UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2011

OR

 

For the transition period from ___to ___

Commission file number 0-11709

FIRST CITIZENS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (731) 285 - 4410

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

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

Common stock, no par value

(Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o  No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o  No þ

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

Yes þ No o

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

Yes þNo o

 

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     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

               

Large accelerated filer o	Accelerated filer þ
Non-accelerated filer o	Smaller reporting company o

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

     The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2011 was approximately $81,953,532 based upon the last known sale price prior to such date.

     As of February 21, 2011, the registrant had 3,607,854 outstanding shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

 

     Certain information called for by Part III of Form 10-K is incorporated by reference to the Proxy Statement for our 2012 Annual Meeting of Shareholders to be filed with the Commission within 120 days after December 31, 2011.

 

 

 

 

 

 

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PART I

 

ITEM 1.  BUSINESS.

 

General

 

First Citizens Bancshares, Inc. (the “Company”) is a financial holding company incorporated in Tennessee in 1982. Through its principal bank subsidiary, First Citizens National Bank (the “Bank”), the Company conducts commercial banking and financial services operations primarily in West Tennessee. At December 31, 2011, the Company and its subsidiaries had total assets of $1.053 billion and total deposits of $856 million. The Company’s principal executive offices are located at One First Citizens Place, Dyersburg, Tennessee 38024 and its telephone number is (731) 285-4410.

 

The Company, headquartered in Dyersburg, Tennessee, is the holding company for the Bank and First Citizens (TN) Statutory Trusts III and IV.  These trusts hold the Company’s trust preferred debt and are not consolidated but are accounted for under the equity method in accordance with accounting principles generally accepted in the United States (“GAAP”).

 

The Bank is a diversified financial services institution that provides banking and other financial services to its customers. The Bank provides customary banking services, such as checking and savings accounts, fund transfers, various types of time deposits, safe deposit facilities, financing of commercial transactions and making and servicing both secured and unsecured loans to individuals, firms and corporations. The Bank is the only community bank in Tennessee recognized as a preferred lender for the Farm Service Agency of the U.S. Department of Agriculture (“FSA”), which provides emergency farm loans to help producers recover from production and physical losses caused by natural disasters or quarantine.  The Bank’s agricultural services include operating loans as well as financing for the purchase of equipment and farmland. The Bank’s consumer lending department makes direct loans to individuals for personal, automobile, real estate, home improvement, business and collateral needs. The Bank typically sells long-term residential mortgages that it originates to the secondary market without retaining servicing rights. The Bank’s commercial lending operations include various types of credit services for customers.

 

The Bank has the following subsidiaries:

• First Citizens Financial Plus, Inc., a Tennessee bank service corporation wholly owned by the Bank, provides licensed brokerage services that allow the Bank to compete on a limited basis with numerous non-bank entities that provide such services to the Company’s customer base.  The brokerage firm operates three locations in West Tennessee.

• White and Associates/First Citizens Insurance, LLC was chartered by the State of Tennessee and is a general insurance agency offering a full line of insurance products including casualty, life and health, and crop insurance.  The Bank holds a 50% ownership in the agency, which is accounted for using the equity method.  The insurance agency operates nine offices in Northwest Tennessee.

• First Citizens/White and Associates Insurance Company is organized and existing under the laws of the State of Arizona.  Its principal activity is credit insurance.  The Bank holds a 50% ownership in the agency, which is accounted for using the equity method in accordance with GAAP.

• First Citizens Investments, Inc. was organized and exists under laws of the State of Nevada.  The principal activity of this entity is to acquire and sell investment securities as well as collect income from the portfolio.  First Citizens Investments, Inc. owns the following subsidiary:

• First Citizens Holdings, Inc. is a Nevada corporation and wholly-owned subsidiary of First Citizens Investments, Inc., acquires and sells certain investment securities, collects income from its portfolio, and owns the following subsidiary:

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• First Citizens Properties, Inc. is a real estate investment trust organized and existing under the laws of the State of Maryland, the principal activity of which is to invest in participation interests in real estate loans made by the Bank and provide the Bank with an alternative vehicle for raising capital.  First Citizens Holdings, Inc. owns 100% of the outstanding common stock and 60% of the outstanding preferred stock of First Citizens Properties, Inc.  Directors, executive officers and certain employees and affiliates of the Bank own approximately 40% of the preferred stock which is reported as Noncontrolling Interest in Consolidated Subsidiaries in the Consolidated Balance Sheets of the Company included elsewhere in this Annual Report on 10-K.

The following table sets forth a comparative analysis of key balance sheet metrics of the Company as of December 31, for the years indicated (in thousands):

 

 

The table below provides a comparison of the Company’s performance to industry standards based on information provided by the Board of Governors of the Federal Reserve (the “Federal Reserve”). According to the Bank Holding Company Performance Report as of September 30, 2011(the most recent report available as of the date of this Annual Report on Form 10-K), the Company’s peer group consisted of 300 bank holding companies with assets totaling $1 billion to $3 billion. The following table presents comparisons of the Company with its peers as indicated in Bank Holding Company Performance Reports for the years ended December 31 for each of the years indicated:

 

 

________________

(1)	Peer information is provided for the nine months ended September 30, 2011, which is the most recent information available.
(2)	For the years ended December 31, 2010 and 2009, the Company’s peer group consisted of approximately 450 bank holding companies with total asset size of $500 million to $1 billion.
(3)	Tier I capital to average assets is the ratio of core equity capital components to average total assets.

 

The Company and the Bank employed a total of 259 full-time equivalent employees as of December 31, 2011.  The Company and the Bank are committed to hiring and retaining high quality employees to execute the Company’s strategic plan.

 

The Company’s website address is www.firstcitizens-bank.com. The Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports available free of charge by link on its website on the “About Us – Investor Relations” webpage under the caption “SEC Filings” as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). Shareholders may request a copy of the annual, quarterly or current reports without charge by contacting Laura Beth Butler, Secretary, First Citizens Bancshares, Inc., P. O. Box 370, Dyersburg, Tennessee 38025-0370.

 

Expansion

 

The Company, through its strategic planning process, intends to seek profitable opportunities that utilize excess capital and maximize income in Tennessee.  If the Company decides to acquire other banking institutions, its objective would be asset growth and diversification into other market areas. Acquisitions and de novo branches might afford the Company increased economies of scale within operation functions and better utilization of human resources. The Company would only pursue an acquisition or open a de novo branch if the Company’s Board of Directors determines it to be in the best interest of the Company and its shareholders.  The Company does not currently have plans to acquire other banking institutions.

 

 

 

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The Company owns two real estate parcels in Jackson, Tennessee which it purchased for construction of full-service facilities.  The lots were purchased in 2007 and 2008, but construction is temporarily on hold because of current economic conditions.  Construction of these facilities is expected to commence in one to three years.

 

Competition

 

The business of providing financial services is highly competitive. In addition to competing with other commercial banks in the service area, the Bank competes with savings and loan associations, insurance companies, savings banks, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit card organizations, credit unions and other enterprises.  In 1998, federal legislation allowed credit unions to expand their membership criteria. Expanded membership criteria coupled with existing tax-exempt status give credit unions a competitive advantage compared to banks.   

 

The Bank builds and implements strategic plans and commitments to address competitive factors in the various markets it serves.  The Bank’s primary strategic focus is on obtaining and maintaining profitable customer relationships in all markets it serves.  The markets demand competitive pricing, but the Bank competes on high quality customer service that will attract and enhance loyal, profitable customers to the Bank.  Industry surveys have consistently revealed that 65-70% of customers leave banks because of customer service issues.  Accordingly, the Bank is committed to providing excellent customer service in all markets that it serves as a means of branding and distinguishing itself from other financial institutions.  The Bank utilizes advertising, including both newspaper and radio, and promotional activities to support its strategic plans. 

 

The Bank offers a typical mix of interest-bearing transaction, savings and time deposit products, as well as traditional non-interest bearing deposit accounts. The Bank is a leader in deposit market share compared to competitors in Dyer, Fayette, Lauderdale, Obion, Tipton and Weakley Counties of Tennessee. The Bank has consistently been a leader in market share of deposits in its markets for several years. The Bank’s market share has been 18% to 20% in Dyer, Fayette, Lauderdale, Obion, Tipton and Weakley Counties combined and in excess of 62% in Dyer County for the last three years.  The following market share information for these counties (banks only, deposits inside of market) is from the Deposit Market Share Report, as of June 30, 2011, prepared annually by the FDIC (dollars in thousands):

                                                                                                          

 

 

 

 

 

The Bank also competes in the Shelby County and Williamson County markets.  Because the size and composition of these two markets is much larger and more diverse than the other markets in which the Bank operates, Shelby and Williamson Counties are excluded from the above table.  The Bank’s market share in Shelby County was 0.88% and 0.75% as of June 30, 2011 and 2010, respectively.  The Bank’s market share in Williamson County was 0.21% and 0.18% as of June 30, 2011 and 2010, respectively.

 

Regulation and Supervision

 

Bank Holding Company Act

 

The Company is a financial holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and is subject to supervision and examination by the Federal Reserve. As a financial holding company, the Company is required to file with the Federal Reserve annual reports and other information regarding its business obligations and those of its subsidiaries.  Federal Reserve approval must be obtained before the Company may:

• Acquire ownership or control of any voting securities of a bank or bank holding company where the acquisition results in the Company owning or controlling more than 5% of a class of voting securities of that bank or bank holding company; or

• Acquire substantially all assets of a bank or bank holding company or merge with another bank holding company.

Federal Reserve approval is not required for a bank subsidiary of a bank holding company to merge with or acquire substantially all assets of another bank if prior approval of a federal supervisory agency, such as the Office of the Comptroller of the Currency (“OCC”), is required under the Bank Merger Act.

 

The Bank Holding Company Act provides that the Federal Reserve shall not approve any acquisition, merger or consolidation that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States.  Further, the Federal Reserve may not approve any other proposed acquisition, merger, or consolidation, the effect of which might be to substantially lessen competition or tend to create a monopoly in any section of the country, or which in any manner would be in restraint of trade, unless the anti-competitive effect of the proposed transaction is clearly outweighed in favor of public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. Further, an application may be denied if the applicant has failed to provide the Federal Reserve with adequate assurances that it will make available such information on its operations and activities, and the operations and activities of any affiliate, deemed appropriate to determine and enforce compliance with the Bank Holding Company Act and any other applicable federal banking statutes and regulations.  In addition, the Federal Reserve considers the competence, experience and integrity of the officers, directors and principal shareholders of the applicant and any subsidiaries as well as the banks and bank holding companies concerned.  The Federal Reserve also considers the record of the applicant and its affiliates in fulfilling commitments to conditions imposed by the Federal Reserve in connection with prior applications.

 

According to Federal Reserve policy and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), a financial holding company must act as a source of financial strength to its subsidiary banks and commit resources to support each such subsidiary. This support may be required at times when a financial holding company may not be able to provide such support.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act

                                                                                                               

The passage of the Dodd-Frank Act brought about a major overhaul of the current financial institution regulatory system. Among other things, the Dodd-Frank Act established a new, independent Consumer Financial Protection Bureau tasked with protecting consumers from unfair, deceptive and abusive financial products and practices. The Dodd-Frank Act includes provisions that, among other things, reorganize bank supervision and strengthen the Federal Reserve. Further, the Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm. In June 2010, prior to the enactment of the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which require that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behavior. Together, the Dodd-Frank Act and the recent guidance on compensation could impact compensation policies of the Bank.  The Dodd-Frank Act provides other restrictions including requiring institutions to retain credit risk when selling loans to third parties.

 

 

 

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On June 29, 2011, the Federal Reserve released its final rule implementing the Durbin Debit Interchange Amendment to the Dodd-Frank Act (the “Durbin Amendment”). The final rule set a base interchange rate of $0.21 per transaction, plus an additional five basis points of the transaction cost for fraud charges. The Federal Reserve also approved an interim final rule that allows for an upward adjustment of no more than $0.01 on the debit interchange fee for implementing certain fraud prevention standards. Additionally, the Federal Reserve adopted requirements that issuers include two unaffiliated networks for routing debit transactions, one that is signature-based and one that is personal identification number based. The effective date for the final and interim final rules of the Durbin Amendment was October 1, 2011.

 

Gramm-Leach-Bliley Act

 

Among other things, the Gramm-Leach-Bliley Financial Modernization Act of 1999 (“GLBA”) modified financial privacy and community reinvestment laws. The financial privacy provisions included in GLBA generally prohibit financial institutions such as the Bank from disclosing non-public personal financial information to third parties unless customers have the opportunity to opt out of the disclosure.  GLBA also magnifies the consequences of a bank receiving less than a satisfactory Community Reinvestment Act (“CRA”) rating, by freezing new activities until the institution achieves a better CRA rating. As of December 31, 2011, the Company had a satisfactory rating under CRA.

 

FDIC Insurance Coverage

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) provides for a risk-based deposit insurance premium structure for insured financial institutions. The FDIC generally provides deposit insurance up to $250,000 per customer per institution for depository accounts held at insured financial institutions. Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. Effective as of the second quarter of 2011, the FDIC bases the deposit insurance assessment on a redefined assessment base and a new scorecard method to calculate the assessment rate.

 

Bank Secrecy Act

 

Over the past 30 plus years, Congress has passed several laws impacting a financial institution’s responsibilities relating to the Bank Secrecy Act.  In 2005, the Federal Financial Institutions Examination Council and federal banking agencies released the interagency “Bank Secrecy Act Anti-Money Laundering Examination Manual.” The manual emphasizes a banking organization’s responsibility to establish and implement risk-based policies, procedures and processes to comply with the Bank Secrecy Act and safeguard its operations from money laundering and terrorist financing. It is a compilation of existing regulatory requirements, supervisory expectations and sound practices for Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance. An effective BSA/AML compliance program requires sound risk management; therefore, the manual also provides guidance on identifying and controlling risk associated with money laundering and terrorist financing. 

