The accompanying notes are an
integral part of the consolidated financial statements.
NOTE 1 – GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies
The accounting
principles followed and the methods of applying those principles conform with
accounting principles generally accepted in the United States (“GAAP”) and to
general practices in the banking industry. The significant accounting policies
applicable to First Farmers and Merchants Corporation are summarized as
follows.
Basis of Presentation
The
accompanying consolidated financial statements present the accounts of the
Corporation and its wholly-owned subsidiary, First Farmers and Merchants Bank.
The Bank has the following direct and indirect subsidiaries: F & M West,
Inc., Maury Tenn, Inc., and Maury Tenn Properties, Inc. Noncontrolling
interests consist of preferred shares in Maury Tenn Properties, Inc. that are
owned by third parties and Maury Tenn, Inc. The preferred shares in Maury Tenn
Properties, Inc. receive dividends, which are included in the consolidated
statements of income. Material intercompany accounts and transactions have
been eliminated in consolidation.
Certain items
in prior financial statements have been reclassified to conform to the current
presentation. The Corporation has evaluated subsequent events for potential
recognition and/or disclosure through March 15, 2013, the date these
consolidated financial statements were issued.
Use of Estimates in
the Preparation of Financial Statements
The
preparation of financial statements in conformity with GAAP requires management
of the Corporation and the Bank to make estimates and assumptions that affect
the reported amounts of assets and liabilities. Those estimates and
assumptions also affect disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
and lease losses, the fair value of financial instruments, the core deposit
intangibles, the valuation of foreclosed real estate, deferred tax assets and
the liability related to post-retirement benefits.
Significant Group
Concentrations of Credit Risk
Note 3 discusses
the types of securities in which the Bank invests. Note 4 discusses the types
of lending in which the Bank engages. First mortgage loans secured by one-to-four
family residential properties comprised 27.8% of the total loan portfolio at December
31, 2011. Management of the Bank recognizes this concentration and believes
the risk is acceptable given the quality of underwriting, current market
conditions and historical loss experience.
Loans secured by
non-farm/non-residential real estate comprised 27.1% of the loan portfolio at December
31, 2011. Management remains comfortable with the real estate exposure levels
within the commercial loan portfolio. Management believes the commercial real
estate portion remains well diversified across several different property types
and several different geographic markets, stretching primarily from Davidson
County, Tennessee to northern Alabama.
The Bank continues
to monitor and manage its exposure to single borrowing entities and its
exposure to groups of borrowers within the same industry. Within the
commercial loan portfolio, the Bank continues to report heavy exposure in five
broad industry categories: health care and social assistance; manufacturing;
real estate rental and leasing; public administration; and other services
(except public administration).
30
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
Cash and Due From
Banks
Included in cash
and due from banks are reserve amounts that are required to be maintained on an
average balance in the form of cash and balances due from the Federal Reserve
Bank and other banks. At December 31, 2011, the Bank was required to maintain
an average of $25,310 at the Federal Reserve. Interest-bearing deposits in
banks mature within one year and are carried at cost. From time to time
throughout the year, the Bank’s balances due from other financial institutions
exceeded Federal Deposit Insurance Corporation insurance limits. Furthermore,
federal funds sold are essentially uncollateralized loans to other financial
institutions. Management considers this to be a normal business risk.
Cash Equivalents
Cash equivalents
include cash on hand, cash due from banks and federal funds sold. Federal
funds are sold for one-day periods. Interest-bearing deposits in banks
included in cash equivalents mature within 90 days.
Securities
Debt securities
that management has the intent and ability to hold to maturity are classified
as held-to-maturity and reported at amortized cost.
Securities not
classified as held-to-maturity, including equity securities with readily
determinable fair values, are classified as available-for-sale. These
securities are reported at fair value, with unrealized gains and losses, net of
deferred tax, excluded from earnings and are reported in other comprehensive
income.
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of
individual available-for-sale and held-to-maturity securities below their cost
that are other than temporary are included in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (i) the
length of time and the extent to which the fair value has been less than cost,
(ii) the financial condition and near-term prospects of the issuer and (iii)
the intent and ability of the Bank to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sales of securities are recorded on the trade date and
are determined using the specific identification method.
Securities Sold Under
Agreements to Repurchase
Securities sold under
agreements to repurchase, which are classified as secured borrowings, generally
mature within one to four days from the transaction date. Securities sold
under agreements to repurchase are reflected at the amount of cash received in
connection with the transaction
Loans
The Bank
grants mortgage, commercial and consumer loans to customers. Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or payoff generally are stated at their outstanding unpaid
principal balances, net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Interest on
loans is accrued daily. Loan origination fees and related direct costs are
deferred and recognized ratably over the life of the loan as an adjustment of
yield. Interest accruals are discontinued when loans are 90 days past due or
when interest is not expected to be collected. Interest income previously
accrued on such loans is reversed against current period interest income.
Interest income on loans in nonaccrual status is recognized only to the extent
of the excess of cash payments received over principal payments due.
31
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
Allowance for Loan
and Lease Losses
The allowance
for loan and lease losses is established through provisions for loan and lease
losses charged against income. Loan losses are charged against the allowance
when management determines that the uncollectibility of a loan has been
confirmed. Subsequent recoveries, if any, are credited to the allowance
account in the period received.
The adequacy of
the allowance for loan and lease losses is evaluated quarterly in conjunction
with loan review reports and evaluations that are discussed in meetings with
loan officers, credit administration and the Bank’s Board of Directors. The
Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect a borrower's ability to repay (including the
timing of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors are considered in this evaluation. This process is inherently
subjective as it requires material estimates that are susceptible to
significant change, including the amounts and timing of future cash flows
expected to be received on impaired loans. The allowance for loan and lease
losses is maintained at a level believed adequate by management to absorb
estimated losses inherent in the loan portfolio.
A loan is
considered impaired when it is probable that the Bank will be unable to collect
all amounts due (principal and interest) according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record and the amount of the shortfall in relation to the
principal and interest owed.
Impairment
is measured on a loan-by-loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price, or the fair value
of the collateral if the loan is collateral dependent. The Bank evaluates
smaller-balance homogeneous loans collectively for impairment. Loans secured
by one to four family residential properties, consumer installment loans and
line of credit loans are considered smaller-balance homogeneous loans.
Loans Held for Sale
Loans held for sale, which is included in other
assets, includes mortgage loans and are reported at the lower of cost or market
value. Cost generally approximates market value, given the short duration of
these assets. The Company does not retain servicing rights on loans sold.
Other Real Estate
Other real estate, which is included in other assets,
represents real estate acquired through foreclosure and is stated at the lower
of fair value, net of estimated selling costs, or cost, at the date of
foreclosure. If, at the time of foreclosure, the fair value of the real estate
is less than the Bank's carrying value of the related loan, a write-down is
recognized through a charge to the allowance for loan losses, and the fair
value becomes the new cost for subsequent accounting. If the Bank later
determines that the cost of the property cannot be
recovered through
sale or use, a write-down is recognized by a charge to operations.
When a
property is not in a condition suitable for sale or use at the time of
foreclosure, completion and holding costs, including such items as real estate
taxes, maintenance and insurance, are capitalized up to the estimated net
realizable value of the property. However, when a property is in a condition
for sale or use at the time of foreclosure, or the property is already carried
at its estimated net realizable value, any subsequent holding costs are
expensed as incurred.
32
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
Legal fees and
any other direct costs relating to foreclosures are charged to operations when
incurred. The Bank had $8,827 in other real estate at December 31, 2011 and $7,927
at December 31, 2010. A loss of $948 was realized on sales of other real
estate during 2011 and $2,434 was realized during 2010.
Premises and
Equipment
Premises and
equipment are stated at cost, less accumulated depreciation and amortization.
The provision for depreciation is computed principally on an accelerated method
over the estimated useful life of an asset, which ranges from 15 to 50 years
for buildings and from three to 33 years for equipment. Costs of major
additions and improvements are capitalized. Expenditures for maintenance and
repairs are charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the asset accounts and
related allowances for depreciation are reduced.
Servicing
Loans serviced
for others are not included in the accompanying consolidated balance sheets.
The unpaid principal balances of mortgage and other loans serviced for others was
$9,261and $14,599 at December 31, 2011 and 2010, respectively. The present
value of servicing income is expected to approximate an adequate compensation
cost for servicing these loans. Therefore, no servicing asset has been
recorded.
Income Taxes
The
Corporation and the Bank file a consolidated federal income tax return.
Deferred income taxes are provided using the liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry-forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and its tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more-likely-than-not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of the changes in tax laws and rates as of the
date of enactment.
The
Corporation adopted the provisions of Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes”, effective
July 2009. ASC Topic 740 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Benefits from tax
positions should be recognized in the financial statements only when it is more-likely-than-not
that the tax position will be sustained upon examination by the appropriate
taxing authority that would have full knowledge of all relevant information. A
tax position that meets the more-likely-than-not recognition threshold is
measured at the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. Tax positions that previously failed
to meet the more-likely-than-not recognition threshold should be recognized in
the first subsequent financial reporting period in which that threshold is
met. Previously recognized tax positions that no longer meet the
more-likely-than-not threshold should be derecognized in the first subsequent
financial reporting period in which that threshold is no longer met. ASC Topic
740 also provides guidance on the accounting for and disclosure of unrecognized
tax benefits, interest and penalties.
Interest and
penalties associated with unrecognized tax benefits are classified as
additional income taxes in the statement of income.
Trust Department
Assets and Income
Trust
department assets are excluded from the balance sheet and income related to the
trust department’s operations is recognized on the accrual basis in the
applicable period earned.
33
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
Fair Value
Measurements
FASB ASC Topic
820, “Fair Value Measurements and Disclosures”, defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and requires certain disclosures about fair value measurements.
See Note 12 – Fair Value Measurement. In general, fair values of financial
instruments are based upon quoted market prices, where available. If such
quoted market prices are not available, fair value is based upon internally
developed models that primarily use, as input, observable market-based
parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. These adjustments may include amounts
to reflect counterparty credit quality and the Corporation’s creditworthiness,
among other things, as well as unobservable parameters. Any such valuation
adjustments are applied consistently over time.
Shareholders’ Equity
and Earnings Per Share
Basic earnings
per share represent income available to shareholders divided by the weighted
average number of shares of Corporation common stock outstanding during the
period. Diluted earnings per share reflect additional shares of common stock that
would have been outstanding if potentially dilutive shares of common stock had
been issued, as well
as any adjustment to income
that would result from the assumed conversion. For the years ended December
31, 2011, 2010 and 2009, there were no potentially dilutive shares of common
stock issuable.
In 2011, the
Corporation adopted a plan to repurchase shares of its common stock. The plan
allowed the purchase of up to 100,000 shares. The Corporation purchased 100,000
shares in 2011. For 2010, the Corporation adopted a similar plan allowing it
to repurchase up to 100,000 shares of common stock. The Corporation
repurchased 76,993 shares in 2010.
Comprehensive Income
Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. A schedule of other comprehensive income is shown in the
following table (dollars in thousands):
|
|
Years
Ended December 31,
|
|
|
|
|
|
|
|
Restated
|
Restated
|
Restated
|
|
|
2011
|
2010
|
2009
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on available-for-sale
|
|
|
|
|
securities
|
$
|
7,688
|
$
|
(912)
|
$
|
1,090
|
|
Reclassification
adjustment for gains realized in income on
|
|
|
|
|
available-for-sale
securities
|
(1,458)
|
(1,614)
|
(2,481)
|
|
Tax
effect - (expense) benefit on available-for-sale securities
|
(2,399)
|
973
|
535
|
|
Change
in unrecognized net actuarial gain (loss) on
|
|
|
|
|
postretirement
benefit obligation
|
3,155
|
111
|
740
|
|
Reclassification
adjustment for gains(losses) realized in
|
|
|
|
|
expense
on postretirement benefit obligation
|
(2,663)
|
77
|
(690)
|
|
Tax
effect - (expense) benefit on postretirement benefit
|
|
|
|
|
obligation
|
1,448
|
(120)
|
404
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
$
|
5,771
|
$
|
(1,485)
|
$
|
(402)
|
34
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
Intangible Assets
Goodwill is
accounted for in accordance with FASB ASC Topic 350, “Goodwill and Other
Intangible Assets,” which addresses the financial accounting and reporting for
acquired goodwill and other intangible assets with indefinite lives. Pursuant
to ASC Topic 350, intangible assets must be periodically tested for impairment.
The Bank completed its impairment review of goodwill and intangible assets
during 2011, which indicated no impairment. Goodwill, amounting to $9,018, is
included in other intangibles. Deposit based intangibles are amortized using
the straight-line method over their estimated useful lives of 72 to 180 months.
The estimated aggregate future amortization expense for intangible assets
remaining as of December 31, 2011 was $19.
Segment Reporting
Segments are
strategic business units that offer different products and services and are
managed separately. At December 31, 2011, the Corporation and the Bank did not
have any identified segments.
Recent Accounting
Pronouncements
FASB
ASC Topic 320, “Investments—Debt and Equity Securities” (i) changed existing
guidance for determining whether an impairment is other than temporary to debt
securities and (ii) replaced the existing requirement that the entity’s
management assert it has both the intent and ability to hold an impaired
security until recovery with a requirement that management assert: (a) it does
not have the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost basis. Under ASC
Topic 320, declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses to the extent the impairment is related
to credit losses. The amount of the impairment related to other factors is
recognized in other comprehensive income. This guidance became effective during
the first quarter of 2009 and did not significantly impact the Corporation’s
financial statements.
FASB
ASC Topic 715, “Compensation - Retirement Benefits” expanded disclosure
requirements related to plan assets of defined benefit pension or other
post-retirement benefit plans effective, for the Corporation, beginning with
the year-ended December 31, 2009. See Note 17 – Employee Benefit Plans and Note
18 – Post Retirement Benefit Plan.
FASB
ASC Topic 805, “Business Combinations” became applicable to the Corporation’s
accounting for business combinations closing on or after January 1, 2009. ASC
Topic 805 requires an acquirer, upon initially obtaining control of another
entity, to recognize the assets, liabilities and any non-controlling interest
in the acquiree at fair value as of the acquisition date. Any contingent
consideration is also required to be recognized and measured at fair value on
the date of acquisition. Acquisition-related costs are to be expensed as incurred.
Assets acquired and liabilities assumed in a business combination that arise
from contingencies are to be recognized at fair value if fair value can be reasonably
estimated. ASC Topic 805 also expands required disclosures regarding the nature
and financial effect of business combinations.
