FIRST CITIZENS
BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
AND 2013
(Dollars in
Thousands)
|
|
|
Nine Months Ended September 30,
|
|
|
|
2014
|
|
2013
|
Net cash provided by operating activities
|
$ 10,793
|
|
$ 7,543
|
Investing activities:
|
|
|
|
|
(Increase) Decrease in interest
bearing deposits in banks
|
(23,394)
|
|
20,402
|
|
Proceeds of maturities of available-for-sale securities
|
36,636
|
|
60,009
|
|
Proceeds of sales of
available-for-sale securities
|
22,845
|
|
29,317
|
|
Purchase of available-for-sale securities
|
(32,655)
|
|
(66,352)
|
|
Increase in loans-net
|
(31,164)
|
|
(43,395)
|
|
Proceeds from sale of other real estate
|
1,030
|
|
648
|
|
Purchases of premises and equipment
|
(2,857)
|
|
(1,357)
|
|
|
Net cash used by investing
activities
|
(29,559)
|
|
(728)
|
Financing activities:
|
|
|
|
|
Net (decrease) increase in
demand accounts
|
(3,815)
|
|
854
|
|
Net (decrease) increase in savings accounts
|
13,714
|
|
(788)
|
|
Net increase (decrease) in time
deposits
|
463
|
|
(16,549)
|
|
Increase in other borrowings
|
5,643
|
|
7,828
|
|
Treasury stock purchases
|
(51)
|
|
(1)
|
|
Cash dividends paid
|
(2,705)
|
|
(2,706)
|
|
Net increase in securities sold under agreements to
repurchase
|
5,483
|
|
1,611
|
|
|
Net cash provided by (used in)
financing activities
|
18,732
|
|
(9,751)
|
Decrease in cash and cash equivalents
|
(34)
|
|
(2,936)
|
Cash and cash equivalents at beginning of period
|
25,249
|
|
28,199
|
Cash and cash equivalents at end of period
|
$25,215
|
|
$25,263
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
Interest payments, net
|
$4,531
|
|
$4,756
|
|
Income taxes paid, net
|
3,125
|
|
3,291
|
|
Transfers from loans to
foreclosed assets
|
1,453
|
|
262
|
|
Transfers from foreclosed assets to loans
|
1,616
|
|
54
|
See accompanying
notes to consolidated financial statements.
7
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of September 30, 2014,
the consolidated statements of income for the three and nine months ended September
30, 2014 and 2013 and the consolidated statements of cash flows for the nine-month
periods then ended have been prepared by First Citizens Bancshares, Inc. (the
Company) without an audit. The accompanying condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations and cash flows
at September 30, 2014 and for all periods presented have been made. Operating
results for the reporting periods presented are not necessarily indicative of
results that may be expected for the year ending December 31, 2014. For
further information, refer to the audited consolidated financial statements and
footnotes in the Companys Registration Statement on Form S-4/A filed with the
Securities and Exchange Commission on August 21, 2014 (File No. 333-197512).
Certain prior year balances have
been reclassified to conform to current year presentation. The consolidated
financial statements include all accounts of the Company, and its subsidiary,
First Citizens National Bank (the Bank). First Citizens (TN) Statutory
Trusts III and IV are reported under the equity method in accordance with
generally accepted accounting principles for Variable Interest Entities for all
periods presented. These investments are included in other assets and the
proportionate share of income (loss) is included in other non-interest income.
The Bank also has two wholly owned subsidiaries, First Citizens Financial Plus,
Inc. and First Citizens Investments, Inc., which are consolidated into its
financial statements.
The principal activity of First
Citizens Investments, Inc. is to acquire and sell investment securities and
collect income from the securities portfolio. First Citizens Holdings, Inc., a
wholly owned subsidiary of First Citizens Investments, Inc., acquires and sells
certain investment securities, collects income from its portfolio, and owns
First Citizens Properties, Inc., a real estate investment trust. First
Citizens Properties, Inc. is a real estate investment trust organized and
existing under the laws of the state of Maryland, the principal activity of
which is to invest in participation interests in real estate loans made by the
Bank and provide the Bank with an alternative vehicle for raising capital.
First Citizens Holdings, Inc. owns 100% of the outstanding common stock and 60%
of the outstanding preferred stock of First Citizens Properties, Inc.
Directors, executive officers and certain employees and affiliates of the Bank
own approximately 40% of the preferred stock which is reported as
Noncontrolling Interest in Consolidated Subsidiary in the Consolidated
Financial Statements of the Company. Net income (loss) attributable to the
noncontrolling interest is included in Other Non-Interest Expense on the
Consolidated Statements of Income and is not material for any of the periods
presented.
The Bank has a 50% ownership
interest in two insurance subsidiaries both of which are accounted for using
the equity method. One is White and Associates/First Citizens Insurance, LLC,
which is a general insurance agency offering a full line of insurance
products. The other is First Citizens/White and Associates Insurance Company
whose principal activity is credit insurance. On September 29, 2014, the
credit insurance company, First Citizens/White and Associates Insurance Company,
was dissolved and assets are in process of liquidation as of September 30,
2014. The investment in these subsidiaries is included in Other Assets on the
Balance Sheets presented in this report and earnings from these subsidiaries
are recorded in Other Income on the Income Statements presented in this
report.
On October 1, 2014, by virtue of
the merger of its parent company, Southern Heritage Bancshares, Inc. (Southern
Heritage), into the Company, Southern Heritage Bank became a wholly-owned subsidiary
of the Company. Southern Heritage Bank was not a subsidiary of the Company at
any time during the periods reported in this Quarterly Report on Form 10-Q.
8
Note 2 - Organization
First Citizens Bancshares,
Inc., is a bank holding company chartered December 14, 1982, under the laws of
the State of Tennessee. On September 23, 1983, all outstanding shares of common
stock of First Citizens National Bank were exchanged for an equal number of
shares in First Citizens Bancshares, Inc.
Note
3 Contingent Liabilities
There is no material
pending or threatened litigation as of the current reportable date that would
result in a liability.
Note 4 -- Cash Reserves and
Interest-Bearing Deposits in Other Banks
The Bank maintains cash reserve
balances as required by the Federal Reserve Bank. Average required balances
during third quarter ended September 30, 2014 and the year ended December 31,
2013 were approximately $500,000. Amounts above the required minimum balance
are reported as Interest-Bearing Deposits in Other Banks on the Consolidated
Balance Sheets. Balances in excess of required reserves held at the Federal
Reserve Bank as of September 30, 2014 and December 31, 2013 were $43.2 million
and $19.8 million, respectively. Interest-bearing deposits in other banks also
include short-term certificates of deposit held in increments that are within
FDIC insurance limits and totaled $2.1 million as of September 30, 2014 and $2.0
million as of December 31, 2013.
Note
5 Investment Securities
The amortized cost and fair value of securities as of September
30, 2014 and December 31, 2013 were as follows:
|
Amortized
Cost |
|
Gross
Unrealized Gains |
|
Gross
Unrealized Losses |
|
Fair Value |
As of September 30, 2014:
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S.
government agencies and corporations |
$292,051 |
|
$3,183 |
|
$(5,217) |
|
$290,017 |
Obligations of states and
political subdivisions |
139,060 |
|
8,920 |
|
(269) |
|
147,711 |
All other |
10 |
|
51 |
|
- |
|
61 |
Total investment
securities |
$431,121 |
|
$12,154 |
|
$(5,486) |
|
$437,789 |
As of December 31, 2013:
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S.
government agencies and corporations |
$326,272 |
|
$2,927 |
|
$ (7,496) |
|
$321,703 |
Obligations of states and
political subdivisions |
130,813 |
|
5,338 |
|
(1,400) |
|
134,751 |
All other |
23 |
|
48 |
|
- |
|
71 |
Total investment
securities |
$457,108 |
|
$8,313 |
|
$(8,896) |
|
$456,525 |
There were no securities classified as trading or
held-to-maturity as of September 30, 2014 or December 31, 2013.
The following table summarizes contractual maturities of
debt securities available-for-sale as of September 30, 2014 (in thousands):
9
|
|
Amortized Cost |
|
Fair Value |
|
Amounts maturing in: |
|
|
|
|
|
One year or less
|
|
$2,547 |
|
$2,578 |
|
After one year through five years
|
|
17,054 |
|
17,999 |
|
After five years through ten years
|
|
69,750 |
|
73,550 |
|
After ten years*
|
|
341,760 |
|
343,601 |
|
Total debt securities
|
|
$431,111 |
|
$437,728 |
|
Equity securities |
|
10 |
|
61 |
|
Total securities
|
|
$431,121 |
|
$437,789 |
|
10
Sales and gains (losses) on sale
of available-for-sale securities for the nine months ended September 30, 2014
and 2013 are presented as follows (in thousands):
|
Gross Sales |
Gross Gains |
|
Gross Losses |
|
Net Gains |
2014 |
|
$22,845 |
|
$1,385 |
|
$ (94) |
|
$1,291 |
2013 |
|
$29,317 |
|
$303 |
|
$ - |
|
$ 303 |
The following table presents
information on securities with gross unrealized losses as of September 30,
2014, aggregated by investment category and the length of time that the
individual securities have been in a continuous loss position (in thousands):
|
Less Than 12 Months |
|
Over 12 Months |
|
Total |
|
Gross
Unrealized Losses |
|
Fair Value |
|
Gross
Unrealized Losses |
|
Fair Value |
|
Gross
Unrealized Losses |
|
Fair Value |
Securities Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations |
$(445) |
|
$43,642 |
|
$(4,772) |
|
$122,095 |
|
$(5,217) |
|
$165,737 |
Obligations of states and political subdivisions
|
(3) |
|
550 |
|
(266) |
|
11,555 |
|
(269) |
|
12,105 |
Other debt securities
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
Total securities with unrealized losses
|
$(448) |
|
$44,192 |
|
$(5,038) |
|
$133,650 |
|
$(5,486) |
|
$177,842 |
In reviewing the investment portfolio for
other-than-temporary impairment of individual securities, consideration is
given but not limited to (1) the length of time in which fair value has been
less than cost and the extent of the unrealized loss, (2) the financial condition
of the issuer, and (3) the positive intent and ability of the Company to
maintain its investment in the issuer for a time that would provide for any
anticipated recovery in the fair value.
As of September 30, 2014, the Company had 74 debt
securities with unrealized losses, with 59 of those securities having been in
an unrealized loss position for greater than 12 months. The Company did not
intend to sell any such securities in unrealized loss position and it was more
likely than not that the Company would not be required to sell the securities
prior to recovery of costs. Aggregate unrealized losses totaled 1.24% of
amortized cost of the total portfolio. All bonds in an unrealized loss
position as of September 30, 2014 were less than 10% of book value on an
individual basis and averaged less than 3%. Securities in an unrealized loss
position as of September 30, 2014 have been evaluated for other-than-temporary
impairment. In analyzing reasons for the unrealized losses, management
considers various factors including, but not limited to, whether the securities
are issued by the federal government or its agencies, or whether downgrades of
bond ratings have occurred, and also reviews any applicable industry analysts
reports. With respect to unrealized losses on municipal and agency and the
analysis performed relating to those securities, management believes that
declines in market value were entirely the result of market factors primarily related
to the fluctuations in the market yield curve between the time of purchase and
as of the current period end and concluded there were no other-than-temporary
losses as of September 30, 2014. For this reason, no other-than-temporary
impairment has been recognized in earnings for the three or nine months ended September
30, 2014.
The Company held no derivative securities
as of September 30, 2014 or December 31, 2013.
Note 6 -- Loans
Performing and non-performing
loans by category were as follows as of September 30, 2014 and December 31,
2013 (in thousands):
11
|
Performing |
|
Non- Performing* |
|
Total |
September 30,
2014: |
|
|
|
|
|
Commercial,
financial and agricultural |
$106,225
|
|
$206
|
|
$106,431
|
Real estate
construction |
55,727
|
|
745
|
|
56,472
|
Real estate
mortgage |
406,772
|
|
6,344
|
|
412,234
|
Installment
loans to individuals |
24,066
|
|
37
|
|
24,103
|
All other loans
|
12,680
|
|
0
|
|
12,680
|
Total
|
$605,470
|
|
$7,332
|
|
$611,920
|
December 31, 2013: |
|
|
|
|
|
Commercial, financial and agricultural
|
$81,089
|
|
$668
|
|
$ 81,757
|
Real estate construction
|
46,313
|
|
646
|
|
46,959
|
Real estate mortgage
|
406,082
|
|
7,153
|
|
413,235
|
Installment loans to individuals
|
24,743
|
|
64
|
|
24,807
|
All other loans
|
13,477
|
|
-
|
|
13,478
|
Total
|
$ 571,704
|
|
$8,531
|
|
$580,236
|
_________________
*Non-Performing
loans consist of loans that are on non-accrual status and loans 90 days past
due and still accruing interest.