 

The specific examination procedures performed will depend on the BSA/AML risk profile of the banking organization, the quality and quantity of independent testing, the financial institution’s history of BSA/AML compliance and other relevant factors.   The Bank has implemented effective risk-based policies and procedures that reinforce existing practices and encourage a vigilant determination to prevent the institution from becoming associated with criminals or being used as a channel for money laundering or terrorist financing activities.

 

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USA Patriot Act

 

The USA Patriot Act (the “Patriot Act”) enhances the powers of the federal government and law enforcement organizations to combat terrorism, organized crime and money laundering.  The Patriot Act significantly amended and expanded the application of the Bank Secrecy Act, including enhanced customer identity measures, new suspicious activity reporting rules and enhanced anti-money laundering programs. Under the Patriot Act, each financial institution is required to establish and maintain anti-money laundering programs, which include, at a minimum, the development of internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs.  In addition, the Patriot Act requires the federal banking agencies to consider the record of a bank or banking holding company in combating money laundering activities in their evaluation of bank and bank holding company merger or acquisition transactions. The Bank has implemented policies and procedures in compliance with stated regulations of the Patriot Act.

 

Customer Information Security and Customer Financial Privacy

 

The Federal Reserve published guidelines for Customer Information Security and Customer Financial Privacy with a mandatory effective date of July 1, 2001.  The Bank has established policies in adherence to the published guidelines. 

• The three principal requirements relating to the Privacy of Consumer Financial Information in GLBA are as follows:

• Financial institutions must provide customers with notices describing their privacy policies and practices, including policies with respect to disclosure of nonpublic personal information to affiliates and to nonaffiliated third parties. Notices must be provided at the time the customer relationship is established and annually thereafter;

• Subject to specified exceptions, financial institutions may not disclose nonpublic personal information about consumers to any nonaffiliated third party unless consumers are given a reasonable opportunity to direct that such information not be shared (to “opt out”); and

• Financial institutions generally may not disclose customer account numbers to any nonaffiliated third party for marketing purposes.

The Customer Information Security guidelines implement section 501(b) of GLBA, which requires agencies to establish standards for financial institutions relating to administrative, technical and physical safeguards for customer records and information. The guidelines require financial institutions to establish an information security program to: identify and assess risks that may threaten customer information; develop a written plan containing policies and procedures to manage and control these risks; implement and test the plan; and adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information, and internal or external threats to information security.

 

Each institution may implement a security program appropriate to its size, complexity, nature and scope of its operations. The Bank has structured and implemented a financial security program that complies with all principal requirements of GLBA.

 

Regulatory agencies also published the “Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice.”  Pursuant to such guidance, each financial institution is required to implement a response program to address unauthorized access to sensitive customer information maintained by the institution or its service providers.  The Bank has implemented an appropriate response program, which includes: formation of an “Incident Response Team”; properly assessing and investigating any incident; notifying the OCC of any security breach, if necessary; taking appropriate steps to contain and control any incident; and notifying affected customers when required.

 

Identity Theft Prevention Program

 

The Fair and Accurate Credit Transactions Act (“FACT”) requires banking institutions to implement an Identity Theft Prevention Program to detect, prevent and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. Program requirements include incorporating federal guidelines on investigating customer address discrepancies and identifying other “red flags” that may indicate potential identity theft.  The Bank has implemented a comprehensive Identity Theft Prevention Program, which covers all customer accounts and accomplishes the following standards as set forth in FACT: (1) identify relevant red flags for covered accounts; (2) detect red flags; (3) respond appropriately to any red flags detected; and (4) ensure the program is updated periodically.

 

 

 

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Federal Legislation on Banking Products and Services

 

Following the economic crises of 2008, Congress and the regulatory agencies issued legislation, rules and regulations creating or amending numerous requirements on disclosures, documentation, and procedures in relation to several products and services offered by financial institutions.  Many of these proposals provide customers with additional disclosure information and protections.  The regulatory changes include, but are not limited to, the Real Estate Settlement Procedures Act, Federal Reserve Regulation E governing overdraft protection, the Truth in Lending Act and the Truth in Savings Act.  The Bank’s policies and procedures are being revised to incorporate recent regulatory requirements and ensure full compliance.

 

Federal Monetary Polices

 

Monetary policies of the Federal Reserve have a significant effect on operating results of bank holding companies and their subsidiary banks.  The Federal Reserve regulates the national supply of bank credit by open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits.

 

Federal Reserve monetary policies have materially affected the operating results of commercial banks in the past and are expected to do so in the future.  The nature of future monetary policies and the effect of such policies on the business and earnings of the company and its subsidiaries cannot be accurately predicted.

 

Basel III

 

In September 2010, the oversight body of the Basel Committee announced a package of reforms, commonly referred to as Basel III, that will increase existing capital requirements substantially over the next four years as well as add additional liquidity requirements for banks. These reforms were endorsed by the G20 at the summit held in Seoul, South Korea in November 2010. The short-term and long-term impact of the new Basel III capital standards and the forthcoming new capital rules to be proposed for U.S. banks is uncertain. As a result of the recent deterioration in the global credit markets and the potential impact of increased liquidity risk and interest rate risk, it is unclear what the short-term impact of the implementation of Basel III may be or what impact a pending an alternative approach for U.S. banks may have on the cost and availability of different types of credit and the potential compliance costs of implementing the new capital standards.

 

Revisions to Regulation E

 

                On July 31, 2010, the Federal Reserve implemented revised Regulation E. The effect of this revision was to allow customers of the Bank to opt out of overdraft protection programs, and thereby potentially reduce fee income generated by the Bank.  The Bank has taken all steps necessary to be compliant with the revised Regulation E.

 

Usury, State Legislation and Economic Environment

 

Tennessee usury laws limit the rate of interest that may be charged by banks. Certain federal laws provide for preemption of state usury laws.

 

Tennessee usury laws permit interest at an annual rate of four percentage points above the average prime loan rate for the most recent week for which such an average rate has been published by the Federal Reserve, or 24%, whichever is less. The “Most Favored Lender Doctrine” permits national banks to charge the highest rate permitted by any state lender.

 

Specific usury laws may apply to certain categories of loans, such as the limitation placed on interest rates on single pay loans of $1,000 or less with a term of one year or less.  Rates charged on installment loans, including credit cards as well as other types of loans, may be governed by the Industrial Loan and Thrift Companies Act.

 

Insurance Activities

 

Subsidiaries of the Company sell various types of insurance as agents in the State of Tennessee.  Insurance activities are subject to regulation by the states in which such business is transacted.  Although most of such regulation focuses on insurance companies and their insurance products, insurance agents and their activities are also subject to regulation by the states, including, among other things, licensing and marketing and sales practices.

 

 

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ITEM 1A.  RISK FACTORS.

 

Information contained herein includes forward-looking statements with respect to the beliefs, plans, risks, goals and estimates of the Company.  Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant banking, economic, and competitive uncertainties, many of which are beyond management’s control.  When used in this discussion, the words “anticipate,” “project,” “expect,” “believe,” “should,” “will,” “intend,” “is likely,” “going forward,” “may” and other expressions are intended to identify forward-looking statements.  These forward-looking statements are within the meaning of section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended.  Such statements may include, but are not limited to, capital resources, strategic planning, acquisitions or de novo branching, ability to meet capital guidelines, legislation and governmental regulations affecting financial services companies, construction of new branch locations, dividends, critical accounting policies, allowance for loan losses, fair value estimates, goodwill, occupancy and depreciation expense, held-to-maturity securities, available-for-sale securities, trading securities, cash flows, core deposit intangibles, diversification in the real estate loan portfolio, interest income, maturity of loans, loan impairment, loan ratings, charge-offs, other real estate owned, maturity and re-pricing of deposits, borrowings with call features, dividend payout ratio, off-balance sheet arrangements, the impact of recently issued accounting standards, changes in funding sources, liquidity, interest rate sensitivity, net interest margins, debt securities, non-accrual status of loans, contractual maturities of mortgage-backed securities and collateralized mortgage obligations, other-than-temporary impairment of securities, amortization expense, deferred tax assets, independent appraisals for collateral, property enhancement or additions, efficiency ratio, ratio of assets to employees, net income, changes in interest rates, loan policies, categorization of loans, maturity of FHLB borrowings and the effectiveness of internal control over financial reporting.

 

Forward-looking statements are based upon information currently available and represent management’s expectations or predictions of the future. As a result of risks and uncertainties involved, actual results could differ materially from such forward-looking statements. The potential factors that could affect the Company’s results include but are not limited to:

 

• Changes in general economic and business conditions;

• Changes in market rates and prices of securities, loans, deposits and other financial instruments;

• Changes in legislative or regulatory developments affecting financial institutions in general, including changes in tax, banking, insurance, securities or other financial service related laws;

• Changes in government fiscal and monetary policies;

• The ability of the Company to provide and market competitive products and services;

• Concentrations within the loan portfolio;

• Fluctuations in prevailing interest rates and the effectiveness of the Company’s interest rate hedging strategies;

• The Company’s ability to maintain credit quality;

• The effectiveness of the Company’s risk monitoring systems;

• The ability of the Company’s borrowers to repay loans;

• The availability of and costs associated with maintaining and/or obtaining adequate and timely sources of liquidity;

• Geographic concentration of the Company’s assets and susceptibility to economic downturns in that area;

• The ability of the Company to attract, train and retain qualified personnel;

• Changes in consumer preferences; and

• Other factors generally understood to affect financial results of financial services companies.

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The Company undertakes no obligation to update its forward-looking statements to reflect events or circumstances that occur after the date of this Annual Report on Form 10-K.

 

In addition to the factors listed above, management believes that the risk factors set forth below should be considered in evaluating the Company’s business. The relevant risk factors outlined below may be supplemented from time to time in the Company’s press releases and filings with the SEC.

 

We are subject to credit quality risks and our credit policies may not be sufficient to avoid losses.

 

We are subject to the risk of losses resulting from the failure of borrowers, guarantors and related parties to pay interest and principal amounts on loans.  Although we maintain credit policies and credit underwriting, monitoring and collection procedures that management believes are sufficient to manage this risk, these policies and procedures may not prevent losses, particularly during periods in which the local, regional or national economy suffers a general decline.  If a large number of borrowers fail to repay their loans, our financial condition and results of operations may be adversely affected.

 

Earnings could be adversely affected if values of other real estate owned decline.

 

                We are subject to the risk of losses from the liquidation and/or valuation adjustments on other real estate owned.  We owned over 100 properties totaling $11.1 million in other real estate owned as of December 31, 2011.  Other real estate owned is valued at the lower of cost or fair market value less cost to sell.  Fair market values are based on independent appraisals for properties valued at $50,000 or greater and appraisals are updated annually.  We may incur future losses on these properties if economic and real estate market conditions result in further declines in the fair market value of these properties. 

 

If our allowance for loan losses becomes inadequate, our financial condition and results of operations could be adversely affected.

 

We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio. Management uses various assumptions and judgments to evaluate on a quarterly basis the adequacy of the allowance for loan losses in accordance with GAAP as well as regulatory guidelines. The amount of future losses is susceptible to changes in economic, operating and other conditions, changes in interest rates which may be beyond our control, and these losses may exceed current estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses or that our loan loss allowance will be adequate in the future. Excessive loan losses could have an adverse effect on our financial performance.

 

Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have an adverse effect on our results of operations.

 

 

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Changes in interest rates could have an adverse effect on our earnings.

 

Our profitability is in part a function of interest rate spread, or the difference between interest rates earned on investments, loans and other interest-earning assets and the interest rates paid on deposits and other interest-bearing liabilities. Interest rates are largely driven by monetary policies set by the Federal Open Market Committee, or FOMC, and trends in the prevailing market rate of interest embodied by the yield curve.  The FOMC establishes target rates of interest to influence the cost and availability of capital and promote national economic goals.  In January 2012, the FOMC indicated that rates would most likely remain at the historical low of a range of 0.00% to 0.25% through the end of 2014.  The yield curve is a representation of the relationship between short-term interest rates to longer-term debt maturity rates.  Currently, the yield curve is fairly steep as short-term rates continue at historic lows.  As of December 31, 2011, the Bank was liability sensitive in terms of interest rate risk exposure, meaning that the Bank will likely experience margin compression when federal funds rates increase.  In other words, upward pressure on deposit interest rates will outpace increases in the interest rates on interest-earning assets.  Deposits are currently priced at historically low levels and are likely to reprice at a faster pace than interest-earning assets when the rate environment begins rising.  The majority of variable-rate loans are priced at floors that will require significant increase in federal fund and prime rates before loan yields increase. 

               

Prepayment of principal cash flows from the investment portfolio is expected to be steady in 2012 as rates continue to be very low. Credit availability has improved recently because of the actions of the Federal Reserve and U.S. Treasury Department as described above. Reinvestment rates on the investment portfolio have dropped significantly (greater than 100 basis points) over the last 12 months.

 

If the rate of interest paid on deposits and other borrowings increases more than the rate of interest earned on loans and other investments, our net interest income and, therefore, earnings could be adversely affected. Earnings could also be adversely affected if the rates on loans and other investments fall more quickly than those on deposits and other borrowings. While management takes measures to guard against interest rate risk, there can be no assurance that such measures will be effective in minimizing the exposure to interest rate risk. A sudden and significant increase in the market rate of interest could have a material adverse effect on the Company’s financial position and earnings.

 

We are geographically concentrated in West Tennessee, and changes in local economic conditions may impact our profitability.

 

We operate primarily in West Tennessee and the majority of all loan customers and most deposit and other customers live or have operations in this area. Accordingly, our success depends significantly upon growth in population, income levels, deposits, housing starts and continued attraction of business ventures to this area. Our profitability is impacted by changes in general economic conditions in this market. The residential real estate market in the Shelby County and surrounding markets continues to be a concern due to elevated inventories and the negative impact on market values.  New and existing home sales have improved, but remain well below 2006 – 2007 levels or the level of absorption required to meaningfully allow the residential real estate market to recover fully.  We also remain concerned about the impact of plant closings (such as Goodyear and Briggs & Stratton) and their impact to unemployment levels and economic conditions in our rural markets.   Additionally, unfavorable local or national economic conditions could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations.