FASB
ASC Topic 810, “Consolidation” amended prior guidance to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. Under ASC Topic 810, a non-controlling
interest in a subsidiary, which is sometimes referred to as minority interest,
is an ownership interest in the consolidated entity that should be reported as
a component of equity in the consolidated financial statements. Among other
requirements, ASC Topic 810 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. The new
authoritative accounting guidance under ASC Topic 810 became effective for the
Corporation on January 1, 2009.
35
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
FASB ASC Topic
815, “Derivatives and Hedging” requires entities that utilize derivative
instruments to provide qualitative disclosures about (i) how and why an entity
uses derivative instruments, (ii) how derivative instruments and related hedge
items are accounted for and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, results of operations and cash
flows. To meet those objectives, ASC Topic 815 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. This new guidance was effective January 1, 2009 and did
not have a significant impact on the Corporation’s consolidated financial
statements.
FASB
ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. The provisions of ASC Topic 820 became effective for the Corporation
on January 1, 2008 for financial assets and financial liabilities and on
January 1, 2009 for non-financial assets and non-financial liabilities. Additional
new accounting guidance under ASC Topic 820, which became effective during the
first quarter of 2009, expanded certain disclosure requirements and affirmed
that the objective of fair value when the market for an asset is not active is
the price that would be received to sell the asset in an orderly transaction, and
clarifies and includes additional factors for determining whether there has
been a significant decrease in market activity for an asset when the market for
that asset is not active. ASU 2009-5, “Fair Value Measurements and Disclosures
(Topic 820) - Measuring Liabilities at Fair Value,” which became effective
during the fourth quarter of 2009, provided guidance for measuring the fair
value of a liability in circumstances in which a quoted price in an active
market for the identical liability is not available. See Note 13 - Fair Value
Measurements.
FASB
ASC Topic 855, “Subsequent Events” establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. The new
authoritative accounting guidance under ASC Topic 855 became effective for the
Corporation’s financial statements for periods ending after June 15, 2009 and
did not have a significant impact on the Corporation’s financial statements.
Accounting
Standards Update (“ASU”) No. 2010-06 “Fair Value Measurement and Disclosures,”
(ASC Topic 820), “Improving Disclosures About Fair Value Measurement,” (“ASU
2010-06”) requires expanded disclosures related to fair value measurements
including (i) the amounts of significant transfers of assets or liabilities
between Levels 1 and 2 of the fair value hierarchy and the reasons for the
transfers, (ii) the reasons for transfer of assets or liabilities in or out of
Level 3 of the fair value hierarchy, with significant transfer disclosed
separately, (iii) the policy for determining when transfer between levels of
the fair value hierarchy are recognized and (iv) for recurring fair value
measurements of assets and liabilities in Level 3 of the fair value hierarchy,
a gross presentation of information about purchases, sales, issuances and
settlements. ASU 2010-06 further clarifies that (i) fair value measurement
disclosures should be provided for each class of assets and liabilities (rather
than major category), which would generally be a subset of assets or
liabilities within a line item in the statement of financial position and (ii)
company’s should provide disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value
measurements for each class of assets and liabilities included in levels 2 and
3 of the fair value hierarchy. The disclosures related to the gross
presentation of purchases, sales, issuances and settlements of assets and
liabilities included in Level 3 of the fair value hierarchy will be required
for the Corporation beginning January 1, 2011. The remaining disclosure
requirements and clarifications made by ASU 2010-06 became effective for the
Corporation on January 1, 2010. See Note 13 – Fair Value Measurement.
ASU No. 2010-10,
“Consolidations (Topic 810) - Amendments for Certain Investment Funds” defers
the effective date of the amendments to the consolidation requirements made by
ASU 2009-17 to a company’s interest in an entity (i) that has all of the
attributes of an investment company, as specified under ASC Topic 946,
“Financial Services - Investment Companies,” or (ii) for which it is industry
practice to apply measurement principles of financial reporting that are
consistent with those in ASC Topic 946. As a result of the deferral, a company
will not be required to apply the ASU 2009-17 amendments to the Subtopic 810-10
consolidation requirements to its interest in an entity that meets the criteria
to qualify for the deferral. ASU 2010-10 also clarifies that any interest held
by a related party should be treated as though it is an entity’s own interest
when evaluating the criteria for determining whether such interest represents a
variable interest. In addition, ASU 2010-10 also clarifies that a quantitative
calculation should not be the sole basis for evaluating whether a decision
maker’s or service provider’s fee is a variable interest. The provisions of ASU
2010-10 became effective for the Corporation as of January 1, 2010 and did not
have a significant impact on the Corporation’s financial statements.
36
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
ASU
No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses” requires entities
to provide disclosures designed to facilitate financial statement users’
evaluation of (i) the nature of credit risk inherent in the entity’s portfolio
of financing receivables, (ii) how that risk is analyzed and assessed in
arriving at the allowance for credit losses and (iii) the changes and reasons
for those changes in the allowance for credit losses. Disclosures must be
disaggregated by portfolio segment, the level at which an entity develops and documents
a systematic method for determining its allowance for credit losses, and class
of financing receivable, which is generally a disaggregation of portfolio segment.
The required disclosures include, among other things, a rollforward of the
allowance for credit losses as well as information about modified, impaired, non-accrual
and past due loans and credit quality indicators. ASU 2010-20 became effective
for the Corporation’s financial statements as of December 31, 2010, as it
relates to disclosures required as of the end of a reporting period.
Disclosures that relate to activity during a reporting period became effective
for the Corporation’s financial statements on January 1, 2011. Certain
disclosures related to troubled debt restructurings were temporarily deferred
by ASU 2011-01, “Receivables (Topic 310) - Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” and
became effective on July 1, 2011 as required by ASU No. 2011-02, “Receivables
(Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a
Troubled Debt Restructuring,” as further discussed below. See Note 4 – Loans.
ASU
No. 2010-28, “Intangibles - Goodwill and Other (Topic 350) - When to Perform
Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts” modifies Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting
units, an entity is required to perform Step 2 of the goodwill impairment test
if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that a goodwill impairment exists, an entity
should consider whether there are any adverse qualitative factors indicating
that an impairment may exist such as if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. ASU 2010-28 became effective for the Corporation on
January 1, 2011 and did not have a significant impact on the Corporation’s financial
statements.
ASU
No. 2010-29, “Business Combinations (Topic 805) - Disclosure of Supplementary
Pro Forma Information for Business Combinations” provides clarification
regarding the acquisition date that should be used for reporting the pro forma
financial information disclosures required by Topic 805 when comparative
financial statements are presented. ASU 2010-29 also requires entities to
provide a description of the nature and amount of material, nonrecurring pro
forma adjustments that are directly attributable to the business combination.
ASU 2010-29 is effective for the Corporation prospectively for business combinations
occurring after December 31, 2010.
ASU
No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a
Restructuring Is a Troubled Debt Restructuring” clarifies which loan
modifications constitute troubled debt restructurings and is intended to assist
creditors in determining whether a modification of the terms of a receivable
meets the criteria to be considered a troubled debt restructuring, both for
purposes of recording an impairment loss and for disclosure of troubled debt
restructurings. In evaluating whether a restructuring constitutes a troubled
debt restructuring, a creditor must separately conclude, under the guidance clarified
by ASU 2011-02, that both of the following exist: (a) the restructuring
constitutes a concession; and (b) the debtor is experiencing financial
difficulties. ASU 2011-02 became effective for the Corporation on July 1,
2011, and applies retrospectively to restructurings occurring on or after
January 1, 2011. See Note
4 - Loans.
ASU
No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of
Effective Control for Repurchase Agreements” is intended to improve financial
reporting of repurchase agreements and other agreements that both entitle and
obligate a transferor to repurchase or redeem financial assets before their
maturity. ASU 2011-03 removes from the assessment of effective control (i) the
criterion requiring the transferor to have the ability to repurchase or redeem
the financial assets on substantially the agreed terms, even in the event of
default by the transferee, and (ii) the collateral maintenance guidance related
to that criterion. ASU 2011-03 will be effective for the Corporation on January
1, 2012 and is not expected to have a significant impact on the Corporation’s financial
statements.
37
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
ASU
2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common
Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS”
amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the
fair value measurement guidance in U.S. generally accepted accounting
principles and International Financial Reporting Standards. ASU 2011-04
clarifies the application of existing fair value measurement requirements,
changes certain principles in Topic 820 and requires additional fair value
disclosures. ASU 2011-04 is effective for annual periods beginning after
December 15, 2011, and is not expected to have a significant impact on the
Corporation’s financial statements.
ASU
2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive
Income” amends Topic 220, “Comprehensive Income,” to require that all non-owner
changes in stockholders’ equity be presented in either a single continuous
statement of comprehensive income or in two separate but consecutive
statements. Additionally, ASU 2011-05 requires entities to present, on the face
of the financial statements, reclassification adjustments for items that are
reclassified from other comprehensive income to net income in the statement or
statements where the components of net income and the components of other comprehensive
income are presented. The option to present components of other comprehensive
income as part of the statement of changes in stockholders’ equity was
eliminated. ASU 2011-05 is effective for annual and interim periods beginning
after December 15, 2011; however, certain provisions related to the presentation
of reclassification adjustments have been deferred by ASU 2011-12
“Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments
to the Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05,” as further
discussed below. ASU 2011-05 is not expected to have a significant impact on
the Corporation’s financial statements.
ASU
2011-08, “Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for
Impairment” amends Topic 350, “Intangibles – Goodwill and Other,” to give
entities the option to first assess qualitative factors to determine whether
the existence of events or circumstances leads to a determination that it is
more likely than not that the fair value of a reporting unit is less than its
carrying amount. If, after assessing the totality of events or circumstances,
an entity determines it is not more likely than not that the fair value of a
reporting unit is less than its carrying amount, then performing the two-step
impairment test is unnecessary. However, if an entity concludes otherwise, then
it is required to perform the first step of the two-step impairment test by
calculating the fair value of the reporting unit and comparing the fair value
with the carrying amount of the reporting unit. ASU 2011-08 is effective for
annual and interim impairment tests beginning after December 15, 2011, and is
not expected to have a significant impact on the Corporation’s financial
statements.
ASU
2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and
Liabilities” amends Topic 210, “Balance Sheet,” to require an entity to
disclose both gross and net information about financial instruments, such as
sales and repurchase agreements and reverse sale and repurchase agreements and
securities borrowing/lending arrangements, and derivative instruments that are
eligible for offset in the statement of financial position and/or subject to a
master netting arrangement or similar agreement. ASU 2011-11 is effective for
annual and interim periods beginning on January 1, 2013, and is not expected to
have a significant impact on the Corporation’s financial statements.
ASU
2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out of Accumulated
Other Comprehensive Income in Accounting Standards Update No. 2011-05” defers
changes in ASU No. 2011-05 that relate to the presentation of reclassification
adjustments to allow the FASB time to redeliberate whether to require
presentation of such adjustments on the face of the financial statements to
show the effects of reclassifications out of accumulated other comprehensive
income on the components of net income and other comprehensive income. ASU
2011-12 allows entities to continue to report reclassifications out of
accumulated other comprehensive income consistent with the presentation
requirements in effect before ASU No. 2011-05. All other requirements in ASU
No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 is effective for
annual and interim periods beginning after December 15, 2011 and is not
expected to have a significant impact on the Corporation’s financial statements.