An aging analysis of loans
outstanding by category as of September 30, 2014 and December 31, 2013 was as
follows (in thousands):
|
30-59 Days
Past Due |
|
60-89 Days
Past Due |
|
Greater Than
90 Days |
|
Total
Past Due |
|
Current
|
|
Total Loans
|
|
Recorded
Investment > 90 Days and
A ccruing |
As of September 30, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$ 136
|
|
$107
|
|
$ 48
|
|
$ 291
|
|
$106,140
|
|
$106,431
|
|
$ 1
|
Real estate construction
|
52
|
|
0
|
|
260
|
|
312
|
|
56,160
|
|
56,472
|
|
-
|
Real estate mortgage
|
3,537
|
|
328
|
|
4,215
|
|
8,080
|
|
404,154
|
|
412,234
|
|
-
|
Installment loans to individuals
|
235
|
|
44
|
|
1
|
|
280
|
|
23,823
|
|
24,103
|
|
-
|
All other loans
|
0
|
|
0
|
|
0
|
|
0
|
|
12,680
|
|
12,680
|
|
-
|
Total
|
$3,960
|
|
$479
|
|
$4,524
|
$8,963
|
|
$602,957
|
|
$611,920
|
|
$ 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
$305
|
|
$117
|
|
$596
|
|
$1,018
|
|
$80,739
|
|
$81,757
|
|
$ -
|
Real estate construction
|
263
|
|
25
|
|
53
|
|
341
|
|
46,618
|
|
46,959
|
|
53
|
Real estate mortgage
|
3,157
|
|
2,116
|
|
2,845
|
|
8,118
|
|
405,117
|
|
413,235
|
|
88
|
Installment loans to individuals
|
99
|
|
3
|
|
13
|
|
115
|
|
24,692
|
|
24,807
|
|
8
|
All other loans
|
-
|
|
-
|
|
-
|
|
-
|
|
13,478
|
|
13,478
|
|
-
|
Total
|
$3,824
|
|
$2,261
|
|
$3,507
|
|
$9,592
|
|
$570,644
|
|
$580,236
|
|
$149
|
12
Loans on
non-accrual status as of September 30, 2014 and December 31, 2013 by category
were as follows (in thousands):
|
September 30, 2014 |
|
December 31, 2013 |
Commercial, financial and agricultural
|
$ 206
|
|
$ 668
|
Real estate construction
|
745
|
|
593
|
Real estate mortgage
|
6,344
|
|
7,065
|
Installment loans to individuals
|
37
|
|
56
|
All other loans
|
-
|
|
-
|
Total
|
$7,332
|
|
$8,382
|
Credit risk management procedures
include assessment of loan quality through use of an internal loan rating
system. Each loan is assigned a rating upon origination and the rating may be
revised over the life of the loan as circumstances warrant. The rating system
utilizes eight major classification types based on risk of loss with Grade 1
being the lowest level of risk and Grade 8 being the highest level of risk.
Loans internally rated Grade 1 to Grade 4 are considered Pass grade loans
with low to average level of risk of credit losses. Loans rated Grade 5 are
considered Special Mention and generally have one or more circumstances that
require additional monitoring but do not necessarily indicate a higher level of
probable credit losses. Loans rated Grade 6 or higher are loans with
circumstances that generally indicate an above average level of risk for credit
losses. Loans by internal risk rating by category as of September 30, 2014 and
December 31, 2013 were as follows (in thousands):
|
Grades 1-4
|
|
Grade 5
|
|
Grades 6-8
|
|
Total
|
September 30,
2014: |
|
|
|
|
|
|
|
Commercial,
financial and agricultural |
|
$106,101
|
|
$ 128
|
|
$ 202
|
|
$106,431
|
Real estate
construction |
|
53,673
|
|
-
|
|
2,799
|
|
56,472
|
Real estate
mortgage |
|
396,714
|
|
1,441
|
|
14,079
|
|
412,234
|
Installment
loans to individuals |
|
24,007
|
|
-
|
|
96
|
|
24,103
|
All other loans
|
|
12,680
|
|
-
|
|
-
|
|
12,680
|
Total
|
|
$593,175
|
|
$ 1,569
|
|
$ 17,176
|
|
$611,920
|
|
|
|
|
|
|
|
|
|
December 31,
2013: |
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural |
|
$ 80,639
|
|
$ 267
|
|
$ 851
|
|
$ 81,757
|
Real estate
construction |
|
42,486
|
|
611
|
|
3,862
|
|
46,959
|
Real estate
mortgage |
|
394,749
|
|
1,645
|
|
16,841
|
|
413,235
|
Installment
loans to individuals |
|
24,662
|
|
-
|
|
145
|
|
24,807
|
All other loans
|
|
13,478
|
|
-
|
|
-
|
|
13,478
|
Total
|
|
$556,014
|
|
$ 2,523
|
|
$ 21,699
|
|
$580,236
|
|
|
|
|
|
|
|
|
|
Information regarding the Companys impaired loans for
the quarter ended September 30, 2014 and 2013 is as follows (in thousands):
13
|
Recorded Investment |
Unpaid Principal Balance |
Specific Allowance |
Average Recorded Investment |
Interest Income Recognized |
September 30,
2014: |
|
|
|
|
|
With no
specific allocation recorded: |
|
|
|
|
|
Commercial,
financial and agricultural |
$ -
|
$ -
|
N/A
|
$ -
|
$ -
|
Real estate
construction |
201
|
201
|
N/A
|
264
|
-
|
Real estate
mortgage |
1,305
|
1,409
|
N/A
|
1,420
|
31
|
Installment
loans to individuals |
5
|
5
|
N/A
|
7
|
-
|
All other loans
|
-
|
-
|
N/A
|
-
|
-
|
With
allocation recorded: |
|
|
|
|
|
Commercial,
financial and agricultural |
$ -
|
$ -
|
$ -
|
$ 375
|
$ -
|
Real estate
construction |
156
|
156
|
79
|
100
|
4
|
Real estate
mortgage |
2,521
|
2,621
|
403
|
3,672
|
5
|
Installment
loans to individuals |
-
|
-
|
-
|
-
|
-
|
All other loans
|
-
|
-
|
-
|
-
|
-
|
Total:
|
|
|
|
|
|
Commercial,
financial and agricultural |
$ -
|
$ -
|
$ -
|
$ 375
|
$ -
|
Real estate
construction |
357
|
357
|
79
|
364
|
4
|
Real estate mortgage
|
3,826
|
4,030
|
403
|
5,092
|
36
|
Installment
loans to individuals |
5
|
5
|
-
|
7
|
-
|
All other loans
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
September 30,
2013 |
|
|
|
|
|
With no
specific allocation recorded: |
|
|
|
|
|
Commercial,
financial and agricultural |
$ -
|
$ -
|
N/A
|
$ 35
|
$ -
|
Real estate
construction |
442
|
442
|
N/A
|
633
|
6
|
Real estate
mortgage |
1,611
|
1,611
|
N/A
|
2,504
|
20
|
Installment
loans to individuals |
4
|
4
|
N/A
|
6
|
-
|
All other loans
|
-
|
-
|
N/A
|
-
|
-
|
With
allocation recorded: |
|
|
|
|
|
Commercial, financial
and agricultural |
$ 534
|
$ 534
|
$ 71
|
$ 845
|
$ -
|
Real estate
construction |
101
|
101
|
10
|
172
|
-
|
Real estate mortgage
|
5,028
|
5,028
|
1,023
|
5,503
|
4
|
Installment
loans to individuals |
18
|
18
|
6
|
8
|
-
|
All other loans
|
-
|
-
|
3
|
-
|
-
|
Total:
|
|
|
|
|
|
Commercial,
financial and agricultural |
$ 534
|
$ 534
|
$ 71
|
$ 880
|
$ -
|
Real estate
construction |
543
|
543
|
10
|
805
|
6
|
Real estate
mortgage |
6,639
|
6,639
|
1,023
|
8,007
|
24
|
Installment
loans to individuals |
22
|
22
|
6
|
14
|
-
|
All other loans
|
-
|
-
|
3
|
-
|
-
|
Loans that were restructured as
of September 30, 2014 consisted of the following (dollars in thousands):
|
Number of
Contracts |
|
Pre-Modification
Outstanding Recorded
Investment |
|
Post-Modification
Outstanding Recorded
Investment |
Troubled debt
restructurings: |
|
|
|
|
|
Commercial,
financial and agricultural |
7
|
|
$474
|
|
$333
|
Real estate
construction |
9
|
|
1,287
|
|
1,026
|
Real estate
mortgage |
27
|
|
4,892
|
|
4,130
|
Installment
loans to individuals |
18
|
|
140
|
|
61
|
All other
loans |
0
|
|
0
|
|
0
|
Total
|
61
|
|
$6,793
|
|
$5,550
|
14
The modification of terms in the troubled
debt restructurings reported in the above table did not have a material impact
on the consolidated financial statements or to the overall risk profile of the
loan portfolio. One loan with a recorded investment of approximately $21,000
that was modified in a troubled debt restructuring during the year ended
December 31, 2013 defaulted during the nine months ended September 30, 2014.
The allowance for loan losses associated with the troubled debt restructurings totaled
approximately $353,000 as of September 30, 2014.
Note 7 Allowance for Loan
Losses
The following table presents the
breakdown of the allowance for loan losses by category and the percentage of
each category in the loan portfolio to total loans as of September 30, 2014 and
December 31, 2013 (dollars in thousands):
|
September 30, 2014 |
December 31, 2013 |
|
Amount |
% to Total Loans |
Amount |
% to Total Loans |
Commercial, financial and agricultural
|
$1,074 |
17.37% |
$1,221
|
14.09% |
Real estate construction
|
1,276 |
9.22% |
1,521
|
8.09% |
Real estate mortgage
|
4,559 |
67.41% |
4,752
|
71.22% |
Installment loans to individuals
|
327 |
3.93% |
243
|
4.28% |
All other loans
|
314 |
2.07% |
81
|
2.32% |
Total
|
$7,550 |
100.00% |
$7,818
|
100.0%
|
An analysis of the allowance for
loan losses by loan category for the nine months ended September30, 2014 is as
follows (in thousands):
|
Beginning Balance
|
|
Charge-offs
|
|
Recoveries
|
|
Provision
|
|
Ending Balance
|
Allowance for
loan losses: |
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural |
$1,221
|
|
($ 244) |
|
$ 84 |
|
$ 13
|
|
$1,074 |
Real estate
construction |
1,521
|
|
(2) |
|
20 |
|
(263) |
|
1,276 |
Real estate
mortgage |
4,752
|
|
(672) |
|
52 |
|
427 |
|
4,559 |
Installment
loans to individuals |
243
|
|
(76) |
|
34 |
|
126 |
|
327 |
All other loans
|
81
|
|
(279) |
|
190 |
|
322 |
|
314 |
Total
|
$7,818
|
|
($1,273) |
|
$380 |
|
$625 |
|
$7,550 |
The allowance for loan losses is
comprised of allocations for loans evaluated individually and loans evaluated
collectively for impairment. The allocations of the allowance for loan losses
for outstanding loans by category evaluated individually and collectively were
as follows as of September 30, 2014 and December 31, 2013 (in thousands):
15
|
Evaluated |
|
Evaluated |
|
|
|
Individually |
|
Collectively |
|
Total |
As of September 30, 2014: |
|
|
|
|
|
Allowance for loan losses |
|
|
|
|
|
Commercial, financial and agricultural
|
$ -
|
|
$1,074 |
|
$1,074 |
Real estate construction
|
79 |
|
1,197 |
|
1,276 |
Real estate mortgage
|
402 |
|
4,157 |
|
4,559 |
Installment loans to individuals
|
- |
|
327 |
|
327 |
All other loans
|
- |
|
314 |
|
314 |
Total
|
$481 |
|
$7,069 |
|
$7,550 |
Loans |
|
|
|
|
|
Commercial, financial and agricultural
|
$ -
|
|
$106,431 |
|
$106,431 |
Real estate construction
|
364
|
|
56,108 |
|
56,472 |
Real estate mortgage
|
3,838
|
|
408,396 |
|
412,234 |
Installment loans to individuals
|
-
|
|
24,103 |
|
24,103 |
All other loans
|
6
|
|
12,674 |
|
12,680 |
Total
|
$4,208
|
|
$607,712 |
|
$611,920 |
As of December 31, 2013: |
|
|
|
|
|
Allowance for loan losses |
|
|
|
|
|
Commercial, financial and agricultural
|
$ 50
|
|
$ 1,171
|
|
$ 1,221
|
Real estate construction
|
90
|
|
1,431
|
|
1,521
|
Real estate mortgage
|
847
|
|
3,905
|
|
4,752
|
Installment loans to individuals
|
-
|
|
243
|
|
243
|
All other loans
|
-
|
|
81
|
|
81
|
Total
|
$ 987
|
|
$6,831
|
|
$ 7,818
|
Loans |
|
|
|
|
|
Commercial, financial and agricultural
|
$500
|
|
$ 81,257
|
|
$ 81,757 |
Real estate construction
|
518
|
|
46,441
|
|
46,959 |
Real estate mortgage
|
6,466
|
|
406,769
|
|
413,235 |
Installment loans to individuals
|
15
|
|
24,792
|
|
24,807 |
All other loans
|
-
|
|
13,478
|
|
13,478 |
Total
|
$7,499
|
|
$572,737
|
|
$580,236 |
Note
8 Goodwill and Intangible Assets
Goodwill is not amortized and is tested for impairment
annually or more frequently if events and circumstances indicate that the asset
might be impaired. The goodwill impairment test is conducted in first quarter
annually and is a two-step test. The first step, used to identify potential
impairment, involves comparing each reporting units estimated fair value to
its carrying value, including goodwill. Currently the Company has one
reporting unit and does not meet the tests to segment under generally accepted
accounting standards. If the estimated fair value of the reporting unit
exceeds its carrying value, goodwill is considered not to be impaired. If the
carrying value exceeds estimated fair value, there is an indication of
potential impairment and the second step is performed to measure the amount of
impairment.
