NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments that are in the opinion of First Farmers and Merchants
Corporations (the Corporation) management, necessary to fairly present the
financial position, results of operations and cash flows of the Corporation.
Those adjustments consist only of normal recurring adjustments.
The
accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosures normally required by accounting principles generally
accepted in the United States of America or those normally made in the
Registrants Annual Report on Form
10-K. Accordingly, the reader of this Quarterly Report on Form 10-Q should
refer to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2012 for further
information in this regard. The condensed consolidated balance sheet of the
Corporation as of December 31, 2012 has been derived from the audited
consolidated balance sheet of the Corporation as of that date. The results of
operations for the period are not necessarily indicative of the results to be
expected for the full year.
Reclassifications:
Certain reclassifications considered to be
immaterial have been made in the prior year condensed consolidated financial
statements to conform to current year presentation. These reclassifications
had no effect on net income.
NOTE 2 ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
BY COMPONENT
Amounts
reclassified from AOCI and the affected line items in the statements of income
during the periods ended March 31, 2013 and 2012, were as follows (dollars in
thousands):
|
Amounts Reclassified from AOCI
|
Affected Line Item in the
Statements of Income
|
|
|
|
March 31, 2013
|
|
March 31, 2012
|
Unrealized gains on available-for-sale securities
|
|
|
|
|
|
|
$
|
823
|
$
|
1,212
|
Realized gain on sale of securities
|
|
|
823
|
|
1,212
|
Total reclassified amount before
tax
|
|
|
(317)
|
|
(467)
|
Tax expense
|
|
$
|
506
|
$
|
745
|
Net reclassified amount
|
|
|
|
|
|
|
Amortization of defined benefit pension items
|
|
|
|
|
|
Actuarial losses
|
$
|
(47)
|
$
|
-
|
|
|
|
(47)
|
|
-
|
Total reclassified amount before tax
|
|
|
-
|
|
-
|
Tax benefit
|
|
$
|
(47)
|
$
|
-
|
Net reclassified amount
|
|
|
|
|
|
|
Total reclassifications out of AOCI
|
$
|
459
|
$
|
745
|
|
7
The
components of accumulated other comprehensive income, included in shareholders
equity, are as follows:
|
|
March 31, 2013
|
|
December 31, 2012
|
Net unrealized gains on available-for-sale
securities
|
$
|
2,275
|
$
|
5,747
|
|
|
|
|
|
Net actuarial loss on unfunded portion of
postretirement benefit obligation
|
|
2,873
|
|
$2,920
|
|
|
5,148
|
|
8,667
|
|
|
|
|
|
Tax effect
|
|
2,000
|
|
3,337
|
|
|
|
|
|
Accumulated other comprehensive income
|
$
|
3,148
|
$
|
5,330
|
NOTE 3 FAIR VALUE MEASUREMENTS
The fair value of an asset or liability is the price
that would be received to sell that asset or paid to transfer that liability in
an orderly transaction occurring in the principal market (or most advantageous
market in the absence of a principal market) for such asset or liability. Fair
value measurement must maximize the use of observable inputs and minimize the
use of unobservable inputs. In estimating fair value, the Corporation utilizes
valuation techniques that are consistent with the market approach, the income
approach and/or the cost approach. Such valuation techniques are consistently
applied. Inputs to valuation techniques include the assumptions that market
participants would use in pricing an asset or liability. Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurements and Disclosures (ASC Topic 820) establishes a fair
value hierarchy for valuation inputs that gives the highest priority to quoted
prices in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs. The fair value hierarchy is as follows:
-
Level 1 Inputs
- Unadjusted quoted prices
in active markets for identical assets or liabilities.
-
Level 2 Inputs
- Inputs other than quoted
prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. These might include quoted prices for
similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, market consensus,
prepayment speeds, credit risks, etc.) or inputs that are derived
principally from or corroborated by market data by correlation or other
means.
-
Level 3 Inputs
- Unobservable inputs for
determining the fair values of assets or liabilities that reflect an
entitys own assumptions about the assumptions that market participants
would use in pricing the assets or liabilities.
Transfers between levels of the fair value hierarchy
are recognized on the actual date of the event or circumstances that caused the
transfer, which generally coincides with the Corporations monthly and/or
quarterly valuation process.
Recurring Measurements
The following table summarizes
financial assets measured at fair value on a recurring basis as of March 31,
2013 and December 31, 2012, and by the level within the fair value hierarchy
utilized to measure fair value (dollars in thousands):
8
Assets measured at fair value on a recurring basis
as of March 31, 2013
|
|
|
Available-For-Sale Securities
|
Level 1
|
Level 2
|
Level 3
|
Total
|
U.S. Government agencies
|
$
|
-
|
$
|
157,676
|
$
|
-
|
$
|
157,676
|
U.S. Government sponsored agency mortgage backed
securities
|
-
|
151,940
|
-
|
151,940
|
States and political subdivisions
|
-
|
52,234
|
-
|
52,234
|
Corporate bonds
|
-
|
20,823
|
-
|
20,823
|
Total assets at fair value
|
$
|
-
|
$
|
382,673
|
$
|
-
|
$
|
382,673
|
Assets measured at fair value on a recurring basis
as of December 31, 2012
|
|
|
Available-For-Sale Securities
|
Level 1
|
Level 2
|
Level 3
|
Total
|
U.S. Government agencies
|
$
|
-
|
$
|
144,017
|
$
|
-
|
$
|
144,017
|
U.S. Government sponsored agency mortgage backed
securities
|
-
|
133,718
|
-
|
133,718
|
States and political subdivisions
|
-
|
50,579
|
-
|
50,579
|
Corporate bonds
|
-
|
17,404
|
-
|
17,404
|
Total assets at fair value
|
$
|
-
|
$
|
345,718
|
$
|
-
|
$
|
345,718
|
Below is a
description of the valuation methodologies and inputs used for assets measured
at fair value on a recurring basis and recognized in the accompanying balance
sheets, as well as the general classification of such assets pursuant to the
valuation hierarchy. There were no significant changes in the valuation
techniques during the three months ended March 31, 2013.
Available-for-Sale Securities
Where quoted market
prices are available in an active market, securities are classified within
Level 1 of the valuation hierarchy. If quoted market prices are not available,
the Corporation obtains fair value measurements from an independent pricing
service, such as Interactive Data, which utilizes pricing models to determine
fair value measurement. The Corporation reviews the pricing quarterly to
verify the reasonableness of the pricing. The fair value measurements consider
observable data that may include dealer quotes, market spreads, cash flows, the
U.S. Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information and the bonds terms and
conditions, among other factors. U.S. government agencies, state and political
subdivisions, U.S. government sponsored agency mortgage-backed securities and corporate
bonds are classified as Level 2 inputs.
Nonrecurring Measurements
The following table summarizes
financial assets measured at fair value on a nonrecurring basis as of March 31,
2013 and December 31, 2012, by the level within the fair value hierarchy
utilized to measure fair value (dollars in thousands):
March 31, 2013
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Impaired loans (collateral dependent)
|
$
|
-
|
$
|
-
|
$
|
2,455
|
$
|
2,455
|
Other real estate owned
|
-
|
-
|
1,499
|
1,499
|
|
|
|
|
December 31, 2012
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Impaired loans (collateral dependent)
|
$
|
-
|
$
|
-
|
$
|
4,840
|
$
|
4,840
|
Other real estate owned
|
-
|
-
|
3,385
|
3,385
|
Impaired Loans (Collateral Dependent)
The
estimated fair value of collateral-dependent impaired loans is based on the
appraised fair value of the collateral, less estimated cost to sell.
Collateral-dependent impaired loans are classified within Level 3 of the fair value
hierarchy.
9
The
Corporation considers the appraisal or evaluation as the starting point for
determining fair value and then considers other factors and events that may
affect the fair value. Appraisals of the collateral underlying
collateral-dependent loans are obtained when the loan is determined to be
collateral-dependent and subsequently as deemed necessary by the Chief Credit
Officer. Appraisals are reviewed for accuracy and consistency by the Chief
Credit Officer. Appraisers are selected from the list of approved appraisers
maintained by management. The appraised values are reduced by discounts to
consider lack of marketability and estimated cost to sell if repayment or
satisfaction of the loan is dependent on the sale of the collateral. These
discounts and estimates are developed by the Chief Credit Officer by comparison
to historical results. Fair value adjustments for collateral-dependent
impaired loans for each of the three months ended March 31, 2013 and 2012 were approximately
$48,000 and $571,000, respectively, and $3.3 million for the year ended
December 31, 2012.