 

We are less able than larger institutions to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we are unable to give assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

 

If financial market conditions worsen or our loan demand increases significantly, our liquidity position could be adversely affected.

 

We rely on dividends from the Bank as our primary source of funds. The Bank’s primary sources of funds are client deposits and loan repayments. While scheduled loan repayments have historically been a relatively stable source of funds, they are susceptible to the inability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters and national or international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

 

 

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Market conditions could adversely affect our ability to obtain additional capital on favorable terms, should we need it.

 

Our business strategy calls for continued growth. We anticipate that we will be able to support this growth through the generation of additional deposits at new branch locations, as well as through returns realized as a result of investment opportunities. However, we may need to raise additional capital in the future to support continued growth and maintain capital levels. We may not be able to obtain additional capital in the amounts or on terms satisfactory to us. Growth may be constrained if we are unable to raise additional capital as needed.

 

Failure to remain competitive in an increasingly competitive industry may adversely affect results of operations and financial condition.

 

We encounter strong competition from other financial institutions in our market areas. In addition, established financial institutions not already operating in our market areas may open branches in our market areas at future dates or may compete in the market via the internet. Certain aspects of our banking business also compete with savings institutions, credit unions, mortgage banking companies, consumer finance companies, insurance companies and other institutions, some of which are not subject to the same degree of regulation or restrictions imposed on us. Many of these competitors have substantially greater resources and lending limits and are able to offer services that we do not provide. While we believe that we compete effectively with these other financial institutions in our market areas, we may face a competitive disadvantage as a result of our smaller size, smaller asset base, lack of geographic diversification and inability to spread our marketing costs across a broader market. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new or to retain existing clients may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.

 

We expect the failure of other banks to increase our expenses.

 

The failure of numerous banks as a result of the economic recession may have a negative impact on our earnings, as premiums required for FDIC insurance may increase in 2012 and beyond. In 2011 and 2010, FDIC premium expense totaled approximately $823,000 and $1.2 million, respectively, and was included in non-interest expense.  We cannot give any assurances that the FDIC will not require special assessments or increase deposit insurance assessments in the future. 

 

Adverse perceptions about our business could adversely affect our results of operations and financial condition.

 

We believe that our reputational risk increased significantly during the recent economic recession as a result of the elevated number of bank failures and volume of negative media headlines related to the banking industry. As a result, the FDIC implemented various programs to help mitigate such risks, including increasing deposit insurance limits to $250,000. As part of its strategic initiatives, management implemented various action plans including communications with and training sessions for our staff and communications to local customers and civic groups regarding management’s view on stability in the Company as well as most local community banking institutions. 

 

The public perception of our ability to conduct business and expand our customer base may also be affected by practices of the Company’s Board of Directors, management and employees. Significant relationships with vendors, customers and other external parties may also affect our reputation. Adverse perceptions about our business practices or the business practices of those with whom we have significant relationships could adversely impact our results of operations and financial condition.

 

We are subject to extensive government regulation and supervision.

 

We are subject to extensive federal and state regulation and supervision.  Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not our shareholders.  These regulations affect our lending practices, capital structure, investment practices and dividend policy and growth, among other things.  Future changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways.  Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, or decrease the flexibility in pricing certain products and services by the Bank, among other things.  Failure to comply with laws, regulations or policies could result in sanctions imposed by regulatory agencies, civil money penalties, civil liability and/or reputation damage, which could have a material adverse effect on our financial condition and results of operations. While our policies and procedures are designed to deter and detect any such violations, there can be no assurance that such violations will not occur.

 

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Our common stock is not listed or traded on any established securities market and is normally less liquid than securities traded in those markets.

 

Our common stock is not listed or traded on any established securities market and we have no plans to seek to list our common stock on any recognized exchange. Accordingly, our common stock has substantially less daily trading volume than the average securities listed on any national securities exchange. Most transactions in our common stock are privately negotiated trades and our common stock is very thinly traded. There is no dealer for our stock and no “market maker.” Our shares do not have a trading symbol. The lack of a liquid market can produce downward pressure on our stock price and can reduce the marketability of our common stock.

 

Our ability to pay dividends may be limited.

 

As a holding company, the Company is a separate legal entity from the Bank and does not conduct significant income-generating operations of its own. It currently depends upon the Bank’s cash and liquidity to pay dividends to its shareholders. We cannot provide assurance that the Bank will have the capacity to pay dividends to the Company in the future. Various statutes and regulations limit the availability of dividends from the Bank. It is possible that, depending upon the Bank’s financial condition and other factors, the Bank’s regulators could assert that payment of dividends by the Bank to the Company is an unsafe or unsound practice. In the event that the Bank is unable to pay dividends to the Company, we may not be able to pay dividends to our shareholders.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None. 

 

ITEM 2. PROPERTIES.

 

The Bank has 16 full-service bank financial centers, three drive-through only branches, one loan production office and 28 ATMs spread over nine Tennessee counties. A list of available banking locations and hours is maintained on the Bank’s website (www.firstcitizens-bank.com) under the “Locate Us” section.  The Bank owns and occupies the following properties:

 

• The Bank’s main branch and executive offices are located in a six-story building at One First Citizens Place (formerly 200 West Court), Dyersburg, Dyer County, Tennessee.  This property also includes the Banking Annex, which has an address of 215-219 Masonic Street.  The Banking Annex houses the Bank’s operations, information technology, call center, bank security and mail departments;

• The Bank’s downtown drive-through branch is located at 117 South Church Street, Dyersburg, Dyer County, Tennessee, and is a remote motor bank with six drive-through lanes and a drive-up ATM lane;

• The Green Village Financial Center, located at 710 U.S. 51 Bypass adjacent to the Green Village Shopping Center in Dyersburg, Dyer County, Tennessee, is a full-service banking facility;

• The Newbern Financial Center, a full-service facility, is located at 104 North Monroe Street, Newbern, Dyer County, Tennessee;

• The Industrial Park Financial Center located at 2211 St. John Avenue, Dyersburg, Dyer County, Tennessee is a full-service banking facility;

• The Ripley Financial Center is a full-service facility located at 316 Cleveland Street in Ripley, Lauderdale County, Tennessee;

• The Troy Financial Center is a full-service banking facility located at 220 East Harper Street in Troy, Obion County, Tennessee;

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• The Union City Financial Center operates one full-service facility, one motor branch and three ATMs in Obion County.  The main office is located at 100 Washington Avenue in Union City, Tennessee, and the drive-through branch is located across from the main office at First and Harrison Streets. 

• The Martin Financial Center is a full-service facility located at 200 University Avenue, Martin, Weakley County, Tennessee;

• The Munford Financial Center is a full-service facility located at 1426 Munford Avenue in Munford, Tipton County, Tennessee.  In addition, a drive-through facility is located at 1483 Munford Avenue, also in Munford;

• The Atoka Financial Center is a full-service facility located at 123 Atoka-Munford Avenue, Atoka, Tipton County, Tennessee;

• The Millington Financial Center is a full-service branch facility located at 8170 Highway 51 N., Millington, Shelby County, Tennessee;

• The Bartlett Financial Center is a full-service facility located at 7580 Highway 70, Bartlett, Shelby County, Tennessee;

• The Arlington Financial Center is a full-service facility located at 5845 Airline Road, Arlington, Shelby County, Tennessee;

• The Oakland Financial Center is a full-service facility located at 7285 Highway 64, Oakland, Fayette County, Tennessee;

• The Collierville Financial Center is a full-service facility located at 3668 South Houston Levee in Collierville, Shelby County, Tennessee;

• The Franklin Financial Center is a full-service facility located at 1304 Murfreesboro Road in Franklin, Williamson County, Tennessee;

• A lot located on Christmasville Cove in Jackson, Madison County, Tennessee, that was purchased in 2007 and on which the Company expects to construct a full-service branch location in the next three to five years; and

• A lot located on Union University Drive in Jackson, Madison County, Tennessee, that was purchased in February 2008 and on which the Company expects to construct a full-service branch in the next one to three years.

The Bank owns all properties and there are no liens or encumbrances against any properties owned by the Bank.  All facilities described above are adequate and appropriate to provide banking services as noted and are adequate to handle growth expected in the foreseeable future.  As growth continues or needs change, individual property enhancements or additional properties will be evaluated as necessary.

 

ITEM 3. LEGAL PROCEEDINGS.

 

The Company and its subsidiaries are defendants in various lawsuits arising out of the normal course of business. In the opinion of management, the ultimate resolution of such matters should not have a material adverse effect on the Company’s consolidated financial condition or results of operations. Litigation is, however, inherently uncertain, and the Company cannot make assurances that it will prevail in any of these actions, nor can it estimate with reasonable certainty the amount of damages that it might incur.

 

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PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Holders and Market Information

 

As of February 21, 2012, there were 1,071 shareholders of the Company’s common stock. The Company’s common stock is not listed or traded on any established public trading market. The table below shows the quarterly range of high and low sale prices for the Company’s common stock during the fiscal years 2011 and 2010.  These sale prices represent known transactions reported to the Company and do not necessarily represent all trading transactions for the periods.

 

 

Dividends

 

The Company paid aggregate dividends per share of the Company’s common stock of $1.10 in 2011 and $1.00 in 2010.  The following quarterly dividends per share of common stock were paid for 2011 and 2010:

 

________________

(1)

On December 15, 2011, the Company paid a special dividend of $0.30 per share, payable to holders of record as of December 1, 2011, in addition to the fourth quarter dividend of $0.20 per share payable to holders of record as of November 15, 2011.  On December 15, 2010, the Company paid a special dividend of $0.40 per share, payable to holders of record as of November 15, 2010, in addition to the fourth quarter dividend of $0.15 per share.

 

Future dividends will depend on the Company’s earnings, financial condition, regulatory capital levels and other factors, which the Company’s Board of Directors considers relevant.  See the section above entitled “Item 1. Business – Regulation and Supervision” and Note 16 to the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on 10-K for more information on restrictions and limitations on the Company’s ability to pay dividends.

 

Issuer Purchases of Equity Securities

 

The Company had no publicly announced plans or programs for purchase of stock during 2011. There were no shares of Company common stock repurchased during the quarter ended December 31, 2011.

 

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Unregistered Sale of Securities

 

The Company sold eight shares of its common stock in 2011 at a price of $34.00 per share for an aggregate price of $272.  Sales of these shares occurred in 2011 as follows (in dollars, except number of shares):

 

 

The Company sold 808 shares of its common stock in 2010 at a price of $32.00 per share for an aggregate price of $25,856 and 1,519 shares of its common stock in 2009 at a weighted average price of $27.69 per share for an aggregate price of $42,054.  The Company used proceeds from such sales to pay general expenses of the Company. All shares of common stock were issued in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and, in some cases, Rule 506 of Regulation D promulgated thereunder relating to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

The following table presents selected financial data of the Company for the 12 months ended December 31, for the years indicated (dollars in thousands, except per share data):

 

________________

⁽¹⁾             Long-term obligations consist of Federal Home Loan Bank (“FHLB”) advances that mature after December 31, 2012, and trust-preferred securities.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Executive Overview

 

For the year ended December 31, 2011, the Company’s stable core earnings streams resulted in a return on equity (“ROE”) of 12.2% compared to 9.8% for 2010.  Dividends increased to $1.10 per share in 2011 compared to $1.00 in 2010.  Strong net interest margin, reduced provision for loan losses and management’s commitment to efficiency and cost control served to more than offset challenges presented by the current economic recession.  Net income for 2011 totaled $11.9 million compared to $8.9 million in 2010 and $8.3 million in 2009.  

 

The major drivers of increased earnings were increased net interest income and reduced provision for loan losses.  Net interest income totaled $36.2 million in 2011 compared to $34.3 million in 2010.  Provision for loan losses decreased from $7.0 million in 2010 to $2.4 million in 2011.  Gain on sale of available-for-sale securities totaled approximately $943,000 in 2011 compared to $1.9 million in 2010 and net credit losses of other-than-temporary impairment realized in earnings totaled approximately $48,000 compared to approximately $589,000 in 2010.  Earnings per share were $3.28 for the year ended December 31, 2011, compared to $2.45 and $2.30 for the years ended December 31, 2010 and 2009, respectively.  

 

During 2011, capital growth of 15.9% outpaced asset growth of 8.1%.  Capital growth greater than asset growth was attributable to a $7.9 million increase in retained earnings and a $6.9 million increase in accumulated other comprehensive income.  Retained earnings increased 11.5% in 2011 as a result of increased undistributed net income and conservative dividend payout ratio of 34%.  Accumulated other comprehensive income increased due to increase of $6.9 million in unrealized appreciation (net of tax) on the available-for-sale securities portfolio compared to prior year.  Return on average equity was 12.2% in 2011 compared to 9.8% for 2010 and 10.2% for 2009.  Return on assets (“ROA”) was 1.22%, 0.92% and 0.89% for 2011, 2010 and 2009, respectively.  For 2011, ROE of 12.2% and ROA of 1.22% exceeded the same measures for the Southeast Public Bank Peer Report, as produced by Mercer Capital’s Financial Institutions Group (the “Peer Report”), which reported an average ROE of negative 2.8% and average ROA of 0.01% for 2011.  The Peer Report provides market pricing and performance data on publicly traded banks in Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, Missouri, and Tennessee. 

 

In 2011, the Company’s dividend payout ratio was 34% compared to 41% in 2010.  The dividend payout ratio has trended lower over the past three years as part of the Company’s strategic effort to grow and preserve capital during the recent economic recession.  Dividend yield for 2011 was 3.24% compared to 3.13% in 2010 and consistent with historical dividend yields in excess of 3%.  The Peer Report reported an average dividend payout ratio of 37.2% and an average dividend yield of 1.73% for 2011. 