16
If required, the second step involves calculating an
implied fair value of goodwill which is determined in a manner similar to the
amount of goodwill calculated in a business combination, by measuring the
excess of the estimated fair value of the reporting unit, as determined in the
first step, over the aggregate estimated fair values of the individual assets,
liabilities and identifiable intangibles as if the reporting unit was being
acquired in a business combination. If the implied fair value of goodwill
exceeds the carrying value of goodwill assigned to the reporting unit, there is
no impairment. If the carrying value of goodwill exceeds the implied fair
value of the goodwill, an impairment charge is recorded for the excess. An
impairment loss cannot exceed the carrying value of goodwill.
The Companys common stock price has historically traded
above its book value per common share and tangible book value per common share
and was trading above its book value per common share and tangible book value
per common share as of September 30, 2014. In the event the stock price were
to trade below its book value per common share and tangible book value per
common share, an evaluation of the carrying value of goodwill would be
performed as of the reporting date. Such a circumstance would be one factor in
an evaluation that could result in an eventual goodwill impairment charge.
Additionally, should future earnings and cash flows decline and/or discount
rates increase, an impairment charge to goodwill and other intangible assets
may also be required.
No impairment of goodwill is recorded in the current or
prior reportable periods. Total goodwill as of the reportable date is $13.7
million or 1.13% of total assets or 11.14% of total capital.
Amortization expense of the other
identifiable intangibles was approximately $32,000 for the nine months ended September
30, 2014 and 2013, respectively.
Note
9 Borrowings
In March 2005, the Company formed a wholly owned
subsidiary -- First Citizens (TN) Statutory Trust III. The trust was created
as a Delaware statutory trust for the sole purpose of issuing and selling trust
preferred securities and using proceeds from the sale to acquire long-term subordinated
debentures issued by the Company. The debentures are the sole assets of the
trust. The Company owns 100% of the common stock of the trust.
On March 17, 2005, the Company, through First Citizens
(TN) Statutory Trust III, sold 5,000 of its floating rate trust preferred
securities at a liquidation amount of $1,000 per security for an aggregate
amount of $5.0 million. For the period beginning on (and including) the date
of original issuance and ending on (but excluding) June 17, 2005, the rate per
annum was 4.84%. For each successive period beginning on (and including) June
17, 2005, and each succeeding interest payment date, interest accrues at a rate
per annum equal to the three-month LIBOR plus 1.80%. Interest payment dates
are March 17, June 17, September 17, and December 17 during the 30-year term.
The entire $5.0 million in proceeds was used to reduce other debt at the
Company. The Companys obligation under the debentures and related documents
constitute a full and unconditional guarantee by the Company of the trust
issuers obligations under the trust preferred securities.
In March 2007, the Company formed a wholly owned
subsidiary -- First Citizens (TN) Statutory Trust IV. The trust was created as
a Delaware statutory trust for the sole purpose of issuing and selling trust
preferred securities and using proceeds from the sale to acquire long-term
subordinated debentures issued by the Company. The debentures are the sole
assets of the trust. The Company owns 100% of the common stock of the trust.
In March 2007, the Company, through First Citizens (TN)
Statutory Trust IV, sold 5,000 of its floating rate trust preferred securities
at a liquidation amount of $1,000 per security for an aggregate amount of $5.0
million. For the period beginning on (and including) the date of original
issuance and ending on (but excluding) June 15, 2007, the rate per annum was
7.10%. For each successive period beginning on (and including) June 15, 2007,
and each succeeding interest payment date, interest accrues at a rate per annum
equal to the three-month LIBOR plus 1.75%. Interest payment dates are March
15, June 15, September 15, and December 15 during the 30-year term. The
purpose of proceeds was to refinance the debt issued through First Citizens (TN)
Statutory Trust II at a lower spread to LIBOR and results in savings of
approximately $92,500 annually. First Citizens (TN) Statutory Trust II was
dissolved as a result of this transaction. The Companys obligation under the
debentures and related documents constitute a full and unconditional guarantee
by the Company of the trust issuers obligations under the trust preferred
securities.
17
Although for accounting presentation the trust preferred
securities are presented as debt, the outstanding balance qualifies as Tier I
capital subject to the limitation that the amount of the securities included in
Tier I Capital cannot exceed 25% of total Tier I capital.
The Company is dependent on the profitability of its
subsidiaries and their ability to pay dividends in order to service its
long-term debt.
The Bank had secured advances from the FHLB totaling $46.5
million as of September 30, 2014 and $40.9 million as of December 31, 2013.
FHLB borrowings are comprised primarily of advances with principal due at call
date or maturity date with fixed interest rates ranging from 0.54% to 7.05%.
Some of these FHLB borrowings have quarterly call features and maturities
ranging from 2014 to 2023. Advances totaling $14 million require repayment if
the call feature is exercised. Under the existing and forecasted rate
environments, borrowings with call features in place are not likely to be
called in the next 12 months. Obligations are secured by loans totaling $389
million consisting of the Banks entire portfolio of fully disbursed,
one-to-four family residential mortgages, commercial mortgages, farm mortgages,
second mortgages and multi-family residential mortgages. The Bank had
additional borrowing capacity with the FHLB of $95.1 million as of September
30, 2014.
Note 10 Bank Owned Life Insurance and Imputed
Income Tax Reimbursement Agreements
The Bank has a significant
investment in bank-owned life insurance policies (BOLI) and provides
endorsement split dollar life insurance to certain employees in the position of
Vice President and higher after one year of service. The cash surrender values
of BOLI were $22.8 million and $22.5 million as of September 30, 2014 and
December 31, 2013, respectively. BOLI is initially recorded at the amount of
premiums paid and is adjusted to current cash surrender values. Changes in
cash surrender values are recorded in other non-interest income and are based
on premiums paid less expenses plus accreted interest income. Earnings on BOLI
resulted in non-interest income of approximately $441,000 and $465,000 for the nine
months ended September 30, 2014 and 2013, respectively.
Post-retirement death benefits
for endorsement split dollar life insurance plans are accounted for in
accordance with FASB ASC Subtopic 715-60, Compensation Retirement Benefits
Defined Benefit Plans Postretirement. Expense for accrual of such benefits
is reflected in Salaries and Employee Benefits on the Consolidated Statements
of Income and was approximately $168,000 and $100,000 for the nine months ended
September 30, 2014 and 2013, respectively. The accrued liability for
post-retirement death benefits is included in Other Liabilities on the
Consolidated Balance Sheet and totaled $2.7 million and $2.6 million as of September
30, 2014 and December 31, 2013, respectively.
Note 11 Fair Value Measurements
Fair value measurements are used
to record fair value adjustments to certain assets and liabilities and to
determine fair value disclosures. The Company measures fair value under
guidance provided by the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 820, Fair Value Measurements and
Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework
for measuring fair value and expands disclosure requirements regarding fair
value measurements. ASC 820 does not expand the use of fair value in any new
circumstances but clarifies the principle that fair value should be based on
assumptions that market participants would use when pricing the asset or
liability. ASC 820 outlines the following three acceptable valuation techniques
may be used to measure fair value:
-
Market approachThe market approach uses prices and other
relevant information generated by market transactions involving identical or
similar assets or liabilities. This technique includes matrix pricing that is
a mathematical technique used principally to value debt securities without
relying solely on quoted prices for specific securities but rather by relying
on securities relationship to other benchmark quoted securities.
18
-
Income approachThe income approach uses valuation
techniques to convert future amounts such as earnings or cash flows to a single
present discounted amount. The measurement is based on the value indicated by
current market expectations about those future amounts. Such valuation
techniques include present value techniques, option-pricing models (such as the
Black-Scholes-Merton formula or a binomial model), and multi-period excess
earnings method (used to measure fair value of certain intangible assets).
-
Cost approachThe cost approach is based on current
replacement cost which is the amount that would currently be required to
replace the service capacity of an asset.
Valuation techniques are selected
as appropriate for the circumstances and for which sufficient data is
available. Valuation techniques are to be consistently applied, but a change
in valuation technique or its application may be made if the change results in
a measurement that is equally or more representative of fair value under the circumstances.
Revisions resulting from a change in valuation technique or its application are
accounted for as a change in accounting estimate which does not require the
change in accounting estimate to be accounted for by restating or
retrospectively adjusting amounts reported in financial statements of prior
periods or by reporting pro forma amounts for prior periods.
ASC 820 also establishes a
hierarchy that prioritizes information used to develop those assumptions. The
level in the hierarchy within which the fair value measurement in its entirety
falls is determined based on the lowest level input that is significant to the
fair value measurement in its entirety. The Company considers an input to be
significant if it drives more than 10% of the total fair value of a particular
asset or liability. The hierarchy is as follows:
- Level 1 Inputs (Highest
ranking): Unadjusted quoted prices in active markets for identical
assets or liabilities that the entity has the ability to access at the
measurement date.
- Level 2 Inputs: Inputs
other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Such inputs may
include quoted prices for similar assets or liabilities in active markets,
and inputs other than quoted market prices that are observable for the
assets and liabilities such as interest rates and yield curves that are
observable at commonly quoted intervals.
- Level 3 Inputs (Lowest
ranking): Unobservable inputs for determining fair values of assets
and liabilities that reflect an entitys own assumptions about the
assumptions that market participants would use in pricing the assets and
liabilities.
Assets and liabilities may be
measured for fair value on a recurring basis (daily, weekly, monthly or
quarterly) or on a non-recurring basis in periods subsequent to initial
recognition. Recurring valuations are measured regularly for investment
securities and the cash flow hedge. Loans held for sale, other real estate and
impaired loans are measured at fair value on a non-recurring basis and do not
necessarily result in a change in the amount recorded on the Consolidated
Balance Sheets. Generally, these assets have non-recurring valuations that are
the result of application of other accounting pronouncements that require the
assets be assessed for impairment or at the lower of cost or fair value. Fair
values of loans held for sale are considered Level 2. Fair values for other
real estate and impaired loans are considered Level 3.
The Company obtains fair value
measurements for securities from a third party vendor based on Level 2
inputs. The fair value measurements reported in Level 2 are primarily matrix
pricing that considers observable data (such as dealer quotes, market spreads,
cash flows, the U.S. Treasury yield curve, live trading levels, trade execution
data, market consensus prepayment speeds, credit information and terms and
conditions of bonds, and other factors). Fair value measurements for pooled
trust-preferred securities are obtained through the use of valuation models
that include unobservable inputs which are considered Level 3 inputs.
19
Certain non-financial assets and
non-financial liabilities measured at fair value on a recurring basis include
reporting units measured at fair value in the first step of a goodwill
impairment test. Certain non-financial assets measured at fair value on a non-recurring
basis include non-financial assets and non-financial liabilities measured at
fair value in the second step of a goodwill impairment test, as well as
intangible assets and other non-financial long-lived assets measured at fair
value for impairment assessment.
Recurring Basis
The following are descriptions of
valuation methodologies used for assets and liabilities measured at fair value
on a recurring basis.
Available for Sale Securities
Fair values for
available-for-sale securities are obtained from a third party vendor and are
valued using Level 2 inputs.
A summary of assets and liabilities as of September 30, 2014
and December 31, 2013 measured at estimated fair value on a recurring basis is
as follows (in thousands):
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total Fair |
|
Inputs |
|
Inputs |
|
Inputs |
|
Value |
September 30, 2014:
|
|
|
|
|
|
|
|
Financial assets: |
|
|
|
|
|
|
|
Securities
available-for-sale |
$ -
|
|
$437,789 |
|
$ -
|
|
$437,789 |
December 31, 2013:
|
|
|
|
|
|
|
|
Financial assets: |
|
|
|
|
|
|
|
Securities
available-for-sale |
$ -
|
|
$456,525 |
|
$ -
|
|
$456,525 |
Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring
basis as described below.
Impaired Loans
Impaired loans are evaluated and valued at the time the
loan is identified as impaired at the lower of cost or fair value. Fair value
is measured based on the value of the collateral securing these loans.
Collateral may be real estate and/or business assets including equipment,
inventory and/or accounts receivable. Independent appraisals for collateral
are obtained and may be discounted by management based on historical
experience, changes in market conditions from time of valuation and/or
managements knowledge of the borrower and the borrowers business. As such
discounts may be significant, these inputs are considered Level 3 in the
hierarchy for determining fair value. Values of impaired loans are reviewed on
at least a quarterly basis to determine if specific allocations in the
allowance for loan losses are adequate.
Loans Held for Sale
Loans held for sale are recorded at the lower of cost or
fair value. Fair value of loans held for sale are based upon binding contracts
and quotes from third party investors that qualify as Level 2 inputs for
determining fair value. Loans held for sale did not have an impairment charge
for second quarters ended September 30, 2014 or 2013.
Other Real Estate
Owned
Other real estate
owned is recorded at the lower of cost or fair
value. Fair value is measured based on independent appraisals and may be
discounted by management based on historical experience and knowledge and
changes in market conditions from time of valuation. As such discounts may be
significant, these inputs are considered Level 3 in the hierarchy for
determining fair value. Values of other real estate owned are reviewed at least
annually or more often if circumstances require more frequent evaluations.