Loans considered
impaired under ASC 310-35, Impairment of a Loan, are loans for which, based
on current information and events, it is probable that the Corporation will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Impaired loans are subject to nonrecurring fair value adjustments
to reflect (1) subsequent partial write-downs that are based on the observable
market price or current appraised value of the collateral or (2) the full
charge-off of the loan carrying value.
Other Real Estate Owned
Other
real estate owned (OREO) is initially recorded at fair value at the time of
acquisition, as determined by independent appraisal or evaluation by the
Corporation, less costs to sell when the real estate is acquired in settlement
of loans. Quarterly evaluations of OREO are performed to determine if there
has been any subsequent decline in the value of OREO properties. Estimated
fair value of OREO is based on appraisals or evaluations, less costs to sell.
OREO is classified within Level 3 of the fair value hierarchy. OREO assets are
subject to nonrecurring fair value adjustments to reflect subsequent partial
write-downs that are based on the observable market price or current appraised
value of the collateral. Fair value adjustments for OREO for the three months
ended March 31, 2013 and 2012 were approximately $250,000 and $213,000,
respectively, and $1.2 million for the year ended December 31, 2012.
Appraisals of
OREO are obtained when the real estate is acquired and subsequently as deemed
necessary by the Chief Credit Officer. Appraisals are required annually and
reviewed for accuracy and consistency by the Chief Credit Officer. The
appraised values are reduced by discounts to consider lack of marketability and
estimated cost to sell. Appraisers are selected from the list of approved
appraisers maintained by management.
Unobservable
(Level 3) Inputs
The
following table presents quantitative information about unobservable inputs
used in nonrecurring Level 3 fair value measurements (dollars in thousands):
|
Fair Value
at March 31, 2013
|
Valuation
Technique(s)
|
Unobservable
Input
|
Range
(Weighted Average)
|
Impaired loans (collateral-dependent)
|
$
2,455
|
Market comparable properties
|
Marketability discount
|
5.0% - 10.0% (6%)
|
Other real estate owned
|
$ 1,499
|
Market comparable properties
|
Marketability discount
|
5.0% - 10.0% (6%)
|
|
|
|
|
|
|
Fair Value
at December 31, 2012
|
Valuation
Technique(s)
|
Unobservable
Input
|
Range
(Weighted Average)
|
Impaired loans (collateral-dependent)
|
$ 4,840
|
Market comparable properties
|
Marketability discount
|
5.0% - 10.0% (7%)
|
Other real estate/assets owned
|
$ 3,385
|
Market comparable properties
|
Marketability discount
|
5.0% - 10.0% (7%)
|
10
ASC Topic 825,
Financial Instruments, requires disclosure of the fair value of financial
assets and liabilities, including those financial assets and liabilities that
are not measured and reported at fair value on a recurring basis or
non-recurring basis.
The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it was practicable to estimate that value:
Cash and due from banks
The carrying amount approximates fair value.
Interest bearing deposits
in other banks
The carrying amount
approximates fair value.
Federal Home Loan Bank
stock
The carrying value of Federal
Home Loan Bank (FHLB) stock approximates fair value based on the redemption
provisions of the FHLB.
Federal Reserve Bank stock
The carrying value of Federal Reserve Bank stock
approximates fair value based on the redemption provisions of the Federal
Reserve Bank.
Federal funds sold
The carrying amount approximates fair value.
Securities available for
sale
The carrying amount
approximates fair value.
Securities
held-to-maturity
Fair values are
based on quoted market prices, if available. If a quoted price is
not available, fair value is estimated using quoted prices for similar
securities. The fair value estimate is provided to management from a
third party using modeling assumptions specific to each type of security that
are reviewed and approved by management. Quarterly sampling of fair
values provided by additional third parties supplement the fair value review
process.
Loans held for sale
The fair value is predetermined at origination
based on sale price.
Loans (net of the
allowance for loan and leases losses)
The fair value of fixed rate loans and variable rate mortgage loans is
estimated by discounting the future cash flows using current rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. For other variable rate loans, the
carrying amount approximates fair value.
Accrued interest
receivable
The carrying amount
approximates fair value.
Deposits
The fair value of fixed maturity time deposits is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities. For deposits
including demand deposits, savings accounts, NOW accounts and certain money
market accounts, the carrying value approximates fair value.
Repurchase agreements
The fair value is estimated by discounting future
cash flows using current rates.
Advances from FHLB
The fair value of these fixed-maturity advances is
estimated by discounting future cash flows using rates currently offered for
advances of similar remaining maturities.
Accrued interest payable
The carrying amount approximates fair value.
11
Commitments to extend
credit and letters of credit
The
fair value of commitments to originate loans is estimated using the fees
currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair values of letters of credit and lines of credit
are based on fees currently charged for similar agreements or on the estimated
cost to terminate or otherwise settle the obligations with the counterparties
at the reporting date. The fair values of these commitments are not
material
.
The
following table presents estimated fair values of the Corporations financial
instruments as of March 31, 2013 and December 31, 2012, and indicates the level
within the fair value hierarchy of the valuation techniques (dollars in thousands):
|
Carrying
Amount
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Financial assets
|
|
|
|
|
Cash and due from banks
|
$
|
12,834
|
$
|
12,834
|
$
|
-
|
$
|
-
|
Interest-bearing deposits in other banks
|
29,011
|
29,011
|
-
|
-
|
Federal funds sold
|
10,000
|
10,000
|
-
|
-
|
Federal Home Loan Bank and Federal Reserve
Bank stock
|
3,879
|
3,879
|
-
|
-
|
Securities available-for-sale
|
382,673
|
-
|
382,673
|
-
|
Securities held-to-maturity
|
30,983
|
-
|
32,454
|
-
|
Loans held for sale
|
2,780
|
2,780
|
-
|
-
|
Loans, net
|
564,906
|
-
|
-
|
575,602
|
Accrued interest receivable
|
4,846
|
-
|
4,846
|
-
|
Financial liabilities
|
|
|
|
|
Non-interest bearing deposits
|
172,141
|
172,141
|
-
|
-
|
Interest bearing deposits
|
791,363
|
-
|
793,024
|
-
|
Repurchase agreements
|
18,766
|
-
|
18,766
|
-
|
Advances from Federal Home Loan Bank
|
3,100
|
-
|
3,130
|
-
|
Accrued interest payable
|
701
|
-
|
701
|
-
|
Off-balance sheet credit related
instruments:
|
|
-
|
|
-
|
|
|
|
|
|
|
Carrying
Amount
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Financial assets
|
|
|
|
|
Cash and due from banks
|
$
|
23,443
|
$
|
23,443
|
$
|
-
|
$
|
-
|
Interest-bearing deposits in other banks
|
31,953
|
31,953
|
-
|
-
|
Federal funds sold
|
15,000
|
15,000
|
-
|
-
|
Federal Home Loan Bank and Federal Reserve
Bank stock
|
3,879
|
3,879
|
-
|
-
|
Securities available-for-sale
|
345,718
|
-
|
345,718
|
-
|
Securities held-to-maturity
|
31,755
|
-
|
33,420
|
-
|
Loans held for sale
|
2,456
|
2,456
|
-
|
-
|
Loans, net
|
558,350
|
-
|
-
|
572,277
|
Accrued interest receivable
|
4,060
|
-
|
4,060
|
-
|
Financial liabilities
|
|
|
|
|
Non-interest bearing deposits
|
169,136
|
169,136
|
-
|
-
|
Interest bearing deposits
|
763,713
|
-
|
766,043
|
-
|
Repurchase agreements
|
17,068
|
-
|
17,068
|
-
|
Advances from Federal Home Loan Bank
|
10,100
|
-
|
10,215
|
-
|
Accrued interest payable
|
754
|
-
|
754
|
-
|
Off-balance sheet credit related instruments:
|
|
-
|
|
-
|
12
NOTE
4
SECURITIES
The
amortized cost and estimated fair value of securities at March 31, 2013 and
December 31, 2012 were as follows (dollars in thousands):
|
Amortized
|
Gross Unrealized
|
Fair
|
March 31, 2013
|
Cost
|
Gains
|
Losses
|
Value
|
Available-for-sale securities
|
|
|
|
|
U.S. Government agencies
|
$
|
158,228
|
$
|
108
|
$
|
660
|
$
|
157,676
|
U.S. Government sponsored agency mortgage backed
securities
|
152,419
|
882
|
1,361
|
151,940
|
States and political subdivisions
|
49,376
|
2,873
|
15
|
52,234
|
Corporate bonds
|
20,375
|
466
|
18
|
20,823
|
Total
|
$
|
380,398
|
$
|
4,329
|
$
|
2,054
|
$
|
382,673
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
States and political subdivisions
|
$
|
30,983
|
$
|
1,471
|
$
|
-
|
$
|
32,454
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
Gross Unrealized
|
Fair
|
December 31, 2012
|
Cost
|
Gains
|
Losses
|
Value
|
Available-for-sale securities
|
|
|
|
|
U.S. Government agencies
|
$
|
143,897
|
$
|
400
|
$
|
280
|
$
|
144,017
|
U.S. Government sponsored agency mortgage backed
securities
|
131,917
|
1,856
|
55
|
133,718
|
States and political subdivisions
|
47,273
|
3,306
|
-
|
50,579
|
Corporate bonds
|
16,884
|
529
|
9
|
17,404
|
Total
|
$
|
339,971
|
$
|
6,091
|
$
|
344
|
$
|
345,718
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
States and political subdivisions
|
$
|
31,755
|
$
|
1,665
|
$
|
-
|
$
|
33,420
|
Certain investments in debt securities are reported in
the financial statements at an amount less than their historical cost. Total
fair value of these investments at March 31, 2013 and December 31, 2012
was approximately $198.0 million and $84.0 million, which was approximately 48%
and 22%, respectively, of the Corporations available-for-sale and
held-to-maturity investment portfolio. The Corporation evaluates its
investment portfolio on a quarterly basis for impairment. The analysis
performed as of March 31, 2013 and December 31, 2012 indicated that all
impairment was considered temporary, market driven due primarily to
fluctuations in market interest rates and not credit-related.