 

Maintaining and improving net interest margins continues to be a top priority for many financial institutions, including the Bank.  The Company’s net interest margin had been stable from 2005 to 2008 in the range of 3.75% to 4.00% and increased to 4.20% in 2009 and 4.28% in 2010 and 2011.  As of December 31, 2011, the Company’s interest rate risk position was liability sensitive.  Being slightly liability sensitive over the past three years contributed to the Company’s ability to maintain a net interest margin above 4.0% from 2009 through 2011.  For more information, see Item 7A of this Annual Report on Form 10-K. 

 

The efficiency ratio is a measure of non-interest expense as a percentage of total revenue.  The Company computes the efficiency ratio by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income.  This is a non-GAAP financial measure, which management believes provides investors with important information regarding the Company’s operational efficiency.  Comparison of the Company’s efficiency ratio with those of other companies may not be possible because other companies may calculate the efficiency ratio differently.  The efficiency ratio for the years ended December 31, 2011, 2010 and 2009 was 60.1%, 59.0%, and 59.8%, respectively. 

 

The tangible common equity ratio is a non-GAAP measure used by management to evaluate capital adequacy. Tangible common equity is total equity less net accumulated other comprehensive income, goodwill and deposit-based intangibles. Tangible assets are total assets less goodwill and deposit-based intangibles.  The tangible common equity ratio was 7.95% as of year-end 2011 compared to 7.84% at year-end 2010 and 7.20% at year-end 2009.

 

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A reconciliation of non-GAAP measures of efficiency ratio and tangible common equity is provided as follows (dollars in thousands):

___________________

(1)	Net interest income includes interest and rates on securities that are non-taxable for federal income tax purposes that are presented on a taxable equivalent basis based on a federal statutory rate of 34%.
(2)	Non-interest income is presented net of any credit losses from other-than-temporary impairment losses on available-for-sale securities recognized against earnings for the years presented.

 

Critical Accounting Policies

 

The accounting and reporting of the Company and its subsidiaries conform to GAAP and follow general practices within the industry.  Preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Management believes that the Company’s estimates are reasonable under the facts and circumstances based on past experience and information supplied from professionals, regulators and others.  Accounting estimates are considered critical if (i) management is required to make assumptions or judgments about items that are highly uncertain at the time estimates are made and (ii) different estimates reasonably could have been used during the current period, or changes in such estimates are reasonably likely to occur from period to period, that could have a material impact on presentation of the Company’s Consolidated Financial Statements. 

 

The development, selection and disclosure of critical accounting policies are discussed and approved by the Audit Committee of the Bank’s Board of Directors.  Because of the potential impact on the financial condition or results of operations and the required subjective or complex judgments involved, management believes its critical accounting policies consist of the allowance for loan losses, fair value of financial instruments and goodwill.

 

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Allowance For Loan Losses

 

The allowance for losses on loans represents management’s best estimate of inherent losses in the existing loan portfolio.  Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb reasonably estimated and probable losses within the portfolio.  Management believes the allowance for loan loss estimate is a critical accounting estimate because:  (i) changes can materially affect provision for loan loss expense on the income statement, (ii) changes in the borrower’s cash flows can impact the reserve, and (iii) management makes estimates at the balance sheet date and also into the future in reference to the reserve.  While management uses the best information available to establish the allowance for loan losses, future adjustments may be necessary if economic or other conditions change materially.  In addition, as a part of their examination process, federal regulatory agencies periodically review the Bank’s loans and allowances for loan losses and may require the Bank to recognize adjustments based on their judgment about information available to them at the time of their examination.  See Note 1 of the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for more information.

 

Fair Value of Financial Instruments

 

Certain assets and liabilities are required to be carried on the balance sheet at fair value.  Further, the fair value of financial instruments must be disclosed as a part of the notes to the consolidated financial statements for other assets and liabilities.  Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, the shape of yield curves and the credit worthiness of counterparties. 

 

Fair values for the majority of the Bank’s available-for-sale investment securities are based on observable market prices obtained from independent asset pricing services that are based on observable transactions but not quoted market prices.  

 

Fair value of derivatives (if any) held by the Company is determined using a combination of quoted market rates for similar instruments and quantitative models based on market inputs including rate, price and index scenarios to generate continuous yield or pricing curves and volatility factors.  Third party vendors are used to obtain fair value of available-for-sale securities and derivatives (if any). For more information, see Notes 1 and 20 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. 

 

Goodwill

 

The Company’s policy is to review goodwill for impairment at the reporting unit level on an annual basis unless an event occurs that could potentially impair the goodwill amount.  Goodwill represents the excess of the cost of an acquired entity over fair value assigned to assets and liabilities.  Management believes accounting estimates associated with determining fair value as part of the goodwill test are critical because estimates and assumptions are made based on prevailing market factors, historical earnings and multiples and other contingencies. For more information, see Notes 1 and 8 in the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Results of Operations

 

The Company reported consolidated net income of $11.9 million for the year ended December 31, 2011, compared to $8.9 million for the year ended December 31, 2010 and $8.3 million in 2009.  The 33% increase in net income from 2010 to 2011 was primarily a result of increased net interest income and reduced provision for loan losses.  Earnings per share were $3.28 for 2011 compared to $2.45 for 2010 and $2.30 for 2009. Return on average assets was 1.22%, 0.92% and 0.89% for the years ended December 31, 2011, 2010 and 2009, respectively.  Return on average equity was 12.2%, 9.8% and 10.2% for 2011, 2010 and 2009, respectively. 

 

During 2011, the Company achieved the milestone of becoming a community bank with over $1 billion in assets.  Asset growth was 8.1% for the year ended December 31, 2011 compared to 1.9% and 3.1% for the years ended December 31, 2010 and 2009, respectively.  Asset growth of $79.1 million was primarily a result of strong core deposit growth, as savings and demand grew 22.2% and 19.5%, respectively in 2011.  Deposit growth was primarily used for incremental purchases of available-for-sale investment securities due to weak loan demand in 2011.  The majority of Interest Bearing Deposits in Banks was the excess balance held at the Federal Reserve Bank which totaled $38.3 million and $5.8 million as of December 31, 2011 and 2010, respectively.  Federal funds sold decreased $3.3 million, net loans decreased $20 million and other real estate owned (“OREO”) decreased $3.7 million in 2011 compared to 2010.  Time deposits decreased 7.5% and other borrowings decreased 9.4% in 2011. 

 

Key economic factors including, but not limited to, stressed real estate markets, job losses and the market interest rate environment put pressure on asset quality during 2009 and 2010 but stabilized somewhat in 2011.  Although the Bank has experienced challenges in asset quality over the past three years because of the downturn in real estate markets, particularly in and around Shelby County, Tennessee, asset quality was considered satisfactory at December 31, 2011 and trends are stabilizing, as evidenced by decreased loans charged off and decreased volume of loans transferred into OREO in 2011 compared to 2010 and 2009. 

 

 

 

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While many economic trends remained problematic during 2011 and had a negative impact on the Bank’s ability to achieve quality loan growth, the overall trend in asset quality for the existing portfolio stabilized in 2011 compared to the prior two years.  As a result, provision for loan losses decreased to $2.4 million in 2011 compared to $7.0 million in each of the prior two years.  Net charge-offs were $2.4 million in 2011 compared to $7.8 million in 2010 and $5.6 million in 2009.  The allowance for loan losses as a percent of total loans was 1.52% as of December 31, 2011 compared to 1.47% at December 31, 2010 and 1.50% at December 31, 2009.  Additions made to the reserve account, as a percent of gross charge-offs, were 90.7%, 85.5% and 118.6% for the years ended December 31, 2011, 2010 and 2009, respectively. 

 

The allowance for loan losses was evaluated in accordance with GAAP and was weighted toward actual historical losses and included factor adjustments for changes in environmental conditions.  The allowance for loan losses was considered adequate for each of the periods presented to properly account for changes in the economies of local markets, changes in collateral values, variables in underwriting methods, levels of charged-off loans and volumes of non-performing loans.  See additional information regarding the allowance for loan losses in Notes 1 and 4 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Non-performing loans as a percent of total loans were 1.49% as of December 31, 2011 compared to 1.12% as of December 31, 2010 and 1.54% as of December 31, 2009.  Non-performing loans and OREO as a percent of total loans plus OREO at December 31, 2011 were 3.51% compared to 3.71% and 3.28% at December 31, 2010 and 2009, respectively, while the average of the Bank’s peer group was 4.04% as reported in the Uniform Bank Performance Report for all insured commercial banks having assets between $1 billion and $3 billion (“UBPR”) at December 31, 2011.  The allowance for loan losses as a percent of non-performing loans was 98.49%, 130.9% and 96.8% as of December 31, 2011, 2010 and 2009, respectively.  OREO totaled $11.1 million, $14.7 million and $10.5 million as of December 31, 2011, 2010 and 2009, respectively.

 

In 2011, the Company had asset quality indicators below certain peer levels in terms of nonperforming loans to total loans and net-charge-offs to average total loans.  Comparison of certain asset quality indicators between the Company and UBPR peer group were as follows for the last five years:

 

___________________

*

Peer data is derived from the UBPR as of December 31 of the year indicated. As of December 31, 2011, the Bank was in Peer Group 2, which consisted of all insured commercial banks having assets between $1 billion and $3 billion.  For 2007 to 2010, the Bank was in Peer Group 3, which consisted of all insured commercial banks having assets between $300 million and $1 billion.

 

Based on the UBPR, the Company’s allowance as a percent of loans was less than peers’, as the Company’s non-performing loans (loans 90 days or more past due accruing interest and non-accrual loans) were also below peers’ as of year-end 2011.  For more information regarding loans and allowance for loan losses, see the section below entitled “Financial Condition -- Loan Portfolio Analysis” and Note 1 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Net yield on average earning assets was 4.28% for both 2011 and 2010 and 4.20% for 2009.  Strong net interest margin over the past three years was attributable to the Company’s ability to reprice interest bearing liabilities at lower rates, primarily time deposits and other borrowings, in a greater volume than decreases in yields on interest earning assets.  The Bank remained in a liability sensitive position as of year-end 2011 and could face margin compression when the rate environment begins rising.  For more information about the Company’s interest rate sensitivity, see Item 7A of this Annual Report on Form 10-K.

 

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Total non-interest income for the year ended December 31, 2011 decreased $1.2 million compared to the year ended December 31, 2010.  The net decrease was primarily attributable to losses recognized on OREO totaling $1.4 million in 2011 compared to $1.2 million in 2010 and reduced gains on sale of available-for-sale securities totaling approximately $943,000 in 2011 compared to $1.9 million in 2010.  Other-than-temporary credit impairment losses on available-for-sale securities for the years ended December 31, 2011 and 2010 totaled approximately $48,000 and $589,000, respectively, and related primarily to pooled trust preferred securities. 

 

The Company’s effective tax rate was 22% in 2011 compared to 19% in 2010 and 2009.  The effective tax rate was impacted by fluctuations in certain factors including, but not limited to, the volume of and related earnings on tax-free investments within the Bank’s investment portfolio, tax-exempt earnings and expenses on bank-owned life insurance (“BOLI”), certain tax benefits that result from dividends and payouts under the Bank’s Employee Stock Ownership Plan (“ESOP”), and other factors incidental to the financial services business.  Fluctuations in the deduction related to the ESOP dividends and payouts and tax-exempt interest earned in the investment portfolio were the largest contributors to the various effective rates for the past three years. 

 

Interest earning assets in 2011 averaged $898 million at an average rate of 5.3% compared to $850 million at an average rate of 5.7% in 2010 and $831 million at an average rate of 6.1% in 2009.  Interest bearing liabilities at December 31, 2011 averaged $797 million at an average cost of 1.2% compared to $772 million at an average cost of 1.6% at December 31, 2010 and $754 million at an average cost of 2.1% at December 31, 2009. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The following table presents the annual average balance sheet and net interest income analysis for the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):

 

 

 

 

 

23

 

 

 

 

 

 

Volume/Rate Analysis

 

The following table provides an analysis of the impact of changes in balances and rates on interest income and interest expense changes from 2011 to 2010 and 2010 to 2009 (in thousands):

 

 

Non-Interest Income

 

The following table compares non-interest income for the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):

 

 

Total non-interest income decreased 9.2% in 2011 compared to 2010.   As residential real estate values remained depressed, the Bank’s mortgage activity declined as the prevailing environment made it difficult for many borrowers to refinance even though mortgage rates remain at or near historically low levels. Mortgage banking income decreased to approximately $830,000 in 2011 compared to $1.1 million in each of 2010 and 2009.  Income from fiduciary activities increased 2.3% or approximately $18,000 in 2011 compared to 2010.  Service charges on deposits decreased 4.2% in 2011 compared to 2010.  Brokerage fees increased approximately $183,000 or 16.9% in 2011 compared to 2010. 

 

 

 

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Loss on sale of foreclosed property includes write downs of OREO subsequent to foreclosure and has had a negative trend over the past three years due to elevated volumes of OREO and declining real estate values.  For more information regarding OREO, see the section below entitled “– Financial Condition – Other Real Estate Owned” and Note 9  in the Company’s Consolidated Financial Statements included elsewhere this Annual Report on Form 10-K.  Earnings on BOLI assets increased approximately $59,000 or 8.7% in 2011 compared to 2010.  Gain on sale of available-for-sale securities decreased approximately $941,000 in 2011 compared to 2010 as a result of strategies designed to realize appreciation in the investment portfolio.  See additional information regarding sale of securities in Note 3 of the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.  In 2011, total non-interest income (excluding impairment losses on available-for-sale securities) contributed 20.41% of total revenue in 2011 compared to 21.7% and 19.6% for 2010 and 2009, respectively.  Other non-interest income totaling approximately $939,000 for 2011 included gain on disposition of property of approximately $273,000 resulting from the sale of the Bank’s real property in Union City, Tennessee.  The Union City property previously served as a limited service facility for the Bank through January 2009.