20
A summary of assets as of September 30, 2014 and December
31, 2013 measured at estimated fair value on a non-recurring basis were as
follows:
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total Fair |
|
Inputs |
|
Inputs |
|
Inputs |
|
Value |
September 30, 2014:
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
Impaired loans
|
$ -
|
|
$ -
|
|
$ 4,188 |
|
$ 4,188 |
Loans held for sale
|
-
|
|
882 |
|
-
|
|
882 |
Other real estate owned
|
-
|
|
-
|
|
5,485 |
|
5,485 |
December 31, 2013:
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
Impaired loans
|
$ -
|
|
$ -
|
|
$ 7,499 |
|
$ 7,499 |
Loans held for sale
|
-
|
|
3,098 |
|
-
|
|
3,098 |
Other real estate owned
|
-
|
|
-
|
|
6,826 |
|
6,826 |
Fair Value Estimates
ASC 820 requires disclosure of the estimated fair value of
financial instruments for interim and annual periods. The following
assumptions were made and methods applied to estimate the fair value of each
class of financial instruments not measured at fair value on the Consolidated
Balance Sheets:
Cash and Cash Equivalents
For instruments that qualify as cash equivalents, as
described in Note 1, the carrying amount is assumed to be fair value.
Loans
The fair value of variable-rate loans with no significant
change in credit risk subsequent to loan origination is based on carrying
amounts. For other loans, such as fixed rate loans, fair values are estimated
utilizing discounted cash flow analyses, applying interest rates currently
offered for new loans with similar terms to borrowers of similar credit
quality. Fair values of loans that have experienced significant changes in
credit risk have been adjusted to reflect such changes.
Accrued Interest Receivable
The fair values of accrued interest receivable and other
assets are assumed to be the carrying value.
Federal Home Loan Bank and Federal Reserve Bank Stock
The carrying amounts of capital stock of the FHLB of
Cincinnati and Federal Reserve Bank of St. Louis approximate fair value.
BOLI
Carrying amount of BOLI is the cash surrender value as of
the end of the periods presented and approximates fair value.
21
Deposit Liabilities
The fair value of deposit
liabilities are assumed to be the carrying value.
Demand Deposits
The fair values of deposits
which are payable on demand, such as interest-bearing and non-interest-bearing
checking accounts, passbook savings, and certain money market accounts are
equal to the carrying amount of the deposits.
Variable-Rate Deposits
The fair value of variable-rate money market accounts and
certificates of deposit approximate their carrying value at the balance sheet
date.
Fixed-Rate Deposits
For fixed-rate certificates of deposit, fair values are
estimated utilizing discounted cash flow analyses, which apply interest rates
currently being offered on certificates of deposits to a schedule of aggregated
monthly maturities on time deposits.
Short Term and Other Borrowings
For securities sold under repurchase agreements payable
upon demand, the carrying amount is a reasonable estimate of fair value. For
securities sold under repurchase agreements for a fixed term, fair values are
estimated using the same methodology as fixed rate time deposits discussed
above. The fair value of the advances from the FHLB and other long-term
borrowings are estimated by discounting the future cash outflows using the
current market rates.
Other Liabilities
Fair value of other liabilities is assumed to be the
carrying values.
The carrying amount and fair value of assets and liabilities
as of September 30, 2014 and December 31, 2013 were as follows (in thousands):
22
|
Carrying |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair |
|
Amount |
|
Inputs |
|
Inputs |
|
Inputs |
|
Value |
As of September 30, 2014:
|
|
|
|
|
|
|
|
|
|
Financial assets: |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
$ 25,215 |
|
$ 25,215 |
|
$ -
|
|
$ -
|
|
$ 25,215 |
Interest-bearing
deposits in other banks |
45,259 |
|
45,259 |
|
- |
|
- |
|
45,259 |
Investment
securities |
437,789 |
|
- |
|
437,789 |
|
- |
|
437,789 |
Loans,
net of allowance |
604,370 |
|
- |
|
608,718 |
|
4,188 |
|
612,906 |
Loans
held-for-sale |
882 |
|
- |
|
882 |
|
- |
|
882 |
Accrued
interest receivable |
6,570 |
|
- |
|
6,570 |
|
- |
|
6,570 |
Federal
Reserve Bank and Federal Home Loan Bank Stock |
5,684 |
|
- |
|
5,684 |
|
- |
|
5,684 |
Other
real estate owned |
5,485 |
|
- |
|
- |
|
5,485 |
|
5,485 |
Bank
owned life insurance |
22,786 |
|
- |
|
22,786 |
|
- |
|
22,786 |
Financial liabilities:
|
|
|
|
|
|
|
- |
|
|
Deposits |
978,892 |
|
- |
|
979,454 |
|
- |
|
979,454 |
Short-term
borrowings |
47,291 |
|
- |
|
47,291 |
|
- |
|
47,291 |
Other
borrowings |
51,810 |
|
- |
|
51,810 |
|
- |
|
51,810 |
Other
liabilities |
8,068 |
|
- |
|
8,068 |
|
- |
|
8,068 |
Off-balance sheet
arrangements |
|
|
|
|
|
|
- |
|
|
Commitments
to extend credit |
61,187 |
|
- |
|
61,187 |
|
- |
|
61,187 |
Standby
letters of credit |
2,342 |
|
- |
|
2,342 |
|
- |
|
2,342 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ 25,249 |
|
$25,249 |
|
$ -
|
|
$ -
|
|
$ 25,249 |
Interest bearing deposits in other banks |
21,865 |
|
21,865 |
|
- |
|
- |
|
21,865 |
Investment securities |
456,525 |
|
- |
|
456,525 |
|
- |
|
456,525 |
Loans, net of allowance |
572,418 |
|
- |
|
570,862 |
|
7,499 |
|
578,361 |
Loans held for sale |
3,098 |
|
- |
|
3,098 |
|
- |
|
3,098 |
Accrued interest receivable |
5,011 |
|
- |
|
5,011 |
|
- |
|
5,011 |
Federal Reserve Bank and Federal Home Loan Bank Stock |
5,684 |
|
- |
|
5,684 |
|
- |
|
5,684 |
Other real estate owned |
6,826 |
|
- |
|
- |
|
6,826 |
|
6,826 |
Bank owned life insurance |
22,466 |
|
- |
|
22,466 |
|
- |
|
22,466 |
Financial liabilities |
|
|
|
|
|
|
- |
|
|
Deposits |
968,530 |
|
- |
|
969,520 |
|
- |
|
969,520 |
Short-term borrowings |
36,808 |
|
- |
|
36,808 |
|
- |
|
36,808 |
Other borrowings |
51,167 |
|
- |
|
49,638 |
|
- |
|
49,638 |
Other liabilities |
5,361 |
|
- |
|
5,361 |
|
- |
|
5,361 |
Off-balance sheet
arrangements |
|
|
|
|
|
|
- |
|
|
Commitments to extend credit |
87,698 |
|
- |
|
87,698 |
|
- |
|
87,698 |
Standby letters of credit |
4,266 |
|
- |
|
4,266 |
|
- |
|
4,266 |
23
Note
12 - Comprehensive Income
The tax effects of each component of other comprehensive
income for the three and nine months ended September 30, 2014 and 2013 are as
follows:
|
|
Before-tax |
|
Tax (Expense) |
|
After-tax |
|
|
Amount |
|
or Benefit |
|
Amount |
Three months ended September
30, 2014 |
|
|
|
|
|
|
Unrealized gains (losses)
on available-for-sale securities: |
|
|
|
|
|
|
Unrealized gains
(losses) arising during the period |
|
$783 |
|
$(300) |
|
$483 |
Reclassification
adjustments for net gains included in net income |
- |
|
- |
|
- |
Net
unrealized gains (losses) |
|
$783 |
|
$(300) |
|
$483 |
Three months ended September
30, 2013 |
|
|
|
|
|
|
Unrealized (losses) gains
on available-for-sale securities: |
|
|
|
|
|
|
Unrealized gains
(losses) arising during the period |
|
$(536) |
|
$205 |
|
$(331) |
Reclassification
adjustments for net gains included in net income |
- |
|
- |
|
- |
Net
unrealized (losses) gains |
|
$(536) |
|
$205 |
|
$(331) |
Nine months ended September
30, 2014 |
|
|
|
|
|
|
Unrealized gains (losses)
on available-for-sale securities: |
|
|
|
|
|
|
Unrealized gains
(losses) arising during the period |
|
$7,846 |
|
$(3,004) |
|
$4,842 |
Reclassification
adjustments for net gains included in net income |
(595) |
* |
228 |
|
(367) |
Net
unrealized gains (losses) |
|
$7,251 |
|
$(2,776) |
|
$4,475 |
Nine months ended September
30, 2013 |
|
|
|
|
|
|
Unrealized (losses) gains on
available-for-sale securities: |
|
|
|
|
|
|
Unrealized
(losses) gains arising during the period |
|
$(14,578) |
|
$5,582 |
|
$(8,996) |
Reclassification
adjustments for net gains included in net income |
(303) |
|
116 |
|
(187) |
Net
unrealized (losses) gains |
|
$(14,881) |
|
$5,698 |
|
$(9,183) |
*For the nine months ended September
30, 2014, reclassification adjustment for gains included in net income reflect
net gains on sale of available-for-sale debt securities and do not include gain
recognized on the sale of the Fannie and Freddie Mac preferred stock as no
unrealized gains or losses were recorded in Accumulated Other Comprehensive
Income.
During a
special meeting on July 16, 2014, the Companys shareholders voted on and
approved authorizing an additional class of common stock (Class A common stock)
and a reclassification of Companys outstanding common stock. Upon the filing
of Companys Charter Amendment on July 18, 2014, each share of Companys common
stock outstanding immediately prior to such filing owned by a shareholder of
record who owned between one and 299 shares of such common stock was, by virtue
of the filing of the Companys Charter Amendment and without any action on the
part of the holders, reclassified as Class A common stock, on the basis of one
share of Class A common stock per each share of common stock so reclassified.
Each share of Companys common stock outstanding immediately prior to the
filing of the Companys Charter Amendment owned by a shareholder of record who
owned 300 or more shares of such common stock was not reclassified and
continued to be classified as common stock. The Companys common stock
continues to have unlimited voting rights. Companys Class A common stock has
no voting rights, except as may be required by law.
24
Note
13 Subsequent Events
The Company has reviewed subsequent events through November
4, 2014, the date the financial statements were available to be issued.
On October 1, 2014, the Company
entered into a Loan Agreement, Pledge and Security Agreement, Promissory Note
(Fixed Rate) and Promissory Note (Floating Rate) (collectively, the Loan
Documents) with First Tennessee Bank, National Association (the Lender),
pursuant to which the Lender has agreed to extend to the Company two five-year
term loans in the aggregate maximum principal amount of $12,000,000 (the Credit
Facilities). The Loan Documents provide that the Credit Facilities will be
repaid in quarterly installments of principal and interest based on a ten-year
amortization schedule at a rate of interest as follows:
- the $6,000,000 five-year fixed rate loan will accrue
interest at a fixed rate of 3.76%; and
- the $6,000,000 five-year floating rate loan will accrue
interest at the 90 day rounded LIBOR plus 2%.
The Credit Facilities are secured
by a pledge of 51% of the stock of First Citizens National Bank, the Companys
wholly owned subsidiary. The Loan Documents also contain a number of
affirmative and negative covenants, including limitations on the incurrence of
additional debt, liens on property, guarantees, mergers, consolidations,
liquidations and dissolutions, asset sales, dividends and other payments in
respect of our capital stock, relocation of the Companys principal office,
principal banking office, or principal registered office, and transactions with
affiliates. The Company is using the proceeds of the Credit Facilities to
finance a part of the cash portion of the merger consideration payable to
shareholders of Southern Heritage described below.
Also on October 1, 2014, the
Company completed its previously announced acquisition of Southern Heritage pursuant
to the terms of the Merger Agreement. In accordance with the Merger Agreement,
Southern Heritage merged with and into the Company, with the Company continuing
as the surviving corporation.
Following the closing of the
Merger, all outstanding shares of Southern Heritage stock were converted into
the right to receive an aggregate of (i) $16,085,903.75 in cash and (ii)
269,302 shares of Company common stock and 108,356 shares of Company Class A
common stock, depending on the class of Southern Heritage stock held and
subject to adjustment as set forth in the Merger Agreement. Southern Heritage
shareholders who held Southern Heritage common stock received Company common
stock and Southern Heritage shareholders who held Southern Heritage Class A
common stock, Southern Heritage Class B common stock or Southern Heritage
Series A preferred stock received Company Class A common stock. Each share of
Southern Heritage stock issued and outstanding immediately prior to the
effective time of the Merger was, subject to the election procedures and
adjustments described in the Merger Agreement, converted into the right to
receive (i) $12.25 in cash, plus (ii) 0.2876 of a share of Company stock. In
lieu of the issuance of any fractional shares of Company stock, the Company paid
each former Southern Heritage shareholder who would otherwise be entitled to
receive any fractional shares an amount in cash determined by multiplying (i)
$42.60 by (ii) the fraction of a share of Company common stock to which such
holder would otherwise have been entitled to receive.