NOTE 2 – RESTATEMENT OF
2011, 2010 AND 2009 FINANCIAL STATEMENTS
38
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
As part of the
Corporation’s year-end financial review, the Corporation determined that it had
not properly recognized the other comprehensive income for the post-retirement
health plan in its financial statements for the years ended December 31, 2011,
2010 and 2009, resulting in an adjustment to the Corporation’s financial
statements for those years. In addition, the Corporation determined that the
FDIC pre-paid insurance was amortized incorrectly for the year ended December
31, 2011. The effects of the adjustments on the Corporation’s retained
earnings and income statements are in the following table (dollars in
thousands):
|
|
December 31, 2011
|
|
|
As Reported
|
Adjustment
|
As Restated
|
|
Consolidated Balance Sheet
|
|
|
|
|
Other assets
|
$
|
45,009
|
$
|
359
|
$
|
45,368
|
|
Total assets
|
1,017,449
|
359
|
1,017,808
|
|
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
16,265
|
(483)
|
15,782
|
|
Total liabilities
|
906,142
|
(483)
|
905,659
|
|
|
|
|
-
|
|
Retained earnings
|
54,890
|
656
|
55,546
|
|
Accumulated other comprehensive income
|
3,022
|
186
|
3,208
|
|
Total shareholders' equity
|
111,307
|
842
|
112,149
|
|
Total liabilities and shareholders' equity
|
1,017,449
|
359
|
1,017,808
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income
|
|
|
|
|
Salaries and benefits
|
$
|
16,173
|
$
|
2,663
|
$
|
18,836
|
|
FDIC insurance premium expense
|
1,515
|
(640)
|
875
|
|
Total noninterest expense
|
31,094
|
2,023
|
33,117
|
|
|
|
|
|
|
Income before provision for income taxes
|
9,779
|
(2,023)
|
7,756
|
|
|
|
|
|
|
Provision for income taxes
|
1,535
|
(791)
|
744
|
|
|
|
|
|
|
Net income available for common shareholders
|
8,228
|
(1,216)
|
7,012
|
|
Earnings per weighted average shares outstanding
|
$
|
1.53
|
$
|
(0.23)
|
$
|
1.30
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income
|
|
|
|
|
Change in unrecognized net actuarial gain (loss) on
postretirement benefit obligation
|
$
|
-
|
$
|
3,155
|
$
|
3,155
|
|
Reclassification adjustment for gains (losses) realized
in expense on postretirement benefit obligation
|
-
|
(2,663)
|
(2,663)
|
|
Tax effect - (expense) benefit on postretirement benefit
obligation
|
-
|
1,448
|
1,448
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
|
|
|
|
Net income (loss)
|
$
|
8,228
|
$
|
(1,232)
|
$
|
6,996
|
|
Postretirement benefit expense
|
-
|
2,663
|
2,663
|
|
Deferred income tax (benefit) expense
|
(199)
|
(1,017)
|
(1,216)
|
|
Other liabilities
|
948
|
(414)
|
534
|
|
|
|
|
|
39
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
|
December 31, 2010
|
|
|
As Reported
|
Adjustment
|
As Restated
|
|
Consolidated Balance Sheet
|
|
|
|
|
Other assets
|
$
|
47,374
|
$
|
(84)
|
$
|
47,290
|
|
Total assets
|
941,709
|
(84)
|
941,625
|
|
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
13,376
|
(218)
|
13,158
|
|
Total liabilities
|
835,487
|
(218)
|
835,269
|
|
|
|
|
-
|
|
Retained earnings
|
52,636
|
1,888
|
54,524
|
|
Accumulated other comprehensive income
|
(809)
|
(1,754)
|
(2,563)
|
|
Total shareholders' equity
|
106,222
|
134
|
106,356
|
|
Total liabilities and shareholders' equity
|
941,709
|
(84)
|
941,625
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income
|
|
|
|
|
Salaries and benefits
|
$
|
15,888
|
$
|
(77)
|
$
|
15,811
|
|
Total noninterest expense
|
32,255
|
(77)
|
32,178
|
|
Income before provision for income taxes
|
8,225
|
77
|
8,302
|
|
Provision for income taxes
|
1,003
|
40
|
1,043
|
|
Net income available for common shareholders
|
7,206
|
37
|
7,243
|
|
Earnings per weighted average shares outstanding
|
$
|
1.31
|
$
|
0.01
|
$
|
1.32
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income
|
|
|
|
|
Change in unrecognized net actuarial gain (loss) on
postretirement benefit obligation
|
$
|
-
|
$
|
111
|
$
|
111
|
|
Reclassification adjustment for gains (losses) realized
in expense on postretirement benefit obligation
|
-
|
77
|
77
|
|
Tax effect - (expense) benefit on postretirement benefit
obligation
|
-
|
(120)
|
(120)
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
|
|
|
|
Net income (loss)
|
$
|
7,206
|
$
|
37
|
$
|
7,243
|
|
Postretirement benefit expense
|
-
|
(77)
|
(77)
|
|
Deferred income tax (benefit) expense
|
(870)
|
(35)
|
(905)
|
|
Other liabilities
|
341
|
75
|
416
|
|
|
|
|
|
40
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
|
December 31, 2009
|
|
|
As Reported
|
Adjustment
|
As Restated
|
|
Consolidated Balance Sheet
|
|
|
|
|
Other assets
|
$
|
48,252
|
$
|
(19)
|
$
|
48,233
|
|
Total assets
|
935,028
|
(19)
|
935,009
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
15,083
|
(49)
|
15,034
|
|
Total liabilities
|
827,855
|
(49)
|
827,806
|
|
|
|
|
|
|
Retained earnings
|
51,264
|
1,852
|
53,116
|
|
Accumulated other comprehensive income
|
744
|
(1,822)
|
(1,078)
|
|
Total shareholders' equity
|
107,173
|
30
|
107,203
|
|
Total liabilities and shareholders' equity
|
935,028
|
(19)
|
935,009
|
|
|
|
|
|
|
Consolidated Statement of Income
|
|
|
|
|
Salaries and benefits
|
$
|
16,447
|
$
|
690
|
$
|
17,137
|
|
Total noninterest expense
|
32,361
|
690
|
33,051
|
|
Income before provision for income taxes
|
9,933
|
(690)
|
9,243
|
|
Provision for income taxes
|
1,453
|
(266)
|
1,187
|
|
Net income available for common shareholders
|
8,464
|
(424)
|
8,040
|
|
Earnings per weighted average shares outstanding
|
$
|
1.53
|
$
|
(0.08)
|
$
|
1.45
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income
|
|
|
|
|
Change in unrecognized net actuarial gain (loss) on
postretirement benefit obligation
|
$
|
-
|
$
|
740
|
$
|
740
|
|
Reclassification adjustment for gains (losses) realized
in expense on postretirement benefit obligation
|
-
|
(690)
|
(690)
|
|
Tax effect - (expense) benefit on postretirement benefit
obligation
|
-
|
404
|
404
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
|
|
|
|
Net income (loss)
|
$
|
8,464
|
$
|
(424)
|
$
|
8,040
|
|
Postretirement benefit expense
|
-
|
690
|
690
|
|
Deferred income tax (benefit) expense
|
(116)
|
(210)
|
(326)
|
|
Other liabilities
|
171
|
(56)
|
115
|
|
|
|
|
|
NOTE 3 – SECURITIES
Securities
with an amortized cost of $214,834 and $176,158 at December 31, 2011 and 2010,
respectively (fair value of $218,693 at December 31, 2011 and $175,463 at December
31, 2010), were pledged to secure deposits and for other purposes as required
or permitted by law. The fair value is established by an independent pricing
service as of the approximate dates indicated. The differences between the
amortized cost and fair value reflect current interest rates and represent the
potential gain (or loss) if the portfolio had been liquidated on that date. Security
gains (or losses) are realized only in the event of dispositions prior to
maturity.
The
amortized cost and fair value of securities available-for-sale and held-to-maturity
at December 31, 2011 and 2010 are summarized as follows (dollars in thousands):
|
|
Amortized
|
Gross
Unrealized
|
Fair
|
|
December
31, 2011
|
Cost
|
Gains
|
Losses
|
Value
|
|
Available-for-sale
securities
|
|
|
|
|
|
U.S. Government agencies
|
$
|
58,793
|
$
|
214
|
$
|
6
|
$
|
59,001
|
|
Mortgage backed securities
|
175,352
|
843
|
145
|
176,050
|
|
States and political subdivisions
|
56,452
|
3,494
|
-
|
59,946
|
|
Other securities
|
22,655
|
582
|
68
|
23,169
|
|
|
$
|
313,252
|
$
|
5,133
|
$
|
219
|
$
|
318,166
|
|
Held-to-maturity
securities
|
|
|
|
|
|
States and political subdivisions
|
$
|
35,214
|
$
|
2,061
|
$
|
-
|
$
|
37,275
|
|
|
$
|
35,214
|
$
|
2,061
|
$
|
-
|
$
|
37,275
|
|
|
|
|
|
|
|
|
|
|
|
41
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
|
Amortized
|
Gross
Unrealized
|
Fair
|
|
December
31, 2010
|
Cost
|
Gains
|
Losses
|
Value
|
|
Available-for-sale
securities
|
|
|
|
|
|
U.S. Government agencies
|
$
|
103,253
|
$
|
55
|
$
|
1,425
|
$
|
101,883
|
|
Mortgage backed securities
|
52,232
|
147
|
521
|
51,858
|
|
States and political subdivisions
|
59,075
|
609
|
721
|
58,963
|
|
Other securities
|
22,936
|
593
|
53
|
23,476
|
|
|
$
|
237,496
|
$
|
1,404
|
$
|
2,720
|
$
|
236,180
|
|
|
|
|
|
|
|
Held-to-maturity
securities
|
|
|
|
|
|
States and political subdivisions
|
$
|
39,975
|
$
|
823
|
$
|
20
|
$
|
40,778
|
|
|
$
|
39,975
|
$
|
823
|
$
|
20
|
$
|
40,778
|
At December
31, 2011, the Bank did not hold investment securities of any single issuer, other than
obligations of the U.S. Treasury and other U.S. government agencies, whose
aggregate book value exceeded 10% of shareholders’ equity.
Proceeds from
the maturity, call or sale of available-for-sale securities were $246,850, $257,569
and $206,157, during 2011, 2010 and 2009, respectively. Proceeds from the
maturity or call of held-to-maturity securities were $4,725, $7,511 and $11,721
during 2011, 2010 and 2009, respectively.
The fair values of all securities at December 31, 2011
either equaled or exceeded the cost of those securities, or the decline in fair
value is considered temporary. The information below classifies the
investments with unrealized losses at December 31, 2011 according to the term
of the unrealized loss. Management evaluates
securities for other-than-temporary impairment periodically, or more frequently
when circumstances require an evaluation. An impairment judgment is based on (i)
the amount of time and loss, (ii) the financial condition of the issuer and
(iii) management’s intent and ability to hold the investment long enough for
any anticipated recovery in value.
Management
has the ability and intent to hold the securities classified as
held-to-maturity until they mature. Furthermore, as of December 31, 2011,
management also had the ability to hold the securities classified as available-for-sale
for a period of time sufficient for a recovery of cost. The unrealized losses
are largely a result of increases in market interest rates over the yield
available at the time the underlying securities were purchased. The fair value
is expected to recover as the bonds approach their maturity date or repricing
date or if market yields for such investments decline. Management does not
believe any of the securities are impaired because of reasons of credit
quality.
Accordingly,
as of December 31, 2011, management believes the impairments detailed in the
table below are temporary and no impairment loss has been realized in the
Corporation’s consolidated income statement.
The following
table presents the Bank's investments with unrealized losses at December 31,
2011 and 2010 according to the term of the unrealized loss (dollars in
thousands):
|
December 31, 2011
|
Less than 12 months
|
12 months or Greater
|
Total
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
Type of Security
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|
US Government agencies
|
$
|
15,063
|
$
|
7
|
$
|
-
|
$
|
-
|
$
|
15,063
|
$
|
7
|
|
Mortgage backed securities
|
40,792
|
145
|
-
|
-
|
40,792
|
145
|
|
Other securities
|
29,154
|
67
|
-
|
-
|
29,154
|
67
|
|
|
$
|
85,009
|
$
|
219
|
$
|
-
|
$
|
-
|
$
|
85,009
|
$
|
219
|
|
|
|
|
|
|
|
|
|
December
31, 2010
|
12 months
|
12 months or Greater
|
Total
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
Type of Security
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|
US Government agencies
|
$
|
75,745
|
$
|
1,425
|
$
|
-
|
$
|
-
|
$
|
75,745
|
$
|
1,425
|
|
Mortgage backed securities
|
33,257
|
521
|
-
|
-
|
33,257
|
521
|
|
Other securities
|
29,627
|
774
|
-
|
-
|
29,627
|
774
|
|
|
$
|
138,629
|
$
|
2,720
|
$
|
-
|
$
|
-
|
$
|
138,629
|
$
|
2,720
|
42
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
At December 31, 2011, none of the 178 state and political subdivision
securities had recorded unrealized losses for 2011.
The
table below shows the amortized cost, fair value and weighted yields (for
tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of
investment securities at December 31, 2011 by contractual or legal maturity.
Expected maturities may differ from contractual maturities
because
issuers may have
the right to call or prepay obligations.
|
|
Amortized
Cost
|
Fair
Value
|
Yield
(Unaudited)
|
|
Available-for-sale
securities
|
|
|
|
|
U.S.
Government agencies
|
|
|
|
|
After one but within five years
|
$
|
12,067
|
$
|
12,075
|
0.9%
|
|
After five but within ten years
|
46,726
|
46,926
|
1.9%
|
|
Mortgage
backed securities
|
|
|
|
|
Within one year
|
2,736
|
2,729
|
0.6%
|
|
After one but within five years
|
127,783
|
128,234
|
1.2%
|
|
After five but within ten years
|
44,833
|
45,087
|
1.9%
|
|
States
and political subdivisions
|
|
|
|
|
Within one year
|
2,397
|
2,417
|
2.4%
|
|
After one but within five years
|
4,893
|
5,072
|
4.4%
|
|
After five but within ten years
|
11,753
|
12,621
|
5.3%
|
|
After ten years
|
37,409
|
39,836
|
5.7%
|
|
Other
securities
|
|
|
|
|
Within one year
|
5,962
|
6,024
|
1.5%
|
|
After one but within five years
|
11,776
|
12,232
|
3.2%
|
|
After five but within ten years
|
1,020
|
1,016
|
3.9%
|
|
After ten years
|
3,897
|
3,897
|
4.6%
|
|
|
$
|
313,252
|
$
|
318,166
|
|
|
Held-to-maturity
securities
|
|
|
|
|
States
and political subdivisions
|
|
|
|
|
Within one year
|
2,561
|
$
|
2,585
|
5.1%
|
|
After one but within five years
|
7,300
|
7,581
|
5.9%
|
|
After five but within ten years
|
10,332
|
11,006
|
3.5%
|
|
After ten years
|
15,021
|
16,103
|
6.2%
|
|
|
$
|
35,214
|
$
|
37,275
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 – LOANS
The
following table presents the Bank's loans by category as of December 31, 2011,
and 2010 (dollars in thousands):
43
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
|
2011
|
|
2010
|
|
Commercial
and industrial:
|
|
|
|
|
Commercial
|
$
|
60,448
|
|
$
|
68,797
|
|
Other
|
2,601
|
|
|
|
Tax exempt municipal loans
|
25,130
|
|
28,163
|
|
Real
estate
|
|
|
|
|
Construction
|
33,270
|
|
37,374
|
|
Commercial mortgages
|
152,539
|
|
156,704
|
|
Residential mortgages
|
196,913
|
|
221,748
|
|
Other
|
30,410
|
|
31,129
|
|
Retail
loans
|
17,027
|
|
15,754
|
|
|
518,338
|
|
559,669
|
|
Less:
|
|
|
|
|
Net unamortized loan origination fees
|
(536)
|
|
(490)
|
|
Allowance for possible loan losses
|
(9,200)
|
|
(9,420)
|
|
Total
net loans
|
$
|
508,602
|
|
$
|
549,759
|
The following
table presents the maturities of the Bank's loans by category as of December
31, 2011 (dollars in thousands):
|
|
Within
One Year
|
One
to Five Years
|
After
Five Years
|
Total
|
|
Commercial,
financial and agricultural
|
$
|
40,135
|
$
|
19,092
|
$
|
3,822
|
$
|
63,049
|
|
Tax
exempt municipal loans
|
1,163
|
9,341
|
14,626
|
25,130
|
|
Real
estate
|
|
|
|
|
|
Construction
|
10,236
|
12,919
|
10,115
|
33,270
|
|
Commercial mortgages
|
24,085
|
97,779
|
30,675
|
152,539
|
|
Residential mortgages
|
21,001
|
64,097
|
111,815
|
196,913
|
|
Other
|
2,254
|
13,617
|
14,539
|
30,410
|
|
Retail
loans
|
10,923
|
6,073
|
31
|
17,027
|
|
Total
|
$
|
109,797
|
$
|
222,918
|
$
|
185,623
|
$
|
518,338
|
Loan
Origination/Risk Management.
The
Corporation has certain lending policies and procedures in place that are
designed to maximize loan income within an acceptable level of risk. Management
reviews and approves these policies and procedures on a regular basis. A
reporting system supplements the review process by providing management with
frequent reports related to loan production, loan quality, concentrations of
credit, loan delinquencies and non-performing
and potential problem loans.
Diversification in the loan portfolio is a means of managing risk associated
with fluctuations in economic conditions.