The following
table shows the Corporations investments gross unrealized losses and fair
value of the Corporations investments with unrealized losses that were not
deemed to be other-than-temporarily impaired, aggregated by investment class
and length of time that individual securities had been in a continuous
unrealized loss position at March 31, 2013 and December 31, 2012 (dollars
in thousands):
13
March 31, 2013
|
Less than 12 months
|
12 months or Greater
|
Total
|
|
Fair
|
Unrealized
|
Fair
|
|
Unrealized
|
Fair
|
Unrealized
|
Type of Security
|
Value
|
Losses
|
Value
|
|
Losses
|
Value
|
Losses
|
U.S. Government agencies
|
$ 117,944
|
$ 660
|
$ -
|
|
$ -
|
$ 117,944
|
$ 660
|
U.S. Government sponsored agency mortgage
|
|
|
|
|
|
|
|
backed securities
|
74,094
|
1,361
|
-
|
|
-
|
74,094
|
1,361
|
States and political subdivisions
|
897
|
15
|
-
|
|
-
|
897
|
15
|
Corporate bonds
|
5,161
|
18
|
-
|
|
-
|
5,161
|
18
|
Total
|
$ 198,096
|
$ 2,054
|
$ -
|
|
$ -
|
$ 198,096
|
$ 2,054
|
|
|
|
|
|
|
|
|
December 31, 2012
|
Less than 12 months
|
12 months or Greater
|
Total
|
|
Fair
|
Unrealized
|
Fair
|
|
Unrealized
|
Fair
|
Unrealized
|
Type of Security
|
Value
|
Losses
|
Value
|
|
Losses
|
Value
|
Losses
|
U.S. Government agencies
|
$ 68,979
|
$ 280
|
$ -
|
|
$ -
|
$ 68,979
|
$ 280
|
U.S. Government sponsored agency mortgage
|
|
|
|
|
|
|
|
backed securities
|
12,881
|
55
|
-
|
|
-
|
12,881
|
55
|
Corporate bonds
|
1,719
|
9
|
-
|
|
-
|
1,719
|
9
|
Total
|
$ 83,579
|
$ 344
|
$ -
|
|
$ -
|
$ 83,579
|
$ 344
|
The
amortized cost and fair value of available-for-sale securities and
held-to-maturity securities at March 31, 2013, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
|
Available-for-Sale
|
|
Held-to-Maturity
|
March 31, 2013
|
Amortized
|
Estimated
|
|
Amortized
|
Estimated
|
|
Cost
|
Fair Value
|
|
Cost
|
Fair Value
|
Within one year
|
$ 7,243
|
$ 7,343
|
|
$ 3,790
|
$ 3,831
|
One to five years
|
20,758
|
21,474
|
|
6,616
|
6,938
|
Five to ten years
|
177,536
|
177,968
|
|
13,616
|
14,330
|
After ten years
|
22,442
|
23,948
|
|
6,961
|
7,355
|
Mortgage-backed securities
|
152,419
|
151,940
|
|
-
|
-
|
Total
|
$ 380,398
|
$ 382,673
|
|
$ 30,983
|
$ 32,454
|
The carrying value of securities pledged as collateral
to secure public deposits and for other purposes was $212.4 million at March
31, 2013 and $210.8 million at December 31, 2012.
The book
value of securities sold under agreements to repurchase amounted to $26.5
million at March 31, 2013 and December 31, 2012.
Gross gains
of approximately $823,000 and $1.2 million, resulting from sales of
available-for-sale securities were realized for the three month periods ended March
31, 2013 and 2012, respectively.
NOTE
5
LOANS
The
following table presents the Corporations loans by class as of March 31, 2013
and December 31, 2012 (dollars in thousands):
14
|
March 31, 2013
|
December 31, 2012
|
Commercial
|
|
|
Commercial and industrial
|
$
|
85,805
|
$
|
83,631
|
Non-farm, nonresidential real estate
|
171,535
|
167,565
|
Construction and development
|
39,306
|
36,323
|
Commercial loans secured by real estate
|
23,864
|
23,983
|
Other commercial
|
23,258
|
24,423
|
Total commercial
|
343,768
|
335,925
|
Residential
|
|
|
Consumer loans
|
10,909
|
11,621
|
Single family residential
|
194,185
|
196,349
|
Other retail
|
24,701
|
23,264
|
Total residential and consumer
|
229,795
|
231,234
|
Tota
l
|
$
|
573,563
|
$
|
567,159
|
The amount of capitalized fees and costs under ASC
310-20, included in the above loan totals were $700,407 and $626,061 at March
31, 2013 and December 31, 2012.
Loan Origination/Risk Management.
The Corporation has certain lending policies and
procedures in place that are designed to maximize loan income within an
acceptable level of credit risk. Management reviews and approves these policies
and procedures on a regular basis. A reporting system supplements the review
process by providing management with frequent reports related to loan
production, loan quality, concentrations of credit, loan delinquencies and
non-performing and potential problem loans. Diversification in the loan
portfolio is a means of managing risk associated with fluctuations in economic
conditions.
Commercial and industrial loans are underwritten after
evaluating and understanding a borrowers ability to operate profitably and
expand its business prudently. Underwriting standards are designed to promote
relationship banking rather than transactional banking. Once it is determined
that the borrowers management possesses sound ethics and solid business
acumen, the Corporations management examines current and projected cash flows
to determine the ability of the borrower to repay their obligations as agreed.
Commercial and industrial loans are primarily made based on the identified cash
flows of the borrower and secondarily on the underlying collateral provided by
the borrower. The cash flows of borrowers, however, may not be as expected and
the collateral securing these loans may fluctuate in value. Most commercial and
industrial loans are secured by the assets being financed or other business
assets such as accounts receivable or inventory and may incorporate a personal
guarantee; however, some short-term loans may be made on an unsecured basis. In
the case of loans secured by accounts receivable, the availability of funds for
the repayment of these loans may be substantially dependent on the ability of
the borrower to collect amounts due from its customers.
Commercial real estate loans are subject to
underwriting standards and processes similar to commercial and industrial
loans, in addition to those of real estate loans. These loans are viewed
primarily as loans secured by real estate. Commercial real estate lending
typically involves higher loan principal amounts and the repayment of these
loans is generally largely dependent on the successful operation of the
property securing the loan or the business conducted on the property securing
the loan. Commercial real estate loans may be more adversely affected by
conditions in the real estate markets or in the general economy. Management
monitors and evaluates commercial real estate loans based on collateral,
geography and risk grade criteria. As a general rule, the Corporation avoids
financing single-purpose projects unless other underwriting factors are present
to help mitigate risk. The Corporation also utilizes third-party experts to
provide insight and guidance about economic conditions and trends affecting
market areas it serves. In addition, management tracks the level of
owner-occupied commercial real estate loans versus non-owner occupied loans. At
March 31, 2013, approximately half of the outstanding principal balance of the Corporations
commercial real estate loans was secured by owner-occupied properties.
With respect to loans to developers and builders (construction
and development) that are secured by non-owner occupied properties that the Corporation
may originate from time to time, the Corporation generally requires the
borrower to have had an existing relationship with the Corporation and have a
proven record of success. Construction loans are underwritten utilizing
feasibility studies, independent appraisal reviews, sensitivity analysis of
absorption and lease rates and financial analysis of the developers and
property owners. Construction loans are generally based upon estimates of costs
and value associated with the complete project. These estimates may be
inaccurate. Construction loans often involve the disbursement of substantial
funds with repayment substantially dependent on the success of the ultimate
project. Sources of repayment for these types of loans may be pre-committed
permanent loans from approved long-term lenders, sales of developed property or
an interim loan commitment from the Corporation until permanent financing is
obtained. These loans are closely monitored by on-site inspections and are
considered to have higher risks than other real estate loans because of their
ultimate repayment being sensitive to interest rate changes, governmental
regulation of real property, general economic conditions and the availability
of long-term financing.