Income from White and Associates/First Citizens Insurance, LLC, a full-service insurance agency (“WAFCI”), was included in Income from Insurance Activities in the Consolidated Statements of Income and increased approximately $18,000 or 2% in 2011 compared to 2010.  Non-interest income generated by WAFCI for 2011, 2010 and 2009 totaled approximately $813,000, $795,000 and $735,000, respectively.   Income from insurance activities also includes commissions from sale of credit life policies and the Company’s proportionate share of income from the Bank’s other 50% owned insurance agency, First Citizens/White and Associates Insurance Company.

 

Non-Interest Expense

 

The following table compares non-interest expense for the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):

 

 

Total non-interest expense increased 4.7% in 2011 compared to 2010.  Non-interest expense was dominated by salaries and employee benefits expense, which comprised 56% of total non-interest expense in 2011 compared to 54% in 2010 and 53% in 2009.  Salary and employee benefits expense increased 8.3% or $1.3 million in 2011 compared to 2010.  The majority of the Company’s employees receive performance-based incentives based on factors designed to achieve strategic goals and are balanced for risk and reward.  Such factors are aligned with strategic objectives and include achievement of a certain ROE level, accomplishing annual budget goals, and attainment of business development goals, asset quality goals, and other metrics applicable to the individual’s job responsibilities.  Incentive pay totaled 11.5% of salaries and benefits in 2011 compared to 8.9% in 2010 and 8.3% in 2009.  The Company also increased its allocation to retirement plans from 5% of compensation in 2010 to 9% in 2011.  For additional information regarding the Company’s retirement plans and contributions, see Note 21 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.  Significant expense associated with salaries and benefits is consistent with the Company’s strategic plan to hire and retain high quality employees to provide outstanding customer service and strive for exceptional shareholder returns.

 

 

 

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The following table compares assets per employee for the Company compared to its peers, based on information obtained from UBPR for the years ended December 31 (in thousands):

 

___________________

*

As of December 31, 2011, the Bank was in Peer Group 2, which consisted of all insured commercial banks having assets between $1 billion and $3 billion.  For 2007 to 2010, the Bank was in Peer Group 3, which consisted of all insured commercial banks having assets between $300 million and $1 billion in assets.

 

Comparison of assets per employee for the Company and its peers revealed that the Company improved in each of the last five years but continued to be more heavily staffed than its peers.  The trend of less assets per employee than peers was consistent with historical trends and employees necessary to support the Company’s non-interest income streams including brokerage, mortgage and trust divisions.  The Company’s ratio of assets per employee steadily improved over the past five years as newer branches became profitable and as a result improved the overall efficiency of operations within the Company.  In an effort to provide a high level of customer service and strategic efforts to continue growth of non-interest income streams, management expects the trend of lower assets per employees compared to peers to continue in future periods.

 

Net occupancy expense decreased by approximately $83,000 or 4.7% in 2011 compared to 2010 as a result of strategic efforts to control expenditures in 2011.  Depreciation was flat in 2011 compared to 2010.  Data processing expense increased 9.4% in 2011 because of increased expenses associated with upgrading certain systems and outsourcing certain portions of the information technology functions of the Bank.  While outsourcing of functions such as item processing resulted in increased data processing expense, this initiative also decreased other categories of other non-interest expense such as postage, stationary and supplies and certain salaries and employee benefits expenses.  Also, upgrades of certain systems were required in order to achieve efficiency strategies and/or in order to comply with changes in regulation.  The Company continues to strive for efficiencies in the areas of expansion, data integrity/security and customer service.  However, strategies adopted by the Company’s Board of Directors to provide superior customer service will continue to exert pressure on occupancy, depreciation and other non-interest expenses going forward. 

 

In 2011, expense related to FDIC insurance premiums decreased approximately $377,000 as a result of the FDIC’s change in how premium assessments are calculated.  The change in calculations had a favorable impact and reduced premium expense in 2011 compared to 2010 and 2009.  The 2009 total included the special assessment as of June 30, 2009 (paid September 30, 2009) in the amount of approximately $425,000 paid to the FDIC to help offset increased costs incurred by the fund caused by an increased number of failed banks.  In December 2009, the FDIC required the Bank to pre-pay projected assessments for 2010 through 2012 totaling $4.2 million.  The prepaid assessment is reflected in Other Assets in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K and totaled $2.1 million and $2.9 million as of December 31, 2011 and 2010, respectively.

 

Legal and professional fees increased in 2011 compared to 2010 as a result of legal expenses related to pursuit of deficiencies on loans charged off and foreclosures as well as consulting projects necessary to comply with increased regulatory burdens and to execute certain efficiency strategies.  Stationary and office supplies were essentially flat and decreased less than 2% in 2011 compared to 2010 as a result of increased cost of supplies offset by reduced usage of papers and other products.  Reduction in use of paper and other supplies was due to increased utilization of electronic rather than paper documents.  Advertising and promotions expense decreased approximately $41,000 in 2011 compared to 2010.  Advertising and promotion costs are expensed as incurred and totaled approximately $662,000 in 2011, approximately $703,000 in 2010 and approximately $622,000 in 2009. 

 

 

 

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Expenses related to OREO totaled approximately $682,000 in 2011 compared to approximately $888,000 in 2010 and approximately $642,000 in 2009.  The reduction in expense was primarily attributable to decreased volume of OREO acquired in 2011.  In 2011, loans totaling $3.6 million were transferred to OREO as compared to $11.7 million in 2010.  For more information regarding OREO, see the section below entitled “Financial Condition – Other Real Estate Owned” and Note 9  in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. 

 

Expenses associated with the Company’s ATM and debit card program totaled approximately $915,000 in 2011 compared to approximately $784,000 in 2010.  Increased expenses for the ATM and debit card program were primarily related to costs of regulatory compliance, data integrity and fraud prevention and control.  Other non-interest expense increased approximately $309,000 in 2011 compared to 2010 due to the combined effect of small increases in, among other things, education, various fees (such as to correspondent banks), directors’ fees, minority interest expense and franchise tax expenses. 

 

No impairment of goodwill was recognized in any of the periods presented in this report.  Goodwill was 1.12% and 1.21% of total assets and 11.66% and 13.56% of total capital as of December 31, 2011 and 2010, respectively. Amortization of core deposit intangibles was flat at approximately $85,000 in each of the past three years.  Core deposit intangibles will be fully amortized in 2012.

 

Financial Condition

 

                Changes in the statement of financial condition for the years ended December 31, 2011 and 2010 reflected the Company’s strategic efforts to focus on quality asset growth and capital preservation during the economic recession.  Asset growth in 2011 was 8.1% and was primarily driven by growth of 19.5% in demand deposits and 22.2% in savings deposits.  Funds from deposit growth were primarily invested in available-for-sale securities, which increased 24.0% in 2011.  The continued impact of the recent economic recession was evident in negative loan growth of 3.7% for the year ended December 31, 2011. 

 

As evidenced in the cash flow statements, the Company’s deployment of capital for purchases of premises and equipment totaled $1.1 million in 2011 compared to $1.5 million in 2010 and approximately $631,000 in 2009.  Premises and equipment purchases in 2009 through 2011 consisted primarily of upgrading and replacing computer hardware and software as well as renovations to various branch facilities.

 

Investment Securities Analysis

               

The following table presents the composition of total investment securities as of December 31 for the last five years (in thousands):

 

 

                In 2011, total investment securities portfolio growth of $70.6 million consisted of $57.8 million increase in agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) and $13.2 million increase in municipal securities.  Growth in the overall portfolio of $70.6 million was primarily driven by incremental purchases of new agency and municipal debt securities as well as an increase of $11.2 million in net unrealized appreciation (pre-tax) on the portfolio. 

 

The allocation to tax-exempt municipal securities as a percent of the total portfolio was 32% as of December 31, 2011 compared to 35% and 36% as of December 31, 2010 and 2009, respectively.  This range of ratios is consistent with recent allocations, as the Company has maintained approximately one-third of its portfolio in the tax-exempt municipal sector for many years. 

 

Maturity and Yield on Securities

 

Contractual maturities on investment securities are generally ten years.  However, the expected remaining lives of such bonds are expected to be much shorter due to anticipated payments from U. S. Treasury and government agency securities.  These securities comprised 68% of the portfolio at December 31, 2011 and are primarily amortizing payments that provide stable monthly cash inflows of principal and interest payments.  The following table presents contractual maturities and yields by category for debt securities as of December 31, 2011 (dollars in thousands):

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________________

(1)	Of this category, 98% of the total consisted of MBS and CMO which are presented based on contractual maturities (with 86% of the total for this category in the Maturing After Ten Years category).  However, the remaining lives of such securities are expected to be much shorter due to anticipated payments.
(2)	Yields are presented on a tax-equivalent basis using a federal statutory rate of 34%.

 

Held-To-Maturity and Available-For-Sale Securities

 

                The Company held no securities in the held-to-maturity or trading categories as of December 31, 2011 or 2010. The following table presents amortized cost and fair value of available-for-sale securities as of December 31, 2011 (in thousands):

 

 

In addition to amounts presented above, the Bank had $5.7 million in FHLB and Federal Reserve Bank stock at both December 31, 2011 and 2010, recorded at cost.  Equity securities listed above consisted primarily of shares of Fannie Mae and Freddie Mac perpetual preferred stock.

 

Total investment securities at December 31, 2011, 2010 and 2009 were $365 million, $295 million and $250 million, respectively.  Available-for-sale investments increased $70.6 million or 24.0% from December 31, 2010 to December 31, 2011, as a result of interest cash flows reinvested into new securities and additional incremental funds allocated to the portfolio during the year.  Objectives of the Bank’s investment portfolio management are to provide safety of principal, adequate liquidity, insulate GAAP capital against excessive changes in market value, insulate earnings from excessive change and optimize investment performance.  Investments also serve as collateral for government, public funds and large deposit accounts that exceed FDIC-insured limits.  Pledged investments at December 31, 2011 had a fair market value of $197 million.  The average expected life of the investment securities portfolio was 4.4 years, 5.1 years and 5.0 years as of December 31, 2011, 2010 and 2009, respectively.  Portfolio yields (on a tax equivalent basis) were 4.1% as of December 31, 2011 compared to 4.7% as of December 31, 2010 and 5.2% as of December 31, 2009.

 

The Company classifies investments, based on intent, into trading, available-for-sale and held-to-maturity categories in accordance with GAAP.  The Company held no securities in the trading category for any of the last five years and does not expect to hold any such securities in 2012.  The Company’s investment strategy is to classify most of the securities portfolio as available-for-sale, which are carried on the balance sheet at fair market value.  Classification of available-for-sale investments allows flexibility to actively manage the portfolio under various market conditions. 

 

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U.S. Treasury securities and government agencies and corporate obligations consisted primarily of MBS and CMO and accounted for 68% and 63% of the investment portfolio for years ended December 31, 2011 and 2010, respectively.  Credit quality of the Company’s MBS and CMO portfolio was considered strong and reflected a net unrealized gain of $6.8 million as of December 31, 2011.  Credit quality factors on the bonds and related underlying mortgages are evaluated at the time of purchase and on a periodic basis thereafter.  These factors typically include, but are not limited to, average loan-to-value ratios, average FICO credit score, payment seasoning (how many months of payment history), geographic dispersion, average maturity and average duration.  Management believes that this level of amortizing securities provides steady cash flows, as evidenced by the Consolidated Statement of Cash Flows included elsewhere in the Annual Report on Form 10-K.  Principal cash flows for 2012 are projected to be $50-60 million.

 

As of December 31, 2011, approximately 32% of the investment portfolio was invested in municipal securities, which were geographically diversified, compared to 36% as of December 31, 2010.  Fair value of municipal securities totaled $116 million ($114.2 million were tax-exempt and $1.4 million taxable) at December 30, 2011.  Approximately 67% of municipal securities were general obligation municipal bonds and the remaining 33% were revenue bonds at December 31, 2011.  The revenue bonds are primarily essential services bonds such as for water and sewer, school systems and other public improvement projects.  Overall credit quality of the municipal portfolio was considered strong and reflected a net unrealized gain of $9.1 million as of year-end 2011.

 

As of December 31, 2011, less than 1% of the investment portfolio consisted of three collateralized debt obligation securities that are backed by trust-preferred securities (“TRUP CDOs”) issued by banks, thrifts and insurance companies.  These three debt securities reflected a net unrealized loss of $1.6 million as of year-end 2011.  The market for TRUP CDOs has been inactive since 2008 and as a result, quoted market values have been significantly below amortized cost since that time.  These securities are evaluated for other-than-temporary impairment on a quarterly basis.  Charges for credit loss portion of other-than-temporary impairment totaling approximately $48,000 and $589,000 were recognized against earnings for the years ended December 31, 2011 and 2010, respectively.  For more information, see Note 3 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. 

 

The following table indicates by category gross unrealized gains and losses within the available-for-sale portfolio as of December 31, 2011 (in thousands):

 

 

Unrealized gains and losses noted above were included in Accumulated Other Comprehensive Income, net of tax.

 

Loan Portfolio Analysis

 

The following table compares the portfolio mix of loans held for investment as of December 31 for each of the last five years (in thousands):

 

 

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For purposes of the table above, loans do not include loans that are sold in the secondary mortgage market.  The Company classifies loans to be sold in the secondary mortgage market separately in its consolidated financial statements. Secondary market mortgages totaled $2.6 million, $2.8 million and $2.7 million as of December 31, 2011, 2010 and 2009, respectively.  For more information, see Notes 4, 5 and 6 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.  Interest and fees earned on secondary mortgage loans were included in mortgage banking income as reported in other non-interest income in the Company’s Consolidated Financial Statements.

