10K/A
 

 

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

Amendment No. 1

(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, 2013

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   ___________________________ to _______________________________________________

Commission file number         000-10972              

First Farmers and Merchants Corporation

(Exact name of registrant as specified in its charter)

 

Tennessee

 

62-1148660

(State or other jurisdiction of

incorporation or organization)

 

 

(I.R.S. Employer

Identification No.)

816 South Garden Street

 

 

Columbia, Tennessee

 

38402 – 1148

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code  (931) 388-3145                     

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

None

 

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $10.00 par value per share

(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   [ X ] No

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   [ X ] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                          

[ X  ]Yes   [  ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[ X ]Yes   [    ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.  [ X ]      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [    ]   

Accelerated filer [ X ]

   

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

Smaller reporting company [    ]

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

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2013 was approximately $121,936,983 based on the reported price at which the common stock was last sold in a transaction known to the registrant.

 

 

 


 

 

 

 

 

As of March 1, 2014, the registrant had outstanding 5,021,012 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

 

Selected sections from Annual Report to Shareholders for Fiscal Year Ended December 31, 2013 titled “Comparative Performance” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” -- Part I and II of this Report.

Proxy Statement for 2014 Annual Shareholders’ Meeting to be held on April 15, 2014 -- Part III of this Report.

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

EXPLANATORY NOTE – AMENDMENT NO. 1

 

           

The sole purpose of this Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) is to amend the  Annual Report on Form 10-K for the year ended December 31, 2013 (the “Original Filing”) of First Farmers and Merchants Corporation (the “Corporation”), which was filed with the Securities and Exchange Commission (“SEC”) on March 5, 2014,  to provide in Item 8 of Part II of the Original Filing a Report of Independent Registered Public Accounting Firm dated March 5, 2014 as to the Corporation’s audited financial statements and a Report of Independent Registered Public Accounting Firm dated March 5, 2014 as to the Corporation’s internal control over financial reporting.  This Amendment No.1 replaces the two reports that were included in Exhibit 13 to the Original Filing, which were dated March 6, 2014.

 

            Item 8 of Part II and Item 15 of Part III of this Amendment No. 1 have been amended solely to reflect the filing of the reports dated March 5, 2014 and to provide updated certifications of the Corporation’s principal executive officer and the principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and SEC Rule 12b-15, as amended.  Except as expressly described herein, no other changes have been made to the Original Filing and the Original Filing continues to speak as of its date.  This Amendment No. 1 has not been updated to reflect events occurring subsequent to the date that the Original Filing was filed with the SEC.

 

 

PART II

Item 8.  Financial Statements and Supplementary Data.

(a)        Consolidated Financial Statements: The Corporation’s consolidated financial statements are included beginning on Page F-1 immediately following this page.

 

 

 

 

 

 

 

 

 

1

 

 

 


 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

Audit Committee, Board of Directors

  and Shareholders

First Farmers and Merchants Corporation

Columbia, Tennessee

 

 

We have audited First Farmers and Merchants Corporation’s (Corporation) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting.  Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances.  We believe our audit provides a reasonable basis for our opinion.

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 Corporation, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

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 Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of December 31, 2013, and our report dated March 5, 2014, expressed an unqualified opinion thereon.

//s//BKD, LLP

Louisville, Kentucky

March 5, 2014

 

 

F-1

 

 

 


 

 

 

 

FIRST FARMERS AND MERCHANTS CORPORATION

COLUMBIA, TENNESSEE

 

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

            The management of First Farmers and Merchants Corporation is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in its annual report.  The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and, as such, include amounts based on informed judgments, assumptions and estimates made by management.

            The management of First Farmers and Merchants Corporation is responsible for establishing and maintaining adequate internal control over financial reporting.  The Corporation’s internal control system was designed to provide reasonable assurance to the Corporation’s management and board of directors regarding the preparation and fair presentation of published financial statement.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

            The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2013.  In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (1992).”  Based on our assessment we believe that, as of December 31, 2013, the Corporation’s internal control over financial reporting is effective based on those criteria.

            BKD, LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Corporation included in this annual report, has issued an attestation report on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2013. The report, which expresses an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2013, is included in this annual report.

 

 

 

 

 

 

F-2

 

 

 


 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

Audit Committee, Board of Directors

  and Shareholders

First Farmers and Merchants Corporation

Columbia, Tennessee

 

 

We have audited the accompanying consolidated balance sheets of First Farmers and Merchants Corporation (Corporation) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2013.  The Corporation’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements 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 we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  Our audits 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.  We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 5, 2014, expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.

//s//BKD, LLP

Louisville, Kentucky

March 5, 2014

 

 

F-3

 


 

 

 

 

 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

December 31,

December 31,

 

(Dollars in Thousands, Except Per Share Data)

2013

 

2012

ASSETS

Cash and due from banks

 $

20,391 

 $

23,443 

Interest-bearing due from banks

25,167 

31,953 

Federal funds sold

9,850 

15,000 

              Total cash and cash equivalents

55,408 

70,396 

Securities

Available-for-sale (amortized cost $346,892

and $339,971 as of December 31, 2013 and December 31, 2012,
respectively)

329,714 

345,718 

Held-to-maturity (fair market value $28,595

and $33,420 as of December 31, 2013 and December 31, 2012,
respectively)

27,839 

31,755 

          Total securities

357,553 

377,473 

Loans, net of deferred fees

606,766 

567,159 

     Allowance for loan and lease losses

(8,595)

(8,809)

          Net loans

598,171 

558,350 

Bank premises and equipment, net

24,868 

26,417 

Other real estate owned

1,438 

5,678 

Bank owned life insurance

25,867 

25,112 

Goodwill

9,018 

9,018 

Deferred tax asset

10,905 

3,884 

Other assets

10,605 

14,035 

 

          TOTAL ASSETS

 $

1,093,833 

 

 $

1,090,363 

LIABILITIES

Deposits

     Noninterest-bearing

 $

179,823 

 $

169,136 

     Interest-bearing

777,514 

763,713 

          Total deposits

957,337 

932,849 

Securities sold under agreements to repurchase

18,095 

17,068 

Accounts payable and accrued liabilities

15,728 

15,755 

Federal Home Loan Bank (FHLB) advances

10,100 

 

           TOTAL LIABILITIES

991,160 

 

975,772 

SHAREHOLDERS'

Common stock - $10 par value per share, 8,000,000 shares

EQUITY

        authorized; 5,021,012 and 5,180,000 shares issued

        and outstanding as of  December 31, 2013 and

        December 31, 2012, respectively

50,210 

51,800 

Retained earnings

61,369 

57,366 

Accumulated other comprehensive income (loss)

(9,001)

5,330 

TOTAL SHAREHOLDERS' EQUITY BEFORE
NONCONTROLLING INTEREST - PREFERRED STOCK OF
SUBSIDIARY

102,578 

114,496 

Noncontrolling interest - preferred stock of subsidiary

95 

95 

TOTAL SHAREHOLDERS' EQUITY

102,673 

114,591 

        TOTAL LIABILITIES AND

 

           SHAREHOLDERS' EQUITY

 $

1,093,833 

 

 $

1,090,363 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-4


 

 

 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31,

 

2013

2012

2011

INTEREST AND

Interest and fees on loans

 $

28,653 

27,951 

29,838 

    DIVIDEND

Income on investment securities

    INCOME

     Taxable interest

5,501 

4,967 

4,219 

     Exempt from federal income tax

2,913 

3,106 

3,616 

     Dividends

294 

360 

295 

 

          Total interest income

37,361 

36,384 

37,968 

INTEREST

Interest on deposits

2,694 

3,343 

4,223 

     EXPENSE

Interest on other borrowings

213 

498 

719 

          Total interest expense

2,907 

3,841 

4,942 

Net interest income

34,454 

32,543 

33,026 

Provision for loan and lease losses

1,120 

3,125 

 

Net interest income after provision

34,454 

31,423 

29,901 

NONINTEREST

     Gain on loans sold

437 

511 

469 

 INCOME

     Trust department income

2,298 

2,119 

1,999 

 

     Service fees on deposit accounts

6,479 

6,689 

6,784 

     Brokerage fees

361 

231 

36 

     Earnings on bank owned life insurance

497 

705 

717 

     Gain on sale of securities

829 

2,294 

1,458 

     Loss on foreclosed property

(308)

(1,317)

(948)

     Other non-interest income

523 

399 

457 

 

          Total noninterest income

11,116 

11,631 

10,972 

NONINTEREST

Salaries and employee benefits

17,901 

19,406 

18,836 

    EXPENSE

Net occupancy expense

2,581 

2,528 

2,488 

Furniture and equipment expense

1,397 

1,334 

1,224 

Data processing expense

2,288 

2,007 

1,867 

Legal and professional fees

1,037 

943 

997 

Stationary and office supplies

293 

279 

286 

Advertising and promotions

1,090 

1,179 

1,217 

FDIC Insurance premium expense

728 

703 

875 

Other real estate expense

128 

309 

640 

Other noninterest expense

5,370 

4,826 

4,687 

          Total noninterest expenses

32,813 

33,514 

33,117 

Income before provision for income taxes

12,757 

9,540 

7,756 

 

Provision for income taxes

2,865 

1,916 

744 

Net income before noncontrolling interest - dividends on
preferred stock of subsidiary

9,892 

7,624 

7,012 

Noncontrolling interest-dividends on preferred stock
subsidiary

16 

16 

16 

 

                   Net income for common shareholders

 $

9,876 

 $

7,608

 $

6,996 

PER SHARE

Weighted Average Shares Outstanding

5,110,849 

5,315,634 

5,393,765 

 

 Earnings per share

 $

1.93 

 $

1.43 

 $

1.30 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-5

 


 

 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

 

Year Ended December 31,

2013

 

2012

 

2011

Net Income for common shareholders

 $

9,876 

 $

7,608 

 $

6,996 

Other Comprehensive Income (Loss)

Unrealized appreciation (depreciation) on available-for-sale securities, net of tax (benefit) expenses of ($8,507), $1,204, and $2,960

(13,589)

1,923 

4,728 

Reclassification adjustment for realized gains included in net income, net of taxes of ($319), ($883), and ($561), respectively

(510)

(1,411)

(897)

Change in unfunded portion of postretirement benefit obligations, net of tax of ($146), $1,008 and $1,214, respectively

(232)

1,610 

1,940 

Other Comprehensive Income (Loss)

(14,331)

2,122 

5,771 

Total Comprehensive Income (Loss)

 $

(4,455)

 $

9,730 

 $

12,767 

                 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-6


 

 

 

 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Accumulated

Other

Shares of

Preferred

Common

Retained

Comprehensive

Years Ended December 31, 2013, 2012 and 2011

stock

Stock

Stock

Earnings

Income (Loss)

Total

Balance at December 31, 2010

    5,430,000

 $

95 

 $

54,300 

 $

54,524 

 $

(2,563)

 $

106,356 

    Net income before dividends on preferred stock of subsidiary

7,012 

7,012 

    Other comprehensive income

5,771 

5,771 

      Repurchase of common stock

      (100,000)

(1,000)

(2,011)

(3,011)

Cash dividends declared, $0.74 per share

(3,963)

(3,963)

Cash dividends - preferred stock of subsidiary

 

 

 

(16)

 

(16)

Balance at December 31, 2011

    5,330,000

95 

53,300 

55,546 

3,208 

112,149 

    Net income before dividends on preferred stock of subsidiary

7,624 

7,624 

    Other comprehensive income

2,122 

2,122 

      Repurchase of common stock

      (150,000)

(1,500)

(1,900)

(3,400)

Cash dividends declared, $0.74 per share

(3,888)

(3,888)

Cash dividends - preferred stock of subsidiary

 

 

 

(16)

 

(16)

Balance at December 31, 2012

    5,180,000

95 

51,800 

57,366 

5,330 

114,591 

    Net income before dividends on preferred stock of subsidiary

9,892 

9,892 

    Other comprehensive loss

(14,331)

(14,331)

      Repurchase of common stock

      (158,988)

(1,590)

(2,132)

(3,722)

Cash dividends declared, $0.74 per share

(3,741)

(3,741)

Cash dividends - preferred stock of subsidiary

(16)

(16)

Balance AT December 31, 2013

    5,021,012

 $

95 

 $

50,210 

 $

61,369 

 $

(9,001)

 $

102,673 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-7


 

 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 

Years Ended December 31,

 

 (unaudited)

2013

2012

2011

OPERATING

Net income available for common shareholders

 $

9,876 

 $

7,608 

 $

6,996 

ACTIVITIES

   Adjustments to reconcile net income to net cash provided

     by (used in) operating activities

       Provision for loan losses

1,120 

3,125 

       Provision for depreciation and amortization of

          premises and equipment

1,543 

1,412 

1,270 

       Deferred tax benefit (expense)

1,950 

(340)