15
The Corporation originates consumer retail loans
utilizing a computer-based credit scoring analysis to supplement the
underwriting process. To monitor and manage consumer retail loan risk, policies
and procedures are developed and modified, as needed, jointly by line and staff
personnel. This activity, coupled with relatively small loan amounts that are
spread across many individual borrowers, minimizes risk. Additionally, trend
and outlook reports are reviewed by management on a regular basis. Underwriting
standards for home equity loans are heavily influenced by statutory
requirements, which include, but are not limited to, a maximum loan-to-value
percentage of 80%, collection remedies, the number of such loans a borrower can
have at one time and documentation requirements.
The Corporation contracts with a third party vendor to
perform loan reviews. The Corporation reviews and validates the credit risk
program on an annual basis. Results of these reviews are presented to
management. The loan review process complements and reinforces the risk identification
and assessment decisions made by lenders and credit personnel, as well as the Corporations
policies and procedures.
The goal of the Corporation is to diversify loans to
avoid a concentration of credit in a specific industry, person, entity, product,
service, or any area vulnerable to a tax law change or an economic event. A
concentration of credit occurs when obligations, direct or indirect, of the
same or affiliated interests represent 15% or more of the Corporation's capital
structure. The Board of Directors recognizes that the Corporation's geographic
trade area imposes some limitations regarding loan diversification if the Corporation
is to perform the function for which it has been chartered. Specifically,
lending to qualified borrowers within the Corporation's trade area will
naturally cause concentrations of real estate loans in the primary communities
served by the Corporation and loans to employees of major employers in the
area.
All
closed-end commercial loans (excluding loans secured by real estate) are
charged off no later than 90 days delinquent. If a loan is considered
uncollectable, it is charged off earlier than 90 days delinquent. When a
commercial loan secured by real estate is past due, a current assessment of the
value of the real estate is made. If the balance of the loan exceeds the fair
value of the property, the loan is placed on nonaccrual with a specific reserve
equal to the difference between book value and fair value assigned to the
credit until such time as the property has been foreclosed. When the
foreclosed property has been legally assigned to the Corporation, a charge-off
is taken with the remaining balance, reflecting the fair value less estimated
costs to sell, transferred to other real estate owned.
All closed-end
consumer loans (excluding conventional 1-4 family residential loans and
installment and revolving loans secured by real estate) are charged off no
later than 120 days (five monthly payments) delinquent. If a loan is
considered uncollectable, it is charged off earlier than 120 days delinquent.
For conventional 1-4 family residential loans and installment and revolving
loans secured by real estate, when a loan is 90 days past due, a current
assessment of the value of the real estate is made. If the balance of the loan
exceeds the fair value of the property, the loan is placed on nonaccrual and
foreclosure proceedings are initiated. When the foreclosed property has been
legally assigned to the Corporation, a charge-off is taken with the remaining
balance reflecting the fair value less estimated costs to sell, transferred to
other real estate owned.
Non-Accrual and Past Due Loans
. Loans are considered past due if the required
principal and interest payments have not been received as of the date such
payments were due. Loans are placed on non-accrual status when (i) principal or
interest has been in default for a period of 90 days or more or (ii) full
payment of principal and interest is not expected. Loans may be placed on
non-accrual status regardless of whether or not such loans are considered past
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income on non-accrual loans is recognized only to the extent
that cash payments are received in excess of principal due. A loan may be
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future principal and interest amounts
contractually due are reasonably assured, which is typically evidenced by a
sustained period (three to six months) of repayment performance by the borrower.
The Corporation had one single family residential loan of approximately $24,000
that was 90 days or more past due that was not included in nonaccrual loans as
of March 31, 2013.
The following
tables provide details regarding the aging of the Corporations loan portfolio
as of March 31, 2013 and December 31, 2012 (dollars in thousands):
16
March 31, 2013
|
30 - 89 Days
Past Due
|
90 Days and
Greater Past Due
|
Total Past Due
|
Current
|
Total Loans
|
Retail
|
|
|
|
|
|
Consumer
|
$
|
170
|
$
|
4
|
$
|
174
|
$
|
10,735
|
$
|
10,909
|
Single family residential
|
2,425
|
529
|
2,954
|
191,231
|
194,185
|
Other retail
|
-
|
-
|
-
|
24,701
|
24,701
|
Retail total
|
|
2,595
|
|
533
|
|
3,128
|
|
226,667
|
|
229,795
|
Commercial
|
|
|
|
|
|
Commercial and industrial
|
|
1,333
|
|
1,423
|
|
2,756
|
|
83,049
|
|
85,805
|
Non-farm, non-residential real estate
|
348
|
250
|
598
|
170,937
|
171,535
|
Construction and development
|
-
|
160
|
160
|
39,146
|
39,306
|
Commercial loans secured by real estate
|
67
|
193
|
260
|
23,604
|
23,864
|
Other commercial
|
722
|
1,379
|
2,101
|
21,157
|
23,258
|
Commercial total
|
|
2,470
|
|
3,405
|
|
5,875
|
|
337,893
|
|
343,768
|
Total
|
$
|
5,065
|
$
|
3,938
|
$
|
9,003
|
$
|
564,560
|
$
|
573,563
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
30 - 89 Days
Past Due
|
90 Days and
Greater Past Due
|
Total Past Due
|
Current
|
Total Loans
|
Retail
|
|
|
|
|
|
Consumer loans
|
$
|
112
|
$
|
7
|
$
|
119
|
$
|
11,502
|
$
|
11,621
|
Single family residential
|
3,543
|
387
|
3,930
|
192,419
|
196,349
|
Other retail
|
193
|
-
|
193
|
23,071
|
23,264
|
Retail total
|
|
3,848
|
|
394
|
|
4,242
|
|
226,992
|
|
231,234
|
Commercial
|
|
|
|
|
|
Commercial and industrial
|
|
618
|
|
1,457
|
|
2,075
|
|
81,556
|
|
83,631
|
Non-farm, non-residential real estate
|
666
|
448
|
1,114
|
166,451
|
167,565
|
Construction and development
|
160
|
-
|
160
|
36,163
|
36,323
|
Commercial loans secured by real estate
|
22
|
193
|
215
|
23,768
|
23,983
|
Other commercial
|
741
|
1,379
|
2,120
|
22,303
|
24,423
|
Commercial total
|
|
2,207
|
|
3,477
|
|
5,684
|
|
330,241
|
|
335,925
|
Total
|
$
|
6,055
|
$
|
3,871
|
$
|
9,926
|
$
|
557,233
|
$
|
567,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the nonaccrual loans by
loan type as of March 31, 2013 and December 31, 2012 (dollars in thousands):
|
March 31, 2013
|
December 31, 2012
|
Retail
|
|
|
Consumer
|
$
|
7
|
$
|
11
|
Single family residential
|
2,659
|
3,541
|
Retail total
|
2,666
|
3,552
|
Commercial
|
|
|
Commercial and industrial
|
$
|
1,842
|
$
|
1,595
|
Nonfarm, non-residential real estate
|
1,254
|
1,372
|
Construction and development
|
160
|
50
|
Commercial loans secured by real estate
|
-
|
126
|
Other commercial
|
2,837
|
1,379
|
Commercial total
|
6,093
|
4,522
|
Total
|
$
|
8,759
|
$
|
8,074
|
17
The following tables summarize the impaired loans by
loan type as of March 31, 2013, December 31, 2012 and March 31, 2012 (dollars
in thousands):
March 31, 2013
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
with no
Allowance
|
Recorded
Investment
with
Allowance
|
Total
Recorded
Investment
|
Related
Allowance
|
Average
Recorded
Investment
|
Interest
Paid
|
Commercial
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,311
|
$
|
416
|
$
|
1,305
|
$
|
1,721
|
$
|
120
|
$
|
1,727
|
$
|
6
|
Non-farm, non-residential real estate
|
2,804
|
2,348
|
-
|
2,348
|
-
|
2,393
|
32
|
Construction and development
|
842
|
188
|
653
|
841
|
147
|
841
|
9
|
Other commercial
|
3,845
|
3,846
|
-
|
3,846
|
-
|
3,856
|
37
|
Commercial total
|
9,802
|
6,798
|
1,958
|
8,756
|
267
|
8,817
|
84
|
Retail
|
|
|
|
|
|
|
|
Single family residential
|
2,111
|
826
|
918
|
1,744
|
227
|
1,768
|
29
|
Retail total
|
2,111
|
826
|
918
|
1,744
|
227
|
1,768
|
29
|
Total
|
$
|
11,913
|
$
|
7,624
|
$
|
2,876
|
$