25
Forward-Looking
Statements
Certain
statements contained in this report may not be based upon historical facts and
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements may be identified by
their reference to a future period or periods or by the use of forward-looking
terminology such as anticipate, project, should, believe, could,
estimate, expect, foresee, hope, intend, may, might, plan,
will, is likely, going forward or would or future or conditional verb
tenses and variations or negatives of such terms. These forward-looking
statements include, without limitation, those relating to capital resources,
strategic planning, acquisitions or de novo branching, ability to meet capital
guidelines, legislation and governmental regulations affecting financial
services companies, construction of new branch locations, dividends, critical
accounting policies, allowance for loan losses, fair value estimates, goodwill,
occupancy and depreciation expense, held-to-maturity securities,
available-for-sale securities, trading securities, cash flows, core deposit
intangibles, diversification in the real estate loan portfolio, interest
income, maturity of loans, loan impairment, loan ratings, charge-offs, other
real estate owned, maturity and re-pricing of deposits, borrowings with call
features, dividend payout ratio, off-balance sheet arrangements, the impact of
recently issued accounting standards, changes in funding sources, liquidity,
interest rate sensitivity, net interest margins, debt securities, non-accrual
status of loans, troubled debt restructurings, contractual maturities of
mortgage-backed securities and collateralized mortgage obligations,
other-than-temporary impairment of securities, amortization expense, deferred
tax assets, independent appraisals for collateral, property enhancement or
additions, efficiency ratio, ratio of assets to employees, net income, changes
in interest rates, loan policies, categorization of loans, maturity of FHLB
borrowings and the effectiveness of internal control over financial reporting.
The Company cautions readers not
to place undue reliance on the forward-looking statements contained in this
report, in that actual results could differ materially from those indicated in
such forward-looking statements as a result of a variety of factors. These
factors may include, but are not limited to, credit quality risks and the sufficiency
of the Companys credit policies to avoid losses, declines in the value of
other real estate owned, the adequacy of the Companys allowance for loan
losses, changes in interest rates, the geographical concentration of the
Companys business and changes in local economic conditions affecting that
concentration, the effect of any worsening in the condition of financial
markets or the increase in the Companys loan demand on the Companys liquidity
position, the availability of secondary sources of liquidity to meet withdrawal
needs or fund operations, the effect of market conditions on the Companys
ability to obtain additional capital on favorable terms should it need it, the
ability to remain competitive in an increasingly competitive industry, the effect
of changes in laws, government regulation and monetary policy, the ability of
the Company or the Bank to pay dividends, failures or breaches of the Companys
operational or security systems or infrastructure, or the failure of the
Companys third party vendors, service providers or other third parties
operational or security systems or infrastructure, including as a result of
cyber-attacks, other factors generally understood to affect the assets,
business, cash flows, financial condition, liquidity, prospects and/or results
of operations of financial services companies and other factors detailed from
time to time in the Companys press and news releases, reports and other
filings with the SEC. Forward-looking statements speak only as of the
date that they were made, and, except as required by law, the Company does not
undertake any obligation to update or revise forward-looking statements to
reflect events or circumstances that occur after the date of this report.
Overview
Net income increased approximately
$72,000 or 0.7% when comparing the first nine months of 2014 to the first nine
months of 2013. For the first nine months of 2014, net income totaled $10.3
million compared to $10.2 million for the same period in 2013. Increased
earnings in 2014 were primarily because of increased gains on sale of
available-for-sale securities, reduced provision for loan losses and increased
net interest income.
26
The Company remains steadfast in
its commitment to quality growth balanced with strong liquidity and capital
positions. Balance sheet growth remains modest at 3.1% for first three
quarters of 2014 as loan growth of 5.5% was funded primarily by investment cash
flows as deposits increased only 1.1% during the first nine months of 2014.
Capital increased $12.0 million or 10.7% from December 31, 2013 to September
30, 2014 as a result of undistributed net income of $7.6 million and increase
of $4.5 million in accumulated other comprehensive income due to overall
appreciation of the investment portfolio. Unrealized gains and losses on
available-for-sale securities continue to fluctuate relative to the overall
market yield curve. The market values of the portfolio are heavily influenced
by the 10-year Treasury rates which were 3.04% as of December 31, 2013 and 2.52%
as of September 30, 2014.
Key performance metrics for the Company reflect solid
capital positions and stable earnings for the first nine months of 2014
consistent with the same period in prior years. Such key metrics are as
follows:
|
2014 |
2013 |
2012 |
2011 |
2010 |
Net income to average total
assets |
1.15% |
1.17% |
1.28% |
1.22% |
0.89% |
Net income to average
shareholders equity |
11.40% |
11.73% |
12.57% |
12.78% |
9.70% |
Dividends declared to net
income |
26.34% |
26.54% |
26.32% |
23.87% |
25.40% |
Average equity to average
assets |
10.13% |
9.85% |
10.21% |
10.36% |
10.13% |
Total equity to total assets
|
10.29% |
9.66% |
10.35% |
10.01% |
9.48% |
The efficiency ratio is a measure of non-interest expense
as a percentage of total revenue. The Company computes the efficiency ratio by
dividing non-interest expense by the sum of net interest income on a tax
equivalent basis and non-interest income. This is a non-GAAP financial
measure, which management believes provides investors with important
information regarding operational efficiency. Comparison of the Companys efficiency
ratio with those of other companies may not be possible because other companies
may calculate the efficiency ratio differently. The Companys efficiency
ratios for the three months ended September 30, 2014, 2013 and 2012 were 66.6%,
60.0%, and 58.5%, respectively. The significant increase is primarily
attributable to one-time transaction costs associated with the merger with
Southern Heritage Bancshares, Inc. which closed October 1, 2014. See also Note
13 to the Consolidated Financial Statements included elsewhere in this report.
The tangible common equity ratio is a non-GAAP measure
used by management to evaluate capital adequacy. Tangible common equity is
total equity less net accumulated other comprehensive income ("OCI"),
goodwill and deposit-based intangibles. Tangible assets are total assets less
goodwill and deposit-based intangibles. The tangible common equity ratio is 8.90%
as of September 30, 2014 compared to 8.28% and 8.33% as of September 30, 2013
and 2012, respectively.
27
A reconciliation of
non-GAAP measures of the efficiency ratio and tangible common equity ratio is
as follows for the three months ended September 30, 2014, 2013 and 2012:
|
At or for the Three
Months Ended September 30, |
|
2014 |
|
2013 |
|
2012 |
Efficiency ratio:
|
|
|
|
|
|
Net interest income(1)
|
$10,407 |
|
$10,182 |
|
$9,985 |
Non-interest income(2)
|
3,161 |
|
3,290 |
|
2,948 |
Total revenue
|
13,568 |
|
13,472 |
|
12,933 |
Non-interest expense |
9,042 |
|
8,209 |
|
7,566 |
Efficiency ratio |
66.64% |
|
60.93% |
|
58.50% |
Tangible common equity ratio:
|
|
|
|
|
|
Total equity capital |
$124,594 |
|
$110,246 |
|
$113,570 |
Less: |
|
|
|
|
|
Accumulated other comprehensive income
|
4,114 |
|
1,439 |
|
11,328 |
Goodwill |
13,651 |
|
13,651 |
|
11,825 |
Other intangible assets
|
352 |
|
405 |
|
- |
Tangible common equity
|
$106,477 |
|
$94,751 |
|
$90,417 |
Total assets |
$1,210,655 |
|
$1,158,982 |
|
$1,097,437 |
Less: |
|
|
|
|
|
Goodwill |
13,651 |
|
13,651 |
|
11,825 |
Other intangible assets
|
352 |
|
405 |
|
- |
Tangible assets |
$1,196,652 |
|
$1,144,926 |
|
$1,085,612 |
Tangible common equity ratio
|
8.90% |
|
8.28% |
|
8.33% |
___________________
(1) |
Net interest income includes
interest and rates on securities that are non-taxable for federal income tax
purposes that are presented on a taxable equivalent basis based on federal
statutory rate of 34%. |
(2) |
Non-interest
income is presented net of any credit component of other-than-temporary
impairment on available-for-sale securities recognized against earnings for the
years presented. |
Critical
Accounting Policies
There was no significant change in critical accounting
policies from December 31, 2013 to September 30, 2014.
28
Results of Operations
Net interest income is the
principal source of earnings for the Company and is defined as the amount of
interest generated by earning assets minus interest costs required to fund
those assets. Net interest income increased 2.2% and totaled $29.1 million for
the nine months ended September 30, 2014 compared to $28.5 million in first nine
months of 2013. Net interest income increased 1.6% and totaled $9.7 million
for the quarter ended September 30, 2014 compared to $9.6 million for the
quarter ended September 30, 2013. The net yield on average earning assets for the
third quarter of 2014 and 2013 were 4.40% and 4.51%, respectively. The modest
decrease of 11 basis points in yield on earning assets is driven by the decline
in loan yields from the third quarter of 2013 to the third quarter of 2014 as
interest rates continue at historical lows. The cost of interest bearing
liabilities decreased from 0.68% in the third quarter of 2013 to 0.64% in the third
quarter of 2014. Net interest margin for the third quarter of 2014 was 3.85%
compared to 3.92% in the third quarter of 2013. Net interest margin has been stable
the past six quarters in the range of 3.80% to 3.95%.
The following table presents quarterly average balances,
interest, and average rates for the periods listed (dollars in thousands):
|
AVERAGE BALANCES AND RATES
|
|
2014 |
|
2013 |
|
2012 |
|
Balance |
Interest |
Rate |
|
Balance |
Interest |
Rate |
|
Balance |
Interest |
Rate |
Assets |
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2)(3)
|
$604,646 |
$8,182 |
5.41% |
|
$577,986 |
$8,200 |
5.67% |
|
$537,440 |
$8,187 |
6.09% |
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
297,482 |
1,683 |
2.26% |
|
307,844 |
1,723 |
2.24% |
|
286.721 |
1,819 |
2.54% |
Tax exempt
(4) |
146,007 |
2,009 |
5.50% |
|
121,719 |
1,785 |
5.87% |
|
116,114 |
1,702 |
5.86% |
Interest earning deposits
|
26,771 |
16 |
0.24% |
|
26,590 |
18 |
0.27% |
|
27,301 |
14 |
0.21% |
Federal funds sold
|
5,352 |
4 |
0.30% |
|
5,025 |
3 |
0.24% |
|
2,410 |
3 |
0.50% |
Total interest earning assets
|
1,080,258 |
11,894 |
4.40% |
|
1,039,164 |
11,729 |
4.51% |
|
969,986 |
11,725 |
4.83% |
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
14,202 |
|
|
|
13,968 |
|
|
|
18,357 |
|
|
Premises and equipment
|
35,444 |
|
|
|
34,362 |
|
|
|
29,132 |
|
|
Other assets
|
65,303 |
|
|
|
66,264 |
|
|
|
65,257 |
|
|
Total assets
|
$1,195,207 |
|
|
|
$1,153,758 |
|
|
|
$1,082,732 |
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
$827,676 |
$1,169 |
0.56% |
|
$805,539 |
$1,194 |
0.59% |
|
$745,279 |
$1,386 |
0.74% |
Federal funds purchased and other interest bearing
liabilities |
99,062 |
318 |
1.28% |
|
99,843 |
353 |
1.41% |
|
88,932 |
354 |
1.59% |
Total interest bearing liabilities
|
926,738 |
1,487 |
0.64% |
|
905,382 |
1,547 |
0.68% |
|
834,211 |
1,740 |
0.83% |
Non-interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
136,614 |
|
|
|
131,734 |
|
|
|
124,838 |
|
|
Other liabilities
|
7,713 |
|
|
|
5,861 |
|
|
|
11,173 |
|
|
Total liabilities
|
1,071,065 |
|
|
|
1,042,977 |
|
|
|
970,222 |
|
|
Total shareholders' equity
|
124,142 |
|
|
|
110,781 |
|
|
|
112,510 |
|
|
Total liabilities and shareholders' equity
|
$1,195,207 |
|
|
|
$1,153,758 |
|
|
|
$1,082,732 |
|
|
Net interest income |
|
$10,407 |
|
|
|
$10,182 |
|
|
|
$9,985 |
|
Net yield on average earning assets
|
|
|
3.85% |
|
|
|
3.92% |
|
|
|
4.12% |
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________
(1) |
Loan
totals are loans held for investments and net of unearned income and loan loss
reserves. |
(2) |
Fee
income on loans held for investment is included in interest income and
computations of the yield. |
(3) |
Includes
loans on non-accrual status. |
(4) |
Interest
and rates on securities that are non-taxable for federal income tax purposes
are presented on a taxable equivalent basis based on the Companys statutory
federal tax rate of 34%. |
29
Provision for loan losses totaled
approximately $250,000 and $187,000 for the three months ended September 30,
2014 and 2013, respectively. Provision for loan losses totaled approximately
$625,000 and $775,000 for the nine months ended September 30, 2014 and 2013,
respectively. Loans charged off net of recoveries totaled approximately $893,000
and $625,000 in the nine months ended September 30, 2014 and 2013,
respectively. Allowance for losses on loans as a percent of total loans was 1.23%
as of September 30, 2014 compared to 1.36% as of September 30, 2013 and 1.34%
as of December 31, 2013.
Non-interest income represents
fees and other income derived from sources other than interest-earning assets.