(1,216)

       Net securities gains

(829)

(2,294)

(1,458)

       Gains on loans sold

(437)

(511)

(417)

       Proceeds from sale of mortgage loans held for sale

21,047 

28,625 

24,402 

       Funding of mortgage loans held for sale

(18,481)

(28,065)

(23,985)

       Loss on other real estate owned

308 

1,317 

948 

      Gain (loss) on sale of premises and equipment

38 

(10)

       Amortization of investment security premiums,

          net of accretion of discounts

1,312 

3,526 

2,094 

       Increase in cash surrender value of life insurance contracts

(497)

(705)

(717)

       (Increase) decrease in

          Other assets

1,243 

741 

1,177 

       Increase (decrease) in

          Other liabilities

(287)

2,647 

534 

               Total adjustments

6,910 

7,463 

5,757 

 

               Net cash provided by operating activities

16,786 

15,071 

12,753 

INVESTING

Proceeds from sales of available-for-sale securities

137,150 

421,346 

140,580 

ACTIVITIES

Proceeds from maturities and calls of available-for-sale securities

44,908 

68,673 

106,270 

Proceeds from maturities and calls of held-to-maturity securities

3,890 

3,430 

4,725 

Purchases of investment securities

      available-for-sale

(189,436)

(521,837)

(323,222)

Net (increase) decrease in loans

(38,267)

(50,846)

38,031 

Proceeds from sale of other real estate owned

2,378 

1,810 

1,683 

Proceeds from sale of premises and equipment

                     799

                          -

                    -

Purchases of premises and equipment

(831)

(786)

(263)

 Purchase of life insurance policies

(258)

(2,282)

(2,799)

 

               Net cash used in investing activities

(39,667)

(80,492)

(34,995)

FINANCING

Net increase in deposits

24,488 

76,419 

64,604 

ACTIVITIES

Net increase  in securities sold under agreements to repurchase

1,027 

721 

10,162 

Payments to FHLB borrowings

(10,100)

(7,000)

(7,000)

Repurchase of common stock

(3,722)

(3,400)

(3,011)

Cash dividends paid on common stock

(3,800)

(3,944)

(1,991)

 

               Net cash provided by financing activities

7,893 

62,796 

62,764 

Increase (decrease) in cash and cash equivalents

(14,988)

(2,625)

40,522 

Cash and cash equivalents at beginning of period

70,396 

73,021 

32,499 

 

Cash and cash equivalents at end of period

 $

55,408 

 $

70,396 

 $

73,021 

Supplemental disclosures of cash flow information

Cash paid during the period for expenses

       Interest on deposits and borrowed funds

 $

2,816 

 $

3,717 

 $

5,235 

       Income taxes

2,072 

860 

1,143 

Loans to facilitate sale of other real estate owned

1,905 

1,774 

 

Real estate acquired in settlement of loans

312 

1,355 

1,375 

     The accompanying notes are an integral part of the consolidated financial statements.

 

All dollar amounts are reported in thousands except share and per share data.

 

F-8


 

NOTE 1 – GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Policies

The accounting principles followed and the methods of applying those principles conform with accounting principles generally accepted in the United States (“GAAP”) and to general practices in the banking industry.  The significant accounting policies applicable to First Farmers and Merchants Corporation (the Corporation) are summarized as follows.

 

Nature of Operations

The Corporation is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, First Farmers and Merchants Bank (the Bank).  The Bank is primarily engaged in providing a full range of banking and financial services, including lending, investing of funds, obtaining deposits, trust and wealth management operations, and other financing activities to individual and corporate customers in the middle Tennessee area.  The Bank is subject to competition from other financial institutions.  The Corporation and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Basis of Presentation

 

The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, First Farmers and Merchants Bank.  The Bank has the following direct and indirect subsidiaries: F & M West, Inc., Maury Tenn, Inc., and Maury Tenn Properties, Inc.  Noncontrolling interests consist of preferred shares in Maury Tenn Properties, Inc. that are owned by third parties and Maury Tenn, Inc.  The preferred shares in Maury Tenn Properties, Inc. receive dividends, which are included in the consolidated statements of income.  Intercompany accounts and transactions have been eliminated in consolidation.

 

Certain items in prior financial statements have been reclassified to conform to the current presentation.  These reclassifications had no effect on net income.

 

 Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management of the Corporation and the Bank to make estimates and assumptions that affect the reported amounts of assets and liabilities.  Those estimates and assumptions also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan and lease losses, the fair value of financial instruments,  the valuation of foreclosed real estate, valuation of goodwill, valuation of deferred tax assets and the liability related to post-retirement benefits.

 

Concentrations of Credit Risk

                

The Corporations’ banking activities include granting commercial, residential, and consumer loans to customers primarily located in central and south central Tennessee and Northern Alabama.  The Corporation is continuing to manage all components of its portfolio mix in a manner to reduce risk from changes in economic conditions.  Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus allowance for loan losses and total capital are not exceeded.  At December 31, 2013 our concentrations of commercial real estate, rental and leasing loans were 119.6% of Tier 1 Capital plus the allowance for loan and lease losses, respectively.  Health care and social assistance loans were 46.3%.  Manufacturing and construction loans were 25.4%.  Wholesale trade credits were 25.2%.  These percentages are within our internally established limits regarding concentrations of credit.

 

           

All dollar amounts are reported in thousands except share and per share data.

 

F-9


 

 

 

 

 

 Loans secured by non-farm, non-residential real estate comprised 29.0% of the loan portfolio at December 31, 2013.  Management remains comfortable with the real estate exposure levels within the commercial loan portfolio.  Management believes the commercial real estate portion remains well diversified across several different property types and several different geographic markets, stretching primarily from Davidson County, Tennessee to northern Alabama.

 

Cash and Due From Banks

 

Included in cash and due from banks are reserve amounts that are required to be maintained in the form of cash and balances due from the Federal Reserve Bank and other banks.  At December 31, 2013, the Bank’s required reserve was $2,560 at the Federal Reserve.  From time to time throughout the year, the Bank’s balances due from other financial institutions exceeded Federal Deposit Insurance Corporation (FDIC) insurance limits.  The Bank had one account over the limit at December 31, 2013 and it was $261.  Furthermore, federal funds sold are essentially uncollateralized loans to other financial institutions. 

 

Cash Equivalents

The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents.  Cash equivalents include cash on hand, cash due from banks and federal funds sold.  Federal funds are sold for one-day periods. 

 

Securities

 

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

For debt securities with fair value below amortized cost when the Corporation does not intend to sell a debt security, and it is more likely than not the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.  For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.  For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security based on cash flow projections. 

 

Loans

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

 

All dollar amounts are reported in thousands except share and per share data.

 

F-10


 

 

 

 

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past-due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Discounts and premiums on purchased commercial loans are amortized to income using the interest method over the remaining period to contractual maturity and adjusted for anticipated prepayments. 

 

Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses is established through provisions for loan and lease losses charged against income.  Loan losses are charged against the allowance when management determines that the uncollectibility of a loan has been confirmed.  Subsequent recoveries, if any, are credited to the allowance account in the period received.

 

The adequacy of the allowance for loan and lease losses is evaluated quarterly in conjunction with loan review reports and evaluations that are discussed in meetings with loan officers, credit administration and the Corporation’s Board of Directors.  The Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors are considered in this evaluation.  This process is inherently subjective as it requires material estimates that are susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.  The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the loan portfolio.

 

A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the 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 of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the 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 the fair value of the collateral if the loan is collateral dependent. 

 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made.  If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed.  When the foreclosed collateral has been legally assigned to the Corporation, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell the collateral then transferred to other real estate owned or other repossessed assets.  When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due. 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-11


 

 

 

All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (4 monthly payments) delinquent.  If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent.  For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made.  If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual and foreclosure proceedings are initiated.  When the foreclosed property has been legally assigned to the Corporation, a charge-off is taken with the remaining balance, reflecting the fair value less estimated costs to sell, transferred to other real estate owned.

 

Loans Held for Sale

 

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income.  Gains and losses on loan sales are recorded in noninterest income.  The Corporation does not retain servicing rights on loans sold.  Loans held for sale at December 31, 2013 and 2012 totaled $327 and $2,456, respectively.

Other Real Estate

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

When foreclosed properties are acquired current appraisals are obtained on the properties.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected selling costs.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 24 months. 

 

Premises and Equipment

 

            Premises and equipment are stated at cost, less accumulated depreciation and amortization.  The provision for depreciation is computed principally on an accelerated method over the estimated useful life of an asset, which ranges from 15 to 39 years for buildings and from three to 25 years for equipment.  Costs of major additions and improvements are capitalized.  Expenditures for maintenance and repairs are charged to operations as incurred.  Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.

 

Federal Reserve and Federal Home Loan Bank Stock

 

Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems.  The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.  At December 31, 2013 and 2012 Federal Reserve and Federal Home Loan Bank stock totaled $3,879.

Goodwill

 

Goodwill is evaluated annually for impairment.  Quantitative and qualitative assessments are performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill.  If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment.  If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the financial statements.

All dollar amounts are reported in thousands except share and per share data.

 

F-12


 

 

 

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

 

The Corporation files consolidated income tax returns with its subsidiaries.  The Corporation accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes).  The income tax accounting guidance results in two components of income tax expense:  current and deferred.  Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.  The Corporation determines deferred income taxes using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.  Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.  With a few exceptions, the Corporation is no longer subject to U.S. federal tax examinations for years before 2010, and state and local tax examinations by tax authorities for years before 2010.

The Corporation recognizes interest and penalties on income taxes as a component of income tax expense.

Securities Sold Under Agreements to Repurchase

 

            Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date.  Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction

  

Fair Value Measurements  

 

            FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements.  See Note 13 – Fair Value Measurement.  In general, fair values of financial instruments are based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as input, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.

 

 

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-13


 

 

 

 

 

 

Shareholders’ Equity and Earnings Per Share

 

Basic earnings per share represent income available to shareholders divided by the weighted average number of shares of Corporation common stock outstanding during the period.  Diluted earnings per share reflect additional shares of common stock that would have been outstanding if potentially dilutive shares of common stock had been issued, as well as any adjustment to income that would result from the assumed conversion.  For the years ended December 31, 2013, 2012 and 2011, there were no potentially dilutive shares of common stock issuable.

 

In 2013, the Corporation adopted a plan to repurchase shares of its common stock.  The plan allowed the purchase of up to 200,000 shares.  The Corporation purchased 158,988 shares in 2013.  In 2012, the Corporation adopted a plan to repurchase up to 150,000 shares of common stock .  The Corporation repurchased 150,000 shares in 2012.  For 2011, the Corporation adopted a similar plan allowing it to repurchase up to 100,000 shares of common stock.  The Corporation repurchased 100,000 shares in 2011.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income tax expenses or benefits.  Other comprehensive (loss) income includes unrealized appreciation or depreciation on available-for-sale securities and changes in the net actuarial gain or loss of the postretirement benefit obligation.

The components of accumulated other comprehensive income (loss), included in shareholder’s equity, are as follows as of December 31, 2013, 2012 and 2011:

 

Years Ended December 31,

2013

2012

2011

Net unrealized gains (losses)

     on available-for-sale securities

 $

(17,178)

 $

5,747 

 $

4,914 

Net actuarial gain on unfunded portion

   of postretirement benefit obligation

2,542 

2,920 

302 

(14,636)

8,667 

5,216 

Tax effect - (expense) benefit

5,635 

 

(3,337)

 

(2,008)

Other comprehensive income (loss)

 

 $

(9,001)

 

 $

5,330 

 

 $

3,208 

 

Transfers Between Fair Value Hierarchy Levels

Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period end date.

Segment Reporting

 

Management analyzes the operations of the Corporation assuming one operating segment, community lending services.

 

Recent Accounting Pronouncements

 

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Corporation on January 1, 2013 and did not have a significant impact on the Corporation’s financial statements. See Note 2 – Other Comprehensive Income (Loss).

 

All dollar amounts are reported in thousands except share and per share data.

 

F-14


 

 

 

 

 

 

 

ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax loss, or a Tax Credit Carryforward Exists (Topic 740-10) – a consensus of the FASB Emerging Issues Task Force.”  ASU 2013-11 provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists.  The objective is to eliminate diversity in practice resulting from a lack of guidance on this topic.  ASU 2013-11 will be effective for the Corporation after December 15, 2013 and is not expected to have a significant impact on the Corporation’s financial statements.

 

ASU 2013-12, “Definition of a Public Business Entity – An Addition to the Master Glossary” amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in U.S. GAAP.  The definition of a public business entity will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to business entities.  The amendment does not affect existing requirements, but instead improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance.  There is no actual effective date for the amendment in this Update.  However, the term public business entity will be used beginning with ASU 2014-01.  ASU 2013-12 is not expected to have a significant impact on the Corporation’s financial statements.