Commercial
and industrial loans are underwritten after evaluating and understanding the
borrower’s ability to operate profitably and prudently expand its business.
Underwriting standards are designed to promote relationship banking rather than
transactional banking. Once it is determined that the borrower’s management
possesses sound ethics and solid business acumen, the Corporation’s management
examines current and projected cash flows to determine the
ability of the borrower to
repay their obligations as agreed. Commercial and industrial loans are
primarily made based on the identified cash flows of the borrower and
secondarily on the underlying collateral provided by the borrower. The cash
flows of borrowers, however, may not be as expected and the collateral securing
these loans may fluctuate in value. Most commercial and industrial loans are
secured by the assets being financed or other business assets such as
accounts receivable or
inventory and may incorporate a personal guarantee; however, some short-term
loans may be made on an unsecured basis. In the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans
may be substantially dependent on the ability of the borrower to collect
amounts due from its customers.
Commercial
real estate loans are subject to underwriting standards and processes similar
to commercial and industrial loans, in addition to those of real estate loans.
These loans are viewed primarily as loans secured by real estate. Commercial
real estate lending typically involves higher loan principal amounts and the
repayment of these loans is generally largely dependent on the successful
operation of the property securing the loan or the business conducted on the
property securing the loan. Commercial real estate loans may be more adversely
affected by conditions in the real estate markets or in the general economy.
Management monitors and evaluates commercial real estate loans based on
collateral, geography and risk grade criteria. As a general rule, the
Corporation avoids financing single-purpose projects unless other underwriting
factors are present to help mitigate risk. The Corporation also utilizes
third-party experts to provide insight and guidance about economic conditions
and trends affecting market areas it serves. In addition, management tracks the
level of owner-occupied commercial real estate loans versus non-owner occupied
loans. At December 31, 2011, approximately half of the outstanding principal
balance of the Corporation’s commercial real estate loans were secured by owner-occupied
properties.
44
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
With
respect to loans to developers and builders that are secured by non-owner
occupied properties that the Corporation may originate from time to time, the Corporation
generally requires the borrower to have had an existing relationship with the
Corporation and have a proven record of success. Construction loans are
underwritten utilizing feasibility studies, independent appraisal reviews,
sensitivity analysis of absorption and lease rates and financial analysis of
the developers and property owners. Construction loans are generally based upon
estimates of costs and value associated with the complete project. These
estimates may be inaccurate. Construction loans often involve the disbursement
of substantial funds with repayment substantially dependent on the success of
the ultimate project. Sources of repayment for these types of loans may be
pre-committed permanent loans from approved long-term lenders, sales of
developed property or an interim loan commitment from the Corporation until
permanent financing is obtained. These loans are closely monitored by on-site
inspections and are considered to have higher risks than other real estate
loans due to their ultimate repayment being sensitive to interest rate changes,
governmental regulation of real property, general economic conditions and the
availability of long-term financing.
The
Corporation originates consumer loans utilizing a computer-based credit scoring
analysis to supplement the underwriting process. To monitor and manage consumer
loan risk, policies and procedures are developed and modified, as needed,
jointly by line and staff personnel. This activity, coupled with relatively
small loan amounts that are spread across many individual borrowers, minimizes
risk. Additionally, trend and outlook reports are reviewed by management on a
regular basis. Underwriting standards for home equity loans are heavily
influenced by statutory requirements, which include, but are not limited to, a
maximum loan-to-value percentage of 80%, collection remedies, the number of
such loans a borrower can have at one time and documentation requirements.
The
Corporation contracts with a third party vendor to perform loan reviews. The
company reviews and validates the credit risk program on an annual basis.
Results of these reviews are presented to management. The loan review process
complements and reinforces the risk identification and assessment decisions
made by lenders and credit personnel, as well as the Corporation’s policies and
procedures.
The goal of the bank
is to diversify loans to avoid a concentration of credit in a specific
industry, person, entity, product, service, or any area vulnerable to a tax law
change or an economic event. A concentration of credit occurs when obligations,
direct or indirect, of the same or affiliated interests represent 15 percent or
more of the bank's capital structure. The board of directors recognizes that
the bank's geographic trade area imposes some limitations regarding loan
diversification if the bank is to perform the function for which it has been
chartered. Specifically, lending to qualified borrowers within the bank's trade
area will naturally cause concentrations of real estate loans in the primary
communities served by the bank and loans to employees of major employers in the
area.
The following
table provides details regarding the aging of the Bank’s loan and lease
portfolio:
|
December 31, 2011
|
30 - 89 Days past due
|
90 Days and greater Past Due*
|
Total
past dues
|
Current
|
Total
loans
|
|
Retail
|
|
|
|
|
|
|
Consumer loans
|
$
|
73
|
$
|
4
|
$
|
77
|
$
|
14,220
|
$
|
14,297
|
|
Residential loans - first lien
|
4,487
|
365
|
4,852
|
132,980
|
137,832
|
|
Residential loans - junior lien
|
77
|
355
|
432
|
656
|
1,088
|
|
HELOC's
|
567
|
282
|
849
|
57,144
|
57,993
|
|
Other retail
|
1
|
-
|
1
|
25,699
|
25,700
|
|
Retail
Totals
|
$
|
5,205
|
$
|
1,006
|
$
|
6,211
|
$
|
230,699
|
$
|
236,910
|
|
Commercial
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
3,858
|
$
|
1,419
|
$
|
5,277
|
$
|
55,171
|
$
|
60,448
|
|
Non-farm, non-residential real estate
|
2,166
|
320
|
2,486
|
137,661
|
140,147
|
|
Construction & development
|
44
|
-
|
44
|
28,998
|
29,042
|
|
Multifamily real estate
|
-
|
-
|
-
|
4,095
|
4,095
|
|
Other commercial
|
1,441
|
159
|
1,600
|
46,096
|
47,696
|
|
Commercial
Totals
|
$
|
7,509
|
$
|
1,898
|
$
|
9,407
|
$
|
272,021
|
$
|
281,428
|
|
TOTAL
|
$
|
12,714
|
$
|
2,904
|
$
|
15,618
|
$
|
502,720
|
$
|
518,338
|
45
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
December 31, 2010
|
30
- 89 Days Past Due
|
90
Days Past Due*
|
Total
Past Dues
|
Current
|
Total
Loans
|
|
Retail
|
|
|
|
|
|
|
Consumer loans
|
$
|
229
|
$
|
104
|
$
|
333
|
$
|
13,886
|
$
|
14,219
|
|
Residential loans - first lien
|
420
|
1,819
|
2,239
|
150,436
|
152,675
|
|
Residential loans - junior lien
|
-
|
156
|
156
|
985
|
1,141
|
|
HELOC's
|
398
|
717
|
1,115
|
55,917
|
57,032
|
|
Other retail
|
14
|
358
|
372
|
28,711
|
29,083
|
|
Retail
Totals
|
$
|
1,061
|
$
|
3,154
|
$
|
4,215
|
$
|
249,935
|
$
|
254,150
|
|
Commercial
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
1,532
|
$
|
725
|
$
|
2,257
|
$
|
57,741
|
$
|
59,998
|
|
Non-farm, non-residential real estate
|
5,322
|
3,734
|
9,056
|
145,074
|
154,130
|
|
Construction & development
|
367
|
-
|
367
|
32,518
|
32,884
|
|
Other commercial
|
63
|
646
|
709
|
57,798
|
58,507
|
|
Commercial
Totals
|
$
|
7,284
|
$
|
5,105
|
$
|
12,389
|
$
|
293,130
|
$
|
305,519
|
|
TOTAL
|
$
|
8,345
|
$
|
8,259
|
$
|
16,604
|
$
|
543,065
|
$
|
559,669
|
|
*Includes
all loans on non-accrual and all bankruptcies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table shows loans as of December 31, 2011 related to each balance in
the allowance for possible loan and lease losses by portfolio segment and
disaggregated on the basis of the Bank’s impairment methodology (dollars in
thousands):
|
|
Commercial
|
Residential
real estate
|
Consumer
& other retail
|
Totals
|
|
Loans
individually evaluated for impairment
|
$
|
12,387
|
$
|
1,217
|
$
|
-
|
$
|
13,604
|
|
Loans
collectively evaluated for impairment
|
270,766
|
219,912
|
14,056
|
$
|
504,734
|
|
Total
|
$
|
283,153
|
$
|
221,129
|
$
|
14,056
|
$
|
518,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the impaired loans by loan type as of December 31,
2011 and 2010:
|
2011
|
Unpaid Contractual Principal Balance
|
Recorded Investment with no allowance
|
Recorded Investment with allowance
|
Total Recorded Investment
|
Related Allowance
|
Average Recorded Investment
|
|
Commercial
|
$
|
14,325
|
$
|
3,724
|
$
|
8,663
|
$
|
12,387
|
$
|
1,111
|
$
|
12,769
|
|
Residential
real estate
|
1,388
|
142
|
1,075
|
1,217
|
131
|
1,269
|
|
Total
|
$
|
15,713
|
$
|
3,866
|
$
|
9,738
|
$
|
13,604
|
$
|
1,242
|
$
|
14,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
Unpaid Contractual Principal Balance
|
Recorded Investment with no allowance
|
Recorded Investment with allowance
|
Total Recorded Investment
|
Related Allowance
|
Average Recorded Investment
|
|
Commercial
|
$
|
27,198
|
$
|
9,215
|
$
|
14,333
|
$
|
23,548
|
$
|
2,707
|
$
|
24,274
|
|
Residential
real estate
|
1,784
|
801
|
744
|
1,545
|
205
|
1,611
|
|
Total
|
$
|
28,982
|
$
|
10,016
|
$
|
15,077
|
$
|
25,093
|
$
|
2,912
|
$
|
25,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
The average
recorded investment in impaired loans was $12,715 in 2011 and $22,600 in 2010.
The loans in the above table that have been identified as impaired and not
accruing interest total $11,469 for December 31, 2011 and $8,259 for December
31, 2010. Interest received on those loans was approximately $959 in 2011 and
$619 in 2010. The gross interest income that would have been recorded if the
loans had been current in accordance with their original terms and had been
outstanding throughout the period or since origination, if held for part of the
period, was $1,384, $958 and $1,600 for the years ended December 31, 2011, 2010
and 2009, respectively.
Year-end
non-accrual loans, segregated by class of loans, were as follows:
|
|
2011
|
2010
|
|
Commercial
& industrial
|
$
|
5,030
|
$
|
725
|
|
Other
commercial
|
876
|
646
|
|
Commercial
real estate
|
2,030
|
3,734
|
|
Residential
real estate
|
3,129
|
2,692
|
|
Consumer
loans
|
72
|
104
|
|
Other
retail
|
332
|
358
|
|
|
$
|
11,469
|
$
|
8,259
|
The restructuring
of a loan is considered a “troubled debt restructuring” if both (i) the
borrower is experiencing financial difficulties and (ii) the creditor has
granted a concession. Concessions may include interest rate reductions or below
market interest rates, principal forgiveness, restructuring amortization
schedules and other actions intended to minimize potential losses. Troubled
debt restructurings during 2011 and 2010 are set forth in the following table.
|
|
As of December 31,
|
|
|
2011
|
|
2010
|
|
|
Number of Contracts
|
Outstanding recorded Investment
|
|
Number of Contracts
|
Outstanding recorded Investment
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
Residential - prime
|
8
|
$ 1,197
|
|
7
|
$ 1,180
|
|
Consumer - other
|
24
|
6,733
|
|
30
|
13,644
|
|
|
Number of Contracts
|
Recorded investment
|
|
Number of Contracts
|
Recorded Investment
|
|
Defaulted troubled debt restructurings:
|
|
|
|
|
|
Residential - prime
|
1
|
$ 441
|
|
1
|
$ 29
|
|
Consumer - other
|
2
|
340
|
|
4
|
742
|
Certain related parties (primarily
directors and senior officers of the Corporation or the Bank, including their
affiliates, families and companies in which they hold 10% or more ownership)
were customers of, and had loans and other transactions with, the Bank in the
ordinary course of business. An analysis of the activity with respect to such
loans for
the years ended December
31, 2011 and 2010 is shown in the table below (dollars in thousands). These
totals exclude loans made in the ordinary course of business to other companies
with which neither the Corporation nor the Bank had a relationship other than
the association of one of its directors in the capacity of officer or
director. These loan transactions were made on substantially the same terms as
those prevailing at the time for comparable loans to other persons.
They did not involve more
than the normal risk of collectability or present other unfavorable features.
No related party loans were charged off in 2011 or 2010.
|
|
2011
|
2010
|
|
Balance
at Beginning of Year
|
$
|
4,361
|
$
|
3,385
|
|
Additions
|
848
|
3,108
|
|
Amount
Collected
|
(1,380)
|
(2,132)
|
|
Balance
at End of Year
|
$
|
3,829
|
$
|
4,361
|
Credit
Quality Indicators.
As part of the on-going
monitoring of the credit quality of the Corporation’s loan portfolio,
management tracks certain credit quality indicators including trends related to
(i) the weighted-average risk grade of commercial loans, (ii) the level of
classified commercial loans, (iii) net charge-offs, (iv) non-performing loans
and (v) the general economic conditions in the State of Tennessee.
47
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
The
Corporation uses a risk grading matrix to assign a risk grade to each of its
commercials loans. Loans are graded on a scale of 1 – 8. A description of the
general characteristics of the 8 risk grades is as follows:
Risk Rating 1: Minimal Risk
General Characteristics:
-
Substantially risk free
-
Federal, state, or municipal
subdivisions with acceptable investment grade credit rating.
-
Large national, regional, or local
entity with proven access to capital markets.
-
Diversity in its line of business
with stable and diversified sales base.
-
Borrower is considered to be an
industry leader with many consecutive years of strong profits and exhibits a
financial condition, equity position, liquidity, and debt service capacity far
exceeding industry norms.
-
Borrower has an abundance of
unpledged financeable assets coupled with superior cash generation
capabilities.
-
Industry conditions and trends are
positive and strong.
-
Borrower has strong management
with evidence of management succession.
-
Credit rating by Moody’s, Standard
& Poor, or other qualified rating agency that is grade A or higher.
-
A cash secured loan with the cash
on deposit in our bank or a guaranty from the Federal government also warrants
this risk rating.
Risk Rating 2
Modest Risk
General Characteristics:
-
Borrower shows strong
profitability, liquidity, and capitalization better than industry norms and a
strong market position in the region.
-
Borrower may have limited access
to public markets for short-term needs or capital requirements, but has ready
access to alternative financing.
