UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM
10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
20
10
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 0-11709
________________________
First Citizens
Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Tennessee
|
62-1180360
|
(State or other jurisdiction of
|
(IRS Employer Identification No.)
|
incorporation or organization)
|
|
One First
Citizens Place
Dyersburg, Tennessee 38024
(Address of principal executive offices including zip code)
(731) 285-4410
(Registrant's telephone number, including area code)
________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Name of Each Exchange on Which Registered
N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
________________________
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [ ] No [ x ]
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes [ ] No [x]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
[x]
No
[ ]
.
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation
S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. []
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer,"
"accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer [ ] Accelerated filer
[x]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [x]
________________________
The aggregate market value of
voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2010 was
approximately
$77,247,680 based upon the last known sale price prior to such date.
As of
February 15, 2011, the registrant had 3,625,826 outstanding shares of common
stock.
________________________
DOCUMENTS
INCORPORATED BY
REFERENCE:
Certain information called for by Part III of Form
10-K is incorporated by reference to the Proxy Statement for our 2011 Annual
Meeting of Shareholders to be filed with the Commission within 120 days after
December 31, 2010.
ITEM 1. BUSINESS.
General
First Citizens Bancshares, Inc. (the "Company") is a financial holding
company incorporated in Tennessee in 1982. Through its principal bank
subsidiary, First Citizens National Bank (the "Bank"), the Company conducts
commercial banking and financial services operations primarily in West Tennessee. At December 31, 2010, the Company and its subsidiaries had total assets of
$974 million and total deposits of $792 million. The Company's principal executive
offices are located at One First Citizens Place, Dyersburg, Tennessee 38024 and
its telephone number is (731) 285-4410.
The Company,
headquartered in Dyersburg, Tennessee, is the holding company for the Bank and
First Citizens (TN) Statutory Trusts III and IV. These trusts hold the
Company's trust preferred debt and are not consolidated but are accounted for
under the equity method in accordance with generally accepted accounting
principles.
The Bank is a
diversified financial services institution that provides banking and other
financial services to its customers. The Bank provides customary banking
services, such as checking and savings accounts, fund transfers, various types
of time deposits, safe deposit facilities, financing of commercial transactions
and making and servicing both secured and unsecured loans to individuals, firms
and corporations. The Bank is the only community bank in Tennessee recognized
as a Preferred Lender for Farm Service Agency. The Bank's agricultural
services include operating loans as well as financing for the purchase of
equipment and farmland. The Bank's consumer lending department makes direct
loans to individuals for personal, automobile, real estate, home improvement,
business and collateral needs. The Bank typically sells long-term residential
mortgages that it originates to the secondary market without retaining
servicing rights. The Bank's commercial lending operations include various
types of credit services for customers.
The Bank has the following
subsidiaries:
-
First Citizens Financial Plus, Inc., a bank service corporation
wholly owned by the Bank, provides licensed brokerage services that allow the
Bank to compete on a limited basis with numerous non-bank entities that provide
such services to the Company's customer base. The brokerage firm operates
three locations in West Tennessee.
-
White and Associates/First Citizens
Insurance, LLC was chartered by the State of Tennessee and is a general
insurance agency offering a full line of insurance products including
casualty, life and health, and crop insurance. The Bank holds a 50%
ownership in the agency, which is accounted for using the equity method.
The insurance agency operates nine offices in Northwest Tennessee.
-
First Citizens/White and Associates Insurance Company is organized and
existing under the laws of the state of Arizona. Its principal
activity is credit insurance. The Bank holds a 50% ownership in the
agency, which is accounted for using the equity method.
-
First Citizens Investments, Inc. was organized and exists under
laws of the state of Nevada. The principal activity of this entity is to
acquire and sell investment securities as well as collect income from the
portfolio. First Citizens Investments, Inc. owns the following subsidiary:
-
First Citizens Holdings, Inc. is a Nevada corporation and is a wholly
owned subsidiary of First Citizens Investments, Inc., acquires and sells
certain investment securities, collects income from its portfolio, and
owns the following subsidiary:
-
First Citizens Properties, Inc. is a real estate investment trust
organized and existing under the laws of the state of Maryland, the
principal activity of which is to invest in participation interests in
real estate loans made by the Bank and provide the Bank with an
alternative vehicle for raising capital. First Citizens Holdings,
Inc. owns 100% of the outstanding common stock and 60% of the
outstanding preferred stock of First Citizens Properties, Inc.
Directors, executive officers and certain employees and affiliates of the Bank own
approximately 40% of the preferred stock which is reported as
Noncontrolling Interest in Consolidated Subsidiaries in the Consolidated
Balance Sheets of the Company included elsewhere in this Annual Report
on 10-K.
-1-
The following table sets forth a
comparative analysis of key balance sheet metrics of the Company as of December
31, for the years indicated (in thousands):
|
2010
|
|
2009
|
|
2008
|
|
Total assets
|
$
|
974,378
|
|
$
|
956,555
|
|
$
|
927,502
|
Total deposits
|
791,845
|
|
752,146
|
|
734,915
|
Total net loans
|
539,675
|
|
578,614
|
|
589,458
|
Total equity capital
|
89,279
|
|
84,367
|
|
77,063
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below
provides a comparison of the Company's performance to industry standards based
on information provided by the Federal Reserve. The Company is grouped with
peers that have assets totaling $500 million to $1 billion in this analysis.
According to the September 30, 2010 Bank Holding Company Performance Report,
which is the most recent report available as of the date of this Annual Report
on Form 10-K, the Company's peer group consisted of 450 bank holding companies.
The following table presents comparisons of the Company with its peers as
indicated in Bank Holding Company Performance Reports for the years ended
December 31 for each of the years indicated:
|
2010
|
2009
|
2008
|
|
Company
|
Peer
(1)
|
Company
|
Peer
|
Company
|
Peer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income to average assets
|
3.77%
|
3.43%
|
3.74%
|
3.33%
|
3.28%
|
3.39%
|
Net operating income to average assets
|
0.92%
|
0.32%
|
0.89%
|
-0.13%
|
0.83%
|
0.29%
|
Net loan losses to average total loans
|
1.38%
|
1.03%
|
0.93%
|
1.18%
|
0.31%
|
0.52%
|
Tier I capital to average assets
(2)
|
8.87%
|
8.86%
|
8.40%
|
8.51%
|
8.13%
|
8.69%
|
Cash dividends to net income
|
40.86%
|
28.75%
|
45.27%
|
38.66%
|
55.85%
|
42.70%
|
The Company and
the Bank employed a total of 259 full-time equivalent employees as of December
31, 2010. The Company and the Bank are committed to hiring and retaining high
quality employees to execute the Company's strategic plans.
The Company's Internet website address is www.firstcitizens-bank.com. The
Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and all amendments to those reports available free
of charge by link on its website on the "About Us - Investor Relations" webpage
under the caption "SEC Filings" as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission (the "SEC"). Shareholders may request a copy of the annual,
quarterly or current reports without charge by contacting Judy Long, Secretary,
First Citizens Bancshares, Inc., P. O. Box 370, Dyersburg, Tennessee 38025-0370.
Expansion
The Company, through its strategic
planning process, intends to seek profitable opportunities that utilize excess
capital and maximize income in Tennessee. If the Company decides to acquire
other banking institutions, its objective would be asset growth and
diversification into other market areas. Acquisitions and de novo branches
might afford the Company increased economies of scale within operation
functions and better utilization of human resources. The Company would only
pursue an acquisition or de novo branch if the Company's Board of Directors
determines it to be in the best interest of the Company and its shareholders.
The Company does not currently have plans to acquire other banking
institutions.
-2-
In 2008, the Company expanded by
opening a full-service branch in Franklin, Tennessee. The Company also owns
two lots in Jackson, Tennessee which it purchased for construction of
full-service facilities. The lots were purchased in 2007 and 2008, but
construction is temporarily on hold because of current economic conditions.
Construction of these facilities is expected to commence in one to three years.
Competition
The business of
providing financial services is highly competitive. In addition to competing
with other commercial banks in the service area, the Bank competes with savings
and loan associations, insurance companies, savings banks, small loan
companies, finance companies, mortgage companies, real estate investment
trusts, certain governmental agencies, credit card organizations, credit unions
and other enterprises. In 1998, federal legislation allowed credit unions to
expand their membership criteria. Expanded membership criteria coupled with
existing tax-exempt status give credit unions a competitive advantage compared
to banks.
The Bank builds
and implements strategic plans and commitments to address competitive factors
in the various markets it serves. The Bank's primary strategic focus is on
obtaining and maintaining profitable customer relationships in all markets it
serves. The markets demand competitive pricing, but the Bank competes on high
quality customer service that will attract and enhance loyal, profitable
customers to the Bank. Industry surveys have consistently revealed that 65-70%
of customers leave banks because of customer service issues. Accordingly, the
Bank is committed to excellent customer service in all markets that it serves as
a means of branding and distinguishing itself from other financial
institutions. The Bank utilizes advertising, including both newspaper and
radio, and promotional activities to support its strategic plans.
The Bank offers
a typical mix of interest-bearing transactions, savings and time deposit
products, as well as traditional non-interest bearing deposit accounts. The
Bank is a leader in deposit market share compared to competitors in Dyer,
Fayette, Lauderdale, Obion, Tipton and Weakley counties. The Bank has
consistently been a leader in market share of deposits in its markets for
several years. The Bank's market share has been 18% to 20% in Dyer, Fayette,
Lauderdale, Obion, Tipton and Weakley counties combined and in excess of 62% in
Dyer County for the last three years. The following market share information
for these counties (banks only, deposits inside of market) is from the Deposit
Market Share Report, as of June 30, 2010, prepared annually by the FDIC
(dollars in thousands):
|
# of
|
|
Total Deposits
|
|
% of Market Share
|
Bank Name
|
Offices
|
|
June 30, 2010
|
|
As of June 30,
2010
|
First State Bank
|
15
|
|
$
|
747,025
|
|
22.76%
|
First Citizens National Bank
|
13
|
|
612,590
|
|
18.62%
|
Regions Bank
|
9
|
|
280,830
|
|
8.56%
|
Bank of Fayette County
|
7
|
|
203,948
|
|
6.21%
|
Somerville Bank & Trust Co.
|
5
|
|
159,399
|
|
4.86%
|
Bank of Ripley
|
4
|
|
150,071
|
|
4.57%
|
BancorpSouth Bank
|
6
|
|
149,646
|
|
4.56%
|
Commercial Bank & Trust
|
2
|
|
114,499
|
|
3.49%
|
Security Bank
|
6
|
|
98,865
|
|
3.01%
|
INSOUTH Bank
|
2
|
|
95,449
|
|
2.91%
|
Reelfoot Bank
|
6
|
|
93,617
|
|
2.85%
|
First Farmers Bank of Lynchburg
|
3
|
|
74,233
|
|
2.26%
|
First South Bank
|
2
|
|
71,151
|
|
2.17%
|
Patriot Bank
|
2
|
|
58,743
|
|
1.79%
|
Bank of Gleason
|
1
|
|
58,325
|
|
1.78%
|
Bank of Halls
|
2
|
|
53,697
|
|
1.64%
|
Brighton Bank
|
2
|
|
45,208
|
|
1.38%
|
Greenfield Banking Co.
|
2
|
|
40,706
|
|
1.24%
|
Clayton Bank and Trust
|
2
|
|
37,102
|
|
1.13%
|
Lauderdale County Bank
|
2
|
|
36,924
|
|
1.13%
|
Gates Banking & Trust Co.
|
1
|
|
34,828
|
|
1.06%
|
All others
|
8
|
|
64,795
|
|
2.02%
|
Total
|
101
|
|
$
|
3,281,651
|
|
100.00%
|
-3-
The Bank also
competes in the Shelby and Williamson County markets. Because the size and
composition of these two markets is much larger and more diverse than the other
markets in which the Bank operates, Shelby and Williamson Counties are excluded
from the above table. The Bank's market share in Shelby County was 0.75% and
0.62%
as of June 30, 2010 and 2009, respectively. The Bank's market
share in Williamson County was 0.18% and 0.11% as of June 30, 2010 and 2009,
respectively.
Regulation and Supervision
The Company is a
one-bank financial holding company under the Bank Holding Company Act of 1956,
as amended, and is subject to supervision and examination by the Board of
Governors of the Federal Reserve (the "Federal Reserve"). As a financial
holding company, the Company is required to file with the Federal Reserve
annual reports and other information regarding its business obligations and
those of its subsidiaries. Federal Reserve approval must be obtained before
the Company may:
Acquire ownership or control of any voting securities of a bank
or bank holding company where the acquisition results in the bank holding
company owning or controlling more than 5% of a class of voting securities of that bank or bank holding company; or
Acquire substantially all assets of a bank or bank holding
company or merge with another bank holding company.
Federal Reserve
approval is not required for a bank subsidiary of a bank holding company to
merge with or acquire substantially all assets of another bank if prior
approval of a federal supervisory agency, such as the Comptroller of the
Currency is required under the Bank Merger Act.
The Bank Holding
Company Act provides that the Federal Reserve shall not approve any
acquisition, merger or consolidation that would result in a monopoly or would
be in furtherance of any combination or conspiracy to monopolize or attempt to
monopolize the business of banking in any part of the United States. Further, the Federal Reserve may not approve any other proposed acquisition, merger,
or consolidation, the effect of which might be to substantially lessen
competition or tend to create a monopoly in any section of the country, or
which in any manner would be in restraint of trade, unless the anti-competitive
effect of the proposed transaction is clearly outweighed in favor of public
interest by the probable effect of the transaction in meeting convenience and
needs of the community to be served. Further, an application may be denied if
the applicant has failed to provide the Federal Reserve with adequate assurances
that it will make available such information on its operations and activities,
and the operations and activities of any affiliate, deemed appropriate to
determine and enforce compliance with the Bank Holding Company Act and any
other applicable federal banking statutes and regulations. In addition,
consideration is given to the competence, experience and integrity of the
officers, directors and principal shareholders of the applicant and any
subsidiaries as well as the banks and bank holding companies concerned. The
Federal Reserve also considers the record of the applicant and its affiliates
in fulfilling commitments to conditions imposed by the Federal Reserve in
connection with prior applications.
A bank holding
company is prohibited with limited exceptions from engaging directly or
indirectly through its subsidiaries in activities unrelated to banking or
managing or controlling banks. One exception to this limitation permits
ownership of a company engaged solely in furnishing services to banks; another
permits ownership of shares of the company, all of the activities of which the
Federal Reserve has determined after due notice and opportunity for hearing, to
be so closely related to banking or managing or controlling banks, as to be a
proper incident thereto.
Usury, State Legislation and
Economic Environment
Tennessee usury laws limit the rate of interest that may be charged by banks. Certain
federal laws provide for preemption of state usury laws.
-4-
Tennessee usury laws permit interest at an annual rate of four percentage points above the
average prime loan rate for the most recent week for which such an average rate
has been published by the Federal Reserve, or 24%, whichever is less. The "Most
Favored Lender Doctrine" permits national banks to charge the highest rate
permitted by any state lender.
Specific usury
laws may apply to certain categories of loans, such as the limitation placed on
interest rates on single pay loans of $1,000 or less with a term of one year or
less. Rates charged on installment loans, including credit cards as well as
other types of loans, may be governed by the Industrial Loan and Thrift
Companies Act.
Gramm-Leach-Bliley Act
Among other
things, the Gramm-Leach-Bliley Financial Modernization Act of 1999 ("GLBA") modified
financial privacy and community reinvestment laws. The new financial privacy
provisions generally prohibit financial institutions such as the Bank from
disclosing non-public personal financial information to third parties unless
customers have the opportunity to opt out of the disclosure. GLBA also
magnifies the consequences of a bank receiving less than a satisfactory
Community Reinvestment Act ("CRA") rating, by freezing new activities until the
institution achieves a better CRA rating.
Bank Secrecy Act
Over the past 30
plus years, Congress has passed several laws impacting a financial
institution's responsibilities relating to the Bank Secrecy Act. In 2005, the
Federal Financial Institutions Examination Council ("FFIEC") and federal
banking agencies released the interagency "Bank Secrecy Act Anti-Money
Laundering Examination Manual." The manual emphasizes a banking organization's
responsibility to establish and implement risk-based policies, procedures and
processes to comply with the Bank Secrecy Act and safeguard its operations from
money laundering and terrorist financing. It is a compilation of existing
regulatory requirements, supervisory expectations and sound practices for Bank
Secrecy Act/Anti-Money Laundering ("BSA/AML") compliance. An effective BSA/AML
compliance program requires sound risk management; therefore, the manual also
provides guidance on identifying and controlling risk associated with money
laundering and terrorist financing.
The specific
examination procedures performed will depend on the BSA/AML risk profile of the
banking organization, the quality and quantity of independent testing, the
financial institution's history of BSA/AML compliance and other relevant
factors. The Bank has implemented effective risk-based policies and
procedures that reinforce existing practices and encourage a vigilant
determination to prevent the institution from becoming associated with
criminals or being used as a channel for money laundering or terrorist
financing activities.
USA Patriot Act
The USA Patriot
Act (the "Patriot Act") enhances the powers of the federal government and law
enforcement organizations to combat terrorism, organized crime and money
laundering. The Patriot Act significantly amended and expanded the application
of the Bank Secrecy Act, including enhanced customer identity measures, new
suspicious activity reporting rules and enhanced anti-money laundering
programs. Under the Patriot Act, each financial institution is required to
establish and maintain anti-money laundering programs, which include, at a
minimum, the development of internal policies, procedures, and controls; the
designation of a compliance officer; an ongoing employee training program; and
an independent audit function to test programs. In addition, the Patriot Act
requires the federal banking agencies to consider the record of a bank or
banking holding company in combating money laundering activities in their
evaluation of bank and bank holding company merger or acquisition transactions.
The Bank has implemented policies and procedures in compliance with stated
regulations of the Patriot Act.
FDIC Insurance Coverage
Beginning with
the Emergency Economic Stabilization Act of 2008, several changes have been
made to federal deposit insurance coverage with regard to the types of accounts
covered and coverage limits. Included in these changes, basic FDIC coverage
per depositor temporarily increased to $250,000 effective through December 31,
2013 and rules on revocable trusts were amended to remove qualification
requirements and allow $250,000 coverage per beneficiary. Two separate
insurance components were created under the FDIC Temporary Liquidity Guarantee
Program: (i) the Debt Guarantee Program; and (ii) the Transaction Account
Guarantee Program ("TAGP"). The Bank opted to participate only in the TAGP
component, under which certain non-interest-bearing transaction account
balances are temporarily fully guaranteed through June 30, 2010. The Bank's
FDIC insurance premium assessments will be affected based on participation in
TAGP and also as a result of assessment increases required to replenish the
FDIC insurance fund ("DIF") following the failure of numerous financial
institutions in 2008 and 2009. Both the increase of deposit increase to
$250,000 per depositor and the unlimited deposit insurance for certain
non-interest bearing transaction accounts (similar to those accounts covered by
TAGP) were made permanent as part of the Dodd-Frank Wall Street Reform and
Protection Act (the "Dodd-Frank Act") signed into law in July of 2010.
-5-
As a result of
increased bank failures and a decrease in the DIF, on September 29, 2009, the
FDIC required all insured financial institutions to prepay three years of
deposit insurance premiums. The FDIC may require additional special assessment
payments if the DIF balance continues to decline.
In October 2008,
the FDIC proposed a rule to alter the way in which it differentiates for risk
in the risk-based assessment system and to revise deposit insurance assessment
rates, including base assessment rates. The FDIC also proposed to introduce
three adjustments that could be made to an institution's initial base
assessment rate, including (i) a potential decrease of up to two basis points
for long-term unsecured debt, including senior and subordinated debt, (ii) a
potential increase for secured liabilities in excess of 15% of domestic
deposits and (iii) for certain institutions, a potential increase for brokered
deposits in excess of 10% of domestic deposits. In addition, the FDIC proposed
raising the current rates uniformly by 7 basis points for the assessment for
the first quarter of 2009. The proposal for first quarter 2009 assessment rates
was adopted as a final rule in December 2008. On April 1, 2009, the FDIC made
additional changes to assessment rates, increasing them to 10-14 basis points
for Risk Category I institutions and 45 basis points for Risk Category IV
institutions. In addition, on May 22, 2009, the FDIC adopted a final rule
imposing up to a 10-basis point emergency special assessment based on a bank's
Report of Condition as of June 30, 2009. This special assessment was collected
on September 30, 2009. The Dodd-Frank Act also revised the assessment base for
deposit insurance premiums so that assessments will be based on a bank's
average consolidated total assets less its average amount of tangible equity.
As part of this change in the assessment base, there are proposed changes to
assessment rates.
Customer Information Security
and Customer Financial Privacy
The Board of
Governors of the Federal Reserve System published guidelines for Customer
Information Security and Customer Financial Privacy with a mandatory effective
date of July 1, 2001. The Bank has established policies in adherence to the
published guidelines.
The three
principal requirements relating to the Privacy of Consumer Financial
Information in GLBA are as follows:
Financial institutions must provide customers with notices
describing their privacy policies and practices, including policies with
respect to disclosure of nonpublic personal information to affiliates and to
nonaffiliated third parties. Notices must be provided at the time the customer
relationship is established and annually thereafter;
Subject to specified exceptions, financial institutions may not
disclose nonpublic personal information about consumers to any nonaffiliated
third party unless consumers are given a reasonable opportunity to direct that
such information not be shared (to "opt out"); and
Financial institutions generally may not disclose customer
account numbers to any nonaffiliated third party for marketing purposes.
The Customer
Information Security guidelines implement section 501(b) of GLBA, which
requires agencies to establish standards for financial institutions relating to
administrative, technical and physical safeguards for customer records and
information. The guidelines require financial institutions to establish an
information security program to: identify and assess risks that may threaten
customer information; develop a written plan containing policies and procedures
to manage and control these risks; implement and test the plan; and adjust the
plan on a continuing basis to account for changes in technology, the
sensitivity of customer information, and internal or external threats to information
security.
Each institution
may implement a security program appropriate to its size, complexity, nature
and scope of its operations. The Bank has structured and implemented a
financial security program that complies with all principal requirements of the
act.
-6-
Regulatory
agencies also published the "Interagency Guidance on Response Programs for
Unauthorized Access to Customer Information and Customer Notice." Each
financial institution is required to implement a response program to address
unauthorized access to sensitive customer information maintained by the
institution or its service providers. The Bank has implemented an appropriate
response program, which includes: formation of an "Incident Response Team";
properly assessing and investigating any incident; notifying the Office of the
Comptroller of the Currency (the "OCC") of any security breach, if necessary;
taking appropriate steps to contain and control any incident; and notifying
affected customers when required.
Identity Theft
Prevention Program
The Fair and
Accurate Credit Transactions Act ("FACT") requires banking institutions to
implement an Identity Theft Prevention Program to detect, prevent and mitigate
identity theft in connection with the opening of certain accounts or certain existing
accounts. Program requirements include incorporating federal guidelines on
investigating customer address discrepancies and identifying other "red flags"
that may indicate potential identity theft. The Bank has implemented a
comprehensive Identity Theft Prevention Program, which covers all customer
accounts and accomplishes the following standards as set forth in FACT: (1)
identify relevant red flags for covered accounts; (2) detect red flags; (3)
respond appropriately to any red flags detected; and (4) ensure the program is
updated periodically.
Federal
Legislation on Banking Products and Services
Following the
economic crises of 2008, Congress and the regulatory agencies issued
legislation, rules and regulations creating or amending numerous requirements
on disclosures, documentation, and procedures in relation to several products
and services offered by financial institutions. Many of these proposals
provide customers with additional disclosure information and protections. The
regulatory changes include, but are not limited to, the Real Estate Settlement
Procedures Act, Federal Reserve Regulation E governing overdraft protection,
the Truth in Lending Act and the Truth in Savings Act. The Bank's policies and
procedures are being revised to incorporate recent regulatory requirements and
ensure full compliance.
Federal Monetary
Polices
Monetary
policies of the Federal Reserve have a significant effect on operating results
of bank holding companies and their subsidiary banks. The Federal Reserve regulates
the national supply of bank credit by open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in
reserve requirements against bank deposits.
Federal Reserve
monetary policies have materially affected the operating results of commercial
banks in the past and are expected to do so in the future. The nature of
future monetary policies and the effect of such policies on the business and
earnings of the company and its subsidiaries cannot be accurately predicted.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act
The passage of the Dodd-Frank Act brought about a major overhaul of the
current financial institution regulatory system. Among other things,
the Dodd-Frank Act
establishes a
new, independent Consumer Financial Protection Bureau tasked with protecting
consumers from unfair, deceptive and abusive financial products and practices.
The Dodd-Frank Act also requires the implementation of the "Volcker Rule" for
banks and bank holding companies, which would prohibit, with certain limited
exceptions, proprietary trading, investment in and sponsorship of hedge funds
and private equity funds, and otherwise limit the relationships with such
funds. The Dodd-Frank Act includes provisions that, among other things,
reorganize bank supervision and strengthen the Federal Reserve. The Dodd-Frank
Act also requires fees charged for debit card transactions, commonly referred
to as interchange fees, to be both "reasonable and proportional" to the cost
incurred by the card issuer.
Further, the Dodd-Frank Act provides that the appropriate federal
regulators must establish standards prohibiting as an unsafe and unsound
practice any compensation plan of a bank holding company or other "covered
financial institution" that provides an insider or other employee with
"excessive compensation" or could lead to a material financial loss to such
firm. In June 2010, prior to the implementation of the Dodd-Frank Act, the bank
regulatory agencies promulgated the Interagency Guidance on Sound Incentive
Compensation Policies, which requires that financial institutions establish
metrics for measuring the impact of activities to achieve incentive
compensation with the related risk to the financial institution of such behavior.
Together, the Dodd-Frank Act and the recent guidance on compensation may impact
the current compensation policies at the Bank. The Dodd-Frank Act provides
other restrictions including limiting the ability of financial institutions to
utilize trust preferred securities as tier one capital going forward, and
requiring institutions to retain credit risk when selling loans to third
parties.
-7-
Basel III
On September 12, 2010, the oversight body of the Basel Committee
announced a package of reforms which will increase existing capital
requirements substantially over the next four years as well as add additional
liquidity requirements onto banks, commonly referred to as Basel III. These
reforms were endorsed by the G20 at the summit held in Seoul, South Korea in November 2010. The short-term and long-term impact of the new Basel III capital
standards and the forthcoming new capital rules to be proposed for non-Basel
III U.S. banks is uncertain. As a result of the recent deterioration in the
global credit markets and the potential impact of increased liquidity risk and
interest rate risk, it is unclear what the short-term impact of the
implementation of Basel III may be or what impact a pending alternative
standardized approach to Basel III option for non-Basel III U.S. banks may have
on the cost and availability of different types of credit and the potential
compliance costs of implementing the new capital standards.
Small
Business Act of 2011
As part of the Small Business Act of 2010, the Small Business Lending
Fund (the "SBLF") was created within the Treasury Department. As announced on
January 14, 2010, the SBLF will buy preferred shares from banks, with the rate
of return on these shares directly tied to the increase in small business
lending undertaken at the bank. To date, the Bank has not chosen to
participate in the SBLF.
Revisions
to Regulation E
On
July 31, 2010, the Federal Reserve implemented revised Regulation E. The effect
of this revision was to allow customers of the Bank to opt out of overdraft
protection programs, and thereby potentially reduce fee income generated by the
Bank. The Bank has taken all steps necessary to be compliant with the revised
Regulation E.
Insurance
Activities
Subsidiaries of
the Company sell various types of insurance as agents in the State of Tennessee. Insurance activities are subject to regulation by the states in which such
business is transacted. Although most of such regulation focuses on insurance
companies and their insurance products, insurance agents and their activities
are also subject to regulation by the states, including, among other things,
licensing and marketing and sales practices.
-8-
ITEM 1A. RISK FACTORS.
Information
contained herein includes forward-looking statements with respect to the
beliefs, plans, risks, goals and estimates of the Company. Forward-looking
statements are necessarily based upon estimates and assumptions that are
inherently subject to significant banking, economic, and competitive
uncertainties, many of which are beyond management's control. When used in
this discussion, the words "anticipate," "project," "expect," "believe,"
"should," "will," "intend," "is likely," "going forward," "may" and other
expressions are intended to identify forward-looking statements. These
forward-looking statements are within the meaning of section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended. Such statements may include, but are not limited to,
capital resources, strategic planning, acquisitions or de novo branching,
ability to meet capital guidelines, legislation and governmental regulations
affecting financial services companies, construction of new branch locations,
dividends, critical accounting policies, allowance for loan losses, fair value
estimates, goodwill, occupancy and depreciation expense, held-to-maturity
securities, available-for-sale securities, trading securities, cash flows, core
deposit intangibles, diversification in the real estate loan portfolio, interest
income, maturity of loans, loan impairment, loan ratings, charge-offs, other
real estate owned, maturity and re-pricing of deposits, borrowings with call
features, dividend payout ratio, off-balance sheet arrangements, the impact of
recently issued accounting standards, changes in funding sources, liquidity,
interest rate sensitivity, net interest margins, debt securities, non-accrual
status of loans, contractual maturities of mortgage-backed securities and
collateralized mortgage obligations, other-than-temporary impairment of
securities, amortization expense, deferred tax assets, independent appraisals
for collateral, property enhancement or additions, efficiency ratio, ratio of
assets to employees, net income, changes in interest rates, loan policies,
categorization of loans, maturity of FHLB borrowings and the effectiveness of
internal control over financial reporting.
Forward-looking
statements are based upon information currently available and represent
management's expectations or predictions of the future. As a result of risks
and uncertainties involved, actual results could differ materially from such
forward-looking statements. The potential factors that could affect the
Company's results include but are not limited to:
Changes in general economic and business conditions;
Changes in market rates and prices of securities, loans, deposits
and other financial instruments;
Changes in legislative or regulatory developments affecting
financial institutions in general, including changes in tax, banking,
insurance, securities or other financial service related laws;
Changes in government fiscal and monetary policies;
The ability of the Company to provide and market competitive
products and services;
Concentrations within the loan portfolio;
Fluctuations in prevailing interest rates and the effectiveness of the Company's
interest rate hedging strategies;
The Company's ability to maintain credit quality;
The effectiveness of the Company's risk monitoring systems;
The ability of the Company's borrowers to repay loans;
The availability of and costs associated with maintaining and/or
obtaining adequate and timely sources of liquidity;
Geographic concentration of the Company's assets and susceptibility to economic
downturns in that area;
The ability of the Company to attract, train and retain qualified
personnel;
Changes in consumer preferences; and
Other factors generally understood to affect the financial
results of financial services companies.
-9-
The Company undertakes no obligation to update its
forward-looking statements to reflect events or circumstances that occur after
the date of this Annual Report on Form 10-K.
In addition to the factors listed
above, management believes that the risk factors set forth below should be
considered in evaluating the Company's business. The relevant risk factors
outlined below may be supplemented from time to time in the Company's press
releases and filings with the Securities and Exchange Commission.
We are
subject to credit quality risks and our credit policies may not be sufficient
to avoid losses.
We are subject
to the risk of losses resulting from the failure of borrowers, guarantors and
related parties to pay interest and principal amounts on loans. Although we
maintain credit policies and credit underwriting, monitoring and collection
procedures that management believes are sufficient to manage this risk, these
policies and procedures may not prevent losses, particularly during periods in
which the local, regional or national economy suffers a general decline. If a
large number of borrowers fail to repay their loans, our financial condition
and results of operations may be adversely affected.
Earnings could be adversely
affected if values of other real estate owned decline.
We are
subject to the risk of losses from the liquidation and/or valuation adjustments
on other real estate owned. We owned over 100 properties totaling $14.7
million in other real estate owned as of December 31, 2010. Other real estate
owned is valued at the lower of cost or fair market value less cost to sell.
Fair market values are based on independent appraisals for properties valued at
$50,000 or greater and appraisals are updated annually. We may incur future
losses on these properties if economic and real estate market conditions result
in further declines in the fair market value of these properties.
If our allowance for loan
losses becomes inadequate, our financial condition and results of operations
could be adversely affected.
We maintain an
allowance for loan losses that we believe is a reasonable estimate of known and
inherent losses in our loan portfolio. Management uses various assumptions and
judgments to evaluate on a quarterly basis the adequacy of the allowance for
loan losses in accordance with generally accepted accounting principles as well
as regulatory guidelines. The amount of future losses is susceptible to changes
in economic, operating and other conditions, changes in interest rates which
may be beyond our control, and these losses may exceed current estimates.
Although we believe the allowance for loan losses is a reasonable estimate of
known and inherent losses in our loan portfolio, we cannot fully predict such
losses or that our loan loss allowance will be adequate in the future.
Excessive loan losses could have an adverse effect on our financial
performance.
Federal and
state regulators periodically review our allowance for loan losses and may
require us to increase our provision for loan losses or recognize further loan
charge-offs, based on judgments different than those of our management. Any
increase in the amount of our provision or loans charged-off as required by
these regulatory agencies could have an adverse effect on our results of
operations.
Changes in interest rates
could have an adverse effect on our earnings.
Our
profitability is in part a function of interest rate spread, or the difference
between interest rates earned on investments, loans and other interest-earning
assets and the interest rates paid on deposits and other interest-bearing
liabilities. Interest rates are largely driven by monetary policies set by the
Federal Open Market Committee, or FOMC, and trends in the prevailing market
rate of interest embodied by the yield curve. The FOMC establishes target
rates of interest to influence the cost and availability of capital and promote
national economic goals. In December 2008, the FOMC cut rates to a historical
low of a range of 0.00% to 0.25%. Federal funds rates remained at that level
through December 2010. The yield curve is a representation of the relationship
between short-term interest rates to longer-term debt maturity rates.
Currently, the yield curve is fairly steep as short-term rates continue at
historic lows. As of December 31, 2010, the Bank is liability sensitive in
terms of interest rate risk exposure, meaning that the Bank will likely
experience margin compression when federal funds rates increase. In other
words, upward pressure on deposit interest rates will outpace increases in the
interest rates on interest-earning assets. Deposits are currently priced at
historically low levels and are likely to reprice at a faster pace than
interest-earning assets when the rate environment begins rising. The majority
of variable-rate loans are priced at floors that will require significant
increase in federal fund and prime rates before loan yields increase. Federal
Home Loan Bank borrowings comprise the majority of wholesale borrowings, the
majority of which will reprice steadily over the next 18 months.
-10-
Prepayment of
principal cash flows from the investment portfolio is expected to be steady in
2011 as rates continue to be very low. Credit availability has improved
recently because of the actions of the Federal Reserve and U. S. Treasury
Department as described above. Reinvestment rates on the investment portfolio
have dropped significantly (greater than 100 basis points) over the last 12
months.
If the rate of
interest paid on deposits and other borrowings increases more than the rate of
interest earned on loans and other investments, our net interest income and,
therefore, earnings could be adversely affected. Earnings could also be
adversely affected if the rates on loans and other investments fall more
quickly than those on deposits and other borrowings. While management takes
measures to guard against interest rate risk, there can be no assurance that
such measures will be effective in minimizing the exposure to interest rate
risk. A sudden and significant increase in the market rate of interest could have
a material adverse effect on the Company's financial position and earnings.
We are geographically
concentrated in West Tennessee, and changes in local economic conditions may
impact our profitability.
We operate
primarily in West Tennessee and the majority of all loan customers and most
deposit and other customers live or has operations in this area. Accordingly,
our success depends significantly upon growth in population, income levels,
deposits, housing starts and continued attraction of business ventures to this
area. Our profitability is impacted by changes in general economic conditions
in this market. One area of particular concern for 2011 is the residential real
estate market in the Shelby County and surrounding markets. As inventories
escalated and sales declined in 2008 and 2009, the loan portfolio was
negatively impacted as the real estate market moved toward economic equilibrium
in 2010. Additionally, unfavorable local or national economic conditions could
reduce our growth rate, affect the ability of our customers to repay their
loans and generally affect our financial condition and results of operations.