 

ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)” clarifies when an in substance repossession or foreclosure occurs – that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The new update requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  The update is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014 and is not expected to have a significant impact on the Corporation’s financial statements.

 

NOTE 2 – ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”) BY COMPONENT

 

Amounts reclassified from AOCI and the affected line items in the statements of income during the periods ended December 31, 2013, 2012 and 2011, were as follows:

 

Affected Line Item in the
Statements of Income

Amounts Reclassified from AOCI

Years Ended

December 31, 2013

December 31, 2012

December 31, 2011

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

$

829 

 $

2,294 

 $

1,458 

Realized gain (loss) on sale of securities

(319)

(883)

(561)

Tax (expense) benefit

 

$

510

 $

1,411

 $

897

Net reclassified amount  

Amortization of defined benefit pension items

   Actuarial gains (losses)

$                    

(190)

$                       

  - 

$                     

 205

73 

(79)

Tax (expense) benefit

$

(117)

 $

 $

126 

Net reclassified amount  

Total reclassifications out of AOCI

$

393 

 $

1,411 

 $

1,023 

 

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-15


 

NOTE 3 – SECURITIES

 

 

                The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2013 and 2012 are summarized as follows:

Amortized

Gross Unrealized

Fair

December 31, 2013

Cost

Gains

Losses

Value

Available-for-sale securities

    U.S. Government agencies

 $

112,863 

$           

-

 $

7,791 

 $

105,072 

    U.S. Government sponsored agency mortgage backed securities

168,045 

27 

10,649 

157,423 

    States and political subdivisions

45,237 

1,240 

140 

46,337 

    Corporate bonds

20,747 

280 

145 

20,882 

 

 $

346,892 

 $

1,547 

 $

18,725 

 $

329,714 

Held-to-maturity securities

    States and political subdivisions

 $

27,839 

 $

756 

 $

 $

28,595 

 

 

 

 

Amortized

Gross Unrealized

Fair

December 31, 2012

Cost

Gains

Losses

Value

Available-for-sale securities

    U.S. Government agencies

 $

143,897 

 $

400 

 $

280 

 $

144,017 

    U.S. Government sponsored agency mortgage backed securities

131,917 

1,856 

55 

133,718 

    States and political subdivisions

47,273 

3,306 

50,579 

    Corporate bonds

16,884 

529 

17,404 

 

 $

339,971 

 $

6,091 

 $

344 

 $

345,718 

Held-to-maturity securities

    States and political subdivisions

 $

31,755 

 $

1,665 

 $

 $

33,420 

 

            Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost.  Total fair value of these investments at December 31, 2013 and 2012 was approximately $269,691 and $83,579, which was approximately 75% and 22%, respectively, of the Corporation’s available-for-sale and held-to-maturity investment portfolio.  The Corporation evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of December 31, 2013 and December 31, 2012 indicated that all impairment was considered temporary, market driven due primarily to fluctuations in market interest rates and not credit-related.

 

            The following table shows the Corporation’s investments’ gross unrealized losses and fair value of the Corporation’s investments with unrealized losses that were not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities had been in a continuous unrealized loss position at December 31, 2013 and 2012:

Less than 12 months

12 months or Greater

Total

December 31, 2013

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Type of Security

Value

Losses

Value

 

Losses

Value

Losses

    US Government agencies

 $   100,533

 $        7,330

 $       4,539

 $           461

 $ 105,072

 $        7,791

    US Government sponsored agency mortgage

       backed securities

      144,134

         10,073

          8,698

              576

    152,832

         10,649

    States and political subdivisions

          2,615

              140

                -

                 -

        2,615

              140

    Corporate bonds

          8,590

              121

             582

                24

        9,172

              145

 $   255,872

 $      17,664

 $     13,819

 

 $        1,061

 $ 269,691

 $      18,725

 

Less than 12 months

12 months or Greater

Total

December 31, 2012

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Type of Security

Value

Losses

Value

 

Losses

Value

Losses

    US Government agencies

 $     68,979

 $           280

 $              -

 $                -

 $   68,979

 $           280

    US Government sponsored agency mortgage

       backed securities

        12,881

                55

                 -

                   -

      12,881

                55

    Corporate bonds

          1,719

                  9

                 -

                   -

        1,719

                  9

 $     83,579

 $           344

 $              -

 

 $                -

 $   83,579

 $           344

 

All dollar amounts are reported in thousands except share and per share data.

 

F-16


 

 

 

The unrealized losses on the Corporation’s investments in direct obligation of U.S. government agencies and U.S. government sponsored agency mortgage backed securities were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.  Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2013.

 

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2013, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Available-for-Sale

 

Held-to-Maturity

December 31, 2013

Amortized

Estimated

Amortized

Estimated

Cost

Fair Value

 

Cost

Fair Value

Within one year

 $      5,841

 $        5,920

 $     3,135

 $         3,208

One to five years

       26,404

         26,489

        7,043

            7,305

Five to ten years

     131,468

       124,308

      16,554

          16,953

After ten years

       15,134

         15,574

        1,107

            1,129

Mortgage-backed securities

     168,045

       157,423

               -

                    -

Total

 $  346,892

 $    329,714

 

 $   27,839

 $       28,595

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $210,494 at December 31, 2013 and $210,800 at December 31, 2012.

 

The book value of securities sold under agreements to repurchase amounted to $34,978 and $26,500 at December 31, 2013 and 2012, respectively.

 

Gross gains of $1,026, $2,455and $1,509 resulting from sales of available-for-sale securities were realized for at December 31, 2013, 2012 and 2011, respectively.  A loss of $197 was included in the net gain of $829 for December 31, 2013.  A loss of $161 was included in the net gain of $2,294 for December 31, 2012.  Losses of $51 were included in the net gain of $1,458 for December 31, 2011.

 

NOTE 4 – LOANS

 

The following table presents the Bank’s loans by category as of December 31, 2013 and 2012:

 

 

December 31, 2013

December 31, 2012

Commercial

Commercial and industrial

 $

94,702 

 $

83,631 

Non-farm, nonresidential real estate

176,213 

167,565 

Construction and development

29,938 

36,323 

Commercial loans secured by real estate

26,940 

23,983 

Other commercial

26,582 

24,423 

Total commercial

354,375 

335,925 

Residential

Consumer loans

10,957 

11,621 

Single family residential

213,763 

196,349 

Other retail

27,671 

23,264 

Total residential and consumer

252,391 

231,234 

$

606,766 

 $

567,159 

Less:

Allowance for possible loan losses

(8,595)

(8,809)

Total net loans

 $

598,171 

 $

558,350 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-17


 

 

 

Loan Origination/Risk Management. The Corporation has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.  Management reviews and approves these policies and procedures on a regular basis.  A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.  Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.  Underwriting standards are designed to promote relationship banking rather than transactional banking.  Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Corporation’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.  Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans.  These loans are viewed primarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.  Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria.  As a general rule, the Corporation avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk.  The Corporation also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves.  In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.  At December 31, 2013, approximately seventy percent of the outstanding principal balance of the Corporation’s commercial real estate loans was secured by owner-occupied properties, compared to eighty percent at December 31, 2012.

 

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Corporation may originate from time to time, the Corporation generally requires the borrower to have had an existing relationship with the Corporation and have a proven record of success.  Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners.  Construction loans are generally based upon estimates of costs and value associated with the complete project.  These estimates may be inaccurate.  Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation until permanent financing is obtained.  These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

The Corporation originates residential and consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process.  To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel.  This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.  Additionally, trend and outlook reports are reviewed by management on a regular basis.  Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

 

All dollar amounts are reported in thousands except share and per share data.

 

F-18


 

 

 

 

 

The Corporation contracts with a third party vendor to perform loan reviews.  The Corporation reviews and validates the credit risk program on an annual basis.  Results of these reviews are presented to management.  The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporation’s policies and procedures.

The goal of the bank is to diversify loans to avoid a concentration of credit in a specific industry, person, entity, product, service, or any area vulnerable to a tax law change or an economic event.  A concentration of credit occurs when obligations, direct or indirect, of the same or affiliated interests represent 15 percent or more of the Bank’s capital structure.  Commercial real estate rental and leasing represented the highest concentration at 120% of tier 1 capital.  The Board of Directors recognizes that the Bank’s geographic trade area imposes some limitations regarding loan diversification if the bank is to perform the function for which it has been chartered.  Specifically, lending to qualified borrowers within the bank’s trade area will naturally cause concentrations of real estate loans in the primary communities served by the bank and loans to employees of major employers in the area.

             The following table provides details regarding the aging of the Bank’s loan portfolio:

December 31, 2013

30 - 89 Days
Past Due

90 Days and Greater
Past Due

Total
Past Due

Current

Total Loans

Retail

  Consumer

 $

182 

 $

 $

185 

 $

10,772 

 $

10,957 

  Single family residential

3,805

83 

3,876 

209,887 

213,763 

  Other retail

319 

28 

359 

27,312 

27,671 

Retail total

 $

4,306 

 $

114 

 $

4,420 

 $

247,971 

 $

252,391 

Commercial

  Commercial and industrial

 $

428 

 $

1,328 

 $

1,756 

 $

92,946 

 $

94,702 

  Non-farm, non-residential real estate

393 

393 

175,820 

176,213 

  Construction and development

28 

28 

29,910 

29,938 

  Commercial loans secured by real estate

38 

178 

216 

26,724 

26,940 

  All other commercial

1,249 

1,249 

25,333 

26,582 

Commercial total

 $

859 

 $

2,783 

 $

3,642 

 $

350,733 

 $

354,375 

Total

 $

5,165 

 $

2,897 

 $

8,062 

 $

598,704 

 $

606,766 

December 31, 2012

30 - 89 Days
Past Due

90 Days and Greater
Past Due

90 Days and Greater
Past Due

Current

Total Loans

Retail

  Consumer

 $

112 

 $

 $

119 

 $

11,502 

 $

11,621 

  Single family residential

3,543 

387 

3,930 

192,419 

196,349 

  Other retail

193 

193 

23,071 

23,264 

Retail total

 $

3,848 

 $

394 

 $

4,242 

 $

226,992 

 $

231,234 

Commercial

  Commercial and industrial

 $

618 

 $

1,457 

 $

2,075 

 $

81,556 

 $

83,631 

  Non-farm, non-residential real estate

666 

448 

1,114 

166,451 

167,565 

  Construction and development

160 

160 

36,163 

36,323 

  Commercial loans secured by real estate

22 

193 

215 

23,768 

23,983 

  All other commercial

741 

1,379 

2,120 

22,303 

24,423 

Commercial total

 $

2,207 

 $

3,477 

 $

5,684 

 $

330,241 

 $

335,925 

Total

 $

6,055 

 $

3,871 

 $

9,926 

 $

557,233 

 $

567,159 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-19


 

 

 

 

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Corporation will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings.

The following table summarizes the impaired loans by loan type as of December 31, 2013 and 2012:

 

December 31, 2013

Unpaid Contractual
Principal Balance

Recorded investment
with no allowance

Recorded Investment with allowance

Total Recorded
Investment

Related
Allowance

Average
Recorded
Investment
Year
To Date

Interest
Received

Interest A
ccrued

Commercial

Commercial and industrial

 $

2,190 

 $

1,338 

 $

234 

 $

1,572 

 $

16 

 $

1,620 

 $

23 

 $

134 

Non-farm, non-residential real estate

3,236 

1,155 

1,551

2,706 

282 

2,819 

157 

168 

Construction and development

461 

461 

461 

44 

556 

30 

30 

Other commercial

3,834 

3,310 

178 

3,488 

3,704 

225 

241 

Commercial total

9,721 

6,264

1,963

8,227 

342 

8,699 

435 

573 

Retail

Single family residential

1,121

568

419 

987

118 

1044

52 

55 

Other retail

     11 

11 

11 

11 

11 

 

 

Retail total

1,132

568 

430 

998

129 

1,097 

52 

55 

Total

 $

10,853

 $

6,382

 $

2,393

 $

9,225

 $

471 

 $

9,796 

 $

487 

 $

628 

December 31, 2012

Unpaid Contractual
Principal Balance

Recorded investment
with no allowance

Recorded Investment with allowance

Total Recorded
Investment

Related
Allowance

Average
Recorded
Investment
Year
To Date

Interest
Received

Interest
Accrued

Commercial

Commercial and industrial

 $

2,036 

 $

1,076 

 $

328 

 $

1,404 

 $

103 

 $

3,483 

 $

74 

 $

259 

Non-farm, non-residential real estate

3,613 

2,417 

2,417 

1,606 

83 

78 

Construction and development

682 

682 

682 

118 

682 

35 

40 

Other commercial

3,124 

3,124 

3,124 

 

3,520 

126 

279 

Commercial total

9,455 

6,617 

1,010 

7,627 

221 

9,291 

318 

656 

Retail

Single family residential

1,237 

402 

613 

1,015 

82 

638 

39 

64 

Retail total

1,237 

402 

613 

1,015 

82 

 

39 

64 

Total

 $

10,692 

 $

7,019 

 $

1,623 

 $

8,642 

 $

303 

 $

9,291 

 $

357 

 $

720 

December 31, 2011

Unpaid Contractual
Principal Balance

Recorded investment with no allowance

Recorded Investment with allowance

Total Recorded
Investment

Related
Allowance

Average Recorded Investment
Year To Date

Interest
Received

Interest
Accrued

Commercial

Commercial and industrial

 $

5,839 

 $

738 

 $

5,678 

 $

5,446 

 $

601 

 $

5,069 

 $

193 

 $

337 

Non-farm, non-residential real estate

4,378 

2,986 

2,115 

4,573 

307 

5,232 

35 

70 

Construction and development

870 

870 

870 

203 

941 

39 

45 

Other commercial

3,238 

1,498 

1,527 

190 

310 

Commercial total

14,325 

3,724 

8,663 

12,387 

1,111 

12,769 

457 

762 

Retail

Single family residential

1,388 

142 

1,075 

1,217 

131 

1,269 

44 

68 

Retail total

1,388 

142 

1,075 

1,217 

131 

1,269 

44 

68 

Total

 $

15,713 

 $

3,866 

 $

9,738 

 $

13,604 

 $

1,242 

 $

14,038 

 $

501 

 $

830 

* Interest income received is recognized interest income and approximates cash basis.