-
Loans may be unsecured based on
the financial strength of the borrower or secured by collateral that is
considered liquid and marketable.
-
Borrower has a proven history of
profitability and financial stability.
-
Borrower has a strong market
position in its industry and has an abundance of financeable assets available
to protect the bank’s position.
-
Proven and steady management with
good management succession.
-
Borrower can withstand major
market instabilities of short duration.
-
Credit rating by Moody’s, Standard
& Poor, or other qualified rating agency that is grade BAA or higher.
Risk Rating 3
Average Risk
General Characteristics:
-
Borrower shows a stable earnings
history and financial condition in line with industry norms with indications
that these trends will continue.
-
The credit extension is considered
sound, however elements may be present which suggest the borrower may not be
free from temporary impairments in the future.
-
Liquidity and leverage is in line
with industry norms.
-
Good management with acceptable
management succession.
-
Under most economic and business
conditions has access to alternative financing but limited or no access to
capital markets for short-term or capital needs.
-
Borrower may be an individual with
a sound financial condition and liquidity with proven historical income to
repay the debt as scheduled.
48
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
Credit extensions are generally
secured by acceptable collateral.
Risk Rating 4
Acceptable
Risk
General Characteristics:
-
Credit is to a borrower with
smaller margins of debt service coverage and with some elements of reduced
financial strength.
-
Borrower is generally in a lower
average market position in its industry.
-
Borrower shows satisfactory asset
quality and liquidity, good debt capacity and coverage, and good management in
critical positions.
-
Management is of unquestioned
character but management succession may be questionable.
-
Borrower can obtain similar
financing from other financial institutions.
-
Interim losses or moderately
declining earnings trends may occur, but the borrower has sufficient strength
and financial flexibility to offset these issues.
-
Credit may be to individuals with
a moderately leveraged financial condition but with satisfactory liquidity and
income to cover debt repayment requirements.
-
Business borrowers may have
moderate leverage, but must have historically consistent cash flow to cover
debt service and other operating needs.
-
Business borrowers may also have
erratic or cyclical operating performances but should demonstrate strong equity
positions to support these profitability swings.
-
Asset-based loans that have
stabilized and proven performance with the financial capacity to provide for
annual clean up may qualify for this rating.
-
Borrower has no access to capital
markets but would be financeable by another financial institution or finance
company.
-
Credit extensions are generally
secured by acceptable collateral.
Risk Rating 5
Pass /
Watch
General Characteristics:
Loans considered for this
risk rating require a heightened level of supervision.
A) Transitional, Event Driven
– This category of risk rated 5 loans captures responses to
early warning
signals from a relationship and, therefore, signifies
a specific,
event-driven, transitional credit grade.
The event is generally something
unplanned or unexpected such as a death, a disaster, the loss of a major
client, product line, or key employee; divorce, or health condition of the
owner or key management person. The Risk Rating 5 category may be used in
transitional upgrades as well as transitional downgrades of credit
relationships. Under these criteria, the risk rating 5 necessitates a
plan of action to either upgrade the credit to a Pass rating (Risk Rating 1-4),
downgrade the credit to a criticized asset, or exit the relationship within six
months.
B)
Ongoing Supervision
Warranted -
This risk rating may also be utilized to identify loans having
inherent characteristics which warrant more than the normal level of
supervision. Loans meeting these criteria may include larger, more
complex loans with unusual structures. Loans, which, due to structure or
nature of the collateral require above average servicing, may also be
considered for this risk rating. Unlike other criteria listed previously
for the Pass / Watch risk rating, these particular characteristics tend not to
be one-time or transitional in nature; therefore, these loans may be expected
to remain in this risk rating category longer than six months. A loan
might remain in this risk rating category for its life or until the characteristic
warranting the Pass / Watch rating can be eliminated or effectively mitigated.
-
Borrowers may exhibit declining
earnings, strained cash flow, increasing leverage, or weakening market
positions that indicate a trend toward an unacceptable risk.
-
Borrower’s liquidity, leverage,
and earnings performance is below or trending below industry norms.
49
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
-
Interim losses and other adverse
trends may occur but not to the level that would impair the bank’s position.
-
Borrower may be a newly formed
company or in a new line of business or may be an established business with new
or unproven management. Borrower should be adequately capitalized, but
may not yet have achieved stabilized cash flow.
-
Borrower generally has a small
market position in its industry.
-
Borrower may be engaged in an
industry that is experiencing an economic downturn or is particularly
susceptible to uncontrollable external factors.
-
Management is of good character
although some management weakness may exist, including lack of depth or
succession.
-
Borrowers generally have limited
additional debt capacity and modest coverage, and average or below-average
asset quality, margins, and market share.
-
Borrower’s ability to obtain
financing from other financial institutions may be impaired.
-
Credit to individuals with
marginal financial condition and liquidity but with income still sufficient to
service the debt.
Risk Rating 6
Special Mention
A special mention asset has
potential weaknesses that deserve management’s close attention. If left
uncorrected, these potential weaknesses may result in deterioration of the
repayment prospects for the asset or in the institution’s credit position at
some future date. Special mention assets are not adversely classified and do
not expose an institution to sufficient risk to warrant adverse classification.
General Characteristics:
-
Cash flow may not be sufficient to
fund anticipated cash needs.
-
Sufficiently or modestly
sufficiently financeable assets are available to protect the bank’s position.
-
Adverse trends in
operations/profits or unbalanced position in the balance sheet but not to the
point where repayment is in jeopardy.
-
Borrower generally shows limited
liquidity or high leverage.
-
Borrower’s financial position is
in the lower quartile of industry norms.
-
Business exhibits a deteriorating
market position in the industry.
-
Management lacks depth and
succession.
-
Business is unable to withstand
temporary setbacks without affecting repayment capability.
-
Borrower is not financeable by
another bank but possibly by a finance company or specialized lender.
Risk Rating 7
Substandard
A substandard asset is
inadequately protected by the current sound worth and paying capacity of the
obligor or of the collateral pledged, if any. Assets so classified must have a
well-defined weakness, or weaknesses, that jeopardize the liquidation of the
debt. They are characterized by the distinct possibility that the bank will
sustain some loss if the deficiencies are not corrected.
General Characteristics:
-
The primary source of repayment no
longer provides satisfactory support and repayment is dependant on secondary
sources.
-
A substandard loan is inadequately
protected by the current sound worth and paying capacity of the obligor or by
the collateral pledged, if any.
-
Normal repayment from the borrower
is impaired although no loss of principal is envisioned.
-
A partial loss of interest or
principal will occur if the deficiencies are not corrected.
-
Cash flow is generally not
sufficient to fund anticipated cash needs.
-
Financeable assets may not be
sufficient to protect the bank’s position.
50
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
-
Adverse trends in operations that
jeopardized debt repayment may require the borrower to undertake a significant
reorganization of financing or the business.
-
Borrower shows poor liquidity and
high leverage impairing the repayment of the debt in accordance with agreed
upon terms.
-
Management lacks depth and
succession; may be inexperienced or of questionable character.
-
Borrower’s market position in the
industry is deteriorating.
-
Borrower is not financeable by
another bank or finance company.
Risk Rating 8
Doubtful
An asset classified doubtful
has all the weaknesses inherent in one classified substandard with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions, and values, highly
questionable and improbable.
General Characteristics:
-
Inadequate primary source of
repayment
.
Assumes a less
than satisfactory secondary source of repayment on a most-likely
case
basis.
There may be
an adequate secondary source of repayment on a
best-case basis.
-
Borrowers have the same weaknesses
found in
Substandard
borrowers.
-
Loss probability is extremely high
but because of certain important and reasonably specific factors that may work
to strengthen the loan, its classification as an estimated loss is deferred
until a more exact status may be determined.
-
Pending factors may include
proposed merger or acquisition; liquidation procedures; capital injections;
perfecting liens on additional collateral; and refinancing plans.
-
Cash flow is insufficient to fund
cash needs.
-
Financeable assets are
insufficient to protect the bank’s position.
-
Source of debt repayment is dependent
on liquidation of assets with a probable loss.
-
Borrower may no longer be a going
concern, or may not exist as a going concern for the foreseeable future.
-
No alternative financing sources
exist.
The
following table presents risk grades and classified loans by class of
commercial loan (dollars in thousands):
|
Commercial
Loan Portfolio: Credit risk profile by internally assigned grade
|
Commercial
& Industrial
|
Non-Farm,
Non-Residential Real Estate Loans
|
Construction
& Development
|
Commercial
Loans Secured by Residential R/E
|
All
Other Commercial Loans
|
Commercial
Loan Totals
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
50,163
|
$
|
132,291
|
$
|
27,613
|
$
|
2,979
|
$
|
44,837
|
$
|
257,883
|
|
Special Mention
|
4,137
|
4,232
|
504
|
439
|
-
|
9,312
|
|
Substandard
|
1,692
|
2,033
|
925
|
677
|
1,480
|
6,807
|
|
Doubtful
|
4,456
|
1,591
|
-
|
-
|
1,379
|
7,426
|
|
TOTALS
|
$
|
60,448
|
$
|
140,147
|
$
|
29,042
|
$
|
4,095
|
$
|
47,696
|
$
|
281,428
|
|
Retail
Loan Portfolio: Credit risk profiles based on delinquency status
classification
|
Consumer
Loans
|
Single-Family
Residential**
|
All
Other Retail Loans
|
Retail
Loan Totals
|
|
|
|
Performing
|
$
|
14,225
|
$
|
193,784
|
$
|
25,368
|
$
|
233,377
|
|
|
|
Non-performing*
|
72
|
3,129
|
332
|
3,533
|
|
|
|
TOTALS
|
$
|
14,297
|
$
|
196,913
|
$
|
25,700
|
$
|
236,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Loans are classified as
non-performing loans and are automatically placed on non-accrual status once
they reach 90 days past due
**Single-family residential
loans includes primary liens, closed-end secondary liens, residential
construction loans, and home equity lines of credit
51
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES
Allowance for Possible
Loan Losses.
The allowance for possible
loan losses is a reserve established through a provision for possible loan
losses charged to expense, which represents management’s best estimate of
probable losses that have been incurred within the existing portfolio of loans.
The allowance, in the judgment of management, is necessary to reserve for
estimated loan losses and risks inherent in the loan portfolio. The
Corporation’s allowance for possible loan
loss methodology includes
allowance allocations calculated in accordance with ASC Topic 310, “Receivables”
and allowance allocations calculated in accordance with ASC Topic 450,
“Contingencies.” Accordingly, the methodology is based on historical loss
experience by type of credit and internal risk grade, specific homogeneous risk
pools and specific loss allocations, with adjustments for current events and
conditions. The Corporation’s process for determining the
appropriate level of the
allowance for possible loan losses is designed to account for credit
deterioration as it occurs. The provision for possible loan losses reflects
loan quality trends, including the levels of and trends related to non-accrual
loans, past due loans, potential problem loans, criticized loans and net charge-offs
or recoveries, among other factors. The provision for possible loan losses also
reflects the totality of actions taken on all loans for a particular period.
In other words, the amount of
the provision reflects not only the necessary increases in the allowance for
possible loan losses related to newly identified criticized loans, but it also
reflects actions taken related to other loans including, among other things,
any necessary increases or decreases in required allowances for specific loans
or loan pools.
The
level of the allowance reflects management’s continuing evaluation of industry
concentrations, specific credit risks, loan loss experience, current loan portfolio
quality, present economic, political and regulatory conditions and unidentified
losses inherent in the current loan portfolio. Portions of the allowance may be
allocated for specific credits; however, the entire allowance is available for
any credit that, in management’s judgment, should be charged off. While management
utilizes its best judgment and information available, the ultimate adequacy of
the allowance is dependent upon a variety of factors beyond the Corporation’s
control, including, among other things, the performance of the Corporation’s
loan portfolio, the economy, changes in interest rates and the view of the
regulatory authorities toward loan classifications.
The
Corporation’s allowance for possible loan losses consists of three elements:
(i) specific valuation allowances determined in accordance with ASC Topic 310
based on probable losses on specific loans; (ii) historical valuation
allowances determined in accordance with ASC Topic 450 based on historical loan
loss experience for similar loans with similar characteristics and trends,
adjusted, as necessary, to reflect the impact of current conditions; and (iii)
general valuation allowances determined in accordance with ASC Topic 450 based
on general economic conditions and other qualitative risk factors both internal
and external to the Corporation.
The
allowances established for probable losses on specific loans are based on a
regular analysis and evaluation of problem loans. Loans are classified based on
an internal credit risk grading process that evaluates, among other things: (i)
the obligor’s ability to repay; (ii) the underlying collateral, if any; and
(iii) the economic environment and industry in which the borrower operates.
This analysis is performed at the relationship manager level for all commercial
loans. When
a loan has a calculated grade
of 10 or higher, a special assets officer analyzes the loan to determine whether
the loan is impaired and, if impaired, the need to specifically allocate a
portion of the allowance for possible loan losses to the loan. Specific
valuation allowances are determined by analyzing the borrower’s ability to
repay amounts owed, collateral deficiencies, the relative risk grade of the
loan and economic conditions affecting the borrower’s industry, among other
things.
Historical
valuation allowances are calculated based on the historical loss experience of
specific types of loans and the internal risk grade of such loans at the time
they were charged-off. The Corporation calculates historical loss ratios for
pools of similar loans with similar characteristics based on the proportion of actual
charge-offs experienced to the total population of loans in the pool. The
historical loss ratios are periodically updated based on actual charge-off
experience. A historical
valuation allowance is established for each pool of similar loans based upon
the product of the historical loss ratio and the total dollar amount of the
loans in the pool. The Corporation’s pools of similar loans include similarly
risk-graded groups of commercial and industrial loans, commercial real estate
loans, consumer real estate loans and consumer and other loans.
52
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
General
valuation allowances are based on general economic conditions and other
qualitative risk factors both internal and external to the Corporation. In general,
such valuation allowances are determined by evaluating, among other things: (i)
the experience, ability and effectiveness of the bank’s lending management and
staff; (ii) the effectiveness of the Corporation’s loan policies, procedures
and internal controls; (iii) changes in asset quality; (iv) changes in loan
portfolio volume; (v) the
composition and concentrations of credit; (vi) the impact of competition on
loan structuring and pricing; (vii) the effectiveness of the internal loan
review function; (viii) the impact of environmental risks on portfolio risks;
and (ix) the impact of rising interest rates on portfolio risk. Management evaluates
the degree of risk that each one of these components has on the quality of the
loan portfolio on a quarterly basis. Each component is determined to have
either a high, moderate or
low degree of risk. The results are then input into a “general allocation
matrix” to determine an appropriate general valuation allowance.