|
10,500
|
$
|
494
|
$
|
10,585
|
$
|
113
|
|
|
|
|
|
|
|
|
December 31, 2012
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
with no
Allowance
|
Recorded
Investment
with
Allowance
|
Total
Recorded
Investment
|
Related
Allowance
|
Average
Recorded
Investment
|
Interest
Paid
|
Commercial
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,036
|
$
|
1,076
|
$
|
328
|
$
|
1,404
|
$
|
103
|
$
|
3,483
|
$
|
74
|
Non-farm, non-residential real estate
|
3,613
|
2,417
|
-
|
2,417
|
-
|
1,606
|
83
|
Construction and development
|
682
|
-
|
682
|
682
|
118
|
682
|
35
|
Other commercial
|
3,124
|
3,124
|
-
|
3,124
|
-
|
3,099
|
126
|
Commercial total
|
9,455
|
6,617
|
1,010
|
7,627
|
221
|
8,870
|
318
|
Retail
|
|
|
|
|
|
|
|
Single family residential
|
1,237
|
402
|
613
|
1,015
|
82
|
1,059
|
39
|
Retail total
|
1,237
|
402
|
613
|
1,015
|
82
|
1,059
|
39
|
Total
|
$
|
10,692
|
$
|
7,019
|
$
|
1,623
|
$
|
8,642
|
$
|
303
|
$
|
9,929
|
$
|
357
|
|
|
|
|
|
|
|
|
March 31, 2012
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
with no
Allowance
|
Recorded
Investment
with
Allowance
|
Total
Recorded
Investment
|
Related
Allowance
|
Average
Recorded
Investment
|
Interest
Paid
|
Commercial
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
5,123
|
$
|
-
|
$
|
4,389
|
$
|
4,389
|
$
|
590
|
$
|
4,627
|
$
|
8
|
Non-farm, non-residential real estate
|
4,106
|
2,852
|
-
|
2,852
|
-
|
2,531
|
17
|
Construction and development
|
819
|
-
|
819
|
$
|
819
|
86
|
837
|
9
|
Other commercial
|
3,753
|
880
|
2,210
|
3,090
|
66
|
3,107
|
32
|
Commercial total
|
|
13,801
|
|
3,732
|
|
7,418
|
|
11,150
|
|
742
|
|
11,102
|
|
66
|
Retail
|
|
|
|
|
|
|
|
Single family residential
|
1,579
|
228
|
1,081
|
1,309
|
117
|
1,330
|
33
|
Total
|
$
|
15,380
|
$
|
3,960
|
$
|
8,499
|
$
|
12,459
|
$
|
859
|
$
|
12,432
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Impaired
Loans
. Loans are considered impaired
when, based on current information and events, it is probable the Corporation
will be unable to collect all amounts due in accordance with the original
contractual terms of the loan agreement, including scheduled principal and
interest payments. Impairment is evaluated in total for smaller-balance loans
of a similar nature and on an individual loan basis for other loans. If a loan
is impaired, a specific valuation allowance is allocated, if necessary, so that
the loan is reported net, at the present value of estimated future cash flows
using the loans existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Interest payments on impaired loans are
typically applied to principal unless collectability of the principal amount is
reasonably assured, in which case interest is recognized on a cash basis.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Troubled
Debt Restructurings.
Included in
certain categories of impaired loans are certain loans that have been modified
in a troubled debt restructuring where economic concessions have been granted
to borrowers who have experienced financial difficulties. These concessions
typically result from our loss mitigation activities and could include
reductions in the interest rate, payment extensions, forgiveness of principal,
forbearance or other actions. Modifications of terms for our loans and their
inclusion as troubled debt restructurings are based on individual facts and
circumstances. Loan modifications that are included as troubled debt
restructurings may involve either an increase or reduction of the interest
rate, extension of the term of the loan, or deferral of principal or interest
payments, regardless of the period of the modification. All of the loans
identified as troubled debt restructuring were modified as a result of
financial stress of the borrower. In order to determine if a borrower is
experiencing financial difficulty, an evaluation is performed to determine the
probability that the borrower will be in payment default on any of its debt in
the foreseeable future with the modification. This evaluation is performed
under the Corporations internal underwriting policy.
When
the Corporation modifies loans in a troubled debt restructuring, the
Corporation evaluates any possible impairment similar to other impaired loans
based on the present value of expected future cash flows, discounted at the
contractual interest rate of the original loan or lease agreement, or use the
current fair value of the collateral, less selling costs for collateral
dependent loans. If the corporation determines that the value of the modified
loan is less than the recorded investment in the loan, impairment is recognized
through an allowance estimate or a charge-off to the allowance. In periods
subsequent to modification, the Corporation evaluates all troubled debt
restructuring, including those that have payment defaults, for possible
impairment and recognize impairment through the allowance.
During the three months ended March 31, 2013,
certain loans were modified in troubled
debt restructurings, where economic concessions were granted to borrowers
consisting of reductions in the interest rates, payment extensions, forgiveness
of principal, and forbearances. There were no troubled debt restructuring
loans that subsequently defaulted during the three months ending March 31, 2013,
2012 and year ending December 31, 2012. Presented below, segregated by class of
loans, are troubled debt restructurings that occurred during the three months
ended March 31, 2013, 2012 and year ended December 31, 2012 (dollars in
thousands):
|
Three Months Ended March 31, 2013
|
|
|
Post-
|
|
|
|
Modifications
|
Net Charge-offs
|
|
Number of
|
Outstanding
|
Resulting from
|
(dollars in thousands)
|
Loans
|
Balance
|
Modifications
|
Retail:
|
|
|
|
Single family residential
|
1
|
130
|
-
|
Total trouble debt restructurings
|
1
|
$ 130
|
$ -
|
19
|
Year Ended December 31, 2012
|
|
|
Post-
|
|
|
|
Modification
|
Net Charge-offs
|
|
Number of
|
Outstanding
|
Resulting from
|
(dollars in thousands)
|
Loans
|
Balance
|
Modifications
|
Commercial:
|
|
|
|
Commercial and industrial
|
1
|
$ 8
|
$ -
|
Nonfarm nonresidential
|
1
|
361
|
-
|
Retail:
|
|
|
|
Consumer
|
1
|
3
|
-
|
Single family residential
|
3
|
237
|
-
|
Total trouble debt restructurings
|
6
|
$ 609
|
$ -
|
|
Three Months Ended March 31, 2012
|
|
|
Post-
|
|
|
|
Modifications
|
Net Charge-offs
|
|
Number of
|
Outstanding
|
Resulting from
|
(dollars in thousands)
|
Loans
|
Balance
|
Modifications
|
Commercial:
|
|
|
|
Commercial and industrial
|
5
|
$ 1,068
|
$ 197
|
Nonfarm nonresidential
|
1
|
$ 1,203
|
$ 222
|
|
|
|
|
Retail:
|
|
|
|
Single family residential
|
-
|
-
|
-
|
Total trouble debt restructurings
|
6
|
$ 2,271
|
$ 419
|
Loans
retain their accrual status at the time of their modification. As a result, if
a loan is on non-accrual status at the time it is modified, it stays as
non-accrual status, and if a loan is on accrual status at the time of the
modification, it generally stays on accrual status. Commercial and consumer
loans modified in a troubled debt restructuring are closely monitored for
delinquency as an early indicator of possible future default. If loans
modified in a troubled debt restructuring subsequently default, the Corporation
evaluates the loan for possible further impairment. The allowance for loan and
lease losses (ALLL) may be increased, adjustments may be made in the
allocation of the allowance or partial charge-offs may be taken to further
write-down the carrying value of the loan. The Corporation considers a loan in default
when it is 90 days or more past due or transferred to nonaccrual status.
Credit Quality Indicators.
As part of the ongoing monitoring of the credit
quality of the Corporations loan portfolio, management tracks certain credit
quality indicators including trends related to (i) the weighted-average risk
grade of commercial loans, (ii) the level of classified commercial loans, (iii)
net charge-offs, (iv) non-performing loans and (v) the general economic
conditions in the State of Tennessee.
The Corporation uses a risk grading matrix to assign a
risk grade to each of its commercial loans. Loans are graded on a scale of 1 through
8. A description of the general characteristics of the eight risk grades is as
follows:
Risk Rating 1 Minimal
Risk
General Characteristics:
-
Substantially risk free
-
Federal, state, or municipal
subdivisions with acceptable investment grade credit rating.