 

           

 

All dollar amounts are reported in thousands except share and per share data.

 

F-20


 

 

            Non-accrual loans, segregated by class of loans, were as follows at December 31, 2013 and 2012:

 

 

2013

2012

Commercial and industrial

 $

1,649 

 $

1,595 

Nonfarm, nonresidential real estate

737 

1,372 

Construction and development

68 

50 

Commercial real estate

6

126 

Other commercial

1,248 

1,379 

Consumer

21 

11 

Single family residential

1,667 

3,541 

Total

 $

5,396 

 $

8,074 

 

Included in certain loan categories of impaired loans are certain loans that have been modified in a troubled debt restructuring where economic concessions have been granted to borrowers who have experienced financial difficulties.  These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances.  Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of the modification.  All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower.  In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future with the modification.  This evaluation is performed under the Corporation’s internal underwriting policy.

           

When the Corporation modifies loans in a troubled debt restructuring, the Corporation evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans.  If the corporation determined that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance.  In periods subsequent to modification, the Corporation evaluates all troubled debt restructuring, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

 

As of December 31, 2013, the Corporation did not have any commitments to extend additional funds to borrowers with loans modified and included as a troubled debt restructuring.

 

During 2013, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances.  Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the year ended December 31, 2013 and 2012:

 

 

 

2013

2012

Post - Modification

Net Charge-offs

Post -Modification

Net Charge-offs

Number of

Outstanding

Resulting from

Number of

Outstanding

Resulting from

(dollars in thousands)

Loans

Balance

Modifications

Loans

Balance

Modifications

Commercial:

  Commercial and industrial

 $

 $

 $

 $

  Nonfarm nonresidential

361 

Retail:

  Consumer

                     -

  Single family residential

167

6

237 

                     -

 

 

 

 

 

 

 

Total trouble debt restructurings

 $

175 

 $

 $

609 

$

 

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-21


 

 

 

Loans retain their accrual status at the time of their modification.  As a result, if a loan is on nonaccrual status at the time it is modified, it stays as no-accrual status, and if a loan is on accrual status at the time of the modification, it generally stays on accrual status.  Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a troubled debt restructuring subsequently default, the Corporation evaluates the loan for possible further impairment.  The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.  The Corporation considers a loan in default when it is 90 days or more past due or transferred to nonaccrual. 

 

As of December 31, 2013 and 2012, the Corporation did not have any loans that were modified in troubled debt restructurings during the past twelve months that have subsequently defaulted. 

 

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Corporation’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) non-performing loans  and (v) the general economic conditions in the State of Tennessee.

 

The Corporation uses a risk grading matrix to assign a risk grade to each of its commercials loans.  Loans are graded on a scale of 1 – 8.  A description of the general characteristics of the 8 risk grades is as follows:

Risk Rating 1:  Minimal Risk

 

General Characteristics:

  • Substantially risk free.

  • Federal, state, or municipal subdivisions with acceptable investment grade credit rating.

  • Large national, regional, or local entity with proven access to capital markets.

  • Diversity in its line of business with stable and diversified sales base.

  • Borrower is considered to be an industry leader with many consecutive years of strong profits and exhibits a financial condition, equity position, liquidity, and debt service capacity far exceeding industry norms.

  • Borrower has an abundance of unpledged financeable assets coupled with superior cash generation capabilities.

  • Industry conditions and trends are positive and strong.

  • Borrower has strong management with evidence of management succession.

  • Credit rating by Moody’s, Standard & Poor, or other qualified rating agency that is grade A or higher.

  • A cash secured loan with the cash on deposit in our bank or a guaranty from the Federal government also warrants this risk rating.

Risk Rating 2:   Modest Risk

 

General Characteristics:

  • Borrower shows strong profitability, liquidity, and capitalization better than industry norms and a strong market position in the region.

  • Borrower may have limited access to public markets for short-term needs or capital requirements, but has ready access to alternative financing.

  • Loans may be unsecured based on the financial strength of the borrower or secured by collateral that is considered liquid and marketable.

  • Borrower has a proven history of profitability and financial stability.

  • Borrower has a strong market position in its industry and has an abundance of financeable assets available to protect the bank’s position.

  • Proven and steady management with good management succession.

  • Borrower can withstand major market instabilities of short duration.

  • Credit rating by Moody’s, Standard & Poor, or other qualified rating agency that is grade BAA or higher.

All dollar amounts are reported in thousands except share and per share data.

 

F-22


 

Risk Rating 3:  Average Risk

 

General Characteristics:

  • Borrower shows a stable earnings history and financial condition in line with industry norms with indications that these trends will continue.

  • The credit extension is considered sound, however elements may be present which suggest the borrower may not be free from temporary impairments in the future.

  • Liquidity and leverage is in line with industry norms.

  • Good management with acceptable management succession.

  • Under most economic and business conditions has access to alternative financing but limited or no access to capital markets for short-term or capital needs.

  • Borrower may be an individual with a sound financial condition and liquidity with proven historical income to repay the debt as scheduled.

  • Credit extensions are generally secured by acceptable collateral.

Risk Rating 4:  Acceptable Risk

 

General Characteristics:

  • Credit is to a borrower with smaller margins of debt service coverage and with some elements of reduced financial strength.

  • Borrower is generally in a lower average market position in its industry.

  • Borrower shows satisfactory asset quality and liquidity, good debt capacity and coverage, and good management in critical positions.

  • Management is of unquestioned character but management succession may be questionable.

  • Borrower can obtain similar financing from other financial institutions.

  • Interim losses or moderately declining earnings trends may occur, but the borrower has sufficient strength and financial flexibility to offset these issues.

  • Credit may be to individuals with a moderately leveraged financial condition, but with satisfactory liquidity and income to cover debt repayment requirements.

  • Business borrowers may have moderate leverage, but must have historically consistent cash flow to cover debt service and other operating needs.

  • Business borrowers may also have erratic or cyclical operating performances but should demonstrate strong equity positions to support these profitability swings.

  • Asset-based loans that have stabilized and proven performance with the financial capacity to provide for annual clean up may qualify for this rating.

  • Borrower has no access to capital markets, but would be financeable by another financial institution or finance company.

  • Credit extensions are generally secured by acceptable collateral.

Risk Rating 5:  Pass / Watch 

 

General Characteristics:

 

Loans considered for this risk rating require a heightened level of supervision. 

 

A) Transitional, Event Driven – This category of risk rated 5 loans captures responses to early warning signals from a relationship and, therefore, signifies a specific, event-driven, transitional credit grade.  The event is generally something unplanned or unexpected such as a death, a disaster, the loss of a major client, product line, or key employee; divorce, or health condition of the owner or key management person.  The Risk Rating 5 category may be used in transitional upgrades as well as transitional downgrades of credit relationships.  Under these criteria, the risk rating 5 necessitates a plan of action to either upgrade the credit to a Pass rating (Risk Rating 1-4), downgrade the credit to a criticized asset, or exit the relationship within six months.

All dollar amounts are reported in thousands except share and per share data.

 

F-23


 

 

 

 

 

 

B) Ongoing Supervision Warranted - This risk rating may also be utilized to identify loans having inherent characteristics which warrant more than the normal level of supervision.  Loans meeting these criteria may include larger, more complex loans with unusual structures.  Loans, which, due to structure or nature of the collateral require above average servicing, may also be considered for this risk rating.  Unlike other criteria listed previously for the Pass / Watch risk rating, these particular characteristics tend not to be one-time or transitional in nature; therefore, these loans may be expected to remain in this risk rating category longer than six months.  A loan might remain in this risk rating category for its life or until the characteristic warranting the Pass / Watch rating can be eliminated or effectively mitigated.

  • Borrowers may exhibit declining earnings, strained cash flow, increasing leverage, or weakening market positions that indicate a trend toward an unacceptable risk.

  • Borrower’s liquidity, leverage, and earnings performance is below or trending below industry norms.

  • Interim losses and other adverse trends may occur, but not to the level that would impair the bank’s position.

  • Borrower may be a newly formed company or in a new line of business or may be an established business with new or unproven management.  Borrower should be adequately capitalized, but may not yet have achieved stabilized cash flow.

  • Borrower generally has a small market position in its industry.

  • Borrower may be engaged in an industry that is experiencing an economic downturn or is particularly susceptible to uncontrollable external factors.

  • Management is of good character although some management weakness may exist, including lack of depth or succession.

  • Borrowers generally have limited additional debt capacity and modest coverage, and average or below-average asset quality, margins, and market share.

  • Borrower’s ability to obtain financing from other financial institutions may be impaired.

  • Credit to individuals with marginal financial condition and liquidity, but with income still sufficient to service the debt.

Risk Rating 6:  Special Mention

 

A special mention asset has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

 

General Characteristics:

  • Cash flow may not be sufficient to fund anticipated cash needs.

  • Sufficiently or modestly sufficiently financeable assets are available to protect the bank’s position.

  • Adverse trends in operations/profits or unbalanced position in the balance sheet, but not to the point where repayment is in jeopardy.

  • Borrower generally shows limited liquidity or high leverage.

  • Borrower’s financial position is in the lower quartile of industry norms.

  • Business exhibits a deteriorating market position in the industry.

  • Management lacks depth and succession.

  • Business is unable to withstand temporary setbacks without affecting repayment capability.

  • Borrower is not financeable by another bank but possibly by a finance company or specialized lender.

Risk Rating 7:  Substandard

 

A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

 

All dollar amounts are reported in thousands except share and per share data.

 

F-24


 

 

 

 

 

General Characteristics:

  • The primary source of repayment no longer provides satisfactory support and repayment is dependent on secondary sources.

  • A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

  • Normal repayment from the borrower is impaired although no loss of principal is envisioned.

  • A partial loss of interest or principal will occur if the deficiencies are not corrected.

  • Cash flow is generally not sufficient to fund anticipated cash needs.

  • Financeable assets may not be sufficient to protect the bank’s position.

  • Adverse trends in operations that jeopardized debt repayment may require the borrower to undertake a significant reorganization of financing or the business.

  • Borrower shows poor liquidity and high leverage impairing the repayment of the debt in accordance with agreed upon terms.

  • Management lacks depth and succession; may be inexperienced or of questionable character.

  • Borrower’s market position in the industry is deteriorating.

  • Borrower is not financeable by another bank or finance company.

Risk Rating 8:  Doubtful

 

An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

General Characteristics:

  • Inadequate primary source of repaymentAssumes a less than satisfactory secondary source of repayment on a most-likely case basis.  There may be an adequate secondary source of repayment on a best-case basis.

  • Borrowers have the same weaknesses found in Substandard borrowers.

  • Loss probability is extremely high but because of certain important and reasonably specific factors that may work to strengthen the loan, its classification as an estimated loss is deferred until a more exact status may be determined.

  • Pending factors may include proposed merger or acquisition; liquidation procedures; capital injections; perfecting liens on additional collateral; and refinancing plans.

  • Cash flow is insufficient to fund cash needs.

  • Financeable assets are insufficient to protect the bank’s position.

  • Source of debt repayment is dependent on liquidation of assets with a probable loss.

  • Borrower may no longer be a going concern, or may not exist as a going concern for the foreseeable future.

  • No alternative financing sources exist.