Non-interest income increased approximately $528,000 or 5.2% when comparing the
nine months ended September 30, 2014 and 2013, respectively. Non-interest
income decreased approximately $129,000 or 3.9% when comparing third quarters
of 2014 and 2013. Non-interest income contributed 24.2% of total revenue in
first nine months of 2014 compared to 23.5% of total revenue in nine months of
2013. Non-interest income contributed 22.0% of total revenue in the third
quarter of 2014 compared to 22.8% of total revenue in the third quarter of 2013.
The following table compares non-interest income for the third quarters of
2014, 2013 and 2012 (dollars in thousands):
|
Total
2014 |
|
(Decrease) Increase
|
|
Total
2013 |
|
(Decrease) Increase
|
|
Total
2012 |
|
|
Amount |
|
% |
|
|
Amount |
|
% |
|
Mortgage banking income
|
$ 280 |
|
($13) |
|
(4.44%) |
|
$293 |
|
($134) |
|
(31.38%) |
|
$427 |
Income from fiduciary
activities |
270 |
|
66 |
|
32.35% |
|
204 |
|
(35) |
|
(14.64%) |
|
239 |
Service charges on
deposit accounts |
1200 |
|
(78) |
|
(6.10%) |
|
1,278 |
|
4 |
|
0.31% |
|
1,274 |
Income from ATM and debit
cards |
693 |
|
54 |
|
8.45% |
|
639 |
|
59 |
|
10.17% |
|
580 |
Brokerage fees
|
396 |
|
55 |
|
16.13% |
|
341 |
|
79 |
|
30.15% |
|
262 |
Earnings on BOLI
|
149 |
|
4 |
|
2.76% |
|
145 |
|
2 |
|
1.40% |
|
143 |
Gain (loss) on sale of
foreclosed property |
(190) |
|
(106) |
|
126.19% |
|
(84) |
|
519 |
|
(86.07%) |
|
(603) |
Gain on sale or call of
available-for-sale securities |
0 |
|
0 |
|
n/a |
|
0 |
|
(265) |
|
(100.00%) |
|
265 |
Gain on disposition of
property |
0 |
|
0 |
|
n/a |
|
0 |
|
0 |
|
n/a |
|
0 |
Income from insurance
activities |
175 |
|
(20) |
|
(10.26%) |
|
195 |
|
19 |
|
10.80% |
|
176 |
Other non-interest income
|
188 |
|
(91) |
|
(32.62%) |
|
279 |
|
94 |
|
50.81% |
|
185 |
Total non-interest
income |
$3,161 |
|
($129) |
|
(3.92%) |
|
$3,290 |
|
$342 |
|
11.60% |
|
$2,948 |
Decreased non-interest income in the
third quarter of 2014 is primarily a result of increased realized losses on other
real estate owned, decreased service charges on deposits and decreased other
non-interest income. Realized losses on other real estate owned increased in the
third quarter of 2014 compared to the third quarter of 2013 primarily because
of the realized loss on one isolated sale in the third quarter of 2014 with a
realized loss of approximately $150,000. Service charges on deposits decreased
because of an overall decrease in overdraft fees. Other non-interest income
decreased as a result of the combination of small decreases in various other
types of fees such as service charges on letters of credit which vary depending
on the volume in any given quarter. Increased income from fiduciary activities,
brokerage activities and income from ATM and debit cards helped to offset lower
overall non-interest income in the third quarter of 2014 compared to the third
quarter of 2013. Income from fiduciary activities varied from the third
quarter of 2014 to the third quarter of 2013 primarily because of timing and
volume of activities such as fees earned from estate planning and settlements.
Brokerage fees increased as a result of overall increased volume of business in
2014 compared to 2013. Income from ATM and debit cards increased as a result
of a change in vendors and as a result of the overall trend of increased use of
debit cards and electronic transactions that continue to replace paper
transactions.
30
Income from
White and Associates/First Citizens Insurance, LLC, a full-service insurance
agency (WAFCI), was included in Income from Insurance Activities in the
Consolidated Statements of Income. Non-interest income generated by WAFCI
for the third quarter of 2014 and 2013 totaled approximately $175,000 and $195,000,
respectively.
No other-than-temporary
impairment losses were recognized in the three or nine months ended September
30, 2014 or 2013. See Investment Securities section for additional
information.
The following table compares non-interest expense for third
quarter of 2014, 2013 and 2012 (dollars in thousands):
|
Total
2014 |
|
Increase (Decrease)
|
|
Total
2013 |
|
Increase (Decrease)
|
|
Total
2012 |
|
|
Amount |
|
% |
|
|
Amount |
|
% |
|
Salaries and employee
benefits |
$5,005 |
|
$325 |
|
6.94% |
|
$4,680 |
|
$436 |
|
10.27 |
|
$4,244 |
Net occupancy expense
|
439 |
|
(13) |
|
(2.88) |
|
452 |
|
30 |
|
7.11 |
|
422 |
Depreciation
|
506 |
|
2 |
|
0.40 |
|
504 |
|
47 |
|
10.28 |
|
457 |
Data processing expense
|
460 |
|
145 |
|
46.03 |
|
315 |
|
(140) |
|
(30.77) |
|
455 |
Legal and professional
fees |
333 |
|
219 |
|
192.11 |
|
114 |
|
47 |
|
70.15 |
|
67 |
Stationary and office
supplies |
67 |
|
15 |
|
28.85 |
|
52 |
|
2 |
|
4.00 |
|
50 |
Amortization of
intangibles |
11 |
|
0 |
|
0 |
|
11 |
|
11 |
|
n/a |
|
0 |
Advertising and
promotions |
239 |
|
(87) |
|
(26.69) |
|
326 |
|
163 |
|
100.00 |
|
163 |
Premiums for FDIC
insurance |
165 |
|
(42) |
|
(20.29) |
|
207 |
|
91 |
|
78.45 |
|
116 |
Expenses related to other real estate owned
|
103 |
|
(18) |
|
(14.88) |
|
121 |
|
(47) |
|
(27.98) |
|
168 |
ATM related fees and
expenses |
296 |
|
8 |
|
2.78 |
|
288 |
|
72 |
|
33.33 |
|
216 |
Other expenses
|
1,418 |
|
279 |
|
24.50 |
|
1,139 |
|
(20) |
|
(1.73) |
|
1,159 |
Total non-interest
expense |
$9,042 |
|
$833 |
|
10.15% |
|
$8,209 |
|
$692 |
|
9.21% |
|
$7,517 |
Non-interest expense represents
operating expenses of the Company and increased approximately $833,000 or 10.2% in the
third quarter of 2014 compared to the third quarter of 2013. Salary and
benefits expense is the largest component of non-interest expense and increased
approximately $325,000 or 6.9% from the third quarter of 2014 to the third
quarter of 2013. Significant expense associated with salaries and benefits is
consistent with the Companys strategic plan to hire and retain high quality
employees to provide outstanding customer service and strive for exceptional
shareholder returns. Expenses increased in 2014 and 2013 as a result of a
combination of pay increases to existing employees, increased cost of employee
benefits (including health insurance, contributions to retirement plans and
incentive plans). Increased expense in the third quarter of 2014 also reflects
the Companys continued strategy to invest in new hires necessary to achieve
expansion and growth goals, absorb regulatory burdens and planning for
succession.
Net occupancy and depreciation were
essentially flat when comparing the third quarter of 2014 to the third quarter of
2013. Data processing (which includes computer services) expense increased
approximately $145,000 in the third quarter of 2014 compared to the third
quarter of 2013 due to timing of expenses related to various information
technology projects related to our core processor, online banking, outsourcing
of certain data processing functions, network security and maintenance. Data
processing is and will continue to be a significant component of non-interest
expense as a result of strategic efforts to ensure integrity and security of
customer data and in order to comply with ever-increasing regulatory burdens.
Legal and professional fees
totaled approximately $333,000 and $114,000 in the third quarter of 2014 and
2013, respectively. These fees relate to legal costs associated with the
normal course of business including but not limited to collection efforts on
loans and consulting on corporate matters such as regulatory compliance. The
increase from 2013 to 2014 is primarily attributable to expenses incurred
related to the Merger with Southern Heritage.
Other real estate owned expense
for the third quarter of 2014 was approximately $103,000 compared to
approximately $121,000 in the third quarter of 2013. The trend of declining
expense is consistent with the declining trend in the overall volume of other
real estate owned. See section below titled Other Real Estate Owned for
additional information.
31
No impairment of goodwill has
been recorded for the current and prior reportable periods. Core deposit
intangible expense for the current reportable quarter was flat at approximately
$11,000. Quarter-to-date advertising, community relations, and other forms of
marketing expenses were approximately $239,000 or 2.64% of other non-interest
expense in the third quarter of 2014 compared to approximately $326,000 or 4.04%
of total non-interest expense in the third quarter of 2013. All marketing or
advertising items are expensed at the time they are incurred.
Changes in Financial Condition
Total assets were $1.21 billion
as of September 30, 2014. Total assets increased $36.2 million or 3.1% during the
nine months ended September 30, 2014 primarily as a result of an increase of $32
million in total loans. Federal funds sold grew $4.7 million while available-for-sale
investment securities decreased $18.7 million during the nine months ended
September 30, 2014. Interest bearing deposits in banks grew $23.4 million
during the nine months ended September 30, 2014.
Deposit growth was modest at 1.1% during the nine months
ended September 30, 2014 and primarily occurred in the savings category. Savings
deposits increased $13.7 million or 2.8% during the nine months ended September
30, 2014. Demand deposits decreased $3.8 million from December 31, 2013 to
September 30, 2014. Demand deposits have been in excess of $130 million during
the nine months ended September 30, 2014 with an average for the nine-month
period of $135.7 million. Time deposits increased approximately $463,000 or less
than one percent over the same period.
Securities sold under agreements
to repurchase increased $5.5 million or 14.9% since year-end 2013. Securities
sold under agreements to repurchase had an average balance of $38.9 million
during the nine months ended September 30, 2014. Other borrowings increased
approximately $5.6 million during the nine months ended September 30, 2014 as a
result of new advances net of principal reductions on existing advances from
the Federal Home Loan Bank.
Capital increased $12.0 million
as a result of undistributed net income totaling $7.6 million in the nine
months ended September 30, 2014 and increased accumulated other comprehensive
income (AOCI). AOCI increased $4.5 million from December 31, 2013 to
September 30, 2014 due to overall appreciation in the available-for-sale
investment securities portfolio.
Investment
Securities
Investment securities are
primarily held by the banks subsidiary, First Citizens Investments, Inc. and
its subsidiary, First Citizens Holdings, Inc. The bank has a portfolio
advisory agreement with a third party vendor to manage the investment portfolio.
Quarterly average rates for taxable securities in the third quarter of 2014
increased two basis points while tax exempt securities decreased 36 basis
points compared to the third quarter of 2013. The investment portfolio is
heavily weighted in agency mortgage-related securities, which accounted for
approximately 67% of total portfolio. The Companys goal continues to be to
steadily maintain or improve the quality of the investment portfolio without
taking on material risk.
Pledged investments reflect a
market value of $214 million as of September 30, 2014.
The carrying value of investment
securities were as follows as of September 30 for each of the years indicated
(in thousands):
|
|
|
|
|
|
U.S. Treasury and government
agencies |
$290,017
|
$300,230
|
$289,297
|
$221,546
|
$ 150,690
|
State and political
subdivisions |
147,711
|
126,546
|
118,009
|
112,915
|
95,492
|
All other |
|
|
|
|
|
Total investment
securities |
|
|
|
|
|
32
For additional information
regarding amortized cost and fair value of investments, see also Note 5 to the
Consolidated Financial Statements included elsewhere in this report. Investments
are classified according to intent under generally accepted accounting
principles. Also, there were no securities in the trading or held-to-maturity
categories as of September 30, 2014, or December 31, 2013.
Accumulated other comprehensive
income reflects $4.1 million net unrealized gain on available-for-sale
securities, net of tax as of September 30 2014. During nine months of 2014,
net unrealized gains on securities (net of tax) increased $4.5 million from
year end 2013 primarily due to modest increase in overall market values of
securities held in the portfolio. There were no realized gains or sales of
securities during the third quarter of 2014 or 2013.
The Company continues to employ a
strong due diligence process on securities purchases and factors considered
include but are not limited to type of security, diversification among and
within portfolio sectors, internal policy limits, credit quality of issuer
and/or underlying collateral, ratings, yield, duration, expected life, maturity
date, etc.
The Company held no derivative
transactions as of September 30, 2014 or December 31, 2013.
Loans
The following table sets forth
total loans held for investment net of unearned income by category for the as
of September 30 for the years indicated (in thousands):
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
2010 |
Commercial, financial and agricultural
|
$106,431 |
|
$96,305 |
|
$82,801 |
|
$82,721 |
|
$77,240 |
Real estate-construction
|
56,472 |
|
42,881 |
|
40,008 |
|
40,918 |
|
52,472 |
Real estate-mortgage |
412,234 |
|
418,512 |
|
385,851 |
|
397,682 |
|
399,631 |
Installment loans to individuals
|
24,103 |
|
25,143 |
|
26,738 |
|
29,059 |
|
32,838 |
Other loans |
12,680 |
|
13,530 |
|
5,660 |
|
3,659 |
|
3,647 |
Total loans
|
$611,920 |
|
$596,371 |
|
$541,058 |
|
$554,039 |
|
$565,828 |
Loans increased $31.6 million from December 31, 2013 to September 30, 2014 and
increased $15.5 million September 30, 2013 to September 30, 2014. Real estate
loans increased $7.3 million from September 30, 2013 to September 30, 2014.