-
Large national, regional, or local
entity with proven access to capital markets.
-
Diversity in borrowers line of
business with stable and diversified sales base.
-
Borrower is considered to be an
industry leader with many consecutive years of strong profits and exhibits a
financial condition, equity position, liquidity, and debt service capacity far
exceeding industry norms.
-
Borrower has an abundance of
unpledged financeable assets coupled with superior cash generation
capabilities.
-
Industry conditions and trends are
positive and strong.
20
-
Borrower has strong management
with evidence of management succession.
-
A credit rating by Moodys,
Standard & Poors, or other qualified rating agency that is grade A or
higher.
-
A cash secured loan with the cash
on deposit in the Corporation or a guaranty from the federal government also
warrants this risk rating.
Risk Rating 2
Modest Risk
General Characteristics:
-
Borrower shows strong
profitability, liquidity, and capitalization better than industry norms and
a strong market position in the region.
-
Borrower may have limited access
to public markets for short-term needs or capital requirements, but has ready
access to alternative financing.
-
Loans may be unsecured based on
the financial strength of the borrower or secured by collateral that is
considered liquid and marketable.
-
Borrower has a proven history of
profitability and financial stability.
-
Borrower has a strong market
position in its industry and has an abundance of financeable assets available
to protect the Corporations position.
-
Borrowers proven and steady
management with good management succession.
-
Borrower can withstand major
market instabilities of short duration.
-
Credit rating by
Moodys, Standard & Poors, or other qualified rating agency that is grade
BAA or higher.
Risk Rating 3
Average
Risk
General Characteristics:
-
Borrower shows a stable earnings
history and financial condition in line with industry norms with indications
that these trends will continue.
-
The credit extension is considered
sound however, elements may be present which suggest the borrower may not be
free from temporary impairments in the future.
-
Borrowers liquidity and leverage
is in line with industry norms.
-
Borrower has good management with
acceptable management succession.
-
Under most economic and business
conditions, borrower has access to alternative financing but limited or no
access to capital markets for short-term or capital needs.
-
Borrower may be an individual with
a sound financial condition and liquidity with proven historical income to
repay the debt as scheduled.
-
Credit extensions are generally
secured by acceptable collateral.
Risk Rating 4
Acceptable Risk
General Characteristics:
-
Credit is to a borrower with
smaller margins of debt service coverage and with some elements of reduced
financial strength.
-
Borrower is generally in a lower
average market position in its industry.
-
Borrower shows satisfactory asset
quality and liquidity, good debt capacity and coverage, and good management in
critical positions.
-
Borrowers management is of
unquestioned character but management succession may be questionable.
-
Borrower can obtain similar financing
from other financial institutions.
-
Interim losses or moderately
declining earnings trends may occur, but the borrower has sufficient strength
and financial flexibility to offset these issues.
21
-
Credit may be to individuals with
a moderately leveraged financial condition but with satisfactory liquidity and
income to cover debt repayment requirements.
-
Business borrowers may have
moderate leverage, but must have historically consistent cash flow to cover
debt service and other operating needs.
-
Business borrowers may also have
erratic or cyclical operating performances but should demonstrate strong equity
positions to support these profitability swings.
-
Asset-based loans that have
stabilized and proven performance with the financial capacity to provide for
annual clean up may qualify for this rating.
-
Borrower has no access to capital
markets but would be financeable by another financial institution or finance
company.
-
Credit extensions are generally
secured by acceptable collateral.
Risk Rating 5 Pass
/ Watch
General Characteristics:
Loans considered for this risk rating require a heightened level of
supervision.
A) Transitional, Event Driven This category of risk rated 5 loans
captures responses to early warning signals from a relationship and, therefore,
signifies a specific, event-driven, transitional credit grade. The event is
generally something unplanned or unexpected such as a death, a disaster, the
loss of a major client, product line, or key employee; divorce, or health
condition of the owner or key management person. This category may be used in
transitional upgrades as well as transitional downgrades of credit
relationships. Under these criteria, this category necessitates a plan of
action to either upgrade the credit to a Pass rating (i.e., Risk Rating 1-4),
downgrade the credit to a criticized asset, or exit the relationship within six
months.
B) Ongoing Supervision Warranted
-
This category may also be
utilized to identify loans having inherent characteristics which warrant more
than the normal level of supervision. Loans meeting these criteria may
include larger, more complex loans with unusual structures. Loans, which,
due to structure or nature of the collateral require above average servicing,
may also be considered for this risk rating. Unlike other criteria listed
previously for this category, these particular characteristics tend not to be
one-time or transitional in nature; therefore, these loans may be expected to
remain in this risk rating category longer than six months. A loan might
remain in this risk rating category for its life or until the characteristic
warranting the rating can be eliminated or effectively mitigated.
-
Borrower may exhibit declining
earnings, strained cash flow, increasing leverage, or weakening market
positions that indicate a trend toward an unacceptable risk.
-
Borrowers liquidity, leverage,
and earnings performance is below or trending below industry norms.
-
Interim losses and other adverse
trends may occur but not to the level that would impair the Corporations
position.
-
Borrower may be a newly formed
company or in a new line of business or may be an established business with new
or unproven management. Borrower should be adequately capitalized, but
may not yet have achieved stabilized cash flow.
-
Borrower generally has a small
market position in its industry.
-
Borrower may be engaged in an
industry that is experiencing an economic downturn or is particularly
susceptible to uncontrollable external factors.
-
Borrower management is of good
character although some management weakness may exist, including lack of depth
or succession.
-
Borrower generally has limited
additional debt capacity and modest coverage, and average or below-average
asset quality, margins, and market share.
-
Borrowers ability to obtain
financing from other financial institutions may be impaired.
-
Credit to individuals with
marginal financial condition and liquidity but with income still sufficient to
service the debt.
22
Risk Rating 6 Special
Mention
A special mention asset has potential weaknesses that deserve
managements close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment prospects for the asset or in the
institutions credit position at some future date. Special mention assets are
not adversely classified and do not expose an institution to sufficient risk to
warrant adverse classification.
General Characteristics:
-
Borrowers cash flow may not be
sufficient to fund anticipated cash needs.
-
Sufficient or modestly sufficient
financeable assets are available to protect the Corporations position.
-
Adverse trends in borrowers operations/profits
or unbalanced position in borrowers balance sheet but not to the point where
repayment is in jeopardy.
-
Borrower generally shows limited
liquidity or high leverage.
-
Borrowers financial position is
in the lower quartile of industry norms.
-
Borrowers business exhibits a
deteriorating market position in the industry.
-
Borrowers management lacks depth
and succession.
-
Business is unable to withstand
temporary setbacks without affecting repayment capability.
-
Borrower is not financeable by
another bank but possibly by a finance company or specialized lender.
Risk Rating 7 Substandard
A substandard asset is inadequately protected by the current sound
worth and paying capacity of the obligor or of the collateral pledged, if any.
Assets so classified must have a well-defined weakness, or weaknesses, that
jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the Corporation will sustain some loss if the deficiencies are
not corrected.
General Characteristics:
-
The primary source of borrowers
repayment no longer provides satisfactory support and repayment is dependent on
secondary sources.
-
A substandard loan is inadequately
protected by the current sound worth and paying capacity of the obligor or by
the collateral pledged, if any.
-
Normal repayment from the borrower
is impaired although no loss of principal is envisioned.
-
A partial loss of interest or
principal will occur if the borrowers deficiencies are not corrected.
-
Borrowers cash flow is generally
not sufficient to fund anticipated cash needs.
-
Borrowers financeable assets may
not be sufficient to protect the Corporations position.
-
Adverse trends in borrowers operations
that jeopardized debt repayment may require the borrower to undertake a
significant reorganization of financing or the business.
-
Borrower shows poor liquidity and
high leverage impairing the repayment of the debt in accordance with agreed
upon terms.
-
Borrowers management lacks depth
and succession; may be inexperienced or of questionable character.
-
Borrowers market position in the
industry is deteriorating.
-
Borrower is not financeable by
another bank or finance company.
Risk Rating 8 Doubtful
23
An asset classified as doubtful has all the weaknesses inherent in one
classified substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
General Characteristics:
-
Inadequate primary source of
repayment. Assumes a less than satisfactory
secondary source of repayment on a most-likely case basis. There may be adequate
secondary source of repayment on a best-case basis.
-
Borrower has the same weaknesses
found in Substandard borrowers.
-
Loss probability is extremely high
but because of certain important and reasonably specific factors that may work
to strengthen the loan, its classification as an estimated loss is deferred
until a more exact status may be determined.
-
Pending factors may include a proposed
merger or acquisition; liquidation procedures; capital injections; perfecting
liens on additional collateral; and refinancing plans.