The following table presents risk grades and classified loans by class for year ending December 31, 2013 and 2012:

 

December 31, 2013

Commercial Loan Portfolio:  Credit risk profile by internally assigned grade

Commercial
and Industrial

Non-Farm, Non-
Residential Real
Estate Loans

Construction
and
Development

Commercial Loans
Secured by
Residential R/E

All Other
Commercial Loans

Commercial
Loan Totals

  Pass

 $

92,155 

 $

170,585 

 $

29,463 

 $

26,516 

 $

24,131 

 $

342,850 

  Special Mention

836 

3,883 

179 

4,898 

  Substandard

635 

1,745 

475 

424 

1,023 

4,302 

  Doubtful

1,076 

1,249 

2,325 

TOTALS

 $

94,702 

 $

176,213 

 $

29,938 

 $

26,940 

 $

26,582 

 $

354,375 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-25


 

 

 

 

 

 

Retail Loan Portfolio:  Credit risk profiles based on delinquency status classification

Consumer
Loans

Single-Family
Residential**

All Other
Retail Loans

Retail
Loan Totals

  Performing

 $

10,9366 

 $

212,096 

 $

27,643 

 $

250,675 

  Nonperforming*

21 

1,667 

28 

1,716 

TOTALS

 $

10,957 

 $

213,763 

 $

27,671 

 $

252,391 

 

December 31, 2012

Commercial Loan Portfolio:  Credit risk profile by internally assigned grade

Commercial
 and Industrial

Non-Farm, Non-
Residential Real
Estate Loans

Construction
and 
Development

Commercial
Loans
Secured by
Residential R/E

All Other
Commercial Loans

Commercial
Loan Totals

  Pass

 $

81,560 

 $

164,290 

 $

35,543 

 $

21,660 

 $

22,857 

 $

325,910 

  Special Mention

269 

815 

98 

398 

1,580 

  Substandard

726 

2,460 

682 

1,925 

187 

5,980 

  Doubtful

1,076 

1,379 

2,455 

TOTALS

 $

83,631 

 $

167,565 

 $

36,323 

 $

23,983 

 $

24,423 

 $

335,925 

Retail Loan Portfolio:  Credit risk profiles based on delinquency status classification

Consumer
Loans

Single-Family
Residential**

All Other
Retail Loans

Retail
Loan Totals

  Performing

 $

11,610 

 $

192,808 

 $

23,131 

 $

227,549 

  Nonperforming*

11 

3,541 

133 

3,685 

TOTALS

 $

11,621 

 $

196,349 

 $

23,264 

 $

231,234 

 

*Loans are classified as nonperforming loans and are automatically placed on nonaccrual status once they reach 90 days past due.  For purposes of this table all loans graded substandard or below are including in nonperforming.

**Single-family residential loans includes primary liens, closed-end secondary liens, residential construction loans, and home equity lines of credit.

 

NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES

 

Allowance for Possible Loan Losses. The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans.  The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.  The Corporation’s allowance for possible loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.”  Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions.  The Corporation’s process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs.  The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.  The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period.  In other words, the amount of the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-26


 

 

 

 

 

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio.  Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.  While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Corporation’s control, including, among other things, the performance of the Corporation’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

 

The Corporation’s allowance for possible loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Corporation. 

 

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans.  Commercial loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates.  This analysis is performed at the relationship manager level for all commercial loans.  When a loan has a calculated grade of 7 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for possible loan losses to the loan.  Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

 

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off.  The Corporation calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool.  The historical loss ratios are periodically updated based on actual charge-off experience.  A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool.  The Corporation’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.

 

The components of the general valuation allowance include (i) the additional reserves allocated to specific loan portfolio segments as a result of applying an environmental risk adjustment factor to the base historical loss allocation and (ii) the additional reserves that are not allocated to specific loan portfolio segments including allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management.

 

There is an inherent imprecision in calculating the specific portion of the allowance for loan and lease losses (“ALLL”).  Therefore, a factor has been added to the allocation of each of the identified segments of the loan portfolio to account for the imprecision.

 

            Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management.  Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

 

The allowance for loan losses is maintained at a level considered adequate to provide for the losses that can be reasonably anticipated.  Management’s periodic evaluation of the adequacy of the allowance is based on the Corporation’s past loan loss experience, know and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to change.  The Corporation uses a rolling eight quarters historic loss period for all segments when estimating the historic charge off rates calculated in accordance with ASC Topic 450 and incorporates environmental factors for various components such as economic conditions, trends in delinquencies, loan review assessments, credit concentrations and level of underperforming ratios. 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-27


 

 

 

 

 

               

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.  In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the bank’s lending management and staff; (ii) the effectiveness of the Corporation’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of changes to interest rates on portfolio risk.  Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis.  Each component is determined to have either a high, moderate or low degree of risk.  The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.

 

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management.  Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

 

Loans identified as losses by management and internal loan review are charged-off.  Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

                 

The following table summarizes the allocation in the allowance for loan losses by loan segment for the years ended December 31, 2013, 2012 and 2011: 

 

December 31, 2013

Commercial

Residential
Real Estate

Consumer and
Other Retail

Totals

Beginning Balance

 $              7,528

 $             1,109

 $                   172

 $             8,809

Less: Charge-offs

                    222

                     27

                        49

                   298

Add: Recoveries

                      53

                       2

                        29

                     84

Add: Provisions

                      -

                   -

                        -

                        -

Ending Balance

 $              7,359

 $             1,084

 $                   152

 $             8,595

 

December 31, 2012

Commercial

Residential
Real Estate

Consumer and
Other Retail

Totals

Beginning Balance

 $              6,895

 $             2,113

 $                   192

 $          9,200

Less: Charge-offs

                 1,690

                   176

                        19

              1,885

Add: Recoveries

                    364

                       2

                          8

                 374

Add: Provisions

                 1,959

                 (830)

                         (9)

              1,120

Ending Balance

 $            7,528

 $           1,109

 $                  172

 $          8,809

 

 

 

December 31, 2011

Commercial

Residential
Real Estate

Consumer and
Other Retail

Totals

Beginning Balance

 $              7,011

 $             2,001

 $                   408

 $            9,420

Less: Charge-offs

                 3,353

                     52

                      147

               3,552

Add: Recoveries

                    103

                        -

                      104

                  207

Add: Provisions

                 3,134

                   164

                     (173)

               3,125

Ending Balance

 $              6,895

 $             2,113

 $                   192

 $            9,200

 

The following tables detail the amount of the ALLL allocated to each portfolio segment as of December 31, 2013, 2012 and 2011, disaggregated on the basis of the Corporation’s impairment methodology:

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-28


 

 

 

 

 

 

 

December 31, 2013

 Commercial

Residential
Real Estate

Consumer and
Other Retail

 Totals

Loans individually evaluated for impairment

 $               342

 $                118

 $                    11

 $              471

Loans collectively evaluated for impairment

               7,017

                   966

                     141

              8,124

Ending Balance

 $            7,359

 $             1,084

 $                  152

 $           8,595

December 31, 2012

 Commercial

Residential
Real Estate

Consumer and
Other Retail

 Totals

Loans individually evaluated for impairment

 $               221

 $                  82

 $                      -

 $              303

Loans collectively evaluated for impairment

               7,307

                1,027

                     172

              8,506

Ending Balance

 $            7,528

 $             1,109

 $                  172

 $           8,809

December 31, 2011

 Commercial

Residential
Real Estate

Consumer and
Other Retail

 Totals

Loans individually evaluated for impairment

 $            1,111

 $                131

 $                      -

$           1,242

Loans collectively evaluated for impairment

               5,784

                1,982

                     192

              7,958

Ending Balance

 $            6,895

 $             2,113

 $                  192

 $           9,200

 

 

The following table shows loans as of December 31, 2013, 2012 and 2011 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Bank’s impairment methodology:

 

December 31, 2013

 Commercial

Residential
Real Estate

Consumer &
Other Retail

 Totals

Loans individually evaluated for impairment

 $

8,227 

 $

987 

 $

11 

 $

9,225 

Loans collectively evaluated for impairment

346,148 

212,776 

38,617 

597,541 

Ending Balance

 $

354,375 

 $

213,763 

 $

38,628 

 $

606,766 

December 31, 2012

 Commercial

Residential
Real Estate

Consumer &
Other Retail

 Totals

Loans individually evaluated for impairment

 $

7,627 

 $

1,015 

 $

 $

8,642 

Loans collectively evaluated for impairment

328,298 

195,334 

34,885 

558,517 

Ending Balance

 $

335,925 

 $

196,349 

 $

34,885 

 $

567,159 

December 31, 2011

 Commercial

Residential
Real Estate

Consumer &
Other Retail

 Totals

Loans individually evaluated for impairment

 $

12,387 

 $

1,217 

 $

 $

13,604 

Loans collectively evaluated for impairment

268,536 

221,365 

14,297 

504,198 

Ending Balance

 $

280,923 

 $

222,582 

 $

14,297 

 $

517,802 

 

 

NOTE 6 – PREMISES AND EQUIPMENT

 

            The following table presents the Corporation’s assets by category at December 31, 2013 and 2012: 

 

2013

2012

Land

 $

8,223 

 $

9,003 

Premises

22,765 

22,717 

Furniture and equipment

9,367 

9,401 

Leasehold improvements

1,095 

1,319 

41,450 

42,440 

Less allowance for depreciation and amortization

(16,582)

(16,023)

 

 

 $

24,868 

 

 $

26,417 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-29


 

 

 

 

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

            Certain related parties (primarily directors and senior officers of the Corporation or the Bank, including their affiliates, families and companies in which they hold 10% or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business.  An analysis of the activity with respect to such loans for the years ended December 31, 2013 and 2012 is shown in the table below (dollars in thousands).  These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank had a relationship other than the association of one of its directors in the capacity of officer or director.  These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons.  They did not involve more than the normal risk of collectability or present other unfavorable features.  No related party loans were charged off in 2013 or 2012.

 

            Activity for related party transactions during 2013 and 2012 is as follows (dollars in thousands):

 

2013

2012

Related party extensions of credit, beginning of period

 $

3,831 

 $

3,829 

New loans

1,116 

745 

Repayments

(1,125)

(743)

Related party extension of credit, end of period

 $

3,822 

 $

3,831 

 

The aggregate balances of related party deposits at December 31, 2013 and 2012 were $15,724 and $15,984, respectively.

 

The aggregate balances of related party repurchase agreements at December 31, 2013 and 2012 were $9,079 and $8,694, respectively.

 

The Corporation and Bank utilize various services and purchased good provided by certain related parties. Significant services provided by a director during 2013 totaled $38, which was for consulting services.  For 2012, these services totaled $1,105, which was for building contractor services.

           

 

NOTE 8 – LEASES

 

            Real property for four of the Bank’s office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2028.  In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms.  In addition, various items of office equipment are leased under cancelable operating leases.  Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to approximately $18, $12 and $13 for equipment leases and approximately $264, $283 and $236 for building leases in 2013, 2012 and 2011, respectively.  Future minimum lease commitments as of December 31, 2013 under all noncancelable operating leases with initial terms of one year or more are shown in the following table: 

 

Year 

Lease Payments

2014

$                         336

2015

                           347

2016

                           320

2017

                           290

2018

                           290

Thereafter

                        3,942

Total

 $                     5,525

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-30


 

 

NOTE 9 – FEDERAL AND STATE INCOME TAXES

 

 

                The following table presents components of income tax expense attributable to continuing operations for the years ended December 31, 2013, 2012 and 2011:

 

 

2013

2012

2011

    Current

 $

915 

 $

2,256 

 $

1,960 

    Deferred

1,950 

(340)

(1,216)

         Total provision for income taxes

2,865 

1,916 

744 

 

 

 

 

Deferred Tax Effects of Principal Temporary Differences

2013 

2012 

2011 

Allowance for possible loan losses

 $

3,309 

 $

3,392 

 $

3,519 

Deferred compensation

2,516 

2,420 

2,234 

Write down of other real estate

314 

1,152 

1,621 

Deferred gain on OREO sale

188 

202 

Amortization of core deposit intangible

(272)

423 

575 

Recognition of nonaccrual loan income

111 

152 

66 

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

6,613 

(2,212)

(1,892)

Post retirement benefit obligation

1,849 

1,733 

1,643 

Accelerated depreciation

(822)

(630)

(562)

Amortization of goodwill

(2,591)

(2,376)

(2,152)

Alternative Minimum Tax

402 

422 

Dividend Income - F&M West

(372)

(219)

(241)

Prepaid Expenses

(178)

(185)

Other

(304)

(368)

(360)

           Net deferred tax asset

 $

10,905 

 $

3,884 

 $

4,872 

 

 

 

 

Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed at the

   Federal Statutory Rate (34% Each Year)

2013

2012

2011

Tax expense at statutory rate

 $

4,332 

 $

3,238 

 $

2,632 

Increase (decrease) in taxes resulting from:

      Tax exempt interest

(1,144)

(1,275)

(1,533)

       Nondeductible interest expense

18 

29 

45 

       Employee benefits

(196)

(240)

(244)

       Other nondeductible expenses

            (nontaxable income) - net

11 

32 

55 

       State income taxes net of federal tax benefit

                        - 

41 

(40)

       Dividend income exclusion

                       -

(1)

(52)

       Other

(156)

92 

(119)

Total provision for income taxes

 $

2,865 

 $

1,916 

 $

745 

 

 

 

 

Effective tax rate

22.4%

20.1%

9.6%

 

The Corporation and one of its subsidiaries file consolidated income tax returns with the Internal Revenue Service and State of Tennessee.  The Corporation is not subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2010.  There was no valuation allowance for deferred tax assets at December 31, 2013 and 2012.  Management believes it is more-likely-than-not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years. 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-31


 

NOTE 10 – BORROWED FUNDS

 

The Bank is a party to the Blanket Agreement for Advances and Security Agreement (the “Blanket Agreement”) with the Federal Home Loan Bank of Cincinnati (the “FHLB”).  Advances made to the Bank under the Blanket Agreement are collateralized by the FHLB stock and qualifying residential mortgage loans totaling 150% of the outstanding amount borrowed.  These collateralization matters are outlined in the Blanket Agreement dated June 20, 2006 between the Bank and the FHLB.  Outstanding advances at December 31, 2013 and 2012 were $0 and $10,100, respectively.