 

Changes In Loan Categories

 

Total loans at December 31, 2011 were $528 million compared to $548 million at December 31, 2010 and $587 million at December 31, 2009. Downward loan trends were a result of overall decreased loan demand as well as management’s strategic efforts to reduce exposures in certain loan categories such as construction and development loans.  Loans decreased 3.7% in 2011 and 6.7% in 2010.  The following table details the breakdown of changes by category for the year ended December 31, 2011 (dollars in thousands):

 

 

The loan portfolio remains heavily weighted in real estate loans, which accounted for $424 million or 80% of total loans as of December 31, 2011 compared to $444 million or 81% of total loans as of December 31, 2010.  Commercial and residential construction loans accounted for $40 million of the $424 million invested in real estate loans.  Construction loans have trended downward steadily over the past five years, consistent with the effects on that sector from the recent economic recession.  Although the portfolio was heavily weighted in real estate, the Bank does not invest in sub-prime or non-traditional mortgages.  Within real estate loans, residential mortgage loans (including residential construction) was the largest category, comprising 35% of total loans as of December 31, 2011 compared to 36% as of December 31, 2010.  Diversification of the real estate portfolio is a necessary and desirable goal of the Company’s real estate loan policy.  In order to achieve and maintain a prudent degree of diversity, given the composition of the market area and the general economic state of the market area, the Company will strive to maintain real estate loan portfolio diversification.  Risk monitoring of commercial real estate concentrations is performed in accordance with regulatory guidelines and includes assessment of risk levels of various types of commercial real estate and review of ratios of various concentrations of commercial real estate as a percentage of capital.  During 2011, loans decreased 3.7% and capital increased 15.9%.  Therefore, real estate loans as a percent of capital decreased.  The following table presents real estate loans as a percent of total risk based capital as of December 31 for each of the last five years:

 

________________

*

Total risk based capital is a non-GAAP measure used by regulatory authorities and reported on quarterly regulatory filings.  Total risk based capital for the Bank was $99.8 million, $92.6 million, $85.8 million, $80.7 million and $78.8 million as of December 31, 2011, 2010, 2009, 2008 and 2007, respectively.

 

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Negative loan growth in 2011 occurred across all loan categories except commercial, financial and agricultural loans with weak overall loan demand as a result of distressed real estate markets, job losses and other factors resulting from the economic recession.  Growth of $5.9 million in commercial, financial and agricultural loans in 2011 was primarily concentrated in the agricultural sector.  Agriculture was a strong sector in the local economies and markets served by the Bank, as crop yields and prices had favorable trends in 2011.  Also, the Bank has strategically reduced its concentration of one-to-four family residential construction and non-owner occupied commercial real estate loans since 2007 as focus shifted to lower-risk owner-occupied commercial real estate.  As a result, the ratios of total construction and development loans as a percent of total risk based capital (as reflected in the table above) and one-to-four family residential construction loans as a percent of total risk based capital trended downward from 2007 to 2011.  As of December 31, 2011, the ratio of one-to-four family residential construction loans to total risk based capital was 11.77% compared to 19.75%, 33.21%, 55.88% and 76.02% as of December 31, 2010, 2009, 2008 and 2007, respectively.  As of December 31, 2011, the ratio of non-owner occupied commercial real estate loans as a percent of total risk based capital also trended downward to 127.12% compared to 148.89%, 188.55%, 232.68% and 243.53% as of December 31, 2010, 2009, 2008 and 2007, respectively. 

 

Average Loan Yields

 

The average yield on loans of the Bank has trended downward over the past five years, as loans have repriced during the historically low interest rate environment.  Average yield on loans for the years indicated were as follows:

 

 

The aggregate amount of unused guarantees, commitments to extend credit and standby letters of credit was $80.2 million at year-end 2011.  For more information regarding commitments and standby letters of credit, see Note 18 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Loan Maturities

 

As of December 31, 2011, contractual maturities of loans were as follows (in thousands):

 

 

                As of December 31, 2011, loans with a remaining maturity of more than one year consisted of the following (in thousands):

 

 

The degree of interest rate risk to which a bank is subjected can be controlled through a well-defined funds management program.  The Company controls interest rate risk by matching interest sensitive assets and liabilities.  At year-end 2011, the Company was liability-sensitive, meaning that liabilities reprice at a faster rate than assets.  Therefore, in a rising rate environment (with a normal yield curve) net interest income would decline.  The majority of the Bank’s loan portfolio will reprice or mature in less than five years.  Approximately $161 million or 31% of total loans will either reprice or mature over the next 12 months, while $159 million or 30% of total loans will mature or reprice after one year but less than three years.  Approximately $150 million or 28% of total loans will mature or reprice after three years but in less than five years.  The remaining 11% or $58 million reprices or matures in greater than five years.

 

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Loan Policy Guidelines

 

Management has established policies approved by the Company’s Board of Directors regarding portfolio diversification and underwriting standards. Loan policy also includes Board-approved guidelines for collateralization, loans in excess of loan to value (“LTV”) limits, maximum loan amount and maximum maturity and amortization period for each loan type.  Policy guidelines for LTV ratios and maturities related to various types of collateral at December 31, 2011, were as follows:

 

___________________________

*	New farm equipment can be amortized over seven years with a guaranty by the FSA. Farm irrigation systems may be amortized over seven years without an FSA guaranty.
**	When proceeds are used to purchase or carry securities not listed on a national exchange, maximum LTV shall be 50%.

 

The Company’s policy manages risk in the real estate portfolio by adherence to regulatory limits in regards to LTV percentages, as designated by the following categories:

 

____________________

*              Multi-family construction loans include loans secured by cooperatives and condominiums. 

 

Loans may be approved in excess of the LTV limits, provided that they are approved on a case by case basis pursuant to the Bank’s loan policy as follows:

• The request is fully documented to support the fact that other credit factors justify the approval of that particular loan as an exception to the LTV limit;

• The loan, if approved, is designated in the Bank’s records and reported as an aggregate number with all other such loans approved by the full Board of Directors on at least a quarterly basis;

• The aggregate total of all loans so approved, including the extension of credit then under consideration, shall not exceed 65% of the Bank’s total capital; and

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• The aggregate portion of these loans in excess of the LTV limits that are classified as commercial, agricultural, multi-family or non-one-to-four family residential property shall not exceed 30% of the Bank’s total capital.

The Bank’s loan policy additionally requires every loan to have a documented repayment arrangement.  While reasonable flexibility is necessary to meet credit needs of customers, in general, real estate loans are to be repaid within the following time frames:

 

 

Credit Risk Management and Allowance for Loan Losses

 

Loan portfolio quality stabilized in 2011 compared to 2010 and 2009 and remains manageable relative to prevailing market conditions.  The ratio of net charge-offs to average net loans outstanding was 0.44%, 1.38% and 0.95% for the years ended December 31, 2011, 2010 and 2009, respectively.  The aggregate of non-performing loans and OREO as a percent of total loans plus OREO at December 31, 2011 totaled 3.52% compared to 3.71% at December 31, 2010 and 3.28% at December 31, 2009.  The decrease from December 31, 2010 to December 31, 2011 was primarily as a result of decreased volume of OREO.  The volume of OREO decreased $3.7 million and loans charged off decreased $5.2 million in 2011 compared to 2010 but the total non-performing loans increased $1.8 million from 2010 to 2011.  Management believes, however, that the Bank’s strong credit risk management practices provide a means for timely identification and assessment of problem credits in order to minimize losses. 

 

Credit risk management procedures include assessment of loan quality through use of an internal loan rating system.  Each loan is assigned a rating upon origination and the rating may be revised over the life of the loan as circumstances warrant.  The rating system utilizes eight major classification types based on risk of loss with Grade 1 being the lowest level of risk and Grade 8 being the highest level of risk.  Loans rated Grades 1 to 4 are the general “pass” grade loans with low to average levels of credit risk.  Loans rated Grade 5 are “special mention” loans that may have one or more circumstances that warrant additional monitoring but do not necessarily indicate probable credit losses or above average levels of credit risk.  Loans rated Grade 6 or higher are considered internally criticized and have above average levels of credit risk.  For additional information regarding the Company’s loans by internal risk rating, see Note 4 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Credit risk management practices also include a loan review function that is independent of the lending process itself.  Results of loan review are reported to the Bank’s Board of Directors and serve to validate the Bank’s internal loan rating process.  Results of loan review, as well as current portfolio mix by rating, are incorporated into the process for quarterly evaluations of the allowance for loan losses and impaired loans. 

 

Examples of factors taken into consideration during assessment of loan quality for rating purposes, for independent loan review and for evaluation of the adequacy of the allowance for loan losses include, but are not limited to, the following:

• Economic conditions;

• Management experience and depth;

• Credit history;

• Business conditions;

• Sources of repayment;

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• Debt service coverage ratios;

• Financial condition of borrower(s) and/or guarantor(s);

• Deposit relationship;

• Payment history;

• Collateral values; and

• Adherence to loan policy and adherence to loan documentation requirements.

Loans internally classified at a Grade 6 or higher are those loans that have certain characteristics or circumstances that warrant additional credit quality monitoring and may meet the definition of an impaired loan described below.  Loans or borrowing relationships with an outstanding balance greater than $250,000 that are also rated Grade 6 or higher are reviewed on an individual basis for impairment as part of the quarterly evaluation of the adequacy of the allowance for loan losses.  Loan impairment of internally criticized loans, if any, is measured using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral-dependent. The majority of the Company’s impaired loans is secured by real estate and considered collateral-dependent. Therefore, impairment losses are primarily based on the fair value of the underlying collateral (usually real estate).  Specific allocations to the allowance for loan losses are made for loans found to be collateral- or cash flow-deficient.  Loans less than $250,000 are generally evaluated on a pooled basis for impairment unless the loan is identified as a troubled debt restructuring (“TDR”). 

 

Specific allocations on impaired loans are typically the difference between the book value or cost of the loan and the estimated fair market value of the collateral, less cost to sell.  An additional provision for loan losses necessary for specific allocations on impaired loans is typically made in the quarter that the loan becomes internally criticized or rated Grade 6 or higher.  At the time a loan with a balance of $250,000 or greater becomes rated Grade 6 or higher, an updated independent third party appraisal is ordered.  If an appraisal for a property securing a loan greater than $250,000 is not received prior to the evaluation date, management estimates the specific allocation for that quarter in a manner similar to that used for loans with a balance of less than $250,000 and makes adjustments if necessary in the subsequent quarter when the independent third party appraisal is received. 

 

An analysis of the allocation of the allowance for loan losses is made each fiscal quarter at the end of the second month (i.e., February, May, August, and November) and reported to the Bank’s Board of Directors at its meeting preceding quarter-end.  The allowance for loan losses is estimated using methods consistent with GAAP as well as regulatory guidance on allowance for loan losses.  For additional information regarding the Company’s accounting policy on the allowance for loan losses, see Note 1 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

The evaluation of the adequacy of the allowance for loan losses includes identification of impaired loans and allocation of specific reserves if considered necessary on a case-by-case basis for loans meeting the Company’s criteria for individual impairment analysis.  A loan is deemed impaired when it is probable that the Bank will be unable to collect all amounts of principal and interest due according to the original contractual terms of the loan. Impairment occurs when (i) the present value of expected future cash flows discounted at the loan’s effective interest rate impede full collection of the contract and (ii) fair value of the collateral, if the loan is collateral-dependent, indicates unexpected collection of full contract value.  Specific reserve allocations are made for loans found to be collateral- or interest cash flow-deficient.  In addition, an allowance is determined for loans evaluated on a pooled basis.  Income recognition from impaired loans is determined in accordance with GAAP, as well as financial institution regulatory guidance.

 

Impaired loans were primarily collateral-dependent and totaled $6.8 million as of December 31, 2011 compared to $9.3 million and $10.0 million as of December 31, 2010 and 2009, respectively. The decreasing trend in impaired loans was attributable to stabilization in the portfolio and consistent with decreasing trend of loans transferred into OREO in 2011 compared to 2010 and 2009.  For additional information on impaired loans, see Note 4 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

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The following table summarizes the change in the allowance for loan losses for the past five years (dollars in thousands):

 

 

Changes to the allowance for loan losses for 2011 consisted of (i) loans charged off of $2.7 million, (ii) recovery of loans previously charged off of approximately $261,000, and (iii) provision for loan losses totaling $2.4 million.  Charge-offs in 2011 occurred in all markets served. 

 

The following table identifies charge-offs and recoveries by category for the years ended December 31 (in thousands):

 

 

For additional information regarding the allowance for loan losses including allocation of the allowance by category, see Note 5 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Charge-offs of impaired loans with specific allocations generally occur at the time of foreclosure, typically when the loan is 60-120 days past due. On occasion, however, a loan is considered collateral-dependent and impaired but is not past due.  In this case, a partial charge-off is made at the time the updated appraisal is received to adjust the loan to fair value of the collateral, less cost to sell. Partially charged-off loans continue to be reported as impaired.  These loans are also reported in non-performing loan totals if such loans fit criteria for non-performing assets as discussed below. 