We are less able
than larger institutions to spread the risks of unfavorable local economic
conditions across a large number of diversified economies. Moreover, we are
unable to give assurance that we will benefit from any market growth or
favorable economic conditions in our primary market areas if they do occur.
If financial market conditions
worsen or our loan demand increases significantly, our liquidity position could
be adversely affected.
We rely on
dividends from the Bank as our primary source of funds. The Bank's primary
sources of funds are client deposits and loan repayments. While scheduled loan
repayments have historically been a relatively stable source of funds, they are
susceptible to the inability of borrowers to repay the loans. The ability of
borrowers to repay loans can be adversely affected by a number of factors,
including changes in economic conditions, adverse trends or events affecting
business industry groups, reductions in real estate values or markets, business
closings or lay-offs, natural disasters and national or international
instability. Additionally, deposit levels may be affected by a number of
factors, including rates paid by competitors, general interest rate levels,
regulatory capital requirements, returns available to clients on alternative
investments and general economic conditions. Accordingly, we may be required
from time to time to rely on secondary sources of liquidity to meet withdrawal
demands or otherwise fund operations. Such sources include Federal Home Loan
Bank advances, sales of securities and loans, and federal funds lines of credit
from correspondent banks, as well as out-of-market time deposits. While we
believe that these sources are currently adequate, there can be no assurance
they will be sufficient to meet future liquidity demands, particularly if we
continue to grow and experience increasing loan demand. We may be required to
slow or discontinue loan growth, capital expenditures or other investments or
liquidate assets should such sources not be adequate.
Market conditions could
adversely affect our ability to obtain additional capital on favorable terms,
should we need it.
Our business
strategy calls for continued growth. We anticipate that we will be able to
support this growth through the generation of additional deposits at new branch
locations, as well as through returns realized as a result of investment
opportunities. However, we may need to raise additional capital in the future
to support continued growth and maintain capital levels. We may not be able to
obtain additional capital in the amounts or on terms satisfactory to us. Growth
may be constrained if we are unable to raise additional capital as needed.
-11-
Failure to remain competitive
in an increasingly competitive industry may adversely affect results of
operations and financial condition.
We encounter
strong competition from other financial institutions in our market areas. In
addition, established financial institutions not already operating in our
market areas may open branches in our market areas at future dates or may
compete in the market via the internet. Certain aspects of our banking business
also compete with savings institutions, credit unions, mortgage banking
companies, consumer finance companies, insurance companies and other
institutions, some of which are not subject to the same degree of regulation or
restrictions imposed on us. Many of these competitors have substantially
greater resources and lending limits and are able to offer services that we do
not provide. While we believe that we compete effectively with these other
financial institutions in our market areas, we may face a competitive
disadvantage as a result of our smaller size, smaller asset base, lack of
geographic diversification and inability to spread our marketing costs across a
broader market. If we have to raise interest rates paid on deposits or lower
interest rates charged on loans to compete effectively, our net interest margin
and income could be negatively affected. Failure to compete effectively to
attract new or to retain existing clients may reduce or limit our margins and
our market share and may adversely affect our results of operations and
financial condition.
We expect the failure of other
banks to increase our expenses.
The failure of
numerous banks from 2008 through 2010 may have a negative impact on our
earnings, as premiums required for FDIC insurance may continue to increase in
2011 and beyond.
In 2009, we paid FDIC deposit insurance assessments
totaling $5.6 million, including a special assessment of $425,000 paid during
third quarter 2009 and prepaid assessment of $4.5 million paid in fourth
quarter 2009, as compared to aggregate payments of approximately $144,000 in
2008. In 2010, approximately $1.2 million of the prepaid assessment was
expensed and included in non-interest expense. We cannot give any assurances
that the FDIC will not require additional special assessments or increase
deposit insurance assessments in the future.
Adverse
perceptions about our business could adversely affect our results of operations
and financial condition.
We believe that
our reputational risk increased significantly during the recent economic
recession as a result of the elevated number of bank failures and volume of
negative media headlines related to the banking industry. As a result, the FDIC
implemented various programs to help mitigate such risks, including increasing
deposit insurance limits to $250,000. As part of its strategic initiatives,
management implemented various action plans including communications with and
training sessions for our staff and communications to local customers and civic
groups regarding management's view on stability in the Company as well as most
local community banking institutions.
The public
perception of our ability to conduct business and expand our customer base may
also be affected by practices of the Company's board of directors, management
and employees. Significant relationships with vendors, customers and other
external parties may also affect our reputation. Adverse perceptions about our
business practices or the business practices of those with whom we have
significant relationships could adversely impact our results of operations and
financial condition.
We are subject to extensive
government regulation and supervision.
We are subject
to extensive federal and state regulation and supervision. Banking regulations
are primarily intended to protect depositors' funds, federal deposit insurance
funds and the banking system as a whole, not our shareholders. These
regulations affect our lending practices, capital structure, investment
practices and dividend policy and growth, among other things. Future changes
to statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could
affect us in substantial and unpredictable ways. Such changes could subject us
to additional costs, limit the types of financial services and products we may
offer and/or increase the ability of non-banks to offer competing financial
services and products, or decrease the flexibility in pricing certain products
and services by the Bank, among other things. Failure to comply with laws,
regulations or policies could result in sanctions by regulatory agencies, civil
money penalties, civil liability and/or reputation damage, which could have a
material adverse effect on our financial condition and results of operations.
While our policies and procedures are designed to deter and detect any such
violations, there can be no assurance that such violations will not occur.
-12-
Our common stock is not listed
or traded on any established securities market and is normally less liquid than
securities traded in those markets.
Our common stock
is not listed or traded on any established securities market and we have no
plans to seek to list our common stock on any recognized exchange. Accordingly,
our common stock has substantially less daily trading volume than the average
securities listed on any national securities exchange. Most transactions in our
common stock are privately negotiated trades and the shares are very thinly
traded. There is no dealer for our stock and no "market maker." Our shares do
not have a trading symbol. The lack of a liquid market can produce downward
pressure on our stock price and can reduce the marketability of our shares.
Our ability to pay dividends
may be limited.
As a holding
company, the Company is a separate legal entity from the Bank and does not
conduct significant income-generating operations of its own. It currently
depends upon the Bank's cash and liquidity to pay dividends to its
shareholders. We cannot provide assurance that in the future the Bank will have
the capacity to pay dividends to the Company. Various statutes and regulations
limit the availability of dividends from the Bank. It is possible, depending
upon the Bank's financial condition and other factors, the Bank's regulators
could assert that payment of dividends by the Bank to the Company is an unsafe
or unsound practice. In the event that the Bank is unable to pay dividends to
the Company, we may not be able to pay dividends to our shareholders.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Bank has 16
full-service bank financial centers, three drive-through only branches, one
loan production office and 30 ATMs spread over nine
Tennessee counties.
A list of available banking locations and hours is maintained on the Bank's
website (www.firstcitizens-bank.com) under the "Locate Us" section. The Bank
owns and occupies the following properties:
The Bank's main branch and executive offices are located in a
six-story building at One First Citizens Place (formerly 200 West Court),
Dyersburg, Dyer County, Tennessee. This property also includes the Banking Annex, which has
an address of 215-219 Masonic Street. The Banking Annex houses the Bank's
operations, information technology, call center, bank security and mail
departments;
The Bank's downtown drive-through branch is located at 117 South
Church Street, Dyersburg, Dyer County, Tennessee, and is a remote motor bank
with six drive-thru lanes and a drive-up ATM lane;
The Green Village Financial Center, located at 620 U.S. 51 Bypass adjacent to the Green Village Shopping Center in Dyersburg,
Dyer County, Tennessee, is a full-service banking facility;
The Newbern Financial Center, a full-service facility, is located
on North Monroe Street, Newbern, Dyer County, Tennessee;
The Industrial Park Financial Center located at 2211 St. John Avenue, Dyersburg,
Dyer County, Tennessee is a full-service banking facility;
The Ripley Financial Center is a full-service facility located at
316 Cleveland Street in Ripley, Lauderdale County, Tennessee;
The Troy Financial Center is a full-service banking facility
located on Harper Street just west of Highway 51 in Troy, Obion County, Tennessee;
-13-
The Union City Financial Center operates one full-service
facility, one motor branch and three ATMs in Obion County. The main office is
located at 100 Washington Avenue in Union City, Tennessee, and the drive-through branch
is located across from the main office at First and Harrison Streets.
The Martin Financial Center is a full-service facility located at
200 University Avenue, Martin, Weakley County, Tennessee;
The Munford Financial Center is a full-service facility
located
at 1426 Munford Avenue in Munford, Tipton County, Tennessee. In addition, a
drive-through facility is located at 1483 Munford Avenue, also in Munford;
The Atoka Financial Center is a full-service facility
located
at 123 Atoka-Munford Avenue, Atoka, Tipton County, Tennessee;
The Millington Financial Center is a full-service branch facility
located at 8170 Highway 51 N. Millington, Shelby County, Tennessee;
The Bartlett Financial Center is a full-service facility
located
at 7580 Highway 70, Bartlett, Shelby County, Tennessee;
The Arlington Financial Center is a full-service facility located
at 5845 Airline Road, Arlington, Shelby County, Tennessee;
The Oakland Financial Center is a full-service facility located
at 7285 Highway 64, Oakland, Fayette County, Tennessee;
The Collierville Financial Center is a full-service facility
located at 3668 South Houston Levee in Collierville, Shelby County, Tennessee;
The Franklin Financial Center is a full-service facility located
at 1304 Murfreesboro Road in Franklin, Williamson County, Tennessee;
A lot located on Christmasville Cove in Jackson, Madison County,
Tennessee, that was purchased in 2007 and on which the Company expects to
construct a full-service branch location in the next one to three years; and
A lot located on Union University Drive in Jackson, Madison County, Tennessee,
that was purchased in February 2008 and on which the Company expects to
construct a full-service branch in the next one to three years.
The Bank owns
all properties and there are no liens or encumbrances against any properties
owned by the Bank. All properties described above are adequate and appropriate
facilities to provide banking services as noted and are adequate to handle
growth expected in the foreseeable future. As growth continues or needs
change, individual property enhancements or additional properties will be
evaluated as necessary.
ITEM 3. LEGAL PROCEEDINGS.
Various legal claims
arise from time to time through the normal course of business of the Company
and its subsidiaries. There was no material pending or threatened litigation
against the Company or its subsidiaries as of December 31, 2010.
-14-
PART II
ITEM 5. MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Holders and Market Information
As of February
15, 2011, there were 1,062 shareholders of the Company's common stock. The
Company's common stock is not listed or traded on any established public
trading market. The table below shows the quarterly range of high and low sale
prices for the Company's common stock during the fiscal years 2010 and 2009. These
sale prices represent known transactions reported to the Company and do not
necessarily represent all trading transactions for the periods.
Year
|
|
|
High
|
|
Low
|
2010
|
First Quarter
|
|
$
|
32.00
|
|
$
|
32.00
|
|
Second Quarter
|
|
32.00
|
|
32.00
|
|
Third Quarter
|
|
32.00
|
|
32.00
|
|
Fourth Quarter
|
|
34.00
|
|
32.00
|
|
|
|
|
|
|
2009
|
First Quarter
|
|
$
|
31.00
|
|
$
|
28.00
|
|
Second Quarter
|
|
28.00
|
|
26.00
|
|
Third Quarter
|
|
26.00
|
|
26.00
|
|
Fourth Quarter
|
|
32.00
|
|
29.80
|
Dividends
The Company paid
aggregate dividends per share of the Company's common stock of $1.00 in 2010
and $1.04 in 2009. The following quarterly dividends per share of common stock
were paid for 2010 and 2009:
Quarter
|
|
2010
|
|
2009
|
First Quarter
|
|
$
|
0.15
|
|
$
|
0.29
|
Second Quarter
|
|
0.15
|
|
0.15
|
Third Quarter
|
|
0.15
|
|
0.15
|
Fourth Quarter
(1)
|
|
0.55
|
|
0.45
|
Total
|
|
$
|
1.00
|
|
$
|
1.04
|
(1) On
December 15, 2010, the Company paid a special dividend of $0.40 per share,
payable to holders of record as of November 15, 2010, in addition to the fourth
quarter dividend of $0.15 per share. On December 15, 2009, the Company paid a
special dividend of $0.30 per share, payable to holders of record as of
November 15, 2009, in addition to the fourth quarter dividend of $0.15 per
share.
Future dividends will depend on the
Company's earnings, financial condition, regulatory capital levels and other
factors, which the Company's Board of Directors considers relevant. See the
section above entitled "Item 1. Business - Regulation and Supervision" and Note
16 to the Company's Consolidated Financial Statements included elsewhere in
this Annual Report on 10-K for more information on restrictions and limitations
on the Company's ability to pay dividends.
Issuer Purchases of Equity
Securities
The Company had
no publicly announced plans or programs for purchase of stock during 2010.
There were no shares of Company common stock repurchased during the quarter
ended December 31, 2010.
-15-
Unregistered Sale of
Securities
The Company sold
808 shares of its common stock in 2010 at a price of $32.00 per share for an
aggregate price of $25,856. Sales of these shares occurred in 2010 as follows
(in dollars, except number of shares):
|
No. of
|
|
Aggregate
|
|
Date
|
Shares
|
|
Price
|
|
January 29, 2010
|
800
|
|
$
|
25,600
|
|
July 8, 2010
|
8
|
|
256
|
|
|
808
|
|
$
|
25,856
|
|
The Company also
sold 1,519 shares of its common stock in 2009 at a weighted average price of
$27.69 per share for an aggregate price of $42,054 and sold 150 shares of its
common stock in 2008 at a weighted average price of $34.74 per share for an
aggregate price of $5,211. The Company used proceeds from such sales to pay
general expenses of the Company. All shares of common stock were issued in
reliance upon the exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), as set forth in
Section 4(2) under the Securities Act and, in some cases, Rule 506 of
Regulation D promulgated thereunder relating to sales by an issuer not involving
any public offering, to the extent an exemption from such registration was
required.
ITEM 6. SELECTED FINANCIAL DATA.
The following
table presents selected financial data of the Company for the 12 months ended
December 31, for the years indicated (dollars in thousands, except per share
data):
|
2010
|
2009
|
2008
|
2007
|
2006
|
Net interest income
|
$
|
34,377
|
$
|
33,199
|
$
|
29,833
|
$
|
27,429
|
$
|
26,785
|
Gross interest income
|
46,347
|
49,011
|
52,467
|
54,279
|
50,927
|
Income from continuing operations
|
8,875
|
8,327
|
7,529
|
9,160
|
9,157
|
Net income per common share
|
2.45
|
2.30
|
2.08
|
2.53
|
2.52
|
Cash dividends declared per common share
|
1.00
|
1.04
|
1.16
|
1.16
|
1.16
|
Total assets at year-end
|
974,378
|
956,555
|
927,502
|
876,156
|
831,420
|
Long-term obligations (1)
|
42,296
|
42,216
|
73,843
|
63,165
|
59,538
|
Allowances for loan losses as a % of total loans
|
1.47%
|
1.50%
|
1.22%
|
1.08%
|
1.13%
|
Allowances for loan losses as a % of
|
|
|
|
|
|
non-performing loans
|
76.40%
|
96.87%
|
168.09%
|
336.24%
|
471.96%
|
Loans 90 days past due as a % of total loans
|
1.12%
|
1.54%
|
0.73%
|
0.32%
|
0.24%
|
|
|
|
|
|
|
|
|
|
|
|
(1) Long-term obligations consist
of Federal Home Loan Bank ("FHLB") advances that mature after December 31, 2011,
and trust-preferred securities.
-16-
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
For the year ended December 31,
2010, the Company's stable core earnings streams resulted in a return on equity
("ROE") of 9.8%. Dividends were reduced slightly from $1.04 per share in 2009
to $1.00 in 2010. Strong net interest margins, gains on sale of
available-for-sale securities and management's commitment to efficiency and
cost control served to more than offset challenges presented by the current
economic recession. Net income for 2010 increased to $8.9 million compared to $8.3
million in 2009 and $7.5 million in 2008. Challenges in 2010 consisted of but were
not limited to stressed real estate conditions and job losses in local markets,
provision for loans losses, expenses related to other real estate owned
("OREO") and other-than-temporary impairment on a small volume of
available-for-sale securities.
The major drivers of increased
earnings were increased net interest income and gain on sale of
available-for-sale securities. Provision for loan losses was $7.0 million in
2010 compared to $7.1 million in 2009 and $2.9 million in 2008. Gain on sale
of available for sale securities totaled $1.9 million in 2010 compared to $1.2
million in 2009 and net credit losses of other-than-temporary impairment
realized in earnings totaled approximately $589,000 compared to approximately
$651,000 in 2009. Earnings per share were $2.45 for the year ended December
31, 2010 compared to $2.30 for the year ended December 31, 2009 and $2.08 for
the year ended December 31, 2008.
During 2010, capital growth of 5.8%
outpaced asset growth of 1.9%. Capital growth greater than asset growth was
attributable to a $5.2 million increase in retained earnings, partially offset
by a $2.4 million decrease in accumulated other comprehensive income. Also,
preferred shares totaling $2 million accounted for as a non-controlling
interest in a consolidated subsidiary were issued to an affiliate in 2010. Increased
retained earnings of $5.2 million was a result of increased earnings and lower
dividends in 2010 compared to 2009. Decreased accumulated other comprehensive
income was a result of unrealized depreciation of the available-for-sale
securities portfolio compared to prior year. Return on average equity was 9.80%
for 2010 compared to 10.19% for 2009 and 10.07% for 2008. Return on assets
("ROA") was 0.92%, 0.89% and 0.83% for 2010, 2009 and 2008, respectively. ROE
of 9.80% and ROA of 0.92% for 2010 exceeded the same measures for the Southeast
Public Bank Peer Report, as produced by Mercer Capital
's
Financial Institutions Group (the "Peer Report")
, which reported an average ROE of negative 15.42% and
average ROA of negative 0.37% for 2010.
In 2010, the Company's dividend
payout ratio was 41% which was slightly lower than the Company's historical
range of 45% to 55% over the past five years. Dividend yield for 2010 was 3.13%,
which was comparable to historical dividend yields in excess of 3%. The Peer
Report reported a peer dividend payout ratio of 50.6% and a dividend yield of
1.52% for 2010.
Maintaining and improving net
interest margins continues to be a top priority for many financial
institutions, including the Bank. The Company's net interest margin had been stable
from 2005 to 2008 in the range of 3.75% to 4.00% and increased to 4.20% in 2009
and 4.28% in 2010. Interest rate risk position for the Company is liability
sensitive, which also contributed to the improvement of net interest margins in
2009 and 2010. For more information, see Item 7A of this Annual Report on Form
10-K.
The efficiency ratio is a
measure of non-interest expense as a percentage of total revenue. The Company
computes the efficiency ratio by dividing non-interest expense by the sum of
net interest income on a tax equivalent basis and non-interest income. This is
a non-GAAP financial measure, which management believes provides investors with
important information regarding the Company's operational efficiency.
Comparison of the Company's efficiency ratio with those of other companies may
not be possible because other companies may calculate the efficiency ratio
differently. The efficiency ratio for the years 2010, 2009 and 2008 was 59.03%,
59.78%, and 66.14%, respectively.
The tangible common equity ratio
is a non-GAAP measure used by management to evaluate capital adequacy. Tangible
common equity is total equity less net accumulated other comprehensive income
("OCI"), goodwill and deposit-based intangibles. Tangible assets are
total assets less goodwill and deposit-based intangibles. The tangible common
equity ratio was 7.84% as of year-end 2010 compared to 7.20% in 2009 and 6.92%
in 2008.
-17-
A reconciliation of non-GAAP
measures of efficiency ratio and tangible common equity is provided as follows
(dollars in thousands):
|
2010
|
|
2009
|
|
2008
|
Efficiency ratio:
|
|
|
|
|
|
Net interest income
(1)
|
$
|
36,368
|
|
$
|
34,891
|
|
$
|
31,033
|
Non-interest income
(2)
|
12,270
|
|
12,462
|
|
11,395
|
Total revenue
|
48,638
|
|
47,353
|
|
42,428
|
|
|
|
|
|
|
Non-interest expense
|
28,710
|
|
28,309
|
|
28,064
|
Efficiency ratio
|
59.03 %
|
|
59.78 %
|
|
66.14 %
|
|
|
|
|
|
|
Tangible common equity ratio:
|
|
|
|
|
|
Total equity capital
|
$
|
89,279
|
|
84,312
|
|
$
|
77,008
|
Less:
|
|
|
|
|
|
Accumulated other comprehensive income
|
1,896
|
|
4,256
|
|
1,526
|
Goodwill
|
11,825
|
|
11,825
|
|
11,825
|
Other intangible assets
|
120
|
|
204
|
|
289
|
Tangible common equity
|
$
|
75,438
|
|
$
|
68,027
|
|
$
|
63,368
|
|
|
|
|
|
|
Total assets
|
$
|
974,378
|
|
$
|
956,555
|
|
$
|
927,502
|
Less:
|
|
|
|
|
|
Goodwill
|
11,825
|
|
11,825
|
|
11,825
|
Other intangible assets
|
120
|
|
204
|
|
289
|
Tangible assets
|
$
|
962,433
|
|
$
|
944,526
|
|
$
|
915,388
|
|
|
|
|
|
|
Tangible common equity ratio
|
7.84%
|
|
7.20%
|
|
6.92%
|
___________________
(1) Net interest income includes interest and
rates on securities that are non-taxable for federal income tax purposes that
are presented on a taxable equivalent basis based on a federal statutory rate
of 34%.
(2) Non-interest income is presented net of
any credit losses from other-than-temporary impairment losses on
available-for-sale securities recognized against earnings for the years
presented.
Critical Accounting Policies
The accounting
and reporting of the Company and its subsidiaries conform to accounting
principles generally accepted in the United States ("GAAP") and follow general
practices within the industry. Preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Management believes that the
Company's estimates are reasonable under the facts and circumstances based on
past experience and information supplied from professionals, regulators and
others. Accounting estimates are considered critical if (i) management is
required to make assumptions or judgments about items that are highly uncertain
at the time estimates are made and (ii) different estimates reasonably could
have been used during the current period, or changes in such estimates are
reasonably likely to occur from period to period, that could have a material
impact on presentation of the Company's Consolidated Financial Statements.
The development,
selection and disclosure of critical accounting policies are discussed and
approved by the Audit Committee of the Bank's Board of Directors. Because of
the potential impact on the financial condition or results of operations and
the required subjective or complex judgments involved, management believes its
critical accounting policies consist of the allowance for loan losses, fair
value of financial instruments and goodwill.
-18-
Allowance For Loan Losses
The allowance
for losses on loans represents management's best estimate of inherent losses in
the existing loan portfolio. Management's policy is to maintain the allowance
for loan losses at a level sufficient to absorb reasonably estimated and
probable losses within the portfolio. Management believes the allowance for
loan loss estimate is a critical accounting estimate because: (i) changes can
materially affect provision for loan loss expense on the income statement, (ii)
changes in the borrower's cash flows can impact the reserve, and (iii) management
makes estimates at the balance sheet date and also into the future in reference
to the reserve. While management uses the best information available to
establish the allowance for loan losses, future adjustments may be necessary if
economic or other conditions change materially.
In addition,
federal regulatory agencies as a part of their examination process periodically
review the Bank's loans and allowances for loan losses and may require the Bank
to recognize adjustments based on their judgment about information available to
them at the time of their examination. See
Note 1 of the Company's
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K for more information.
Fair Value of Financial Instruments
Certain assets
and liabilities are required to be carried on the balance sheet at fair value.
Further, the fair value of financial instruments must be disclosed as a part of
the notes to the consolidated financial statements for other assets and
liabilities. Fair values are volatile and may be influenced by a number of
factors, including market interest rates, prepayment speeds, discount rates,
the shape of yield curves and the credit worthiness of counter parties.
Fair values for
the majority of the Bank's available-for-sale investment securities are based
on observable market prices obtained from independent asset pricing services
that are based on observable transactions but not quoted market prices.
Fair value of derivatives
(if any) held by the Company is determined using a combination of quoted market
rates for similar instruments and quantitative models based on market inputs
including rate, price and index scenarios to generate continuous yield or
pricing curves and volatility factors. Third party vendors are used to obtain
fair value of available-for-sale securities and derivatives (if any). For more
information, see Notes 1 and 20 in the Company's Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K.
Goodwill
The Company's
policy is to review goodwill for impairment at the reporting unit level on an
annual basis unless an event occurs that could potentially impair the goodwill
amount. Goodwill represents the excess of the cost of an acquired entity over
fair value assigned to assets and liabilities. Management believes accounting
estimates associated with determining fair value as part of the goodwill test
are critical because estimates and assumptions are made based on prevailing
market factors, historical earnings and multiples and other contingencies. For
more information, see Notes 1 and 8 in the Consolidated Financial Statements
included elsewhere this Annual Report on Form 10-K.
Results of Operations
The Company
reported consolidated net income of $8.9 million for the year ended December
31, 2010 compared to $8.3 million in 2009 and $7.5 million in 2008. The
increase from 2010 to 2009 was a result of increases in net interest income and
gain on sale of available-for-sale securities, which served to more than offset
increased expenses and losses related to OREO. Earnings per share were $2.45
for 2010 compared to $2.30 for 2009 and $2.08 for 2008. Return on average
assets was 0.92%, 0.89% and 0.83% for the years ended December 31, 2010, 2009
and 2008, respectively. Return on average equity was 9.80%, 10.19% and 10.07% for
2010, 2009 and 2008, respectively.
Asset growth was
modest at less than 2% in 2010 compared to 3.1% in 2009 and 5.9% in 2008.
Asset growth of $18 million was driven primarily by growth in
available-for-sale investment securities of $45 million. Federal funds sold increased
$7 million, net loans decreased $39 million and OREO increased $4 million in 2010
compared to 2009. Deposit growth of 5.3% or $40 million in 2010 consisted of
increased savings deposits of $28 million and increased time deposits of $12
million. Demand deposits were flat at $100 million at both year-end 2010 and
2009.
-19-
Prevailing
economic factors including, but not limited to, stressed real estate markets,
job losses and the market interest rate environment put pressure on asset
quality during 2009 and 2010. The Bank has been challenged by deteriorating
asset quality over the past three years primarily because of the downturn in
real estate markets in and around Shelby County, Tennessee. Economic
conditions have resulted in non-performing loans and OREO levels above
historical ranges experienced in recent years prior to 2008. While economic
trends were unfavorable over the past three years, such conditions were
considered manageable by the Company's management and core earnings streams
were generally able to absorb required increased provision for loan losses as
well as increased expense and losses related to OREO. Non-performing loans as
a percent of total loans showed more favorable trends at 1.12% as of year-end
2010 compared to 1.54% as of year-end 2009. Non-performing loans and OREO as a
percent of total loans plus OREO at December 31, 2010 were 3.71% compared to
3.28% and 1.63% at December 31, 2009 and 2008, respectively,
while the
Bank's peer group's average was 4.61% as reported in the
Uniform Bank Performance Report
for all insured commercial
banks having assets between $300 million and $1 billion ("UBPR") at December
31, 2010. Net charge-offs in 2010 were $7.8 million compared to $5.6 million
in 2009 and $1.9 million in 2008. The allowance for loan losses as a percent
of non-performing loans was 130.9%, 96.8% and 167.2% as of December 31, 2010,
2009 and 2008, respectively. Unfavorable trends in these key asset quality
metrics over the last three years began to show some improvement by year-end
2010. OREO totaled $14.7 million, $10.5 million and $5.4 million as of
December 31, 2010, 2009 and 2008, respectively.
Provision for
loan losses was flat at $7 million in both 2009 and 2010. The allowance for
loan losses as a percent of total loans was 1.47% at year-end 2010 compared to 1.50%
at year-end 2009 and 1.22% at year-end 2008. Additions made to the reserve
account, as a percent of gross charge-offs, for 2010 were 85.5% compared to 118.6%
in 2009 and 125.7% for 2008. The allowance for loan losses was evaluated in
accordance with GAAP and was weighted toward actual historical losses and
included factor adjustments for changes in environmental conditions. The
methodology used to evaluate the adequacy of the allowance was revised slightly
in fourth quarter 2010 pursuant to ASC Update 2010-20 Receivables (Topic 310),
Disclosures about the Credit Quality of Financial Receivables and the Allowance
for Credit Losses but did not result in a significant change in the required
reserve considered necessary to absorb probable losses. For more information,
see the section below entitled "Recently Issued Accounting Standards."
The allowance
for loan losses as of December 31, 2010 compared to December 31, 2009 trended
downward in terms of amount allocated and as a percentage of total loans
because of decreased loans in 2010 and improving trends of past due and
impaired loans. The allowance for loan losses was considered adequate for each
of the periods presented to properly account for changes in the economies of
local markets, changes in collateral values, variables in underwriting methods,
levels of charged-off loans and volumes of non-performing loans. See additional
information regarding the allowance for loan losses in Notes 1 and 4 to the
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Consistent with
prior years, the Company continues to show asset quality indicators below peer
levels in terms of loans 30-89 days past due and nonperforming loans.
Comparison of key asset quality indicators between the Company and peers were
as follows for the last five years:
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
COMPANY
|
|
PEER*
|
|
COMPANY
|
|
PEER
|
|
COMPANY
|
|
PEER
|
|
COMPANY
|
|
PEER
|
|
COMPANY
|
|
PEER
|
Allowance as % of total
loans
|
1.47%
|
|
1.93%
|
|
1.50%
|
|
1.82%
|
|
1.22%
|
|
1.43%
|
|
1.08%
|
|
1.21%
|
|
1.13%
|
|
1.21%
|
Non-performing loans to
total loans
|
1.12%
|
|
3.21%
|
|
1.54%
|
|
3.14%
|
|
0.74%
|
|
2.07%
|
|
0.32%
|
|
1.03%
|
|
0.24%
|
|
0.55%
|
Loans 30-89 days past due to
total loans
|
0.44%
|
|
1.20%
|
|
0.93%
|
|
1.44%
|
|
1.15%
|
|
1.43%
|
|
0.74%
|
|
1.11%
|
|
0.62%
|
|
0.79%
|
Net charge-offs to average
total loans
|
1.38%
|
|
0.99%
|
|
0.93%
|
|
1.06%
|
|
0.31%
|
|
0.51%
|
|
0.13%
|
|
0.18%
|
|
0.23%
|
|
0.11%
|
___________________
* Peer data is derived from the UBPR as of
December 31 of the year indicated.
The Company's
allowance as a percent of loans was less than peer as the Company's
non-performing loans (loans 90 days or more past due accruing interest and
non-accrual loans) were also below peer as of year-end 2010. For more
information regarding loans and allowance for loan losses, see the section
below entitled "Financial Condition -- Loan Portfolio Analysis" and Note 1 to
the Consolidated Financial Statements included elsewhere in this Annual Report
on Form 10-K.
Net yield on
average earning assets improved to 4.28% for 2010 compared to 4.20% for 2009
and 3.84% for 2008. Net interest margin improvement was attributed to the
Company's ability to reprice interest bearing liabilities at lower rates,
primarily time deposits and other borrowings, in a greater volume than
decreases in yields on interest earning assets. The Bank remained in a
liability sensitive position as of year-end 2010 and could face margin
compression when the rate environment begins rising. For more information
about the Company's interest rate sensitivity, see Item 7A of this Annual
Report on Form 10-K.
-20-
Total
non-interest income for 2010 decreased approximately $254,000 compared to 2009.
The net decrease was primarily attributable to losses recognized on OREO
totaling $1.2 million in 2010 compared to approximately $470,000 in 2009.
Other-than-temporary credit impairment losses on available-for-sale securities
for 2010 and 2009 totaled approximately $589,000 and $651,000, respectively,
and related primarily to two different series of pooled trust preferred
securities.
Non-interest
income from mortgage banking and service charges on deposits were flat in 2010
compared to 2009. Despite the challenges of the national real estate market,
the markets served by the Bank continued to deliver consistent mortgage
activity and overall stable non-interest income. Gross income and fees
recorded from mortgage activity totaled $1.1 million per year in each of the
past three years. Income from fiduciary activities totaled approximately
$785,000 in 2010 compared to approximately $806,000 in 2009 and approximately
$816,000 in 2008. Bank-owned life insurance ("BOLI") earnings totaled
approximately $677,000 in 2010 compared to approximately $830,000 in both 2009
and 2008. Fee income from deposit accounts, which included interchange fees on
debit and ATM transactions, was $6.9 million per year in 2010 and 2009 and $7.2
million in 2008. Recent legislation that became effective in 2010 will likely
result in dilution of overdraft fee income and interchange income with respect
to the Bank's debit card program beginning in 2011. Brokerage fees decreased
approximately $237,000 in 2010 and $156,000 in 2009 because of continued
volatility in stock and bond markets and weak consumer confidence during the
recent economic recession.
The Company's
effective tax rate was 19% in 2010 and 2009 and 27% in 2008. The effective tax
rate was impacted by fluctuations in certain factors including, but not limited
to, the volume of and related earnings on tax-free investments within the
Bank's investment portfolio, tax-exempt earnings and expenses on BOLI, certain
tax benefits that result from dividends and payouts under the Bank's Employee
Stock Ownership Plan ("ESOP"), and other factors incidental to the financial
services business. Fluctuations in the deduction related to the ESOP dividends
and payouts and tax-exempt interest earned in the investment portfolio were the
largest contributors to the various effective rates for the past three years.
Interest-earning
assets in 2010 averaged $850 million at an average rate of 5.7% compared to
$831 million at an average rate of 6.1% in 2009 and $808 million at an average
rate of 6.7% in 2008. Interest bearing liabilities at year-end 2010 averaged
$772 million at an average cost of 1.6% compared to $754 million at an average
cost of 2.1% at year-end 2009 and $737 million at an average cost of 3.1% at
year-end 2008. The following table presents the annual average balance sheet
and net interest income analysis for the years ended December 31, 2010, 2009
and 2008 (dollars in thousands):
|
YEAR-TO-DATE AVERAGES AND RATES
|
|
2010
|
|
2009
|
|
2008
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Balance
|
Interest
|
Rate
|
|
Balance
|
Interest
|
Rate
|
|
Balance
|
Interest
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2)(3)
|
$
|
561,964
|
$
|
36,085
|
6.42%
|
|
$
|
589,528
|
$
|
38,402
|
6.51%
|
|
$
|
606,015
|
$
|
42,356
|
6.99%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
171,024
|
6,262
|
3.66%
|
|
148,140
|
7,260
|
4.90%
|
|
141,724
|
7,643
|
5.39%
|
Tax exempt (4)
|
94,185
|
5,970
|
6.34%
|
|
75,752
|
4,977
|
6.57%
|
|
54,204
|
3,529
|
6.51%
|
Interest earning
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
1,056
|
6
|
0.57%
|
|
914
|
16
|
1.75%
|
|
867
|
42
|
4.84%
|
Federal funds sold
|
21,705
|
55
|
0.25%
|
|
16,392
|
48
|
0.29%
|
|
4,721
|
97
|
2.05%
|
Total interest earning
assets
|
849,934
|
48,378
|
5.69%
|
|
830,726
|
50,703
|
6.10%
|
|
807,531
|
53,667
|
6.65%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Table continued on next page.)