-
Borrowers cash flow is
insufficient to fund cash needs.
-
Borrowers financeable assets are
insufficient to protect the Corporations position.
-
Borrowers source of debt
repayment is dependent on liquidation of assets with a probable loss.
-
Borrower may no longer be a going
concern, or may not exist as a going concern for the foreseeable future.
-
No alternative financing sources
exist for borrower.
The following tables present risk grades and
classified loans by class of commercial loan in the Corporations portfolios as
of March 31, 2013 and December 31, 2012 (dollars in thousands):
March 31, 2013
|
|
|
|
|
|
|
Commercial Loan Portfolio: Credit risk profile by
internally assigned grade
|
Commercial and Industrial
|
Non-Farm, Non-Residential Real Estate Loans
|
Construction and Development
|
Commercial Loans Secured by Residential Real Estate
|
Other Commercial Loans
|
Commercial Loan Totals
|
|
|
|
|
|
|
|
Pass
|
$
|
83,533
|
$
|
168,628
|
$
|
38,448
|
$
|
22,831
|
$
|
20,439
|
$
|
333,879
|
Special Mention
|
259
|
797
|
-
|
392
|
-
|
1,448
|
Substandard
|
937
|
2,110
|
858
|
641
|
1,440
|
5,986
|
Doubtful
|
1,076
|
-
|
-
|
-
|
1,379
|
2,455
|
TOTALS
|
$
|
85,805
|
$
|
171,535
|
$
|
39,306
|
$
|
23,864
|
$
|
23,258
|
$
|
343,768
|
|
|
|
|
|
|
|
Retail Loan Portfolio: Credit risk profiles based on
delinquency status classification
|
Consumer
|
Single-Family Residential**
|
All Other Retail Loans
|
Retail Loan Totals
|
|
|
Performing
|
$
|
10,890
|
$
|
191,017
|
$
|
24,576
|
$
|
226,483
|
|
|
Non-performing*
|
19
|
3,168
|
125
|
3,312
|
|
|
TOTALS
|
$
|
10,909
|
$
|
194,185
|
$
|
24,701
|
$
|
229,795
|
|
|
*Loans are classified as non-performing loans and are
automatically placed on non-accrual status once they reach 90 days past due.
For the purposes of this calculation,
|
all loans rated at or below Substandard (RR7)
are classified as non-performing.
|
|
|
|
**Single-family residential loans
include
first mortgages, closed-end second mortgages, residential construction loans,
and home equity lines of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
December 31, 2012
|
|
|
|
|
|
|
|
Commercial Loan Portfolio: Credit risk profile by
internally assigned grade
|
Commercial and Industrial
|
Non-Farm, Non-Residential Real Estate Loans
|
Construction and Development
|
Commercial Loans Secured by Residential Real Estate
|
Other Commercial Loans
|
Commercial Loan Totals
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
81,560
|
$
|
164,290
|
$
|
35,543
|
$
|
21,660
|
$
|
22,857
|
$
|
325,910
|
|
Special Mention
|
269
|
815
|
98
|
398
|
-
|
1,580
|
|
Substandard
|
726
|
2,460
|
682
|
1,925
|
187
|
5,980
|
|
Doubtful
|
1,076
|
-
|
-
|
-
|
1,379
|
2,455
|
|
TOTALS
|
$
|
83,631
|
$
|
167,565
|
$
|
36,323
|
$
|
23,983
|
$
|
24,423
|
$
|
335,925
|
|
Retail Loan Portfolio: Credit risk profiles based on
delinquency status classification
|
Consumer
|
Single-Family Residential**
|
All Other Retail Loans
|
Retail Loan Totals
|
|
|
|
Performing
|
$
|
11,610
|
$
|
192,808
|
$
|
23,131
|
$
|
227,549
|
|
|
|
Non-performing*
|
11
|
3,541
|
133
|
3,685
|
|
|
|
TOTALS
|
$
|
11,621
|
$
|
196,349
|
$
|
23,264
|
$
|
231,234
|
|
|
|
*Loans are classified as non-performing loans and are
automatically placed on non-accrual status once they reach 90 days past due.
For the purposes of this calculation,
|
all loans rated at or below Substandard (RR7)
are classified as non-performing.
|
|
|
|
|
**Single-family residential loans includes first
mortgages, closed-end second mortgages, residential construction loans, and
home equity lines of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses.
The ALLL is a reserve established through a provision
for loan losses charged to expense, which represents managements best estimate
of probable losses that have been incurred within the existing portfolio of
loans. The allowance, in the judgment of management, is necessary to reserve
for estimated loan losses and risks inherent in the loan portfolio. The
Corporations ALLL methodology includes allowance allocations calculated in
accordance with ASC Topic 310, Receivables (ASC Topic 310), and allowance
allocations calculated in accordance with ASC Topic 450, Contingencies (ASC
Topic 450). Accordingly, the methodology is based on historical loss
experience by type of credit and internal risk grade, specific homogeneous risk
pools and specific loss allocations, with adjustments for current events and
conditions. The Corporations process for determining the appropriate level of
the ALLL is designed to account for credit deterioration as it occurs. The
provision for loan losses reflects loan quality trends, including the levels of
and trends related to non-accrual loans, past due loans, potential problem
loans, criticized loans and net charge-offs or recoveries, among other factors.
The provision for loan losses also reflects the totality of actions taken on
all loans for a particular period. Therefore, the amount of the provision
reflects not only the necessary increases in the ALLL related to newly
identified criticized loans, but it also reflects actions taken related to
other loans including, among other things, any necessary increases or decreases
in required allowances for specific loans or loan pools.
The level of the allowance reflects managements
continuing evaluation of industry concentrations, specific credit risks, loan
loss experience, current loan portfolio quality, present economic, political
and regulatory conditions and unidentified losses inherent in the current loan
portfolio. Portions of the allowance may be allocated for specific credits;
however, the entire allowance is available for any credit that, in managements
judgment, should be charged off. While management utilizes its best judgment
and information available, the ultimate adequacy of the allowance is dependent
upon a variety of factors beyond the Corporations control, including, among
other things, the performance of the Corporations loan portfolio, the economy,
and changes in interest.
The Corporations ALLL consists of three elements: (i)
specific valuation allowances determined in accordance with ASC Topic 310 based
on probable losses on specific loans; (ii) historical valuation allowances
determined in accordance with ASC Topic 450 based on historical loan loss
experience for loans with similar characteristics and trends, adjusted, as
necessary, to reflect the impact of current conditions; and (iii) general
valuation allowances determined in accordance with ASC Topic 450 based on
general economic conditions and other qualitative risk factors both internal
and external to the Corporation.
25
The allowances established for probable losses on
specific loans are based on a regular analysis and evaluation of problem loans.
Loans are classified based on an internal credit risk grading process that
evaluates, among other things: (i) the obligors ability to repay; (ii) the
underlying collateral, if any; and (iii) the economic environment and industry
in which the borrower operates. This analysis is performed at the relationship
manager level for all commercial loans. When
a loan has an assigned risk rating of 8 (Doubtful) or higher, a special
assets officer analyzes the loan to determine whether the loan is impaired and,
if impaired, the need to specifically allocate a portion of the ALLL to the
loan. Specific valuation allowances are determined by analyzing the borrowers
ability to repay amounts owed, collateral deficiencies, the relative risk grade
of the loan and economic conditions affecting the borrowers industry, among
other things.
Historical valuation allowances are calculated based
on the historical loss experience of specific types of loans and the internal
risk grade of such loans at the time they were charged-off. The Corporation
calculates historical loss ratios for pools of similar loans with similar
characteristics based on the proportion of actual charge-offs experienced to
the total population of loans in the pool. The historical loss ratios are
updated quarterly based on actual charge-off experience. A historical
valuation allowance is established for each pool of similar loans based upon
the product of the historical loss ratio and average balance of the loans in
the pool. The Corporations pools of similar loans include similarly
risk-graded groups of commercial and industrial loans, commercial real estate
loans, consumer real estate loans and consumer and other loans.
The components of the general valuation allowance
include (i) the additional reserves allocated to specific loan portfolio
segments as a result of applying an environmental risk adjustment factor to the
base historical loss allocation and (ii) the additional reserves that are not
allocated to specific loan portfolio segments including allocations for groups
of similar loans with risk characteristics that exceed certain concentration
limits established by management.
There is an inherent imprecision in calculating the
specific portion of the ALLL. Therefore, a factor has been added to the
allocation of each of the identified segments of the loan portfolio to account
for the imprecision.
Included in the general valuation allowances are
allocations for groups of similar loans with risk characteristics that exceed
certain concentration limits established by management. Concentration risk
limits have been established, among other things, for certain industry
concentrations, large balance and highly leveraged credit relationships that
exceed specified risk grades, and loans originated with policy exceptions that
exceed specified risk grades.
