report on Form 8-K filed on February 26, 2013. Under the Rights Offering each Legacy Shareholder received one non-transferable subscription right to purchase two shares of our common stock at the subscription price of $1.50 per share for every one share of common stock owned by such Legacy Shareholder as of the record date of April 10, 2013. Additionally, each Legacy Shareholder that fully exercised such Legacy Shareholder's subscription rights had the ability to submit an over-subscription request to purchase additional shares of common stock, subject to certain limitations and subject to allotment under the Rights Offering. On September 27, 2013, we completed the Rights Offering issuing 3,329,234 shares of common stock for $1.50 per share for gross proceeds of approximately $5.0 million. We downstreamed the net proceeds to supplement the capital of FSGBank.
The following table compares the required capital ratios maintained by First Security and FSGBank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
FSGBank
Consent Order
(1)
|
|
Minimum
Capital Requirements to be "Well Capitalized"
|
|
Minimum Capital Requirements
|
First
Security
|
|
FSGBank
|
|
|
Tier 1 capital to risk adjusted assets
|
N/A
|
|
|
6.0
|
%
|
|
4.0
|
%
|
12.9
|
%
|
|
12.1
|
%
|
|
|
Total capital to risk adjusted assets
|
N/A
|
|
|
10.0
|
%
|
|
8.0
|
%
|
14.1
|
%
|
|
13.3
|
%
|
|
|
Leverage ratio
|
N/A
|
|
|
5.0
|
%
|
(2)
|
4.0
|
%
|
9.6
|
%
|
|
9.0
|
%
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk adjusted assets
|
N/A
|
|
|
6.0
|
%
|
|
4.0
|
%
|
13.6
|
%
|
|
12.8
|
%
|
(3)
|
|
Total capital to risk adjusted assets
|
13.0
|
%
|
|
10.0
|
%
|
|
8.0
|
%
|
14.9
|
%
|
|
14.1
|
%
|
(3)
|
|
Leverage ratio
|
9.0
|
%
|
|
5.0
|
%
|
(2)
|
4.0
|
%
|
9.4
|
%
|
|
8.7
|
%
|
(3)
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk adjusted assets
|
N/A
|
|
|
6.0
|
%
|
|
4.0
|
%
|
3.0
|
%
|
|
3.4
|
%
|
(3)
|
|
Total capital to risk adjusted assets
|
13.0
|
%
|
|
10.0
|
%
|
|
8.0
|
%
|
4.3
|
%
|
|
4.7
|
%
|
(3)
|
|
Leverage ratio
|
9.0
|
%
|
|
5.0
|
%
|
(2)
|
4.0
|
%
|
1.7
|
%
|
|
1.9
|
%
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The Order was terminated on March 10, 2014 and accordingly, FSGBank is no longer subject to the elevated capital requirements and is considered "well capitalized."
|
|
(2)
The Federal Reserve Board definition of well capitalized for bank holding companies does not include a leverage ratio component; accordingly, the leverage ratio requirement for well capitalized status only applies to FSGBank.
|
|
(3)
Effective March 10, 2014 with the termination of the Consent Order, FSGBank was considered well capitalized.
|
On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the Federal Reserve. The final rules implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
The final rules include new or increased risk-based capital requirements that will be phased in from 2015 to 2019. The rules add a new common equity Tier 1 capital to risk-weighted assets ratio minimum of 4.5%, increase the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, and decrease the Tier 2 capital that may be included in calculating total risk-based capital from 4.0% to 2.0%. The final rules also introduce a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and total risk-based capital requirements. The required minimum ratio of total capital to risk-weighted assets will remain 8.0% and the minimum leverage ratio will remain 4.0%. The new risk-based capital requirements (except for the capital conservation buffer) will become effective for the Company on January 1, 2015. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.
The following chart compares the risk-based capital ratios required under existing Federal Reserve rules to those prescribed under the new final rules described above:
|
|
|
|
|
|
|
|
|
Current Rules
|
|
Final Rules
|
|
Common Equity Tier 1
|
not present
|
|
4.5%
|
|
Tier 1
|
4.0%
|
|
6.0%
|
|
Total Risk-Based Capital
|
8.0%
|
|
8.0%
|
|
Common Equity Tier 1 Capital Conservation Buffer
|
not present
|
|
2.5%
|
The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital. The final rules also set forth certain changes for the calculation of risk-weighted assets that the Company will be required to implement beginning January 1, 2015.
In addition to the updated capital requirements, the final rules also contain revisions to the prompt corrective action framework. Beginning January 1, 2015, the minimum ratios for the Bank to be considered well-capitalized will be updated as follows:
|
|
|
|
|
|
|
|
|
Current Rules
|
|
Final Rules
|
|
Total Capital
|
10.0%
|
|
10.0%
|
|
Tier 1 Capital
|
6.0%
|
|
8.0%
|
|
Common Equity Tier 1 Capital
|
not present
|
|
6.5%
|
|
Leverage Ratio
|
5.0%
|
|
5.0%
|
Management is currently evaluating the provisions of the final rules and their expected impact on the Company. Based on the Company's current capital composition and levels, management does not presently anticipate that the final rules present a material risk to the Company's financial condition or results of operations.
EFFECTS OF GOVERNMENTAL POLICIES
We are affected by the policies of regulatory authorities, including the Federal Reserve Board and the OCC. An important function of the Federal Reserve Board is to regulate the national money supply.
Among the instruments of monetary policy used by the Federal Reserve Board are: purchases and sales of U.S. Government securities in the marketplace; changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve Board; and changes in the reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels and inflation.