Included in the
general valuation allowances are allocations for groups of similar loans with risk
characteristics that exceed certain concentration limits established by
management. Concentration risk limits have been established, among other
things, for certain industry concentrations, large balance and highly leveraged
credit relationships that exceed specified risk grades, and loans originated
with policy exceptions that exceed specified risk grades.
Loans
identified as losses by management, internal loan review and/or bank examiners
are charged-off. Furthermore, consumer loan accounts are charged-off automatically
based on regulatory requirements.
The following
table summarizes the allocation in the allowance for loan and lease losses by
loan segment for the year ended December 31, 2011 (dollars in thousands):
|
|
Commercial
|
Residential
Real Estate
|
Consumer
& Other Retail
|
Unallocated
|
Totals
|
|
Beginning
Balance
|
$
|
6,915
|
$
|
2,001
|
$
|
408
|
$
|
96
|
$
|
9,420
|
|
Less:
Charge-offs
|
3,353
|
52
|
147
|
|
3,552
|
|
Add:
Recoveries
|
103
|
-
|
104
|
|
207
|
|
Add:
Provisions
|
2,292
|
164
|
(173)
|
842
|
3,125
|
|
Ending
Balance
|
$
|
5,957
|
$
|
2,113
|
$
|
192
|
$
|
938
|
$
|
9,200
|
|
|
|
|
|
|
|
|
|
Commercial
|
Residential
Real Estate
|
Consumer
& Other Retail
|
Unallocated
|
Totals
|
|
Loans
individually evaluated for impairment
|
$
|
1,111
|
$
|
131
|
$
|
-
|
$
|
-
|
$
|
1,242
|
|
Loans
collectively evaluated for impairment
|
4,846
|
1,982
|
192
|
938
|
7,958
|
|
Ending
Balance
|
$
|
5,957
|
$
|
2,113
|
$
|
192
|
$
|
938
|
$
|
9,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the changes in the allowance for loan and lease losses
for the years ended December 31, 2011 and 2010 (dollars in thousands):
53
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
|
2011
|
2010
|
|
Balance
at beginning of period
|
$
|
9,420
|
$
|
8,929
|
|
Provision
(reduction) charged (credited) to operating expenses
|
3,125
|
1,896
|
|
Charge-offs:
|
|
|
|
Commercial and industrial
|
(3,353)
|
(2,046)
|
|
Real estate
|
(52)
|
(108)
|
|
Consumer and other
|
(147)
|
(77)
|
|
Total charge-offs
|
(3,552)
|
(2,231)
|
|
Recoveries:
|
|
|
|
Commercial and industrial
|
103
|
782
|
|
Real estate
|
-
|
-
|
|
Consumer and other
|
104
|
44
|
|
Total recoveries
|
207
|
826
|
|
Balance
at end of year
|
$
|
9,200
|
$
|
9,420
|
NOTE 6 – BANK PREMISES AND EQUIPMENT
The following table presents the Bank's assets by
category at December 31, 2011 and 2010 (dollars in thousands):
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Land
|
|
$
|
9,003
|
|
$
|
9,008
|
|
Premises
|
|
20,784
|
|
19,233
|
|
Furniture
and equipment
|
|
8,505
|
|
8,669
|
|
Leasehold
improvements
|
|
1,398
|
|
1,487
|
|
|
|
39,690
|
|
38,397
|
|
Less
allowance for depreciation and amortization
|
|
(15,366)
|
|
(15,555)
|
|
|
|
$
|
24,324
|
|
$
|
22,842
|
Annual provisions for depreciation
and amortization of Bank premises and equipment totaled $1,270 for 2011, $1,195
for 2010 and $1,235 for 2009. Included in premises, furniture and equipment
cost and allowance for depreciation and amortization are certain fully
depreciated assets totaling $6,518 at December
31, 2011.
NOTE 7 – LIMITATION ON SUBSIDIARY DIVIDENDS
The Corporation’s primary source of funds with
which to pay its future obligations is the receipt of dividends from the Bank.
Banking regulations provide that the Bank must maintain capital sufficient to
enable it to operate as a viable institution and, as a result, may limit the
amount of dividends the Bank may pay without prior approval. It is management’s
intention to limit the amount of dividends paid to the Corporation in order to
maintain compliance with capital guidelines and to maintain a strong capital
position in the Bank.
Real property
for four of the Bank's office locations and certain equipment are leased under
noncancelable operating leases expiring at various times through 2028. In most
cases, the leases provide for one or more renewal options of five to ten years
under the same or similar terms. In addition, various items of office
equipment are leased under cancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases with terms of
less than one month, amounted to approximately $13, $13 and $35 for equipment
leases and approximately $236, $293 and $331 for building leases in 2011, 2010
and 2009, respectively. Future minimum lease commitments as of December 31,
2011 under all noncancelable operating leases with initial terms of one year or
more are shown in the following table (dollars in thousands):
|
Year
|
Lease
Payments
|
|
2012
|
$ 253
|
|
2013
|
234
|
|
2014
|
234
|
|
2015
|
199
|
|
2016
|
195
|
|
Total
|
$ 1,115
|
54
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
NOTE 9 – FEDERAL AND
STATE INCOME TAXES
The following table presents components of
income tax expense attributable to continuing operations for the years ended December
31, 2011, 2010 and 2009 (dollars in thousands):
|
|
Restated
|
Restated
|
Restated
|
|
|
2011
|
2010
|
2009
|
|
Current
|
$
|
1,960
|
$
|
1,948
|
$
|
1,513
|
|
Deferred
|
(1,216)
|
(905)
|
(326)
|
|
Total provision for income
|
$
|
744
|
$
|
1,043
|
$
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Effects of Principal Temporary Differences
|
2011
|
2010
|
2009
|
|
Allowance
for possible loan losses
|
$
|
3,519
|
$
|
3,604
|
$
|
3,415
|
|
Deferred
compensation
|
2,234
|
2,050
|
1,861
|
|
Write
down of other real estate
|
1,621
|
1,052
|
15
|
|
Amortization
of core deposit intangible
|
575
|
727
|
878
|
|
Recognition
of nonaccrual loan income
|
66
|
90
|
264
|
|
Unrealized
gains (losses) on available-for-sale securities
|
(1,892)
|
506
|
(466)
|
|
Deferred
post-retirement benefit
|
1,643
|
1,800
|
1,881
|
|
Accelerated
depreciation
|
(562)
|
(282)
|
(251)
|
|
Amortization
of goodwill
|
(2,152)
|
(1,937)
|
(1,722)
|
|
Alternative
Minimum Tax
|
422
|
345
|
328
|
|
Dividend
Income - F&M West
|
(241)
|
(244)
|
(248)
|
|
Prepaid
expense
|
49
|
-
|
-
|
|
Other
|
(410)
|
(442)
|
(520)
|
|
Net deferred tax asset
|
$
|
4,872
|
$
|
7,269
|
$
|
5,435
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Total Income Taxes Reported with the Amount of Income Taxes Computed at
the
|
|
|
Federal Statutory Rate (34% Each Year)
|
2011
|
2010
|
2009
|
|
Tax
expense at statutory rate
|
$
|
2,632
|
$
|
2,827
|
$
|
3,137
|
|
Increase
(decrease) in taxes resulting from:
|
|
|
|
|
Tax exempt interest
|
(1,533)
|
(1,635)
|
(1,739)
|
|
Nondeductible interest expense
|
45
|
70
|
99
|
|
Employee benefits
|
(244)
|
(286)
|
(233)
|
|
Other nondeductible expenses
|
|
|
|
|
(nontaxable income) - net
|
55
|
56
|
54
|
|
State income taxes net of federal tax benefit
|
(40)
|
(95)
|
(6)
|
|
Dividend income exclusion
|
(52)
|
(51)
|
(48)
|
|
Other
|
(119)
|
157
|
(77)
|
|
Total
provision for income taxes
|
$
|
744
|
$
|
1,043
|
$
|
1,187
|
|
|
|
|
|
|
Effective
tax rate
|
9.6 %
|
12.5 %
|
12.9 %
|
|
|
|
|
|
|
|
|
|
|
|
The
Corporation and one of its subsidiaries file consolidated income tax returns
with the Internal Revenue Service and State of Tennessee. The Corporation is
not subject to U.S. federal, state and local, or non-U.S. income tax examinations
by tax authorities for years before 2008. There was no valuation allowance for
deferred tax assets at December 31, 2011 and 2010. Management believes it is
more-likely-than-not that all of the deferred tax assets will be realized
because they were supported by recoverable taxes paid in prior years.
The
Corporation did not have any liability for unrecognized tax benefits as of December
31, 2011 or 2010.
55
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
NOTE 10 – BORROWED FUNDS
The Bank is a party to the Blanket Agreement for Advances and Security
Agreement (the “Blanket Agreement”) with the
Federal Home Loan Bank of Cincinnati (the “FHLB”). Advances made to the Bank
under the Blanket Agreement are collateralized by the FHLB stock and
unidentified qualifying residential mortgage loans totaling 150% of the
outstanding amount borrowed. These collateralization matters are outlined in
the Blanket Agreement dated June 20, 2006 between the Bank and the FHLB. The
advances mature at varying dates throughout 2013 at interest rates ranging from
2.61 - 3.76%.
Scheduled annual principal maturities and interest rate
terms of borrowings under this credit line as of December 31, 2011 for the next two years are as
follows (dollars in thousands):
|
2012
|
|
7,000,000
|
|
2013
|
|
10,100,000
|
|
Total
|
|
$
|
17,100,000
|
Stock held in the FHLB totaling $3,009 at December 31, 2011 is carried at
cost. The stock is restricted and can only be
sold back to the FHLB at par.
The Bank also has a Cash Management Advance Line of
Credit Agreement (the “CMA”) dated June 21, 2010, with the Federal Home Loan Bank. The CMA is a component of the Blanket Agreement. The purpose of the CMA is to assist with short-term
liquidity management. Under the terms of the CMA, the Bank may borrow a
maximum of $40,000, selecting a variable rate of interest for up to 90 days or
a fixed rate for a maximum of 30 days. There were no borrowings outstanding
under the CMA as of December 31, 2011.
NOTE 11 – COMMITMENTS
AND CONTINGENCIES
The Bank is a
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement the
Bank has in those particular financial instruments.
The total
outstanding loan commitments and standby letters of credit in the normal course
of business were $110,605 and $8,370, respectively, at December 31, 2011; and
$94,700 and $9,400 at December 31, 2010, respectively. Loan commitments are
agreements to lend to a customer provided there is not a violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. The commitments for equity lines of credit may expire without being
used. Therefore, the total commitment amounts do not necessarily represent
future cash requirements. Standby letters of credit are
conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in making a loan.
The Bank's loan
portfolio is well-diversified with loans generally secured by tangible personal
property, real property, bank deposit accounts or stock. The loans are
expected to be repaid from cash flow or proceeds from the sale of selected
assets of the borrowers. Collateral requirements for the loan portfolio are based
on credit evaluation of each customer.
56
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
Various legal
claims have arisen from time to time in the normal course of business which, in
the opinion of management, should not have a material effect on the
Corporation’s consolidated operating results and financial condition.
NOTE 12 – REGULATORY MATTERS
The Corporation
and the Bank are subject to federal regulatory risk-adjusted capital adequacy
standards. Failure to meet capital adequacy requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that
could have a material adverse effect on the operating results and financial
condition of the Corporation and the Bank. The applicable regulations require
the Bank to meet specific capital adequacy guidelines that involve quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital classification
is also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and the Bank to maintain minimum amounts and ratios of Total
Capital and Tier I Capital to risk-weighted assets and of Tier I Capital to
average assets. Actual capital amounts and ratios are presented in the table
below (dollars in thousands). Management believes, as of December 31, 2011,
that the Corporation and the Bank met all
capital adequacy requirements to which they were subject.
|
Restated
|
|
|
For
Minimum Capital
|
For
Minimum Regulatory
|
|
(Dollars in Thousands)
|
Actual
|
Adequacy
Purposes
|
Compliance
Purposes
|
|
As
of December 31, 2011
|
Amount
|
Ratio
|
Amount
|
Ratio
> or =
|
Amount
|
Ratio
> or =
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
Assets) Consolidated
|
$
107,856
|
16.9%
|
$
51,020
|
8.00%
|
$
-
|
-
|
|
Bank
|
104,856
|
16.5%
|
50,699
|
8.00%
|
63,373
|
10.00%
|
|
Tier
I Capital (to Risk Weighted
|
|
|
|
|
|
|
|
Assets) Consolidated
|
99,923
|
15.
7%
|
25,510
|
4.00%
|
-
|
-
|
|
Bank
|
96,923
|
15.3%
|
25,349
|
4.00%
|
38,024
|
6.00%
|
|
Tier
I Capital (to Average
|
|
|
|
|
|
|
|
Assets) Consolidated
|
99,923
|
10.1%
|
39,589
|
4.00%
|
-
|
-
|
|
Bank
|
96,923
|
9.8%
|
39,589
|
4.00%
|
49,486
|
5.00%
|
|
Restated
|
|
|
|
|
|
|
|
As
of December 31, 2010
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
Assets) Consolidated
|
$
108,035
|
16.5%
|
$
52,383
|
8.00%
|
$
-
|
-
|
|
Bank
|
104,891
|
16.1%
|
52,072
|
8.00%
|
65,0540
|
10.00%
|
|
Tier
I Capital (to Risk Weighted
|
|
|
|
|
|
|
|
Assets) Consolidated
|
99,882
|
15.3%
|
26,192
|
4.00%
|
-
|
-
|
|
Bank
|
96,828
|
14.9%
|
26,036
|
4.00%
|
39,070
|
6.00%
|
|
Tier
I Capital (to Average
|
|
|
|
|
|
|
|
Assets) Consolidated
|
99,882
|
10.6%
|
37,717
|
4.00%
|
-
|
-
|
|
Bank
|
96,828
|
10.3%
|
37,717
|
4.00%
|
47,146
|
5.00%
|
57
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
NOTE 13 – FAIR VALUE
MEASUREMENT
The
fair value of an asset or liability is the price that would be received to sell
that asset or paid to transfer that liability in an orderly transaction
occurring in the principal market (or most advantageous market in the absence
of a principal market) for such asset or liability. In estimating fair value,
the Corporation utilizes valuation techniques that are consistent with the
market approach, the income approach and/or the cost approach. Such valuation
techniques are consistently applied. Inputs to valuation techniques include
the assumptions that market participants would use in pricing an asset or
liability. ASC Topic 820 establishes a fair value hierarchy for valuation
inputs that gives the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to unobservable
inputs. The fair value hierarchy is as follows:
-
Level 1 Inputs
- Unadjusted
quoted prices in active markets for identical assets or liabilities that
the reporting 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. These might include
quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable for the
asset or liability (such as interest rates, volatilities, prepayment
speeds, credit risks, etc.) or inputs that are derived principally from or
corroborated by market data by correlation or other means.