The ALLL
is maintained at a level considered adequate to provide for the losses that can
be reasonably anticipated. Managements periodic evaluation of the adequacy of
the allowance is based on the Corporations past loan loss experience, know and
inherent risks in the portfolio, adverse situations that may affect the
borrowers ability to repay, the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it requires
material estimates that may be susceptible to change.
The following tables summarize the allocation in the ALLL
by loan segment for the three months ended March 31, 2013 and March 31, 2012
and the year ended December 31, 2012 (dollars in thousands):
|
|
Residential
|
Consumer &
|
|
|
Commercial
|
Real Estate
|
Other Retail
|
Total
|
Beginning ALLL balance - 12/31/12
|
$
|
7,528
|
$
|
1,109
|
$
|
172
|
$
|
8,809
|
Less: Charge-offs
|
(144)
|
(12)
|
(14)
|
(170)
|
Add: Recoveries
|
10
|
-
|
8
|
18
|
Add: Provisions
|
(54)
|
46
|
8
|
-
|
Ending ALLL balance - 3/31/13
|
$
|
7,340
|
$
|
1,143
|
$
|
174
|
$
|
8,657
|
|
|
|
|
|
|
|
Residential
|
Consumer &
|
|
|
Commercial
|
Real Estate
|
Other Retail
|
Total
|
Beginning ALLL balance -12/31/11
|
$
|
6,895
|
$
|
2,113
|
$
|
192
|
$
|
9,200
|
Less: Charge-offs
|
(1,016)
|
(106)
|
(5)
|
(1,127)
|
Add: Recoveries
|
23
|
1
|
2
|
26
|
Add: Provisions
|
1,106
|
(487)
|
(19)
|
600
|
Ending ALLL balance - 3/31/12
|
$
|
7,008
|
$
|
1,521
|
$
|
170
|
$
|
8,699
|
|
|
|
|
|
|
|
Residential
|
Consumer &
|
|
|
Commercial
|
Real Estate
|
Other Retail
|
Total
|
Beginning ALLL balance - 1/1/12
|
$
|
6,895
|
$
|
2,113
|
$
|
192
|
$
|
9,200
|
Less: Charge-offs
|
(1,690)
|
(176)
|
(19)
|
(1,885)
|
Add: Recoveries
|
364
|
2
|
8
|
374
|
Add: Provisions
|
1,959
|
(830)
|
(9)
|
1,120
|
Ending ALLL balance - 12/31/12
|
$
|
7,528
|
$
|
1,109
|
$
|
172
|
$
|
8,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
The following tables detail the amount of the ALLL allocated
to each portfolio segment as of March 31, 2013, December 31, 2012 and March 31,
2012, disaggregated on the basis of the Corporations impairment methodology
(dollars in thousands):
|
|
Residential
|
Consumer &
|
|
March 31, 2013
|
Commercial
|
Real Estate
|
Other Retail
|
Totals
|
Loans individually evaluated for impairment
|
$
|
267
|
$
|
227
|
$
|
-
|
$
|
494
|
Loans collectively evaluated for impairment
|
7,073
|
916
|
174
|
8,163
|
Total
|
$
|
7,340
|
$
|
1,143
|
$
|
174
|
$
|
8,657
|
|
|
|
|
|
|
|
Residential
|
Consumer &
|
|
December 31, 2012
|
Commercial
|
Real Estate
|
Other Retail
|
Total
|
Loans individually evaluated for impairment
|
$
|
221
|
$
|
82
|
$
|
-
|
$
|
303
|
Loans collectively evaluated for impairment
|
7,307
|
1,027
|
172
|
8,506
|
Total
|
$
|
7,528
|
$
|
1,109
|
$
|
172
|
$
|
8,809
|
|
|
|
|
|
|
|
Residential
|
Consumer &
|
|
March 31, 2012
|
Commercial
|
Real Estate
|
Other Retail
|
Total
|
Loans individually evaluated for impairment
|
$
|
742
|
$
|
117
|
$
|
-
|
$
|
859
|
Loans collectively evaluated for impairment
|
6,266
|
1,404
|
170
|
7,840
|
Total
|
$
|
7,008
|
$
|
1,521
|
$
|
170
|
$
|
8,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show loans related to each
balance in the ALLL by portfolio segment and disaggregated on the basis of the Corporations
impairment methodology (dollars in thousands):
|
|
Residential
|
Consumer &
|
|
March 31, 2013
|
Commercial
|
Real Estate
|
Other Retail
|
Total
|
Loans individually evaluated for impairment
|
$
|
8,756
|
$
|
1,744
|
$
|
-
|
$
|
10,500
|
Loans collectively evaluated for impairment
|
335,012
|
212,907
|
15,144
|
563,063
|
Ending Balance
|
$
|
343,768
|
$
|
214,651
|
$
|
15,144
|
$
|
573,563
|
|
|
|
|
|
`
|
|
Residential
|
Consumer &
|
|
December 31, 2012
|
Commercial
|
Real Estate
|
Other Retail
|
Total
|
Loans individually evaluated for impairment
|
$
|
7,627
|
$
|
1,015
|
$
|
-
|
$
|
8,642
|
Loans collectively evaluated for impairment
|
328,298
|
195,334
|
34,885
|
558,517
|
Ending Balance
|
$
|
335,925
|
$
|
196,349
|
$
|
34,885
|
$
|
567,159
|
|
|
|
|
|
|
|
Residential
|
Consumer &
|
|
March 31, 2012
|
Commercial
|
Real Estate
|
Other Retail
|
Total
|
Loans individually evaluated for impairment
|
$
|
11,150
|
$
|
1,309
|
$
|
-
|
$
|
12,459
|
Loans collectively evaluated for impairment
|
268,592
|
211,286
|
13,308
|
493,186
|
Ending Balance
|
$
|
279,742
|
$
|
212,595
|
$
|
13,308
|
$
|
505,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
NOTE
6
BORROWED FUNDS
The Corporation
is a party to the Blanket Agreement for Advances and Security Agreement, dated
June 20, 2006 (the Blanket Agreement), with
the FHLB of Cincinnati. Advances made to the Corporation under the Blanket
Agreement are collateralized by the FHLB stock and qualifying residential
mortgage loans totaling 150% of the outstanding amount borrowed. These collateralization
matters are outlined in the Blanket Agreement. The advances mature at varying
dates throughout 2013 at interest rates ranging from 2.61% to 3.76%.
The Corporation also has a Cash Management Advance Line of Credit
Agreement (the CMA), dated June 21,
2010, with the FHLB. The CMA is a component of the Blanket Agreement. The
purpose of the CMA is to assist with short-term liquidity management. Under
the terms of the CMA, the Corporation may borrow a maximum of $40 million,
selecting a variable rate of interest for up to 90 days or a fixed rate for a
maximum of 30 days. There were no borrowings outstanding under the CMA as of March
31, 2013 or December 31, 2012.
NOTE 7
POST-RETIREMENT BENEFIT PLAN
|
Three months ended
|
(dollars in thousands)
|
March 31, 2013
|
March 31, 2012
|
Service cost
|
$
|
35
|
$
|
23
|
Interest cost
|
73
|
92
|
Amortization of net loss
|
47
|
-
|
Net periodic pension cost
|
$
|
155
|
$
|
115
|
The Corporation amended the plan subsequent to March
31, 2013. Effective July 1, 2013, employees retiring after that date will no
longer be eligible to receive post-retirement medical insurance coverage. The
Corporation will pay qualifying employees a retirement bonus equal to $20,000
to employees (i) who were hired prior to March 20, 2007; (ii) who retire on or
after July 1, 2013; (iii) who are at least age 59 ½ at the time of retirement;
and (iv) who have at least twenty-five years of service. The bonus will be
paid in a lump sum cash payment within sixty days after retirement.
Current retirees who retired prior to July 1, 2007
will retain their insurance coverage under the current plan structure as of
March 31, 2013. For employees retiring between July 1, 2007 and June 30, 2013
the Corporation made changes to eligibility and the amounts of required
premiums based on age and years of service at the time of retirement.
The Corporation
contributed approximately $107,000 and $39,000 to the plan for the three month
periods ending March 31, 2013 and 2012, respectively.
NOTE
8
RECENT ACCOUNTING PRONOUNCEMENTS
ASU 2013-02,
Comprehensive Income (Topic 220)
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income.
ASU 2013-02 amends recent guidance related to the reporting of
comprehensive income to enhance the reporting of reclassifications out of
accumulated other comprehensive income. ASU 2013-02 became effective for the
Corporation on January 1, 2013 and did not have a significant impact on the
Corporations financial statements. See Note 2 Other Comprehensive Income
(Loss).
28