-21-
|
YEAR-TO-DATE AVERAGES AND RATES
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
|
Balance
|
Interest
|
Rate
|
|
Balance
|
Interest
|
Rate
|
|
Balance
|
Interest
|
Rate
|
|
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
17,802
|
|
|
|
$
|
14,989
|
|
|
|
$
|
16,357
|
|
|
|
Premises & equipment
|
30,498
|
|
|
|
31,143
|
|
|
|
34,771
|
|
|
|
Other assets
|
67,067
|
|
|
|
56,178
|
|
|
|
51,325
|
|
|
|
Total assets
|
$
|
965,301
|
|
|
|
$
|
933,036
|
|
|
|
$
|
909,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
$
|
304,605
|
$
|
2,972
|
0.98%
|
|
$
|
265,055
|
$
|
3,007
|
1.13%
|
|
$
|
217,754
|
$
|
2,846
|
1.31%
|
|
Time deposits
|
360,634
|
5,738
|
1.59%
|
|
374,469
|
8,722
|
2.33%
|
|
390,233
|
14,671
|
3.76%
|
|
Federal funds purchased and
|
|
|
|
|
|
|
|
|
|
|
|
|
other interest bearing
liabilities
|
107,208
|
3,300
|
3.08%
|
|
114,624
|
4,083
|
3.56%
|
|
129,194
|
5,117
|
3.96%
|
|
Total interest bearing
liabilities
|
772,447
|
12,010
|
1.55%
|
|
754,148
|
15,812
|
2.10%
|
|
737,181
|
22,634
|
3.07%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
97,294
|
|
|
|
89,819
|
|
|
|
90,999
|
|
|
|
Other liabilities
|
4,996
|
|
|
|
7,367
|
|
|
|
7,061
|
|
|
|
Total liabilities
|
874,737
|
|
|
|
851,334
|
|
|
|
835,241
|
|
|
|
Total shareholders' equity
|
90,564
|
|
|
|
81,702
|
|
|
|
74,743
|
|
|
|
Total liabilities and
shareholders'
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
|
$
|
965,301
|
|
|
|
$
|
933,036
|
|
|
|
$
|
909,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
36,368
|
|
|
|
$
|
34,891
|
|
|
|
$
|
31,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Yield on Average Earning
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
4.28%
|
|
|
|
4.20%
|
|
|
|
3.84%
|
|
___________________
(1) Loan
totals are loans held for investments and net of unearned income and loan loss
reserves.
(2) Fee
income on loans held for investment is included in interest income and
computations of the yield. Loans held for sale and related mortgage banking
income, however, are reported in other assets and other income and, therefore,
are excluded.
(3) Includes
loans on non-accrual status.
(4) Interest
and rates on securities that are non-taxable for federal income tax purposes
are presented on a taxable equivalent basis based on the Company's statutory
federal tax rate of 34%.
-22-
Volume/Rate
Analysis
The following table provides an analysis of the impact of changes in
balances and rates on interest income and interest expense changes from 2010 to
2009 and 2009 to 2008 (in thousands):
|
2010 Compared to 2009
Due to Changes in:
|
|
2009 Compared to 2008
Due to Changes in:
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
Average
|
|
Average
|
|
Increase
|
|
Average
|
|
Average
|
|
Increase
|
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
(1,770)
|
|
$
|
(547)
|
|
$
|
(2,317)
|
|
$
|
(1,073)
|
|
$
|
(2,881)
|
|
$
|
(3,954)
|
|
Taxable securities
|
838
|
|
(1,836)
|
|
(998)
|
|
314
|
|
(697)
|
|
(383)
|
|
Tax exempt securities
|
1,169
|
|
(176)
|
|
993
|
|
1,416
|
|
32
|
|
1,448
|
|
Interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
deposits with other banks
|
1
|
|
(11)
|
|
(10)
|
|
1
|
|
(27)
|
|
(26)
|
|
Federal funds sold and
|
|
|
|
|
|
|
|
|
|
|
|
|
securities purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
under agreements to sell
|
13
|
|
(6)
|
|
7
|
|
34
|
|
(83)
|
|
(49)
|
|
Total interest earning assets
|
$
|
251
|
|
$
|
(2,576)
|
|
$
|
(2,325)
|
|
$
|
692
|
|
$
|
(3,656)
|
|
$
|
(2,964)
|
|
Interest expense on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
388
|
|
(423)
|
|
(35)
|
|
535
|
|
(374)
|
|
161
|
|
Time deposits
|
(220)
|
|
(2,764)
|
|
(2,984)
|
|
(367)
|
|
(5,582)
|
|
(5,949)
|
|
Federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
and securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
(228)
|
|
(555)
|
|
(783)
|
|
(519)
|
|
(515)
|
|
(1,034)
|
|
Total interest bearing liabilities
|
(60)
|
|
(3,742)
|
|
(3,802)
|
|
(351)
|
|
(6,471)
|
|
(6,822)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earnings
|
$
|
311
|
|
$
|
1,166
|
|
$
|
1,477
|
|
$
|
1,043
|
|
$
|
2,815
|
|
$
|
3,858
|
|
Non-Interest Income
The following
table compares non-interest income for the years ended December 31, 2010, 2009
and 2008 (dollars in thousands):
|
|
|
Increase
|
|
|
|
Increase
|
|
|
|
|
Total
|
|
(Decrease)
|
|
Total
|
|
(Decrease)
|
|
Total
|
|
|
20
10
|
|
Amount
|
|
%
|
|
200
9
|
|
Amount
|
|
%
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income
|
$
|
1,116
|
|
$
|
5
|
|
0.45
|
|
$
|
1,111
|
|
$
|
(28)
|
|
-2.46
|
|
$
|
1,139
|
Income from fiduciary activities
|
785
|
|
(21)
|
|
-2.61
|
|
806
|
|
(10)
|
|
-1.23
|
|
816
|
|
Service charges on deposit accounts
|
6,923
|
|
(18)
|
|
-0.26
|
|
6,941
|
|
(331)
|
|
-4.55
|
|
7,272
|
|
Brokerage fees
|
1,080
|
|
(237)
|
|
-18.00
|
|
1,317
|
|
(156)
|
|
-10.59
|
|
1,473
|
|
Earnings on bank owned life insurance
|
677
|
|
(155)
|
|
-18.63
|
|
832
|
|
(1)
|
|
-0.12
|
|
833
|
|
Gain (loss) on sale of foreclosed property
|
(1,156)
|
|
(686)
|
|
145.96
|
|
(470)
|
|
(186)
|
|
65.49
|
|
(284)
|
|
Gain on sale of available-for-sale securities
|
1,884
|
|
688
|
|
57.53
|
|
1,196
|
|
760
|
|
174.31
|
|
436
|
|
Income from insurance activities
|
913
|
|
79
|
|
9.47
|
|
834
|
|
(106)
|
|
-11.28
|
|
940
|
|
Other non-interest income
|
637
|
|
91
|
|
16.67
|
|
546
|
|
(25)
|
|
-4.38
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
$
|
12,859
|
|
$
|
(254)
|
|
-1.94%
|
|
$
|
13,113
|
|
$
|
(83)
|
|
-0.63%
|
|
$
|
13,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-23-
Total
non-interest income decreased less than two percent in 2010 compared to 2009. Although residential real estate values declined and it became more difficult
for borrowers to purchase or refinance in 2010, the Bank's mortgage activity
remained stable because of the historically low interest rate environment.
Mortgage banking income has been flat at $1.1 million per year in each of the
past three years. Income from fiduciary activities decreased 2.6% or approximately
$21,000 in 2010 compared to 2009. Service charges on deposits decreased less
than one percent in 2010 compared to 2009. Brokerage fees decreased
approximately $237,000 or 18.0% in 2010 compared to 2009 as consumer confidence
and willingness to invest in brokerage products remained weak. Gain on sale of
foreclosed property includes write down of OREO subsequent to foreclosure and has
had a negative trend over the past two years due to increased volume of OREO.
For more information regarding OREO, see the section below entitled "-
Financial Condition - Other Real Estate Owned" and Note 9 in the Company's
Consolidated Financial Statements included elsewhere this Annual Report on Form
10-K. Earnings on BOLI assets decreased approximately $155,000 or 18% in 2010
compared to 2009 due to lower overall earnings and higher overall mortality
charges on the policies. Gain on sale of available-for-sale securities
increased approximately $688,000 in 2010 compared to 2009 as a result of
strategies to realize appreciation in the investment portfolio. See additional
information regarding sale of securities in Note 3 of the Company's Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K. In
2010, total non-interest income (excluding impairment losses on
available-for-sale securities) contributed 21.7% of total revenue compared to 19.6%
and 20.1% for 2009 and 2008, respectively.
Income from First Citizens/White and Associates Insurance Company, LLC
was included in Income from Insurance Activities in the Consolidated Statements
of Income and increased approximately $60,000 or 8% in 2010 compared to 2009.
This increase was a result of increased income from various insurance products
including commercial lines, personal lines, title insurance and other products.
Non-interest income generated by First Citizens/White and Associates Insurance
Company, LLC, a full-service insurance agency, for 2010, 2009 and 2008 totaled
approximately $795,000, $735,000, and $773,000, respectively. Other income
from insurance activities consists of commissions from sale of credit life
policies and the Company's proportionate share of income from First
Citizens/White and Associates Insurance Company.
Non-Interest
Expense
The following
table compares non-interest expense for the years ended December 31, 2010, 2009
and 2008 (dollars in thousands):
|
|
|
Increase
|
|
|
|
Increase
|
|
|
|
Total
|
|
(Decrease)
|
|
Total
|
|
(Decrease)
|
|
Total
|
|
20
10
|
|
Amount
|
|
%
|
|
200
9
|
|
Amount
|
|
%
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
$
|
15,417
|
|
$
|
132
|
|
0.86%
|
|
$
|
15,285
|
|
$
|
(1,547)
|
|
-9.19
|
|
$
|
16,832
|
Net occupancy expense
|
1,759
|
|
(45)
|
|
-2.49
|
|
1,804
|
|
59
|
|
3.38
|
|
1,745
|
Depreciation
|
1,792
|
|
(60)
|
|
-3.24
|
|
1,852
|
|
(16)
|
|
-0.86
|
|
1,868
|
Data processing expense
|
1,591
|
|
399
|
|
33.47
|
|
1,192
|
|
208
|
|
21.14
|
|
984
|
|
441
|
|
136
|
|
44.59
|
|
305
|
|
(48)
|
|
-13.60
|
|
353
|
Stationary and office supplies
|
221
|
|
(33)
|
|
-12.99
|
|
254
|
|
(5)
|
|
-1.93
|
|
259
|
Amortization of intangibles
|
85
|
|
-
|
|
-
|
|
85
|
|
-
|
|
-
|
|
85
|
Advertising and promotions
|
703
|
|
81
|
|
13.02
|
|
622
|
|
(89)
|
|
-12.52
|
|
711
|
Premiums for FDIC insurance
|
1,200
|
|
(471)
|
|
-28.19
|
|
1,671
|
|
1,576
|
|
1658.95
|
|
95
|
OREO expenses
|
888
|
|
246
|
|
38.32
|
|
642
|
|
207
|
|
47.59
|
|
435
|
ATM related fees and expenses
|
784
|
|
301
|
|
62.32
|
|
483
|
|
61
|
|
14.45
|
|
422
|
Other non-interest expenses
|
3,829
|
|
(285)
|
|
-6.93
|
|
4,114
|
|
(161)
|
|
-3.77
|
|
4,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
$
|
28,710
|
|
$
|
401
|
|
1.42%
|
|
$
|
28,309
|
|
$
|
245
|
|
0.87%
|
|
$
|
28,064
|
Total
non-interest expense increased 1.4% in 2010 compared to 2009. Non-interest
expense was dominated by salaries and benefits expense, which comprised 54% of
total non-interest expense in 2010 compared to 53% in 2009 and 58% in 2008. Salary
and benefits expense increased approximately $132,000 or less than 1% in 2010
compared to 2009. The majority of the Company's employees receive
performance-based incentives based on factors designed to achieve strategic
goals and are balanced for risk and reward. Such factors are aligned with
strategic objectives and include achievement of a certain ROE level,
accomplishing annual budget goals, and attainment of business development
goals, asset quality goals, and other metrics applicable to the individual's
job responsibilities. Incentive pay totaled 8.9% of salaries and benefits
expenses in 2010 compared to 8.3% in 2009 and 9.3% in 2008. Significant
expense associated with salaries and benefits is consistent with the Company's
strategic plan to hire and retain high quality employees to provide outstanding
customer service and strive for exceptional shareholder returns.
-24-
The following
table compares assets per employee for the Company compared to its peers, based
on information obtained from UBPR for the years ended December 31 (in
thousands):
|
Company
|
|
Peer
|
|
|
|
|
2010
|
$
|
3,760
|
|
$
|
4,540
|
2009
|
3,680
|
|
4,600
|
2008
|
3,465
|
|
4,310
|
2007
|
3,210
|
|
4,060
|
2006
|
3,121
|
|
3,940
|
|
|
|
|
|
|
Comparison of
assets per employee for the Company and its peers revealed that the Company
improved in each of the last five years but continued to be more heavily
staffed than its counterparts. The trend of less assets per employee than peers
was consistent with historical trends and employees necessary to support the
Company's non-interest income streams including brokerage, mortgage and trust
divisions. The Company's ratio steadily improved over the past few years as
newer branches become profitable and as a result improve the overall efficiency
of operations within the Company. In an effort to provide a high level of
customer service and strategic efforts to continue growth of non-interest
income streams, management expects the trend of lower assets per employees
compared to peer to continue in future periods.
Net occupancy
expense decreased modestly by approximately $45,000 or 2.5% in 2010 compared to
2009 as a result of strategic efforts to control expenditures in 2010.
Depreciation trended slightly lower in 2009 and 2010 compared to 2008 as a
result of controlling purchases and expenses related primarily to computer
equipment and software. Certain shorter-lived assets, primarily computer
equipment and software, were fully depreciated by early 2008 and were not
immediately replaced with new purchases. Data processing expense increased
approximately $400,000 in 2010 because of increased expenses associated with
upgrading certain systems and outsourcing certain portions of the information
technology functions of the Bank. While outsourcing of functions such as item
processing resulted in increased data processing expense, this initiative also
decreased other categories of other non-interest expense such as postage,
stationary and supplies and salaries and employee benefits expenses. Also,
upgrades of certain systems were required in order to achieve efficiency
strategies and/or in order to comply with changes in regulation. The Company
continues to strive for efficiencies in the areas of expansion, data
integrity/security and customer service. However, strategies adopted by the
Company's Board of Directors to provide superior customer service will continue
to exert pressure on occupancy, depreciation and other non-interest expenses
going forward.
Expense related
to FDIC insurance premiums decreased approximately $400,000 in 2010 compared to
2009. The decrease was primarily a result of the special assessment as of June
30, 2009 (paid September 30, 2009) in the amount of approximately $425,000 by
the FDIC to help offset increased costs incurred by the fund caused by an
increased number of failed banks. In December 2009, the FDIC required the Bank
to pre-pay projected assessments for 2010 through 2012 totaling $4.2 million.
The prepaid assessment is reflected in Other Assets in the Company's
Consolidated Financial Statements included elsewhere this Annual Report on Form
10-K and totaled $2.9 million and $4.0 million as of December 31, 2010 and
2009, respectively.
Legal and
professional fees increased in 2010 compared to 2009 as a result of legal
expenses incurred for collections and foreclosures as well as consulting
projects related to increased regulatory burdens and overall efficiency
strategies. Stationary and office supplies decreased approximately 13% in 2010
compared to 2009 as a result of outsourcing certain data processing functions
and increased use of electronic rather than paper documents. Advertising and
promotions expense increased approximately $81,000 in 2010 compared to 2009
because of the implementation and promotion of the Company's customer-centric
strategies. Advertising and promotion costs are expensed as incurred and
totaled approximately $703,000 in 2010 compared to approximately $622,000 in
2009. Expenses related to OREO totaled approximately $888,000 in 2010 compared
to approximately $642,000 in 2009 and approximately $435,000 in 2008. For more
information regarding OREO, see the section below entitled "Financial Condition
- Other Real Estate Owned" and Note 9 in the Company's Consolidated Financial
Statements included elsewhere this Annual Report on Form 10-K. Other
non-interest expense decreased approximately $285,000 in 2010 compared to 2009
primarily because of efforts to control costs as part of the Company's overall
efficiency strategies.
-25-
No impairment of
goodwill was recognized in any of the periods presented in this report.
Goodwill was 1.21% and 1.24% of total assets and 13.56% and 14.03% of total
capital as of December 31, 2010 and 2009, respectively. Amortization of core
deposit intangibles was flat at approximately $85,000 in each of the past three
years. Core deposit intangibles will be fully amortized in 2012.
Financial Condition
Changes in the statement of financial
condition for the years ended December 31, 2010 and 2009 reflected the
Company's strategic efforts to focus on modest quality asset growth and capital
preservation during the economic recession. Asset growth in 2010 was primarily
driven by growth in available-for-sale investment securities. The impact of
the recession was evident in negative loan growth and increased OREO for the
year ended December 31, 2010. Deposit growth overall for 2010 was moderate at 5.3%
with increased savings and time deposits and flat overall demand deposits.
As evidenced in the cash flow
statements, the Company slowed deployment of capital for purchases of premises
and equipment to approximately $1.5 million in 2010 compared to approximately $631,000
in 2009 and $3.3 million in 2008. Premises and equipment purchases in 2009 and
2010 consisted primarily of upgrade and replacement of computer hardware and
software as well as renovations to various branches.
Investment Securities Analysis
The following
table presents the composition of total investment securities at December 31
for the last five years (in thousands):
|
December 31,
|
|
|
|
20
10
|
|
200
9
|
|
200
8
|
|
200
7
|
|
2006
|
|
|
U. S. Treasury & government agencies
|
$
|
191,443
|
|
$
|
158,458
|
|
$
|
148,269
|
|
$
|
134,460
|
|
$
|
127,602
|
|
State & political subdivisions
|
102,450
|
|
89,211
|
|
59,588
|
|
51,037
|
|
44,338
|
|
|
All others
|
930
|
|
2,122
|
|
2,643
|
|
4,910
|
|
5,436
|
|
|
Total investment securities
|
$
|
294,823
|
|
$
|
249,791
|
|
$
|
210,500
|
|
$
|
190,407
|
|
$
|
177,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2010, total
portfolio growth of $45.0 million consisted of $33.0 million increase in agency
mortgage-backed securities and collateralized mortgage obligations and $13.2
million increase in municipal securities. Growth in the overall portfolio of $45.0
million was primarily driven by purchases of new agency and municipal debt securities.
The allocation to tax-exempt municipal securities as a percent of the total
portfolio was consistent at 35% of total securities as of year-end 2010 compared
to 36% as of year-end 2009. Allocation to tax-exempt municipal securities
increased in 2009 and 2010 as this sector was considered to have exceptional
value based on ongoing dislocations in the public finance market and because of
opportunities presented by the spending of municipalities as a result of
government stimulus programs. The increase in tax-exempt municipal bonds also
serves as protection from further downward movement in interest rates that is
balanced out by a more defensive posture in the Company's taxable sector of the
portfolio.
Maturity
and Yield on Securities
Contractual
maturities on investment securities are generally ten years. However, the
expected remaining lives of such bonds are expected to be much shorter due to
anticipated payments from U. S. Treasury and government agency securities.
These securities comprise 64% of the portfolio and are primarily amortizing
payments that provide stable monthly cash inflows of principal and interest
payments. The following table presents contractual maturities and yields by
category for debt securities as of December 31, 2010 (dollars in thousands):
-26-
|
|
|
|
|
Maturing
|
|
Maturing
|
|
|
|
|
|
|
|
|
Maturing
|
|
After One
|
|
After Five
|
|
Maturing
|
|
|
|
|
Within One
|
|
Year Within
|
|
Years Within
|
|
After Ten
|
|
|
|
|
Year
|
|
Five Years
|
|
Ten Years
|
|
Years
|
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Total
|
|
U. S. Treasury and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government agencies
(1)
|
$
|
-
|
|
0.00%
|
|
$
|
1,187
|
|
4.04%
|
|
$
|
21,661
|
|
3.47%
|
|
$
|
168,595
|
|
3.66%
|
|
$
|
191,443
|
|
State and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,371
|
|
6.98%
|
|
8,488
|
|
6.99%
|
|
25,342
|
|
6.32%
|
|
65,249
|
|
6.54%
|
|
102,450
|
|
All other
|
-
|
|
-%
|
|
-
|
|
-%
|
|
-
|
|
- %
|
|
885
|
|
5.56%
|
|
885
|
|
Total debt securities
|
$
|
3,371
|
|
|
|
$
|
9,675
|
|
|
|
$
|
47,003
|
|
|
|
$
|
234,729
|
|
|
|
$
|
294,778
|
|
Equity securities
|
-
|
|
-%
|
|
-
|
|
-%
|
|
-
|
|
- %
|
|
|
45
|
|
1.18%
|
|
|
45
|
|
Total
|
$
|
3,371
|
|
|
|
$
|
9,675
|
|
|
|
$
|
47,003
|
|
|
|
$
|
234,774
|
|
|
|
$
|
294,823
|
|
________________
(1) The above table includes agency
mortgage-backed securities (MBS) and collateralized mortgage obligations (CMO)
based on contractual maturities (primarily in the After Ten Years category).
However, the remaining lives of such securities are expected to be much shorter
due to anticipated payments.
(2) Yields are presented on a tax-equivalent basis using a federal statutory
rate of 34%.
Held-To-Maturity and
Available-For-Sale Securities
The Company held
no securities in the held-to-maturity category as of December 31, 2010 and 2009.
The following table presents amortized cost and fair value of
available-for-sale securities as of December 31, 2010 (in thousands):
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
U. S. government agencies and corporate obligations
|
$
|
189,280
|
|
$
|
191,443
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
Taxable securities
|
1,415
|
|
1,318
|
|
Tax-exempt securities
|
98,359
|
|
101,132
|
|
U. S. securities:
|
|
|
|
|
Other debt securities
|
2,675
|
|
885
|
|
Equity securities
|
23
|
|
45
|
|
Total
|
$
|
291,752
|
|
$
|
294,823
|
|
In addition to amounts presented
above, the Bank also had $5.7 million in FHLB and Federal Reserve Bank stock at
December 31, 2010 recorded at cost. Equity securities listed above consisted
primarily of shares of Fannie Mae and Freddie Mac perpetual preferred stock.
Total investment
securities at December 31, 2010, 2009 and 2008 were $295 million, $250 million
and $210 million, respectively. Available-for-sale investments increased $45.0
million or 18.0% from December 31, 2009 to December 31, 2010 as a result of
interest cash flows reinvested into new securities and additional incremental
funds allocated to the portfolio during the year. Objectives of the Bank's
investment portfolio management are to provide safety of principal, adequate
liquidity, insulate GAAP capital against excessive changes in market value,
insulate earnings from excessive change and optimize investment performance.
Investments also serve as collateral for government, public funds and large
deposit accounts that exceed FDIC-insured limits. Pledged investments at
year-end 2010 had a fair market value of $181 million. The average expected
life of the investment securities portfolio was 5.1 years, 5.0 years and 3.7
years as of December 31, 2010, 2009 and 2008, respectively. Portfolio yields
(on a tax equivalent basis) were 4.7% as of year-end 2010 compared to 5.2% as
of year-end 2009 and 5.5% as of year-end 2008.
The Company
classifies investments, based on intent, into trading, available-for-sale and
held-to-maturity categories in accordance with GAAP. The Company held no
securities in the trading category for any of the last five years and does not
expect to hold any such securities in 2011. The Company's investment strategy
is to classify most of the securities portfolio as available-for-sale, which
are carried on the balance sheet at fair market value. Classification of
available-for-sale investments allows flexibility to actively manage the
portfolio under various market conditions.
-27-
U.S. Treasury
securities and government agencies and corporate obligations consisted
primarily of mortgage-backed securities ("MBS") and collateralized mortgage
obligations ("CMO") and accounted for 63% of the investment portfolio for years
ended December 31, 2010 and 2009. Credit quality of the Company's MBS and CMO
portfolio was considered strong and reflected a net unrealized gain of $2.2
million as of December 31, 2010. Credit quality factors on the bonds and
related underlying mortgages are evaluated at the time of purchase and on a
periodic basis thereafter. These factors typically include, but are not
limited to, average loan-to-value ratios, average FICO credit score, payment
seasoning (how many months of payment history), geographic dispersion, average
maturity and average duration. Management believes that this level of
amortizing securities provides steady cash flows, as evidenced by the Consolidated
Statement of Cash Flows included elsewhere in the Annual Report on Form 10-K.
Principal cash flows for 2011 are projected to be $41 million.
Approximately
36% of the portfolio was invested in municipal securities at both December 31, 2010
and 2009. Municipal securities totaled $102 million and were geographically
diversified. Approximately 71%, or $68 million, of municipal securities were
general obligation municipal bonds and the remaining 28% were revenue bonds.
The revenue bonds are primarily essential services bonds such as for water and
sewer, school systems and other public improvement projects. Overall credit
quality of the municipal portfolio was considered strong and reflected a net
unrealized gain of $2.7 million as of year-end 2010.
Approximately 1%
of the portfolio at December 31, 2010 consisted of one corporate bond and three
collateralized debt obligation securities that are backed by trust-preferred
securities ("TRUP CDOs") issued by banks, thrifts and insurance companies.
These four debt securities reflected a net unrealized loss of $1.8 million as
of year-end 2010. The market for TRUP CDOs became inactive in 2008 and as a
result, quoted market values trended significantly below amortized cost
beginning in 2008. These securities are evaluated for other-than-temporary
impairment on a quarterly basis. Charges for credit loss portion of
other-than-temporary impairment totaling approximately $589,000 and $651,000
were recognized against earnings for the years ended December 31, 2010 and 2009,
respectively. For more information, see Note 3 in the Company's Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K.
The Company had
one interest rate swap classified as a cash flow hedge at December 31, 2009
which matured in September 2010. For more information, see Note 3 in the
Company's Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-K.
The following
table indicates by category gross unrealized gains and losses within the
available-for-sale portfolio as of December 31, 2010 (in thousands):
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Net
|
|
U. S. Treasury securities and obligations of U. S.
|
|
|
|
|
|
|
government agencies and corporations
|
$
|
3,721
|
|
$
|
(1,558)
|
|
$
|
2,163
|
|
Obligations of states and political subdivisions
|
3,073
|
|
(397)
|
|
2,676
|
|
All other
|
22
|
|
(1,790)
|
|
(1,768)
|
|
Total
|
$
|
6,816
|
|
$
|
(3,745)
|
|
$
|
3,071
|
|
|
|
|
|
|
|
|
Unrealized gains and losses noted above were included in
Accumulated Other Comprehensive Income, net of tax.
-28-
Loan Portfolio Analysis
The following
table compares the portfolio mix of loans held for investment as of December 31
for each of the last five years (in thousands):
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Commercial, financial and agricultural
|
$
|
66,297
|
|
$
|
71,301
|
|
$
|
80,317
|
|
$
|
80,509
|
|
$
|
80,033
|
|
Real estate-construction
|
49,148
|
|
66,414
|
|
97,340
|
|
106,695
|
|
86,206
|
|
Real estate-mortgage
|
395,256
|
|
407,058
|
|
375,714
|
|
353,655
|
|
340,839
|
|
Installment loans to individuals
|
31,593
|
|
34,071
|
|
36,220
|
|
37,106
|
|
36,735
|
|
Other loans
|
5,409
|
|
8,554
|
|
7,167
|
|
6,674
|
|
5,021
|
|
Total loans
|
$
|
547,703
|
|
$
|
587,398
|
|
$
|
596,758
|
|
$
|
584,639
|
|
$
|
548,834
|
|
For purposes of the
table above, loans do not include loans that are sold in the secondary mortgage
market. The Company classifies loans to be sold in the secondary mortgage
market separately in its consolidated financial statements. Secondary market
mortgages totaled $2.8 million, $2.7 million, and $2.6 million as of December
31, 2010, 2009 and 2008, respectively. For more information, see Notes 4, 5
and 6 in the Company's Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K. Interest and fees earned on secondary
mortgage loans were included in mortgage banking income as reported in other
non-interest income in the Company's Consolidated Financial Statements.
Changes In Loan Categories
Total loans at
December 31, 2010 were $548 million compared to $587 million at December 31,
2009 and $597 million at December 31, 2008. Loans decreased 6.8% in 2010 and 1.6%
in 2009 compared to loan growth of 2.1% in 2008. The following table details
the breakdown of changes by category for 2010 (dollars in thousands):
|
|
|
Increase
|
|
Percent
|
|
|
|
|
|
(Decrease)
|
|
Change
|
|
|
Commercial, financial and agricultural
|
|
|
$
|
(5,004)
|
|
-6.23%
|
|
Real estate-construction
|
|
|
(17,266)
|
|
-17.74%
|
|
|
Real estate-mortgage
|
|
|
(11,802)
|
|
-3.14%
|
|
|
Installment loans to individuals
|
|
|
(2,478)
|
|
-6.84%
|
|
|
Other loans
|
|
|
(3,145)
|
|
-43.88%
|
|
|
Total change in loans
|
|
|
$
|
(39,695)
|
|
-6.65%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2010, the loan portfolio was heavily weighted in real estate loans, which
accounted for $444 million or 81% of total portfolio. Commercial and
residential construction loans accounted for $49 million of the $444 million
invested in real estate loans. Although the portfolio was heavily weighted in
real estate, the Bank does not invest in sub-prime or non-traditional
mortgages. Within real estate loans, residential mortgage loans (including
residential construction) were the largest category, comprising 36% of total
loans. Diversification of the real estate portfolio is a necessary and
desirable goal of the real estate loan policy. In order to achieve and
maintain a prudent degree of diversity, given the composition of the market
area and the general economic state of the market area, the Company will strive
to maintain real estate loan portfolio diversification. Risk monitoring of
commercial real estate concentrations is performed in accordance with
regulatory guidelines and includes assessment of risk levels of various types
of commercial real estate and review of ratios of various concentrations of
commercial real estate as a percentage of capital. During 2010, as loans
decreased 6.7% and capital increased 5.8%, real estate loans as a percent of
capital decreased. The following table presents real estate loans as a percent
of total risk based capital for each of the last five years:
-29-
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
As a percent of total risk based capital*:
|
|
|
|
|
|
|
|
|
|
Construction and development
|
53.05%
|
|
77.40%
|
|
120.68%
|
|
135.33%
|
|
115.24%
|
|
Residential (one-to-four family)
|
184.50%
|
|
206.82%
|
|
203.75%
|
|
193.71%
|
|
203.93%
|
|
Other real estate loans
|
245.15%
|
|
270.74%
|
|
265.31%
|
|
257.64%
|
|
255.93%
|
|
Total real estate loans
|
482.70%
|
|
554.96%
|
|
589.74%
|
|
586.68%
|
|
575.10%
|
|
________________
* Total
risk based capital is a non-GAAP measure used by regulatory authorities and
reported on quarterly regulatory filings. Total risk based capital for the
Bank was $92.6 million, $85.8 million, $80.7 million, $78.8 million and $74.8
million for years ended December 31, 2010, 2009, 2008, 2007 and 2006,
respectively.
Negative loan
growth in 2010 occurred across all loan categories with weak overall loan
demand as a result of distressed real estate markets, job losses and other
factors resulting from the economic recession. Also, the Bank strategically
reduced its concentration of one-to-four family residential construction and
non-owner occupied commercial real estate loans since 2007 as focus shifted to
lower-risk owner-occupied commercial real estate. As a result, the ratio of
one-to-four family residential construction loans as a percent of total risk
based capital trended downward from 2007 to 2010 and was 19.75% as of December
31, 2010 compared to 33.21% as of December 31, 2009, 55.88% as of December 31,
2008 and 76.02% at December 31, 2007. The ratio of non-owner occupied
commercial real estate loans as a percent of total risk based capital also
trended downward to 148.89% as of December 31, 2010 compared to 188.55% as of
December 31, 2009, 232.68% as of December 31, 2008 and 243.53% as of December
31, 2007. The ratio of owner occupied commercial real estate loans as a
percent of total risk based capital was 105.57% as of December 31, 2010 compared
to 107.05% as of December 31, 2009 compared to 101.80% as of December 31, 2008
and 102.99% as of December 31, 2007.
Average Loan Yields
The average
yield on loans of the Bank has trended downward as loans repriced during the
historically low interest rate environment over the past three years. Average
yield on loans for the years indicated were as follows:
2010 - 6.42%
|
2009 - 6.51%
|
2008 - 6.99%
|
2007 - 7.98%
|
2006 - 7.65%
|
The aggregate
amount of unused guarantees, commitments to extend credit and standby letters
of credit was $80.9 million at year-end 2010. For more information regarding
commitments and standby letters of credit, see Note 18 in the Company's
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Loan Maturities
Contractual
maturities of loans as of December 31, 2010 were as follows (in thousands):
|
|
|
Due After
|
|
|
|
Due in One
|
|
One Year but
|
|
Due After
|
|
Year or Less
|
|
Within Five
Years
|
|
Five Years
|
|
$
|
93,820
|
|
$
|
279,427
|
|
$
|
71,157
|
Commercial, financial and agricultural
|
39,616
|
|
28,337
|
|
3,753
|
All other loans
|
8,209
|
|
21,773
|
|
1,611
|
Total
|
$
|
141,645
|
|
$
|
329,537
|
|
$
|
76,521
|
-30-
Loans with Maturities After One Year for which:
|
|
|
|
|
|
(In thousands)
|
Interest Rates are Fixed or Predetermined
|
$
|
338,426
|
|
Interest Rates are Floating or Adjustable
|
$
|
67,632
|
|
|
|
|
|
|
|
The degree of interest rate risk
to which a bank is subjected can be controlled through a well-defined funds
management program. The Company controls interest rate risk by matching
interest sensitive assets and liabilities. Overall, the Company remains in a
fairly neutral position in terms of interest rate risk as evidenced by flat net
interest margins during a the three-year period from 2008 through 2010, in which
federal funds rates have ranged from 0.25% to 5.25%. At year-end 2010, the
Company was liability-sensitive, meaning that liabilities reprice at a faster
rate than assets. Therefore, in a rising rate environment (with a normal yield
curve) net interest income would decline, while a declining rate environment
would result in increased interest rate margins and net interest income. The
majority of the Bank's loan portfolio will reprice or mature in less than five
years. Approximately $159 million or 29% of total loans will either reprice or
mature over the next 12 months, while $185 million or 34% of total loans will
mature or reprice after one year but less than three years. Approximately $144
million or 26% of total loans will mature or reprice after three years but in
less than five years. The remaining 11% or $60 million reprices or matures in
greater than five years.
Loan Policy Guidelines
Management has
established policies approved by the Company's Board of Directors regarding
portfolio diversification and underwriting standards. Loan policy also includes
Board-approved guidelines for collateralization, loans in excess of loan to
value ("LTV") limits, maximum loan amount and maximum maturity and amortization
period for each loan type. Policy guidelines for loan to value ratios and
maturities related to various collateral at December 31, 2010 were as follows:
Collateral
|
Maximum Amortization
|
Maximum LTV
|
Real estate
|
Various (see discussion
below)
|
Various (see discussion
below)
|
Equipment*
|
5 Years
|
75%
|
Inventory
|
5 Years
|
50%
|
Accounts receivable
|
5 Years
|
75%
|
Livestock
|
5 Years
|
75%
|
Crops
|
1 Year
|
50%
|
Securities**
|
10 Years
|
75%(Listed), 50%
(Unlisted)
|
___________________________
* New farm equipment
can be amortized over seven years with an FSA guaranty; farm irrigation systems
may be amortized over seven years without an FSA guaranty.
** When
proceeds are used to purchase or carry stocks not listed on a national
exchange, maximum LTV shall be 50%.
The Company's
policy manages risk in the real estate portfolio by adherence to supervisory
limits in regards to LTV percentages, as designated by the following
categories:
-31-
Loan Category
|
LTV Limit
|
Raw land
|
65%
|
Farmland
|
80%
|
Real estate-construction:
|
|
Commercial acquisition
and development
|
70%
|
Commercial,
multi-family* and other non-residential
|
80%
|
One-to-four family
residential owner occupied
|
80%
|
One-to-four family
residential non-owner occupied
|
75%
|
Commercial (existing
property):
|
|
Owner occupied improved
property
|
85%
|
Non-owner occupied
improved property
|
80%
|
Residential (existing
property):
|
|
Home equity lines
|
80%
|
Owner-occupied one-to-four
family residential
|
90%
|
Non-owner occupied one-to-four family residential
|
75%
|
____________________
* Multi-family
construction loans include loans secured by cooperatives and condominiums.