 

Stock held in the FHLB totaling $3,009 at December 31, 2013 is carried at cost.  The stock is restricted and can only be sold back to the FHLB at par.

 

The Bank has a Cash Management Advance Line of Credit Agreement (the “CMA”) dated June 21, 2010, with the Federal Home Loan Bank.  The CMA is a component of the Blanket Agreement.  The purpose of the CMA is to assist with short-term liquidity management.  Under the terms of the CMA, the Bank may borrow a maximum of $40 million selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days.  There were no borrowings outstanding under the CMA as of December 31, 2013.

 

Short-term borrowings included the following at December 31:

 

2013

2012

 

 

 

Securities sold under repurchase agreements

$       18,095   

$       17,068   

 

Securities sold under agreements to repurchase consist of obligations of the Bank to other parties.  The obligations are secured by investment securities and such collateral is held by in safekeeping by a third party.  The maximum amount of outstanding agreements at any month end during 2013 and 2012 totaled $22,359 and $22,598, respectively, and the monthly average of such agreements totaled $19,052 and $18,657 for 2013 and 2012, respectively.  The agreements at December 31, 2013, mature January 2, 2014.

 

NOTE 11 – SIGNIFICANT ESTIMATES, COMMITMENTS AND CONTINGENCIES

 

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.  Estimates related to the allowance for loan losses are reflected in the footnote regarding loans.  Other significant estimates and concentrations not discussed in those footnotes include:

General Litigation

The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business.  It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Corporation.

Pension and Other Postretirement Benefit Obligations

The Corporation has a noncontributory defined benefit postretirement health care plan whereby it agrees to provide certain postretirement benefits to eligible employees.  The benefit obligation is the actuarial present value of all benefits attributed to service rendered prior to the valuation date based on the projected unit credit cost method.  It is reasonably possible that events could occur that would change the estimated amount of this liability materially in the near term.

All dollar amounts are reported in thousands except share and per share data.

 

F-32


 

 

Current Economic Conditions

The current protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. 

The accompanying financial statements have been prepared using values and information currently available to the Corporation.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Corporation’s ability to meet regulatory capital requirements and maintain sufficient liquidity.  Furthermore, the Corporation’s regulators could require material adjustments to asset values or the allowance for loan losses for regulatory capital purposes that could affect the Corporation’s measurement of regulatory capital and compliance with the capital adequacy guidelines under the regulatory framework for prompt corrective action.

Commitments and Credit Risk

The Corporation grants agribusiness, commercial and residential loans to customers throughout the state.  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.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.  The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.

Commitments to Originate Loans

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Mortgage loans in the process of origination represent amounts that the Corporation plans to fund within a normal period of 30 to 90 days, and which are intended for sale to investors in the secondary market.  Total mortgage loans in process of origination were $407 and $9,488, at December 31, 2013 and 2012, respectively.  Total mortgage loans held for sale amounted to $327 and $2,456, at December 31, 2013 and 2012, respectively.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party.  Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.  Performance standby letters of credit are issued to guarantee performance of certain customers under nonfinancial contractual obligations.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  Should the Corporation be obligated to perform under the standby letters of credit, the Corporation may seek recourse from the customer for reimbursement of amounts paid.

The Corporation had total outstanding standby letters of credit amounting to $11,384 and $9,070, at December 31, 2013 and 2012, respectively, with terms ranging from seven days to 23 years. 

All dollar amounts are reported in thousands except share and per share data.

 

F-33


 

 

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Lines of credit generally have fixed expiration dates.  Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.  Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

At December 31, 2013, the Corporation had granted unused lines of credit to borrowers aggregating approximately $79,150 and $44,318 for commercial lines and open-end consumer lines, respectively.  At December 31, 2012, unused lines of credit to borrowers aggregated approximately $64,455 for commercial lines and $45,302 for open-end consumer lines.

 

NOTE 12 – REGULATORY MATTERS

 

            The Corporation and the Bank are subject to federal regulatory risk-adjusted capital adequacy standards.  Failure to meet capital adequacy requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that could have a material adverse effect on the operating results and financial condition of the Corporation and the Bank.  The applicable regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

            Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Capital and Tier I Capital to risk-weighted assets and of Tier I Capital to average assets.  Actual capital amounts and ratios are presented in the table below (dollars in thousands).  Management believes, as of December 31, 2013, that the Corporation and the Bank met all capital adequacy requirements to which they were subject.

 

For Minimum Capital

For Minimum Regulatory

(Dollars in Thousands)

Actual

Adequacy Purposes

Compliance Purposes

As of December 31, 2013

Amount

Ratio

Amount

Ratio > or =

Amount

Ratio > or =

Total Capital (to Risk Weighted

      Assets)   Consolidated

 $

110,276 

15.3 %

 $

57,632 

8.0 %

 $

                         -

                      Bank

107,392 

15.0 %

57,248 

8.0 %

71,560 

10.0%

Tier I Capital (to Risk Weighted

      Assets)   Consolidated

101,681 

14.1 %

28,816 

4.0 %

-

                      Bank

98,797 

13.8 %

28,624 

4.0 %

42,936 

6.0%

Tier I Capital (to Average

      Assets)   Consolidated

101,681 

9.4 %

43,358 

4.0 %

-

                      Bank

98,797 

9.1 %

43,358 

4.0 %

54,198 

5.0%

As of December 31, 2012

Total Capital (to Risk Weighted

      Assets)   Consolidated

 $

109,011 

15.8 %

 $

55,265 

8.0 %

 $

                         -

                      Bank

106,075 

15.5 %

54,890 

8.0 %

68,613 

10.0%

Tier I Capital (to Risk Weighted

      Assets)   Consolidated

100,338 

14.5 %

27,603 

4.0 %

-

                      Bank

97,402 

14.2 %

27,418 

4.0 %

41,127 

6.0%

Tier I Capital (to Average

      Assets)   Consolidated

100,338 

9.7 %

41,505 

4.0 %

-

                      Bank

97,402 

9.4 %

41,492 

4.0 %

51,865 

5.0%

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-34


 

 

 

 

 

The Corporation is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  At December 31, 2013, approximately $15,022 of retained earnings were available for dividend declaration without prior approval.

 

NOTE 13 – FAIR VALUE MEASUREMENT

 

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability.  Fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs.  In estimating fair value, the Corporation utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.  Such valuation techniques are consistently applied.  Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.  Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

  • Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities.

                                                                                                                                            

  • Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, market consensus, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

  • Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

Recurring Measurements

 

The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2013 and 2012, and by the level within the fair value hierarchy utilized to measure fair value:

 

December 31, 2013       

Available-For-Sale Securities

Level 1

Level 2

Level 3

Total

    U.S. Government agencies

 $

 $

105,072 

 $

 $

105,072 

    U.S. government sponsored agency mortgage backed securities

157,423 

157,423 

    States and political subdivisions

46,337 

46,337 

    Corporate bonds

20,882 

20,882 

    Total assets at fair value

 $

 $

329,714 

 $

 $

329,714 

December 31, 2012

Available-For-Sale Securities

Level 1

Level 2

Level 3

Total

    U.S. Government agencies

 $

 $

144,017 

 $

 $

144,017 

    U.S. government sponsored agency mortgage backed securities

133,718 

133,718 

    States and political subdivisions

50,579 

50,579 

    Corporate bonds

17,404 

17,404 

    Total assets at fair value

 $

 $

345,718 

 $

 $

345,718 

 

The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.  There have been no significant changes in the valuation techniques during the year ended December 31, 2013. 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-35


 

 

Available-for-Sale Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  If quoted market prices are not available, the Corporation obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement.  The Corporation reviews the pricing quarterly to verify the reasonableness of the pricing.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors.  U.S. government agencies, state and political subdivisions, U.S. government sponsored agency mortgage-backed securities and corporate bonds are classified as Level 2 inputs.

 

Nonrecurring Measurements

 

The following table summarizes financial assets measured at fair value on a nonrecurring basis as of December 31, 2013 and December 31, 2012, by the level within the fair value hierarchy utilized to measure fair value:

 

 

Assets measured at fair value on a nonrecurring basis as of December 31, 2013

 

Level 1

Level 2

Level 3

Total

    Impaired loans (collateral-dependent)

 $

 $

 $

2,214 

 $

2,214 

    Other real estate owned

208 

208 

Assets measured at fair value on a nonrecurring basis as of December 31, 2012

 

Level 1

Level 2

Level 3

Total

    Impaired loans (collateral-dependent)

 $

 $

 $

4,840 

 $

4,840 

    Other real estate owned

3,385 

3,385 

 

Impaired Loans (Collateral-Dependent)

 

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell.  Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

 

The Corporation considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value.  Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer.  Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer.  Appraisers are selected from the list of approved appraisers maintained by management.  The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.  These discounts and estimates are developed by the Chief Credit Officer by comparison to historical results.  Fair value adjustments were approximately $79 at December 31, 2013 and $3,300 at December 31, 2012.

 

            Loans considered impaired under ASC 310-35, “Impairment of a Loan,” are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are subject to nonrecurring fair value adjustments to reflect (1) subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral or (2) the full charge-off of the loan carrying value.

 

Other Real Estate Owned

 

Other real estate owned (“OREO”) is initially recorded at fair value at the time of acquisition, as determined by independent appraisal or evaluation by the Corporation, less costs to sell when the real estate is acquired in settlement of loans.  Quarterly evaluations of OREO are performed to determine if there has been any subsequent decline in the value of OREO properties.  Estimated fair value of OREO is based on appraisals or evaluations, less costs to sell.  OREO is classified within Level 3 of the fair value hierarchy.  OREO assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral.  Fair value adjustments were approximately $395 at December 31, 2013 and $1,200 at December 31, 2012.

 

All dollar amounts are reported in thousands except share and per share data.

 

F-36

 


 

 

 

            Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Chief Credit Officer.  Appraisals are required annually and reviewed for accuracy and consistency by the Chief Credit Officer.  The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell.  Appraisers are selected from the list of approved appraisers maintained by management.

 

Unobservable (Level 3) Inputs

 

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements as of December 31, 2013 and 2012:

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2013

Fair Value

Valuation
Technique(s)

Unobservable
Input

Range
(Weighted
Average)

Impaired loans (collateral-dependent)

 $

2,214 

 Market
comparable
properties

 Marketability
discount

 5.0% - 10.0% (7%)

Other real estate/assets owned

 $

208 

 Market
comparable
properties

 Marketability
discount

 5.0% - 10.0% (7%)

 

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2012

Fair Value

Valuation
Technique(s)

Unobservable Input

Range (Weighted Average)

Impaired loans (collateral-dependent)

 $

4,840 

 Market
comparable
properties

 Marketability
discount

 5.0% - 10.0% (7%)

Other real estate/assets owned

 $

3,385 

 Market
comparable
properties

 Marketability
discount

 5.0% - 10.0% (7%)

 

            ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

 

            The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Cash and due from banks – The carrying amount approximates fair value.

 

Interest bearing deposits in other banks – The carrying amount approximates fair value.

 

Federal funds sold – The carrying amount approximates fair value.

 

Securities held-to-maturity – Fair values are based on quoted market prices, if available.  If a quoted price is not available, fair value is estimated using quoted prices for similar securities.  The fair value estimate is provided to management from a third party using modeling assumptions specific to each type of security that are reviewed and approved by management.  Quarterly sampling of fair values provided by additional third parties supplement the fair value review process.

 

Loans held for sale – The fair value is predetermined at origination based on sale price.