 

 

 

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Non-Performing Assets

 

Non-performing assets consist of non-performing loans, OREO and non-accrual debt securities.  Non-performing loans consist of non-accrual loans, loans 90 days or more past due and still accruing interest and restructured loans. Categorization of a loan as non-performing is not in itself a reliable indicator of impairment.  A loan may be deemed impaired prior to becoming 90 days past due, restructured or put on non-accrual status.  The Bank’s policy is to not accrue interest or discount on (i) any asset which is maintained on a cash basis because of deterioration in the financial position of the borrower, (ii) any asset for which payment in full of interest or principal is not expected or (iii) any asset upon which principal or interest has been in default for a period of 90 days or more unless it is both well-secured and in the process of collection. For purposes of applying the 90 days past due test for non-accrual of interest discussed above, the date on which an asset reaches non-accrual status is determined by its contractual term.  A debt is well-secured if it is secured by collateral in the form of liens or pledges of real or personal property, including securities that have a realizable value sufficient to discharge the debt (including accrued interest) in full, considered to be proceeding in due course either through legal action, including judgment enforcement procedures or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in the loan’s restoration to a current status. Loans that represent probable losses are recognized as impaired and adequately reserved for in the allowance for loan losses. Valuation of non-performing loans are subject to the same process described above for internally criticized loans in regards to obtaining new appraisals and timing of specific allocations and subsequent charge-off.  There have been no significant time lapses in the years ended December 31, 2011, 2010 or 2009 between the identification and recognition of impairment and subsequent charge-off of non-performing or impaired loans.  The following table summarizes non-performing assets at December 31 for the past five years (dollars in thousands):

 

 

                Other non-performing assets decreased $3.5 million from December 31, 2010 to December 31, 2011 primarily as a result of decreased OREO.  For more information about OREO, see the section below entitled “– Other Real Estate Owned.” 

 

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Interest income on loans is recorded on an accrual basis.  The accrual of interest is discontinued on all loans, except consumer loans, which become 90 days past due, unless the loan is well secured and in the process of collection. Consumer loans which become past due 90 to 120 days are charged to the allowance for loan losses.  The gross interest income that would have been recorded for the 12 months ended December 31, 2011 if all loans reported as non-accrual had been current in accordance with their original terms and had been outstanding throughout the period was approximately $404,000 for 2011 compared to approximately $209,000, $216,000, $178,000 and $103,000 for the same periods in 2010, 2009, 2008 and 2007, respectively.  Loans on which terms have been modified to provide for a reduction of either principal or interest as a result of deterioration in the financial position of the borrower are considered to be restructured loans.  The Company had TDRs totaling $7.1 million, of which $4.7 million were on non-accrual status as of December 31, 2011.  The Company had restructured loans totaling $3.2 million, of which approximately $393,000 was on non-accrual status as of December 31, 2010.  The Company had restructured loans totaling $2.8 million, of which $1.4 million was on non-accrual status as of December 31, 2009.  For additional discussion regarding TDRs, see Note 4 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Certain loans internally rated Grade 5 or higher may not meet the criteria and therefore are not included in the non-accrual, past due or restructured loan totals. Management is confident that, although certain of these loans may pose credit issues, any probable loss has been provided for by specific allocations to the loan loss reserve account.  Loan officers are required to develop a “plan of action” for each problem loan within their portfolio. Adherence to each established plan is monitored by the Bank’s loan administration and re-evaluated at regular intervals for effectiveness.

 

Other Real Estate Owned

 

The book value of OREO was $11.1 million as of December 31, 2011, compared to $14.7 million and $10.5 million as of December 31, 2010 and 2009, respectively.  As of December 31, 2011, there were over 150 properties accounted for as OREO consisting primarily of newly constructed single-family homes and residential lots.  Approximately 83% of the $11.1 million accounted for as OREO was located in Shelby County and surrounding counties.  Approximately 13% of the $11.1 million in OREO was located in and around Williamson County and surrounding counties in Middle Tennessee.  While management continues efforts to liquidate OREO, Shelby, Williamson and their surrounding counties have been under stress with declining home sales and declining market values.  According to MarketGraphics Research Group, Inc. and the Memphis Area Association of Realtors for the 12 months ended November 30, 2011 (the most recent data available), new home inventory was down 15.3% and new home permits were down 12.4% in Shelby County, Tennessee.  Also, new home sales volumes in Shelby County declined 34.1% and new home average price was flat with modest 1% decline for the 12 months ended November 30, 2011.  All home sales volumes in Shelby County were down about 12% and average price of all home sales was also near flat with a decrease of less than 2% for the same period.

 

                Activity in OREO for the years ended December 31, 2011, 2010, and 2009 was as follows (in thousands):

 

 

Capitalized costs consist of costs to complete construction of homes partially complete at the time of foreclosure or to complete certain phases of a development project for raw land.  Capitalized costs were incurred in order to improve marketability of certain properties.  Valuation adjustments through earnings reflected above includes write down of properties subsequent to foreclosure and realized gains and losses on sale of OREO.

 

OREO is recorded at the time of foreclosure at the lesser of its appraised value or the loan balance.  Any reduction in value at the time of foreclosure is charged to the allowance for loan losses.  All other real estate parcels are appraised at least annually and carrying values adjusted to reflect the decline, if any, in their realizable value.  Such adjustments made subsequent to foreclosure are charged against earnings.  Net losses on sale and write down of OREO values subsequent to foreclosure totaled $1.4 million in 2011 compared to $1.2 million in 2010 and approximately $470,000 in 2009. 

 

Other non-interest expenses for property taxes, maintenance and other costs related to acquisition or maintenance of OREO totaled approximately $682,000, $888,000 and $642,000 for the years ended December 31, 2011, 2010 and 2009, respectively.  The positive trend in other non-interest expense related to OREO from 2010 to 2011 was attributable to the reduced volume of OREO acquired. 

 

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Composition of Deposits

 

The average balance of deposits and average interest rates paid on such deposits are summarized in the following table for the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):

 

 

 

The decrease in average cost of deposits for the year ended December 31, 2011 compared to the prior year was a result of the continued historically low interest rate environment and as a result of the impact of the Federal Open Market Committee (“FOMC”) decision to maintain federal funds rates low until at least mid-2013.  Subsequent to December 31, 2011, the FOMC declared that federal fund rates would most likely remain at the current range of 0.00% to 0.25% through the end of 2014.  During 2011, the prevailing market and competitive environment continued to yield strong competition in pricing of interest-bearing deposit products but overall pricing remained very low compared to long-term historical trends.  The Bank does not compete solely on price, as strategies are focused more on customer relationships that attract and retain core deposit customers rather than time deposits.

 

Total deposits grew $64 million or 8.1% during the year ended December 31, 2011.  Savings deposit growth was $72 million or 22.2% and demand deposit balances grew $20 million or 19.5% during 2011.  Growth in savings and demand deposits was partially offset by time deposits, which declined $27 million or 7.5% in 2011.  Savings deposit growth was primarily attributable to growth in the Bank’s interest bearing savings accounts, including the Wall Street, e-Solutions and First Rate accounts, which carry competitive attractive rates compared to other options available to customers in time deposits and other brokerage or investment products. 

 

The Bank participates in the Certificate of Deposit Account Registry Service (“CDARS”), a deposit placement service that allows the Bank to accept very large-denomination certificates of deposit (“CDs”) (up to $50,000,000) from customers and ensures that 100% of those CDs are FDIC-insured.  Participating in this network enhances the Bank’s ability to attract and retain large-denomination depositors without having to place funds in a Sweep or Repurchase Agreement.  The CDARS network provides a means to place reciprocal deposits for the Bank’s customers, purchase time deposits (referred to as “One-Way Buy” deposits) or to sell excess deposits (referred to as “One-Way Sell” deposits).  One-Way Buy deposits are structured similarly to traditional brokered deposits.  The Bank held reciprocal deposits and “One-Way Buy” deposits in the CDARS program totaling $25 million at year-end 2011 compared to $24 million at year-end 2010 and $25 million at year-end 2009.  CDARS accounts are classified as brokered time deposits for regulatory reporting purposes.  Brokered deposits including CDARS totaled $25 million or 3% of total deposits as of December 31, 2011, $26 million or 3% of total deposits as of December 31, 2010 and $36 million or 4% of total deposits as of December 31, 2009. 

 

Time deposits over $100,000 plus brokered time deposits comprised 53.3% of total time deposits as of December 31, 2011 compared to 56.1% as of year-end 2010 and 55.1% as of year-end 2009.  As of December 31, 2011, approximately 90% of time deposits including brokered time deposits will mature or reprice over the next 12 months as the prevailing competitive market and rate environment continued to exhibit strong demand for shorter terms during 2011. 

 

Maturity Distribution of Time Deposits in Amounts of $100,000 and Over

 

Deposits over $100,000 decreased $21.9 million or 10.3% from December 31, 2010 to December 31, 2011.  This was primarily a result of increased demand for the Bank’s interest bearing savings and transaction accounts.  Of the $192 million in time deposits as of December 31, 2011, $86 million were for deposits in an amount greater than $250,000.  Of the $213.7 million in time deposits as of December 31, 2010, $110.2 million were for deposits in an amount greater than $250,000.   Public fund time deposits totaled $70.3 million at year-end 2011 compared to $82.9 million at year-end 2010. 

 

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The following table sets forth the maturity distribution of CDs and other time deposits of $100,000 or more outstanding at December 31, 2011 and 2010 (dollars in thousands):

 

 

Other Borrowings

 

In addition to deposits, the Company uses a combination of short-term and long-term borrowings to supplement its funding needs.  Short-term borrowings consisted of a demand note under the Federal Reserve’s Treasury, Tax and Loan Service (“TT&L”), federal funds purchased and short-term advances from the FHLB.  There was a zero balance on the TT&L demand note as of December 31, 2011 because the Federal Reserve ended the TT&L program as of December 31, 2011. The short-term borrowings table below provides the maximum amount of borrowings at any month end during the years presented.  Short-term borrowings are used to manage fluctuations in liquidity based on seasonality of agricultural production loans and other factors.  Short-term borrowings were used on a very limited basis during the most recent three years because of the Company’s strategic efforts to maintain a strong liquidity position, slow loan demand, and steady growth in core deposits over the past three years.  The following table presents short-term borrowing balances at year end, maximum borrowings at month end during the year and average cost for the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):

 

 

For more information about short-term borrowings, see Note 12 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Other borrowings at the holding company level carried a variable rate and consisted of trust-preferred debt in 2011 and 2010. 

 

The Bank’s other borrowings consist of advances from the FHLB.  Average volume of FHLB advances for 2011 was $37.6 million at an average rate of 2.73% compared to $60.9 million at an average rate of 4.26% in 2010 and $65.1 million at an average rate of 4.84% in 2009.  Strong core deposit growth coupled with weak loan demand have allowed the Bank to reduce its reliance on wholesale borrowings and, therefore, average FHLB advances decreased from 2009 to 2011. The average remaining maturity for FHLB long-term borrowings was approximately three years at December 31, 2011.  FHLB borrowings were comprised primarily of fixed rate positions ranging from 0.62% to 7.05% as of December 31, 2011.  The Bank also had one LIBOR based advance totaling $2.5 million, which had a rate of 0.34% as of year-end 2011.  Most of the FHLB borrowings have quarterly call features and maturities ranging from 2012 to 2019.  Approximately 8% or $3.1 million will mature on or before December 31, 2012.  As of December 31, 2011, advances totaling $16 million require repayment if the call feature was exercised.  Under the existing and forecasted rate environments, borrowings with call features in place are not likely to be called in the next 12 months and, therefore, were not included in current liabilities.  For more information about liquidity, see the section below entitled “– Liquidity.”  

 

The following table presents average volumes, rates, maturities and re-pricing frequencies for other borrowings for the year ended December 31, 2011 (dollars in thousands):

 

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Aggregate Contractual Obligations

 

At December 31, 2011, contractual obligations were due as follows (in thousands):

 

 ________________________

*              Other borrowings presented as principal only, excluding interest.

 

For more information about long-term obligations, see Notes 13 and 18 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Off-Balance Sheet Arrangements

 

Except for unfunded loan commitments and standby letters of credit, the Bank does not materially engage in off-balance sheet activities and does not anticipate material changes in volume going forward.

 

For more information about off-balance sheet risk, see Notes 13 and 18 in the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

Capital Resources

 

The following table presents key capital and earnings ratios for the years ended December 31:

 

 

Total capital increased 15.9% to $103.5 million at year-end 2011 compared to $89.3 million at year-end 2010 and $84.4 million at year-end 2009.  Growth in capital during 2011 was from undistributed net income from the Bank totaling $7.9 million.  In addition, accumulated Other Comprehensive Income increased $6.9 million at December 31, 2011 compared to December 31, 2010, as market values of available-for-sale securities increased during 2011. 

 

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The Company has historically maintained capital in excess of minimum levels established by regulation.  The total risk-based capital ratios of 16.9% as of December 31, 2011 compared to 15.3% as of December 31, 2010 were significantly in excess of the 8% mandated by regulation.  This ratio has steadily increased during the past three years as loans trended lower and asset growth was primarily in investments and interest bearing deposits at other banks.  Total capital as a percentage of total assets was 9.8%, 9.2%, and 8.8% at December 31, 2011, 2010 and 2009, respectively. 

 

Risk-based capital focuses primarily on broad categories of credit risk and incorporates elements of transfer, interest rate and market risks. The calculation of risk-based capital ratio is accomplished by dividing qualifying capital by weighted risk assets in accordance with financial institution regulatory guidelines.  The minimum risk-based capital ratio is 8.00%.  At least one-half of this ratio or 4.00% must consist of core capital (Tier I), and the remaining 4.00% may be in the form of core (Tier I) or supplemental capital (Tier II).  Tier I capital or core capital consists of common shareholders’ equity, qualified perpetual preferred stock and minority interests in consolidated subsidiaries.  Tier II capital or supplementary capital may consist of the allowance for loan and lease losses, perpetual preferred stock, term-subordinated debt and other debt and stock instruments.

 

Dividend payments totaled $1.10 per share in 2011 compared to $1.00 per share in 2010 and $1.04 per share in 2009.  The Company’s strategy continues to be to pay dividends at a level that provides dividend payout ratio and dividend yield in excess of average for peers as reported in the Peer Report.  The dividend payout ratio was 33.5% in 2011 compared to 40.86% in 2010 and 45.27% in 2009.  The projected payout ratio for 2012 is in the range of 30% to 45%.  Average dividend payout in the Peer Report for 2011 was 37.20%.  The Company’s dividend yield in 2011 was 3.24% compared to 3.13% in 2010 and 3.35% in 2009.  The average dividend yield in the Peer Report was 1.73% for 2011. 