On an approved
exception basis, loans may be approved in excess of the LTV limits, provided
that they are approved pursuant to the Bank's loan policy as follows:
-
The request is fully documented
to support the fact that other credit factors justify the approval of that
particular loan as an exception to the LTV limit;
-
The loan, if approved, is
designated in the Bank's records and reported as an aggregate number with
all other such loans approved by the full Board of Directors on at least a
quarterly basis;
-
The aggregate total of all
loans so approved, including the extension of credit then under
consideration, shall not exceed 65% of the Bank's total capital; and
-
The aggregate portion of these
loans in excess of the LTV limits that are classified as commercial,
agricultural, multi-family or non-one-to-four family residential property
shall not exceed 30% of the Bank's total capital.
The Bank's loan
policy additionally requires every loan to have a documented repayment
arrangement. While reasonable flexibility is necessary to meet credit needs of
customers, in general, real estate loans are to be repaid within the following
time frames:
Loan Category
|
|
|
Amortized Period
|
Raw land
|
|
|
10 years
|
Real estate- construction
|
|
|
1.5 years
|
Commercial, multi-family,
and other non-residential
|
20 years
|
One-to-four family
residential
|
|
25-30 years
|
Home equity
|
10 years
|
Farmland
|
20 years
|
Credit Risk Management and Allowance
for Loan Losses
Loan portfolio
quality faced challenges in 2009 and 2010 but remains manageable relative to
prevailing market conditions. The ratio of net charge offs to average net
loans outstanding was 1.38%, 0.95% and 0.31% for 2010, 2009 and 2008,
respectively. The aggregate of non-performing loans and OREO as a percent of
total loans plus OREO at year-end 2010 increased to 3.71% compared to 3.28% and
1.63% at year-end 2009 and 2008, respectively, primarily as a result of
increased volume of OREO. Negative trends in OREO and charged off loans were
expected given negative economic trends across the industry during the recent
economic recession. Management believes, however, that the Bank's strong
credit risk management provides a means for timely identification and assessment
of problem credits in order to minimize losses.
-32-
Credit risk management
procedures include assessment of loan quality through use of an internal loan
rating system. Each loan is assigned a rating upon origination and the rating
may be revised over the life of the loan as circumstances warrant. The rating
system utilizes eight major classification types based on risk of loss with
Grade 1 being the lowest level of risk and Grade 8 being the highest level of
risk. Loans rated Grades 1 to 4 are the general "pass" grade loans with low to
average levels of credit risk. Loans rated Grade 5 are "special mention" loans
that may have one or more circumstances that warrant additional monitoring but
do not necessarily indicate probable credit losses or above average levels of
credit risk. Loans rated Grade 6 or higher are considered internally
criticized and have above average levels of credit risk.
Credit risk management practices
also include a loan review function that is independent of the lending process
itself. Results of loan review are reported to the Bank's Board of Directors
and serve to validate the Bank's internal loan rating process. Results of loan
review, as well as current portfolio mix by rating, are incorporated into the
process for quarterly evaluations of the allowance for loan losses and impaired
loans.
Examples of factors taken into
consideration during assessment of loan quality for rating purposes, for
independent loan review and for evaluation of the adequacy of the allowance for
loan losses include, but are not limited to, the following:
Economic conditions;
Management experience and depth;
Credit history;
Business conditions;
Sources of repayment;
Debt service coverage ratios;
Financial condition of borrower(s) and/or guarantor(s);
Deposit relationship;
Payment history;
Collateral values; and
Adherence to loan policy and adherence to loan documentation
requirements.
Loans internally
classified at a Grade 6 or higher are those loans that have certain
characteristics or circumstances that warrant additional credit quality
monitoring and may meet the definition of an impaired loan described below. Loans
or borrowing relationships with an outstanding balance greater than $250,000 that
are also rated Grade 6 or higher are reviewed on an individual basis for
impairment as part of the quarterly evaluation of the adequacy of the allowance
for loan losses. Loan impairment of internally criticized loans, if any, is
measured using either the present value of expected future cash flows
discounted at the loan's effective interest rate or the fair value of the
collateral if the loan is collateral dependent. The majority of the Company's
impaired loans is secured by real estate and considered collateral-dependent.
Therefore, impairment losses are primarily based on the fair value of the
underlying collateral (usually real estate). Specific allocations to the
allowance for loan losses are made for loans found to be collateral- or cash
flow-deficient. All loans less than $250,000 are evaluated on a pooled basis
for impairment.
Specific allocations on impaired
loans are typically the difference between the book value or cost of the loan
and the estimated fair market value of the collateral, less cost to sell. An
additional provision for loan losses necessary for specific allocations on
impaired loans is typically made in the quarter that the loan becomes
internally criticized or rated Grade 6 or higher. At the time a loan with a
balance of $250,000 or greater becomes rated Grade 6 or higher, an updated
independent third party appraisal is ordered. If an appraisal for a property
securing a loan greater than $250,000 is not received prior to the evaluation
date, management estimates the specific allocation for that quarter in a manner
similar to that used for loans with a balance of less than $250,000 and makes
adjustments if necessary in the subsequent quarter when the independent third
party appraisal is received.
An analysis of
the allocation of the allowance for loan losses is made each fiscal quarter at
the end of the second month (i.e., February, May, August, and November) and
reported to the Bank's Board of Directors at its meeting preceding
quarter-end. The allowance for loan losses is estimated using methods
consistent with GAAP as well as regulatory guidance on allowance for loan
losses. For additional information regarding the Company's accounting policy
on the allowance for loan losses, see Note 1 in the Company's Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K.
-33-
The evaluation
of the adequacy of the allowance for loan losses includes identification of
impaired loans and allocation of specific reserves if considered necessary on a
case-by-case basis for loans meeting the Company's criteria for individual
impairment analysis. A loan is deemed impaired when it is probable that a
creditor will be unable to collect all amounts of principal and interest due
according to the original contractual terms of the loan. Impairment occurs when
(i) the present value of expected future cash flows discounted at the loan's
effective interest rate impede full collection of the contract and (ii) fair
value of the collateral, if the loan is collateral-dependent, indicates
unexpected collection of full contract value. Specific reserve allocations are
made for loans found to be collateral- or interest cash flow-deficient. In
addition, an allowance is determined for loans evaluated on a pooled basis.
Income recognition from impaired loans is determined in accordance with GAAP,
as well as financial institution regulatory guidance.
Impaired loans were
primarily collateral-dependent and totaled $9.3 million as of December 31, 2010
compared to $10.0 million as of December 31, 2009 and $12.2 million as of
December 31, 2008. For additional information on impaired loans, see Note 4 in
the Company's Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
The following
table summarizes activity posted to the allowance for loan losses for the past
five years (in thousands):
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Average net loans outstanding
|
$
|
561,964
|
|
$
|
589,528
|
|
$
|
606,014
|
|
$
|
606,015
|
|
$
|
554,219
|
|
Balance of allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
at beginning of period
|
8,784
|
|
7,300
|
|
6,328
|
|
6,211
|
|
6,830
|
|
Loans charged off
|
(8,187)
|
|
(5,951)
|
|
(2,274)
|
|
(1,096)
|
|
(1,538)
|
|
Recovery of loans previously charged off
|
431
|
|
375
|
|
388
|
|
379
|
|
236
|
|
Net loans charged off
|
(7,756)
|
|
(5,576)
|
|
(1,886)
|
|
(717)
|
|
(1,302)
|
|
Additions to allowance charged to expense
|
7,000
|
|
7,060
|
|
2,858
|
|
834
|
|
683
|
|
Balance at end of period
|
$
|
8,028
|
|
$
|
8,784
|
|
$
|
7,300
|
|
$
|
6,328
|
|
$
|
6,211
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charged off loans to average
|
|
|
|
|
|
|
|
|
|
|
net loans outstanding
|
1.38%
|
|
0.95%
|
|
0.31%
|
|
0.12%
|
|
0.23%
|
|
Changes to the allowance
for loan losses for 2010 consisted of (i) loans charged off of $8.2 million,
(ii) recovery of loans previously charged off of approximately $431,000, and
(iii) provision for loan losses totaling $7.0 million. Charge-offs in 2010
occurred in all markets served. However, approximately 55% of charge-offs
related to loans made in Shelby County and the surrounding counties and 26% of
charge-offs related to the Company's new market in and around Williamson County.
The following
table identifies charge-offs and recoveries by category for the years presented
(in thousands):
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$
|
(953)
|
|
$
|
(874)
|
|
$
|
(638)
|
|
$
|
(227)
|
|
$
|
(447)
|
|
Real estate-construction
|
(4,462)
|
|
(1,824)
|
|
(569)
|
|
(107)
|
|
-
|
|
|
Real estate-mortgage
|
(2,565)
|
|
(2,812)
|
|
(655)
|
|
(406)
|
|
(685)
|
|
|
Installment loans to individuals and credit cards
|
(207)
|
|
(441)
|
|
(412)
|
|
(356)
|
|
(406)
|
|
|
Total charge-offs
|
$
|
(8,187)
|
|
$
|
(5,951)
|
|
$
|
(2,274)
|
|
$
|
(1,096)
|
|
$
|
(1,538)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$
|
121
|
|
$
|
68
|
|
$
|
141
|
|
$
|
124
|
|
$
|
76
|
|
|
Real estate-construction
|
52
|
|
130
|
|
23
|
|
22
|
|
-
|
|
|
Real estate-mortgage
|
180
|
|
64
|
|
82
|
|
148
|
|
51
|
|
|
Installment loans to individuals and credit cards
|
78
|
|
113
|
|
142
|
|
85
|
|
109
|
|
|
Total recoveries
|
431
|
|
375
|
|
388
|
|
379
|
|
236
|
|
|
Net loans charged off
|
$
|
(7,756)
|
|
$
|
(5,576)
|
|
$
|
(1,886)
|
|
$
|
(717)
|
|
$
|
(1,302)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-34-
For additional
information regarding the allowance for loan losses including allocation of the
allowance by category, see Note 5 in the Company's Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K.
Charge off of impaired loans
with specific allocations generally occurs at the time of foreclosure,
typically when the loan is 60-120 days past due. On occasion, however, a loan
is considered collateral-dependent and impaired but is not past due. In this
case, a partial charge-off is made at the time the updated appraisal is
received to adjust the loan to fair value of the collateral, less cost to sell.
Partially charged-off loans continue to be reported as impaired. These loans
are also reported in non-performing loan totals if such loans fit criteria for
non-performing assets as discussed below.
Non-Performing Assets
Non-performing assets consist of
non-performing loans, OREO and non-accrual debt securities. Non-performing
loans consist of non-accrual loans, loans 90 days or more past due and still
accruing interest and restructured loans. Categorization of a loan as
non-performing is not in itself a reliable indicator of impairment. A loan may
be deemed impaired prior to becoming 90 days past due, restructured or put on
non-accrual status. The Bank's policy is to not accrue interest or discount on
(i) any asset which is maintained on a cash basis because of deterioration in
the financial position of the borrower, (ii) any asset for which payment in
full of interest or principal is not expected or (iii) any asset upon which
principal or interest has been in default for a period of 90 days or more
unless it is both well-secured and in the process of collection. For purposes
of applying the 90 days past due test for non-accrual of interest discussed
above, the date on which an asset reaches non-accrual status is determined by
its contractual term. A debt is well-secured if it is secured by collateral in
the form of liens or pledges of real or personal property, including securities
that have a realizable value sufficient to discharge the debt (including
accrued interest) in full, considered to be proceeding in due course either
through legal action, including judgment enforcement procedures or, in
appropriate circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the debt or in
the loan's restoration to a current status. Loans that represent probable
losses are recognized as impaired and adequately reserved for in the allowance
for loan losses. Valuation of non-performing loans are subject to the same
process described above for internally criticized loans in regards to obtaining
new appraisals and timing of specific allocations and subsequent charge-off.
There have been no significant time lapses in the years ended December 31, 2010
or 2009 between the identification and recognition of impairment and subsequent
charge-off of non-performing or impaired loans. The following table summarizes
non-performing assets at December 31 of the past five years (in thousands):
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$
|
500
|
|
$
|
639
|
|
$
|
425
|
|
$
|
133
|
|
$
|
19
|
|
Real estate-construction
|
854
|
|
1,171
|
|
662
|
|
354
|
|
-
|
|
Real estate-mortgage
|
2,545
|
|
1,927
|
|
2,496
|
|
1,123
|
|
291
|
|
Installment loans to individuals
|
249
|
|
64
|
|
90
|
|
68
|
|
61
|
|
Total non-accrual loans
|
$
|
4,148
|
|
$
|
3,801
|
|
$
|
3,673
|
|
$
|
1,678
|
|
$
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days past due accruing interest:
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$
|
500
|
|
$
|
106
|
|
$
|
-
|
|
$
|
25
|
|
$
|
-
|
|
Real estate-construction
|
35
|
|
1,472
|
|
-
|
|
53
|
|
-
|
|
Real estate-mortgage
|
1,441
|
|
3,660
|
|
722
|
|
126
|
|
944
|
|
Installment loans to individuals
|
10
|
|
34
|
|
25
|
|
-
|
|
2
|
|
Total loans 90 days past due accruing interest
|
1,986
|
|
5,272
|
|
747
|
|
204
|
|
946
|
|
Total non-current loans
|
$
|
6,134
|
|
$
|
9,073
|
|
$
|
4,420
|
|
$
|
1,882
|
|
$
|
1,317
|
|
Total non-current loans as % of total loans
|
1.12 %
|
|
1.54 %
|
|
0.74 %
|
|
0.32 %
|
|
0.24 %
|
|
-35-
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructuring
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$
|
15
|
|
$
|
11
|
|
$
|
14
|
|
$
|
-
|
|
$
|
-
|
|
Real estate-construction
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Real estate-mortgage
|
2,770
|
|
1,117
|
|
1,138
|
|
1,568
|
|
-
|
|
Installment loans to individuals
|
68
|
|
122
|
|
92
|
|
53
|
|
-
|
|
Total troubled debt restructuring
|
$
|
2,853
|
|
$
|
1,250
|
|
$
|
1,244
|
|
$
|
1,621
|
|
$
|
-
|
|
Total troubled debt restructuring as a % of total loans*
|
0.52 %
|
|
0.21 %
|
|
0.21 %
|
|
0.28 %
|
|
0.00 %
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO & other repossessed property
|
$
|
14,734
|
|
$
|
10,527
|
|
$
|
5,446
|
|
$
|
2,302
|
|
$
|
1,815
|
|
Non-accrual debt securities
|
241
|
|
520
|
|
-
|
|
-
|
|
-
|
|
Total non-performing assets
|
$
|
23,962
|
|
$
|
21,370
|
|
$
|
11,110
|
|
$
|
5,805
|
|
$
|
3,132
|
|
Total non-performing assets as % of total assets
|
2.46 %
|
|
2.23 %
|
|
1.20 %
|
|
0.70 %
|
|
0.40 %
|
|
___________________________
* Total troubled
debt restructurings that are on non-accrual status are not included in this
total as they are reported in the non-accruals totals.
Non-performing assets increased $2.6
million from 2009 to 2010 primarily as a result of increased OREO, which
trended higher over the last two years during the economic recession. For more
information about OREO, see the section below entitled "- Other Real Estate
Owned."
Interest income
on loans is recorded on an accrual basis. The accrual of interest is
discontinued on all loans, except consumer loans, which become 90 days past
due, unless the loan is well secured and in the process of collection. Consumer
loans which become past due 90 to 120 days are charged to the allowance for
loan losses. The gross interest income that would have been recorded for the
12 months ended December 31, 2010 if all loans reported as non-accrual had been
current in accordance with their original terms and had been outstanding
throughout the period was approximately $209,000 compared to approximately $216,000,
$178,000, $103,000, and $25,000 for the same periods in 2009, 2008, 2007, and 2006,
respectively. Loans on which terms have been modified to provide for a
reduction of either principal or interest as a result of deterioration in the
financial position of the borrower are considered to be restructured loans.
The Company had restructured loans totaling $3.2 million, of which approximately
$393,000 was on non-accrual status as of December 31, 2010. The Company had
restructured loans totaling $2.8 million, of which $1.4 million was on
non-accrual status as of December 31, 2009.
Certain loans internally
rated Grade 5 or higher may not meet the criteria and therefore are not included
in the non-accrual, past due or restructured loan totals. Management is
confident that, although certain of these loans may pose credit issues, any
probable loss has been provided for by specific allocations to the loan loss
reserve account. Loan officers are required to develop a "plan of action" for
each problem loan within their portfolio. Adherence to each established plan is
monitored by the Bank's loan administration and re-evaluated at regular
intervals for effectiveness.
Other Real Estate Owned
The book value
of OREO was $14.7 million as of December 31, 2010 compared to $10.5 million as
of December 31, 2009 and $5.4 million as of December 31, 2008. As of December
31, 2010, there were over 100 properties accounted for as OREO consisting
primarily of newly constructed single-family homes and residential lots.
Approximately 82% of the $14.7 million accounted for as OREO was located in Shelby County and surrounding counties. Approximately 14% of the $14.7 million in OREO was
located in and around Williamson County and surrounding counties in Middle
Tennessee. While management continues efforts to liquidate OREO, Shelby,
Williamson and their surrounding counties have been under stress with declining
home sales and declining market values. According to MarketGraphics Research
Group, Inc. and the Memphis Area Association of Realtors for the 12 months
ended November 30, 2010 (the most recent data available), new home inventory
was down 32% and new home permits were up 26%. Also, new home sales volumes
were up 9.3% and new home average price was down 13% for the 12 months ended
November 30, 2010. All home sales volumes were almost flat with decrease of less
than 2% and average price of all home sales was also near flat with a decrease of
less than 3% for the same period.
-36-
Activity in OREO
for the most recent three years is as follows (in thousands):
|
|
2010
|
|
2009
|
|
2008
|
|
|
Beginning balance
|
|
$
|
10,527
|
|
$
|
5,424
|
|
$
|
2,302
|
|
|
Acquisitions
|
|
11,691
|
|
9,983
|
|
5,440
|
|
|
Capitalized costs
|
|
500
|
|
424
|
|
29
|
|
|
Dispositions
|
|
(6,828)
|
|
(4,834)
|
|
(2,063)
|
|
|
Valuation adjustments through earnings
|
|
(1,156)
|
|
(470)
|
|
(284)
|
|
|
Ending balance
|
|
$
|
14,734
|
|
$
|
10,527
|
|
$
|
5,424
|
|
|
Capitalized
costs consist of costs to complete construction of homes partially complete at
the time of foreclosure or to complete certain phases of a development project
for raw land. Capitalized costs were incurred in order to improve
marketability of certain properties. Valuation adjustments through earnings
reflected above includes write down of properties subsequent to foreclosure and
realized gains and losses on sale of OREO.
OREO is recorded
at the time of foreclosure at the lesser of its appraised value or the loan
balance. Any reduction in value at the time of foreclosure is charged to the
allowance for loan losses. All other real estate parcels are appraised at least
annually and carrying values adjusted to reflect the decline, if any, in their
realizable value. Such adjustments made subsequent to foreclosure are charged
against earnings. Net losses on sale and write down of OREO values subsequent
to foreclosure totaled $1.2 million in 2010 compared to approximately $470,000
and $284,000 for years ended December 31, 2009 and 2008.
Other
non-interest expenses for property taxes, maintenance and other costs related
to OREO totaled approximately $888,000, $642,000, and $435,000 in the years
ended December 31, 2010, 2009 and 2008, respectively. The negative trend in
other non-interest expense related to OREO was attributable to the larger
volume of OREO over the past three years.
Composition of Deposits
The average balance
of deposits and average interest rates paid on such deposits are summarized in
the following table for the years ended December 31, 2010, 2009 and 2008
(dollars in thousands):
|
2010
|
|
2009
|
|
2008
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
Non-interest bearing demand deposits
|
$
|
97,294
|
|
0.00%
|
|
$
|
89,819
|
|
0.00%
|
|
$
|
90,999
|
|
0.00%
|
Savings deposits
|
304,605
|
|
0.98%
|
|
265,055
|
|
1.13%
|
|
217,754
|
|
1.31%
|
Time deposits
|
360,634
|
|
1.59%
|
|
374,469
|
|
2.33%
|
|
390,233
|
|
3.76%
|
Total deposits
|
$
|
762,533
|
|
1.14%
|
|
$
|
729,343
|
|
1.61%
|
|
$
|
698,986
|
|
2.51%
|
The decrease in
average cost of deposits at December 31, 2010 compared to December 31, 2009 was
a result of the continued historically low interest rate environment. The
prevailing market and competitive environment continued to yield strong
competition in pricing of interest-bearing deposit products. The Bank does not
compete solely on price, as strategies are focused more on customer
relationships that attract and retain core deposit customers rather than time
deposits.
Total deposits
grew $40 million or 5.3% during the year ended December 31, 2010. Savings
deposit growth was $28 million or 9.4% and time deposit growth was $12 million
or 3.4% in 2010 compared to 2009 while demand deposit balances were flat. During
2010, demand deposit balances fluctuated in the range of $90 million to $110
million consistent with historical ranges while overall average demand deposit
balances trended higher than averages for the past two years. Savings deposit
growth was primarily attributable to growth in the Bank's competitively priced
interest bearing transaction accounts, including the Wall Street, e-Solutions
and First Rate accounts.
-37-
In June 2008,
the Bank began participating in the Certificate of Deposit Account Registry
Service ("CDARS"). CDARS is a deposit placement service that allows the Bank
to accept very large-denomination certificates of deposit ("CDs") (up to
$50,000,000) from customers and ensures that 100% of those CDs are
FDIC-insured. Participating in this network enhances the Bank's ability to
attract and retain large-denomination depositors without having to place funds
in a Sweep or Repurchase Agreement. The CDARS network provides a means to
place reciprocal deposits for the Bank's customers, purchase time deposits
(referred to as "One-Way Buy" deposits) or to sell excess deposits (referred to
as "One-Way Sell" deposits). One-Way Buy deposits are structured similar to
traditional brokered deposits. The Bank held reciprocal deposits and "One-Way
Buy" deposits in the CDARS program totaling $24 million at year-end 2010
compared to $25 million at year end 2009 and $45 million at year end 2008.
CDARS accounts are classified as brokered time deposits for regulatory
reporting purposes. Brokered deposits including CDARS totaled $25 million or 3%
as of December 31, 2010 compared to $36 million or 4% of total deposits as of
December 31, 2009 and $76 million or 10% of total deposits as of December 31,
2008. Core deposit growth allowed the Company to reduce its reliance on
brokered deposits in 2009 and 2010. Customer demand for CDARS decreased in 2009
and 2010 compared to 2008.
Time deposits
over $100,000 plus brokered time deposits comprised 56.1% of total time
deposits as of year-end 2010 compared to 55.1% as of year-end 2009 and 40.5% as
of year-end 2008. Approximately 86% of time deposits including brokered time
deposits will mature or reprice over the next 12 months as the current
competitive market and rate environment continues to exhibit strong demand for
shorter terms at historically low rates.
Maturity Distribution of Time
Deposits in Amounts of $100,000 and Over
Deposits over
$100,000 increased $24.1 million or 12.7% from December 31, 2009 to December
31, 2010. This was a result of the increase in FDIC insurance limits from
$100,000 to $250,000 beginning in October 2008. Of the $213.7 million in time
deposits as of December 31, 2010, $110.2 million were for deposits in an amount
greater than $250,000. Of the $189.6 million in time deposits over $100,000 as
of December 31, 2009, $107.2 million were for deposits in an amount greater
than $250,000. Public fund time deposits decreased $2.6 million from $85.5
million at year-end 2009 to $82.9 million at year-end 2010.
The following
table sets forth the maturity distribution of CDs and other time deposits of
$100,000 or more outstanding on December 31, 2010 and 2009 (dollars in
thousands):
|
2010
|
|
2009
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Maturing in:
|
|
|
|
|
|
|
|
3 Months or less
|
$
|
75,610
|
|
35.39%
|
|
$
|
92,883
|
|
48.98%
|
Over three months less than six months
|
43,045
|
|
20.14%
|
|
32,625
|
|
17.21%
|
Over Six Months less than 12 months
|
66,526
|
|
31.13%
|
|
53,392
|
|
28.16%
|
Over 12 months
|
28,496
|
|
13.34%
|
|
10,719
|
|
5.65%
|
Total
|
$
|
213,677
|
|
100.00%
|
|
$
|
189,619
|
|
100.00%
|
Other Borrowings
In addition to
deposits, the Company uses a combination of short-term and long-term borrowings
to supplement its funding needs. Short-term borrowings consist of a treasury,
tax and loan demand note, federal funds purchased and short-term advances from
the FHLB. The short-term borrowings table below provides the maximum amount of
borrowings at any month end during the years presented. Short-term borrowings
are used to manage fluctuations in liquidity based on seasonality of
agricultural production loans and other factors. Short-term borrowings were
used on a very limited basis during 2009 and 2010 because of the Company's
strategic efforts to maintain a strong liquidity position, slow loan demand,
and steady growth in core deposits over the past two years. The following
table presents short-term borrowing balances at year end, maximum borrowings at
month end during the year and average cost for the years presented (dollars in
thousands):
|
2010
|
2009
|
2008
|
Amount outstanding at end of year
|
$
|
1,000
|
$
|
748
|
$
|
1,000
|
Weighted average interest rate at end of year
|
0.00 %
|
0.00 %
|
0.00 %
|
Maximum outstanding at any month end
|
$
|
1,000
|
$
|
1,000
|
$
|
48,500
|
Average outstanding during year
|
$
|
667
|
$
|
1,029
|
$
|
20,679
|
Weighted average interest rate during year
|
0.00 %
|
0.00 %
|
2.70 %
|
-38-
For more
information about short-term borrowings, see Note 12 in the Company's
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Other borrowings
at the holding company level carried a variable rate and consisted of trust-preferred
debt in 2010 and 2009. Totals for 2008 also included a line of credit with
First Tennessee Bank, which was paid in full in December 2008.
The Bank's other
borrowings consists of advances from the FHLB. Average volume of FHLB advances
for 2010 was $60.9 million at an average rate of 4.26% compared to $65.1
million at an average rate of 4.84% in 2009 and $61.1 million at an average
rate of 5.03% in 2008. The average remaining maturity for FHLB long-term
borrowings was approximately three years at December 31, 2010. FHLB borrowings
are comprised primarily of fixed rate positions ranging from 1.15% to 7.05%.
The Bank also had one LIBOR based advance totaling $2.5 million which had a
rate of 0.31% as of year-end 2010. Most of the FHLB borrowings have quarterly
call features and maturities ranging from 2011 to 2019. Approximately 35% or $14.5
million will mature on or before December 31, 2011. Advances totaling $9.5
million at December 31, 2010 had call features that offer the option to pay off
the advance without penalty or to have the advance reprice at a variable rate
tied to the 90-day LIBOR, when called. As of December 31, 2010, advances
totaling $16 million require repayment if the call feature was exercised.
Under the existing and forecasted rate environments, borrowings with call
features in place are not likely to be called in the next 12 months and,
therefore, were not included in current liabilities. For more information
about liquidity, see the section below entitled "- Liquidity."
The following
table presents average volumes, rates, maturities and re-pricing frequencies
for other borrowings for the year ended December 31, 2010 (dollars in
thousands):
|
Average
|
Average
|
Average
|
Repricing
|
|
Volume
|
Rate
|
Maturity
|
Frequency
|
FHLB Borrowings
|
$
|
60,902
|
4.26%
|
3
|
Fixed
|
Trust Preferred Debt
|
10,310
|
2.14%
|
26
|
Variable
|
|
|
|
|
|
|
Aggregate Contractual
Obligations and Off-Balance Sheet Arrangements
At December 31, 2010,
contractual obligations were due as follows (in thousands):
|
Total
|
|
Less than
One
Year
|
|
One-Three
Years
|
|
Three-Five
Years
|
|
Greater than
Five
Years
|
|
Unfunded loan commitments
|
$
|
78,107
|
|
$
|
78,107
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Standby letters of credit
|
2,752
|
|
2,752
|
|
-
|
|
-
|
|
-
|
|
Other borrowings*
|
52,259
|
|
9,963
|
|
13,481
|
|
4,188
|
|
24,627
|
|
Capital lease obligations
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Operating lease obligations
|
313
|
|
87
|
|
226
|
|
-
|
|
-
|
|
Purchase obligations
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Other long-term liabilities
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Total
|
$
|
133,431
|
|
$
|
90,909
|
|
$
|
13,707
|
|
$
|
4,188
|
|
$
|
24,627
|
|
________________________
* Other borrowings
presented as principal only, excluding interest.
Except for unfunded loan
commitments and standby letters of credit, the Bank does not materially engage
in off-balance sheet activities and does not anticipate material changes in
volume going forward.
For more
information about long-term obligations and off-balance sheet risk, see Notes 13
and 18 in the Company's Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K.
-39-
Capital Resources
The following
table presents return on equity and assets for the years presented:
|
2010
|
2009
|
2008
|
2007
|
2006
|
Percentage of net income to:
|
|
|
|
|
|
Average total assets
|
0.92%
|
0.89%
|
0.83%
|
1.08%
|
1.10%
|
Average shareholders equity
|
9.80%
|
10.19%
|
10.07%
|
12.79%
|
13.88%
|
Percentage of dividends declared
|
|
|
|
|
|
to net income
|
40.86%
|
45.27%
|
55.85%
|
45.93%
|
47.04%
|
Percentage of average equity
|
|
|
|
|
|
to average assets
|
9.38%
|
8.76%
|
8.21%
|
8.45%
|
7.93%
|
Total capital
(excluding reserve for loan losses) as a percentage of total assets is
presented in the following table for years indicated:
2010
|
2009
|
2008
|
2007
|
2006
|
9.16%
|
8.81%
|
8.30%
|
8.56%
|
8.36%
|
Total capital
increased 5.8% to $89.3 million at year-end 2010 compared to $84.4 million at
year-end 2009 and $77.0 million at year-end 2008. Growth in capital during 2010
was from undistributed net income from the Bank of $5.2 million and $2.0
million from increased non-controlling minority interest in consolidated
subsidiary. Accumulated Other Comprehensive Income decreased $2.4 million at
December 31, 2010 compared to December 31, 2009 as market values of
available-for-sale securities trended lower in December 2010 compared to
December 2009.
The Company has
historically maintained capital in excess of minimum levels established by
regulation. The risk-based capital ratios of 15.3% as of December 31, 2010 and
13.55% at December 31, 2009 were significantly in excess of the 8% mandated by
regulation. This ratio has steadily increased during the past three years.
Total capital as a percentage of total assets was 9.16%, 8.81%, and 8.30% at
December 31, 2010, 2009 and 2008, respectively.
Risk-based
capital focuses primarily on broad categories of credit risk and incorporates
elements of transfer, interest rate and market risks. The calculation of
risk-based capital ratio is accomplished by dividing qualifying capital by
weighted risk assets in accordance with financial institution regulatory
guidelines. The minimum risk-based capital ratio is 8.00%. At least one-half
of this ratio or 4.00% must consist of core capital (Tier 1), and the remaining
4.00% may be in the form of core (Tier 1) or supplemental capital (Tier 2).
Tier 1 capital or core capital consists of common shareholders' equity,
qualified perpetual preferred stock and minority interests in consolidated
subsidiaries. Tier 2 capital or supplementary capital may consist of the
allowance for loan and lease losses, perpetual preferred stock, term-subordinated
debt and other debt and stock instruments.
Dividend
payments totaled $1.00 per share in 2010 compared to $1.04 per share in 2009 and
$1.16 per share 2008. The Company's strategy continues to be to pay dividends
at a level that provides dividend payout ratio and dividend yield in excess of
average for peers as reported in the Peer Report. The dividend payout ratio
was 40.86% in 2010 compared to 45.27% in 2009 and 55.85% in 2008. The
projected payout ratio for 2011 is in the range of 40% to 50%. Dividend payout
in the Peer Report for 2010 was 50.66%. The Company's dividend yield in 2010
was 3.13% compared to 3.35% in 2009 and 3.41% in 2008. The dividend yield in
the Peer Report was 1.52% for 2010.
As of year-end
2010, there were approximately $11 million of retained earnings available for
the payment of future dividends from the Bank to the Company. Banking
regulations require certain capital levels to be maintained and may limit
dividends paid by the Bank to the Company or by the Company to its
shareholders. Historically, these restrictions have posed no practical limit
on the ability of the Bank or the Company to pay dividends.
Over the past 15
years, the Company has repurchased approximately 91,767 shares of its common
stock; treasury stock has weighted average cost basis of $26.32 per share.
During 2010, the Company did not repurchase any of its shares of common stock.
During 2010, the Company sold 808 shares of its common stock at a price of
$32.00 per share for an aggregate price of $25,856. During 2009, the Company
repurchased 1,000 shares at a weighted average cost of $26.00 per share.
During 2009, the Company sold 1,519 shares of its common stock at a weighted
average price of $27.69 per share. There are currently no publicly announced
plans or programs to repurchase shares in place.
-40-
Liquidity
The Company manages liquidity in
a manner to ensure the availability of ample funding to satisfy loan demand,
fund investment opportunities and fund large deposit withdrawals. Primary funding
sources for the Company include customer core deposits, and FHLB borrowings as
well as correspondent bank and other borrowings. The Company's liquidity
position is further strengthened by ready access to a diversified base of
wholesale borrowings, which includes lines of credit with the FHLB, federal
funds purchased, securities sold under agreements to repurchase, brokered CDs
and others.
The turmoil and events in
financial markets and across the banking industry during the recent economic
recession serve as a reminder that adequate liquidity is critical to the
Company's success and survival, especially during times of turbulent market
conditions. Therefore, management has reviewed, tested and updated strategic
action plans related to liquidity, including crisis and contingency liquidity
plans to defend against any material downturn in the Bank's liquidity
position.
Deposits accounted for 89% of
funding at December 31, 2010 compared to 86% of funding for each of the prior
two years. Borrowed funds from the FHLB amounted to 4.7% ($42 million) of
total funding as of December 31, 2010 compared to 7.5% ($65 million) of total
funding at December 31, 2009 and 7.5% ($63 million) of total funding at December
31, 2008. The Bank had additional borrowing capacity of $60.6 million with the FHLB as of December 31, 2010. The Bank also has federal fund lines of credit
with four correspondent banks with lines totaling $54.5 million as of December
31, 2010. In each of the years ended December 31, 2010 and 2009, the Bank held
$23 million in short-term CDs with the State of Tennessee. Brokered time
deposits were $26 million and $36 million as of year-end 2010 and 2009,
respectively. Decreased loan demand in 2010 allowed the Bank to reduce its
reliance on wholesale funding sources such as brokered deposits and FHLB
advances. Brokered deposits include reciprocal and one-way buy deposits in the
CDARS program. For more information about CDARS, see the section above
entitled "Financial Condition - Composition of Deposits."
When evaluating
liquidity, funding needs are compared against the current level of liquidity,
plus liquidity that would likely be available from other sources. This
comparison provides a means for determining whether funds management practices
are adequate. Management should be able to manage unplanned changes in funding
sources, as well as react to changes in market conditions that could hinder the
Bank's ability to quickly liquidate assets with minimal loss. Funds management
practices are designed and implemented to ensure that the Company does not
maintain liquidity by paying above market prices for funds or by relying unduly
on wholesale or credit-sensitive funding sources. The Office of the
Comptroller of Currency ("OCC") has established benchmarks to be used as
guidelines in managing liquidity. The following areas are considered liquidity
red flags:
-
Significant increases in reliance on wholesale funding;
-
Significant increases in large CDs, brokered deposits or deposits
with interest rates higher than the market;
-
Mismatched funding - funding long-term assets with short-term
liabilities or short-term assets with long-term liabilities;
-
Significant increases in borrowings;
-
Significant increases in dependence on funding sources other than
core deposits;
-
Reduction in borrowing lines by correspondent banks;
-
Increases in cost of funds;
-
Declines in levels of core deposits; and
-
Significant decreases in short-term investments.