 

All dollar amounts are reported in thousands except share and per share data.

 

F-37


 

 

 

 

 

Loans (net of the allowance for loan  losses) – The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  For other variable rate loans, the carrying amount approximates fair value.

 

Federal Home Loan Bank stock – The carrying value of Federal Home Loan Bank (“FHLB”) stock approximates fair value based on the redemption provisions of the FHLB.

 

Federal Reserve Bank stock – The carrying value of Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal Reserve Bank.

 

Accrued interest receivable – The carrying amount approximates fair value.

 

Deposits – The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.  For deposits including demand deposits, savings accounts, NOW accounts, and certain money market accounts, the carrying value approximates fair value.

 

Repurchase agreements – The fair value is estimated by discounting future cash flows using current rates.

 

Advances from FHLB – The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently offered for advances of similar remaining maturities.

 

Accrued interest payable – The carrying amount approximates fair value.

 

Commitments to extend credit and letters of credit – The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.  The fair values of these commitments are not material.

 

The following tables present estimated fair values of the Corporation’s financial instruments as of December 31, 2013 and 2012, and indicate the levels within the fair value hierarchy of the valuation techniques:

 

 

Fair Value Measurements at December 31, 2013 Using

 

Carrying
Amount

Quoted Prices
in Active Markets
for Identical Assets (Level 1)

Significant
Other Observable
Inputs (Level 2)

Significant
Unobservable
Inputs   (Level 3)

Financial assets

      Cash and due from banks

 $

20,391 

 $

20,391 

 $

 $

      Interest-bearing deposits in other banks

25,167 

25,167 

      Federal funds sold

9,850 

9,850 

      Federal Home Loan Bank and Federal Reserve Bank stock

3,879 

3,879 

      Securities available-for-sale

329,714 

329,714 

      Securities held-to-maturity

27,839 

28,595 

      Loans held for sale

327 

327 

      Loans, net

598,171 

607,113 

      Accrued interest receivable

4,183 

4,183 

Financial liabilities

      Non-interest bearing deposits

179,823 

179,823 

     Interest bearing deposits

777,514 

778,682 

      Repurchase agreements

18,095 

18,095 

      Accrued interest payable

663 

663 

Off-balance sheet credit related instruments:

      Commitments to extend credit and letters of credit

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-38


 

 

Fair Value Measurements at December 31, 2012 Using

 

Carrying
Amount

Quoted Prices
in Active Markets
for Identical Assets (Level 1)

Significant
Other Observable
Inputs (Level 2)

Significant
Unobservable
Inputs   (Level 3)

Financial assets

      Cash and due from banks

 $

23,443 

 $

23,443 

 $

 $

      Interest-bearing deposits in other banks

31,953 

31,953 

      Federal funds sold

15,000 

15,000 

      Federal Home Loan Bank and Federal Reserve Bank stock

3,879 

3,879 

      Securities available-for-sale

345,718 

345,718 

      Securities held-to-maturity

31,755 

33,420 

      Loans held for sale

2,456 

2,456 

      Loans, net

558,350 

572,277 

      Accrued interest receivable

4,060 

4,060 

Financial liabilities

      Non-interest bearing deposits

169,136 

169,136 

     Interest bearing deposits

763,713 

766,043 

      Repurchase agreements

17,068 

17,068 

     Advances from Federal Home Loan Bank

10,100 

10,215 

      Accrued interest payable

754 

754 

Off-balance sheet credit related instruments:

      Commitments to extend credit and letters of credit

 

 

NOTE 14 – QUARTERLY RESULTS OF OPERATIONS (Unaudited)

 

The following table presents unaudited quarterly interim financial information for the Corporation for the years ended December 31, 2013 and 2012:  

 

 

 

 

 

First

Second

Third

Fourth

2013

Quarter

Quarter

Quarter

Quarter

Total

Interest income

 $        9,223

 $        9,523

 $         9,328

 $        9,287

 $      37,361

Interest expense

              834

              751

               679

              643

           2,907

Net interest income

           8,389

           8,772

            8,649

           8,644

         34,454

Provision for possible loan losses, net

                   -

                   -

                    -

                   -

                   -

Noninterest income

           3,329

           2,620

            2,509

           2,658

         11,116

Noninterest expenses

           8,105

           8,165

            8,322

           8,237

         32,829

Income before income taxes

           3,613

           3,227

            2,836

           3,065

         12,741

Income taxes

              557

              842

               779

              687

           2,865

Net income

 $        3,056

 $        2,385

 $         2,057

 $        2,378

 $        9,876

Basic earnings per share

             0.59

             0.46

              0.40

             0.47

             1.93

Weighted average shares outstanding per quarter

    5,178,759

    5,133,051

     5,086,469

    5,046,833

    5,110,849

 

 

 

 

 

 

 First

 Second

 Third

 Fourth

2012

 Quarter

 Quarter

 Quarter

 Quarter

 Total

Interest income

 $        9,065

 $        9,095

 $         9,114

 $        9,110

 $      36,384

Interest expense

           1,071

              979

               917

              874

           3,841

Net interest income

           7,994

           8,116

            8,197

           8,236

         32,543

Provision for possible loan losses, net

              600

              520

                    -

                   -

           1,120

Noninterest income

           3,379

           3,360

            2,276

           2,616

         11,631

Noninterest expenses

           7,754

           8,424

            8,145

           9,207

         33,530

Income before income taxes

           3,019

           2,532

            2,328

           1,645

           9,524

Income taxes

              690

              451

               373

              402

           1,916

Net income

 $        2,329

 $        2,081

 $         1,955

 $        1,243

 $        7,608

Basic earnings per share

             0.44

             0.39

              0.37

             0.23

             1.43

Weighted average shares outstanding per quarter

    5,330,000

    5,330,000

     5,328,002

    5,332,893

    5,315,634

 

All dollar amounts are reported in thousands except share and per share data.

 

F-39


 

NOTE 15 – DEPOSITS

 

            The Bank does not have any foreign offices and all deposits are serviced in its 16 domestic offices.  Maturities of time deposits of $100 or more at December 31, 2013 and 2012 are as follows:

 

2013

2012

Under 3 months

 $     31,514

 $       28,504

3 to 12 months

 $     63,429

          64,639

Over 12 months

 $     27,834

          27,018

Total

 $   122,777

 $     120,161

 

 

 

 

The following table presents maturities of interest-bearing time deposits as of December 31, 2013:

 

2014

 $      185,687

2015

 $        25,422

2016

 $        14,712

2017

 $          7,120

2018

 $          5,893

Thereafter

 $                -  

Total

 $      238,834

 

 

 

NOTE 16 – CONDENSED FINANCIAL INFORMATION OF THE CORPORATION

 

            The following tables present the condensed balance sheets, statements of income, comprehensive income, and cash flows of the Corporation as of December 31, 2013 and 2012: 

 

CONDENSED BALANCE SHEETS

 

 

As of December 31,

2013

2012

Cash

 $

23 

 $

61 

Investment in bank subsidiary

99,695 

111,655 

Investment in credit life insurance company

54 

54 

Investment in other securities

17 

17 

Dividends receivable from bank subsidiary

2,058 

1,917 

Cash surrender value - life insurance

4,409 

4,395 

            Total assets

 $

106,256 

 $

118,099 

Liabilities

    Accrued liabilities

 $

1,820 

 $

1,686 

    Dividends payable

1,858 

1,917 

            Total liabilities

3,678 

3,603 

Shareholders' equity

 

 

    Common stock - $10 par value, 8,000,000 shares authorized;

       5,021,012 and 5,180,000 shares issued and outstanding,

      as of December 31, 2013 and December 31, 2012, respectively

50,210 

51,800 

    Retained earnings

61,369 

57,366 

    Accumulated other comprehensive income (loss)

(9,001)

5,330 

            Total shareholders' equity

102,578 

114,496 

            Total liabilities and shareholders' equity

 $

106,256 

 $

118,099 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-40


 

 

CONDENSED STATEMENTS OF INCOME

Years ended December 31,

2013

2012

2011

 Operating income

     Dividends from bank subsidiary

 $

7,663 

 $

7,289 

 $

6,974 

     Other dividend income

15 

18 

15 

     Other

65 

135 

130 

 Operating expenses

(238)

(218)

(199)

             Income before equity in undistributed net

                  income of bank subsidiary

7,505 

7,224 

6,920 

 Equity in undistributed net income of bank subsidiary

2,371 

384 

76 

             Net Income

 $

9,876 

 $

7,608 

 $

6,996 

 

 

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

 

Year Ended December 31,

2013

 

2012

 

2011

Net Income for common shareholders

 $

9,876 

 $

7,608 

 $

6,996 

Other Comprehensive Income (Loss)

Unrealized appreciation (depreciation) on available-for-sale securities, net of tax

expense (benefit) of ($8,507), $1,204, and $2,960

(13,589)

1,923 

4,728 

Reclassification adjustment for realized gains included in net income, net of taxes of
($319), ($883), and ($561), respectively

(510)

(1,411)

(897)

Change in unfunded portion of postretirement benefit obligations, net of tax of ($146),
$1,008 and $1,214, respectively

(232)

1,610 

1,940 

Other Comprehensive Income (Loss)

(14,331)

2,122 

5,771 

Total Comprehensive Income (Loss)

 $

(4,455)

 $

9,730 

 $

12,767 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-41


 

 

 

 

CONDENSED STATEMENTS OF CASH FLOWS

 

 

Years Ended December 31,

2013

2012

2011

Operating activities

    Net income for the year

 $

9,876 

 $

7,608 

 $

6,996 

    Adjustments to reconcile net income to net cash

               provided by operating activities

        Equity in undistributed net income of bank subsidiary

(2,371)

(384)

(76)

        Increase in cash surrender value of life insurance contracts

(65)

(135)

(130)

        (Increase) decrease in other assets

(90)

56 

(1,972)

        Decrease in payables

84 

127 

126 

             Total adjustments

(2,442)

(336)

(2,052)

        Net cash provided by operating activities

7,434 

7,272 

4,944 

Investing activities

        Purchase of single premium life insurance policy

(310)

        Net cash used by investing activities

(310)

Financing activities

       Payment to repurchase common stock

(3,722)

(3,400)

(3,011)

       Cash dividends paid

(3,800)

(3,944)

(1,991)

       Advance from subsidiary

50 

       Net cash used by financing activities

(7,472)

(7,344)

(5,002)

Decrease in cash

(38)

(382)

(58)

Cash at beginning of year

61 

443 

501 

Cash at end of year

 $

23 

 $

61 

 $

443 

 

 

NOTE 17 – EMPLOYEE BENEFIT PLANS

 

            The Bank contributes to a qualified profit-sharing plan covering employees who meet participation requirements.  To be eligible to participate, employees must complete 1,000 hours of service within the twelve month time period following their date of hire.  Employees must be age twenty or older.  The amount of the contribution is at the discretion of the Bank’s Board of Directors, up to the maximum deduction allowed for federal income tax purposes.  Contributions to the plan, which amounted to approximately $1,596, $1,019 and $874 in 2013, 2012 and 2011, respectively, are included in salaries and employee benefits expense.

 

            The Bank formalized a nonqualified salary continuation plan for certain key officers.  In connection with this plan, the value of the single premium universal life insurance policies (approximately $975 at December 31, 2013 and approximately $963 at December 31, 2012) purchased in 1993 to fund the plan and the related liability (approximately $49 at December 31, 2013 and $59 at December 31, 2012) were included in other assets and other liabilities, respectively.  The principal cost of the plan is accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. 

 

            The Corporation and Bank implemented a deferred compensation plan that permits directors to defer their director’s fees and earn interest on the deferred amount in the amount of the wall street journal prime rate plus three percent.  The agreements provide for a lump sum payment or 120 month payments of deferred fees plus accrued interest after retirement, separation from service, or death.  The liability accrued for this plan totaled $6,487 and $6,226 at December 30, 2013 and 2012, respectively.  The charge to expense for the agreements was $722, $853 and $711 for the years ended December 31 2013, 2012 and 2011, respectively.    

 

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

F-42


NOTE 18 – POST RETIREMENT BENEFIT PLAN 

 

 

 

 

Effective July 1, 2013, the Corporation revised its retiree medical benefit plan for employees who were hired before March 27, 2007. Newly retiring employees will no longer be offered medical, dental or life insurance coverage. Instead, qualified retirees will receive a post retirement bonus. The Corporation will pay a post retirement bonus equal to $20,000 to employees (i) who were hired prior to March 20, 2007; (ii) who retire on or after July 1, 2013; (iii) who are at least age 59 ½ at the time of retirement; and (iv) who have at least twenty-five years of service to the Corporation as of retirement. The bonus will be paid in a lump sum cash payment (subject to applicable tax withholding requirements) within 60 days after the employee’s retirement, provided such retirement constitutes a “separation from service” under section 409A of the Internal Revenue Code. The Corporation still sponsors a defined benefit post-retirement health care plan for retirees who retired prior to July 1, 2007.  Under this plan, premiums paid by retirees and spouses depend on date of retirement, age and coverage election. 