 

As of year-end 2011, there were approximately $16 million of retained earnings available for the payment of future dividends from the Bank to the Company.  Banking regulations require certain capital levels to be maintained and may limit dividends paid by the Bank to the Company or by the Company to its shareholders.  Historically, these restrictions have posed no practical limit on the ability of the Bank or the Company to pay dividends.

 

Over the past 16 years, the Company has repurchased approximately 109,739 shares of its common stock; treasury stock had weighted average cost basis of $27.54 per share at December 31, 2011.  During 2011, the Company repurchased 17,980 shares of its own common stock for an aggregate cost of $607,758 and weighted average per share cost of $33.81.  The Company sold eight shares of its common stock in 2011 at a price of $34.00 per share for an aggregate price of $272.  During 2010, the Company did not repurchase any shares of its common stock and sold 808 shares of its common stock at a price of $32.00 per share for an aggregate price of $25,856.  There are currently no publicly announced plans or programs to repurchase shares in place.

 

Liquidity

 

The Company manages liquidity in a manner to ensure the availability of ample funding to satisfy loan demand, fund investment opportunities and fund large deposit withdrawals.  Primary funding sources for the Company include customer core deposits, and FHLB borrowings as well as correspondent bank and other borrowings.  The Company’s liquidity position is further strengthened by ready access to a diversified base of wholesale borrowings, which includes lines of credit with the FHLB, federal funds purchased, securities sold under agreements to repurchase, brokered CDs and others. 

 

The turmoil and events in financial markets and across the banking industry during the recent economic recession serve as proof that adequate liquidity is critical to the Company’s success and survival, especially during times of market turbulence.  Therefore, management maintains and regularly updates its strategic action plans related to liquidity, including crisis and contingency liquidity plans to defend against any material downturn in the Bank’s liquidity position. 

 

As of December 31, 2011, deposits accounted for 90% of total liabilities compared to 89% as of December 31, 2010 and 86% as of December 31, 2009.  Borrowed funds from the FHLB totaled 3.9% ($37 million) of total liabilities as of December 31, 2011 compared to 4.7% ($42 million) as of December 31, 2010 and 7.5% ($65 million) at December 31, 2009.  The Bank had additional borrowing capacity of $115.5 million with the FHLB as of December 31, 2011.  The Bank also has federal fund lines of credit with four correspondent banks with lines totaling $54.5 million as of December 31, 2011.  In each of the years ended December 31, 2011 and 2010, the Bank held $23 million in short-term CDs with the State of Tennessee.  Brokered time deposits were $25 million and $26 million as of year-end 2011 and 2010, respectively.  During 2011, weak loan demand and strong core deposit growth resulted in a reduced reliance on wholesale funding sources such as FHLB advances.  Brokered deposits include reciprocal and one-way buy deposits in the CDARS program.  For more information about CDARS, see the section above entitled “Financial Condition – Composition of Deposits.”

 

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When evaluating liquidity, funding needs are compared against the current level of liquidity, plus liquidity that would likely be available from other sources. This comparison provides a means for determining whether funds management practices are adequate. Management should be able to manage unplanned changes in funding sources, as well as react to changes in market conditions that could hinder the Bank’s ability to quickly liquidate assets with minimal loss.  Funds management practices are designed and implemented to ensure that the Company does not maintain liquidity by paying above market prices for funds or by relying unduly on wholesale or credit-sensitive funding sources.  The OCC has established benchmarks to be used as guidelines in managing liquidity.  The following areas are considered liquidity red flags:

 

• Significant increases in reliance on wholesale funding;

• Significant increases in large CDs, brokered deposits or deposits with interest rates higher than the market;

• Mismatched funding – funding long-term assets with short-term liabilities or short-term assets with long-term liabilities;

• Significant increases in borrowings;

• Significant increases in dependence on funding sources other than core deposits;

• Reduction in borrowing lines by correspondent banks;

• Increases in cost of funds;

• Declines in levels of core deposits; and

• Significant decreases in short-term investments.

Although liquidity has steadily improved during the past three years, liquidity remains a strategic focus of the Bank’s Funds Management Committee, which strives to maintain diverse funding sources conducive to net interest margin strategies.  The following table reflects the liquidity position of the Bank as of December 31, 2011, 2010 and 2009 in comparison to the OCC Liquidity Benchmarks:

 

 

The above comparison is one quantitative means of monitoring liquidity levels.  However, other quantitative and qualitative factors are considered in the overall risk management process for liquidity.  Such other factors evaluated by management include, but are not limited to, forecasting and stress testing capital levels, diversification of funding sources, degree of reliance on short-term volatile funding sources, deposit volume trends and stability of deposits.  There are no known trends or uncertainties that are likely to have a material effect on the Company’s liquidity or capital resources.  There currently exist no recommendations by regulatory authorities, which, if implemented, would have such an effect. 

 

Recently Issued Accounting Standards

 

Troubled Debt Restructurings

 

In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification Update (“ASU”) 2011-01 Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This update postponed the effective date to periods ending after June 15, 2011 for certain required disclosures related to TDRs that were included in ASC Update No. 2010-20.

 

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In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” (“ASU 2011-02”).  ASU 2011-02 amends previous guidance with respect to TDRs and is designed to assist creditors with determining whether or not a restructuring constitutes a TDR. In particular, additional guidance has been added to help creditors determine whether a concession has been granted and whether a debtor is experiencing financial difficulties. Both of these conditions are required to be met for a restructuring to constitute a TDR.  The amendments in ASU 2011-02 are effective for the first interim period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  ASU 2011-02 did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

Repurchase Agreements

 

In April 2011, the FASB issued ASU No. 2011-03, “Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”).   ASU 2011-03 removes the transferor’s ability criterion from the consideration of effective control for repurchase agreements and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity.  ASU 2011-03 removes from the assessment of effective control (1) 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 (2) the collateral maintenance implementation guidance related to that criterion.  The effective date for ASU 2011-03 is the first interim or annual period beginning on or after December 15, 2011.  ASU 2011-03 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Fair Value Measurements

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement:  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”).  Amendments in ASU 2011-04 do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting, but serve to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and international financial reporting standards.  Some amendments clarify FASB’s intent about the application of existing fair value measurement requirements, while others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011.  ASU 2011-04 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Comprehensive Income

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”).  The objective of ASU 2011-05 is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity, among other amendments in ASU 2011-05.  The amendments require that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. 

 

In December 2011, the FASB issued ASU No. 2011-12, “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” (“ASU 2011-12”). ASU 2011-12 was issued in order to defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments, and ASU 2011-05 supersedes certain pending paragraphs in ASU 2011-05. The amendments are being made to allow FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities will continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.  All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. These requirements are applicable for fiscal years, and interim periods within those years, beginning after December 15, 2011. ASU 2011-12 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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Goodwill

 

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350)” (“ASU 2011-08”).  The objective of ASU 2011-08 is to simplify how public and private entities test goodwill for impairment.  Under the amendments of ASU 2011-08, an entity has 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. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss.  Under the amendments in ASU 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. ASU 2011-08 is not expected to have a material impact on the Company’s financial statements.

 

Disclosures about Offsetting Assets and Liabilities

 

                In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), as an amendment to require entities to provide enhanced disclosures about offsetting and related arrangements to enable users of financials statements to understand effects of those arrangements on its financial position.  Entities are required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  Entities should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  Adoption of ASU 2011-11 is not expected to have a material impact on the Company’s financial statements.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

               

Interest Rate Sensitivity

 

Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities.  Overnight federal funds, on which rates change daily, and loans which are tied to the prime rate are much more sensitive than long-term investment securities and fixed rate loans. The shorter-term interest sensitive assets and liabilities are key to measurement of the interest sensitivity gap.  Minimizing this gap is a continual challenge and a primary objective of the asset/liability management program.

 

The Company monitors and employs multiple strategies to manage interest rate risk and liquidity continuously at acceptable levels.  Such strategies include but are not limited to use of FHLB borrowings, floors on variable rate loans, use of interest rate swaps and investments in mortgage-backed investments that enable the Company to have steady cash inflows. 

 

Overall, the Company maintained net interest margins above 4% from 2009 through 2011 after maintaining net interest margins in the range of 3.7% to 4.0% from 2005 to 2008.  Margins steadily improved in 2009 to 4.2% for the first time in over five years and held at 4.28% for each of the years ended December 31, 2010 and 2011.  Strong net interest margins over the past three years were a result of the Company’s ability to keep interest earning asset yields declining at a pace slower than the decline of interest bearing liabilities.  The Company’s quarterly net interest margin was 4.27%, 4.35%, 4.35% and 4.09% for the four calendar quarters of 2011.  The downward trend to 4.09% in the fourth quarter was primarily the result of a shift in the balance sheet mix as loans decreased while lower yielding cash and investment securities increased.  The Company’s quarterly net interest margin was 4.34%, 4.30%, 4.18% and 4.26% for the four calendar quarters of 2010.

 

Interest rate risk is separated and analyzed according to the following categories of risk: (1) re-pricing; (2) yield curve; (3) option risk; (4) price risk; and (5) basis risk. Trading assets are utilized infrequently and are addressed in the investment policy.  Unfavorable trends reflected in interest rate margins will cause an immediate adjustment to the Bank’s gap position or asset/liability management strategies.  The data schedule below reflects a summary of the Company’s interest rate risk using simulations.  The projected 12-month exposure is based on different rate movements (flat, rising or declining). 

 

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The following condensed gap reports provide an analysis of interest rate sensitivity of earning assets and costing liabilities in a flat rate environment at December 31, 2011 and 2010 (dollars in thousands):

 

CONDENSED GAP REPORT

CURRENT BALANCES

DECEMBER 31, 2011

 

_______________

(1)	Includes balance in excess reserves held at Federal Reserve Bank that are interest bearing and priced similarly to federal funds sold held at other correspondent banks.
(2)	RSA/RSL is the ratio of rate-sensitive assets to rate-sensitive liabilities.

 

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CONDENSED GAP REPORT

CURRENT BALANCES

DECEMBER 31, 2010

 

_______________

^*                      RSA/RSL is the ratio of rate-sensitive assets to rate-sensitive liabilities.

 

Notes to the Gap Reports:

 

1. The gap report reflects the interest sensitivity positions during a flat rate environment.  Time frames could change depending on whether rates rise or fall.

2. Re-pricing overrides maturities in various time frames.

3. Demand deposits are considered to be core and are spread among the one-year, two-year, three-year and greater than five-year categories for gap analysis.

4. Savings accounts, also considered core, are split into various time frames based on characteristics of the various accounts and pricing strategies related to those accounts.  Regular savings accounts are the least sensitive type of interest bearing account based on the Company’s most recent non-maturity deposit study, which was completed as of September 30, 2011.  First Rate, E-Solutions and Wall Street deposit products are more sensitive to rate changes and, therefore, are repriced more aggressively than regular savings and other less sensitive type deposit accounts. 

5. Simulations are utilized to reflect the impact of multiple rate scenarios on net interest income at risk, net income at risk and economic value of equity at risk.  Strategies are implemented to increase net interest income, while always considering the impact on interest rate risk.  Overall, the Bank manages the gap between interest rate sensitive liabilities to expand and contract with the rate cycle phase.  The Bank’s Funds Management Committee is responsible for implementing and monitoring procedures to improve net interest income through volume increases and better pricing techniques. 

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The Company’s interest rate risk position was liability sensitive at year-end 2011.  Therefore, net interest margins would be diluted slightly by increases in rates over the next 12 months under a normal interest rate environment.  As of December 2011, federal funds rates continue at the historical low range of 0.00% to 0.25%.  Federal funds rates at this level do not have the capacity to decrease even 100 basis points.  Therefore, in the interest rate risk models, the rates on federal funds and prime hit a floor of zero and 3.0%, respectively.  The prime rate floor of 3% assumes that the normal spread between federal funds rates and prime is maintained and remains fixed at 300 basis points.   While prime rate in the model reaches a floor of 3%, the Bank’s variable rate loan pricing carries an average floor in the range of 5.0 to 5.5%.  As rates in the model are shocked, loans will decrease only until the floor position is reached while some liabilities continue to reprice downward.  However, the variance between the flat rate scenario and the down rate shocks are negative as the current pricing of liabilities is historically low and has little room to trend downward beyond its current position.  With federal funds rates currently between 0.00% to 0.25%, the down 100 basis points and down 200 basis point scenarios are the most unlikely scenarios.  Scenarios for exposure in the up 100 basis points and up 200 basis points are considered more realistic. However, recent statements by the FOMC indicate that federal funds rates will mostly remain flat through 2014. 

 

These rate shock scenarios also indicate a negative variance because the upward scenarios indicate that deposits will reprice faster than loans and investments, especially given that most of the loans are currently at a floor and will require a more than 200-basis point increase in federal funds rates and prime rate before loan floors will increase. 

 

The Company’s exposure to interest rate risk is within established policy limits.  The following table presents net interest income at risk as of December 31, 2011 projected over a 12-month exposure period and compared to the Company’s internal policy limits (dollars in thousands): 

 

____________________________

*              Net interest income assumes that interest rates would change immediately within the total portfolio, a scenario which would reflect a worst case position and is unlikely to happen. 

 

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company’s internal control system is designed to provide reasonable assurance to management and the Company’s Board of Directors regarding the preparation and fair presentation of the Company’s annual financial statements in accordance with GAAP. 

 

Inherent limitations exist in the effectiveness of any internal control structure, including the possibility of human error and circumvention of controls.  Accordingly, even effective internal control can only provide reasonable assurance with respect to financial statement preparation. 

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management believes that, as of December 31, 2011, the Company’s internal control over financial reporting was effective. 

 

Alexander Thompson Arnold, PLLC, the Company’s independent registered public accounting firm, has audited the Company’s consolidated financial statements and issued an attestation report on the Company’s internal control over financial reporting. This report appears beginning on page 48 of this Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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