-41-
Liquidity is
high priority for the Bank's Funds Management Committee, which continues to
seek alternative funding sources conducive to net interest margin strategies.
The following table reflects the liquidity position of the Bank as of December
31, 2010, 2009 and 2008 in comparison to the OCC Liquidity Benchmarks:
OCC Liquidity
Benchmark
|
December 31, 2010
|
|
December 31, 2009
|
|
December 31, 2008
|
|
Short Term Liabilities/ Total Assets > 20%
|
17.00%
|
|
20.13%
|
|
16.63%
|
|
On Hand Liquidity to Total Liabilities < 8%
|
10.76%
|
|
5.93%
|
|
10.77%
|
|
Loan to Deposits < 80%
|
68.14%
|
|
76.94%
|
|
80.21%
|
|
Wholesale Funds/Total Sources > 15%
|
9.13%
|
|
13.22%
|
|
15.28%
|
|
Non Core Funding Dependence > 20%
|
30.13%
|
|
30.82%
|
|
30.96%
|
|
The above
comparison is one quantitative means of monitoring liquidity levels. However,
other quantitative and qualitative factors are considered in the overall risk
management process for liquidity. Such other factors evaluated by management
include, but are not limited to, forecasting and stress testing capital levels,
diversification of funding sources, degree of reliance on short-term volatile
funding sources, deposit volume trends and stability of deposits. There are no
known trends or uncertainties that are likely to have a material effect on the
Company's liquidity or capital resources. There currently exist no recommendations
by regulatory authorities, which, if implemented, would have such an effect.
Recently Issued Accounting Standards
Business Combinations
In December
2010, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Codification ("ASC") Update No. 2010-29 Business Combinations (Topic
805). This update clarifies the acquisition date that should be used for
reporting the pro forma financial information disclosures in Topic 805 when
comparative financial statements are presented. It addresses diversity in
practice about the interpretation of the pro forma revenue and earnings
disclosure requirements for business combinations. The amendments in this update
specify that if a public entity presents comparative financial statements, the entity
should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as
of the beginning of the comparable prior annual reporting period only. The
amendments in this update are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. This update did not
have a material effect on the Company's financial statements.
Goodwill and Other
Intangibles
In December
2010, the FASB issued ASC Update No. 2010-28 Intangibles-Goodwill and Other
(Topic 350). This amendment addresses questions about entities with reporting
units with zero or negative carrying amounts because some entities concluded that
Step 1 of the test is passed in those circumstances because the fair value of
their reporting unit will generally be greater than zero. The amendment
instructs these entities to perform Step 2 of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists. For public
entities, the amendments in this update are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2010. This update
did not have a material effect on the Company's financial statements.
Technical Amendments
In August 2010,
FASB issued ASC Update No. 2010-21 Accounting for Technical Amendments to
Various SEC Rules and Schedules Amendments to SEC Paragraphs Pursuant to
Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and
Codification of Financial Reporting Policies (SEC Update) and 2010-22
Accounting for Various Topics-Technical Corrections to SEC Paragraphs (SEC
Update). These two updates amend paragraphs in the ASC on various topics
including, but not limited to, noncontrolling interests, equity, condensed
financial statements, business combinations and others. This update did not
have a material effect on the Company's financial statements.
-42-
Allowance for Credit Losses
In July 2010,
the FASB issued
ASC Update 2010-20
Receivables (Topic 310) Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses
. This amendment requires
an entity to provide disclosures regarding the nature of credit risk inherent
in the portfolio, how risks are analyzed and assessed in arriving at the
allowance for credit losses, and changes and reasons for changes in the
allowance for credit losses. Such disclosures are to be provided on two levels
of disaggregation, namely portfolio segment and class of financing
receivables. Existing disclosures are also amended to require presentation on
a disaggregated basis. Additional disclosures are required regarding credit
quality indicators at the end of the reporting period by class, aging of past
dues by class, nature and extent of troubled debt restructurings that occurred
during the period by class and the effect on the allowance for credit losses,
troubled debt restructurings that defaulted by class and the effect on the
allowance for credit losses, significant purchases and sales of financial
receivables during the period by portfolio segment. For public entities, the
disclosures as of the end of the reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for interim
and annual reporting periods beginning on or after December 31, 2010. The
amendments encourage but do not require comparative disclosures for earlier
reporting periods that ended before initial adoption and require comparative
disclosures for periods ending after initial adoption. Management believes
that adoption of this update is likely to significantly change the disclosures
related to the allowance for loan losses.
In January 2011,
the FASB issued ASC Update 2011-1 Receivables (Topic 310): Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No.
2010-20. This update postponed the effective date to periods ending after June
15, 2011 for certain required disclosures related to troubled debt
restructurings that were included in ASC Update 2010-20.
Subsequent Events
In February,
FASB issued ASC Update 2010-09 Subsequent Events (Topic 855) Amendments to
Certain Recognition and Disclosure Requirements. This amendment to Subtopic
855-10 requires reporting entities to evaluate subsequent events through the
date that the financial statements are issued. In addition, a reporting entity
is not required to disclose the date through which subsequent events have been
evaluated. These amendments are effective for interim or annual periods ending
after June 15, 2010. This update did not have a material effect on the
Company's financial statements.
Fair
Value Measurements
In January 2010,
FASB issued ASC Update 2010-06 Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value Measurements. This amendment to
Subtopic 820-10 requires separate disclosures of the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and
descriptions of the reasons for the transfers. In addition, the reporting
entity should present separately information about purchases, sales, issuances,
and settlements on activity in Level 3 fair value measurements. This update
also clarifies existing disclosures regarding level of disaggregation and
inputs and valuation techniques as well as includes conforming amendments to the
guidance on employers' disclosures about post-retirement benefit plan assets.
The new disclosures and clarification of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuance, and settlements in the
roll forward of activity in Level 3 fair value measurements. These disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. Management does not expect that
adoption of this update will materially affect its financial statements.
Technical Corrections
In January 2010,
FASB issued ASC Update No. 2010-04 Accounting for Various Topics Technical
Corrections to SEC Paragraphs. This update provided technical correction on
various accounting topics including, but not limited to, subsequent events,
push down accounting, goodwill, and others. In February 2010, FASB issued ASC
Update No. 2010-08, which was another technical correction to various
accounting topics. Topics addressed in this update included, but are not limited
to, amendments to master glossary, statement of cash flows, debt and equity
securities, equity method investments, goodwill, income taxes, derivatives and
others. These two updates did not have a material impact on the Company's
financial statements.
-43-
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Interest rate
sensitivity varies with different types of interest earning assets and
interest-bearing liabilities. Overnight federal funds, on which rates change
daily, and loans which are tied to the prime rate are much more sensitive than
long-term investment securities and fixed rate loans. The shorter-term interest
sensitive assets and liabilities are key to measurement of the interest
sensitivity gap. Minimizing this gap is a continual challenge and a primary
objective of the asset/liability management program.
The Company
monitors and employs multiple strategies to continuously manage interest rate
risk and liquidity at acceptable levels. Such strategies include but are not
limited to use of FHLB borrowings, floors on variable rate loans, use of
interest rate swaps and investments in mortgage-backed investments that enable
the Company to have steady cash inflows.
Overall, the
Company improved net interest margins to above 4% in 2009 and 2010 after maintaining
steady net interest margins in the range of 3.7% to 4.0% from December 2005 to
December 2008. Margins steadily improved in 2009 to 4.2% for the first time in
over five years and held at 4.28% for the year ended December 31, 2010. Margin
improvement is a result of the Company's ability to keep interest earning asset
yields declining at a pace slower than the decline of interest bearing
liabilities. The Company's overall fairly neutral interest rate risk position
is evidenced by comparison of the range of federal funds rate compared to range
of the Company's net yield on average earning assets. From 2005 to 2010, the
average quarterly federal funds rate fluctuated between 0.00% and 5.25% while
the Company's average quarterly net yield range for the same period is 3.59% to
4.41%. The Company's quarterly net interest margin was 4.34%, 4.30%, 4.18% and
4.26% for the four calendar quarters of 2010.
Interest rate
risk is separated and analyzed according to the following categories of risk:
(1) re-pricing; (2) yield curve; (3) option risk; (4) price risk; and (5) basis
risk. Trading assets are utilized infrequently and are addressed in the
investment policy. Unfavorable trends reflected in interest rate margins will
cause an immediate adjustment to the Bank's gap position or asset/liability
management strategies. The data schedule below reflects a summary of the
Company's interest rate risk using simulations. The projected 12-month
exposure is based on different rate movements (flat, rising or declining).
-44-
The following
condensed gap report provides an analysis of interest rate sensitivity of
earning assets and costing liabilities in a flat rate environment:
CONDENSED
GAP REPORT
CURRENT BALANCES
DECEMBER 31, 2010
|
One
|
Three
|
Six
|
12
|
Two
|
Three
|
Five
|
More than Five
|
Non-
|
|
|
Month
|
Months
|
Months
|
Months
|
Years
|
Years
|
Years
|
Years
|
Sensitive
|
|
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash and Due
|
|
|
|
|
|
|
|
|
|
|
From Banks
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
21,899
|
$
|
21,899
|
Total Investments
|
5,136
|
8,847
|
8,806
|
19,292
|
33,714
|
30,437
|
48,272
|
137,332
|
2,987
|
294,823
|
|
|
|
|
|
|
|
|
|
|
|
Total Fed Funds Sold
|
18,063
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
18,063
|
Total Net Loans
|
120,208
|
39,821
|
45,949
|
71,745
|
130,285
|
87,591
|
52,051
|
-
|
(7,975)
|
539,675
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
|
|
|
|
|
|
|
99,918
|
Total Assets
|
$
|
143,407
|
$
|
48,668
|
$
|
54,755
|
$
|
91,037
|
$
|
163,999
|
$
|
118,028
|
$
|
100,323
|
$
|
137,332
|
$
|
16,911
|
$
|
974,378
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Demand
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
10,040
|
$
|
5,020
|
$
|
5,020
|
$
|
-
|
$
|
80,050
|
$
|
-
|
$
|
100,130
|
Total Savings
|
67,698
|
-
|
-
|
-
|
26,169
|
26,169
|
69,242
|
133,801
|
-
|
323,079
|
Total Time
|
37,423
|
89,940
|
79,020
|
112,696
|
39,840
|
5,514
|
4,131
|
72
|
-
|
368,636
|
Total Deposits
|
105,121
|
89,940
|
79,020
|
122,736
|
71,029
|
36,703
|
73,373
|
213,923
|
-
|
791,845
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings
|
33,204
|
14,226
|
489
|
5,653
|
8,834
|
6,669
|
2,493
|
16,000
|
-
|
87,568
|
Other Liabilities
|
|
|
|
|
|
|
|
|
5,686
|
5,686
|
Total Other Liabilities
|
33,204
|
14,226
|
489
|
5,653
|
8,834
|
6,669
|
2,493
|
16,000
|
5,686
|
93,254
|
Total Liabilities
|
138,325
|
104,166
|
79,509
|
128,389
|
79,863
|
43,372
|
75,866
|
229,923
|
5,686
|
885,099
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
89,279
|
89,279
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities/Equity
|
$
|
138,325
|
$
|
104,166
|
$
|
79,509
|
$
|
128,389
|
$
|
79,863
|
$
|
43,372
|
$
|
75,866
|
$
|
229,923
|
$
|
94,965
|
$
|
974,378
|
|
|
|
|
|
|
|
|
|
|
|
Period Gap
|
(85,980)
|
(55,498)
|
(24,754)
|
(37,352)
|
84,136
|
74,656
|
24,457
|
(92,591)
|
11,225
|
-
|
Cumulative Gap
|
5,089
|
(50,409)
|
(75,163)
|
(112,515)
|
(28,379)
|
46,277
|
70,734
|
(21,857)
|
(10,632)
|
(10,632)
|
RSA/RSL
|
37.84 %
|
46.72 %
|
68.87 %
|
70.91 %
|
205.35 %
|
272.13 %
|
132.24 %
|
23.00 %
|
17.81 %
|
0.00 %
|
-45-
The following
condensed gap report provides an analysis of interest rate sensitivity of
earning assets and costing liabilities in a flat rate environment:
CONDENSED
GAP REPORT
CURRENT BALANCES
DECEMBER 31, 2009
|
One
|
Three
|
Six
|
12
|
Two
|
Three
|
Five
|
More than Five
|
Non
|
|
|
Month
|
Months
|
Months
|
Months
|
Years
|
Years
|
Years
|
Years
|
Sensitive
|
|
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Balance
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash and Due
|
|
|
|
|
|
|
|
|
|
|
From
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
21,177
|
$
|
21,177
|
Total Investments
|
4,767
|
9,734
|
10,390
|
19,649
|
31,705
|
25,162
|
38,442
|
102,931
|
7,011
|
249,791
|
|
|
|
|
|
|
|
|
|
|
|
Total Fed Funds Sold
|
11,170
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
11,170
|
Total Net Loans
|
150,869
|
43,716
|
44,568
|
73,936
|
100,028
|
118,876
|
55,552
|
-
|
(8,931)
|
578,614
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
95,803
|
Total Assets
|
$
|
166,806
|
$
|
53,450
|
$
|
54,958
|
$
|
93,585
|
$
|
131,733
|
$
|
144,038
|
$
|
93,994
|
$
|
102,931
|
$
|
19,257
|
$
|
956,555
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Demand
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
10,068
|
$
|
5,034
|
$
|
5,034
|
$
|
-
|
$
|
80,368
|
$
|
-
|
$
|
100,504
|
Total Savings
|
62,852
|
-
|
-
|
-
|
24,453
|
24,453
|
63,594
|
119,848
|
-
|
295,200
|
Total Time
|
49,689
|
106,404
|
73,948
|
98,354
|
16,806
|
7,208
|
3,954
|
79
|
-
|
356,442
|
Total Deposits
|
112,541
|
106,404
|
73,948
|
108,422
|
46,293
|
36,695
|
67,548
|
200,295
|
-
|
752,146
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings
|
32,376
|
7,157
|
6,888
|
22,606
|
11,536
|
5,858
|
2,180
|
24,310
|
-
|
112,911
|
Other Liabilities
|
|
|
|
|
|
|
|
|
7,186
|
7,186
|
Total Other Liabilities
|
32,376
|
7,157
|
6,888
|
22,606
|
11,536
|
5,858
|
2,180
|
24,310
|
7,186
|
120,097
|
Total Liabilities
|
144,917
|
113,561
|
80,836
|
131,028
|
57,829
|
42,553
|
69,728
|
224,605
|
7,186
|
872,243
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
84,312
|
84,312
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities/Equity
|
$
|
144,917
|
$
|
113,561
|
$
|
80,836
|
$
|
131,028
|
$
|
57,829
|
$
|
42,553
|
$
|
69,728
|
$
|
224,605
|
$
|
91,498
|
$
|
956,555
|
|
|
|
|
|
|
|
|
|
|
|
Period Gap
|
(66,068)
|
(60,111)
|
(25,878)
|
(37,443)
|
73,904
|
101,485
|
24,266
|
(121,674)
|
12,071
|
-
|
Cumulative Gap
|
21,889
|
(38,222)
|
(64,100)
|
(101,543)
|
(27,639)
|
73,846
|
98,112
|
(23,562)
|
(11,491)
|
-
|
RSA/RSL
|
54.41 %
|
47.07 %
|
67.99 %
|
71.42 %
|
227.80 %
|
338.49 %
|
134.80 %
|
23.00 %
|
21.05 %
|
0.00 %
|
_______________
* RSA/RSL means the ratio of rate-sensitive
assets to rate-sensitive liabilities.
Notes to the Gap Reports
1. The gap report reflects the interest sensitivity positions during a flat
rate environment. Time frames could change depending on whether rates rise or
fall.
2. Re-pricing overrides maturities in various time frames.
-46-
3. Demand deposits
are considered to be core and are spread among the one-year, two-year,
three-year and greater than five-year categories for gap analysis.
4. Savings accounts, also considered core, are split into various time
frames based on characteristics of the various accounts and pricing strategies
related to those accounts. In a flat rate environment, regular savings
accounts tend not to re-price or liquidate and become price sensitive only
after a major increase in the six-month CD rate. First Rate and Wall
Street deposit products are more rate sensitive and, therefore, are placed in the
variable category of less than one month.
5.
Simulations
are utilized to reflect the impact of multiple rate scenarios on net interest
income at risk, net income at risk and economic value of equity at risk.
Strategies are implemented to increase net interest income, while always
considering the impact on interest rate risk. Overall, the Bank manages
the gap between rate sensitive liabilities to expand and contract with the rate
cycle phase. The Bank's Funds Management Committee is responsible for
implementing and monitoring procedures to improve net interest income through
volume increases and better pricing techniques.
The Company's
interest rate risk position was liability sensitive at year-end 2010.
Therefore, net interest margins would be diluted slightly by increases in rates
over the next 12 months under a normal interest rate environment. As of
December 2010, federal funds rates continue at the historical low range of
0.00% - 0.25%. Federal funds rates at this level do not have the capacity to
decrease even 100 basis points. Therefore, in the interest rate risk models,
the rates on federal funds and prime hit a floor of zero and 3.0%,
respectively. The prime rate floor of 3% assumes that the normal spread
between federal funds rates and prime is maintained and remains fixed at 300
basis points. While prime rate in the model reaches a floor of 3%, the Bank's
variable rate loan pricing carries an average floor of 5.5%. As rates in the
model are shocked, loans will decrease only until the floor position is reached
while some liabilities continue to reprice downward. However, the variance
between the flat rate scenario and the down rate shocks are negative as the
current pricing of liabilities is historically low and has little room to trend
downward beyond its current position. With federal funds rates currently at
0.00% to 0.25%, the down 100 basis points and down 200 basis point scenarios
are the most unlikely scenarios. Scenarios for exposure in the up 100 basis
points and up 200 basis points are considered more realistic. These scenarios
also indicate a negative variance because the upward scenarios indicate that
deposits will reprice faster than loans and investments, especially given that
most of the loans are currently at a floor and will require a more than 200-basis
point increase in federal funds rates and prime rate before loan floors will
increase.
The Company's
exposure to interest rate risk is well within established policy limits as
presented in the following table (dollars in thousands):
Net
Interest Income at Risk*
December
31, 2010
Tier 1 Capital
$85,695
|
Projected 12
Month Exposure
|
|
Rate
|
|
|
|
|
|
|
|
|
|
POLICY
|
|
Moves In
|
|
Current
|
|
Possible
|
|
|
|
% of Net Int
|
|
% of Net Int
|
Net Interest
Income Levels
|
Basis Pts
|
|
Position
|
|
Scenarios
|
|
Variance
|
|
Income
|
|
Income
|
Declining 2
|
(200)
|
|
$
|
33,110
|
|
$
|
30,635
|
|
$
|
(2,475)
|
|
-7.5%
|
|
-20.0%
|
Declining 1
|
(100)
|
|
33,110
|
|
32,922
|
|
(188)
|
|
-0.6%
|
|
-10.0%
|
Most Likely-Base
|
-
|
|
33,110
|
|
33,110
|
|
-
|
|
-%
|
|
-%
|
Rising 1
|
100
|
|
33,110
|
|
32,227
|
|
(883)
|
|
-2.7%
|
|
-10.0%
|
Rising 2
|
200
|
|
33,110
|
|
31,336
|
|
(1,774)
|
|
-5.4%
|
|
-25.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________________
* Net interest income assumes that
interest rates would change immediately within the total portfolio, a scenario
which would reflect a worst case position and is unlikely to happen.
-47-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control system is designed to
provide reasonable assurance to management and the Company's Board of Directors
regarding the preparation and fair presentation of the Company's annual
financial statements in accordance with GAAP.
Inherent
limitations exist in the effectiveness of any internal control structure,
including the possibility of human error and circumvention of controls.
Accordingly, even effective internal control can only provide reasonable
assurance with respect to financial statement preparation.
Management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2010, based on criteria for effective internal
control over financial reporting described in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that, as of December
31, 2010, the Company's internal control over financial reporting was
effective.
Alexander
Thompson Arnold, PLLC, the Company's independent registered public accounting
firm, has audited the Company's consolidated financial statements and issued an
attestation report on the Company's internal control over financial reporting.
This report appears on page 49 of this
Annual Report on Form 10-K.
-48-
|
185 N. Church
Street Telephone: (731) 285-7900
Dyersburg, TN 38024 (800)
608-5612
Fax: (731) 285-6221
Members of
American Institute of Certified Public
Accountants
AICPA Center for Public Company Audit Firms
AICPA Governmental Audit Quality Center
AICPA Employee Benefit Plan Audit Quality Center
Tennessee Society of Certified Public
Accountants
Kentucky Society of Certified Public
Accountants
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Stockholders of
First Citizens Bancshares, Inc. and Subsidiaries
Dyersburg, Tennessee 38024
We
have audited the accompanying consolidated balance sheets of First Citizens
Bancshares, Inc., and subsidiaries as of December 31, 2010 and 2009, and the
related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three year period ended December
31, 2010. We also have audited First Citizens Bancshares, Inc. and
subsidiaries' internal control over financial reporting as of December 31, 2010,
based on criteria established in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). First Citizens Bancshares, Inc. and subsidiaries' management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility is to express
an opinion on these financial statements and an opinion on the company's
internal control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
-
49 -
First Citizens Bancshares, Inc.
Page 2
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of First Citizens Bancshares, Inc.,
and subsidiaries as of December 31, 2010 and 2009, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2010, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, First Citizens
Bancshares, Inc. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010, based
on criteria established in
Internal Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
/s/
ALEXANDER THOMPSON ARNOLD PLLC
Dyersburg, Tennessee
March 1, 2011
Dyersburg, TN
|
McKenzie, TN
|
Union City, TN
|
Milan, TN
|
Henderson, TN
|
Murray, KY
|
Jackson, TN
|
Paris, TN
|
Martin, TN
|
Trenton, TN
|
|
|
-50-
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(dollars in thousands)
|
|
|
December 31,
2010
|
|
December 31,
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
15,628
|
|
$
|
17,402
|
|
Federal funds sold
|
18,063
|
|
11,170
|
|
|
Cash and cash equivalents
|
33,691
|
|
28,572
|
|
Interest-bearing deposits in other banks
|
6,271
|
|
3,775
|
|
Investment securities:
|
|
|
|
|
|
Available-for-sale, stated at market
|
294,823
|
|
249,791
|
|
Loans (excluding unearned income of $352 at December 31,
2010
|
|
|
|
|
|
and $434 at December 31, 2009)
|
547,703
|
|
587,398
|
|
Less: allowance for loan losses
|
8,028
|
|
8,784
|
|
|
|
Net loans
|
539,675
|
|
578,614
|
|
Loans held-for-sale
|
2,777
|
|
2,741
|
|
Federal Home Loan Bank and Federal Reserve Bank stocks, at
cost
|
5,684
|
|
5,684
|
|
Premises and equipment
|
30,268
|
|
30,525
|
|
Accrued interest receivable
|
5,215
|
|
5,405
|
|
Goodwill
|
|
11,825
|
|
11,825
|
|
Other intangible assets
|
120
|
|
204
|
|
Other real estate owned
|
14,734
|
|
10,527
|
|
Bank owned life insurance policies
|
21,656
|
|
21,116
|
|
Other assets
|
7,639
|
|
7,776
|
|
|
|
TOTAL ASSETS
|
$
|
974,378
|
|
$
|
956,555
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
$
|
100,130
|
|
$
|
100,504
|
|
Interest bearing time deposits
|
368,636
|
|
356,442
|
|
Interest bearing savings deposits
|
323,079
|
|
295,200
|
|
|
Total deposits
|
791,845
|
|
752,146
|
|
Securities sold under agreements to
|
|
|
|
|
|
Repurchase
|
34,309
|
|
36,881
|
|
Federal funds purchased and other short
|
|
|
|
|
|
term borrowings
|
1,000
|
|
748
|
|
Other borrowings
|
52,259
|
|
75,282
|
|
Other liabilities
|
5,686
|
|
7,131
|
|
|
|
Total liabilities
|
885,099
|
|
872,188
|
|
-51-
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (cont'd)
DECEMBER 31, 2010 AND 2009
(Dollars in
thousands)
|
|
|
December 31,
2010
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
Common stock, no par value - 10,000,000
|
|
|
|
|
|
authorized; 3,717,593 issued and outstanding
|
|
|
|
|
|
at December 31, 2010 and December 31, 2009
|
$
|
3,718
|
|
$
|
3,718
|
|
Surplus
|
|
15,331
|
|
15,331
|
|
Retained earnings
|
68,696
|
|
63,448
|
|
Accumulated other comprehensive income
|
1,896
|
|
4,256
|
|
|
Total common stock and retained earnings
|
89,641
|
|
86,753
|
|
Less-91,767 treasury shares, at cost as of December 31,
2010
|
|
|
|
|
|
and 92,575 treasury shares, at cost as of December 31,
2009
|
2,417
|
|
2,441
|
|
|
|
Total shareholders' equity
|
87,224
|
|
84,312
|
|
Noncontrolling (minority) interest in consolidated
subsidiary
|
2,055
|
|
55
|
|
|
|
Total equity
|
89,279
|
|
84,367
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
$
|
974,378
|
|
$
|
956,555
|
|
|
|
|
|
|
|
|
Note: See
accompanying notes to consolidated financial statements.
-52-
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2010, 2009 AND 200
8
(In thousands,
except per share data)
|
|
2010
|
|
2009
|
|
2008
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
36,085
|
|
$
|
38,402
|
|
$
|
42,357
|
|
Interest and dividends on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
6,038
|
|
7,029
|
|
7,334
|
|
|
Tax-exempt
|
|
3,940
|
|
3,285
|
|
2,329
|
|
|
Dividends
|
|
224
|
|
231
|
|
309
|
|
|
Other interest income
|
|
60
|
|
64
|
|
138
|
|
|
Total interest income
|
|
46,347
|
|
49,011
|
|
52,467
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
8,710
|
|
11,729
|
|
17,517
|
|
|
Interest on borrowings
|
|
2,815
|
|
3,428
|
|
4,166
|
|
|
Other interest expense
|
|
485
|
|
655
|
|
951
|
|
|
Total interest expense
|
|
12,010
|
|
15,812
|
|
22,634
|
|
|
Net interest income
|
|
34,337
|
|
33,199
|
|
29,833
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
7,000
|
|
7,060
|
|
2,858
|
|
|
Net interest income after provision for loan losses
|
27,337
|
|
26,139
|
|
26,975
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
Mortgage banking income
|
|
1,116
|
|
1,111
|
|
1,139
|
|
|
Income from fiduciary activities
|
|
785
|
|
806
|
|
816
|
|
|
Service charges on deposit accounts
|
|
6,923
|
|
6,941
|
|
7,272
|
|
|
Brokerage fees
|
|
1,080
|
|
1,317
|
|
1,473
|
|
|
Earnings on bank owned life insurance
|
|
677
|
|
832
|
|
833
|
|
|
Loss on sale of foreclosed property
|
|
(1,156)
|
|
(470)
|
|
(284)
|
|
|
Gain on sale of available-for-sale securities
|
|
1,884
|
|
1,196
|
|
436
|
|
|
Income from insurance activities
|
|
913
|
|
834
|
|
940
|
|
|
Other non-interest income
|
|
637
|
|
546
|
|
571
|
|
|
Total non-interest income
|
|
12,859
|
|
13,113
|
|
13,196
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than temporary impairment losses
|
|
1,567
|
|
1,357
|
|
1,810
|
|
|
Portion of loss recognized in other
|
|
|
|
|
|
|
|
|
comprehensive income (before taxes)
|
|
(978)
|
|
(706)
|
|
-
|
|
|
Net impairment losses recognized in earnings
|
|
589
|
|
651
|
|
1,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-53-
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (cont'd)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands,
except per share data)
|
|
2010
|
|
2009
|
|
2008
|
|
Non-interest expense
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
15,417
|
|
15,285
|
|
16,832
|
|
Net occupancy expense
|
|
1,759
|
|
1,804
|
|
1,745
|
|
Depreciation
|
|
1,792
|
|
1,852
|
|
1,868
|
|
Data processing expense
|
|
1,591
|
|
1,192
|
|
984
|
|
Legal and professional fees
|
|
441
|
|
305
|
|
353
|
|
Stationary and office supplies
|
|
221
|
|
254
|
|
259
|
|
Amortization of intangibles
|
|
85
|
|
85
|
|
85
|
|
Advertising and promotions
|
|
703
|
|
622
|
|
711
|
|
Premiums for FDIC insurance
|
|
1,200
|
|
1,671
|
|
95
|
|
Expenses related to other real estate owned
|
|
888
|
|
642
|
|
435
|
|
ATM related fees and expenses
|
|
784
|
|
483
|
|
422
|
|
Other non-interest expense
|
|
3,829
|
|
4,114
|
|
4,275
|
|
Total non-interest expense
|
|
28,710
|
|
28,309
|
|
28,064
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
10,897
|
|
10,292
|
|
10,297
|
|
Provision for income tax expense
|
|
2,022
|
|
1,965
|
|
2,768
|
|
Net income
|
|
$
|
8,875
|
|
$
|
8,327
|
|
$
|
7,529
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.45
|
|
$
|
2.30
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
3,626
|
|
3,625
|
|
3,625
|
|
|
|
|
|
|
|
|
|
Note: See
accompanying notes to consolidated financial statements.
-54-
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED
DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
|
|
2010
|
|
2009
|
|
2008
|
Net income
|
|
$
|
8,875
|
|
$
|
8,327
|
|
$
|
7,529
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
Net change in unrealized gains (losses) on cash flow
hedge
|
|
69
|
|
44
|
|
(14)
|
Net change in unrealized gains (losses) on available-
|
|
|
|
|
|
|
for-sale securities
|
|
(2,429)
|
|
2,687
|
|
596
|
Total other comprehensive income, net of tax
|
|
(2,360)
|
|
2,731
|
|
582
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
6,515
|
|
$
|
11,058
|
|
$
|
8,111
|
Related tax effects allocated to each component of other
comprehensive income are as follows:
|
|
Before-tax
|
|
Tax (Expense)
|
|
Net-of-tax
|
|
|
Amount
|
|
or Benefit
|
|
Amount
|
|
|
|
|
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedge
|
|
$
|
111
|
|
$
|
(42)
|
|
$
|
69
|
Unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the
period
|
|
4,901
|
|
(1,878)
|
|
(1,630)
|
Reclassification adjustments for net gains
included in net income
|
(1,295)
|
|
496
|
|
(799)
|
Unrealized gains (losses) on available-for-sale
securities, net
|
|
3,606
|
|
(1,382)
|
|
(2,429)
|
Net unrealized gains (losses)
|
|
$
|
3,717
|
|
$
|
(1,424)
|
|
$
|
(2,360)
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedge
|
|
$
|
71
|
|
$
|
(27)
|
|
$
|
44
|
Unrealized gains (losses) on available-for-sale
securities:
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the
period
|
|
4,901
|
|
(1,878)
|
|
3,023
|
Reclassification adjustments for net gains
included in net income
|
(545)
|
|
209
|
|
(336)
|
Unrealized gains (losses) on available-for-sale
securities, net
|
|
4,356
|
|
(1,669)
|
|
2,687
|
Net unrealized gains (losses)
|
|
$
|
4,427
|
|
$
|
(1,696)
|
|
$
|
2,731
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedge
|
|
$
|
(23)
|
|
$
|
9
|
|
$
|
(14)
|
Unrealized gains (losses) on available-for-sale
securities:
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the
period
|
|
(408)
|
|
156
|
|
(252)
|
Reclassification adjustments for net losses
included in net income
|
1,374
|
|
(526)
|
|
848
|
Unrealized gains (losses) on available-for-sale
securities, net
|
|
966
|
|
(370)
|
|
596
|
Net unrealized gains (losses)
|
|
$
|
943
|
|
$
|
(361)
|
|
$
|
582
|
|
|
|
|
|
|
|
Note: See accompanying notes to consolidated financial statements.
-55-
FIRST CITIZENS
BANCSHARES, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED
DECEMBER 31, 2010, 2009 AND 2008
(In thousands,
except per share data)
|
|
|
|
|
|
|
|
|
Accum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Non-
|
|
|
|
Common Stock
|
|
|
|
Retained
|
|
Compre.
|
|
Treasury
|
|
Controlling
|
|
|
|
Shares
|
|
Amount
|
|
Surplus
|
|
Earnings
|
|
Income
|
|
Stock
|
|
Interests
|
|
Total
|
|
(#)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
Balance January 1, 200
8
|
3,718
|
|
$
|
3,718
|
|
$
|
15,331
|
|
$
|
57,485
|
|
$
|
944
|
|
$
|
(2,447)
|
|
$
|
55
|
|
$
|
75,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, year ended December 31, 2008
|
|
|
|
|
|
|
7,529
|
|
|
|
|
|
|
|
7,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principle (adoption of EITF
06-04)
|
|
|
|
|
|
|
(1,919)
|
|
|
|
|
|
|
|
(1,919)
|
Adjustment of unrealized gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available-for-sale, net of tax
|
|
|
|
|
|
|
|
|
596
|
|
|
|
|
|
596
|
Adjustment of unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash flow hedge, net of tax
|
|
|
|
|
|
|
|
|
(14)
|
|
|
|
|
|
(14)
|
Cash dividends paid - $1.16 per share
|
|
|
|
|
|
|
(4,205)
|
|
|
|
|
|
|
|
(4,205)
|
Treasury stock transitions-net
|
|
|
|
|
|
|
|
|
|
|
(10)
|
|
|
|
(10)
|
Balance December 31, 2008
|
3,718
|
|
$
|
3,718
|
|
$
|
15,331
|
|
$
|
58,890
|
|
$
|
1,526
|
|
$
|
(2,457)
|
|
$
|
55
|
|
$
|
77,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, year ended December 31, 2009
|
|
|
|
|
|
|
8,327
|
|
|
|
|
|
|
|
8,327
|
Adjustment of unrealized gain (loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available-for-sale, net of tax
|
|
|
|
|
|
|
|
|
2,686
|
|
|
|
|
|
2,686
|
Adjustment of unrealized gain (loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash flow hedge, net of tax
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
44
|
Cash dividends paid - $1.04 per share
|
|
|
|
|
|
|
(3,769)
|
|
|
|
|
|
|
|
(3,769)
|
Treasury stock transitions, net
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
16
|
Balance December 31, 2009
|
3,718
|
|
$
|
3,718
|
|
$
|
15,331
|
|
$
|
63,448
|
|
$
|
4,256
|
|
$
|
(2,441)
|
|
$
|
55
|
|
$
|
84,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, year ended December 31, 2010
|
|
|
|
|
|
|
8,875
|
|
|
|
|
|
|
|
8,875
|
Adjustment of unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available-for-sale, net of tax
|
|
|
|
|
|
|
|
|
(2,429)
|
|
|
|
|
|
(2,429)
|
Adjustment of unrealized gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash flow hedge, net of tax
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
69
|
Cash dividends paid - $1.00 per share
|
|
|
|
|
|
|
(3,627)
|
|
|
|
|
|
|
|
(3,627)
|
Treasury stock transitions, net
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
24
|
Sale of subsidiary preferred shares to
noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
2,000
|
Balance December 31, 20
10
|
3,718
|
|
$
|
3,718
|
|
$
|
15,331
|
|
$
|
68,696
|
|
$
|
1,896
|
|
$
|
(2,417)
|
|
$
|
2,055
|
|
$
|
89,279
|
Note: See
accompanying notes to consolidated financial statements.
-56-
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
YEARS ENDED
DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
|
|
2010
|
|
2009
|
|
2008
|
|
Operating activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,875
|
|
$
|
8,327
|
|
$
|
7,529
|
|
Adjustments to reconcile net income to net
|
|
|
|
|
|
|
|
cash provided by operating activities:
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
7,000
|
|
7,060
|
|
2,858
|
|
Provision for depreciation
|
|
1,792
|
|
1,852
|
|
1,868
|
|
Provision for amortization of intangibles
|
|
85
|
|
85
|
|
85
|
|
Deferred income taxes
|
|
65
|
|
(789)
|
|
(870)
|
|
Gains on sale or call of investment securities
|
|
(1,884)
|
|
(1,196)
|
|
(436)
|
|
Impairment losses on securities recorded in earnings
|
|
589
|
|
651
|
|
1,810
|
|
Net losses on sale or write down of other real estate
owned
|
|
1,156
|
|
470
|
|
284
|
|
Net increase in loans held-for-sale
|
|
(36)
|
|
(109)
|
|
(445)
|
|
Decrease in accrued interest receivable
|
|
190
|
|
176
|
|
983
|
|
Increase (decrease) in accrued interest payable
|
|
(244)
|
|
(980)
|
|
148
|
|
Increase in cash surrender value of bank-owned life
insurance policies
|
|
(540)
|
|
(489)
|
|
(694)
|
|
Net (increase) decrease in other assets
|
|
375
|
|
(5,174)
|
|
(296)
|
|
Net increase (decrease) in other liabilities
|
|
71
|
|
(1,500)
|
|
2,821
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
17,494
|
|
8,384
|
|
15,645
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
Increase in interest-bearing deposits in other banks
|
|
(2,496)
|
|
(793)
|
|
(2,081)
|
|
Proceeds of maturities of held-to-maturity investment
securities
|
|
-
|
|
115
|
|
175
|
|
Proceeds of paydowns and maturities of
available-for-sale
|
|
|
|
|
|
|
|
investment securities
|
|
69,296
|
|
36,943
|
|
50,402
|
|
Purchases of available-for-sale investment securities
|
|
(178,964)
|
|
(111,550)
|
|
(101,226)
|
|
Decrease (increase) in loans - net
|
|
23,224
|
|
(4,040)
|
|
(18,807)
|
|
Proceeds from sale of other real estate owned
|
|
5,043
|
|
2,600
|
|
1,396
|
|
Purchase of premises and equipment
|
|
(1,535)
|
|
(631)
|
|
(3,306)
|
|
NET CASH USED BY INVESTING ACTIVITIES
|
|
(23,128)
|
|
(36,315)
|
|
(42,683)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
Net increase in demand deposits and savings accounts
|
|
27,505
|
|
53,629
|
|
32,142
|
|
Net increase (decrease) in time deposits
|
|
12,194
|
|
(36,398)
|
|
12,178
|
|
Net increase (decrease) in short-term borrowings
|
|
(2,320)
|
|
3,864
|
|
(10,100)
|
|
Issuance of other borrowings
|
|
10,000
|
|
2,000
|
|
12,000
|
|
Payment of principal on other borrowings
|
|
(33,023)
|
|
(561)
|
|
(1,319)
|
|
Cash dividends paid
|
|
(3,627)
|
|
(3,769)
|
|
(4,205)
|
|
Treasury stock transactions - net
|
|
24
|
|
16
|
|
(10)
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
10,753
|
|
18,781
|
|
40,686
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: See
accompanying notes to consolidated financial statements.
-57-
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS (cont'd)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
|
|
2010
|
|
2009
|
|
2008
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
$
|
5,119
|
|
$
|
(9,150)
|
|
$
|
13,381
|
Cash and cash equivalents at beginning of year
|
|
28,572
|
|
37,722
|
|
24,341
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
33,691
|
|
$
|
28,572
|
|
$
|
37,722
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
Interest paid
|
|
$
|
12,234
|
|
$
|
16,792
|
|
$
|
22,782
|
Income taxes paid
|
|
$
|
2,816
|
|
$
|
3,788
|
|
$
|
2,425
|
|
|
|
|
|
|
|
Supplemental noncash disclosures:
|
|
|
|
|
|
|
Transfers from loans to other real estate owned
|
|
$
|
11,691
|
|
$
|
9,493
|
|
$
|
5,440
|
Transfers from foreclosed other real estate owned to
loans
|
|
$
|
1,785
|
|
$
|
1,940
|
|
$
|
400
|
Note: See
accompanying notes to consolidated financial statements.
-58-
FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
AND 2009
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting
and reporting policies of First Citizens Bancshares, Inc., and subsidiaries
(the "Company") conform to generally accepted accounting principles ("GAAP").
The significant policies are described as follows:
Basis of Presentation
The Consolidated
Financial Statements include all accounts of the Company and its subsidiary,
First Citizens National Bank (the "Bank"). First Citizens (TN) Statutory
Trusts III and IV are reported under the equity method in accordance with GAAP
for Variable Interest Entities for all periods presented. These investments
are included in Other Assets and the proportionate share of income (loss) is
included in other non-interest income. The Bank also has two wholly-owned
subsidiaries, First Citizens Financial Plus, Inc. and First Citizens
Investments, Inc., which are consolidated into its financial statements. The
Company's investment in these subsidiaries is reflected on the Company's
condensed balance sheet. See Note 22 for more information.
The Bank has a
50% ownership in two insurance subsidiaries, both of which are accounted for
using the equity method. White and Associates/First Citizens Insurance, LLC is
a general insurance agency offering a full line of insurance products. First
Citizens/White and Associates Insurance Company's principal activity is credit
insurance. The investment in these subsidiaries is included in Other Assets on
the Consolidated Balance Sheets presented in this report and earnings from
these subsidiaries are recorded in Other Income on the Consolidated Statements
of Income.
The principal
activity of First Citizens Investments, Inc. is to acquire and sell investment
securities and collect income from the securities portfolio. First Citizens
Holdings, Inc., a wholly owned subsidiary of First Citizens Investments, Inc.,
acquires and sells certain investment securities, collects income from its
portfolio, and owns First Citizens Properties, Inc., a real estate investment
trust. First Citizens Properties, Inc. is a real estate investment trust
organized and existing under the laws of the state of Maryland, the principal
activity of which is to invest in participation interests in real estate loans
made by the Bank and provide the Bank with an alternative vehicle for raising
capital. First Citizens Holdings, Inc. owns 100% of the outstanding common
stock and 60% of the outstanding preferred stock of First Citizens Properties,
Inc. Directors, executive officers and certain employees and affiliates of the
Bank own approximately 40% of the preferred stock which is reported as Noncontrolling
Interest in Consolidated Subsidiary in the Consolidated Financial Statements of
the Company. Net income (loss) attributable to the noncontrolling interest is included
in Other Non-Iterest Expense on the Consolidated Statements of Income and is
not material for any of the periods presented.
The Company has
two additional wholly owned subsidiaries, First Citizens (TN) Statutory Trust
III and First Citizens (TN) Statutory Trust IV. The purpose and activities of
these trusts are further discussed in Note 13.
All significant
inter-company balances and transactions are eliminated in consolidation.
Certain balances have been reclassified to conform to current year
presentation.
Nature of Operations
The Company and
its subsidiaries provide a wide variety of commercial banking services to
individuals and corporate customers in the mid-southern United States with a concentration in West Tennessee. The Company's primary products are checking
and savings deposits and residential, commercial and consumer lending.
Basis of Accounting
The Consolidated
Financial Statements are presented using the accrual method of accounting.
-59-
Use of Estimates
The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Material
estimates that are particularly susceptible to significant change relate to the
fair value of investment securities, determination of the allowance for losses
on loans, the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans, and determination of fair values associated with
impairment testing of goodwill. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties. Estimates and assumptions
used in goodwill impairment testing are made based on prevailing market
factors, historical earnings and multiples and other factors.
Cash Equivalents
Cash equivalents
include amounts due from banks which do not bear interest and federal funds
sold. Generally, federal funds are purchased or sold for one-day periods.
Interest-Bearing Deposits in Other
Banks
Interest-bearing
deposits in other banks consist of excess balances above the minimum required
balance at the Federal Reserve Bank and short-term certificates of deposits
held at other banks. The certificates of deposits at other banks are held in
increments of less than $250,000 and, therefore, are covered by FDIC
insurance. Interest income on deposits in banks is reported as Other Interest
Income on the Consolidated Statements of Income.
Securities
Investment
securities are classified as follows:
Held-to-maturity, which includes those investment securities
which the Company has the intent and the ability to hold until maturity;
Trading securities, which include those investments that are held
for short-term resale; and
Available-for-sale, which includes all other investment
securities.
Held-to-maturity
securities are reflected at cost, adjusted for amortization of premiums and
accretion of discounts using methods which approximate the interest method.
Available-for-sale securities are carried at fair value, and unrealized gains
and losses are recognized as direct increases or decreases to accumulated other
comprehensive income except for other-than-temporary impairment losses that are
required to be charged against earnings. The credit portion of
other-than-temporary impairment losses is recorded against earnings and is
separately stated on the Consolidated Statements of Income. Trading
securities, where applicable, are carried at fair value, and unrealized gains
and losses on these securities are included in net income.
Realized gains
and losses on sale or call of investment securities transactions are determined
based on the specific identification method and are included in net income.
Loans Held for Sale
Mortgage loans
originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or market, as determined by outstanding commitments
from investors. Net unrealized losses, if any, are recorded as a valuation
allowance and charged to earnings. Servicing rights are not retained when
mortgage loans are sold. Income from loans held for sale is reported in
Mortgage Banking Income, which is included in Non-Interest Income in the
Consolidated Financial Statements.
-60-
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reflected on the Consolidated Balance
Sheets at the unpaid principal amount less the allowance for loan losses and
unearned interest and fees. Interest on loans is recorded on an accrual
basis unless it meets criteria to be placed on non-accrual status. The
Bank's policy is to not accrue interest or discount on (i) any asset which is
maintained on a cash basis because of deterioration in the financial position of
the borrower, (ii) any asset for which payment in full of interest or principal
is not expected or (iii) any asset upon which principal or interest has been in
default for a period of 90 days or more unless it is both well-secured and in
the process of collection. For purposes of applying the 90 days past due test
for non-accrual of interest, the date on which an asset reaches non-accrual
status is determined by its contractual term. A debt is deemed well-secured if
it is secured by collateral in the form of liens or pledges of real or personal
property, including securities that have a realizable value sufficient to
discharge the debt (including accrued interest) in full, considered to be
proceeding in due course either through legal action, including judgment
enforcement procedures or, in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in its restoration to a current status. Unpaid
interest on loans placed on non-accrual status is reversed from income and
further accruals of income are not usually recognized. Subsequent
collections related to impaired loans are usually credited first to principal
and then to previously uncollected interest.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectability of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components.
The specific component relates to loans evaluated on an individual basis for
impairment. For each loan evaluated individually that is determined to be
impaired, a specific allocation to the allowance is established when the
discounted cash flows (or collateral value or observable market price) of the
loan is lower than the carrying value of that loan. The general component
of the allowance is determined based on loans evaluated on a pooled basis which
consist of non-impaired loans and pools of loans with similar characteristics
that are not evaluated individually for impairment.
For the year ended December 31, 2010, loans that meet the
criteria for individual impairment analysis are those loans or borrowing
relationships with current outstanding principal balance greater than or equal
to $250,000 at the measurement date and have an internal rating of "Grade 6" or
higher (generally characterized as "Substandard" or worse). Once
identified for individual analysis, then a loan is considered impaired when,
based on current information and events, it is probable that the Bank will be
unable to collect scheduled payments of principal or interest when due according
to contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral value,
and the probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all circumstances surrounding the loan and the
borrower, including the length of delay, reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to principal
and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or fair value of the collateral if the loan is
collateral dependent. The majority of the Company's impaired loans is
secured by real estate and considered collateral-dependent. Therefore,
impairment losses are primarily based on the fair value of the underlying
collateral (usually real estate).
In the year ended December 31, 2009, the criteria for
individual impairment analysis was the same as discussed above except that the
threshold was loans or borrowing relationships over $50,000 rather than
$250,000. In 2010, the threshold was raised to $250,000 primarily due to
strategic efforts to align credit risk management practices common among banks
with $1 billion or more in total assets as the Bank's asset level approaches $1
billion. Management believes that loans or borrowing relationships in the
range of $50,000 to $250,000 can be adequately evaluated on a pooled basis based
on loan type and internal risk rating. The change in methodology did not
result in a significant change in the overall allowance for loan losses required
to cover probable losses in the portfolio.
-61-
The general component of the allowance for loan losses is based on
historical loss experience adjusted for qualitative factors. Loans are pooled
together based on the type of loans and internal risk ratings. Risk factors
for each pool are developed using historical charge-offs for the past three
years. The risk factors are then adjusted based on current conditions of the
loan portfolio and lending environment that may result in future losses
differing from historical patterns. Such factors include, but are not limited
to:
Changes in underlying collateral securing the loans;
Changes in lending policies and procedures including changes in
underwriting, collection, charge-off and recovery practices;
Changes in economic and business conditions that affect the
collectability of the portfolio;
Changes in the nature and volume of the portfolio;
Changes in the experience, ability and depth of lending
management and other related staff;
Changes in the volume and severity of past due loans, volume of
non-accruals, and/or problem loans;
Changes in the quality of the Company's loan review system;
Existence and effect of any concentration of credit and changes
in the level of concentrations; and
The effect of other external factors such as competition, legal
or regulatory requirements.
The risk factors
for loans evaluated collectively are also adjusted based on the level of risk
associated with the internal risk ratings of the loans. Loans rated Grade 1
are considered low risk and have the lowest risk factors applied. Loans rated
Grades 2 and 3 have an average level of risk. Loans rated Grade 4 and 5 have a
marginal level of risk slightly higher than Grades 2 and 3. Loans rated Grade
6 or higher have above average risk and therefore have higher risk factors
applied to that portion of the portfolio.
Premises and Equipment
Bank premises
and equipment are stated at cost less accumulated depreciation. The provision
for depreciation is computed using straight-line and accelerated methods for
both financial reporting and income tax purposes. Expenditures for maintenance
and repairs are charged against income as incurred. Cost of major additions and
improvements are capitalized and depreciated over the estimated useful life of
the addition or improvement.
Other Real Estate Owned
Real estate
acquired through foreclosure is separately stated on the Consolidated Balance
Sheets as Other Real Estate Owned ("OREO") and recorded at the lower of cost or
fair value less cost to sell. Adjustments made at the date of foreclosure are
charged to the allowance for loan losses. Expenses incurred in connection with
ownership, subsequent adjustments to book value, and gains and losses upon
disposition are included in other non-interest expenses. Adjustments to net
realizable value subsequent to acquisition are made at least annually if
necessary based on appraisal.
Securities Sold under
Agreements to Repurchase
Securities sold
under agreements to repurchase are accounted for as collateralized financing
transactions, represent the purchase of interests in securities by banking
customers and are recorded at the amount of cash received in connection with
the transaction. Daily repurchase agreements are settled on the following
business day and fixed repurchase agreements have various fixed terms. All securities
sold under agreements to repurchase are collateralized by certain pledged
securities, generally U.S. government and federal agency securities, and are
held in safekeeping by the purchasing financial institution. These transactions
are not deposits and, therefore, are not covered by FDIC insurance. Securities
sold under agreements to repurchase are reported separately on the Company's Consolidated
Balance Sheets and interest expense related to these transactions is reported
on the Company's Consolidated Statements of Income as Other Interest Expense.
-62-
Income Taxes
The Company uses
the accrual method of accounting for federal and state income tax reporting.
Deferred tax assets or liabilities are computed for significant differences in
financial statement and tax bases of assets and liabilities, which result from
temporary differences in financial statement and tax accounting. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized. Provision for income taxes is made on a separate income tax return
basis for each entity included in the Consolidated Financial Statements.
Interest
Income and Fees on Loans
Interest income
on commercial and real estate loans is computed on the basis of daily principal
balance outstanding using the accrual method. Interest on installment loans is
credited to operations by the level-yield method. Interest income on loans is
discontinued at the time the loan is 90 days delinquent unless the loan is well
secured and in process of collection. Loans may be placed on non-accrual
status at an earlier date if collection of principal or interest is considered
doubtful. All interest accrued but not received for loans placed on
non-accrual status is reversed against interest income. Interest received on
such loans is accounted for on the cash-basis or cost-recovery method until
qualifying to return to accrual status. Loans are returned to accrual status
when all principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Fees on loans
are generally recognized in earnings at the time of origination as they are
generally offset by related expenses also incurred at origination. Certain
fees such as commitment fees are deferred and amortized over the life of the
loan using the interest method.
Net Income per Share of Common
Stock
Net income per
share of common stock is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period, after
giving retroactive effect to stock dividends and stock splits.
Income from Fiduciary
Activities
Income from
fiduciary activities is recorded on an accrual basis.
Advertising and Promotions
The Company's
policy is to charge advertising and promotions to expenses as incurred.
Fair Value
Fair value
measurements are used to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. The Company measures fair
value under guidance provided by the Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC") Topic 820, "Fair Value
Measurements and Disclosures" ("ASC 820"), and was effective January 1, 2008
for all applicable financial and non-financial assets and liabilities. ASC 820
defines fair value, establishes a framework for measuring fair value and
expands disclosure requirements regarding fair value measurements. ASC 820
does not expand the use of fair value in any new circumstances but clarifies
the principle that fair value should be based on assumptions that market
participants would use when pricing the asset or liability. ASC 820 outlines
the following three acceptable valuation techniques may be used to measure fair
value:
-63-
-
Market approach-The market
approach uses prices and other relevant information generated by market
transactions involving identical or similar assets or liabilities. This
technique includes matrix pricing that is a mathematical technique used
principally to value debt securities without relying solely on quoted
prices for specific securities but rather by relying on securities'
relationship to other benchmark quoted securities.
-
Income approach-The income
approach uses valuation techniques to convert future amounts such as
earnings or cash flows to a single present discounted amount. The
measurement is based on the value indicated by current market expectations
about those future amounts. Such valuation techniques include present
value techniques, option-pricing models (such as the Black-Scholes formula
or a binomial model), and multi-period excess earnings method (used to
measure fair value of certain intangible assets).
-
Cost approach-The cost approach
is based on current replacement cost which is the amount that would
currently be required to replace the service capacity of an asset.
Valuation
techniques are selected as appropriate for the circumstances and for which
sufficient data is available. Valuation techniques are to be consistently
applied, but a change in valuation technique or its application may be made if
the change results in a measurement that is equally or more representative of
fair value under the circumstances. Revisions resulting from a change in
valuation technique or its application are accounted for as a change in
accounting estimate which does not require the change in accounting estimate to
be accounted for by restating or retrospectively adjusting amounts reported in
financial statements of prior periods or by reporting pro forma amounts for
prior periods.
ASC 820 also
establishes a hierarchy that prioritizes information used to develop those
assumptions. The level in the hierarchy within which the fair value
measurement in its entirety falls is determined based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company
considers an input to be significant if it drives more than 10% of the total
fair value of a particular asset or liability. The hierarchy is as follows:
Level 1
Inputs
(Highest ranking): Unadjusted quoted prices in active markets for
identical assets or liabilities that the entity has the ability to access at
the measurement date.
Level 2
Inputs
: Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. Such
inputs may include quoted prices for similar assets or liabilities in active
markets, and inputs other than quoted market prices that are observable for the
assets and liabilities such as interest rates and yield curves that are
observable at commonly quoted intervals.
Level 3
Inputs
(Lowest ranking): Unobservable inputs for determining fair
values of assets and liabilities that reflect an entity's own assumptions about
the assumptions that market participants would use in pricing the assets and
liabilities.
Assets and
liabilities may be measured for fair value on a recurring basis (daily, weekly,
monthly or quarterly) or on a non-recurring basis in periods subsequent to
initial recognition. Recurring valuations are measured regularly for
investment securities and derivatives (if any). Loans held for sale, OREO and
impaired loans are measured at fair value on a non-recurring basis and do not
necessarily result in a change in the amount recorded on the Consolidated
Balance Sheets. Generally, these assets have non-recurring valuations that are
the result of application of other accounting pronouncements that require the
assets be assessed for impairment or at the lower of cost or fair value. Fair
values of loans held for sale are considered Level 2. Fair values for OREO and
impaired loans are considered Level 3. See Note 20 for more information.
The Company obtains fair value
measurements for securities and derivatives (if any) from a third party
vendor. The Company's cash flow hedge and the majority of the
available-for-sale securities are valued using Level 2 inputs. Collateralized
debt obligation securities that are backed by trust preferred securities and
account for less than 1% of the available-for-sale securities portfolio are
valued using Level 3 inputs. The fair value measurements reported in Level 2
are primarily matrix pricing that considers observable data (such as dealer
quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading
levels, trade execution data, market consensus prepayment speeds, credit
information and terms and conditions of bonds, and other factors). Fair value
measurements for pooled trust-preferred securities are obtained through the use
of valuation models that include unobservable inputs which are considered Level
3. See additional discussion of valuation techniques and inputs in Note 20.
-64-
Certain non-financial assets and
non-financial liabilities measured at fair value on a recurring basis include
reporting units measured at fair value in the first step of a goodwill
impairment test. Certain non-financial assets measured at fair value on a
non-recurring basis include non-financial assets and non-financial liabilities
measured at fair value in the second step of a goodwill impairment test, as
well as intangible assets and other non-financial long-lived assets measured at
fair value for impairment assessment.
Effective January 1, 2008, the
Company adopted ASC 820, which permits the Company to choose to measure
eligible items at fair value at specified election dates. Unrealized gains and
losses on items for which the fair value measurement option has been elected
are reported in earnings at each subsequent reporting date. The fair value
option (i) may be applied instrument by instrument, with certain exceptions
enabling the Company to record identical financial assets and liabilities at
fair value or by another measurement basis permitted under generally accepted
accounting principles, (ii) is irrevocable (unless a new election date occurs)
and (iii) is applied only to entire instruments and not to portions of
instruments. Adoption of ASC 820 on January 1, 2008 did not have a material
impact on the Company's financial condition or results of operation.
Subsequent Events
The Company has reviewed subsequent
events through March 1, 2011.
NOTE 2 - CASH RESERVES AND
INTEREST-BEARING DEPOSITS IN OTHER BANKS
The Bank
maintains cash reserve balances as required by the Federal Reserve Bank.
Average required balances during both 2010 and 2009 were approximately
$500,000. Amounts above the required minimum balance are reported as Interest-Bearing
Deposits in Other Banks on the Consolidated Balance Sheets. Balances in excess
of required reserves held at the Federal Reserve Bank as of December 31, 2010
and 2009 were $5.3 million and $2.8 million, respectively. Interest-bearing
deposits in other banks also include short-term certificates of deposit held in
increments that are within FDIC insurance limits and totaled approximately
$975,000 and $1 million as of December 31, 2010 and 2009, respectively.
NOTE 3 - INVESTMENT SECURITIES
The following
tables reflect amortized cost, unrealized gains, unrealized losses and fair
value of available-for-sale investment securities for the dates presented (in
thousands):
|
|
|
Gross
|
|
Gross
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government agencies and corporations
|
$
|
189,280
|
|
$
|
3,721
|
|
$
|
(1,558)
|
|
$
|
191,443
|
Obligations of states and political subdivisions
|
99,774
|
|
3,073
|
|
(397)
|
|
102,450
|
All others
|
2,698
|
|
22
|
|
(1,790)
|
|
930
|
Total investment securities
|
$
|
291,752
|
|
$
|
6,816
|
|
$
|
(3,745)
|
|
$
|
294,823
|
|
|
|
|
|
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
U. S. Treasury securities and obligations of U. S.
|
|
|
|
|
|
|
|
government agencies and corporations
|
$
|
153,924
|
|
$
|
4,774
|
|
$
|
(240)
|
|
$
|
158,458
|
Obligations of states and political subdivisions
|
85,574
|
|
3,735
|
|
(98)
|
|
89,211
|
All others
|
3,289
|
|
4
|
|
(1,171)
|
|
2,122
|
Total investment securities
|
$
|
242,787
|
|
$
|
8,513
|
|
$
|
(1,509)
|
|
$
|
249,791
|
There were no
securities categorized as trading or held-to-maturity as of December 31, 2010
or 2009. At December 31, 2010 and 2009, investment securities were pledged to
secure government, public and trust deposits as follows (in thousands):
-65-
|
|
Amortized Cost
|
|
Fair Value
|
2010
|
|
$
|
177,598
|
|
$
|
180,943
|
2009
|
|
$
|
143,089
|
|
$
|
148,369
|
The following table summarizes
contractual maturities of debt securities available-for-sale as of December 31,
2010 (in thousands):
|
|
Amortized Cost
|
|
Fair Value
|
|
Amounts maturing in:
|
|
|
|
|
|
One year or less
|
|
$
|
3,308
|
|
$
|
3,371
|
|
After one year through five years
|
|
9,204
|
|
9,675
|
|
After five years through ten years
|
|
45,366
|
|
47,003
|
|
After ten years*
|
|
233,851
|
|
234,729
|
|
|
|
$
|
291,729
|
|
$
|
294,778
|
|
Equity securities
|
|
23
|
|
45
|
|
Total securities
|
|
$
|
291,752
|
|
$
|
294,823
|
|
_______________
* This table includes
agency mortgage-backed securities ("MBS") and collateralized mortgage
obligations ("CMO") based on contractual maturities (primarily in the After ten
years category). However, the remaining lives of such securities are expected
to be much shorter because of anticipated payments.
Sales and gains
(losses) on sales of available-for-sale securities are presented as follows (in
thousands):
|
Gross Sales
|
Gains
|
|
Losses
|
|
Net
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
62,304
|
|
$
|
1,884
|
|
$
|
-
|
|
$
|
1,884
|
|
|
2009
|
|
41,041
|
|
1,196
|
|
-
|
|
1,196
|
|
|
2008
|
|
30,497
|
|
396
|
|
(40)
|
|
356
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_______________
* For the year ended
December 31, 2008, the Company also had realized gain of approximately $80,000
on call of available-for-sale securities totaling $6.1 million.
The following
table presents information on securities with gross unrealized losses at
December 31, 2010, aggregated by investment category and the length of time
that the individual securities have been in a continuous loss position (in
thousands):
|
|
Less Than 12
Months
|
|
12 Months and
Over
|
|
Total
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations of U.S. government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
corporations and agencies
|
|
$
|
(1,558)
|
|
$
|
54,486
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(1,558)
|
|
$
|
54,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subdivisions
|
|
(397)
|
|
17,517
|
|
-
|
|
-
|
|
(397)
|
|
17,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt securities
|
|
-
|
|
-
|
|
(1,790)
|
|
885
|
|
(1,790)
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for -sale
|
|
$
|
(1,955)
|
|
$
|
72,003
|
|
$
|
(1,790)
|
|
$
|
885
|
|
$
|
(3,745)
|
|
$
|
72,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-66-
In reviewing the
investment portfolio for other-than-temporary impairment of individual
securities, consideration is given but not limited to (1) the length of time in
which fair value has been less than cost and the extent of the unrealized loss,
(2) the financial condition of the issuer, and (3) the positive intent and
ability of the Company to maintain its investment in the issuer for a time that
would provide for any anticipated recovery in the fair value.
As of December
31, 2010, the Company had 69 debt securities with unrealized losses. The
Company did not intend to sell any such securities in an unrealized loss
position and it was more likely than not that the Company would not be required
to sell the debt securities prior to recovery of costs. Of the 69 debt
securities, four were corporate debt securities that had been in an unrealized
loss position for greater than 12 months and accounted for approximately half
of the unrealized gross losses as of December 31, 2010. The remaining 65 bonds
had been in an unrealized loss position for less than 12 months and consisted
of 47 municipal bonds and 18 agency MBSs or CMOs. The securities in an
unrealized loss position as of December 31, 2010 were evaluated for
other-than-temporary impairment. In analyzing reasons for the unrealized
losses, management considers various factors including, but not limited to,
whether the securities are issued by the federal government or its agencies,
whether downgrades of bond ratings have occurred, and reviews any applicable
industry analysts' reports. With respect to unrealized losses on municipal and
agency securities and the analysis performed relating to the securities,
management believes that declines in market value were not other-than-temporary
at December 31, 2010. The unrealized losses on the agency and municipal
securities have not been recognized for other-than-temporary impairment.
The Company's four
corporate bonds accounted for $1.8 million of the $3.7 million gross unrealized
loss as of December 31, 2010. Three of the four corporate debt securities are
pooled collateralized debt obligation securities that are backed by
trust-preferred securities ("TRUP CDOs") issued by banks, thrifts and insurance
companies. These three bonds were rated below investment grade (BBB) by
Moody's and/or S&P at December 31, 2010. The fourth bond is a
single-issuer corporate debt security.
At December 31,
2010, the one single-issuer corporate debt security carried a gross unrealized
loss of approximately $10,000 and had been in an unrealized loss position for
more than 12 months. However the value of the bond has improved in recent
months and was called and paid in full in January 2011. Thus, this bond was
not recognized for other-than-temporary impairment.
At December 31,
2010, the three TRUP CDOs had an aggregate book value of $2.3 million and fair
market value of approximately $885,000 and each of the three are the mezzanine
or "B" class tranches. One of the three bonds referred to as I-Pretsl IV has
a book value of $1 million and a fair value of approximately $198,000 with the
unrealized loss reflected in accumulated other comprehensive income as of
December 31, 2010. This bond had experienced deferrals totaling 11.6% of
performing collateral and no defaults as of December 31, 2010. This bond has
not experienced an adverse change in projected cash flows as quarterly testing to
date for this bond yielded present value of projected cash flows above book
value. Therefore, no other-than-temporary impairment has been recognized to
date on this bond.
The other two
TRUP CDOs referred to as Pretsl I and Pretsl X had an aggregate book value of
$1.3 million and aggregate fair value of approximately $240,000 as of year end
2010. These two bonds have been recognized for other-than-temporary impairment
because of adverse changes in present value of projected cash flows resulting
from multiple deferrals and defaults during 2009 and 2010. The credit
component of other-than-temporary impairment on these two securities reflected
in earnings totaled approximately $583,000 and $651,000 for the years ended
December 31, 2010 and 2009, respectively. The gross unrealized loss related to
factors other than credit totaled approximately $978,000 and $706,000 that was reflected
in accumulated other comprehensive income net of applicable taxes as of
December 31, 2010 and 2009, respectively. The credit component of the
unrealized loss was based on the difference between the book value of the
security and the present value of projected cash flows at December 31, 2010 and
2009. As of December 31, 2010, Pretsl I had deferrals and defaults totaling
36.2% of performing collateral and Pretsl X had deferrals and defaults totaling
45.5% of performing collateral. In addition, these two securities were on
non-accrual status as of December 31, 2010.
The following
table provides additional information regarding the Company's three investments
in TRUP CDOs as of December 31, 2010:
-67-
|
|
Actual Over Collateral Ratio
(1)
|
Required Over Collateral Ratio
(2)
|
|
Pretsl I
|
Mezzanine
|
77.1%
|
N/A
(3)
|
N/A
|
Pretsl X
|
B-2
|
60.0%
|
N/A
(3)
|
N/A
|
I-Pretsl IV
|
B-1
|
102.9%
|
106.0%
|
-3.1%
|
_________________
(1) The Over
Collateral ("OC") Ratio reflects the ratio of performing collateral to a given
class of notes and is calculated by dividing the performing collateral by the
sum of the current balance of a given class of notes plus all senior classes.
(2) The
Required OC Ratio for a particular class of bonds reflects the required
overcollateralization ratio such that cash distributions may be made to lower
classes of bonds. If the OC Ratio is less than the Required OC ratio, cash is
diverted from the lower classes of bonds to the senior bond classes. For
example, if the OC Ratio for Class B is lower than the Class B
Required
OC Ratio in the transaction, all cash payments will be diverted to the Class B
and Class A bonds until such time that he OC Ratio exceeds the Required OC
Ratio. The lower class bonds will capitalize interest or pay-in-kind ("PIK").
(3) The
Required OC Ratio is not applicable in this case, as interest on these bonds
for the applicable tranche is capitalized to the bond or PIK. The Company does
not recognize PIK interest for book purposes and has these bonds on non-accrual
status.
Security-specific
collateral is used in the assumptions to project cash flows each quarter.
Issuers in default are assumed at zero recovery. Issuers in deferral are
assumed at a 15% recovery beginning two years from deferral date. Forward
interest rates are used to project future principal and interest payments
allowing the model to indicate impact of over- or under-collateralization for
each transaction. Higher interest rates generally increase credit stress on
undercollateralized transactions by reducing excess interest (calculated as the
difference between interest received from underlying collateral and interest
paid on the bonds). The discount rate is based on the original discount margin
calculated at the time of purchase based on the purchase price. The original
discount margin is then added to the three-month LIBOR to determine the
discount rate. The discount rate is then used to calculate the present value
for the then-current quarter's projected cash flows. If the present value of the
then-current quarter's projected cash flows is less than the prior quarter or
less than the then-current book value of the security, that difference is
recorded against earnings as the credit component of other-than-temporary
impairment.
The Company's equity
securities consist primarily of Fannie Mae and Freddie Mac perpetual preferred
stock. These equity securities incurred $1.8 million in impairment losses for
the year ended December 31, 2008 that was caused when the Federal Housing
Finance Agency placed both Fannie Mae and Freddie Mac under conservatorship in
the third quarter of 2008. No impairment charges were recognized on these
securities in 2009 and approximately $6,000 in other-than-temporary impairment
losses were recognized in 2010.
The following is
a tabular rollforward of the amount related to the pre-tax credit loss
component recognized in earnings on debt securities (in thousands):
|
Year ended
|
|
Year ended
|
|
December 31, 2010
|
|
December 31, 2009
|
|
|
|
|
Balance of credit losses on available-for-sale securities
|
$
|
-
|
|
$
|
-
|
Additions for credit losses for which an OTTI loss was not
previously recognized
|
-
|
|
651
|
Additions for credit losses for which an OTTI loss was
previously recognized
|
589
|
|
-
|
Balance of credit losses on available-for-sale securities
|
$
|
589
|
|
$
|
651
|
See also
discussion of valuation techniques and hierarchy for determining fair value of
these securities at Note 20.
-68-
GAAP has
established accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. These standards require that derivatives
be reported either as assets or liabilities on the Consolidated Balance Sheets
and be reflected at fair value. The accounting for changes in the fair value of
a derivative instrument depends on the intended use of the derivative and the
resulting designation. The Company had one derivative transaction, which was
a $1.5 million interest rate swap that was purchased in June 2000 and matured
in September 2010. Because a Federal Home Loan Bank ("FHLB") Variable LIBOR
Borrowing was designated as the hedged item, the Company effectively fixed the
cost of this liability. As a floating rate liability was hedged, there were no
significant fluctuations in its market value but there were fluctuations in the
cash flows. Therefore, the swap was designated as a cash flow hedge, hedging
the "benchmark interest rate." The market value gain or loss of the swap was
adjusted through other comprehensive income. The purpose of the transaction
was to reduce exposure to interest rate risk.
The value of the
derivative was a liability of approximately $111,000 as of December 31, 2009
and it matured in September 2010. Accumulated other comprehensive income
related to the cash flow hedge totaled approximately negative $69,000 as of December
31, 2009. The Company had no derivative transactions as of December 31, 2010.
There were no reclassification adjustments to other comprehensive income for
gains or losses related to the cash flow hedge for any of the periods presented
in the Consolidated Financial Statements.
NOTE 4 - LOANS
Performing
and non-performing loans by category were as follows as of December 31, 2010
and 2009 (in thousands):
|
|
|
Non-
|
|
|
|
|
Performing
|
|
Performing
|
|
Total
|
|
December 31, 2010:
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
65,428
|
|
$
|
869
|
|
$
|
66,297
|
|
Real estate -
construction
|
48,259
|
|
889
|
|
49,148
|
|
Real estate -
mortgage
|
391,270
|
|
3,986
|
|
395,256
|
|
Installment
loans to individuals
|
31,334
|
|
259
|
|
31,593
|
|
All other loans
|
5,278
|
|
131
|
|
5,409
|
|
Total
|
$
|
541,569
|
|
$
|
6,134
|
|
$
|
547,703
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
70,934
|
|
$
|
367
|
|
$
|
71,301
|
|
Real estate -
construction
|
63,771
|
|
2,643
|
|
66,414
|
|
Real estate -
mortgage
|
401,471
|
|
5,587
|
|
407,058
|
|
Installment
loans to individuals
|
33,978
|
|
93
|
|
34,071
|
|
All other loans
|
8,176
|
|
378
|
|
8,554
|
|
Total
|
$
|
578,330
|
|
$
|
9,068
|
|
$
|
587,398
|
|
_________________
*Non-Performing
loans consist of loans that are on non-accrual status and loans 90 days past
due and still accruing interest.
-69-
An aging analysis
of loans outstanding by category as of December 31, 2010 and 2009 was as follows
(in thousands):
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
Greater Than 90 Days
|
|
Total Past Due
|
|
Current
|
|
Total Loans
|
|
Recorded Investment > 90 Days and Accruing
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
405
|
|
$
|
167
|
|
$
|
716
|
|
$
|
1,288
|
|
$
|
65,009
|
|
$
|
66,297
|
|
$
|
500
|
|
Real estate -
construction
|
368
|
|
117
|
|
35
|
|
520
|
|
48,628
|
|
49,148
|
|
35
|
|
Real estate -
mortgage
|
1,093
|
|
349
|
|
2,238
|
|
3,680
|
|
391,576
|
|
395,256
|
|
1,441
|
|
Installment
loans to individuals
|
210
|
|
81
|
|
13
|
|
304
|
|
31,289
|
|
31,593
|
|
10
|
|
All other loans
|
-
|
|
-
|
|
-
|
|
-
|
|
5,409
|
|
5,409
|
|
-
|
|
Total
|
$
|
2,076
|
|
$
|
714
|
|
$
|
3,002
|
|
$
|
5,792
|
|
$
|
541,911
|
|
$
|
547,703
|
|
$
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
416
|
|
$
|
87
|
|
$
|
207
|
|
$
|
710
|
|
$
|
70,591
|
|
$
|
71,301
|
|
$
|
106
|
Real estate -
construction
|
1,076
|
|
375
|
|
1,472
|
|
2,923
|
|
63,491
|
|
66,414
|
|
1,472
|
Real estate -
mortgage
|
3,018
|
|
1,023
|
|
4,599
|
|
8,640
|
|
398,418
|
|
407,058
|
|
3,660
|
Installment
loans to individuals
|
256
|
|
117
|
|
78
|
|
451
|
|
33,620
|
|
34,071
|
|
29
|
All other loans
|
-
|
|
|
|
282
|
|
282
|
|
8,272
|
|
8,554
|
|
-
|
Total
|
$
|
4,766
|
|
$
|
1,602
|
|
$
|
6,638
|
|
$
|
13,006
|
|
$
|
574,392
|
|
$
|
587,398
|
|
$
|
5,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans on
non-accrual status as of December 31, 2010 and 2009 by category were as follows
(in thousands):
|
2010
|
|
2009
|
Commercial,
financial and agricultural
|
$
|
369
|
|
$
|
261
|
Real estate -
construction
|
854
|
|
1,171
|
Real estate -
mortgage
|
2,545
|
|
1,927
|
Installment
loans to individuals
|
249
|
|
64
|
All other loans
|
131
|
|
378
|
Total
|
$
|
4,148
|
|
$
|
3,801
|
Credit risk
management procedures include assessment of loan quality through use of an internal
loan rating system. Each loan is assigned a rating upon origination and the
rating may be revised over the life of the loan as circumstances warrant. The
rating system utilizes eight major classification types based on risk of loss
with Grade 1 being the lowest level of risk and Grade 8 being the highest level
of risk. Loans internally rated Grade 1 to Grade 4 are considered "Pass" grade
loans with low to average level of risk of credit losses. Loans rated Grade 5
are considered "Special Mention" and generally have one or more circumstances
that require additional monitoring but do not necessarily indicate a higher
level of probable credit losses. Loans rated Grade 6 or higher are loans with
circumstances that generally indicate an above average level of risk for credit
losses. Loans by internal risk rating by category as of December 31, 2010 and
2009 were as follows (in thousands):
|
Grades 1-4
|
|
Grade 5
|
|
Grades 6-8
|
|
Total
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
64,297
|
|
$
|
71
|
|
$
|
1,929
|
|
$
|
66,297
|
|
Real estate -
construction
|
45,931
|
|
820
|
|
2,397
|
|
49,148
|
|
Real estate -
mortgage
|
373,025
|
|
4,912
|
|
17,319
|
|
395,256
|
|
Installment
loans to individuals
|
31,136
|
|
14
|
|
443
|
|
31,593
|
|
All other loans
|
5,278
|
|
-
|
|
131
|
|
5,409
|
|
Total
|
$
|
519,667
|
|
$
|
5,817
|
|
$
|
22,219
|
|
$
|
547,703
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
69,500
|
|
$
|
288
|
|
$
|
1,513
|
|
$
|
71,301
|
|
Real estate -
construction
|
61,166
|
|
1,445
|
|
3,803
|
|
66,414
|
|
Real estate -
mortgage
|
386,604
|
|
6,949
|
|
13,505
|
|
407,058
|
|
Installment
loans to individuals
|
33,790
|
|
12
|
|
269
|
|
34,071
|
|
All other loans
|
7,578
|
|
506
|
|
470
|
|
8,554
|
|
Total
|
$
|
558,638
|
|
$
|
9,200
|
|
$
|
19,560
|
|
$
|
587,398
|
|
|
|
|
|
|
|
|
|
|
-70-
Information regarding the
Company's impaired loans for the years ended December 31, 2010 and 2009 is as
follows (in thousands):
|
Recorded
Investment
|
Unpaid Principal
Balance
|
Specific
Allowance
|
Average Recorded
Investment
|
Interest Income
Recognized
|
December 31, 2010:
|
|
|
|
|
|
With no specific allocation
recorded:
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
-
|
$
|
-
|
N/A
|
$
|
234
|
$
|
-
|
Real estate -
construction
|
841
|
841
|
N/A
|
1,799
|
34
|
Real estate -
mortgage
|
2,846
|
2,846
|
N/A
|
3,642
|
206
|
Installment
loans to individuals
|
-
|
-
|
N/A
|
-
|
-
|
All other loans
|
-
|
-
|
N/A
|
-
|
-
|
With allocation recorded:
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
500
|
$
|
500
|
$
|
50
|
$
|
436
|
$
|
20
|
Real estate -
construction
|
742
|
742
|
375
|
4,743
|
-
|
Real estate -
mortgage
|
4,210
|
4,210
|
853
|
7,058
|
96
|
Installment
loans to individuals
|
200
|
200
|
37
|
185
|
-
|
All other loans
|
-
|
-
|
-
|
265
|
-
|
Total:
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
500
|
$
|
500
|
$
|
50
|
$
|
670
|
$
|
20
|
Real estate -
construction
|
1,583
|
1,583
|
375
|
6,542
|
34
|
Real estate -
mortgage
|
7,056
|
7,056
|
853
|
10,700
|
302
|
Installment
loans to individuals
|
200
|
200
|
37
|
185
|
-
|
All other loans
|
-
|
-
|
-
|
265
|
-
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
158
|
$
|
158
|
N/A
|
$
|
239
|
$
|
-
|
Real estate -
construction
|
647
|
647
|
N/A
|
634
|
-
|
Real estate -
mortgage
|
776
|
776
|
N/A
|
1,201
|
-
|
Installment
loans to individuals
|
-
|
-
|
N/A
|
-
|
-
|
All other loans
|
-
|
-
|
N/A
|
-
|
-
|
With allocation recorded:
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
342
|
$
|
342
|
$
|
150
|
$
|
399
|
$
|
18
|
Real estate -
construction
|
1,543
|
1,543
|
300
|
3,452
|
59
|
Real estate -
mortgage
|
7,284
|
7,284
|
983
|
8,900
|
364
|
Installment
loans to individuals
|
232
|
232
|
163
|
120
|
5
|
All other loans
|
472
|
472
|
100
|
153
|
5
|
Total:
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
500
|
$
|
500
|
$
|
150
|
$
|
638
|
$
|
18
|
Real estate -
construction
|
2,190
|
2,190
|
300
|
4,086
|
59
|
Real estate -
mortgage
|
8,060
|
8,060
|
983
|
10,101
|
364
|
Installment
loans to individuals
|
232
|
232
|
163
|
120
|
5
|
All other loans
|
472
|
472
|
100
|
153
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-71-
NOTE 5 - ALLOWANCE FOR LOAN
LOSSES
The following
table presents the breakdown of the allowance for loan losses by category and
the percentage of each category in the loan portfolio to total loans at
December 31 for the years indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% to Total Loans
|
Commercial, financial and agricultural
|
$
|
944
|
12.10%
|
$
|
959
|
12.14%
|
$
|
864
|
13.46%
|
$
|
750
|
13.77%
|
$
|
736
|
14.58%
|
Real estate - construction
|
1,295
|
8.97%
|
1,148
|
11.31%
|
1,399
|
16.31%
|
1,340
|
18.25%
|
1,316
|
15.71%
|
Real estate - mortgage
|
5,299
|
72.17%
|
5,811
|
69.30%
|
4,537
|
62.96%
|
3,747
|
60.49%
|
3,676
|
62.10%
|
Installment loans to individuals
|
462
|
5.77%
|
694
|
5.80%
|
431
|
6.07%
|
459
|
6.35%
|
451
|
6.70%
|
All other
loans
|
28
|
0.99%
|
172
|
1.46%
|
69
|
1.20%
|
32
|
1.14%
|
32
|
0.91%
|
Total
|
$
|
8,028
|
100.0%
|
$
|
8,784
|
100.0%
|
$
|
7,300
|
100.0%
|
$
|
6,328
|
100.0%
|
$
|
6,211
|
100.0%
|
An analysis of
the allowance for loan losses during the years ended December 31 is as follows
(in thousands):
|
|
2010
|
|
2009
|
|
2008
|
Balance - beginning of year
|
|
$
|
8,784
|
|
$
|
7,300
|
|
$
|
6,328
|
Provision for loan losses
|
|
7,000
|
|
7,060
|
|
2,858
|
Loans charged to allowance
|
|
(8,187)
|
|
(5,951)
|
|
(2,274)
|
Recovery of loans previously charged off
|
|
431
|
|
375
|
|
388
|
Net charge-offs
|
|
(7,756)
|
|
(5,576)
|
|
(1,886)
|
Balance - end of year
|
|
$
|
8,028
|
|
$
|
8,784
|
|
$
|
7,300
|
The allowance for
loan losses is comprised of allocations for loans evaluated individually and
loans evaluated collectively for impairment. The allocations of the allowance
for loan losses for outstanding loans by category evaluated individually and
collectively were as follows as of December 31, 2010 (in thousands):
|
Evaluated
|
|
Evaluated
|
|
|
|
Individually
|
|
Collectively
|
|
Total
|
Allowance for loan losses
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
50
|
|
$
|
894
|
|
$
|
944
|
Real estate -
construction
|
375
|
|
920
|
|
1,295
|
Real estate -
mortgage
|
853
|
|
4,446
|
|
5,299
|
Installment
loans to individuals
|
37
|
|
425
|
|
462
|
All other loans
|
-
|
|
28
|
|
28
|
Total
|
$
|
1,315
|
|
$
|
6,713
|
|
$
|
8,028
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Commercial,
financial and agricultural
|
$
|
500
|
|
$
|
65,797
|
|
$
|
66,297
|
Real estate -
construction
|
1,583
|
|
47,565
|
|
49,148
|
Real estate -
mortgage
|
7,056
|
|
388,200
|
|
395,256
|
Installment
loans to individuals
|
200
|
|
31,393
|
|
31,593
|
All other loans
|
-
|
|
5,409
|
|
5,409
|
Total
|
$
|
9,339
|
|
$
|
538,364
|
|
$
|
547,703
|
|
|
|
|
|
|
-72-
NOTE 6 - SECONDARY MORTGAGE
MARKET ACTIVITIES
Mortgage loans originated and
intended for sale in the secondary market are carried at the lower of aggregate
cost or market, as determined by outstanding commitments from investors. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings. There were no such losses for any of the years ended December 31, 2010,
2009 or 2008. There has been no material difference between cost and fair
market values of loans held for sale for any of the periods presented.
Servicing rights
are not retained on any mortgage loans held for sale. Mortgage banking income
included in non-interest income was $1.1 million for each of the years ended
December 31, 2010, 2009 and 2008.
NOTE 7 - PREMISES AND EQUIPMENT
The fixed assets
used in the ordinary course of business are summarized as follows (in
thousands):
|
|
Useful Lives
|
|
|
|
|
|
|
in Years
|
|
2010
|
|
2009
|
Land
|
|
|
|
$
|
8,479
|
|
$
|
8,479
|
Buildings
|
|
5 to 50
|
|
28,444
|
|
28,040
|
Furniture and equipment
|
|
3 to 20
|
|
14,264
|
|
13,134
|
|
|
|
|
51,187
|
|
49,653
|
Less: Accumulated depreciation
|
|
|
|
20,919
|
|
19,128
|
Net fixed assets
|
|
|
|
$
|
30,268
|
|
$
|
30,525
|
NOTE 8 - GOODWILL AND OTHER
INTANGIBLE ASSETS
Goodwill is not amortized but
tested at least annually for impairment. No impairment charges were recorded
for any periods presented in the Consolidated Financial Statements and Notes
and no impairment charges have been recorded since December 31, 2010. There
was no activity in goodwill during the years ended December 31, 2010, 2009 and
2008. Total goodwill as of December 31, 2010 was $11.8 million or 1.21% of
total assets and 13.56% of total capital.
Other
identifiable intangibles consisted of core deposit intangibles being amortized
over a ten-year period as follows (in thousands):
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Core deposit intangible
|
|
$
|
845
|
|
$
|
845
|
|
Accumulated amortization
|
|
(725)
|
|
(641)
|
|
Net core deposit intangible
|
|
$
|
120
|
|
$
|
204
|
|
Amortization
expense was approximately $84,500 per year for 2010, 2009 and 2008.
Amortization expense is estimated to be approximately $85,000 in 2011 and
approximately $35,000 in 2012.
-73-
NOTE 9 - OTHER REAL ESTATE OWNED
The carrying
value of foreclosed real estate on the Consolidated Balance Sheets was $14.7
million as of December 31, 2010 and $10.5 million as of December 31, 2009. The
value of OREO is based on the lower of cost or fair value less cost to sell.
Fair value is based on independent appraisals for significant properties and
may be adjusted by management as discussed in Note 20.
NOTE 10 - BANK-OWNED LIFE INSURANCE
AND IMPUTED INCOME TAX REIMBURSEMENT AGREEMENTS
The Bank has a
significant investment in bank-owned life insurance policies ("BOLI") and
provides the associated fringe benefit to certain employees in the position of
Vice President and higher after one year of service. The cash surrender values
of BOLI were $21.7 million and $21.1 million as of December 31, 2010 and 2009,
respectively. BOLI are initially recorded at the amount of premiums paid and
are adjusted to current cash surrender values. Changes in cash surrender
values are recorded in other non-interest income and are based on premiums paid
less expenses plus accreted interest income. Earnings on BOLI resulted in
non-interest income of approximately $677,000, $832,000 and $833,000 for the
years ended December 31, 2010, 2009 and 2008, respectively.
The Company
adopted guidance in ASC 715-60 effective January 1, 2008. The cumulative
effective adjustment to retained earnings for change in accounting principle
was recorded January 1, 2008 in the amount of $1.9 million to accrue the
post-retirement death benefits for endorsement split dollar life insurance
plans. Expense related to these accruals is reflected in Salaries and Employee
Benefits on the Consolidated Statements of Income and was approximately $175,000,
$164,000 and $265,000 for the years ended December 31, 2010, 2009 and 2008,
respectively. The accrual for the post-retirement death benefits is included
in Other Liabilities on the Consolidated Balance Sheet and totaled $2.4 million
and $2.3 million as of December 31, 2010 and 2009, respectively.
Executive
Management Life Insurance Death Benefit Only Salary Continuation Plans provided
for in the employment agreements for certain officers of the Bank were replaced
in December 2007 with Endorsement Split Dollar Life Insurance Plans and Amended
and Restated Split Dollar Agreements. The new agreements combine the death
benefits from the Bank's larger group plan with the death benefits established
in the Executive Management Life Insurance Death Benefit Only Salary
Continuation Plans. The new agreements did not change the total after-tax
death benefit provided to each participant. Imputed Income Tax Reimbursement
Agreements for each participant became effective January 1, 2008 and were
entered into in order to keep the participants at the same after-tax benefit
under the Amended and Restated Split Dollar Agreements. These Imputed Income
Tax Reimbursement Agreements provide for annual cash payments to the
participants until death beginning in March 2009 for the 2008 tax year in
amounts equal to the portion of the amount of federal and state income taxes
attributable to the income imputed to the participant on the benefit under the
Amended and Restated Split Dollar Agreement.
Because the
new Endorsement Split Dollar Life Insurance Plans created imputed income to
each participant without generating cash to pay the tax expense associated with
the imputed income, and in order to provide participants the same after-tax
benefit provided under the previous plans, effective January 1, 2008 the Bank
entered into Imputed Income Tax Reimbursement Agreements with the applicable
officers under the Amended and Restated Split Dollar Agreements. The Imputed
Income Tax Reimbursement Agreements provide for annual cash payments to the
participants until death beginning in March 2009 for the previous tax year in
amounts equal to a portion of federal income taxes attributable to (i) the
income imputed to the participant on the benefit under the Amended and Restated
Split Dollar Agreement and (ii) the additional cash payments under the Imputed
Income Tax Reimbursement Agreement.
Each
participant was 100% vested in benefits provided under Imputed Income Tax
Reimbursement Agreements as of January 1, 2008. Therefore, 100% of the
principal (or service) cost of the plan was accrued for as of January 1, 2008
and expensed through earnings in the year ended December 31, 2008. Service
costs are based on the net present value of the sum of payments in accordance
with each participant's agreement. Interest accrues monthly at a rate of
7.0%.
Net other
post-retirement benefits expense for Imputed Income Tax Reimbursement
Agreements is included in Salaries and Employee Benefits on the Consolidated
Statements of Income as follows (in thousands):
|
2010
|
|
2009
|
|
Service cost
|
$ -
|
|
$ -
|
|
Interest cost
|
25
|
|
25
|
|
Net other post-retirement benefits expense
|
$ 25
|
|
$ 25
|
|
-74-
The accumulated
post-retirement defined benefit obligation for Imputed Income Tax Reimbursement
Agreements is included in Other Liabilities on the Consolidated Balance Sheet
as follows (in thousands):
Accumulated other post-retirement benefit obligation:
|
2010
|
|
2009
|
|
Beginning balance
|
$
|
382
|
|
$
|
371
|
|
Service cost
|
-
|
|
-
|
|
Interest cost
|
25
|
|
25
|
|
Benefit payments
|
(15)
|
|
(14)
|
|
Ending balance
|
$
|
392
|
|
$
|
382
|
|
The
accumulated post-retirement benefit obligation was included in Other Liabilities
as of December 31, 2010 and 2009 and was equal to the funded status of the plan
as of each applicable year-end as there were no related assets recognized on
the Consolidated Balance Sheet for the Imputed Income Tax Reimbursement
Agreements.
NOTE 11 - DEPOSITS
Included in
deposits shown on the Consolidated Balance Sheets are the following time and
savings deposits in denominations of $100,000 to $250,000 and greater than
$250,000 (in thousands):
|
2010
|
|
2009
|
Time Deposits
|
|
|
|
Greater than $100,000 but less than $250,000
|
$
|
103,518
|
|
$
|
93,308
|
Greater than $250,000
|
110,159
|
|
96,310
|
|
|
|
|
Savings Deposits
|
|
|
|
Greater than $100,000 but less than $250,000
|
$
|
69,064
|
|
$
|
57,210
|
Greater than $250,000
|
141,600
|
|
124,990
|
NOW accounts, included in
savings deposits on the Consolidated Balance Sheets, totaled $59.8 million as
of December 31, 2010 and $62.1 million at December 31, 2009. Demand deposit
balances reclassified as loans consisted of overdrafts totaling approximately $423,000
and $296,000 as of December 31, 2010 and 2009, respectively.
Time deposits
maturing in years subsequent to December 31, 2010, were as follows (in
thousands):
|
|
|
|
On or before December 31, 2011
|
|
$
|
318,867
|
|
On or during year ended December 31, 2012
|
|
40,235
|
|
On or during year ended December 31, 2013
|
|
5,484
|
|
On or during year ended December 31, 2014
|
|
1,492
|
|
During or after year ended December 31, 2015
|
|
2,558
|
|
|
|
$
|
368,636
|
|
NOTE 12 - FEDERAL FUNDS
PURCHASED AND OTHER SHORT-TERM BORROWINGS
The Bank has
three sources of short-term borrowings, which consist of cash management
advances from the FHLB, Treasury, Tax and Loan ("TT&L") option note, and
federal funds purchased from correspondent banks. Short-term borrowings are
used to manage seasonal fluctuations in liquidity.
Cash management
advances from FHLB are secured by one-to-four family first mortgages under the
blanket collateral pledge agreement that also collateralizes long-term advances
from FHLB and have maturities of 90 days or less. See Note 13 for more
information about maximum borrowing capacity with FHLB. There were no
short-term borrowings outstanding against this line as of December 31, 2010 or
2009.
-75-
The Bank is an
Option B bank in regards to TT&L and up to $1 million in TT&L payments
collected can be retained as a short-term option note. This option note is
callable upon demand by the TT&L. The balance of this line was $1 million
and approximately $748,000 as of December 31, 2010 and 2009, respectively.
The Bank has
federal fund lines of credit available with four correspondent banks totaling $54.5
million. There were no federal funds purchased as of December 31, 2010 or 2009.
The following tabular analysis
presents short-term borrowing year-end balance, maximum month-end balance, annual
average and weighted average interest rates for 2010, 2009 and 2008:
|
2010
|
2009
|
2008
|
Amount outstanding at end of year
|
$
|
1,000
|
$
|
748
|
$
|
1,000
|
Weighted average interest rate at end of year
|
0.00 %
|
0.00 %
|
0.00 %
|
Maximum outstanding at any month end
|
$
|
666
|
$
|
1,000
|
$
|
48,500
|
Average outstanding during year
|
$
|
1,029
|
$
|
1,029
|
$
|
20,679
|
Weighted average interest rate during year
|
0.00 %
|
0.00 %
|
2.70 %
|
NOTE 13 - OTHER BORROWINGS
In March 2005,
the Company formed a wholly owned subsidiary -- First Citizens (TN) Statutory
Trust III. The trust was created as a Delaware statutory trust for the sole
purpose of issuing and selling trust preferred securities and using proceeds
from the sale to acquire long-term subordinated debentures issued by the
Company. The debentures are the sole assets of the trust. The Company owns
100% of the common stock of the trust.
On March 17,
2005, the Company, through First Citizens (TN) Statutory Trust III, sold 5,000
of its floating rate trust preferred securities at a liquidation amount of
$1,000 per security for an aggregate amount of $5.0 million. For the period
beginning on (and including) the date of original issuance and ending on (but
excluding) June 17, 2005, the rate per annum was 4.84%. For each successive
period beginning on (and including) June 17, 2005, and each succeeding interest
payment date, interest accrues at a rate per annum equal to the three-month
LIBOR plus 1.80%. Interest payment dates are March 17, June 17, September 17,
and December 17 during the 30-year term. The entire $5.0 million in proceeds
was used to reduce other debt at the Company. The Company's obligation under
the debentures and related documents constitute a full and unconditional guarantee
by the Company of the trust issuer's obligations under the trust preferred
securities.
In March 2007,
the Company formed a wholly owned subsidiary -- First Citizens (TN) Statutory
Trust IV. The trust was created as a Delaware statutory trust for the sole
purpose of issuing and selling trust preferred securities and using proceeds
from the sale to acquire long-term subordinated debentures issued by the
Company. The debentures are the sole assets of the trust. The Company owns
100% of the common stock of the trust.
In March 2007,
the Company, through First Citizens (TN) Statutory Trust IV, sold 5,000 of its
floating rate trust preferred securities at a liquidation amount of $1,000 per
security for an aggregate amount of $5.0 million. For the period beginning on
(and including) the date of original issuance and ending on (but excluding)
June 15, 2007, the rate per annum was 7.10%. For each successive period
beginning on (and including) June 15, 2007, and each succeeding interest
payment date, interest accrues at a rate per annum equal to the three-month
LIBOR plus 1.75%. Interest payment dates are March 15, June 15, September 15,
and December 15 during the 30-year term. The purpose of proceeds was to
refinance the debt issued through First Citizens (TN) Statutory Trust II at a
lower spread to LIBOR and results in savings of approximately $92,500
annually. First Citizens (TN) Statutory Trust II was dissolved as a result of
this transaction. The Company's obligation under the debentures and related
documents constitute a full and unconditional guarantee by the Company of the
trust issuer's obligations under the trust preferred securities.
Although for
accounting presentation the trust preferred securities are presented as debt,
the outstanding balance qualifies as Tier I capital subject to the limitation
that the amount of the securities included in Tier I Capital cannot exceed 25%
of total Tier I capital.
-76-
The Company is
dependent on the profitability of its subsidiaries and their ability to pay
dividends in order to service its long-term debt.
The Bank had
secured advances from the FHLB totaling $41.9 million as of December 31, 2010
and $65.0 million as of December 31, 2009. FHLB borrowings are comprised
primarily of advances with principal due at call date or maturity date with
fixed interest rates ranging from 1.15% to 5.33%. Most of these FHLB
borrowings have quarterly call features and maturities range from 2011 to 2019.
Most of the advances with call features when called offer the option to pay off
the advance without penalty or to have the advance reprice at a variable rate
tied to the 90-day LIBOR. Advances totaling $16 million require repayment if
the call feature is exercised. Under the existing and forecasted rate
environments, borrowings with call features in place are not likely to be
called in the next 12 months. The Bank has one LIBOR based variable rate
advance totaling $2.5 million with a rate of 0.31% as of December 31, 2010. Also
included in the FHLB borrowings total reported above is a pool of smaller
balance amortizing advances that total $1.4 million as of year end 2010 and $2.0
million as of year end 2009. These smaller balance advances have rates ranging
from 3.34% to 7.05% and maturities range from 2011 to 2019. Obligations are
secured by loans totaling $372 million consisting of the Bank's entire
portfolio of fully disbursed, one-to-four family residential mortgages,
commercial mortgages, farm mortgages, second mortgages and multi-family
residential mortgages. The Bank had additional borrowing capacity of $60.6
million as of December 31, 2010.
Annual average
volume, rates and maturities of other borrowings for 2010 and 2009 were as
follows (dollars in thousands):
|
|
Average
|
|
Average
|
|
Average
|
|
|
Volume
|
|
Interest Rate
|
|
Maturity
|
2010
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
|
$
|
10,310
|
|
2.14%
|
|
26 years
|
First Citizens National Bank
|
|
60,902
|
|
4.26%
|
|
3 years
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
|
$
|
10,310
|
|
279%
|
|
27 years
|
First Citizens National Bank
|
|
65,072
|
|
4.82%
|
|
2 years
|
Maturities of
principal of other borrowings for the following five years are as shown (in
thousands):
2011
|
|
$
|
9,963
|
2012
|
|
3,316
|
2013
|
|
10,165
|
2014
|
|
2,105
|
2015
|
|
2,083
|
Thereafter
|
|
24,627
|
|
|
$
|
52,259
|
NOTE 14 - INCOME TAXES
Provision for income taxes was
comprised of the following for the years shown (in thousands):
|
|
2010
|
|
2009
|
|
2008
|
Income tax expense (benefit):
|
|
|
|
|
|
|
Current
|
|
$
|
1,957
|
|
$
|
2,754
|
|
$
|
3,638
|
Deferred
|
|
65
|
|
(789)
|
|
(870)
|
State income tax expense (benefit of operating loss
carryforwards)
|
(164)
|
|
41
|
|
(260)
|
Change in valuation allowance
|
|
164
|
|
(41)
|
|
260
|
|
|
$
|
2,022
|
|
$
|
1,965
|
|
$
|
2,768
|
-77-
Effective tax
rates differed from federal statutory rate of 34% applied to income before
income taxes as a result of the following (in thousands):
|
2010
|
|
2009
|
|
2008
|
Tax expenses at statutory rate
|
$
|
3,705
|
|
$
|
3,499
|
|
$
|
3,501
|
(Decrease) increase resulting from:
|
|
|
|
|
|
Tax exempt interest income
|
(1,340)
|
|
(1,207)
|
|
(858)
|
Net earnings on bank-owned life insurance
|
(171)
|
|
(193)
|
|
(162)
|
ESOP dividend
|
(261)
|
|
(265)
|
|
(295)
|
Impairment loss on equity securities
|
-
|
|
-
|
|
615
|
Other items
|
89
|
|
131
|
|
(33)
|
|
$
|
2,022
|
|
$
|
1,965
|
|
$
|
2,768
|
In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefit of these deductible differences. However,
the amount of deferred tax assets considered realizable could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced. Deferred tax assets and liabilities were comprised of the
following as of December 31 for the years indicated (in thousands):
|
|
2010
|
|
2009
|
|
2008
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
2,714
|
|
$
|
2,987
|
|
$
|
2,482
|
Impairment loss on equity securities
|
|
618
|
|
615
|
|
615
|
Impairment loss on debt securities
|
|
419
|
|
221
|
|
-
|
Net unrealized loss on cash flow hedge
|
|
-
|
|
43
|
|
70
|
Deferred loan fees
|
|
94
|
|
111
|
|
108
|
State income tax benefit for net operating loss
carryforwards
|
|
1,559
|
|
1,395
|
|
1,436
|
Imputed income tax reimbursement plan
|
|
133
|
|
130
|
|
43
|
Unrealized loss on other real estate owned
|
|
498
|
|
119
|
|
-
|
|
|
41
|
|
73
|
|
-
|
Total deferred tax assets
|
|
6,076
|
|
5,694
|
|
4,754
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Depreciation
|
|
(2,240)
|
|
(2,046)
|
|
(1,757)
|
FHLB stock dividends
|
|
(742)
|
|
(748)
|
|
(748)
|
Net unrealized gain on available-for-sale
|
|
|
|
|
|
|
debt securities
|
|
(1,177)
|
|
(2,684)
|
|
(1,016)
|
Prepaid expenses
|
|
(121)
|
|
(113)
|
|
(111)
|
Other
|
|
-
|
|
-
|
|
(72)
|
Total deferred tax liabilities
|
|
(4,280)
|
|
(5,591)
|
|
(3,704)
|
|
|
|
|
|
|
|
Valuation allowance for state income tax benefit
|
|
(1,559)
|
|
(1,395)
|
|
(1,436)
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
237
|
|
$
|
(1,292)
|
|
$
|
(386)
|
-78-
At
year-end 2010, the Company had a net operating loss carryforward for state tax
purposes of $3.2 million expiring in 2020, $6.2 million expiring in 2021, $7.9
million expiring in 2022, $4.0 million expiring in 2023 and an estimated $2.5
million expiring in 2025. As of December 31, 2010 and 2009, the Company
had no unrecognized tax benefits. The Company's policy is to recognize
penalties and interest on unrecognized tax benefits in Provision for Income Tax
Expense in the Consolidated Statements of Income. There were no amounts
related to interest and penalties recognized for each of the years ended
December 31, 2010, 2009 and 2008. The tax years subject to examination by
federal and state taxing authorities are the years ended December 31, 2010,
2009, 2008 and 2007.
NOTE 15 -
REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company and the Consolidated Financial Statements. The regulations require
the Bank to meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital
classification is also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier I capital (as defined in the regulations) to total average assets
(as defined), and minimum ratios of Tier I and total risk-based capital (as
defined) to risk-weighted assets (as defined). To be considered adequately
capitalized (as defined) under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier I leverage, Tier I risk-based and
total risk-based ratios as set forth in the table. The Bank's actual
capital amounts and ratios are presented in the table below.
As
of December 31, 2010, the most recent notification from the Bank's primary
regulatory authorities categorized the Bank and the Company as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since notification that management believes
have changed the institution's category.
The Company's and the Bank's actual and minimum capital amounts and ratios are
presented in the following table (dollars in thousands):
|
|
|
|
|
To Be
Well
|
|
|
|
|
|
Capitalized Under
|
|
|
|
For
Capital
|
Prompt Corrective
|
|
Actual
|
Adequacy Purposes
|
Action Provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
December 31, 2010:
|
|
|
|
|
|
|
Total capital to risk
|
|
|
|
|
|
|
weighted assets:
|
|
|
|
|
|
|
First Citizens
Bancshares, Inc.
|
$
|
93,301
|
15.4%
|
$
|
48,563
|
8.0%
|
N/A
|
10.0%
|
First Citizens National Bank
|
92,643
|
15.3%
|
48,568
|
8.0%
|
$
|
60,710
|
10.0%
|
|
|
|
|
|
|
|
Tier I capital to risk
|
|
|
|
|
|
|
weighted assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
85,695
|
14.1%
|
24,293
|
4.0%
|
N/A
|
6.0%
|
First Citizens National Bank
|
85,080
|
14.0%
|
24,291
|
4.0%
|
36,437
|
6.0%
|
|
|
|
|
|
|
|
Tier I capital to
|
|
|
|
|
|
|
average assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
85,695
|
8.9%
|
38,385
|
4.0%
|
N/A
|
5.0%
|
First Citizens National Bank
|
85,080
|
8.9%
|
38,368
|
4.0%
|
47,959
|
5.0%
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
Total capital to risk
|
|
|
|
|
|
|
weighted assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
$
|
86,307
|
13.6%
|
$
|
50,956
|
8.0%
|
N/A
|
10.0%
|
First Citizens National Bank
|
85,811
|
13.5%
|
50,926
|
8.0%
|
$
|
63,658
|
10.0%
|
|
|
|
|
|
|
|
Tier I capital to risk
|
|
|
|
|
|
|
weighted assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
78,336
|
12.3%
|
25,475
|
4.0%
|
N/A
|
6.0%
|
First Citizens National Bank
|
77,897
|
12.2%
|
25,457
|
4.0%
|
38,185
|
6.0%
|
|
|
|
|
|
|
|
Tier I capital to
|
|
|
|
|
|
|
average assets:
|
|
|
|
|
|
|
First Citizens Bancshares, Inc.
|
78,336
|
8.3%
|
37,662
|
4.0%
|
N/A
|
5.0%
|
First Citizens National Bank
|
77,897
|
8.3%
|
37,677
|
4.0%
|
47,096
|
5.0%
|
-79-
NOTE 16 - CAPITAL
The Company is
subject to capital adequacy requirements imposed by the Federal Reserve. In
addition, the Bank is restricted by the Office of the Comptroller of the
Currency from paying dividends in an amount in excess of the net earnings of
the current year plus retained profits of the preceding two years. As of
December 31, 2010, $11.2 million of retained earnings were available for future
dividends from the Bank to the Company.
Accumulated
Other Comprehensive Income as of December 31, 2010 and 2009 was as follows (in
thousands):
|
December 31, 2010
|
|
December 31, 2009
|
Unrealized loss on cash flow hedge, net of tax
|
$
|
-
|
|
$
|
(69)
|
Unrealized gains on available-for-sale securities
|
|
|
|
without other-than-temporary impairment, net
of tax
|
2,501
|
|
4,791
|
Unrealized losses on available-for-sale securities with
|
|
|
|
other-than-temporary impairment, net of tax
|
(605)
|
|
(466)
|
Total accumulated other comprehensive income
|
$
|
1,896
|
|
$
|
4,256
|
NOTE 17 - RELATED PARTY
TRANSACTIONS
The Company has
loans and deposits with certain executive officers, directors and their
affiliates. The Company also enters into contracts with certain related
parties from time to time such as for construction of a branch. All related
party transactions are entered into under substantially the same terms as
unrelated third-party transactions. All material contracts are awarded based
on competitive bids.
Activity in
loans to executive officers, directors and their affiliates was as follows for
the years ended December 31, 2010, 2009 and 2008 (in thousands):
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
10,575
|
|
$
|
16,076
|
|
$
|
17,247
|
New loans
|
|
4,569
|
|
6,369
|
|
10,665
|
Repayments
|
|
(3,499)
|
|
(11,870)
|
|
(11,836)
|
Balance at end of period
|
|
$
|
11,645
|
|
$
|
10,575
|
|
$
|
16,076
|
There were no
charged-off, restructured or non-current loans to related parties for any of
the periods presented. Loans to related parties are made on substantially the
same terms as third-party transactions.
-80-
Indebtedness
shown represents amounts owed by directors and executive officers of the
Company and the Bank and by entities in which such persons are general partners
or have at least 10% or greater interest and trust and estates in which they
have a substantial beneficial interest. All loans have been made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others and do not
involve other than normal risks of collectibility.
The Bank routinely enters into
deposit relationships with its directors, officers and employees in the normal
course of business. These deposits bear the same terms and conditions as those
prevailing at the time for comparable transactions with unrelated parties.
Balances of executive officers and directors on deposit as of December 31, 2010
and 2009 were $14.8 million and $17.5 million, respectively.
The Bank has
invested in the construction of new branches and the operations center over the
past three years. Contracts for construction and/or renovation of branch
facilities, operations center and leasehold improvements for the loan
production offices were awarded on a competitive bid basis to a related party.
Contract payments were paid to the related party and totaled approximately
$155,000 and less than $60,000 in 2010 and 2009, respectively compared to $1.2
million in 2008.
NOTE 18
- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk not
recognized in the statement of financial position.
The Bank's
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. The
same policies are utilized in making commitments and conditional obligations as
are used for creating on-balance sheet instruments. Ordinarily, collateral or
other security is not required to support financial instruments with
off-balance sheet risk.
Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Loan commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many commitments are expected to expire without
being drawn upon, total commitment amounts do not necessarily represent future
cash requirements. Each customer's credit-worthiness is evaluated on a
case-by-case basis, including the collateral required, if deemed necessary by
the Bank upon extension of credit, and is based on management's credit
evaluation of the counter party. At December 31, 2010 and 2009, the Bank had
outstanding loan commitments of $78.1 million and $79.8 million, respectively.
As of year-end 2010, variable rate commitments were $52.0 million and fixed
rate commitments were $26.1 million. As of year-end 2009, variable rate commitments
were $59.4 million and fixed rate commitments were $20.5 million. Of these
commitments, none had an original maturity in excess of one year.
Standby letters
of credit and financial guarantees are conditional commitments issued by the
Bank to guarantee performance of a customer to a third party. Those guarantees
are issued primarily to support public and private borrowing arrangements, and
the credit risk involved is essentially the same as that involved in extending
loans to customers. The Bank requires collateral to secure these commitments
when deemed necessary. At December 31, 2010 and 2009, outstanding standby
letters of credit totaled $2.8 million and $4.5 million, respectively.
In the normal
course of business, the Bank extends loans, which are subsequently sold to
other lenders, including agencies of the U.S. government. Certain of these
loans are conveyed with recourse creating off-balance sheet risk with regard to
the collectibility of the loan. At December 31, 2010 and 2009, the Bank had no
loans sold with recourse.
The Bank also
had an off-balance sheet liability at December 31, 2009 in the form of a $25
million standby letter of credit issued by FHLB on the Bank's behalf. This
letter of credit was used to collateralize public fund deposits in 2009.
-81-
NOTE 19 - SIGNIFICANT
CONCENTRATIONS OF CREDIT RISK
The Bank grants
agribusiness, commercial, residential and personal loans to customers
throughout a wide area of the mid-southern United States. A large majority of
the Bank's loans, however, are concentrated in the immediate vicinity of the
Bank, primarily in West Tennessee. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
obligations is dependent upon the agribusiness and industrial economic sectors
of that geographic area.
NOTE 20 - FAIR VALUE
MEASUREMENTS
Recurring Basis
The following
are descriptions of valuation methodologies used for assets and liabilities
measured at fair value on a recurring basis.
Available-for-Sale
Securities
Fair values for available-for-sale
securities are obtained from a third party vendor and are valued using Level 2
inputs, except for TRUP CDOs which are accounted for using Level 3 inputs.
TRUP CDOs accounted for less than 2% of the portfolio at December 31, 2010 and
2009.
The markets for
TRUP CDOs and other similar securities were not active at December 31, 2010 or
2009. The inactivity was evidenced first by a significant widening of the
bid-ask spread in the brokered markets in which these securities trade and then
by a significant decrease in the volume of trades relative to historical
levels. The new issue market has also been relatively inactive.
The market
values for TRUP CDOs and other securities except for those issued or guaranteed
by the U.S. Treasury have been very depressed relative to historical levels.
For example, the yield spreads for the broad market of investment grade and
high yield corporate bonds reached all-time levels versus Treasuries at the end
of November 2008 and remained close to those levels at December 31, 2010.
Therefore, during 2010 and 2009, a low market price for a particular bond may
only have provided evidence of stress in credit markets in general rather than
being an indicator of credit problems with a particular issuer.
Given market
conditions for TRUP CDOs at December 31, 2009 and 2010 and the relative
inactivity in the secondary and new issue markets, the Company determined:
Few observable transactions existed and market quotations that
were available were not reliable for purposes of determining fair value as of
December 31, 2010 and 2009;
An income valuation approach technique (present value technique)
that maximized the use of relevant observable inputs and minimized the use of
unobservable inputs were equally or more representative of fair value
than the
market approach valuation technique used at prior measurement dates; and
The Company's TRUP CDOs should be classified within Level 3 of
the fair value hierarchy because significant adjustments were required to
determine fair value at the measurement date.
The Company's
TRUP CDO valuations were prepared by an independent third party. The third
party's approach to determining fair value involved these steps as of December
31, 2009:
-
The credit quality of the collateral was calibrated by assigning
default probabilities to each issuer;
-
Asset defaults were generated taking into account both the
probability of default of the asset and an assumed level of correlation among
the assets;
-
A 50% level of correlation was assumed among assets from the same
industry (e.g., banks with other banks) while a lower (30%) correlation level
is assumed among those from different industries;
-
The loss given default was assumed to be 100% (i.e., no
recovery);
-
The cash flows were forecast for the underlying collateral and
applied to each TRUP CDO tranche to determine the resulting distribution among
the securities;
-
The calculations were modeled in 10,000 scenarios using a Monte Carlo engine;
-
The expected cash flows for each scenario were discounted at the
risk-free rate (three-month LIBOR) plus 300 basis points (for illiquidity) to
calculate the present value of the security; and
-
The prices were aggregated and the average price was used for
valuation purposes.
-82-
The third
party's methodology was adjusted slightly in fourth quarter 2010 and the
approach to determining fair value as of December 31, 2010 involved these
steps:
-
The credit quality of the collateral was calibrated by assigning
default probabilities to each issuer;
-
Asset defaults were generated taking into account both the
probability of default of the asset and an assumed level of correlation among
the assets;
-
A 50% level of correlation was assumed among assets from the same
industry (e.g., banks with other banks) while a lower (30%) correlation level
is assumed among those from different industries;
-
The loss given default was assumed to be 100% (i.e., no
recovery);
-
The cash flows were forecast for the underlying collateral and
applied to each TRUP CDO tranche to determine the resulting distribution among
the securities;
-
The calculations were modeled in 10,000 scenarios using a Monte Carlo engine;
-
The expected cash flows for each scenario were discounted using a
discount rate that the third party calculates for each bond that represents an
estimate of the yield that would be required in today's market for a bond with
a similar credit profile as the bond in question; and
-
The prices were aggregated and the average price was used for
valuation purposes.
The primary
difference in the steps used to determine fair value as of December 31, 2009
compared to December 31, 2010 was on how expected cash flows were discounted to
determine the present value of the bond. This change resulted in significantly
lower overall fair values as of December 31, 2010 compared to December 31, 2009.
The Company
recalculated the overall effective discount rates for these valuations. The
overall discount rates ranged from 1.3% to 19.8% and were highly dependent upon
the credit quality of the collateral, the relative position of the tranche in
the capital structure of the TRUP CDO and the prepayment assumptions.
Cash Flow Hedge
The Company's
cash flow hedge is valued by a third party vendor and based on matrix pricing
using Level 2 inputs as specified in Note 1. The cash flow hedge matured in
September 2010 and the Company held no derivative transactions as of December
31, 2010.
A summary of
assets and liabilities as of December 31, 2010 and 2009 measured at estimated
fair value on a recurring basis is as follows (in thousands):
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
|
|
Inputs
|
|
Inputs
|
|
Inputs
|
|
Value
|
December 31, 2010:
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Securities available-for-sale
|
$
|
-
|
|
$
|
294,384
|
|
$
|
439
|
|
$
|
294,823
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Securities available-for-sale
|
$
|
-
|
|
$
|
248,064
|
|
$
|
1,727
|
|
$
|
249,791
|
Financial liabilities:
|
|
|
|
|
|
|
|
Cash flow hedge
|
$
|
-
|
|
$
|
111
|
|
$
|
-
|
|
$
|
111
|
The following
table presents a reconciliation and income statement classification of gains
and losses for all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the years ended December 31, 2010
and 2009 (in thousands):
-83-
|
2010
|
|
2009
|
|
Available-for-sale securities
|
|
|
|
|
Beginning balance
|
$
|
1,727
|
|
$
|
2,342
|
|
Total unrealized gains (losses) included in:
|
|
|
|
|
Net income
|
(583)
|
|
(651)
|
|
Other comprehensive income
|
(705)
|
|
36
|
|
Purchases, sales, issuances and settlements, net
|
-
|
|
-
|
|
Transfers in and (out) of Level 3
|
-
|
|
-
|
|
Ending balance
|
$
|
439
|
|
$
|
1,727
|
|
Non-Recurring Basis
Certain assets
are measured at fair value on a non-recurring basis as described below.
Impaired Loans
Impaired loans
are evaluated and valued at the time the loan is identified as impaired at the
lower of cost or fair value. Fair value is measured based on the value of the
collateral securing these loans. Collateral may be real estate and/or business
assets including equipment, inventory and/or accounts receivable. Independent
appraisals for collateral are obtained and may be discounted by management
based on historical experience, changes in market conditions from time of
valuation and/or management's knowledge of the borrower and the borrower's
business. As such discounts may be significant, these inputs are considered
Level 3 in the hierarchy for determining fair value. Values of impaired loans
are reviewed on at least a quarterly basis to determine if specific allocations
in the reserve for loan losses are adequate.
Loans Held for Sale
Loans held for
sale are recorded at the lower of cost or fair value. Fair value of loans held
for sale are based upon binding contracts and quotes from third party investors
that qualify as Level 2 inputs for determining fair value. Loans held for sale
did not have an impairment charge in 2010 or 2009.
Other Real Estate Owned
OREO is recorded
at the lower of cost or fair value. Fair value is measured based on independent
appraisals and may be discounted by management based on historical experience
and knowledge and changes in market conditions from time of valuation. As such
discounts may be significant, these inputs are considered Level 3 in the
hierarchy for determining fair value. Values of OREO are reviewed at least
annually or more often if circumstances require more frequent evaluations.
A summary of
assets as of December 31, 2010 and 2009 measured at estimated fair value on a
non-recurring basis were as follows:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
|
|
Inputs
|
|
Inputs
|
|
Inputs
|
|
Value
|
December 31, 2010:
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Impaired loans
|
$
|
-
|
|
$
|
-
|
|
$
|
3,687
|
|
$
|
3,687
|
Loans held for sale
|
-
|
|
2,777
|
|
-
|
|
2,777
|
Other real estate owned
|
-
|
|
-
|
|
14,734
|
|
14,734
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Impaired loans
|
$
|
-
|
|
$
|
-
|
|
$
|
10,059
|
|
$
|
10,059
|
Loans held for sale
|
-
|
|
2,741
|
|
-
|
|
2,741
|
Other real estate owned
|
-
|
|
-
|
|
10,527
|
|
10,527
|
-84-
Fair
Value Estimates
ASC 820 requires
disclosure of the estimated fair value of financial instruments for interim and
annual periods. The following assumptions were made and methods applied to
estimate the fair value of each class of financial instruments not measured at
fair value on the Consolidated Balance Sheets:
Cash and Cash Equivalents
For instruments
that qualify as cash equivalents, as described in Note 1, the carrying amount
is assumed to be fair value.
Interest-Bearing Deposits in Other
Banks
Interest
bearing deposits in other banks consist of excess balances held at the Federal
Reserve Bank and short term certificates of deposits and the carrying amount is
assumed to be fair value.
Loans
Fair value of
variable-rate loans with no significant change in credit risk subsequent to
loan origination is based on carrying amounts. For other loans, such as fixed
rate loans, fair values are estimated utilizing discounted cash flow analyses,
applying interest rates currently offered for new loans with similar terms to
borrowers of similar credit quality. Fair values of loans that have
experienced significant changes in credit risk have been adjusted to reflect
such changes.
Accrued Interest Receivable
The fair values
of accrued interest receivable and other assets are assumed to be the carrying
value.
Federal Home Loan Bank and
Federal Reserve Bank Stock
Carrying amounts
of capital stock of the FHLB of Cincinnati and Federal Reserve Bank of St. Louis approximate fair value.
Bank-Owned Life Insurance
Carrying amount
of bank-owned life insurance is the cash surrender value as of the end of the
periods presented and approximates fair value.
Deposit Liabilities
Demand Deposits
The fair values
of deposits which are payable on demand, such as interest-bearing and
non-interest-bearing checking accounts, passbook savings, and certain money
market accounts are equal to the carrying amount of the deposits.
Variable-Rate Deposits
The fair value
of variable-rate money market accounts and certificates of deposit approximate
their carrying value at the balance sheet date.
Fixed-Rate Deposits
For fixed-rate
certificates of deposit, fair values are estimated utilizing discounted cash
flow analyses, which apply interest rates currently being offered on
certificates of deposits to a schedule of aggregated monthly maturities on time
deposits.
-85-
Other Borrowings
For securities
sold under repurchase agreements payable upon demand, the carrying amount is a
reasonable estimate of fair value. For securities sold under repurchase
agreements for a fixed term, fair values are estimated using the same
methodology as fixed rate time deposits discussed above. The fair value of the
advances from the FHLB and other long-term borrowings are estimated by
discounting the future cash outflows using the current market rates.
Other Liabilities
Fair value of other liabilities is
assumed to be the carrying values.
The carrying
amount and fair value of assets and liabilities as of December 31, 2010 and 2009
were as follows (in thousands):
|
|
2010
|
|
|
|
2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
33,691
|
|
$
|
33,691
|
|
$
|
28,572
|
|
$
|
28,572
|
Interest-bearing deposits in other banks
|
6,271
|
|
6,271
|
|
3,775
|
|
3,775
|
Investment securities
|
294,823
|
|
294,823
|
|
249,791
|
|
249,791
|
Loans
|
547,703
|
|
|
|
587,398
|
|
|
Less: allowance for loan losses
|
(8,028)
|
|
|
|
(8,784)
|
|
|
Loans, net of allowance
|
539,675
|
|
540,479
|
|
578,614
|
|
579,465
|
Loans held for sale
|
2,777
|
|
2,777
|
|
2,741
|
|
2,741
|
Accrued interest receivable
|
5,215
|
|
5,215
|
|
5,405
|
|
5,405
|
Federal Reserve Bank and Federal
|
|
|
|
|
|
|
|
Home Loan Bank Stock
|
5,684
|
|
5,684
|
|
5,684
|
|
5,684
|
Other real estate owned
|
14,734
|
|
14,734
|
|
10,527
|
|
10,527
|
Bank-owned life insurance
|
21,656
|
|
21,656
|
|
21,116
|
|
21,116
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
$
|
793,978
|
|
|
|
|
$
|
754,452
|
Short-term borrowings
|
35,309
|
|
35,402
|
|
37,629
|
|
37,679
|
Other borrowings
|
52,259
|
|
52,359
|
|
75,282
|
|
76,307
|
Other liabilities
|
5,686
|
|
5,686
|
|
7,131
|
|
7,131
|
|
|
|
|
|
|
|
|
Off-balance sheet arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
$
|
78,107
|
|
$
|
78,107
|
|
$
|
79,776
|
|
$
|
79,776
|
Standby letters of credit
|
2,752
|
|
2,752
|
|
4,534
|
|
4,534
|
NOTE 21 - EMPLOYEE STOCK
OWNERSHIP AND 401(k) PLANS
The Bank maintains the First
Citizens National Bank of Dyersburg Employee Stock Ownership Plan (the "ESOP")
and the First Citizens National Bank 401(k) Plan (the "401(k) Plan") as
employee benefits. The plans provide for a contribution annually not to exceed
25% of the total compensation of all participants and afford eligibility for
participation to all full-time employees who have completed at least one year
of service and are age 21 or older.
-86-
The Company annually contributes
amounts equal to 3% of total eligible compensation to the 401(k) Plan and a
discretionary percentage of total eligible compensation to the ESOP. The discretionary
percentage of total eligible compensation for 2010 and 2009 was 2%. Total
eligible compensation for both plans consists of total compensation subject to
income tax. Total eligible compensation includes any salary deferrals made
through the 401(k) Plan and Section 125 Cafeteria Plan and is subject to
maximum limits set annually by the IRS. Each participant may also elect to
defer up to 75% of his or her pay into the 401(k) Plan, subject to dollar
limitations imposed by law.
Employer cash contributions to
the 401(k) Plan totaled approximately $364,000 in 2010, $362,000 in 2009, and
$339,000 in 2008. Cash contributions to the ESOP totaled approximately $239,000
in 2010, $243,000 in 2009, and $785,000 in 2008. Cash contributions to the
401(k) Plan and ESOP are reported in Salaries and Employee Benefits in Non-Interest
Expenses on the Consolidated Statements of Income.
The ESOP is a non-leveraged plan
and all shares owned by the ESOP were allocated to participants as of December
31, 2009. As of December 31, 2010, all shares owned by the ESOP were allocated
to participants except for 8,691 shares which remained unallocated. Cash
dividends paid by the Company on common stock held by the ESOP are charged to
retained earnings. All shares owned by the ESOP are considered outstanding for
earnings per share computations. In the event a terminated or retired ESOP
participant desires to sell his or her shares of Company common stock, or if
certain employees elect to diversify their account balances, the Company may be
required to purchase the shares from the participant at their fair market
value. The ESOP owned 779,984 shares of Company common stock with an estimated
fair value of $26.5 million as of December 31, 2010 and 754,985 shares of
Company common stock with an estimated fair value of $24.2 million as of
December 31, 2009.
NOTE 22 - CONDENSED FINANCIAL INFORMATION
FIRST CITIZENS
BANCSHARES, INC.
(Parent Company
Only)
Balance Sheets
December 31, 2010 and 2009
(In thousands)
|
|
2010
|
|
2009
|
ASSETS
|
|
|
|
|
Cash
|
|
$
|
304
|
|
$
|
206
|
Investment in Subsidiaries
|
|
97,231
|
|
94,493
|
Other assets
|
|
26
|
|
0
|
TOTAL ASSETS
|
|
$
|
97,561
|
|
$
|
94,699
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Long Term Debt
|
|
$
|
10,310
|
|
$
|
10,310
|
Accrued Expenses
|
|
25
|
|
77
|
TOTAL LIABILITIES
|
|
10,335
|
|
10,387
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
87,226
|
|
84,312
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
97,561
|
|
$
|
94,699
|
-87-
FIRST CITIZENS
BANCSHARES, INC.
(Parent Company
Only)
Condensed Income
Statements
Years ended
December 31, 2010 and 200
9
(In Thousands)
|
|
2010
|
|
2009
|
INCOME
|
|
|
|
|
Dividends from Bank Subsidiary
|
|
$
|
4,050
|
|
$
|
4,195
|
Other Income
|
|
7
|
|
9
|
TOTAL INCOME
|
|
4,057
|
|
4,204
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
Interest Expense
|
|
221
|
|
288
|
Other Expenses
|
|
204
|
|
204
|
TOTAL EXPENSES
|
|
425
|
|
492
|
|
|
|
|
|
Income Before Income Taxes and Equity in Undistributed
|
|
|
|
|
Net Income of Bank Subsidiary
|
|
3,632
|
|
3,712
|
Income Tax Benefit
|
|
(144)
|
|
(164)
|
|
|
3,776
|
|
3,876
|
Equity in Undistributed Net Income of Bank Subsidiary
|
|
5,099
|
|
4,451
|
NET INCOME
|
|
$
|
8,875
|
|
$
|
8,327
|
-88-
FIRST CITIZENS
BANCSHARES, INC.
(Parent Company
Only)
Condensed
Statements of Cash Flows
Years ended December 31, 2010and 200
9
(In Thousands)
|
|
|
|
|
|
|
2010
|
|
2009
|
Operating activities
|
|
|
|
|
Net income
|
|
$
|
8,875
|
|
$
|
8,327
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
Undistributed income of subsidiary
|
|
(5,099)
|
|
(4,451)
|
Increase in other assets
|
|
(26)
|
|
-
|
Increase (decrease) in other liabilities
|
|
(49)
|
|
15
|
Net cash provided by operating activities
|
|
$
|
3,698
|
|
$
|
3,891
|
|
|
|
|
|
Financing activities
|
|
|
|
|
Payment of dividends and payments in lieu of fractional shares
|
(3,627)
|
|
(3,770)
|
Treasury stock transactions - net
|
|
24
|
|
16
|
Net cash used by financing activities
|
|
(3,600)
|
|
(3,754)
|
|
|
|
|
|
Increase in cash
|
|
98
|
|
137
|
|
|
|
|
|
Cash at beginning of year
|
|
206
|
|
69
|
|
|
|
|
|
CASH AT END OF YEAR
|
|
$
|
304
|
|
$
|
206
|
-89-
NOTE 23 - QUARTERLY SELECTED FINANCIAL DATA (UNAUDITED)
|
|
Interest
|
|
Net Interest
|
|
Net
|
|
EPS
|
|
EPS
|
|
|
Income
|
|
Income
|
|
Income
|
|
Basic
|
|
Diluted
|
(
In thousands, except per share data
)
|
2010
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11,872
|
|
$
|
8,681
|
|
$
|
2,169
|
|
$
|
0.60
|
|
$
|
0.60
|
Second Quarter
|
|
11,675
|
|
8,584
|
|
2,021
|
|
0.56
|
|
0.56
|
Third Quarter
|
|
11,439
|
|
8,452
|
|
2,234
|
|
0.61
|
|
0.61
|
Fourth Quarter
|
|
11,361
|
|
8,620
|
|
2,451
|
|
0.68
|
|
0.68
|
Total
|
|
$
|
46,347
|
|
$
|
34,337
|
|
$
|
8,875
|
|
$
|
2.45
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
12,207
|
|
$
|
7,609
|
|
$
|
1,779
|
|
$
|
0.49
|
|
$
|
0.49
|
Second Quarter
|
|
12,124
|
|
8,069
|
|
2,285
|
|
0.63
|
|
0.63
|
Third Quarter
|
|
12,376
|
|
8,631
|
|
2,418
|
|
0.67
|
|
0.67
|
Fourth Quarter
|
|
12,304
|
|
8,889
|
|
1,845
|
|
0.51
|
|
0.51
|
Total
|
|
$
|
49,011
|
|
$
|
33,198
|
|
$
|
8,327
|
|
$
|
2.30
|
|
$
|
2.30
|
-90-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been
no changes in the Company's independent registered public accounting firm for
the two most recent fiscal years.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company,
under supervision of and with the participation of its management, including
the Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of the end of the period covered by this Annual Report on
Form 10-K. Disclosure controls and procedures are defined in accordance with Rule
13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Based upon that evaluation as of the end of the
period covered by this Annual Report on Form 10-K, management concluded that
the Company's disclosure controls and procedures were effective in ensuring
that information required to be disclosed in the reports that the Company files
with or submits to the SEC under the Exchange Act is recorded, processed,
summarized and reported on a timely basis.
There have been
no changes in internal control over financial reporting during the quarter
ended December 31, 2010 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting. Management's
report and the attestation report of the Company's independent registered
public accounting firm regarding internal control over financial reporting are
included in Item 8 of this Annual Report on Form 10-K.
-91-
PART III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE.
Information appearing in the
sections entitled "Proposal 1: Election of Directors," "General Information -
Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance
- Code of Ethics," "General Information - Proposals by Shareholders/Director
Selection," "Audit Committee Report" and "Corporate Governance - Committees of
the Board of Directors" of the Company's 2011 Proxy Statement is incorporated
herein by reference.
Executive Officers
The following
information relates to the executive officers of the Company, as of December
31, 2010:
Name
|
Age
|
Position, Office and Background
|
Jeffrey D. Agee
|
50
|
Mr. Agee serves as President
and CEO of the Bank and the Company. He previously served as Executive Vice
President and CFO of the Bank and Vice President and CFO of the Company from
August 1999 to June 2004. Mr. Agee holds a bachelor's degree in accounting
from the University of Tennessee and is a graduate of ABA Stonier Graduate
School of Banking at Georgetown University and of BAI School of Bank
Administration at University of Wisconsin. He is also a Certified Public
Accountant and certified through FINRA as holder of a Series 27 Broker's
license. He serves as Financial and Operations Principal of First Citizens
Financial Plus, Inc. (wholly-owned subsidiary of the Bank) and demonstrates
an understanding of SEC rules and regulations, internal controls and
financial reporting. He also currently serves on boards of directors of 16
community and professional organizations.
|
|
|
|
Sherrell Armstrong
|
48
|
Mr. Armstrong has served as
Executive Vice President of the Company and Executive Vice President and
Chief Credit Officer for the Bank since January 1, 2007. Mr. Armstrong
previously served as Executive Vice President and Loan Administrator of the
Bank from 2003 to 2007. He also served as Senior Vice President of the Bank
from 2002 to 2003 as well as a Vice President and Commercial Lender of the
Bank from 1997 to 2002. Mr. Armstrong has been employed by the Bank since
June 1997.
|
|
|
|
Laura Beth Butler
|
35
|
Ms. Butler has served as
Executive Vice President and Chief Financial Officer for the Company and the
Bank since April 2009. Ms. Butler previously served as Senior Vice President
and Chief Financial Officer from June 2004 to April 2009. Ms. Butler is a
Certified Public Accountant and previously served as Senior Audit Manager of
the banking practice of a local accounting firm from 2000 to 2004.
|
|
|
|
Christian Heckler
|
43
|
Mr. Heckler was appointed
Regional President of the Southwest Region for the Bank in April 2006. He
previously served as Community Bank President and Commercial Lender from 2002
to April 2006. Mr. Heckler earned a bachelor's degree in business
administration from the University of Tennessee. He also served as Vice
President/Commercial Lending for Renasant Bank from 2000 to 2003 and Vice
President/Commercial Lending of Trustmark National Bank from 1998 to 2000.
He has also served on the board of directors for Millington YMCA, advisory
board for Covington Heart to Heart and as past Chairman of Covington Heart to
Heart Annual Fund Campaign.
|
|
|
|
Judy Long
|
55
|
Ms. Long has served as
Executive Vice President and Secretary for the Company and Executive Vice
President, Chief Operations Officer and Secretary of the Bank since August
1999. Ms. Long previously served as Senior Vice President, Chief Operations
Officer and Secretary from 1997 to 1999, Senior Vice President and
Administrative Officer from 1996 to 1997 and Vice President and Loan
Operations Manager from 1992 to 1996. Ms. Long has been employed by the
Company since July 1974.
|
-92-
|
|
|
Bennett Ragan, Jr.
|
62
|
Appointed Regional President-Dyer County of the Company in March 2007 and named Executive Officer of the Company
in April 2008. Mr. Ragan served as Senior Vice President, Green Village
Branch Manager and Commercial Lender of the Company from July 2003 to March
2007.
|
|
|
|
Katie S. Winchester
|
70
|
Ms. Winchester serves as
Chairman of the Company and the Bank. She previously served as President of
the Company and the Bank from 1992 to 2006 and CEO and Vice Chairman of the
Company and the Bank from 1996 to April 2007. She serves as Chairman of the
Tennessee Higher Education Commission and Chairman of Baptist Memorial Health
Care Corporation in Memphis, Tennessee. She also serves as Chairman of
Dunagan Chair of Banking for the University of Tennessee at Martin. She
served as a Member of Federal Advisory Council for the Federal Reserve Board
in Washington, D.C. in 2000, 2001 and 2002. She is also a member of the
boards of directors for Dyersburg State Community College Foundation Board, United Way of Dyer County, Dyer County Adult Education and Tennessee Vocational
Rehabilitation (Dyersburg).
|
ITEM 11. EXECUTIVE
COMPENSATION.
Information appearing in the sections
entitled "Compensation Discussion and Analysis," "Corporate Governance -
Compensation Committee Interlocks and Insider Participation" and "Compensation
Committee Report" of the Company's 2011 Proxy Statement is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's 2011 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Information appearing in the
sections entitled "Certain Relationships and Related Transactions" and
"Corporate Governance - Director Independence" of the Company's 2011 Proxy
Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES.
Information appearing in the
section entitled "Proposal 2: Ratification of Independent Registered Public
Accounting Firm" of the Company's 2011 Proxy Statement is incorporated herein
by reference.
-93-
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
1.
Financial Statements
. The
following financial statements of the Company are set forth in Item 8 above:
-
Reports of Independent Registered Public Accounting Firm;
-
Consolidated Balance Sheets as of December 31, 2010 and 2009;
-
Consolidated Statements of Income for the years ended
December 31, 2010, 2009 and 2008;
-
Consolidated Statements of Changes in Shareholders' Equity
and Other Comprehensive Income for the years ended December 31, 2010, 2009
and 2008;
-
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008; and
-
Notes to Consolidated Financial Statements.
2.
Financial Statement Schedules.
All schedules are omitted because they are not applicable or are not required,
or because the information is included in the consolidated financial statements
and notes thereto included herein.
3.
Exhibits.
The following
Exhibits are filed herewith or incorporated herein by reference:
Exhibit
Number
Description
3.1 Charter
of First Citizens Bancshares, Inc., as amended (1)
3.2 Bylaws
of First Citizens Bancshares, Inc., as amended (1)
10.1
Form of Amendment to Executive Employment Agreement for Jeffrey D. Agee and
Judy D. Long (1)*
10.2
Form of First Citizens National Bank Amended and Restated Split Dollar
Agreement (1)*
10.3
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Jeffrey D. Agee, dated April 21, 1994 (1)*
10.4
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Katie S. Winchester, dated December 28, 2007 (1)*
10.5
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Judy D. Long, dated April 15, 1998 (1)*
10.6
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Ralph E. Henson, dated July 1, 2006 (1)*
10.7
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Stallings Lipford, dated December 28, 2007 (1)*
10.8
Form of First Citizens National Bank Imputed Income Tax Reimbursement Agreement
(1)*
10.9 Description
of the First Citizens Bancshares, Inc. and subsidiaries Incentive Compensation
Plan for the year ended December 31, 2010*
21 Subsidiaries of the Registrant
31.1 Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
_____________________________
(1) Previously
filed as an exhibit to First Citizens Bancshares, Inc.'s Annual Report on Form
10-K, as filed with the Securities and Exchange Commission on March 13, 2009
and incorporated herein by reference.
*
Management contract or compensatory plan or arrangement.
-94-
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
First Citizens Bancshares, Inc.
(Registrant)
Date: March 15, 2011
/s/
JEFFREY D. AGEE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the Registrant and in the capacities
indicated on March 15, 2011.
/s/ Jeffrey D. Agee
|
|
/s/ Larry W. Gibson
|
|
/s/ Green Smitheal III
|
Jeffrey D. Agee
|
|
Larry W. Gibson
|
|
Green Smitheal III
|
President and Chief
Executive Officer; Director
|
|
Director
|
|
Director
|
|
|
|
|
|
/s/ Eddie E. Anderson
|
|
/s/ Christian E. Heckler
|
|
/s/ David R. Taylor
|
Eddie E. Anderson
Director
|
|
Christian E. Heckler
Director
|
|
David R. Taylor
Director
|
|
|
|
|
|
/s/ J. Walter Bradshaw
|
|
/s/ Ralph E. Henson
|
|
/s/ Larry S. White
|
J. Walter Bradshaw
Director
|
|
Ralph E. Henson
Director
|
|
Larry S. White
Director
|
|
|
|
|
|
/s/ Laura Beth Butler
|
|
/s/ Barry T. Ladd
|
|
/s/ Dwight S. Williams
|
Laura Beth Butler
Chief Financial Officer
|
|
Barry T. Ladd
Director
|
|
Dwight S. Williams
Director
|
|
|
|
|
|
/s/ J. Daniel Carpenter
|
|
/s/ John M. Lannom
|
|
/s/ Katie S. Winchester
|
J. Daniel Carpenter
Director
|
|
John M. Lannom
Director
|
|
Katie S. Winchester
Director
|
|
|
|
|
|
/s/ William C. Cloar
|
|
/s/ Stallings Lipford
|
|
/s/ Joseph S. Yates
|
William C. Cloar
Director
|
|
Stallings Lipford
Director
|
|
Joseph S. Yates
Director
|
|
|
|
|
|
/s/ Richard W. Donner
|
|
/s/ Milton E. Magee
|
|
|
Richard W. Donner
Director
|
|
Milton E. Magee
Director
|
|
|
|
|
|
|
|
/s/ Bentley F. Edwards
|
|
/s/ Allen Searcy
|
|
|
Bentley F. Edwards
Director
|
|
Allen Searcy
Director
|
|
|
|
|
|
|
|
-95-
EXHIBIT INDEX
Exhibit
Number
Description
3.1 Charter
of First Citizens Bancshares, Inc., as amended (1)
3.2 Bylaws
of First Citizens Bancshares, Inc., as amended (1)
10.1
Form of Amendment to Executive Employment Agreement for Jeffrey D. Agee and
Judy D. Long (1)*
10.2
Form of First Citizens National Bank Amended and Restated Split Dollar
Agreement (1)*
10.3
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Jeffrey D. Agee, dated April 21, 1994 (1)*
10.4
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Katie S. Winchester, dated December 28, 2007 (1)*
10.5 Executive
Employment Agreement by and between First Citizens Bancshares, Inc. and Judy D.
Long, dated April 15, 1998 (1)*
10.6
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Ralph E. Henson, dated July 1, 2006 (1)*
10.7
Executive Employment Agreement by and between First Citizens Bancshares, Inc.
and Stallings Lipford, dated December 28, 2007 (1)*
10.8
Form of First Citizens National Bank Imputed Income Tax Reimbursement Agreement
(1)*
10.9 Description
of the First Citizens Bancshares, Inc. and subsidiaries Incentive Compensation
Plan for the Year Ended December 31, 2010*
21 Subsidiaries
of the Registrant
31.1 Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
_____________________________
(1) Previously
filed as an exhibit to First Citizens Bancshares, Inc.'s Annual Report on Form
10-K, as filed with the Securities and Exchange Commission on March 13, 2009
and incorporated herein by reference.
*
Management contract or compensatory plan or arrangement.
-96-
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