-
Level 3 Inputs
- Unobservable
inputs for determining the fair values of assets or liabilities that
reflect an entity’s own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities.
A
description of the valuation methodologies used for instruments measured at
fair value as well as the general classification of such instruments pursuant
to the valuation hierarchy is set forth below. These valuation methodologies
were applied to all of the Corporation’s and the Bank’s financial assets and
financial liabilities of the Corporation and the Bank carried at fair value
effective January 1, 2009. In general, fair value is based on quoted market
prices, where available. If such quoted market prices are not available, fair
value is based on internally developed models that primarily use, as inputs,
observable market-based parameters. Valuation adjustments may be made to ensure
that financial instruments are recorded at fair value. These adjustments may
include amounts to reflect counterparty credit quality and the Corporation’s
creditworthiness among other things, as well as unobservable parameters. Any
such valuation adjustments are applied consistently over time. The
Corporation’s valuation methodologies may produce a fair value calculation that
may not be indicative of net realizable value or reflective of future fair
values. While management believes the valuation methodologies are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting
date. Furthermore, the reported fair value amounts have not been
comprehensively revalued since the presentation dates and, therefore, estimates
of fair value after the balance sheet date may differ significantly from the
amounts presented herein.
Financial
assets and financial liabilities measured at fair value on a recurring basis
include the following:
Securities
available-for-sale
–
Securities
classified as available-for-sale are reported at fair value utilizing Level 2 inputs.
For these securities, the Corporation obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable
data that may include dealer quotes, market spreads, cash flows, the U.S.
Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information and the bond’s terms and
conditions, among other things.
The following table summarizes financial assets and liabilities
measured at fair value on a recurring basis as of December 31, 2011, segregated
by the level of the valuation inputs within the fair value hierarchy utilized
to measure fair value:
58
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
Assets
and liabilities measured at fair value on a recurring basis as of December
31, 2011
|
|
|
Securities available-for-sale:
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
U.S. Government agencies
|
$
-
|
$
59,001
|
$
-
|
$
59,001
|
|
Mortgage backed securities
|
-
|
176,050
|
-
|
176,050
|
|
States and political subdivisions
|
-
|
59,946
|
-
|
59,946
|
|
Other securities
|
-
|
23,169
|
-
|
23,169
|
|
Total assets at fair value
|
$
-
|
$
318,166
|
$
-
|
$
318,166
|
|
Assets
and liabilities measured at fair value on a recurring basis as of December
31, 2010
|
|
|
Securities available for sale:
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
U.S. Government agencies
|
$
-
|
$
101,883
|
$
-
|
$
101,883
|
|
Mortgage backed securities
|
-
|
51,858
|
-
|
51,858
|
|
States and political subdivisions
|
-
|
58,963
|
-
|
58,963
|
|
Other securities
|
-
|
23,476
|
-
|
23,476
|
|
Total assets at fair value
|
$
-
|
$
236,180
|
$
-
|
$
236,180
|
Certain
financial assets and liabilities are measured at fair value on a nonrecurring
basis. These instruments are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances (for example,
when there is evidence of impairment). The only financial asset or liability measured
at fair value on a non-recurring basis for 2011 was impaired loans.
Impaired
Loans
– Certain impaired
loans are reported at the fair value of the underlying collateral if repayment
is expected solely from the collateral. Collateral values are estimated using
Level 2 inputs based on observable market data or Level 3 inputs based on
customized discounting criteria. During 2011, certain impaired loans were
re-measured and reported at fair value through a specific valuation allowance
allocation of the allowance for loan and lease losses based on the fair value
of the underlying collateral. Impaired loans with a carrying value of $13,604
were reduced by specific valuation allowance allocations totaling $1,242 to a
total reported fair value of $12,362 based on collateral valuations utilizing
Level 3 valuation inputs.
Non-Financial
Assets and Non-Financial Liabilities
–
Application of ASC Topic 820 to
non-financial assets and non-financial liabilities became effective January 1,
2009. The Corporation has no non-financial assets or non-financial liabilities
measured at fair value on a recurring basis. Certain non-financial assets and
non-financial liabilities measured at fair value on a non-recurring basis
include foreclosed assets (upon initial recognition or subsequent impairment),
non-financial assets and non-financial liabilities measured at fair value in
the second step of goodwill impairment test, and intangible assets and other
non-financial long-lived assets measured at fair value for impairment
assessment.
During
2011, certain foreclosed assets, upon initial recognition, were remeasured and
reported at fair value through a charge-off to the allowance for loan and lease
losses based upon the fair value of the foreclosed asset. The fair value of a
foreclosed asset, upon initial recognition, is estimated using Level 2 inputs
based on observable market
data or Level 3 inputs based
on customized discounting criteria. Foreclosed assets measured at fair value totaled
$8,827 (utilizing Level 2 valuation inputs) at December 31, 2011 and $7,927 at
December 31, 2010.
ASC
Topic 825 requires disclosure of the fair value of financial assets and
liabilities, including those financial assets and liabilities that are not
measured and reported at fair value on a recurring basis or non-recurring
basis. The methodologies for estimating the fair value of financial assets and
liabilities that are measured at fair value on a recurring or non-recurring
basis are discussed below.
Estimated fair
values have been determined by the Bank using the best available data. Many of
the Bank's financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an unforced,
unforeclosed transaction. Therefore, significant estimations and present value
calculations were
used by the Bank for the
purposes of this disclosure. Changes in assumptions or the estimation
methodologies used could have a material effect on the estimated fair values
included in this note.
59
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
Financial assets
–
Cash and cash equivalents are considered to be carried
at their fair value and have not been valued differently from historical cost
accounting. Both securities available-for-sale and held-to-maturity are
valued by an independent pricing
service as discussed in Note 2. A present value discounted cash flow
methodology was used to value the net loan portfolio. The discount rate used
in these calculations was the current rate at which new loans in the same
classification for regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For loans with floating
interest rates, it is assumed that estimated fair values generally approximate
the recorded book balances.
Financial
liabilities
– Deposits with stated maturities have been valued using
a present value discounted cash flow with a discount rate approximating the
current market for similar liabilities. Financial instrument liabilities with
no stated maturities have an estimated fair value equal to both the amount
payable on demand and the recorded book balance. For deposits with floating
interest rates, it is assumed that estimated fair values generally approximate
the recorded book balances. The carrying amount of other short-term borrowings
is considered to approximate fair value.
Fair values for
off-balance sheet, credit-related financial instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties’ credit standing.
At December 31,
2011, the Bank had outstanding standby letters of credit and commitments to
extend credit. These off-balance sheet financial instruments are generally
exercisable at the market rate prevailing at the date the underlying
transaction will be completed and subject to customer’s credit quality.
The
following table presents the fair value of the Bank's financial instruments as
of December 31, 2011 and 2010 (dollars in thousands):
|
|
December
31, 2011
|
December
31, 2010
|
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
|
Amount
|
Value
|
Amount
|
Value
|
|
Financial
assets
|
|
|
|
|
|
Cash and due from banks
|
$
|
17,927
|
$
|
17,927
|
$
|
11,161
|
$
|
11,161
|
|
Interest-bearing deposits in banks
|
38,594
|
38,594
|
4,238
|
4,238
|
|
Federal funds sold
|
16,500
|
16,500
|
17,100
|
17,100
|
|
Securities available-for-sale
|
318,166
|
318,166
|
236,180
|
236,180
|
|
Securities held-to-maturity
|
35,214
|
37,275
|
39,975
|
40,778
|
|
Loans, net
|
508,602
|
523,847
|
549,759
|
563,270
|
|
Accrued interest receivable
|
4,095
|
4,095
|
4,044
|
4,044
|
|
Financial
liabilities
|
|
|
|
|
|
Deposits
|
856,430
|
858,774
|
791,826
|
793,270
|
|
Federal funds purchased and
|
|
|
|
|
|
securities sold under agreements
|
|
|
|
|
|
to repurchase
|
16,347
|
16,347
|
5,813
|
5,813
|
|
Other short term liabilities
|
-
|
-
|
372
|
372
|
|
FHLB borrowings
|
17,100
|
17,521
|
24,100
|
24,901
|
|
Accrued interest payable
|
878
|
878
|
1,078
|
1,078
|
|
Off-balance
sheet credit related instruments:
|
|
|
|
|
|
Commitments to extend credit
|
|
109
|
|
95
|
|
|
|
|
|
|
|
|
|
|
Under
ASC Topic 825, entities may choose to measure eligible items at fair value at
specified election dates. Unrealized gains and losses on items for which the
fair value measurement option has been elected are reported in earnings at each
subsequent reporting date. The fair value option (i) may be applied instrument
by instrument, with certain exceptions; therefore, the Corporation may record
identical financial assets and liabilities at fair value or by another
measurement basis permitted under generally accepted accounting principles;
(ii) is irrevocable (unless a new election date occurs) and (iii) is applied
only to entire instruments and not to portions of instruments. During the
reported periods, the Bank had no financial instruments measured at fair value
under the fair value measurement option.
60
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
NOTE 14 – QUARTERLY
RESULTS OF OPERATIONS (Unaudited)
The
following table presents unaudited quarterly interim financial information for
the Corporation for the years ended December 31, 2011 and 2010 (dollars in
thousands, except per share amount):
|
|
|
|
|
Restated
|
Restated
|
|
|
First
|
Second
|
Third
|
Fourth
|
|
|
2011
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
|
|
Interest
income
|
$
|
9,461
|
$
|
9,680
|
$
|
9,541
|
$
|
9,286
|
$
|
37,968
|
|
Interest
expense
|
1,372
|
1,255
|
1,179
|
1,136
|
4,942
|
|
Net
interest income
|
8,089
|
8,425
|
8,362
|
8,150
|
33,026
|
|
Provision
for possible loan losses
|
|
|
|
|
|
|
(recoveries), net
|
725
|
750
|
750
|
900
|
3,125
|
|
Noninterest
expenses, net of
|
|
|
|
|
|
|
noninterest income
|
5,494
|
5,358
|
4,687
|
6,622
|
22,161
|
|
Income
before income taxes
|
1,870
|
2,317
|
2,925
|
628
|
7,740
|
|
Income
taxes
|
325
|
306
|
632
|
(519)
|
744
|
|
Net
income
|
$
|
1,545
|
$
|
2,011
|
$
|
2,293
|
$
|
1,147
|
$
|
6,996
|
|
Basic
earnings per share
|
$
|
0.29
|
$
|
0.37
|
$
|
0.43
|
$
|
0.21
|
$
|
1.30
|
|
Weighted
average shares outstanding per quarter
|
5,427,650
|
5,392,760
|
5,380,000
|
5,374,531
|
5,393,765
|
|
|
First
|
Second
|
Third
|
Fourth
|
|
|
2010
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
|
|
Interest
income
|
$
|
10,019
|
$
|
10,174
|
$
|
9,563
|
$
|
9,853
|
$
|
39,609
|
|
Interest
expense
|
1,927
|
1,785
|
1,715
|
1,574
|
7,001
|
|
Net
interest income
|
8,092
|
8,389
|
7,848
|
8,279
|
32,608
|
|
Provision
for possible loan losses
|
|
|
|
|
|
|
(recoveries), net
|
1,086
|
405
|
-
|
405
|
1,896
|
|
Noninterest
expenses, net of
|
|
|
|
|
|
|
noninterest income
|
5,882
|
5,848
|
5,544
|
5,136
|
22,410
|
|
Income
before income taxes
|
1,124
|
2,136
|
2,304
|
2,738
|
8,302
|
|
Income
taxes
|
(68)
|
196
|
478
|
397
|
1,043
|
|
Net
income
|
$
|
1,192
|
$
|
1,940
|
$
|
1,826
|
$
|
2,301
|
$
|
7,259
|
|
Basic
earnings per share
|
$
|
0.22
|
$
|
0.35
|
$
|
0.33
|
$
|
0.42
|
$
|
1.32
|
|
Weighted
average shares outstanding per quarter
|
5,504,030
|
5,487,729
|
5,487,713
|
5,465,664
|
5,486,183
|
61
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
NOTE 15 – DEPOSITS
The Bank does not have any foreign offices and all
deposits are serviced in its 17 domestic offices. Maturities of time deposits
of $100 or more at December 31, 2011 and 2010 are as follows (dollars in
thousands):
|
|
2011
|
2010
|
|
|
|
|
|
Under
3 months
|
$
|
31,221
|
$
|
35,163
|
|
3
to 12 months
|
52,729
|
54,769
|
|
Over
12 months
|
24,972
|
17,493
|
|
|
|
|
|
Total
|
$
|
108,922
|
$
|
107,425
|
The
following table presents maturities of interest-bearing deposits as of December
31, 2011 (dollars in thousands):
|
Interest bearing transaction accounts
|
$
470,839
|
|
2012
|
191,681
|
|
2013
|
13,801
|
|
2014
|
8,882
|
|
2015
|
12,774
|
|
2016
|
14,437
|
|
Thereafter
|
13
|
|
Total
|
$
712,427
|
NOTE 16 – CONDENSED FINANCIAL INFORMATION OF THE CORPORATION
The following
tables present the condensed balance sheets, statements of income and cash
flows of the Corporation as of December 31, 2011 and 2010 (dollars in
thousands, except per share amounts):
CONDENSED BALANCE SHEETS
|
|
As
of December 31,
|
|
|
Restated
|
Restated
|
|
|
2011
|
2010
|
|
Cash
|
$
443
|
$
501
|
|
Investment
in bank subsidiary - at equity
|
109,149
|
103,302
|
|
Investment
in credit life insurance company - at cost
|
54
|
54
|
|
Investment
in other securities
|
17
|
17
|
|
Dividends
receivable from bank subsidiary
|
1,972
|
-
|
|
Cash
surrender value - life insurance
|
3,950
|
3,820
|
|
Total assets
|
$
115,585
|
$
107,694
|
|
Liabilities
|
|
|
|
Payable to bank subsidiary
|
$
-
|
$
-
|
|
Payable to directors
|
1,560
|
1,429
|
|
Other payable
|
(1)
|
4
|
|
Dividends payable
|
1,972
|
-
|
|
Total liabilities
|
3,531
|
1,433
|
|
Shareholders'
equity
|
|
|
|
Common stock - $10 par value, 8,000,000 shares authorized;
|
|
|
|
5,330,000 and 5,430,000 shares issued and outstanding,
|
|
|
|
as of December 31, 2011 and December 31, 2010, respectively
|
53,300
|
54,300
|
|
Retained earnings
|
55,546
|
54,524
|
|
Accumulated other comprehensive income
|
3,208
|
(2,563)
|
|
Total shareholders' equity
|
112,054
|
106,261
|
|
Total liabilities and shareholders' equity
|
$
115,585
|
$
107,694
|
62
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME
|
|
Years
ended December 31,
|
|
|
Restated
|
Restated
|
Restated
|
|
|
2011
|
2010
|
2009
|
|
Operating
income
|
|
|
|
|
Dividends from bank subsidiary
|
$
|
6,974
|
$
|
6,603
|
$
|
8,206
|
|
Other dividend income
|
15
|
8
|
13
|
|
Interest income
|
-
|
-
|
1
|
|
Other
|
130
|
156
|
131
|
|
Operating
expenses
|
(199)
|
(197)
|
(189)
|
|
Income before equity in undistributed net
|
|
|
|
|
income of bank subsidiary
|
6,920
|
6,570
|
8,162
|
|
Equity
in undistributed net income of bank subsidiary
|
76
|
673
|
(122)
|
|
Net Income
|
$
|
6,996
|
$
|
7,243
|
$
|
8,040
|
CONDENSED STATEMENTS OF CASH FLOWS
|
|
Years
Ended Dec. 31,
|
|
|
Restated
|
Restated
|
|
|
2011
|
2010
|
|
Operating
activities
|
|
|
|
Net income for the year
|
$
|
6,996
|
$
|
7,243
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
provided by operating activities
|
|
|
|
Equity in undistributed net income of bank subsidiary
|
(76)
|
(673)
|
|
Increase in cash surrender value of life insurance contracts
|
(130)
|
(156)
|
|
Increase/Decrease in other assets
|
(1,972)
|
2,538
|
|
Increase/Decrease in payables
|
126
|
144
|
|
Total adjustments
|
(2,022)
|
1,890
|
|
Net cash provided by operating activities
|
4,944
|
9,096
|
|
Investing
activities
|
|
|
|
Purchase of single premium life insurance policy
|
-
|
(190)
|
|
Net cash used by investing activities
|
-
|
(190)
|
|
Financing
activities
|
|
|
|
Payment to repurchase common stock
|
(3,011)
|
(2,564)
|
|
Cash dividends paid
|
(1,991)
|
(6,077)
|
|
Net cash used by financing activities
|
(5,002)
|
(8,641)
|
|
Increase
(decrease) in cash
|
(58)
|
265
|
|
Cash
at beginning of year
|
501
|
236
|
|
Cash
at end of year
|
$
|
443
|
$
|
501
|
63
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
NOTE 17 – EMPLOYEE
BENEFIT PLANS
The Bank
contributes to a qualified profit-sharing plan covering employees who meet
participation requirements. The amount of the contribution is at the
discretion of the Bank’s Board of Directors, up to the maximum deduction
allowed for federal income tax purposes. Contributions to the plan, which
amounted to approximately $874, $764 and $1,170 in 2011, 2010 and 2009,
respectively, are included in salaries and employee benefits expense.