Commercial, financial and agricultural loans increased $10.1 million when
comparing September 30, 2014 and 2013. Loan demand has improved significantly
during 2013 and 2014 and growth levels are strong through the third quarter of
2014. The Company continues to exercise strategic caution with its growth
strategies under the current economic conditions.
The loan portfolio was heavily
weighted in real estate loans, which accounted for approximately $470 million
or 77% of total loans. Commercial and residential construction loans comprised
$56 million, or 9.2%, of the total loans. Although the portfolio was heavily
weighted in real estate, the Bank did not and does not invest in sub-prime or
non-traditional mortgages. Within real estate loans, residential mortgage
loans (including residential construction) were the largest category comprising
31% of total loans. Diversification of the real estate portfolio is a
necessary and desirable goal of the real estate loan policy. In order to
achieve and maintain a prudent degree of diversity, given the composition of
the market area and the general economic state of the market area, the Company
will strive to maintain real estate loan portfolio diversification. Risk
monitoring of commercial real estate concentrations is performed in accordance
with regulatory guidelines and includes assessment of risk levels of various
types of commercial real estate and review of ratios of various concentrations
of commercial real estate as a percentage of capital.
33
The aggregate amount of loans the
company is permitted to make under applicable bank regulations to any one
borrower is 15% of unimpaired capital. The Banks legal lending limit at September
30, 2014 was $17.8 million. Although the Banks legal lending limit has been
in excess of $10 million for several years, the Bank rarely extends credit in
excess of $5 million to one borrower. There were no material reportable
contingencies as of September 30, 2014.
Agricultural Loans
First Citizens is one of the largest agriculture lenders
in the State of Tennessee and is the only preferred Farm Services Agency
community bank lender in Tennessee. Agriculture makes a significant
contribution to commerce of the Companys core market in Dyer County,
Tennessee, generating over $100 million in revenue on an annual basis.
Agricultural credits including loans secured by farmland and loans to finance
agricultural production comprise $106 million of total loans as of September
30, 2014 compared to $99 million as of September 30, 2013. Net charge-offs in
this category were approximately $19,000 for the nine months ended September
30, 2014 and less than $1,000 for the nine months ended September 30, 2014.
Non-Performing
Loans and Allowance for Loan Losses
Non-performing loans have historically been in the range
of 1-2% of total loans over the past five years. Non-performing loans totaled
$7.3 million as of September 30, 2014 compared to $8.5 million as of December
31, 2013. The decreasing trend of non-performing loans is due to resolution of
non-performing loans exceeding the volume of newly identified problems and
non-performing loans during 2014.
Non-current loans at third quarter end 2014 were $4.5
million or less than one percent of total loans compared to $3.5 million or
less than one percent as of year-end 2013. The difference between
non-performing and non-current loans is due to a certain volume of loans placed
on nonaccrual status in a previous quarter are paying and showing improvements,
but have not yet been on a paying status for long enough or shown enough
financial improvement to return to full accrual status.
The allowance for loan losses totaled 1.23% as of September
30, 2014 compared to 1.35% as of December 2013 and 1.36% as of September 30,
2013. The following recaps activity in the allowance for the first nine months
for each of the past five years (in thousands):
|
Year-To-Date Ended September 30,
|
|
2014
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
Beginning of period balance
|
$7,818
|
|
$7,955
|
|
$8,039
|
|
$8,028
|
|
$8,784
|
Loans charged off
|
(1,273) |
|
(815) |
|
(1,335) |
|
(2,086) |
|
(6,948) |
Recovery of loans previously charged off
|
380
|
|
190
|
|
735
|
|
228
|
|
223
|
Net loans charged-off
|
(893) |
|
(625) |
|
(600) |
|
(1,858) |
|
(6,725) |
Provision for loan losses
|
625
|
|
775
|
|
500
|
|
1,925
|
|
6,000
|
End of period balance
|
$7,550 |
|
$8,105 |
|
$7,939 |
|
$8,095 |
|
$8,059 |
See also Notes 6 and 7 to the financial statements
included elsewhere in this Quarterly Report on Form 10-Q for additional
information regarding the loan portfolio and the allowance for loan losses.
Other
Real Estate Owned
The book value of other real
estate owned (OREO) was $5.5 million as of September 30, 2014 and $6.8
million at December 31, 2013.
As of current quarter end, there
were over 69 properties in OREO consisting primarily of residential lots, land
for development and other commercial purpose properties. Approximately 94% of
the $5.5 million in OREO is located in Shelby County, Tennessee and surrounding
counties. Management continues efforts to market and liquidate OREO with
minimal losses.
34
Accounting for adjustments to the
value of OREO when recorded subsequent to foreclosure is accomplished on the
basis of an independent appraisal. The asset is recorded at the time of
foreclosure at the lesser of its appraised value or the loan balance. Any
reduction in value at the time of acquisition of the property is charged to the
allowance for loan losses. All other real estate parcels are appraised
annually and the carrying value adjusted to reflect the decline, if any, in its
realizable value. Write-downs subsequent to foreclosure and gains or losses on
the sale of OREO are reported in Loss on Sale of Foreclosed Property in the
Non-Interest Income section of the Consolidated Income Statements. The net
loss on sale or writedown of OREO for the third quarter of 2014 totaled
approximately $190,000 compared to approximately $84,000 for the third quarter of
2014.
Other real estate expenses totaled
approximately $103,000 in the third quarter of 2014 compared to approximately $121,000
in the third quarter of 2013. Other real estate expenses consist of expenses
related to owning the property such as property taxes, insurance, property
improvements and maintenance costs.
Activity in OREO for the third quarters of 2014 and 2013
consisted of the following:
|
|
2014 |
|
2013 |
Beginning balance |
|
$5,755 |
|
$8,248 |
Acquisitions |
|
78 |
|
77
|
Capitalized costs |
|
-
|
|
-
|
Dispositions |
|
(158) |
|
(391) |
Valuation adjustments
through earnings |
|
(190) |
|
(84)
|
Ending balance |
|
$5,485 |
|
$7,850 |
Liquidity
Liquidity is managed to ensure
there is ample funding to satisfy loan demand, investment opportunities, and
large deposit withdrawals. The Companys primary funding sources include
customer core deposits, FHLB borrowings, other borrowings, and correspondent
borrowings. Customer based deposits accounted for at least 90% of funding as of
September 30, 2014, September 30, 2013 and year-end 2013. As of both September
30, 2014 and December 31, 2013, the Company had $23 million in deposit funds
from the State of Tennessee.
The Bank participates in
Certificate of Deposit Account Registry Service (CDARS). CDARS is a deposit
placement service that allows the Bank to accept very large-denomination
certificates of deposit (CDs) (up to $50,000,000) from customers and ensures
that 100% of those CDs are FDIC-insured. Participating in this network
enhances the Banks ability to attract and retain large-denomination depositors
without having to place them in a sweep or repurchase agreement. The CDARS
network provides a means to place reciprocal deposits for the Banks customers,
purchase time deposits (referred to as One-Way Buy deposits) or to sell excess
deposits (referred to as One-Way Sell deposits). One-Way Buy deposits are
structured similar to traditional brokered deposits. The Bank held reciprocal
deposits and One-Way Buy deposits in the CDARS program totaling $7.2 million as
of September 30, 2014 compared to $8.4 million as of December 31, 2013. CDARS
accounts are classified as brokered time deposits for regulatory reporting
purposes.
Securities sold under agreements
to repurchase increased $5.5 million from December 31, 2013 to September 30,
2014. Borrowed funds from the FHLB totaled $46.5 million or 4.3% of total
liabilities as of September 30, 2014 compared to $40.9 million or 3.9% of total
funding as of December 30, 2013.
35
Appropriate liquidity risk management remains a high
priority for the Company especially given current conditions in the banking
industry and national economy. The Companys liquidity position is
strengthened by ready access to a diversified base of wholesale borrowings.
These include correspondent borrowings, federal funds purchased, securities
sold under agreements to repurchase, FHLB advances, brokered certificates of
deposit, and others. Rates on wholesale borrowing sources including FHLB
advances, overnight federal funds purchased, and brokered deposits continue to
be funding sources that offer attractive pricing in the current environment.
As of September 30, 2014, the Bank has available lines of
credit for federal fund purchases totaling $54.5 million with four
correspondent banks as well as additional borrowing capacity of $95 million
with FHLB.
The Company maintains a crisis contingency liquidity plan
at the bank and holding company level to defend against any material downturn
in its liquidity position.
Capital
Resources and Regulatory Requirements for Capital
Management of shareholder equity
in a highly regulated environment requires a balance between leverage and
return on equity while maintaining adequate capital amounts and ratios. The
Company and the Bank are subject to federal regulatory capital adequacy
standards. The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, account for off-balance-sheet exposure and minimize
disincentives for holding liquid assets. Failure to meet capital adequacy
requirements could result in certain mandatory, and possibly additional
discretionary, actions by regulators that could have a direct material adverse
effect on the financial condition of the Company and the Bank. Federal
regulations require the Company and 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
policies. The capital classification is also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
The
FDICs capital‑based supervisory system for insured financial institutions
categorizes the capital position for banks into five categories, ranging from
well capitalized to critically undercapitalized. To be well-capitalized,
the Companys and the Banks Tier 1 Risk-Based Capital Ratio (ratio of Tier 1
Capital to risk-weighted assets) must be at least 6%, its Total Risk-Based
Capital Ratio (ratio of total capital to risk-weighted assets) must be at least
10%, and its Tier 1 Leverage Capital Ratio (ratio of Tier 1 Capital to average
assets) must be at least 5%. Equity capital (net of certain adjustments for
intangible assets and investments in non-consolidated subsidiaries and certain
classes of preferred stock) and other certain equity like instruments are
considered Tier 1 Capital. Tier 2 Capital consists of core capital plus
supplementary or temporary capital such as subordinated debt, some types of
preferred stock, and a defined percentage of the allowance for loan losses. The Company has
historically maintained capital in excess of minimum levels established by the
Federal Reserve Board.
As of September 30, 2014, the
Banks Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio and Tier
1 Leverage Capital Ratios were 16.17%, 17.27%, and 9.45%, respectively,
compared to 16.26%, 17.44%, and 9.32% at December 31, 2013. At September 30,
2014, the Companys Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital
Ratio and Tier 1 Leverage Capital Ratios were 17.01%, 18.12% and 9.88%, respectively,
compared to 16.41%, 17.58%, and 9.40% at December 31, 2013. Management
believes, as of September 30, 2014, that the Company and the Bank each met all
capital adequacy requirements to which they are subject. Total capital increased
10.7% during 2014 to $124.6 million. The increase in capital consists of an
increase in unrealized gains on available-for-sale securities as well as
undistributed net income.
On July 2, 2013, the Board of
Governors of the Federal Reserve System approved the final rule for Basel III
capital requirements for all commercial banks charted in the United States of
America. The rule was subsequently approved by the FDIC on July 9, 2013. The
rule will implement in the United States certain of the Basel III regulatory
capital reforms from the Basel Committee on Banking Supervision and certain
changes required by the Dodd-Frank Wall Street Reform and Consumer Protection
Act. The major provisions of the new rule applicable to the Company and the
Bank are:
36
-
The
new rule implements higher minimum capital requirements, includes a new
common equity Tier 1 capital requirement, and establishes criteria that
instruments must meet in order to be considered common equity Tier 1
capital, additional Tier 1 capital, or Tier 2 capital. These enhancements
will both improve the quality and increase the quantity of capital
required to be held by banking organizations, better equipping the U.S.
banking system to deal with adverse economic conditions.
-
The
new minimum capital to risk-weighted assets (RWA) requirements are a
Common Equity Tier 1 Capital Ratio of 4.5% and a Tier 1 Capital Ratio of
6.0% which is an increase from 4.0%, and a Total Capital Ratio that
remains at 8.0%. The minimum Leverage Ratio (Tier 1 capital to total
assets) is 4.0%.
-
The
new rule improves the quality of capital by implementing changes to the
definition of capital. Among the most important changes are stricter
eligibility criteria for regulatory capital instruments that would
disallow the inclusion of instruments such as trust preferred securities
in Tier 1 capital going forward, and new constraints on the inclusion of
minority interests, mortgage-servicing assets (MSAs), deferred tax assets
(DTAs), and certain investments in the capital of unconsolidated financial
institutions. In addition, the new rule requires that most regulatory
capital deductions be made from common equity Tier 1 capital.
-
Under
the new rule, in order to avoid limitations on capital distributions,
including dividend payments and certain discretionary bonus payments to
executive officers, a banking organization must hold a capital
conservation buffer composed of common equity Tier 1 capital above its
minimum risk-based capital requirements. This buffer will help to ensure
that banking organizations conserve capital when it is most needed,
allowing them to better weather periods of economic stress. The buffer is
measured relative to risk weighted assets. Phase-in of the capital
conservation buffer requirements will begin on January 1, 2016. A banking
organization with a buffer greater than 2.5% would not be subject to
limits on capital distributions or discretionary bonus payments; however,
a banking organization with a buffer of less than 2.5% would be subject to
increasingly stringent limitations as the buffer approaches zero. The new
rule also prohibits a banking organization from making distributions or
discretionary bonus payments during any quarter if its eligible retained
income is negative in that quarter and its capital conservation buffer
ratio was less than 2.5% at the beginning of the quarter. When the new
rule is fully phased in, the minimum capital requirements plus the capital
conservation buffer will exceed the prompt corrective action
well-capitalized thresholds.