The monetary policies of the Federal Reserve Board and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and in the money market, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels or loan demand or whether the changing economic conditions will have a positive or negative effect on operations and earnings.
Legislation from time to time is introduced in the United States Congress and the Tennessee General Assembly and other state legislatures, and regulations are proposed by the regulatory agencies that could affect our business. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which our business may be affected thereby.
Dodd-Frank Act
.
The bank regulatory landscape was dramatically changed by the Dodd-Frank Act, which was enacted on July 21, 2010 and which implements far-reaching regulatory reform. Its provisions include significant regulatory and compliance changes that are designed to improve the supervision, oversight, safety and soundness of the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the OCC and the FDIC.
Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry as a whole or on the Company’s and the Bank’s business, results of operations, and financial condition. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Company and Bank. Some of the rules that have been adopted to comply with the Dodd-Frank Act's mandates are discussed below.
Consumer Financial Protection Bureau (“CFPB”).
The Dodd-Frank Act created a new, independent federal agency, the CFPB, which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes
The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. Although FSGBank has less than $10 billion in assets, the impact of the formation of the CFPB has caused a ripple effect across all bank regulatory agencies, and placed a renewed focus on consumer protection and compliance efforts. For examples of this new authority, the CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for
the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
The CFPB has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending, and servicing practices. During 2012, the CFPB issued three proposed rulemakings covering loan origination and servicing requirements, which were finalized in January 2013, along with other rules on mortgages. The ability to repay and qualified mortgage standards rules, as well as the mortgage servicing rules, became effective in January 2014. The escrow and loan originator compensation rules became effective in June 2013. A final rule integrating disclosures required by the Truth in Lending Act and the Real Estate Settlement and Procedures Act became effective in January 2014. We continue to analyze the impact that such rules have on our business model, particularly with respect to our mortgage banking business.
UDAP and UDAAP.
Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act-the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce ("UDAP" or "FTC Act"). "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices" ("UDAAP"), which has been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.
Interchange Fees.
The Federal Reserve has issued final rules limiting the amount of any debit card interchange fee that an issuer may receive or charge with respect to electronic debit card transactions to be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.
Volcker Rule.
On December 10, 2013, the federal regulators adopted final regulations to implement the proprietary trading and private fund prohibitions of the Volcker Rule under the Dodd-Frank Act. Under the final regulations, which will become effective on April 1, 2014, banking entities are generally prohibited, subject to significant exceptions from: (i) short-term proprietary trading as principal in securities and other financial instruments, and (ii) sponsoring or acquiring or retaining an ownership interest in private equity and hedge funds. The Federal Reserve has granted an extension for compliance with the Volcker Rule until July 21, 2015. On April 7, 2014, the Federal Reserve Board announced that it is granting an additional two year extension until July, 21, 2017 for compliance with the Volcker Rule with respect to certain collateralized loan obligations. The Company is reviewing the impact of the Volcker Rule on its investment portfolio.
Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates or require the adoption of further implementing regulations and, therefore, their impact on the Company’s operations cannot be fully determined at this time.
Restrictions on Transactions with Affiliates
First Security and FSGBank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:
|
|
|
|
•
|
a bank’s loans or extensions of credit to affiliates;
|
|
|
|
|
•
|
a bank’s investment in affiliates;
|
|
|
|
|
•
|
assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
|
|
|
|
|
•
|
loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and
|
|
|
|
|
•
|
a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
|
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. We must also comply with other provisions designed to avoid the taking of low-quality assets.
First Security and FSGBank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.
FSGBank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders, and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features. Effective July 21, 2011, an insured depository institution is prohibited from engaging in asset purchases or sales transactions with its officers, directors or principal shareholders unless (1) the transaction is on market terms and (2) if the transaction represents greater than 10% of the capital and surplus of the bank, a majority of disinterested directors has approved the transaction.
Limitations on Senior Executive Compensation
In June of 2010, federal banking regulators issued guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking or undermine the safety and soundness of the organization. In connection with this guidance, the regulatory agencies announced that they will review incentive compensation arrangements as part of the regular, risk-focused supervisory process.
Regulatory authorities may also take enforcement action against a banking organization if its incentive compensation arrangement or related risk management, control, or governance processes pose a risk to the safety and soundness of the organization and the organization is not taking prompt and effective measures to correct the deficiencies. To ensure that incentive compensation arrangements do not undermine safety and soundness at insured depository institutions, the incentive compensation guidance sets forth the following key principles:
|
|
|
|
•
|
incentive compensation arrangements should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose the organization to imprudent risk;
|
|
|
|
|
•
|
incentive compensation arrangements should be compatible with effective controls and risk management; and
|
|
|
|
|
•
|
incentive compensation arrangements should be supported by strong corporate governance, including active and effective oversight by the board of directors.
|
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging potential changes to the structures, regulations and competitive relationships of financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
Effect of Governmental Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board, including its ongoing "Quantitative Easing" program, affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.
RECENT ACCOUNTING PRONOUNCEMENTS
The following items represent accounting changes that have been issued but are not currently effective. Refer to the Notes to our consolidated financial statements for accounting changes that became effective during the current periods.
In January 2014, the FASB issued Accounting Standards Update 2014-04, "Receivables - Troubled Debt Restructuring by Creditors." This update clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The update is effective for annual and interim periods within those annual periods, beginning after December 15, 2014. We do not believe this update will have a significant impact to our consolidated financial statements.