 

            The Corporation funding policy is to make the minimal annual contribution that is required by applicable regulations, plus such amounts as the Corporation may determine to be appropriate from time to time.  The Corporation expects to contribute $145 to the plan in 2014.

 

            The following table provides further information about the plan:

 

Post-Retirement Benefits

2013

2012

 

 

Change in benefit obligation

Benefit obligation at beginning of year

 $

7,421 

 $

4,572 

Service cost

138 

91 

Interest cost

292 

351 

Plan participants’ contribution

                          77

(81)

Expected benefits paid

(343)

(128)

Actuarial (gain) loss

(5,220)

2,616 

Amendments

(52)

Benefit obligation at end of year

 $

2,313 

 $

7,421 

Change in fair value of assets

Fair value of plans assets at beginning of year

 $

-  

 $

-  

Employer contribution

77  

(209) 

Plan participants' contributions

                       266 

(105) 

Benefits paid

(343)

(314)

Fair value of plan assets at end of year

 $

 $

Reconciliation of funded status to benefit costs recognized

Projected benefit obligation, end of year

 $

(2,313)

 $

(7,421)

Fair value of assets, end of year

Funded status, end of year

(2,313)

(7,421)

Unrecognized prior service cost

(52)

Unrecognized net loss/(gain)

(2,490)

2,920 

Prepaid/(accrued) benefit cost

(4,855)

(4,501)

 

            Amounts recognized in accumulated other comprehensive income not yet recognized as components of net periodic benefit cost consist of:

 

2013

2012

Unrecognized net actuarial gain/loss

 $

2,490 

 $

2,920 

Unrecognized prior service cost

52 

 $

2,542 

 $

2,920 

   

Amounts recognized in statement of financial position are as follows:

 

2013

2012

Current Liability

 $

183 

 $

266 

Noncurrent liability

4,672 

4,235 

Total

 $

4,855 

 $

4,501 

 

 

           

All dollar amounts are reported in thousands except share and per share data.

 

F-43


 

 

A reconciliation of other comprehensive income is as follows:

 

 

 

Post-Retirement Benefits

2013

2012

2011

Accumulated other comprehensive income beginning of year

 $

2,920 

 $

305 

 $

(2,849)

     Less: loss/(gain) recognized in current year

(190)

205 

     Plus: loss/(gain) incurred in current year

(136)

2,615 

     Plus: prior service cost established in current year

(52)

     Other comprehensive income/(loss)

(378)

2,615 

2,950 

Ending balance (before tax effects)

 $

2,542 

 $

2,920 

 $

305 

Post-Retirement Benefits

Components of net periodic benefit cost:

2013

2012

2011

 

 

 

Service cost

 $

138 

 $

91 

 $

24 

Interest cost

292 

351 

139 

Recognized net actuarial (gain) loss

190 

(205)

Net periodic benefit cost (income)

 $

620 

 $

442 

 $

(42)

 

           

            The estimated net gain for the defined benefits postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $188.

 

Post-Retirement Benefits

Weighted-average assumption used to determine benefit obligation:

2013

2012

Discount rate

 5%

 4%

Rate of compensation increase

 NA

NA

 

 

Post-Retirement Benefits

Weighted-average assumptions used to determine benefit costs:

2013

2012

Discount rate

4%

8%

 

The following table gives the Health Care Cost Trend, which is applied to gross charges, net claims and retiree paid premiums to reflect the Corporation’s past practice and stated ongoing intention to maintain relatively constant cost sharing between the Corporation and retirees:

 

Health care trend rate

2013

2012

     Initial

            Pre-65

11%

11%

            Post-65

7.50%

8%

     Ultimate (pre and post-65

5.00%

5%

     Years to ultimate

            Pre-65

                        6

                   6

            Post-65

                        5

                   6

 

           

All dollar amounts are reported in thousands except share and per share data.

 

F-44

 


 

 

 

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid, net of participant contributions:

 

 

FYE

Company Benefits

2014

 $         183

2015

            167

2016

            178

2017

            169

2018

            191

2019-2025

            935

 

 $      1,823

 

               Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage-point change in assumed health care cost trend rates would have the following effects:

1-Percentage-Point
Increase

1-Percentage-Point
Decrease

Effect on total of service and interest cost

                $     29

                 $  (16)

Effect on postretirement benefit obligation

                     212

                  (109)

 

 

 

 

 

 

 

All dollar amounts are reported in thousands except share and per share data.

 

 

F-45

 

 

 


 

 

 

 

PART IV

Item 15.

Exhibits and Financial Statement Schedules.

   

(a)

Index to Consolidated Financial Statements, Financial Statement Schedules and Exhibits:

   

 

(1)

Consolidated Financial Statements: See Item 8 under Part II, “Financial Statements and Supplementary Data.”

     

 

(2)

Consolidated Financial Statement Schedules: All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes in this report.

     

 

(3)

Exhibits:

     

 

3.1

Charter. (1)

     

 

3.2

Articles of Amendment to Charter. (1)

     

 

3.3

Second Amended and Restated Bylaws, as amended. (2)

     

 

4

Specimen Stock Certificate. (1)

     

 

10.1

Profit Sharing Plan. (3)*

     

 

10.2

First Amendment to Profit Sharing Plan. (3)*

     

 

10.3

Second Amendment to Profit Sharing Plan. (3)*

     

 

10.4

Executive Salary Continuation Agreement by and between First Farmers and Merchants National Bank and Waymon L. Hickman, dated as of December 1, 1992. (3)*

     

 

10.5

Benefits Agreement by and between First Farmers and Merchants Bank and Thomas Randall Stevens, the Bank’s and the Corporation’s Chairman and Chief Executive Officer, dated as of January 26, 2007. (4)*

     

 

10.6

Benefits Agreement by and between John P. Tomlinson, III, the Bank’s and Corporation’s Chief Administrative Officer, dated as of January 29, 2007. (4)*

 

 

 

 

10.7

Form of First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement.(5)*

 

 

 

 

10.8

First Amendment to the First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)*

 

 

 

 

10.9

Form of First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement. (5)*

 

 

 

 

10.10

First Amendment to the First Farmers and Merchants Bank Director Deferred Compensation Agreement with Thomas Randall Stevens, dated as of January 5, 2007. (5)*

 

 

 

 

10.11

First Amendment to the First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)*

 

 

 

 

10.12

Form of First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)*

 

 

 

 

10.13

Form of Amendment to the First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)*

 

 

 

 

10.14

First Farmers & Merchants Bank Group Term Carve-Out Plan, dated as of March 27, 2007. (5)*

 

 

 

3

 


 

 

 

 

 

 

 

 

 

10.15

First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)*

   

 

 

10.16

Amendment to the First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)*

   

 

 

10.17

First Farmers & Merchants Bank Life Insurance Endorsement Method Split Dollar Plan Agreement, dated as of January 7, 2008. (5)*

   

 

 

10.18

Form of First Farmers and Merchants Corporation Director Deferred Compensation Agreement. (5)*

   

 

 

10.19

Form of First Farmers and Merchants Bank Director Deferred Compensation Agreement. (5)*

   

 

 

10.20

First Farmers and Merchants Bank Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)*

   

 

 

10.21

First Farmers and Merchants Corporation Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)*

 

 

 

 

13

Selected sections from Annual Report to Shareholders. (6)

 

 

 

 

21

List of Subsidiaries. (6)

 

 

 

 

31.1

Certification of the Chief Executive Officer of First Farmers and Merchants Corporation pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

31.2

Certification of the Treasurer (principal financial officer) of First Farmers and Merchants Corporation pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32

Certification of the Chief Executive Officer and Treasurer (principal financial officer) of First Farmers and Merchants Corporation pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     
 

101

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) the Consolidated Statements of Income for each of the years ended December 31, 2013,   2012 and 2011; (iii) the Consolidated Statements of Changes in Shareholders’ Equity for each of the years ended December 31, 2013, 2012 and 2011; (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2013, 2012 and 2011; and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. (6)

 

 

 

 

*

Indicates a compensatory plan or arrangement.

 

(1)        Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on May 7, 2004 (File Number 000-10972).

(2)        Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 13, 2011 (File Number 000-10972).

(3)        Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 2 to the Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on July 19, 2004 (File Number 000-10972).

 

4

 

 

 

 

 

 

 

(4)        Incorporated by reference to the First Farmers and Merchants Corporation Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 30, 2007 (File Number 000-10972).

(5)        Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 13, 2009 (File Number 000-10972).

(6)        Included in the Original Filing under the captions “Comparative Performance” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

5

 

 

 

 

 

 

 

SIGNATURES

 

                Pursuant to the requirements of Section 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, thereunto duly authorized.

 

FIRST FARMERS AND MERCHANTS CORPORATION

 By:         /s/ T. Randy Stevens

                T. Randy Stevens

                Chief Executive Officer  

                Date:  September 9, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 


 

 

 

 

EXHIBIT INDEX

FIRST FARMERS AND MERCHANTS CORPORATION

 

 

3.1

Charter. (1)

     

 

3.2

Articles of Amendment to Charter. (1)

     

 

3.3

Second Amended and Restated Bylaws, as amended. (2)

     

 

4

Specimen Stock Certificate. (1)

     

 

10.1

Profit Sharing Plan. (3)*

     

 

10.2

First Amendment to Profit Sharing Plan. (3)*

     

 

10.3

Second Amendment to Profit Sharing Plan. (3)*

     

 

10.4

Executive Salary Continuation Agreement by and between First Farmers and Merchants National Bank and Waymon L. Hickman, dated as of December 1, 1992. (3)*

     

 

10.5

Benefits Agreement by and between First Farmers and Merchants Bank and Thomas Randall Stevens, the Bank’s and the Corporation’s Chairman and Chief Executive Officer, dated as of January 26, 2007. (4)*

     

 

10.6

Benefits Agreement by and between John P. Tomlinson, III, the Bank’s and Corporation’s Chief Administrative Officer, dated as of January 29, 2007. (4)*

 

 

 

 

10.7

Form of First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement.(5)*

 

 

 

 

10.8

First Amendment to the First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)*

 

 

 

 

10.9

Form of First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement. (5)*

 

 

 

 

10.10

First Amendment to the First Farmers and Merchants Bank Director Deferred Compensation Agreement with Thomas Randall Stevens, dated as of January 5, 2007. (5)*

 

 

 

 

10.11

First Amendment to the First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)*

 

 

 

 

10.12

Form of First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)*

 

 

 

 

10.13

Form of Amendment to the First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)*

 

 

 

 

10.14

First Farmers & Merchants Bank Group Term Carve-Out Plan, dated as of March 27, 2007. (5)*

 

 

 

 

10.15

First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)*

   

 

 

10.16

Amendment to the First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)*

   

 

 

10.17

First Farmers & Merchants Bank Life Insurance Endorsement Method Split Dollar Plan Agreement, dated as of January 7, 2008. (5)*

   

 

 

10.18

Form of First Farmers and Merchants Corporation Director Deferred Compensation Agreement. (5)*

 

 

7


 

 

 

 

 

 

 

 

 

 

10.19

Form of First Farmers and Merchants Bank Director Deferred Compensation Agreement. (5)*

   

 

 

10.20

First Farmers and Merchants Bank Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)*

   

 

 

10.21

First Farmers and Merchants Corporation Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)*

 

 

 

 

13

Selected sections from Annual Report to Shareholders. (6)

 

 

 

 

21

List of Subsidiaries. (6)

 

 

 

 

31.1

Certification of the Chief Executive Officer of First Farmers and Merchants Corporation pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

31.2

Certification of the Treasurer (principal financial officer) of First Farmers and Merchants Corporation pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32

Certification of the Chief Executive Officer and Treasurer (principal financial officer) of First Farmers and Merchants Corporation pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     
 

101

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) the Consolidated Statements of Income for each of the years ended December 31, 2013,   2012 and 2011; (iii) the Consolidated Statements of Changes in Shareholders’ Equity for each of the years ended December 31, 2013, 2012 and 2011; (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2013, 2012 and 2011; and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. (6)

 

 

 

 

*

Indicates a compensatory plan or arrangement.

*          Indicates a compensatory plan or arrangement.

(1)        Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on May 7, 2004 (File Number 000-10972).

(2)        Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 13, 2011 (File Number 000-10972).

(3)        Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 2 to the Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on July 19, 2004 (File Number 000-10972).

(4)        Incorporated by reference to the First Farmers and Merchants Corporation Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 30, 2007 (File Number 000-10972).

(5)        Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 13, 2009 (File Number 000-10972).

(6)        Included in the Original Filing under the captions “Comparative Performance” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

8