In 1992, the
Bank formalized a nonqualified salary continuation plan for certain key
officers. In connection with this plan, the value of the single premium
universal life insurance policies (approximately $960 at December 31, 2011 and
approximately $933 at December 31, 2010) purchased in 1993 to fund the plan and
the related liability (approximately $76 at December 31, 2011 and $112 at December
31, 2010) were included in other assets and other liabilities, respectively.
Net noncash income/expense recognized a gain on these policies of $18 in 2011, and
recognized a loss of $3 in 2010. Net noncash income/expense recognized a gain
on these policies $20 in 2009. These amounts are included in the above asset
values. The principal cost of the plan is accrued over the anticipated
remaining period of active employment, based on the present value of the expected
retirement benefit. Beginning in January 2009, the Bank combined the income
and expense related to the plan.
In 1993, the
Corporation and the Bank implemented a deferred compensation plan that permits
directors to defer their director's fees and earn interest on the deferred
amount. Liability increases for current deferred fees, net of benefits paid, of
approximately $521 for 2011, $532 for 2010 and $536 for 2009 have been
recognized in the accompanying consolidated financial statements. In connection
with this plan, a single premium universal life insurance policy was purchased
on the life of each director who elected to participate. Net noncash income
recognized on these policies of approximately $405 in 2011, $477 in 2010 and $355
in 2009 was included in the cash surrender values of $13,194, $12,788 and $11,518
reported in other assets at December 31, 2011, 2010 and 2009, respectively.
In 1996, the
Bank established an officer group term replacement/split-dollar plan to provide
life insurance benefits that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan and a
split-dollar agreement was made with an irrevocable trust that specified the
portion of the insurance proceeds that would become part of the trust. The
value of this policy ($1,275 at December 31, 2011 and $1,250 at December 31,
2010) is included in other assets, and net noncash income recognized on this
policy of approximately $25 in 2011, $24 in 2010 and $29 in 2009 is included in
the above asset values.
In 2002, the
Bank implemented a Director Split-Dollar Life Insurance Plan and an Executive
Split-Dollar Life Insurance Plan. The Bank purchased a single premium whole
life insurance policy on the life of each participant and endorsed a portion of
the policy death benefits to the insured’s estate, a trust or another
individual. The total life insurance purchased was $3,735 in 2002,
approximately $190 in 2003 and approximately $253 in 2004. Additional single
premium universal life insurance policies, totaling approximately $154 in 2005,
$623 in 2007, $559 in 2008, and $833 in 2009, and $254 in 2011, were purchased for
new participants. Net noncash income was recognized on these policies of
approximately $270 in 2011 and $342 in 2010 and was included in the asset value
of $8,192 as of December 31, 2011 ($7,670 as of December 31, 2010), which is a
part of bank other assets.
64
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
ASC Topic 715
requires the recognition of a liability and related compensation expense for
endorsement split-dollar life insurance policies that provide a benefit to an
employee that extends to post-retirement periods. Life insurance policies
purchased for the purpose of providing such benefits do not effectively settle
an entity’s obligation to the employee. Accordingly, the entity must recognize
a liability and related compensation expense during the employee’s active
service period based on the future cost of insurance to be incurred during the
employee’s retirement. If the entity has agreed to provide the employee with a
death benefit, then the liability for the future death benefit should be
recognized by following the guidance in ASC Topic 715. This topic provides
accounting guidance for postretirement benefits related to collateral
assignment split-dollar life insurance arrangements, whereby the employee owns
and controls the insurance policies. The consensus concludes that an employer should recognize a
liability for the postretirement benefit in accordance with ASC Topic 715, as
well as recognize an asset based on the substance of the arrangement with the
employee. The guidance was effective for fiscal years beginning after
December 15, 2010. The Corporation and the Bank adopted ASC Topic 715
on January 1, 2010, and the effect of adoption on the consolidated
financial statements was a reduction in retained earnings of approximately $342 and an increase in accrued liabilities
of approximately $342.
The Bank is the
beneficiary of the insurance policies that fund the salary continuation plan,
the deferred compensation plan, the group term replacement/split-dollar plan
and the split-dollar life insurance plans. These policies had an aggregate
current death benefit of $48,241 at December 31, 2011.
NOTE 18 – POST
RETIREMENT BENEFIT PLAN
The Corporation
sponsors a defined benefit post-retirement health care plan covering employees
who were hired before March 27, 2007. Under the plan, covered employees may
retire at age 60 with 15 years of work experience with the Bank. ASC Topic 715
requires employers to (i) recognize the overfunded or underfunded status of a
single-employer defined benefit post-retirement plan as an asset or liability
in its statement of financial position and (ii) recognize changes in that
funded status in comprehensive income. ASC Topic 715 also requires companies
to accrue the cost of post-retirement health care and life insurance benefits
within the employees’ active service periods. Eligibility requirements for
employees hired prior to March 27, 2007 are as follows:
-
25 years of service at any age;
-
15 years of service at attained
age 60; and
-
15 years of service at attained
age 55, with a qualifying disability
Premiums paid
by retirees and spouses depend on date of retirement, age and coverage
election. Employees retiring after June 2007, who are at least 60 years old
with a minimum of 15 years of service, will pay half of the full monthly
premium. Coverage will cease at age 63.5 for persons who retire with less than
25 years of service. All persons hired after March 27, 2007 are ineligible for
retiree health benefits.
The
Corporation’s funding policy is to make the minimum annual contribution that is
required by applicable regulations, plus such amounts as the Corporation may
determine to be appropriate from time to time. The
Corporation expects to contribute $241 to the plan in 2012.
The following
table provides further information about the plan (dollars in thousands):
65
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
Obligations and Funded Status
|
|
|
|
|
Post-Retirement
Benefits
|
|
|
2011
(Restated)
|
2010
(Restated)
|
|
Change
in benefit obligation
|
|
|
|
Benefit
obligation at beginning of year
|
$
1,825
|
$
1,924
|
|
Service
cost
|
24
|
28
|
|
Interest
cost
|
139
|
160
|
|
Plan
participants' contributions
|
107
|
102
|
|
Actuarial
(gain) loss
|
2,950
|
(117)
|
|
Benefits
paid
|
(473)
|
(272)
|
|
Benefit
obligation at end of year
|
$
4,572
|
$
1,825
|
|
Change
in plan assets
|
|
|
|
Fair
value of plans assets at beginning of year
|
$
-
|
$
-
|
|
Employer
contribution
|
365
|
170
|
|
Plan
participants' contributions
|
107
|
102
|
|
Benefits
paid
|
(472)
|
(272)
|
|
Fair
value of plan assets at end of year
|
$
-
|
$
-
|
|
Funded
status
|
$
(4,572)
|
$
(1,825)
|
|
Unrecognized
net actuarial (gain) loss
|
305
|
(2,849)
|
|
Accrued
benefit cost
|
$
(4,267)
|
$
(4,675)
|
|
|
|
Post-Retirement
Benefits
|
|
|
|
2011
(Restated)
|
2010
(Restated)
|
|
Accounts
payable and accrued liabilities
|
|
$
4,267
|
$
4,675
|
Amounts recognized in
accumulated other comprehensive income not yet recognized as components of net
periodic benefit cost consist of:
|
|
|
Post-Retirement
Benefits
|
|
|
|
2011
(Restated)
|
2010
(Restated)
|
|
Unrecognized
net actuarial (gain) loss
|
$
305
|
$
(2,849)
|
|
Unrecognized
prior service cost
|
|
-
|
-
|
|
Total
(before tax effects)
|
$
305
|
$
(2,849)
|
A reconciliation of other
comprehensive income is as follows:
|
|
|
Post-Retirement
Benefits
|
|
|
|
2011
(Restated)
|
2010
(Restated)
|
|
Other
comprehensive income at beginning of year
|
$
(2,849)
|
$
(2,960)
|
|
Amortization
of net gain (loss) included in net periodic benefit cost
|
|
205
|
213
|
|
Net
actuarial (gain) loss during the period
|
|
2,950
|
(102)
|
|
Total
(before tax effects)
|
$
305
|
$
2,849
|
|
|
|
|
|
|
|
Post-Retirement
Benefits
|
|
Components
of net periodic benefit cost
|
|
2011
(Restated)
|
2010
(Restated)
|
|
Service
cost
|
$
24
|
$
28
|
|
Interest
cost
|
|
139
|
160
|
|
Recognized
net actuarial (gain) loss
|
|
(205)
|
(213)
|
|
Net
periodic benefit cost (income)
|
$
(42)
|
$
(25)
|
Other
changes in benefit obligations recognized in other comprehensive income:
|
|
|
Post-Retirement
Benefits
|
|
|
|
2011
(Restated)
|
2010
(Restated)
|
|
Net
actuarial (gain) loss
|
$
2,950
|
$
(102)
|
|
Recognized
net actuarial gain (loss)
|
|
205
|
213
|
|
Total
recognized in other comprehensive income (before tax effects)
|
$
3,155
|
$
111
|
Significant
assumptions include:
|
|
|
Post-Retirement
Benefits
|
|
Weighted-average
assumption used to determine benefit obligation:
|
|
2011
|
2010
|
|
Discount
Rate
|
$
8%
|
8%
|
|
Rate
of compensation increase
|
NA
|
NA
|
66
FIRST FARMERS AND MERCHANTS CORPORATION AND
SUBSIDIARIES
|
|
|
Post-Retirement
Benefits
|
|
Weighted-average
assumptions used to determine benefit costs:
|
|
2011
|
2010
|
|
Discount
Rate
|
$
8%
|
8%
|
|
Corridor
|
|
10%
|
10%
|
|
Rate
of compensation increase
|
NA
|
NA
|
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid, net of participant contributions (dollars
in thousands) (restated):
|
Year
|
|
|
Company
Benefits
|
|
2012
|
|
$
|
241
|
|
2013
|
|
|
259
|
|
2014
|
|
|
271
|
|
2015
|
|
|
310
|
|
2016
|
|
|
310
|
|
2017
and later
|
|
|
1,745
|
|
|
|
$
|
3,136
|
The following
table gives the Health Care Cost Trend, which is applied to gross charges, net
claims and retiree paid premiums to reflect the Corporation's past practice and
stated ongoing intention to maintain relatively constant cost sharing between
the Corporation and retirees:
|
|
|
2011
|
2010
|
|
Health
care cost trend rate assumed for next year
|
7.5
- 11%
|
5.5
- 7%
|
|
Rate
to which the cost trend rate is assumed
|
|
|
|
to decline (the ultimate trend rate)
|
5%
|
6%
|
|
Year
that the rate reaches the ultimate trend rate
|
2018
|
2013
|
Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. A one-percentage-point change in assumed health care cost trend
rates would have the following effects (dollars in thousands):
|
|
1-Percentage-Point
Increase
|
1-Percentage-Point
Decrease
|
|
Effect
on total of service and interest cost
|
$
613
|
$
(519)
|
|
Effect
on postretirement benefit obligation
|
61
|
(64)
|
67