-
The
new rule also increases the risk weights for past-due loans, certain
commercial real estate loans, and some equity exposures, and makes
selected other changes in risk weights and credit conversion factors.
The transition
period for implementation of Basel III is January 1, 2015, through December 31,
2018.
Dividends per share were $0.25 per share in each of the third
quarters of 2014, 2013 and 2012. The Company continues to pursue a
conservative dividend strategy as part of its strategic efforts to maintain a
strong capital base. The dividend payout ratio was 26.5% for nine months ended
September 30, 2014, compared to 26.3% for the same period in 2013. The Company
anticipates continuing to pay quarterly dividends of $0.25 per share in 2014
and consideration of a special dividend contingent on the Companys actual and
projected earnings and capital levels in December 2014. The dividend payout
ratio for the year ending December 31, 2014 is expected to be in the range of
30-40%, consistent with the prior year.
The Company has re-purchased 440 shares of common stock
for $45.00 per share or $19,800 in aggregate and sold 358 shares of its own common
stock for $45.00 per share or $16,110 in aggregate in the open market during the
three months ended September 30, 2014. The Company has no formal plans or
programs in place to repurchase common stock or Class A common stock.
37
Recently
Issued Accounting Standards
ASU
2014-14, Receivables Troubled Debt Restructurings by Creditors (Subtopic
310-40). ASU 2014-14 applies to creditors that hold government-guaranteed
mortgage loans, including those guaranteed by the Federal Housing
Administration and the Veterans Administration. The amendments in this update
require that a mortgage loan be derecognized and that a separate receivable be
recognized upon foreclosure if the following conditions are met: (1) the loan
has a government guarantee that is not separable from the loan before
foreclosure; (2) at the time of foreclosure, the creditor has the intent to
convey the real estate property to the guarantor and make a claim on the
guarantee, and the creditor has the ability to recover under that claim; and
(3) at the time of foreclosure, any amount of the claim that is determined on
the basis of the fair value of the real estate is fixed. Upon foreclosure, the
separate receivable should be measured based on the amount of the loan balance
(principal and interest) expected to be recovered from the guarantor. ASU
2014-14 is effective for public business entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2014.
The new standard is not expected to have a material impact on the Companys
financial statements.
ASU 2014-15,
Presentation of
Financial Statements Going Concern (Subtopic 205-40). ASU 2014-15
applies to all entities and requires management to assess an entitys ability
to continue as a going concern by incorporating and expanding upon certain
principles that are currently in U.S. auditing standards. Specifically, the
update (1) provides a definition of the term substantial doubt; (2) requires an
evaluation every reporting period including interim periods; (3) provides
principles for considering the mitigating effect of managements plans; (4) requires
certain disclosures when substantial doubt is alleviated as a result of
consideration of managements plans; (5) requires an express statement and
other disclosures when substantial doubt is not alleviated; and (6) requires an
assessment for a period of one year after the date that the financial
statements are issued (or available to be issued). The amendments in this
update are effective for the annual period ending after December 5, 2016, and
for annual periods and interim periods thereafter. Early application is
permitted. The new standard is not expected to have a material impact on the Companys
financial statements.
Interest
Rate Risk
The Bank maintains a formal asset
and liability management process to quantify, monitor and control interest rate
risk. The Funds Management Committee strives to maintain stability in net
interest margin assuming various interest rate cycles. Multiple strategies are
utilized to reduce interest rate risk and include but are not limited to the
following: use of Federal Home Loan Bank borrowings, shortening or lengthening
the re-pricing date of loans and/or time deposits depending on the current rate
environment, managing overnight borrowings exposure, and increased
mortgage-related investments securities to provide constant cash inflows. As
of September 30, 2014, the Company is in a liability sensitive position in
which the Company would likely experience a dilution in net interest margin in
a rising rate environment. Interest rate risk exposures are within policy
limits. Net interest margins remain stable at 3.85% for the quarter ended September
30, 2014.
The current interest rate
environment and condition of the financial markets creates a unique scenario
with attributes that are difficult to quantify in traditional models.
Management is aware of such issues and attempts to implement conservative and
realistic assumptions as much as possible. Models are back-tested and run
under various scenarios to help assist in validating such assumptions. One
example of the uniqueness of this environment is an inability to factor into
quantitative models the impact of irrational pricing of retail deposits that
has and may continue to occur when interest rates begin rising in the future.
In an upward rate environment, the Bank may find that competitive pressures
force greater rate increases than seen in historical trends and traditional
rate shock scenarios and may also hinder the ability to push rates any lower in
a prolonged low rate environment. For additional discussion of interest rate
risk, see the Companys Registration Statement on Form S-4 filed July 18, 2014
During the three months ended September 30, 2014, there were
no significant changes to the quantitative and qualitative disclosures about
market risks presented in the Companys Registration Statement on Form S-4/A
filed August 21, 2014.
38
ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and
operation of disclosure controls and procedures was performed as of September
30, 2014 under the supervision and with the participation of Management,
including the Chief Executive Officer and Chief Financial Officer. Based on
that evaluation, Management, including the Chief Executive Officer and Chief
Financial Officer, concluded that disclosure controls and procedures were
designed and operating effectively as of September 30, 2014.
Changes in Internal Control over Financial Reporting
There have been no material changes in the Companys
internal control over financial reporting during the three months ended September
30, 2014 that have materially affected, or are reasonably likely to materially
affect the Companys internal control over financial reporting.
39
There were no material legal proceedings filed against the
Company or its subsidiaries as of this report date.
There have been no material changes from the risk factors
previously disclosed in the Companys Registration Statement on Form S-4 filed
July 18, 2014.
The Company has re-purchased 440
shares of common stock for $45.00 per share or $19,800 in aggregate and sold
358 shares of its own common stock for $45.00 per share or $16,110 in aggregate
in the open market during the three months ended September 30, 2014. Treasury
stock purchases for third quarter 2014 occurred as follows:
|
Shares
|
|
Average
|
|
|
Purchased |
|
Price per Share |
|
July 1 to July 31, 2014
|
340
|
|
$45.00
|
|
August 1 to August 31, 2014
|
-
|
|
-
|
|
September 1 to September 30, 2014
|
100
|
|
$45.00
|
|
Total
|
440
|
|
$45.00
|
|
Exhibit Number |
|
Description |
2.1
|
|
Agreement and
Plan of Merger, dated as of March 20, 2014, between First Citizens
Bancshares, Inc. and Southern Heritage Bancshares, Inc. (a) |
2.2
|
|
First Amendment
to Agreement and Plan of Merger, dated as of June 27, 2014, between First
Citizens Bancshares, Inc. and Southern Heritage Bancshares, Inc. (a) |
2.3
|
|
Second
Amendment to Agreement and Plan of Merger, dated as of August 14, 2014, between
First Citizens Bancshares, Inc. and Southern Heritage Bancshares, Inc. (a)
|
3.1
|
|
Charter of
First Citizens Bancshares, Inc., as amended. (b) |
3.2
|
|
Articles of
Amendment to the Charter of First Citizens Bancshares, Inc. (c) |
3.3
|
|
Bylaws of First
Citizens Bancshares, Inc., as amended. (b) |
10.1
|
|
Loan Agreement,
dated as of October 1, 2014, by and between First Citizens Bancshares, Inc.
and First Tennessee Bank, National Association. (d) |
10.2
|
|
Pledge and
Security Agreement, dated as of October 1, 2014, by and between First
Citizens Bancshares, Inc. and First Tennessee Bank, National Association. (d)
|
10.3
|
|
Promissory Note
(Fixed Rate), dated as of October 1, 2014, by and between First Citizens
Bancshares, Inc. and First Tennessee Bank, National Association. (d) |
10.4
|
|
Promissory Note
(Floating Rate), dated as of October 1, 2014, by and between First Citizens
Bancshares, Inc. and First Tennessee Bank, National Association. (d) |
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act
of 2002 |
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act
of 2002 |
32
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the SarbanesOxley Act of 2002
|
40
101.INS
|
|
XBRL Instance
Document |
101.SCH
|
|
XBRL Schema Document
|
101.CAL
|
|
XBRL Calculation Linkbase
Document |
101.LAB
|
|
XBRL Label Linkbase Document
|
101.PRE
|
|
XBRL Presentation Linkbase
Document |
101.DEF
|
|
XBRL Definition Linkbase
Document |
|
|
|
|
|
|
|
(a) |
|
Incorporated by reference to Annex A of First
Citizens Bancshares, Incs registration statement on Form S-4/A, dated August
21, 2014 (File No. 333-197512). |
|
|
|
(b) |
|
Incorporated by reference to First
Citizens Bancshares, Inc.s Annual Report on Form 10-K for the year ended
December 31, 2008 (File No. 000-11709). |
|
|
|
(c) |
|
Incorporated by reference to First
Citizens Bancshares, Inc.s registration statement on Form S-4 filed on July
18, 2014 (Registration No. 333-197512). |
|
|
|
(d) |
|
Incorporated by reference to First
Citizens Bancshares, Inc.s Current Report on Form 8-K, filed on October 1,
2014 (File No. 333-197512). |
|
|
|
41
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
First
Citizens Bancshares, Inc.
(Registrant)
|
|
|
|
|
|
|
Date: November 10, 2014
|
/s/
Jeffrey D. Agee
|
|
Jeffrey
D. Agee,
|
|
Chief
Executive Officer and President
|
|
|
|
|
Date: November 10, 2014
|
/s/Laura
Beth Butler
|
|
Laura
Beth Butler,
|
|
Executive
Vice President, Chief Financial Officer & Secretary
|
42
Exhibit Index
Exhibit Number |
|
Description |
2.1
|
|
Agreement and
Plan of Merger, dated as of March 20, 2014, between First Citizens
Bancshares, Inc. and Southern Heritage Bancshares, Inc. (a) |
|
2.2
|
|
First Amendment
to Agreement and Plan of Merger, dated as of June 27, 2014, between First
Citizens Bancshares, Inc. and Southern Heritage Bancshares, Inc. (a) |
|
2.3
|
|
Second Amendment
to Agreement and Plan of Merger, dated as of August 14, 2014, between First
Citizens Bancshares, Inc. and Southern Heritage Bancshares, Inc. (a) |
|
3.1
|
|
Charter of
First Citizens Bancshares, Inc., as amended. (b) |
|
3.2
|
|
Articles of
Amendment to the Charter of First Citizens Bancshares, Inc. (c) |
|
3.3
|
|
Bylaws of First
Citizens Bancshares, Inc., as amended. (b) |
|
10.1
|
|
Loan Agreement,
dated as of October 1, 2014, by and between First Citizens Bancshares, Inc.
and First Tennessee Bank, National Association. (d) |
|
10.2
|
|
Pledge and
Security Agreement, dated as of October 1, 2014, by and between First
Citizens Bancshares, Inc. and First Tennessee Bank, National Association. (d)
|
|
10.3
|
|
Promissory Note
(Fixed Rate), dated as of October 1, 2014, by and between First Citizens
Bancshares, Inc. and First Tennessee Bank, National Association. (d) |
|
10.4
|
|
Promissory Note
(Floating Rate), dated as of October 1, 2014, by and between First Citizens
Bancshares, Inc. and First Tennessee Bank, National Association. (d) |
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act
of 2002 |
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act
of 2002 |
|
32
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the SarbanesOxley Act of 2002
|
|
101.INS
|
|
XBRL Instance
Document |
|
101.SCH
|
|
XBRL Schema Document
|
|
101.CAL
|
|
XBRL Calculation Linkbase
Document |
|
101.LAB
|
|
XBRL Label Linkbase Document
|
|
101.PRE
|
|
XBRL Presentation Linkbase
Document |
|
101.DEF
|
|
XBRL Definition Linkbase
Document |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Incorporated by reference to Annex A of
First Citizens Bancshares, Incs registration statement on Form S-4/A,
dated August 21, 2014 (File No. 333-197512). |
|
|
|
(b) |
|
Incorporated by reference to First
Citizens Bancshares, Inc.s Annual Report on Form 10-K for the year ended
December 31, 2008 (File No. 000-11709). |
|
|
|
(c) |
|
Incorporated by reference to First
Citizens Bancshares, Inc.s registration statement on Form S-4 filed on July
18, 2014 (Registration No. 333-197512). |
|
|
|
(d) |
|
Incorporated by reference to First
Citizens Bancshares, Inc.s Current Report on Form 8-K, filed on October 1,
2014 (File No. 333-197512). |
In connection with the quarterly report of First Citizens Bancshares,
Inc. (the Company) on Form 10‑Q for the quarter ended
September 30, 2014, as filed with the Securities and Exchange Commission
on the date hereof (the Report), Jeffrey D. Agee, as Chief Executive Officer
of the Company, and Laura Beth Butler, as Chief Financial Officer of the
Company, each hereby certifies, pursuant to 18 U.S.C. Sec. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: