UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD |
For the transition period from to
Commission File Number 000-49966
COMMUNITY FIRST, INC.
(Exact Name of Registrant as Specified in its Charter)
Tennessee | | 04-3687717 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
501 S. James Campbell Blvd. Columbia, Tennessee | | 38401 |
(Address of principal executive offices) | | (Zip Code) |
(931) 380-2265
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
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 x
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o
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. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | o | | | Accelerated filer | o |
| | | | | |
Non-accelerated filer | x | (Do not check if a smaller reporting company) | | Smaller reporting company | o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the Registrant’s outstanding Common Stock held by nonaffiliates of the Registrant on June 30, 2015 was approximately $10,668,388. There were 3,296,666 shares of Common Stock outstanding on March 9, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2016 Annual Meeting of Shareholders, currently scheduled to be held on May 17, 2016, are incorporated by reference into Part III of this Annual Report on Form 10-K.
COMMUNITY FIRST, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2015
Table of Contents
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements made herein, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning and subject to the protections 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 (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation those described under Item 1A, “Risk Factors,” in this document and the following:
| · | deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; |
| · | greater than anticipated deterioration or lack of sustained growth in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA; |
| · | changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions or regulatory development; |
| · | failure to maintain capital levels above levels required by banking regulations or commitments or agreements we make with our regulators; |
| · | the inability to comply with regulatory capital requirements and required capital maintenance levels, including those resulting from the implementation of the Basel III capital guidelines, and to secure any required regulatory approvals for capital actions; |
| · | the vulnerability of our network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; |
| · | the inability to grow our loan portfolio; |
| · | governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in banking, securities and tax laws and regulations; |
| · | the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities; |
| · | continuation of the historically low short-term interest rate environment; |
| · | the ability to retain large, uninsured deposits; |
| · | rapid fluctuations or unanticipated changes in interest rates; |
| · | the development of any new market; |
| · | a merger or acquisition; |
| · | any activity that would cause us to conclude that there was impairment of any asset, including goodwill or any other intangible asset; |
| · | our recording a further valuation allowance related to our deferred tax asset; |
| · | the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services; |
| · | changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); |
| · | the failure of assumptions underlying the establishment of reserves for possible loan losses and other estimates; |
| · | further deterioration in the valuation of other real estate owned; |
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| · | changes in accounting policies, rules and practices; |
| · | the actions of the owners of the preferred securities (the “Preferred Stock”) sold through our participation in the United States Department of the Treasury’s (the “U.S. Treasury”) Capital Purchase Program (the “CPP”); |
| · | changes in technology or products that may be more difficult, or costly, or less effective, than anticipated; |
| · | the effects of war or other conflict, acts of terrorism or other catastrophic events that may affect general economic conditions; and |
| · | other circumstances, many of which may be beyond our control. |
All forward-looking statements that are included in this report are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.
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PART I
Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “the Company” or “Community First” as used herein refer to Community First, Inc. and its subsidiaries, including Community First Bank & Trust, which we sometimes refer to as “the Bank,” “our Bank” or “our Bank subsidiary”.
(Dollar amounts in thousands, except per share data or as otherwise indicated)
General
Community First, Inc. is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and became so upon the acquisition of all the voting shares of the Bank on August 30, 2002. An application for the bank holding company was approved by the Federal Reserve Bank of Atlanta (the “FRB”) on August 6, 2002. The Company was incorporated under the laws of the State of Tennessee as a Tennessee corporation on April 9, 2002.
The Bank commenced business on May 18, 1999 as a Tennessee-chartered commercial bank whose deposits are insured by the Federal Deposit Insurance Corporation’s (the “FDIC”) Deposit Insurance Fund (the “DIF”). The Bank is primarily regulated by the Tennessee Department of Financial Institutions (the “Department”) and the FDIC. The Bank’s sole subsidiary is Community First Properties, Inc. (“Properties”), a Maryland corporation which was established as a real estate investment trust (“REIT”) pursuant to Internal Revenue Service regulations but which terminated its REIT election effective March 30, 2012. On March 30, 2012, the Company dissolved two of the Bank’s previously existing subsidiaries, Community First Title, Inc., a Tennessee corporation, and CFBT Investments, Inc., a Nevada corporation. On December 31, 2015, Properties redeemed all of its outstanding shares of preferred stock, and as a result Properties’ equity securities are 100% owned by the Bank. The assets of these two subsidiaries were distributed to the Bank. The Bank conducts a wide range of banking activities and its principal business is to accept demand and saving deposits from the general public and to make residential mortgage, commercial, and consumer loans.
The Company completed its acquisition of 100% of the outstanding shares of common stock of The First National Bank of Centerville, a national banking association headquartered in Centerville, Tennessee (“First National”), on October 26, 2007 pursuant to the terms of an Agreement and Plan of Reorganization and Share Exchange, dated as of August 1, 2007, by and between the Company and First National. On January 31, 2008, First National was merged with and into the Bank, with the Bank continuing as the surviving entity.
The Company conducts banking activities from the main office and three branch offices in Columbia, Tennessee, one branch office in Mount Pleasant, Tennessee, one branch office in Centerville, Tennessee, one branch office in Lyles, Tennessee and one branch office in Thompson Station, Tennessee. The Company also operates seven automated teller machines in Maury County, Tennessee, one automated teller machine in Williamson County, Tennessee and two automated teller machines in Hickman County, Tennessee.
The Company is a bank holding company and its assets consist primarily of its investment in the Bank. The Company provides a wide range of financial services through the Bank. At December 31, 2015, the Company’s consolidated total assets were $469,940, its consolidated net loans, including loans held for sale, were $260,350, its total deposits were $416,714, and its total shareholders’ equity was $22,965. At December 31, 2014, consolidated total assets were $443,555, the Company’s consolidated net loans, including loans held for sale, were $251,371, its total deposits were $398,080, and its total shareholders’ equity was $10,886. At December 31, 2013, the Company’s consolidated total assets were $448,443, its consolidated net loans, including loans held for sale, were $265,668, its total deposits were $407,532, and its total shareholders’ equity was $8,616.
Loans
We make secured and unsecured loans to individuals, partnerships, corporations, and other business entities within the Middle Tennessee area. Our loan portfolio consists of commercial, financial and agricultural loans, residential and commercial mortgage loans, and consumer loans. Our legal lending limits under applicable regulations (based upon the legal lending limits of 25% of capital and surplus) were $11,964 as of December 31, 2015.
Commercial loans are made primarily to small and medium-sized businesses. Some of these loans are guaranteed by U.S. Government entities such as the U.S. Small Business Administration and the U.S. Department of Agriculture as well as on a conventional basis. These loans are secured and unsecured and are made available for general operating inventory and accounts receivables, for real estate construction and development, as well as for any other purposes considered appropriate. We will generally look to a borrower’s business operations as the principal source of repayment, but will also receive, when appropriate, a security
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interest in personal property and/or personal guarantees. In addition, the majority of commercial loans that are not mortgage loans are secured by a lien on equipment, inventory, and/or other assets of the commercial borrower, or, in the case of real estate construction and development loans, the underlying real property.
Commercial lending (including commercial real estate lending) involves more risk than residential real estate lending because loan balances are larger and repayment is dependent upon the borrower’s operations. We attempt to minimize the risks associated with these transactions by generally limiting our exposure to owner-operated properties of customers with an established profitable history. In many cases, risk can be further reduced by limiting the amount of credit to any one borrower to an amount less than our legal lending limit (or if lower, our internal limits) and avoiding types of commercial real estate financing that we deem to be too risky.
We originate residential mortgage loans with either fixed or variable interest rates. Our general policy is to sell most fixed rate loans in the secondary market. This policy is subject to review by management and may be revised as a result of changing market and economic conditions and other factors. We do not retain servicing rights with respect to residential mortgage loans that we originate and sell into the secondary market. Typically, all of our residential real estate loans are secured by a first lien on the real estate. Also, we offer home equity loans, which are secured by junior liens on the subject residence.
We make personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats and other recreational vehicles, and the making of home improvements and personal investments. All such loans are retained by us.
Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans and usually involve more credit risk than mortgage loans because of the type and nature of the collateral. Consumer lending collections are dependent on a borrower’s continuing financial stability and are thus likely to be adversely affected by job loss, illness, or personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying collateral. We underwrite these consumer loans carefully, with a strong emphasis on the amount of the down payment, credit quality and history, employment stability, and monthly income. These loans are generally expected to be repaid on a monthly repayment schedule with the payment amount tied to the borrower’s periodic income. We believe that the generally higher yields earned on consumer loans help compensate for the increased credit risk associated with such loans and that consumer loans are important to our efforts to serve the credit needs of our customer base.
Although we take a progressive and competitive approach to lending, we seek to maintain high quality in our loans. We are subject to written loan policies that contain general lending guidelines that are subject to periodic review and revision by our Board of Directors and by the Loan Committee established by the Board of Directors. These policies concern loan administration, documentation, approval, and reporting requirements for various types of loans.
Lending Policies
While the ultimate authority to approve loans rests with the Board of Directors, lending authority is delegated by the Board of Directors to the loan officers and Loan Committee. Loan officers, each of whom are limited as to the amount of secured and unsecured loans that he or she can make to a single borrower or related group of borrowers, report to either the Bank’s Chief Credit Officer, Jim Bratton, or Retail Branch Administrator, Janice Simpson. Louis Holloway, the Chief Executive Officer of our Bank, chairs the Loan Committee. Our Chief Credit Officer of the Bank, Jim Bratton, also serves as Vice Chairman of the Loan Committee. Lending limits of individual loan officers are documented in the Bank’s Loan Policies and Procedures and are approved by the Board of Directors. Loan officers discuss with the Chief Credit Officer, Retail Branch Administrator or Chief Executive Officer any loan request that exceeds their individual lending limit. The loan must have approval from the Bank’s Chief Executive Officer, Chief Credit Officer, Retail Branch Administrator, or the Loan Committee as required by Loan Policy and Procedures. The Chief Executive Officer and the Chief Credit Officer have lending authority on secured and unsecured loans up to $1,000,000, and the Retail Branch Administrator has lending authority on secured loans up to $150,000.
Our policies provide written guidelines for lending activities and are reviewed periodically by the Board of Directors. The Board of Directors recognizes that, from time to time, it is in the best interests of the Company to deviate from the established, written credit policy and have established guidelines for granting exceptions to the policy. Situations in which such exceptions might be granted include the waiving of requirements for independent audited financial statements when a comfort level with respect to the financial statements of the borrower can be otherwise obtained and when it is deemed desirable to meet the terms offered by a competitor.
Tennessee has adopted the provisions of the Federal Reserve Regulation O with respect to restrictions on loans and other extensions of credit to bank “insiders.” Further, under Tennessee law, state banks are prohibited from lending to any one person, firm or corporation amounts more than fifteen percent (15%) of its equity capital accounts, except (i) in the case of certain loans secured by negotiable title documents covering readily marketable nonperishable staples, or (ii) with the prior approval of the state bank’s board
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of directors or finance committee (however titled), the state bank may make a loan to any person, firm or corporation of up to twenty-five percent (25%) of its equity capital accounts.
We seek to maintain a diversified loan portfolio, including secured and unsecured consumer loans, secured loans to individuals for business purposes, secured commercial loans, secured agricultural production loans, and secured real estate loans. Our primary trade area lies in the counties of Middle Tennessee, with the primary focus in Maury, Williamson, and Hickman Counties. The Loan Committee must approve all out-of-trade area loans.
As a general rule, we seek to maintain loan-to-collateral value ratios in conformity with industry and regulatory guidelines. The following standards, established by inter-agency guidelines by the federal bank regulators, including the FDIC, went into effect on March 19, 1993:
| | Maximum Allowable | |
Loan Category | | Loan-to-Value Ratio | |
Land | | | 65 | % |
Land development | | | 75 | % |
Construction | | | | |
Commercial, multifamily (1) and other nonresidential | | | 80 | % |
1-4 family residential | | | 85 | % |
Improved property | | | 85 | % |
Owner-occupied 1-4 family and home equity (2) | | | (2 | ) |
(1) | Multifamily construction includes condominiums and cooperatives. |
(2) | A loan-to-value limit has not been established for permanent mortgage or home equity loans or owner-occupied, 1-4 family residential property. However, for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination, appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral is required. Home equity lines of credit (HELOC) loan-to-value may be up to 100% of the collateral appraisal value. |
Loan Review and Nonperforming Assets
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The Company assigns an initial credit risk rating on every loan. All loan relationships with aggregate debt greater than $250 are reviewed at least annually or more frequently if performance of the loan or other factors warrant review. Smaller balance loans are reviewed and evaluated based on changes in loan performance, such as becoming past due or upon notifying the Bank of a change in the borrower’s financial status. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Pass. Loans in this category are to persons or entities with good balance sheets, acceptable liquidity, and acceptable or strong earnings. Guarantors have reasonable or strong net worth, liquidity and earnings. Collateral is acceptable or strong, and is at or below policy advance rates. These borrowers have acceptable quality management if they are entities and have handled previous obligations with the Bank substantially within agreed-upon terms. Cash flow is adequate to service long-term debt. These entities may be minimally profitable now, with projections indicating continued profitability into the foreseeable future. Overall, these loans are basically sound.
Watch. Loans characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced operating losses and declining financial condition. The borrower has satisfactorily handled debts with the Bank in the past, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, the borrower’s margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit the Bank’s exposure. This classification includes loans to establish borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity is limited.
Special Mention. Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the repayment source or in the Bank’s credit position in the future.
Substandard. Loans inadequately protected by the payment capacity of the borrower or the pledged collateral.
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Doubtful. Loans with the same characteristics as substandard loans with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values. These are poor quality loans in which neither the collateral nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time or evidence of permanent impairment in the collateral securing the loan.
Nonperforming loans, are placed on the non-accrual basis of accounting if: (i) there is deterioration in the financial condition of the borrower; (ii) payment in full of contractual principal or interest is not expected; or (iii) principal or interest has been in default for 90 days or more, unless the obligation is well secured and in the process of collection. The three categories of nonperforming loans are non-accrual status loans, renegotiated debt, and loans in Chapter 13 bankruptcy unless a repayment schedule is adopted that pays out the loan.
Asset/Liability Management
The Company’s Asset/Liability Committee, a committee composed of certain officers and directors of the Bank, is responsible for managing the Bank’s assets and liabilities. The chairperson of this committee is an outside director, Randy A. Maxwell. This committee attempts to manage asset growth, liquidity, investments and capital in order to maximize income and reduce interest rate risk, directs our overall acquisition and allocation of funds, and reviews and discusses our assets and liability funds budget in relation to the actual flow of funds. This committee also reviews and discusses peer group comparisons; the ratio of the amount of rate-sensitive assets to the amount of rate-sensitive liabilities; the ratio of allowance for loan losses to outstanding and nonperforming loans; and other variables, such as expected loan demand, investment opportunities, core deposit growth within specific categories, regulatory changes, monetary policy adjustments, and the overall state of the local and national economies.
Investment Policy
Our investment portfolio policy is designed to provide guidelines by which the funds not otherwise needed to meet loan demand of our market area can best be invested to meet fluctuations in the loan demand and deposit structure. The Bank’s President and Chief Financial Officer, Jon Thompson, also serves as Investment Officer. We seek to balance the market and credit risk against the potential investment return, make investments compatible with the pledging requirements of our deposits of public funds, maintain compliance with regulatory investment requirements, and assist the various local public entities with their financing needs. Our investment policy is a component of the Company’s Asset/ Liability Management policy. The investment policy is reviewed annually by the Asset/ Liability Management Committee and by the Board of Directors.
Customers
In the opinion of management, there is no single customer or affiliated group of customers whose deposits, if withdrawn, would have a material adverse effect on our business. As of December 31, 2015, we had a total of 104 lending relationships that represent exposure to us of at least $500. We believe that the loss of one of these relationships or an affiliated group of relationships, while significant, would not materially impact our performance.
Competition and Seasonality
The banking business is highly competitive. Our primary market area consists of Maury, Williamson, and Hickman Counties in Tennessee. We compete with numerous commercial banks and savings institutions with offices in these market areas. In addition to these competitors, we compete for loans with insurance companies, regulated small loan companies, credit unions, and certain government agencies. We also compete with numerous companies and financial institutions engaged in similar lines of business, such as mortgage banking companies, brokerage companies and lending companies. Some of our competitors have significantly greater financial resources and offer a greater number of branch locations. To offset this advantage of our larger competitors, the Company focuses on providing superior customer service and tailors our products and services to the specific market segments that we serve. The Company does not experience significant seasonal trends in its operations.
Employees
As of December 31, 2015, we had 106 full-time equivalent employees and 110 total employees. The Company plans to continue to hire additional employees as necessary to meet the demands of its customers. Neither the Company nor any of its subsidiaries is a party to any collective bargaining agreement, and the Company believes that its relations with its employees are good.
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Participation in the United States Department of the Treasury’s Capital Purchase Program
On February 27, 2009, as part of the Capital Purchase Program (the “CPP”) established by the U.S. Department of the Treasury (the “U.S. Treasury”) under the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009 (the “ARRA”) (the “EESA”), the Company issued and sold to the U.S. Treasury (i) 17,806 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and (ii) a ten-year warrant to purchase 890 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, having a liquidation preference of $1,000 per share (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, the “Preferred Stock”), at an initial exercise price of $0.01 per share (the “Warrant”), for an aggregate purchase price of $17,806,000 in cash. On February 27, 2009, the U. S. Treasury exercised the Warrant to purchase 890 shares (after net settlement without cash payment) of Series B Preferred Stock.
On April 14, 2014, the U.S. Treasury, the then holder of all the Series A Preferred Stock and Series B Preferred Stock issued by the Company, closed on the sale of the securities in a modified Dutch auction. The clearing price for the Series A Preferred Stock was $300.50 per share and the clearing price for the Series B Preferred Stock was $521.75 per share. The sale was to unaffiliated third party investors as well as certain directors and executive officers of the Company. On January 23, 2015, certain of our directors and executive officers acquired 2,000 additional shares of the Series A Preferred Stock from an investor that had acquired the shares from the U.S. Treasury, resulting in our directors and executive officers owning in excess of 50% of the outstanding shares of the Series A Preferred Stock. On April 15, 2015, certain of our directors and executive officers, and other individuals, acquired an additional 2,901 shares of the Series A Preferred Stock from an investor that had acquired the shares from the U.S. Treasury.
On December 31, 2015, we redeemed (i) all of the outstanding shares of Series B Preferred Stock for a total redemption price of $1,374 and (ii) 5,901 of the 17,806 outstanding shares of Series A Preferred Stock for a total redemption price of $3,541. None of the shares of Series A Preferred Stock redeemed were held by the Company’s directors or executive officers or other individuals that are holders of the shares (and all of the holders of the Series A Preferred Stock whose shares were not redeemed consented to redemptions), but rather were held by institutional investors that acquired the shares from the U.S. Treasury in April 2014 or from other institutional investors that had acquired the shares from the U.S. Treasury. For additional information regarding the redemptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources” beginning on page 56 of this Form 10-K.
As described in the definitive proxy statement filed by the Company with the Securities and Exchange Commission on December 4, 2015, the Company submitted to the holders of the Series A Preferred Stock and the holders of the Company’s Common Stock for their approval at a special meeting of shareholders held on February 25, 2016, and the holders of the Series A Preferred Stock and Common Stock at that meeting approved, a collection of amendments to the Company’s charter (the “Charter Amendments”) to modify the terms of the Series A Preferred Stock to, among other things, (i) cancel the amount of undeclared dividends in respect of the Series A Preferred Stock; (ii) reduce the liquidation preference on the Series A Preferred Stock to $650 per share plus the amount of any declared and unpaid dividends, without accumulation of any undeclared dividends; (iii) reduce the dividend rate payable on the Series A Preferred Stock from 9% per annum to 5% per annum; (iv) change the designation of the Series A Preferred Stock from “Cumulative” to “Non-Cumulative” and change the rights of the holders of the Series A Preferred Stock such that dividends or distributions on the Series A Preferred Stock will not accumulate unless declared by the Company’s board of directors and subsequently not paid; and (v) eliminate the restrictions on the Company’s ability to pay dividends or make distributions on, or repurchase, shares of its common stock or other junior stock or stock ranking in parity with the Series A Preferred Stock prior to paying accumulated but undeclared dividends or distributions on the Series A Preferred Stock.
The Series A Preferred Stock qualifies as Tier 1 capital under current regulatory guidelines and following the effectiveness of the amendments described in the previous paragraph provides for noncumulative dividends at a rate of 5% per annum (down from 9% per annum in 2015). Noncumulative dividends are payable on the Series A Preferred Stock quarterly and, if paid, are payable on February 15, May 15, August 15 and November 15 of each year. Because the dividends are noncumulative, if the Company fails to make a dividend payment it will not accrue and thereafter be payable. If the Company fails to pay a total of six dividend payments on the Series A Preferred Stock, whether or not consecutive, holders of the Series A Preferred Stock shall be entitled, voting together with any other series of voting parity stock, to elect two directors to the Company’s Board of Directors until the Company has paid all such dividends that it had failed to pay. As a result of the Company’s deteriorating financial condition, at the request of the Federal Reserve Bank of Atlanta (the “FRB”), we informally agreed, through a board resolution adopted by the Board of Directors on January 18, 2011 (which was replaced with a written agreement on April 19, 2014), that we would not, among other things, pay dividends on the Series A Preferred Stock or the Series B Preferred Stock without the prior approval of the FRB. Beginning with the dividend payment due on May 15, 2011, we have been unable to secure the approval of the FRB to pay dividends on the Series A Preferred Stock or, prior to its redemption, the Series B Preferred Stock. Since we have deferred dividend payments on the Series A Preferred Stock for more than six quarters, the holders of the Preferred Stock have the right to elect two directors to our Board of Directors.
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The Series A Preferred Stock has no maturity date and ranks senior to the Company’s common stock, no par value per share (the “Common Stock”), with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. Except for limited circumstances, the Series A Preferred Stock is generally non-voting.
Under the ARRA, the Series A Preferred Stock may be redeemed by the Company at any time subject to prior approval by the FRB.
Supervision and Regulation
General
As a registered bank holding company and Tennessee-chartered, federally insured commercial bank, respectively, the Company and the Bank are subject to extensive regulation. Lending activities and other investments must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Bank is regularly examined by the FDIC and the Department and files periodic reports concerning its activities and financial condition with its regulators. The Bank’s relationships with depositors and borrowers are also regulated to a great extent by both federal law and the laws of the State of Tennessee, especially in such matters as the ownership of accounts and the form and content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the operation of the Company and the Bank, including reserves, loans, mortgages, capital, issuance of securities, payment of dividends, and establishment of branches. Federal and state bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice. Both the Department and the FDIC have the authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.
The following summaries of statutes and regulations affecting banks do not purport to be complete. Such summaries are qualified in their entirety by reference to the statutes and regulations described.
The Dodd-Frank Wall Street Reform and Consumer Protection Act – On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching reforms of major elements of the financial landscape, particularly for larger financial institutions. Many of its most far-reaching provisions do not directly apply to community-based institutions like the Company or the Bank. For instance, provisions that regulate derivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital are among the provisions that do not directly impact the Company either because of exemptions for institutions below a certain asset size or because of the nature of the Company’s operations. Those provisions that have been adopted or are expected to be adopted and have impacted and will continue to impact the Company include the following:
| · | Changing the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminating the ceiling and increasing the size of the floor of the DIF, and offsetting the impact of the increase in the minimum floor on institutions with less than $10 billion in assets; |
| · | Making permanent the $250 limit for federal deposit insurance, increasing the cash limit of Securities Investor Protection Corporation protection to $250 and providing unlimited federal deposit insurance until December 31, 2012 for non-interest bearing demand transaction accounts at all insured depository institutions; |
| · | Repealing the federal prohibition on payment of interest on demand deposits, thereby permitting depositing institutions to pay interest on business transaction and other accounts; |
| · | Centralizing responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing federal consumer protection laws, although banks below $10 billion in assets will continue to be examined and supervised for compliance with these laws by their federal banking regulator; |
| · | Restricting the preemption of state law by federal law and disallowing national bank subsidiaries from availing themselves of such preemption; |
| · | Limiting the debit interchange fees that certain financial institutions are permitted to charge; |
| · | Imposing new requirements for mortgage lending, including new minimum underwriting standards, prohibitions on certain yield-spread compensation to mortgage originators, special consumer protections for mortgage loans that do not meet certain provision qualifications, prohibitions and limitations on certain mortgage terms and various new mandated disclosures to mortgage borrowers; |
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| · | Applying the same leverage and risk based capital requirements that apply to insured depository institutions to holding companies; |
| · | Permitting national and state banks to establish de novo interstate branches at any location where a bank based in that state could establish a branch, and requiring that bank holding companies and banks be well capitalized and well managed in order to acquire banks located outside their home state; |
| · | Imposing new limits on affiliated transactions and causing derivative transactions to be subject to lending limits; and |
| · | Implementing certain corporate governance revisions that apply to all public companies. |
Supervision by the Federal Reserve Board – The Company is a bank holding company registered under the provisions of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and consequently is subject to examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).
As a bank holding company, the Company is required to file with the Federal Reserve annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve and is required to obtain approval of the Federal Reserve prior to acquiring, directly or indirectly, ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting stock of such bank unless it already owns a majority of the voting stock of such bank. Furthermore, a bank holding company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of any voting stock of any company which is not a bank or a bank holding company, and must engage only in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. One of the exceptions to this prohibition is the ownership of shares of a company, the activities of which the Federal Reserve has determined to be so closely related to banking or management or controlling banks as to be properly incident thereto.
A bank holding company and its subsidiaries are also prohibited from engaging in certain tying arrangements in connection with the extension of credit or provision of any property or service. Thus, an affiliate of a bank holding company may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer must obtain or provide some additional credit, property, or services from or to the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. The Federal Reserve has adopted significant amendments to its anti-tying rules that: (1) removed Federal Reserve-imposed anti-tying restrictions on bank holding companies and their non-bank subsidiaries; (2) allow banks greater flexibility to package products with their affiliates; and (3) establish a safe harbor from the tying restrictions for certain foreign transactions. These amendments were designed to enhance competition in banking and non-banking products and to allow banks and their affiliates to provide more efficient, lower cost service to their customers.
In approving acquisitions by bank holding companies of banks and companies engaged in banking-related activities, the Federal Reserve considers a number of factors, including expected benefits to the public such as greater convenience, increased competition, or gains in efficiency, as weighed against the risks of possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve is also empowered to differentiate between new activities and activities commenced through the acquisition of a going concern.
The Change in Bank Control Act of 1978, as amended, requires a person (or group of persons acting in concert) acquiring “control” of a bank holding company to provide the Federal Reserve with 60 days’ prior written notice of the proposed acquisition. Following receipt of this notice, the Federal Reserve has 60 days within which to issue a notice disapproving the proposed acquisition, but the Federal Reserve may extend this time period for up to another 30 days. An acquisition may be completed before expiration of the disapproval period if the Federal Reserve issues written notice of its intent not to disapprove the transaction. In addition, any “company” must obtain the Federal Reserve’s approval before acquiring 25% (5% if the “company” is a bank holding company) or more of the outstanding shares or otherwise obtaining control over the company.
The Attorney General of the United States may, within 15 days after approval by the Federal Reserve of an acquisition, bring an action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Failure of the Attorney General to challenge an acquisition does not, however, exempt the holding company from complying with both state and federal antitrust laws after the acquisition is consummated or immunize the acquisition from future challenge under the anti-monopolization provisions of the Sherman Act.
Bank holding companies are not permitted to engage in “unsafe and unsound” banking practices. The Federal Reserve’s Regulation Y, for example, generally requires a bank holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with consideration paid for any repurchases or redemptions in the
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preceding year, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe and unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve could take the position that paying a dividend would constitute an unsafe and unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank holding companies and their non-bank subsidiaries which represent unsafe and unsound banking practices or which constitute knowing or reckless violations of laws or regulations, if those activities caused a substantial loss to a depository institution. These penalties can be as high as one million dollars for each day the activity continues.
On April 19, 2012, the Company entered into a written agreement (the “Written Agreement”) with the FRB. The terms of the Written Agreement replaced the board resolution adopted by the Board of Directors at the request of the FRB on January 18, 2011. Under the terms of the Written Agreement, the Company agreed to, among other things, take the following actions:
| · | Take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure that the Bank complies with the Consent Order (as defined below); |
| · | Submit within 60 days of April 19, 2012 a written plan to maintain sufficient capital at the Company on a consolidated basis, and within 10 days of approval of the plan by the FRB, adopt the approved capital plan; |
| · | Submit within 60 days of April 19, 2012 a written statement of the Company’s planned sources and uses of cash for debt service, operating expenses, and other purposes for 2012; |
| · | Provide notice in compliance with applicable federal law and regulations, of any changes in directors or senior executive officers of the Company; |
| · | Comply with applicable federal law and regulations restricting indemnification and severance payments; and |
| · | Provide within 45 days after the end of each calendar quarter, a written progress report detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement. |
In addition, under the terms of the Written Agreement, the Company has agreed to, among other things:
| · | Refrain from declaring or paying any dividends without prior approval of the FRB; |
| · | Not directly or indirectly take dividends or any other form of payment representing a reduction in capital from the Bank without prior approval; |
| · | Not (along with the Company’s non-bank subsidiary) make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior approval; |
| · | Not (along with the Company’s non-bank subsidiary) directly or indirectly incur, increase, or guarantee any debt without prior approval; and |
| · | Not directly or indirectly purchase or redeem any shares of its stock without prior approval. |
As of December 31, 2015, all of the plans required to be submitted to the FRB have been submitted and approved. Management believes that the Company is in full compliance with the requirements of the Written Agreement as of December 31, 2015.
On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of February 29, 2016. As of February 29, 2016, the Company and the Bank have no outstanding enforcement agreements with any of their regulators.
Securities Registration and Reporting – The Common Stock of the Company is registered as a class with the SEC under the Exchange Act and thus the Company is subject to the periodic reporting and proxy solicitation requirements and the insider-trading restrictions of the Exchange Act. In addition, the securities issued by the Company are subject to the registration requirements of the Securities Act and applicable state securities laws unless exemptions are available. The periodic reports, proxy statements, and other information filed by the Company with the SEC are available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer with the SEC and the Company’s filings may be obtained free of charge at the SEC website (http://www.sec.gov). The Company also makes available on its website (http://www.cfbk.com), free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after the Company files such material with, or furnishes such material to, the SEC.
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Participation in the Capital Purchase Program of the Troubled Asset Relief Program – As a result of the Company’s participation in the CPP, the Company was, prior to the date that the U.S. Treasury auctioned off all of the Preferred Stock that it owned, required to comply with certain limits and restrictions concerning executive compensation throughout the time that the U.S. Treasury held any equity or debt securities acquired from the Company pursuant to the CPP, including a requirement that any bonus or incentive compensation paid to the Company’s senior executive officers and next twenty most highly compensated employees during the period that the U.S. Treasury held the Preferred Stock be subject to “clawback” or recovery if the payment was based on materially inaccurate financial statements or other materially inaccurate performance metrics criteria and a prohibition on making any “golden parachute” payment (as defined in Section 111 of the EESA, as amended by the ARRA as well as all rules, regulations, guidance or other requirements issued thereunder including the interim final rule issued by the U.S. Treasury on June 15, 2009 (the “June 2009 IFR”)) during that same period to any senior executive officer or the next five most highly compensated employees. The prohibition on “golden parachute” payments has been expanded under the ARRA and the June 2009 IFR to prohibit any payment to these employees for departure from the Company for any reason, except for payments for services performed or benefits accrued.
In addition to the above-described restrictions and limitations on executive compensation, the Company’s participation in the CPP also required the Company to (i) ensure that the incentive compensation programs for its senior executive officers did not encourage unnecessary and excessive risks that threatened the value of the Company; (ii) not make any bonus, incentive or retention payment to the Company’s chief executive officer, except as permitted under the June 2009 IFR; (iii) not deduct for tax purposes executive compensation in excess of $500 in any one fiscal year for each of the Company’s senior executive officers; (iv) establish a Company-wide policy regarding “excessive or luxury expenditures;” and (v) include in the Company’s proxy statement for its annual shareholder meeting a non-binding, advisory shareholder vote on the compensation the Company paid to its senior executive officers.
On April 14, 2014, the U.S. Treasury closed on the sale of all of the Preferred Stock to unaffiliated third party investors as well as certain directors and executive officers of the Company in a modified Dutch auction. Upon the closing of the sale of the Preferred Stock, the Company was no longer subject to the above-described executive compensation and corporate governance requirements to which participants in the CPP were subject while the U.S. Treasury held the securities.
Tennessee Supervision and Regulation – As a Tennessee-chartered commercial bank, the Bank is subject to various state laws and regulations which limit the amount that can be loaned to a single borrower, the type of permissible investments the Bank may make, and geographic expansion, among other things. The Bank must submit an application and receive the approval of the Tennessee Department of Financial Institutions (the “Department”) before opening a new branch office or merging with another financial institution. The Department regularly examines state chartered banks like the Bank and in connection with its examinations may identify matters necessary to improve a bank’s operation in accordance with principles of safety and soundness. Any matters identified in such examinations are required to be appropriately addressed by the bank being examined and may include maintaining capital at levels above those required by federal statutory provisions to be considered well capitalized and not paying dividends without the prior approval of the Commissioner of the Department.
The Commissioner of the Department has the authority to enforce state laws and regulations by ordering a director, officer or employee of the Bank to cease and desist from violating a law or regulation and from engaging in unsafe or unsound banking practices. The Bank will be required to file annual reports and such other additional information as Tennessee law requires. Tennessee law contains limitations on the interest rates that may be charged on various types of loans and restrictions on the nature and amount of loans that may be granted and on the type of investments which may be made. The operations of banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All Tennessee banks, including the Bank, must become and remain insured under the Federal Deposit Insurance Act.
Dividends – The Company is a legal entity separate and distinct from the Bank. The principal source of the Company’s revenues however, is from dividends declared by the Bank. Under Tennessee banking law, the Bank can only pay dividends in an amount equal to or less than the total amount of its net income for that calendar year combined with retained net income of the preceding two (2) years. Payment of dividends in excess of this amount requires prior approval by the Commissioner of the Department. The Bank’s ability to pay dividends also may depend on its ability to meet minimum capital levels established from time to time by the FDIC. Under such regulations, FDIC-insured state banks are prohibited from paying dividends, making other distributions or paying any management fee to a parent if, after such payment, the bank would fail to have a common equity Tier 1 risk-based capital ratio of at least 5.125%, a Tier 1 risk-based capital ratio of at least 6.625%, a total risk-based capital ratio of at least 8.625% and a Tier 1 leverage capital ratio of at least 4%, in each case, including the portion of the capital conservation buffer implemented beginning January 1, 2016, under the FDIC regulations implementing the Basel III capital requirements. Beginning January 1, 2016, this capital conservation buffer is being phased in at 0.625% per year. When fully phased in on January 1, 2019, the full capital conservation buffer of up to 2.5% following a three-year phase-in period. The Bank’s ability to pay dividends to the Company may also be limited by limitations imposed on the Bank by the FDIC or the Department, including both formal and informal actions.
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Under Tennessee law, the Bank (subject to any limitations under Tennessee banking law) and the Company may pay common stock dividends if, after giving effect to the dividends, the Company or the Bank can pay its debts as they become due in the ordinary course of business and the Company’s or the Bank’s total assets exceed its total liabilities. The payment of dividends by the Company also may be affected or limited by certain factors, such as the requirements to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank holding company or a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may take various supervisory actions to prevent such action, including a cease and desist order prohibiting such practice. At the request of the FRB, the Board of Directors of the Company, on January 18, 2011, adopted a board resolution (which has been replaced by the Written Agreement) agreeing that the Company would not, among other things, incur additional debt, pay dividends on any of its common stock or preferred stock, or redeem treasury stock without approval from the FRB. The Company requested permission to make dividend payments on its Preferred Stock and interest payments on its subordinated debentures that were scheduled for the first quarter of 2011. In the first quarter of 2011, the FRB granted the Company permission to pay the dividends on its Preferred Stock that were due on February 15, 2011, but denied the Company permission to make interest payments on its subordinated debentures. As a result of the FRB’s decision, the Company was required to begin the deferral of interest payments on each of its three issuances of subordinated debentures during the first quarter of 2011. The Company has the right to defer the payment of interest on the subordinated debentures at any time, for a period not to exceed 20 consecutive quarters. During the period in which it is deferring the payment of interest on its subordinated debentures, the indentures governing the subordinated debentures provide that the Company cannot pay any dividends on its Common Stock or Preferred Stock. Accordingly, the Company was required to suspend its dividend payments on its Preferred Stock beginning in the second quarter of 2011.
As a result of improvements in the Bank and Company’s financial condition, management sought approval from its regulators to allow the Bank to pay dividends to the Company in an amount sufficient to allow the Company to pay all accrued but unpaid interest payments on its subordinated debentures during the fourth quarter of 2015. The Company received all of the required regulatory approvals and in December 2015 made interest payments totaling $5,444 to the holders of the subordinated debt. As of December 31, 2015, the Company is current on all interest payments due related to its subordinated debentures.
Also during 2015, the Company and Bank sought permission for the Bank to pay additional dividends to the Company sufficient to allow it to redeem all of the Series B Preferred Stock and 5,901 shares of the Series A Preferred Stock as described above. Upon redemption of the 5,901 shares of Series A Preferred Stock, $2,360 of the Company’s equity that was attributable to the redeemed shares of Series A Preferred Stock was transferred to common equity as a result of the cash redemption amount being less than the face value of the redeemed shares of Series A Preferred Stock. Due to the restrictions on the Company’s ability to pay dividends, a total of $2,114 of dividends had been accrued as of the redemption date for the 5,901 shares that were redeemed. Upon redemption, the accrued dividends were reversed, which increased the Company’s retained earnings.
Following the redemptions, as of December 31, 2015, the Company had accumulated $4,265 in deferred dividends on the 11,905 shares of the Series A Preferred Stock not redeemed.
Following approval and effectiveness of the Charter Amendments on February 25, 2016, the Company’s total equity increased due to the reversal of $4,386 accrued but undeclared dividends on the Series A Preferred Stock as of December 31, 2015. In addition, the portion of the Company’s capital that is allocated to common stock was increased by the reduction in the liquidation preference of the Series A Preferred Stock from $1,000 per share to $650 per share resulting from the Charter Amendments. As a result of the Charter Amendments, a total of $4,167 of the Company’s equity was transferred during the first quarter of 2016 from Preferred Stock to Common Stock.
Additionally, because the Company had, until December 2015, deferred the payment of interest on its subordinated debentures, the Bank’s sole subsidiary, Community First Properties, Inc., was also prohibited from paying dividends on its issued and outstanding preferred stock and common stock until such time as the Company is current on the payment of interest on its subordinated debt. On December 31, 2015, Community First Properties, Inc. paid $778 to the holders of its outstanding preferred stock inclusive of $562 paid to the Bank. The payment was for accrued but unpaid dividends on the preferred stock and also fully redeemed the shares at face value. As of December 31, 2015, Community First, Properties, Inc. had no shares of preferred stock outstanding.
On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of February 29, 2016. As of February 29, 2016, the Company and the Bank have no outstanding enforcement agreements with any of their regulators.
In addition to the limitations on the Company’s ability to pay dividends under Tennessee law, the Company’s ability to pay dividends on its Common Stock is also limited by the terms of the Series A Preferred Stock and the indentures governing its subordinated debentures and by certain statutory or regulatory limitations.
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Deposit Insurance – Our deposit accounts are insured by the FDIC up to applicable limits by the DIF. The DIF was designated as an insurance fund pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). FIRREA provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC insured depository institution in danger of default. FIRREA provides that certain types of persons affiliated with financial institutions can be fined by the federal regulatory agency having jurisdiction over a depository institution with federal deposit insurance (such as the Bank) up to $1,000 per day for each violation of certain regulations related (primarily) to lending to and transactions with executive officers, directors, and principal shareholders, including the interests of these individuals. Other violations may result in civil monetary penalties of $5 to $25 per day or in criminal fines and penalties. In addition, the FDIC has been granted enhanced authority to withdraw or to suspend deposit insurance in certain cases.
As an insurer, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally supervises and regulates the operations of state-chartered banks that, like the Bank, are not members of the Federal Reserve. FDIC approval is required prior to any merger or consolidation involving state, nonmember banks, or the establishment or relocation of an office facility thereof. FDIC supervision and regulation is intended primarily for the protection of depositors and the DIF. The FDIC regularly examines state-chartered banks like the Bank and in connection with its examinations may identify matters necessary to improve a bank’s operation in accordance with principles of safety and soundness. Any matters identified in such examinations are required to be appropriately addressed by the bank being examined and may include maintaining capital at levels above those required by federal statutory provisions to be considered well capitalized or not paying dividends without the prior approval of the FDIC.
The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which made certain changes to the Federal deposit insurance program. These changes included merging the Bank Insurance Fund and the Savings Association Insurance Fund to form the DIF, increasing retirement account coverage to $250 and providing for inflationary adjustments to general coverage beginning in 2010, providing the FDIC with authority to set the fund’s reserve ratio within a specified range, and requiring dividends to banks if the reserve ratio exceeds certain levels. In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.
Under the Dodd-Frank Act, the FDIC adopted regulations that base deposit insurance assessments on total assets less capital rather than deposit liabilities and include off-balance sheet liabilities of institutions and their affiliates in risk-based assessments.
The Dodd-Frank Act increased the basic limit on federal deposit insurance coverage from $100 to $250 per depositor. In addition, FDIC coverage of non-interest bearing deposit transaction accounts had unlimited FDIC insurance coverage until December 31, 2012. The Dodd-Frank Act also repealed the prohibition on paying interest on demand transaction accounts, but did not extend unlimited insurance protection for these accounts.
Any insured bank which does not operate in accordance with or conform to FDIC regulations, policies and directives may be sanctioned for non-compliance. For example, proceedings may be instituted against any insured bank or any director, officer or employee of such bank that engages in unsafe and unsound practices, including the violation of applicable laws and regulations. The FDIC has the authority to terminate deposit insurance pursuant to procedures established for that purpose.
FDICIA & Prompt Corrective Action – The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), which was enacted on December 19, 1991, substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act (“FDIA”) and several other banking statutes. The additional supervisory powers and regulations mandated by FDICIA include a “prompt corrective action” program based upon five regulatory zones for banks, in which all banks are categorized, largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s capital leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. Each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The FDIC has adopted regulations implementing the prompt corrective action provisions of the FDICIA, which place financial institutions in the five categories based upon capital ratios as set forth in the tables below. The capital ratios associated with the particular categories were revised January 1, 2015 to give effect to the implementation of the Basel III capital guidelines.
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Threshold Requirements as of December 31, 2015:
| | Common Equity Tier 1 Risk-based Capital ratio | | | Total Risk-based Capital ratio | | | Tier 1 Risk-based Capital ratio | | | Tier 1 Leverage ratio | |
Well capitalized | | | 6.5 | % | | | 10 | % | | | 8 | % | | | 5 | % |
Adequately capitalized | | | 4.5 | % | | | 8 | % | | | 6 | % | | | 4 | % |
Undercapitalized | | | < 4.5 | % | | | < 8 | % | | | < 6 | % | | | < 4 | % |
Significantly undercapitalized | | | < 3 | % | | | < 6 | % | | | < 4 | % | | | < 3 | % |
Critically undercapitalized | | Tangible Equity/Total Assets ≤ 2% | |
The regulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital. Specifically, Section 38 of the FDIA and the implementing regulations provide that a federal banking agency may, after notice and an opportunity for a hearing, reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. (The FDIC may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized). The FDIC may also, as part of its examination of a bank, require that a bank maintain capital at levels above those required to be well capitalized under the prompt corrective action provisions of FDICIA. If the FDIC were to impose higher capital ratio requirements on a financial institution in connection with any written agreement, consent order, order to cease and desist, capital directive or prompt corrective action directive, that institution even if well capitalized under statutorily required minimums would be reclassified as adequately capitalized for certain purposes including the acceptance or renewal of brokered deposits and limits on the rates that the institution may pay on deposits.
FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.
FDICIA contains numerous other provisions, including accounting, audit and reporting requirements, beginning in 1995 termination of the “too big to fail” doctrine except in special cases, limitations on the FDIC’s payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised regulatory standards for, among other things, powers of state banks, real estate lending and capital adequacy. FDICIA also requires that a depository institution provide 90 days prior notice of the closing of any branches.
Various other legislation, including proposals to revise the bank regulatory system and to limit or expand the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. The Department and the FDIC examine the Bank periodically for compliance with various regulatory requirements. Such examinations, however, are for the protection of the DIF and depositors and not for the protection of investors and shareholders.
Standards for Safety and Soundness – The FDIA requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness (the “Guidelines”) to implement safety and soundness standards required by the FDIA. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The agencies also adopted asset quality and earnings standards which are part of the Guidelines. Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the Guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIA. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.
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Support of Subsidiary Institutions – Under the Dodd-Frank Act, and previously under Federal Reserve policy, the Company is required to act as a source of financial strength for the Bank, and to commit resources to support the Bank. This support can be required at times when it would not be in the best interest of the Company’s shareholders or creditors to provide such support. In the event of our bankruptcy, any commitment by the Bank to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee and entitled to a priority of payment.
Capital Requirements—The FDIC’s minimum capital standards applicable to FDIC-regulated banks and savings banks require the most highly-rated institutions to meet a “Tier 1” leverage capital ratio of at least 3.0% of total assets. Tier 1 (or “core capital”) prior to January 1, 2015 consisted of common stockholders’ equity, noncumulative perpetual preferred stock, and minority interests in consolidated subsidiaries minus all intangible assets other than limited amounts of purchased mortgage servicing rights and certain other accounting adjustments. All banks must have a Tier 1 leverage ratio of at least 100-200 basis points above the 3% minimum. The FDIC capital regulations establish a minimum leverage ratio of not less than 4% for banks that are not highly rated or are anticipating or experiencing significant growth. The Series A Preferred Stock, and, prior to its redemption, the Series B Preferred Stock, qualifies as Tier 1 capital as do the majority of the subordinated debentures the Company has previously issued, and, as described below, the Series A Preferred Stock currently continues to qualify as Tier 1 capital (even after giving effect to the Charter Amendments) following passage of the Dodd-Frank Act and will continue to qualify as Tier 1 capital under rules adopted by federal banking regulators implementing Basel III. Prior to January 1, 2015, Tier 2 capital consisted of an amount equal to the sum of (i) the allowance for possible loan losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative perpetual preferred stock with an original maturity of 20 years or more and related surplus; (iii) hybrid capital instruments (instruments with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) in an amount up to 50% of Tier 1 capital, eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus. The inclusion of the foregoing elements of Tier 2 capital is subject to certain requirements and limitations of the FDIC.
FDIC capital regulations require higher capital levels for banks which exhibit more than a moderate degree of risk or exhibit other characteristics which necessitate that higher than minimum levels of capital be maintained. Any insured bank with a tangible equity to total assets ratio of less than 2% is deemed to be operating in an unsafe and unsound condition pursuant to Section 8(a) of the FDIA unless the insured bank enters into a written agreement, to which the FDIC is a party, to correct its capital deficiency. Insured banks operating with tangible equity to total assets ratio below 2% (and which have not entered into a written agreement) are subject to an insurance removal action. Insured banks operating with lower than the prescribed minimum capital levels generally will not receive approval of applications submitted to the FDIC. Also, inadequately capitalized state nonmember banks will be subject to such administrative action as the FDIC deems necessary.
FDIC regulations also require that banks meet a risk-based capital standard. Prior to January 1, 2015, the risk-based capital standard required the maintenance of total capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital) to risk-weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%. Subsequent to January 1, 2015, these standards are 8% for total risk-based capital and 6% for Tier 1 risk-based capital. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 250%, based on the risks the FDIC believes are inherent in the type of asset or item. Prior to January 1, 2015, the components of Tier 1 capital were equivalent to those discussed above under the 3% leverage requirement. The components consisted of mandatory convertible securities, long-term subordinated debt, intermediate-term preferred stock and allowance for possible loan losses. Allowance for possible loan losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Prior to January 1, 2015, overall, the amount of capital counted toward supplementary capital could not exceed 100% of Tier 1 capital. The FDIC includes in its evaluation of a bank’s capital adequacy an assessment of risk-based capital focusing principally on broad categories of credit risk. No measurement framework for assessing the level of a bank’s interest rate risk exposure has been codified but effective board and senior management oversight of the bank’s tolerance for interest rate risk is required.
FDIC capital requirements are designated as the minimum acceptable standards for banks whose overall financial condition is fundamentally sound, which are well-managed and have no material or significant financial weakness. The FDIC capital regulations state that, where the FDIC determines that the financial history or condition, including off-balance sheet risk, managerial resources and/or the future earnings prospects of a bank are not adequate and/or a bank has a significant volume of assets classified as substandard, doubtful or loss or otherwise criticized, the FDIC may determine that the minimum adequate amount of capital for that bank is greater than the minimum standards established in the regulation.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies with total consolidated assets in excess of $1 billion. Prior to January 1, 2015, these guidelines provided that a minimum ratio of Tier 1 capital to Average Assets, less goodwill and other specified intangible assets, of at least 4% should be maintained for most bank holding companies. For a bank holding company to be considered “well capitalized” prior to January 1, 2015, it was required to maintain a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and not be subject to a written agreement, order or directive to maintain capital above a specified level. The guidelines also provided that bank holding companies experiencing
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high internal growth or making acquisitions would be expected to maintain strong capital positions substantially above the minimum supervisory levels. Furthermore, the Federal Reserve has indicated that it will consider a bank holding company’s Tier 1 capital leverage ratio, after deducting all intangibles, and other indicators of capital strength in evaluating proposals for expansion or new activities.
In late 2010, the Basel Committee on Banking Supervision issued Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (“Basel III”), a new capital framework for banks and bank holding companies. Basel III imposes a stricter definition of capital, with more focus on common equity for those banks to which it is applicable. In July 2013, the federal bank regulatory agencies, including the Federal Reserve and the FDIC, adopted final rules that revised their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in Basel III and certain provisions of the Dodd-Frank Act. The final rules, which became effective on January 1, 2015, apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million (or, if currently proposed regulatory changes are approved, $1 billion) or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules establish a new common equity Tier 1 minimum capital requirement of 4.5%, a minimum Tier 1 risk-based capital requirement of 6% (up from 4%), a total risk-based capital requirement of 8%, a Tier 1 leverage capital requirement of 4%, and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status. In order to be considered “well-capitalized” beginning on January 1, 2015, the Bank must maintain at least the following minimum capital ratios: common equity Tier 1 capital of 6.5%; Tier 1 risked-based capital of 8% (up from 6%); total risk-based capital of 10%; and Tier 1 leverage capital of 5%. These new capital requirements limit a banking organization’s capital distributions and certain discretionary bonus payments as well as a banking organization’s ability to repurchase its own shares if the banking organization does not hold a “capital conservation buffer” consisting of an additional 2.5% of Tier 1 capital (when fully phased in) in addition to the amount necessary to meet its minimum risk-based capital requirements. Beginning January 1, 2016, 0.625% of the capital conservation buffer was phased in such that the required levels of capital in order to engage in actions for which a bank or bank holding company’s capital must exceed the levels required by these buffers are as of the date hereof: a common equity Tier 1 risk-based capital ratio of 5.125%, a Tier 1 risk-based capital ratio of 6.625% and a total risk-based capital ratio of 8.625%. When fully phased in, the capital requirements, inclusive of the capital conservation buffer, would be a Tier 1 leverage ratio of 4%, a Tier 1 common risk-based equity capital ratio of 7%, a Tier 1 equity risk-based capital ratio of 8.5% and a total risk-based capital ratio of 10.5%. Under the new rules, Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Cumulative preferred stock and trust preferred securities (including associated subordinated debentures) issued after May 19, 2010 will no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010 (like our subordinated debentures) including, in the case of bank holding companies with less than $15 billion in total assets on December 31, 2009, trust preferred securities issued prior to that date will continue to count as Tier 1 capital subject to certain quantitative limitations. Our shares of Series A Preferred Stock and Series B Preferred Stock qualified as Tier 1 capital prior to the redemption of the Series B Preferred Stock and the modifications to the Series A Preferred Stock resulting from the Charter Amendments because of an exemption available for shares issued under the CPP. As a result of the modifications to the Series A Preferred Stock resulting from the Charter Amendments approved by our shareholders on February 25, 2016, our Series A Preferred Stock is expected to continue to qualify as Tier 1 capital as a result of dividends on those shares now being noncumulative. Common equity Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions. The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in Accumulated Other Comprehensive Income. We and the Bank have exercised this opt-out right. Because the Company’s total consolidated assets are below $1 billion, these new capital rules are not applicable to the Company on a consolidated basis. Should the Company’s total consolidated assets increase to more than $1 billion, the Company would then be subject to these new rules.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive by the FDIC, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.
The Dodd-Frank Act contains a number of provisions dealing with capital adequacy of insured depository institutions and their holding companies, and for the most part will result in insured depository institutions and their holding companies being subject to more stringent capital requirements. Under the so-called “Collins Amendment” to the Dodd-Frank Act, federal regulators have established minimum leverage and risk-based capital requirements for, among other entities, banks and bank holding companies with total assets in excess of $1 billion on a consolidated basis. These minimum requirements require that a bank holding company maintain a Tier 1 risk-based capital ratio of not less than 4% and a total risk-based capital ratio of not less than 8%. The Collins
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Amendment also excludes trust preferred securities issued after May 19, 2010 from being included in Tier 1 capital unless the issuing company is a bank holding company with less than $500 million in total assets. Under the regulations implementing Basel III, trust preferred securities issued prior to that date will continue to count as Tier 1 capital, subject to certain qualitative limitations, for bank holding companies with less than $15 billion in total assets, and such securities will be phased out of Tier 1 capital treatment for bank holding companies with over $15 billion in total assets over a three-year period beginning in 2015. The Collins Amendment did not exclude preferred stock issued to the U.S. Treasury through the CPP from Tier 1 capital treatment. Accordingly, the Company’s subordinated debentures and Preferred Stock issued to the U.S. Treasury through the CPP qualified as Tier 1 capital, and, as described above, the Company’s Series A Preferred Stock continues to qualify as Tier 1 capital.
Restrictions on Transactions with Affiliates – Both the Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:
| · | A bank’s loans or extensions of credit, including purchases of assets subject to an agreement to repurchase, to or for the benefit of affiliates; |
| · | A bank’s investment in affiliates; |
| · | Assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve; |
| · | The amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; |
| · | Transactions involving the borrowing or lending of securities and any derivative transaction that results in credit exposure to an affiliate; and |
| · | A bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate. |
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid the taking of low-quality assets.
The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing in the market at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.
Activities and Investments of Insured State-Chartered Banks—Section 24 of the FDIA, as amended by the FDICIA, generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investment may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
FDIC regulations implementing Section 24 of the FDIA provide that an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member, and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank or savings bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.
Loans-to-One-Borrower – The aggregate amount of loans that we are permitted to make under applicable regulations to any one borrower, including related entities, is the greater of 25% of unimpaired capital and surplus or $500. Based on the Bank’s
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capitalization at December 31, 2015, our loans-to-one borrower limit is approximately $11,964. Our house limit on loans to one borrower is equal to the loan to one borrower limit.
Federal Reserve System – In 1980 Congress enacted legislation which imposed Federal Reserve requirements (under “Regulation D”) on all depository institutions that maintain transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. NOW accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank.
Community Reinvestment Act – The Company is also subject to the provisions of the Community Reinvestment Act of 1977, which requires the appropriate federal bank regulatory agency, in connection with its regular examination of a bank, to assess the bank’s record in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the Company’s record is made available to the public. Further, such assessment is required of any bank which has applied, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution.
Interstate Banking – The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”), which was enacted on September 29, 1994, among other things and subject to certain conditions and exceptions, permits (i) bank holding company acquisitions of banks of a minimum age of up to five years as established by state law in any state, (ii) mergers of national and state banks after May 31, 1997 across state lines unless the home state of either bank has opted out of the interstate bank merger provision, (iii) branching de novo by national and state banks into others states if the state has elected this provision of the Interstate Act, and (iv) certain interstate bank agency activities after one year after enactment. Following the passage of the Dodd-Frank Act, national or state chartered banks are permitted to establish branches in states where the laws permit banks chartered in such states to establish branches.
Gramm-Leach Bliley Act – The Gramm-Leach-Bliley Act of 1999 (the “Act”) represented a pivotal point in the history of financial services regulation in the United States. The Act removed large parts of a regulatory structure that had its roots in the 1930’s and creates new opportunities for banks, other depository institutions, insurance companies and securities firms to enter into combinations. The Act also provided new flexibility to design financial products and services that better serve the banking consumer. The Act, among other provisions, (i) substantially eliminated the prohibition under the BHC Act which existed previously on affiliations between banks and insurance companies; (ii) repealed Section 20 of the Glass-Steagall Act which prohibited banks from affiliating with securities firms; (iii) set forth procedures for such affiliations; (iv) provided for the formation of financial holding companies; and (v) eliminated the blanket exclusion of banks from the definitions of the terms “broker” and “dealer” under the Exchange Act, while permitting banks to continue to conduct certain limited brokerage and dealer activities without registration under the Exchange Act as a broker-dealer.
In addition to expanding the activities in which banks and bank holding companies may engage, the Act also imposed new requirements on financial institutions with respect to customer privacy. The Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of customer privacy than the Act.
The USA Patriot Act of 2001 – The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) was enacted in October 2001. The USA Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions of all kinds is significant and wide ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: (i) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; (ii) standards for verifying customer identification at account opening; (iii) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iv) reports by non-financial trades and businesses filed with the U.S. Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10; and (v) filing of suspicious activities reports involving securities by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.
Proposed Legislation and Regulatory Action – New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions. The Company cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which the Company may be affected by any new regulation or statute. With the enactments of EESA, ARRA and the Dodd-Frank Act, and the significant amount
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of rulemaking mandated by the Dodd-Frank Act, the nature and extent of future legislative and regulatory changes affecting financial institutions remains unpredictable at this time.
Effect of Governmental Monetary Policies – The Company’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through the Federal Reserve’s statutory power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. The Company cannot predict the nature or impact of future changes in monetary and fiscal policies.
Change in Control Restrictions
Statutory Provisions
The Change in Bank Control Act requires the written consent of the FDIC be obtained prior to any person or company acquiring “control” of a state-chartered bank. Tennessee law also requires the prior written consent of the Department to acquire control of a Tennessee-chartered bank. Upon acquiring control, a company will be deemed to be a bank holding company and must register with the FRB. Conclusive control is presumed to exist if, among other things, an individual or company acquires more than 25% of any class of voting stock of a bank. Rebuttable control is presumed to exist if, among other things, a person acquires more than 10% of any class of voting stock and the issuer’s securities are registered under Section 12 of the Exchange Act (the common stock is not expected to be so registered) or the person would be the single largest stockholder. Restrictions applicable to the operations of a bank holding company and conditions that may be imposed by the FRB in connection with its approval of a company to become a bank holding company may deter companies from seeking to obtain control of the Bank.
Other
While not directly restricting efforts to acquire control of the Company, certain other characteristics of our organization may discourage attempts to acquire control of the Company. The Company’s Charter provides that approximately one-third of its Directors are elected each year (see “Management -- Classification of Directors”), thereby making it more difficult for a potential acquirer of control of the Company to replace the members of the Board of Directors than it would be if directors were elected at more frequent intervals or if a greater percentage of directors were elected at any one time.
As a result of all of the foregoing restrictions on acquisitions, the Company is a less attractive target for a “takeover” attempt than other less-highly regulated companies generally. Accordingly, these restrictions might deter offers to purchase the Company which shareholders may consider to be in their best interests, and may make it more difficult to remove incumbent management.
Monetary Policy
The Bank, like other depository institutions, is affected by the monetary policies implemented by the Board of Governors of the Federal Reserve. The Federal Reserve has the power to restrict or expand the money supply through open market operations, including the purchase and sale of government securities and the adjustment of reserve requirements. These actions may result in significant fluctuations in market interest rates, which could adversely affect the operations of the Bank, such as its ability to make loans and attract deposits, as well as market demand for loans. See “Supervision and Regulation.”
Capital Adequacy
See “Supervision and Regulation - Capital Requirements” for a discussion of bank regulatory agencies’ capital adequacy requirements.
Investing in our Common Stock involves various risks, which are particular to our company, our industry and our market area. Investors should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K and the documents incorporated by reference before deciding to purchase our common stock. It is possible that risks and uncertainties not listed below may arise or become material in the future and affect our business as currently planned and our financial condition or operating results.
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We are geographically concentrated in the Middle Tennessee area and changes in local economic conditions could impact our profitability.
Our primary market area consists of Maury County and Hickman County, Tennessee. We also have operations in Williamson County in Tennessee. Substantially all of our loan customers and most of our deposit and other customers live or have operations in this same geographic area. Accordingly, our financial results have significantly depended upon the growth in population, income levels, and deposits in these areas, along with the continued attraction of business ventures to these areas and the stability of the housing market, and our profitability is impacted by the changes in general economic conditions in these markets.
With the sale of our branch locations in Murfreesboro and Franklin, Tennessee during 2012, our results of operations have become more dependent on the economic climate in our primary market, Maury and Hickman Counties. Economic conditions in the Maury and Hickman County markets weakened in 2009, continued to be challenging in 2010 and 2011 and despite modest improvement since 2011 remain uncertain, particularly in the real estate construction and development sector.
We cannot assure you that economic conditions in the Maury and Hickman County markets will continue to improve in 2016 or thereafter, and continued uncertain economic conditions in those markets could cause us to suffer additional losses, 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 a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies.
Our loan portfolio includes a significant amount of real estate loans, including construction and development loans, which loans have a greater credit risk than residential mortgage loans.
As of December 31, 2015, approximately 90.6% of our loans held for investment were secured by real estate. Of this amount, approximately 46.5% were commercial real estate loans, 8.9% were residential real estate loans, 41.9% were construction and development loans and 2.7% were other real estate loans. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the markets we serve or in the State of Tennessee, like those we experienced in 2008, 2009, 2010, 2011 and to a lesser extent since 2011 have adversely affected, and could continue to adversely affect, the value of our assets, our revenues, results of operations and financial condition. In addition, construction and development lending is generally considered to have relatively high credit risks because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and operation of the related real estate project. Consequently, the credit quality of many of these loans deteriorated during the challenging economic environment from 2008 to 2011. Although real estate prices appear to have stabilized somewhat over the last three years, reductions in residential real estate market demand could result in renewed price reductions in home and land values (which may occur quickly) adversely affecting the value of collateral securing the construction and development loans that we hold, which could result in increases in provision for loan losses, increases in operating expenses as a result of the allocation of management time and resources to the collection and workout of loans, and higher nonperforming assets expenses, all of which would negatively impact our financial condition and results of operations.
We have a concentration of credit exposure to borrowers in certain industries, and we also target small to medium-sized businesses.
We have meaningful credit exposures to borrowers in certain businesses, including commercial and residential building lessors, new home builders, and land subdividers. These industries experienced adversity during 2008 through 2010 as a result of sluggish economic conditions, and, as a result, an increased level of borrowers in these industries were unable to perform under their loan agreements with us, or suffered loan downgrades which negatively impacted our results of operations. If the economic environment in our markets weakens in 2016 or beyond, these industry concentrations could result in increased deterioration in credit quality, past dues, loan charge offs and collateral value declines, which could cause our earnings to be negatively impacted. Furthermore, any of our large credit exposures that deteriorate unexpectedly could cause us to have to make significant additional loan loss provisions, negatively impacting our earnings.
A substantial focus of our marketing and business strategy is to serve small to medium-sized businesses in our market areas. As a result, a relatively high percentage of our loan portfolio consists of commercial loans primarily to small to medium-sized businesses. We expect to seek to expand the amount and percentage of such loans in our portfolio in 2016. During periods of lower economic growth like those we have experienced in recent years, small to medium-sized businesses may be impacted more severely and more quickly than larger businesses. Consequently, the ability of such businesses to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition.
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Changes that became effective on January 1, 2015 (and continue to be phased in) to capital requirements for bank holding companies and depository institutions may negatively impact the Company’s and the Bank’s results of operations.
In July 2013, the Federal Reserve and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bank. The final rules, which became effective as to the Bank on January 1, 2015 but are not applicable to bank holding companies (like the Company) with less than $1 billion in total assets, implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies with total assets in excess of $1 billion. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms include new minimum risk-based capital and leverage ratios. These rules also refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum capital ratios, and result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by a like percentage each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital levels fall below the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
The application of more stringent capital requirements for the Company and the Bank, like those adopted to implement the Basel III reforms (particularly the new common equity Tier 1 capital ratio), could, among other things, if applicable to the Company or the Bank, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if the Company or the Bank were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of the final rules regarding Basel III could result in the Company or the Bank having to lengthen the term of their funding, restructure their business models and/or increase their holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit the Company’s and the Bank’s ability to make distributions, including paying dividends, or buying back shares.
If the Bank’s capital levels decline, the amounts that it can lend any one borrower are reduced.
At December 31, 2015, the Bank’s legal lending limit under applicable regulations (based upon the maximum legal lending limits of 25% of capital and surplus) was $11,964. As the Bank’s capital levels declined from 2008 through 2011, its legal lending limit was reduced. Increases in the Bank’s total capital over the last three years have reversed that trend and increased the limit. If the legal lending limit is reduced below the level of credit, including lines of credit, that the Bank has extended to a borrower, it can no longer renew or continue undrawn credit lines or make additional loans or advances to its largest borrower relationships, and its ability to renew outstanding loans to such customers is extremely limited. Additionally, if the Bank seeks to reduce the amount of credit that it has extended to a particular borrower because of a reduction in its legal lending limit, the borrower may decide to move its loan relationships to another financial institution with legal lending limits high enough to accommodate the borrower’s relationships. A loss of loan customers as a result of being subject to lower lending limits, could negatively impact the Bank’s liquidity and results of operations.
We could sustain additional losses if our asset quality deteriorates.
Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. A significant portion of our loans are real estate based or made to real estate based borrowers, and the credit quality of such loans has at times in the past deteriorated and could deteriorate further if real estate market conditions decline again or fail to continue to improve nationally or, more importantly, in our market areas. We have sustained losses, and could continue to sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to further deterioration in asset quality in a timely manner. Problems with asset quality could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase, which could adversely affect our results of operations and financial condition.
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An inadequate allowance for loan losses would reduce our earnings.
The risk of credit losses on loans varies with, among other things, general economic conditions, real estate market conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan.
Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon its estimate of probable incurred credit losses, using past loan experience, volume and types of loans in the portfolio, nature and value of the portfolio, specific borrower and collateral value information, internal loan classifications, trends in classifications, volumes and trends in delinquencies, nonaccruals and charge-offs, loss experience of various loan categories, economic conditions and other factors. Reflecting management’s belief that our asset quality metrics were improving, in 2015 we reduced the amount of our allowance for loan losses expressed as a percentage of our total loans by taking a negative provision expense. If the quality of our loan portfolio were to deteriorate or we were to grow our loan portfolio materially we would likely need to build our allowance for loan losses through a charge against earnings to maintain the allowance at appropriate levels after loan charge offs less recoveries. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, our earnings and capital could be significantly and adversely affected.
In addition, federal and state regulators periodically review our loan portfolio and may require us to increase our allowance for loan losses or recognize loan charge-offs. Their conclusions about the quality of a particular borrower of ours or of our entire loan portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge offs as required by these regulatory agencies could have a negative effect on our operating results. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our management’s control. These additions may require increased provision expense which would negatively impact our results of operations.
Our ability to achieve and thereafter maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions.
We, and the Bank, are required to maintain certain capital levels established by banking regulations or specified by bank regulators, including those capital maintenance standards imposed on us as a result of the Dodd-Frank Act and the federal regulations implementing Basel III, and we are required to serve as a source of financial strength to the Bank. At December 31, 2015, the Bank’s capital ratios exceeded the levels required to be considered “well-capitalized”. The Company, separate from the Bank, is regulated by the FRB. As of December 31, 2015, the Company was a party to a Written Agreement with the FRB prohibiting the Company from, among other things, paying interest on its subordinated debentures and dividends on its common and Preferred Stock without the prior approval of the FRB. On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of February 29, 2016. The Written Agreement did not establish any specific capital ratios that must be attained by the Company. We must also maintain adequate funding sources in the normal course of business to support our operations and fund outstanding liabilities. Our, and the Bank’s, ability to maintain capital levels at or above those required by federal banking regulations, as well as adequate sources of funding and liquidity could be impacted by changes in the capital markets in which we operate and deteriorating economic and market conditions. In addition, we have from time to time supported our capital position with the issuance of trust preferred securities. The trust preferred market has deteriorated significantly since the second half of 2007 and following the passage of the Dodd-Frank Act and the issuances of the federal regulations implementing Basel III we will no longer be able to count trust preferred securities issued after May 19, 2010 as Tier 1 capital, if our total assets exceed $500 million.
Failure by the Bank to meet applicable capital guidelines or commitments or to satisfy certain other regulatory requirements could subject the Bank to a variety of enforcement remedies available to the federal and state regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC.
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Though over the last several years we have been focused on preserving and improving the amount and type of our capital including by reducing the size of the Bank, as our financial health continues to improve we may seek to expand our operations.
While for the last several years we have been focused on reducing the size of the Bank and improving our capital position, we believe growth in our loan portfolio will be important in improving our core profitability over the next several years. Loan demand remains sluggish in our key markets and competition for loans is intense. As a result, we may explore opportunities to grow our loan portfolio through means other than organic growth, including by way of expansion into new markets or existing markets. This type of expansions involve various risks, including:
Management of Growth. We may be unable to successfully:
| · | maintain loan quality in the context of significant loan growth; |
| · | avoid diversion or disruption of our existing operations or management as well as those of an acquired institution; |
| · | maintain adequate management personnel and systems to oversee such growth; |
| · | maintain adequate internal audit, loan review and compliance functions; and |
| · | implement additional policies, procedures and operating systems required to support such growth. |
Operating Results. There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Execution on a growth strategy could lead to increases in overhead expenses if we were to add new offices and staff. Our historical results may not be indicative of future results or results that may be achieved if we were to increase the number and concentration of our branch offices in our existing or new markets.
Development of Offices. There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, any new branches we establish can be expected to negatively impact our earnings for some period of time until they reach certain economies of scale. The same is true for our efforts to expand in these markets with the hiring of additional seasoned professionals with significant experience in that market. Our expenses could be further increased if we encounter delays in opening any of our new branches. We may be unable to accomplish future branch expansion plans due to a lack of available satisfactory sites, difficulties in acquiring such sites, increased expenses or loss of potential sites due to complexities associated with zoning and permitting processes, higher than anticipated merger and acquisition costs or other factors. Finally, we have no assurance any branch will be successful even after it has been established or acquired, as the case may be.
Regulatory and Economic Factors. Growth of banks like ours may be adversely affected by a number of regulatory and economic developments or other events. Failure to obtain required regulatory approvals, changes in laws and regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may prevent or adversely affect our growth and expansion. Such factors may cause us to alter our growth and expansion plans or slow or halt the growth and expansion process, which may prevent us from entering our expected markets or allow competitors to gain or retain market share in our existing markets.
Failure to successfully address these and other issues related to our expansion could have a material adverse effect on our financial condition and results of operations, and could adversely affect our ability to successfully implement our business strategy.
We have increased levels of other real estate, primarily as a result of foreclosures, and we anticipate higher levels of foreclosed real estate expense.
As we continue to resolve non-performing real estate loans, we have increased levels of foreclosed properties. Foreclosed real estate expense consists of three types of charges: maintenance costs, valuation adjustments owed on new appraisal values and gains or losses on disposition. These charges will increase as levels of other real estate increase, and also as local real estate values decline, negatively affecting our results of operations. Management has been successful in offsetting a substantial portion of these expenses through rental of properties that are owned, but bank regulations limit the amount of time that the Bank may hold these properties before it must divest the property. If the Bank is required to divest of a property before real estate market conditions improve further it may suffer a loss on the sale of the property. Moreover, if market conditions change such that market rates for rental properties decline in the Bank’s market area, the Bank’s income could be further negatively impacted.
Environmental liability associated with commercial lending could result in losses.
In the course of business, the Bank has, and may in the future acquire through foreclosure, properties securing loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be
23
discovered on these properties. In this event, we, or the Bank, might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties, or, if lower, could nonetheless materially and adversely affect our results of operations. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have a material adverse effect on our business, results of operations and financial condition.
Liquidity needs could adversely affect our results of operations and financial condition.
We rely on dividends from the Bank as our primary source of funds, and the Bank relies on customer deposits and loan repayments as its primary source of funds. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability 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, inclement weather, natural disasters, and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, and general economic conditions. Historically, we have relied to a significant degree on national time deposits and brokered deposits, which may be more volatile and expensive than local time deposits. Over the last three years, we have reduced our reliance on these types of deposits. At December 31, 2015, national time deposits represented 1.4% of our total deposits and brokered deposits represented 0.3% of our total deposits. While we believe that our stable core deposit base and secondary sources of liquidity, including Federal Home Loan Bank advances and federal funds lines of credit from correspondent banks, are currently adequate for our liquidity needs, there can be no assurance they will be sufficient to meet future liquidity demands.
We rely on dividends from our bank subsidiary as our primary source of liquidity and payment of these dividends is limited under Tennessee law.
Under Tennessee law, the amount of dividends that may be declared by the Bank in a year without approval of the Commissioner of the Department is limited to net income for that calendar year combined with retained net income for the two preceding years. In addition, the FDIC and the Department have broad discretion to impose limitations on the Bank’s ability to pay dividends to us. As a result of the restriction on the Bank’s ability to pay dividends to us, we may, in the future, be required to defer the interest on our subordinated debentures and miss dividend payments on the Series A Preferred Stock.
Although we have initiated efforts to reduce our reliance on noncore funding, it is possible that the Bank could be required to seek additional non-core funds if market conditions change, reducing the amount of liquidity provided by the Bank’s core deposits.
In addition to the traditional core deposits, such as demand deposit accounts, interest checking, money market savings and certificates of deposits, we have historically utilized several noncore funding sources, such as brokered certificates of deposit, Federal Home Loan Bank of Cincinnati advances, Federal funds purchased and other sources. We have utilized these noncore funding sources to fund the ongoing operations and growth of the Bank. Although we believe that our available cash and other liquid assets, including our available for sale investment securities and loan repayments, and our secondary sources of liquidity will provide sufficient liquidity to meet these demands, we can provide no assurance that these sources of liquidity will be adequate. The availability of these noncore funding sources are subject to broad economic conditions and to investor assessment of our financial strength and, as such, the cost of funds may fluctuate significantly and/or be restricted, thus impacting our net interest income, our immediate liquidity and/or our access to additional liquidity. We have somewhat similar risks to the extent that core deposits exceed the amount of deposit insurance coverage available.
Negative developments in the U.S. and local economy and in local real estate markets have adversely impacted our operations and results and may continue to adversely impact our results in the future.
Economic conditions in the markets in which we operate deteriorated significantly between early 2008 and the middle of 2010 and remained sluggish into 2012. As a result, we incurred significant losses in 2009, 2010 and 2011. Over the last three years, the Bank continued to work through its existing problem loans and greatly reduced the balance of problem loans through transfers to other real estate, successful resolutions, and charge offs. Additionally, the Bank had fewer loan relationships to become newly classified as problem loans during 2014 and 2015 than in prior years, which contributed to a substantial reduction in provision for loan losses. Despite these improvements, we continue to have higher levels of nonperforming assets than we would prefer which will continue to negatively impact our results of operations. Management anticipates that additional progress will be made in 2016 to reduce overall problem loans.
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Implementation of the various provisions of the Dodd-Frank Act may increase our operating costs or otherwise have a material effect on our business, financial condition or results of operations.
On July 21, 2010, President Obama signed the Dodd-Frank Act. This landmark legislation includes, among other things, (i) the creation of a Financial Services Oversight Counsel to identify emerging systemic risks and improve interagency cooperation; (ii) the elimination of the Office of Thrift Supervision and the transfer of oversight of federally chartered thrift institutions and their holding companies to the Office of the Comptroller of the Currency and the Federal Reserve; (iii) the creation of a Consumer Financial Protection Agency authorized to promulgate and enforce consumer protection regulations relating to financial products that would affect banks and non-bank finance companies; (iv) the establishment of new capital and prudential standards for banks and bank holding companies; (v) the termination of investments by the U.S. Treasury under TARP; (vi) enhanced regulation of financial markets, including the derivatives, securitization and mortgage origination markets; (vii) the elimination of certain proprietary trading and private equity investment activities by banks; (viii) the elimination of barriers to de novo interstate branching by banks; (ix) a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250; (x) the authorization of interest-bearing transaction accounts; and (xi) changes in how the FDIC deposit insurance assessments will be calculated and an increase in the minimum designated reserve ratio for the DIF.
Certain provisions of the legislation were not immediately effective or are subject to required studies and implementing regulations. Further, community banks with less than $10 billion in assets (like the Bank) are exempt from certain provisions of the legislation. Although certain regulations implementing portions of the Dodd-Frank Act have been promulgated, we are still unable to predict how this significant legislation may be interpreted and enforced or how implementing regulations and supervisory policies may affect us. There can be no assurance that these or future reforms will not significantly increase our compliance or operating costs or otherwise have a significant impact on our business, financial condition and results of operations.
National or state legislation or regulation may increase our expenses and reduce earnings.
Federal bank regulators are increasing regulatory scrutiny and imposing additional restrictions (including those originating from the Dodd-Frank Act) on financial institutions. Changes in tax law, federal legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer protection laws, and capital requirements, among others, can result in significant increases in our expenses and/or charge-offs, which may adversely affect our earnings. Changes in state or federal tax laws or regulations can have a similar impact. Furthermore, financial institution regulatory agencies are expected to continue to be very aggressive in responding to concerns and trends identified in examinations, including the continued issuance of additional enforcement or supervisory actions. These actions, whether formal or informal, could result in our agreeing to limitations or to take actions that limit our operational flexibility, limit the Bank’s ability to pay dividends to us, restrict our growth or increase our capital or liquidity levels. Failure to comply with any formal or informal regulatory restrictions, like the Written Agreement, would lead to further regulatory enforcement actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans.
Competition from financial institutions and other financial service providers may adversely affect our profitability.
The banking business is highly competitive, and we experience competition in each of our markets, particularly our Williamson County, Tennessee market, where we have a small market share. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other community banks, super-regional and national financial institutions that operate offices in our primary market areas and elsewhere. Many of our competitors are well-established, larger financial institutions that have greater resources and lending limits and a lower cost of funds than we have.
If the federal funds rate remains at current extremely low levels, our net interest margin, and consequently our net earnings, may continue to be negatively impacted.
Because of significant competitive deposit pricing pressures in our market and the negative impact of these pressures on our cost of funds, coupled with the fact that a significant portion of our loan portfolio has variable rate pricing that moves in concert with changes to the Federal Reserve’s federal funds rate (which is at an extremely low rate as a result of current economic conditions), our net interest margin continues to be negatively impacted. Because of these competitive pressures, we have been unable to lower the rate that we pay on interest-bearing liabilities to the same extent and as quickly as the yields we charge on interest-earning assets. Additionally, the amount of nonaccrual loans and other real estate owned has been and may continue to be elevated. As a result, our net interest margin, and consequently our profitability, have been, and may continue to be, negatively impacted.
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Changes in interest rates could adversely affect our results of operations and financial condition.
Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense, our largest recurring expenditure. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. In a period of rising interest rates, our interest expense, particularly deposit costs, could increase in different amounts and at different rates, while the interest that we earn on our assets, particularly, fixed rate assets, may not change in the same amounts or at the same rates. Accordingly, increases in interest rates could decrease our net interest income. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.
Loss of our senior executive officers or other key employees could impair our relationship with our customers and adversely affect our business.
We have assembled a senior management team which has substantial background and experience in banking and financial services in the Nashville MSA, and particularly the Maury County, Tennessee market. Loss of these key personnel could negatively impact our earnings because of their skills, customer relationships and/or the potential difficulty of promptly replacing them.
Events beyond our control may disrupt operations and harm operating results.
We may be adversely affected by a war, terrorist attack, third party acts, natural disaster or other catastrophe. A catastrophic event could have a direct negative impact on us, our customers, the financial markets or the overall economy. It is impossible to fully anticipate and protect against all potential catastrophes. A security breach, criminal act, military action, power or communication failure, flood, hurricane, severe storm or the like could lead to service interruptions, data losses for customers, disruptions to our operations, or damage to our facilities. Any of these could have a material adverse effect on our business and financial results. In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage.
We operate in a highly regulated environment that is becoming more heavily regulated and are supervised and examined by various federal and state regulatory agencies who may adversely affect our ability to conduct business.
The Company is a bank holding company regulated by the Federal Reserve. The Bank is a state-chartered bank and comes under the supervision of the Commissioner of the Department and the FDIC. The Bank is also governed by the laws of the state of Tennessee and federal banking laws under, among others, the FDICA, the FDICIA and the Federal Reserve Act. The Bank is also regulated by other agencies including, but not limited to, the Internal Revenue Service, OSHA, and the Department of Labor. These and other regulatory agencies impose certain regulations and restrictions on the Bank, including:
| · | explicit standards as to capital and financial condition; |
| · | limitations on the permissible types, amounts and extensions of credit and investments; |
| · | requirements for brokered deposits; |
| · | restrictions on permissible non-banking activities; and |
| · | restrictions on dividend payments. |
Federal and state regulatory agencies have extensive discretion and power to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. As a result, we must expend significant time and expense to assure that we are in compliance with regulatory requirements and agency practices.
We also undergo periodic examinations by one or more regulatory agencies. Following such examinations, we may be required, among other things, to make additional provisions to our allowance for loan loss, to restrict our operations, to maintain capital at levels above these required by federal statutes to be well capitalized or to not pay dividends. In some cases our regulators may seek to impose civil monetary penalties against us for failure to comply with applicable laws and regulations. These actions would result from the regulators’ judgments based on information available to them at the time of their examination.
Our operations are also governed by a wide variety of state and federal consumer protection laws and regulations. These federal and state regulatory restrictions limit the manner in which we may conduct business and obtain financing. These laws and regulations can and do change significantly from time to time and any such change could adversely affect our results of operations.
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Our Series A Preferred Stock is senior to our Common Stock and holders of the Series A Preferred Stock have certain rights and preferences that are senior to those of the holders of our Common Stock.
Our Series A Preferred Stock ranks senior to our Common Stock and all other equity securities of ours designated as ranking junior to these shares. So long as any of these shares remain outstanding, unless dividends for a period in which we desire to pay a dividend on our Common Stock have been paid or are contemporaneously declared and paid in full on the Series A Preferred Stock, no dividend whatsoever shall be paid or declared on our Common Stock. Furthermore, the Series A Preferred Stock is entitled to a liquidation preference over our Common Stock in the event of our liquidation, dissolution or winding up.
Holders of the Series A Preferred Stock have the right to elect two directors to our Board of Directors.
As described above, we have agreed with the FRB that we will not pay dividends on our Common Stock or Series A Preferred Stock without the FRB’s prior approval. We also are prohibited from paying dividends on our Common Stock and Series A Preferred Stock at times when we are not current on the payment of interest on our subordinated debentures. Since we have failed to pay dividends on the Series A Preferred Stock for at least six quarters, the holders of the Series A Preferred Stock have the right to increase the authorized number of directors constituting our Board of Directors by two. However, the holders have not exercised this right; yet, they continue to have this right until all accrued and unpaid dividends on the Preferred Stock for all past dividend periods have been paid in full.
Holders of our junior subordinated debentures have rights that are senior to those of our shareholders.
We have issued trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. At December 31, 2015, we had outstanding trust preferred securities and accompanying junior subordinated debentures totaling $23 million. Payments of the principal and interest on the trust preferred securities of these trusts are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures we have issued to the trusts are senior to shares of our Series A Preferred Stock and Common Stock. As a result, and as described elsewhere in this report, we must make payments on the junior subordinated debentures before any dividends can be paid on our Common Stock or Series A Preferred Stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our Common Stock or Series A Preferred Stock. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our Series A Preferred Stock or Common Stock.
We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of operations.
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify these systems as circumstances warrant, the security of our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact.
We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
In addition, we provide our customers the ability to bank remotely, including over the Internet. The secure transmission of confidential information is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation, results of operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject us to additional regulatory scrutiny, expose us to civil litigation and possible financial liability and cause reputational damage.
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We are subject to certain litigation, and our expenses related to this litigation may adversely affect our results.
We are from time to time subject to certain litigation in the ordinary course of our business. These claims and legal actions, including supervisory actions by our regulators, could involve large monetary claims and significant defense costs. The outcome of these cases is uncertain. However, during the current credit crisis, we have seen both the number of cases and our expenses related to those cases increase. Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects.
An established public market for our Common Stock does not currently exist.
While our Common Stock is freely transferable by most shareholders, there is not an established public market for trading in our Common Stock and we cannot be sure when an active or established trading market will develop for our Common Stock, or, if one develops, that it will continue. Our Common Stock is traded locally among individuals and is not currently listed on The NASDAQ Global Market, the NASDAQ Capital Market or any other securities market.
The Company’s Common Stock is thinly traded and recent prices may not reflect the prices at which the stock would trade in an active trading market.
Because the Company’s Common Stock is not traded through an organized exchange, but rather in individually-arranged transactions between buyers and sellers, recent prices at which the stock has traded may not necessarily reflect the actual value of the Company’s Common Stock. A shareholder’s ability to sell the shares of Company Common Stock in a timely manner may be substantially limited by the lack of a trading market for the Common Stock.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
The Company’s principal office building is located at 501 South James M. Campbell Boulevard, Columbia, Tennessee 38401. The Bank constructed the building and owns the building and the property.
The Bank operates a branch office at 601 North Garden Street, Columbia, Tennessee. The Bank owns the building and the property at this location.
In October 2007, the Company acquired First National with branches at 314 North Public Square, Centerville, Tennessee and 5200 Highway 100, Lyles, Tennessee. As a result of the acquisition, the Company now owns the building and the property at both locations. In addition, the Company owns a storage facility located at Hackberry Street East in Centerville.
The Bank operates a branch office at 105 Public Square, Mount Pleasant, Tennessee. The Bank owns the building and the property at this location.
The Bank operates a branch office in the Wal-Mart store at 2200 Brookmeade Drive in Columbia. The Bank leases the space occupied by the branch at this location.
The Bank has an operations building located at 501 South James Campbell Boulevard, Columbia, Tennessee, 38401. The Bank owns the building and property.
The Bank operates a branch office at Neely’s Mill, 1412 Trotwood Avenue, Columbia, Tennessee. The Bank owns the building and leases the property.
The Bank operates a branch office at 4809 Columbia Pike, Thompson Station, Tennessee. The Bank owns the building and property.
At December 31, 2015, the cost of office properties and equipment (less allowances for depreciation and amortization) owned by us was $11,673.
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The Company and the Bank are party to certain routine claims and litigation that are incidental to the business and occur in the normal course of operations. In the opinion of management, none of these matters, when resolved, will have a material effect on the financial position of the Company, the Bank or their respective future operations.
ITEM 4. | MINE SAFETY DISCLOSURES |
None.
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PART II
ITEM 5: | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
No public market exists for the Company's Common Stock, and there can be no assurance that a public trading market for the Company's Common Stock will develop. As of March 9, 2016 there were 2,108 holders of record of the Company’s Common Stock and 3,296,666 shares outstanding, excluding vested options. As of March 9, 2016, there were 40,400 vested options outstanding to purchase shares of Common Stock.
While there is no public market for the Company's Common Stock, the most recent trade of the Company's Common Stock known to the Company occurred on November 17, 2015 at a price of $3.90 per share. These sales are isolated transactions and, given the small volume of trading in the Company's Common Stock, may not be indicative of its present value. Below is a table which sets forth high and low prices of the Company’s Common Stock of which the Company is aware for the relevant quarters during the three fiscal years ended December 31:
2015 | | High | | | Low | |
First quarter | | $ | 6.00 | | | $ | 6.00 | |
Second quarter | | $ | 6.00 | | | $ | 1.79 | |
Third quarter | | $ | 5.00 | | | $ | 1.79 | |
Fourth quarter | | $ | 5.00 | | | $ | 3.00 | |
2014 | | High | | | Low | |
First quarter | | $ | 6.00 | | | $ | 6.00 | |
Second quarter | | $ | 6.00 | | | $ | 6.00 | |
Third quarter | | $ | 6.00 | | | $ | 6.00 | |
Fourth quarter | | $ | 6.00 | | | $ | 6.00 | |
2013 | | High | | | Low | |
First quarter | | $ | 7.00 | | | $ | 5.00 | |
Second quarter | | $ | 5.00 | | | $ | 5.00 | |
Third quarter | | $ | 6.00 | | | $ | 5.00 | |
Fourth quarter | | $ | 6.00 | | | $ | 6.00 | |
Historically, the principal sources of cash revenue for the Company were dividends paid to it by the Bank. There are certain restrictions on the payment of these dividends imposed by federal banking laws, regulations and authorities. Further, the dividend policy of the Bank is subject to the discretion of the Board of Directors of the Bank and will depend upon such factors as future earnings, financial conditions, cash needs, capital adequacy and general business conditions. The Company paid no dividends to common shareholders in 2015, 2014 or 2013. Tennessee law provides that without the approval of the Commissioner of the Department dividends may be paid by the Bank in an amount equal to net income in the calendar year the dividend is declared plus retained net income for the prior two years. Tennessee laws regulating banks require certain charges against and transfers from an institution's undivided profits account before undivided profits can be made available for the payment of dividends.
In addition to the limitations on the Company’s ability to pay dividends under Tennessee law, the Company’s ability to pay dividends on its Common Stock is also limited by the terms of the Series A Preferred Stock (which prohibit dividends on all Common Stock at times when there are declared but unpaid dividends on the Series A Preferred Stock) and by the terms of the indentures pursuant to which its subordinated debentures have been issued.
In the future, the declaration and payment of dividends on the Company's Common Stock will depend upon the Company's earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company's ability to service any equity or debt obligations senior to the Common Stock, including the Series A Preferred Stock, and other factors deemed relevant by the Board of Directors.
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ITEM 6. | SELECTED FINANCIAL DATA (Dollars in thousands, except per share data) |
The following selected financial data for the five years ended December 31, 2015, was derived from our consolidated financial statements and the related notes thereto. This data should be read in conjunction with our audited consolidated financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
INCOME STATEMENT DATA: | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 17,176 | | | $ | 15,936 | | | $ | 17,444 | | | $ | 22,728 | | | $ | 28,686 | |
Interest expense | | | 2,797 | | | | 2,971 | | | | 4,175 | | | | 7,020 | | | | 9,088 | |
Net interest income | | | 14,379 | | | | 12,965 | | | | 13,269 | | | | 15,708 | | | | 19,598 | |
(Reversal of) provision for loan losses | | | (2,257 | ) | | | (1,014 | ) | | | 45 | | | | 2,700 | | | | 13,029 | |
Noninterest income | | | 2,514 | | | | 2,668 | | | | 2,687 | | | | 7,994 | | | | 3,353 | |
Noninterest expense | | | 14,438 | | | | 14,240 | | | | 14,183 | | | | 17,959 | | | | 26,529 | |
Net income (loss) | | | 17,407 | | | | 2,407 | | | | 1,728 | | | | 3,043 | | | | (15,052 | ) |
Net income(loss) allocated to common shareholders | | | 17,022 | | | | 803 | | | | 559 | | | | 1,883 | | | | (16,197 | ) |
BALANCE SHEET DATA: | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 469,940 | | | $ | 443,555 | | | $ | 448,443 | | | $ | 510,715 | | | $ | 616,773 | |
Total securities | | | 118,824 | | | | 91,440 | | | | 81,926 | | | | 70,180 | | | | 63,660 | |
Total loans, net | | | 260,194 | | | | 251,265 | | | | 265,668 | | | | 297,114 | | | | 361,650 | |
Allowance for loan losses | | | (4,275 | ) | | | (5,171 | ) | | | (8,039 | ) | | | (9,767 | ) | | | (19,546 | ) |
Total deposits | | | 416,714 | | | | 398,080 | | | | 407,532 | | | | 448,946 | | | | 555,037 | |
FHLB advances | | | — | | | | — | | | | — | | | | 13,000 | | | | 16,000 | |
Subordinated debentures | | | 23,000 | | | | 23,000 | | | | 23,000 | | | | 23,000 | | | | 23,000 | |
Total shareholders’ equity | | | 22,965 | | | | 10,886 | | | | 8,616 | | | | 10,336 | | | | 9,575 | |
PER COMMON SHARE DATA: | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) per share - basic | | $ | 5.20 | | | $ | 0.25 | | | $ | 0.17 | | | $ | 0.58 | | | $ | (4.95 | ) |
Earnings (loss) per share-diluted | | | 5.20 | | | | 0.25 | | | | 0.17 | | | | 0.58 | | | | (4.95 | ) |
Cash dividend declared and paid | | | — | | | | — | | | | — | | | | — | | | | — | |
Book value | | | 3.38 | | | | (2.38 | ) | | | (3.07 | ) | | | (2.48 | ) | | | (2.66 | ) |
PERFORMANCE RATIOS: | | | | | | | | | | | | | | | | | | | | |
Return on average assets | | | 3.83 | % | | | 0.54 | % | | | 0.35 | % | | | 0.48 | % | | | (2.35 | )% |
Return on average equity | | | 141.58 | % | | | 24.29 | % | | | 18.44 | % | | | 16.82 | % | | | (83.21 | )% |
Net interest margin (1) | | | 3.42 | % | | | 3.18 | % | | | 3.05 | % | | | 2.93 | % | | | 3.20 | % |
ASSET QUALITY RATIOS: | | | | | | | | | | | | | | | | | | | | |
Nonperforming loans to total loans | | | 2.75 | % | | | 4.21 | % | | | 12.42 | % | | | 11.08 | % | | | 10.96 | % |
Net loan charge offs to average loans | | | (0.52 | )% | | | 0.71 | % | | | 0.61 | % | | | 3.42 | % | | | 2.17 | % |
Allowance for loan losses to total loans | | | 1.62 | % | | | 2.02 | % | | | 2.94 | % | | | 3.18 | % | | | 5.13 | % |
CAPITAL RATIOS: | | | | | | | | | | | | | | | | | | | | |
Leverage ratio (2) | | | 4.82 | % | | | 3.52 | % | | | 3.15 | % | | | 2.40 | % | | | 1.61 | % |
Tier 1 risk-based capital ratio | | | 7.09 | % | | | 5.71 | % | | | 5.05 | % | | | 4.23 | % | | | 2.37 | % |
Total risk-based capital ratio | | | 11.91 | % | | | 9.83 | % | | | 8.84 | % | | | 7.62 | % | | | 4.85 | % |
(1) | Net interest margin is the result of net interest income for the period divided by average interest earning assets. |
(2) | Leverage ratio is defined as Tier 1 capital (pursuant to risk-based capital guidelines) as a percentage of adjusted average assets. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
(Dollars in thousands, except per share data)
Unless indicated otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “the Company” or “Community First” as used herein refer to Community First, Inc. and its subsidiaries, including Community First Bank & Trust, which we sometimes refer to as “the Bank,” “our Bank” or “our Bank subsidiary”. The Bank has one subsidiary, Community First, Properties, Inc., which we refer to as “Properties” herein. The following is a discussion of our financial condition at December 31, 2015 and December 31, 2014, and our results of operations for the three-year period ended December 31, 2015. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the annual audited consolidated financial statements. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere herein.
FORWARD-LOOKING STATEMENTS
Certain of the statements made herein, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning and subject to the protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation, those described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K and the following:
| · | deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; |
| · | greater than anticipated deterioration or lack of sustained growth in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA; |
| · | changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions or regulatory development; |
| · | failure to maintain capital levels above levels required by banking regulations or commitments or agreements we make with our regulators; |
| · | the inability to comply with regulatory capital requirements and required capital maintenance levels, including those resulting from the implementation of the Basel III capital guidelines, and to secure any required regulatory approvals for capital actions; |
| · | the vulnerability of our network and our online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human errors, natural disasters, power loss and other security breaches; |
| · | the inability to grow our loan portfolio; |
| · | governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in banking, securities and tax laws and regulations; |
| · | the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities; |
| · | continuation of the historically low short-term interest rate environment; |
| · | the ability to retain large, uninsured deposits; |
| · | rapid fluctuations or unanticipated changes in interest rates; |
| · | the development of any new market; |
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| · | a merger or acquisition; |
| · | any activity that would cause us to conclude that there was impairment of any asset, including core deposit intangible or any other intangible asset; |
| · | the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services; |
| · | changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); |
| · | the failure of assumptions underlying the establishment of reserves for possible loan losses and other estimates; |
| · | further deterioration in the valuation of other real estate owned; |
| · | changes in accounting policies, rules and practices; |
| · | the actions of the owners of the preferred securities (the “Preferred Stock”) we sold through our participation in the United States Department of the Treasury’s (the “U.S. Treasury”) Capital Purchase Program (“CPP”); |
| · | changes in technology or products that may be more difficult, or costly, or less effective, than anticipated; |
| · | the effects of war or other conflict, acts of terrorism or other catastrophic events that may affect general economic conditions; and |
| · | other circumstances, many of which may be beyond our control. |
All written or oral forward-looking statements that are made by or are attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.
General
Community First, Inc., (the “Company”) is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and became so upon the acquisition of all the voting shares of the Bank on August 30, 2002. The Company was incorporated under the laws of the state of Tennessee as a Tennessee corporation on April 9, 2002. We conduct substantially all of our activities through and derive substantially all of our income from the Bank.
The Bank commenced business on May 18, 1999, as a Tennessee-chartered commercial bank whose deposits are insured by the Federal Deposit Insurance Corporation’s (the “FDIC”) Deposit Insurance Fund. The Bank is primarily regulated by the Tennessee Department of Financial Institutions (the “Department”) and the FDIC. The Bank’s sole subsidiary is Community First Properties, Inc., a Maryland corporation, which was established as a real estate investment trust (“REIT”) pursuant to Internal Revenue Service regulations but which terminated its REIT election effective March 30, 2012. On March 30, 2012, the Company dissolved two of the Bank’s previously existing subsidiaries, Community First Title, Inc., a Tennessee corporation, and CFBT Investments, Inc., a Nevada corporation. The assets of these two subsidiaries were distributed to the Bank. The Bank conducts a wide range of banking activities and its principal business is to accept demand and saving deposits from the general public and to make residential mortgage, commercial, and consumer loans.
Substantially all of the Company’s activities are conducted through the Bank locations, which include a main office and three branch offices in Columbia, Tennessee, one branch office in Mount Pleasant, Tennessee, one branch office in Thompson’s Station, Tennessee, one branch office in Centerville, Tennessee, and one branch office in Lyles, Tennessee. The Company also operates seven automated teller machines in Maury County, one automated teller machine in Williamson County and two automated teller machines in Hickman County, Tennessee.
At December 31, 2015, the Company employed 106 full-time equivalent employees and 111 total employees. The Company’s employees are not represented by a union or covered by a collective bargaining agreement.
The Company’s and its subsidiaries’ principal business is to accept demand, savings and time deposits from the general public and to make residential mortgage, commercial, construction, and consumer loans. The Company’s results of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans and investments, and the interest expense incurred on interest bearing liabilities, such as deposits, subordinated debentures, and other borrowings. The Company also generates noninterest income, including service charges on deposit accounts, mortgage lending income, investment
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service income, earnings on bank-owned life insurance (“BOLI”), and other charges, and fees. The Company’s noninterest expense consists primarily of employee compensation and benefits, net occupancy and equipment expense, expenses associated with the Bank’s portfolio of other real estate owned and other operating expenses. The Company’s results of operations are significantly affected by its provision for loan losses and its provision for income taxes.
The banking and financial services business is highly competitive. The increasingly competitive environment faced by banks is a result primarily of changes in laws and regulations, changes in technology and product delivery systems, and the continued consolidation among financial services providers. The Company competes for loans, deposits, trust and investment advisory services and clients with other commercial banks, savings and loan associations, securities and brokerage companies, investment advisors, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers.
The following discussion provides a summary of the Company’s operations for the past three years and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report.
Critical Accounting Estimates
The accounting principles we follow and our methods of applying these principles conform with the accounting principles generally accepted in the United States of America and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, fair value of financial instruments, including securities and other real estate owned, other-than-temporary impairment of securities, intangible assets, and income taxes have been critical to the determination of our financial position, results of operations and cash flows.
Securities: Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Allowance for Loan Losses: Credit risk is inherent in the business of extending loans to borrowers. This credit risk is addressed through a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management determines the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is identified as impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be collected when due according to the contractual terms of the loan agreement. However, there are some loans that are termed impaired because of doubt regarding collectability of interest and principal according to the contractual terms, which are both fully secured by collateral and are current in their interest and principal payments. Additionally, loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
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Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans over $150 are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non‑impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan portfolio segments have been identified with a discussion of the risk characteristics of these portfolio segments: real estate construction; 1-4 family residential; commercial real estate; other real estate secured; commercial, financial, and agricultural; consumer; tax exempt; and other loans.
Other Real Estate Owned: Real estate acquired through foreclosure on a loan or by surrender of the real estate in lieu of foreclosure is called “OREO”. OREO is initially recorded at the fair value of the property less estimated costs to sell, which establishes a new cost basis. OREO is subsequently accounted for at the lower of cost or fair value of the property less estimated costs. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Valuation adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Valuation adjustments are also required when the listing price to sell an OREO has had to be reduced below the current carrying value. If there is a decrease in the fair value of the property from the last valuation, the decrease in value is charged to noninterest expense. All income produced from, changes in fair values in, and gains and losses on OREO is also included in noninterest expense. During the time the property is held, all related operating and maintenance costs are expensed as incurred.
Intangible Assets: Intangible assets consisted of core deposit and acquired customer relationship intangible assets arising from the Company’s acquisition of the First National Bank of Centerville, in Centerville, Tennessee (“First National”). These assets are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which were determined to be 15 years.
Income Taxes: The Company uses the asset and liability method, which recognizes the future tax consequences attributable to an event or a liability or asset that has been recognized in the consolidated financial statements. Due to tax regulations, several items of income and expense are recognized in different periods for tax return purposes than for financial reporting purposes. These items represent “temporary differences.” Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. Deferred tax assets represent future deductions in the Company’s income tax return, while deferred tax liabilities represent future payments to tax authorities. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
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ANALYSIS OF RESULTS OF OPERATION
We had net income of $17,407 for the year ended December 31, 2015, compared to net income of $2,407 for 2014 and $1,728 for 2013. Pretax net income increased to $4,712 in 2015 compared to $2,407 in 2014 and $1,728 in 2013. Provision for loan losses was a recovery of $2,257 in 2015 compared to a recovery of $1,014 in 2014 and an expense of $45 in 2013. The Company had an income tax benefit of $12,695 in 2015 compared to no income tax expense in 2014 and 2013.
Net Interest Income
Net interest income is the most significant component of the Company’s earnings. Net interest income represents the amount by which interest income earned on various earnings assets, principally loans, exceeds interest expense associated with interest-bearing liabilities, principally deposits.
2015 compared to 2014
Net interest income before the provision for loan losses was $14,379 in 2015, an increase of $1,414 or 10.9% from $12,965 in 2014. The increase in net interest income is primarily due to $733 of interest recoveries on non-performing loan relationships. Also contributing to an increase in net interest income was a slight decrease in the average rate paid for deposits and other borrowings.
Total interest income on loans was $14,684 in 2015, an increase of $951 or 6.9% from $13,733 in 2014. The increase was primarily due to interest recoveries on non-performing loan relationships. In addition, our balance of nonaccrual loans was $375 at December 31, 2015, compared to $8,655 at December 31, 2014, a decrease of $8,280 or 95.7%. This decrease led to a larger percentage of our total loan portfolio earning interest income.
Interest income on taxable securities was $2,082 in 2015, an increase of $275 or 15.2% from $1,807 in 2014. The increase is primarily due to an increase in the average balance of taxable securities offset by a slight decrease in average rate earned during 2015 compared to 2014. The average balance of taxable securities during 2015 was $103,193 compared to $87,164 in 2014.
Interest income on tax exempt securities was $48, a decrease of $28 or 36.8% from $76 in 2014. The decrease is primarily due to a decrease in the average balance of tax-exempt securities, which decreased to $1,643 in 2015 compared to $2,485 in 2014.
Total interest income on federal funds sold and other was $362 in 2015, an increase of $42 or 13.1% from $320 in 2014. The increase is due to increases in the average rate earned on the Bank’s interest bearing deposits and time deposits in other financial institutions offset by reductions in the average balance of the Bank’s interest bearing deposits in other financial institutions. A large portion of the Bank’s cash is invested in time deposits in other financial institutions in order to maximize yield and maintain a reasonable total duration for the Bank’s assets outside of the loan portfolio. As of December 31, 2015, time deposits in other financial institutions had a weighted average rate of 1.076%. The Bank has also been able to utilize interest bearing money market accounts in other financial institutions to achieve a higher return, though deposits in other banks are limited by the Bank’s correspondent concentration policy.
Total interest expense was $2,797 in 2015, a decrease of $174 or 5.9% from $2,971 in 2014. The decrease was due to decreases in both the average rate paid on deposits and the average balance of deposits combined with decreases in the average rate paid on other borrowings during 2015 compared to 2014.
Total interest expense on deposits was $2,011 in 2015, a decrease of $162 or 7.5% from $2,173 in 2014, due primarily to a decrease in the average rate paid on deposits. The average rate paid on deposits was 0.59% in 2015 compared to 0.63% in 2014. The decrease in rate is due to a shift in the mix of our deposit portfolio from time deposits to demand deposits, which typically earn a lower rate. Management expects that the Bank’s market may begin to experience some upward pressure on deposit rates during 2016 as a result of the Federal Reserve’s increase to the federal funds rate in December 2015 and their indications that additional increases are forthcoming. Management does not expect the upward pressure to have a significant impact on the overall cost of funds for deposits; however, changes in market conditions (including unexpected actions by the Federal Reserve to increase short-term interest rates) and other factors could result in more significant increases in deposit rates than are currently anticipated.
Other interest expense was $786 in 2015, a decrease of $12 or 1.5% from $798 in 2014. Other interest expense is comprised of interest paid on the Company’s subordinated debentures. This decrease is due to a slight decrease in the average rate paid on the Company’s subordinated debt. This decrease is due to the payment of deferred interest amounts in the fourth quarter of 2015, which led to lower compounding interest throughout the year.
Net interest margin was 3.42% in 2015, an increase of 24 basis points (“bps”) from 3.18% in 2014. The increase in net interest margin is primarily due to increases in the average rate earned on loans and the average balances of taxable securities combined with the
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decrease in the average balances and average rate paid on deposits and other borrowings. The average rate earned on loans was 5.58% in 2015 compared to 5.20% in 2014, which is due to multiple interest recoveries on non-performing loan relationships. The average rate paid on deposits was 0.59% in 2015 compared to 0.63% in 2014, which due to a shift in the mix of our deposit portfolio. Management anticipates that there will not be a significant fluctuation in net interest margin in 2016, unless market rates begin to increase, which should continue to help improving net interest margin. If the Bank encounters additional increases in nonaccrual loans or experiences decreases in gross loans, net interest margin could be negatively impacted.
2014 compared to 2013
Net interest income before the provision for loan losses was $12,965 in 2014, a decrease of $304 or 2.3% from $13,269 in 2013. The decrease in net interest income was primarily due to decreases in the average balance of earning assets together with a slight decrease in average rate on interest earning assets offset by decreases in the average balance of and average rate paid for deposits and other borrowings.
Total interest income on loans was $13,733 in 2014, a decrease of $2,106 or 13.3% from $15,839 in 2013. The decrease was primarily due to the decrease in the average balance of loans during 2014 compared to 2013. The average balance of loans during 2014 was $264,229, a decrease of $28,115 from $292,344 during 2013. The decrease in the average balance of loans reflects management’s efforts to eliminate non-performing loans from the Bank’s portfolio combined with the reduction in loan demand that began during the second half of 2010 and continued throughout 2014.
Interest income on taxable securities was $1,807 in 2014, an increase of $612 or 51.2% from $1,195 in 2013. The increase was primarily due to an increase in the average balance of taxable securities combined with an increase in average rate earned during 2014 compared to 2013. The average balance of taxable securities during 2014 was $87,164 compared to $65,178 in 2013.
Interest income on tax exempt securities was $76, a decrease of $63 or 45.3% from $139 in 2013. The decrease was primarily due to a decrease in the average balance of tax-exempt securities, which decreased to $2,485 in 2014 compared to $4,206 in 2013.
Overall yield on the Bank’s securities portfolio increased during 2014, primarily due to management’s decision to sell lower rate securities and reinvest in new securities at higher rates.
Total interest income on federal funds sold and other was $320 in 2014, an increase of $49 or 18.1% from $271 in 2013. The increase was primarily due to increases in the average balance of and average rate earned on the Bank’s time deposits in other financial institutions offset by reductions in the average balance of the Bank’s interest bearing deposits in other financial institutions. A large portion of the Bank’s cash was left on deposit with the Federal Reserve Bank, which earns interest at the Federal Funds rate, which was 0.25% during 2014 and 2013. The Bank has also been able to utilize interest bearing money market accounts in other financial institutions to achieve a higher return, though deposits in other banks are limited by the Bank’s correspondent concentration policy.
Total interest expense was $2,971 in 2014, a decrease of $1,204 or 28.8% from $4,175 in 2013. The decrease was due to decreases in both the average rate paid on deposits and the average balance of deposits combined with decreases in the average balance of other borrowings during 2014 compared to 2013.
Total interest expense on deposits was $2,173 in 2014, a decrease of $1,011 or 31.8% from $3,184 in 2013, due primarily to a decrease in the average rate paid on deposits. The average rate paid on deposits was 0.63% in 2014 compared to 0.85% in 2013. The decrease in rate was due to continued decreases in market rates in the Bank’s market area. During 2014, management was successful at reducing rates for various deposit products while growing the Bank’s core deposit base and reducing reliance on wholesale funding sources. This success was possible due to historically low rates combined with excess liquidity in the Bank’s market area.
Other interest expense was $798 in 2014, a decrease of $85 or 9.6% from $883 in 2013. Other interest expense is comprised of interest paid on the Company’s subordinated debentures and repurchase agreement. The decrease in other interest expense was primarily due to the maturity of the repurchase agreement during 2013. This decrease was offset by a slight increase in the average rate paid on the Company’s subordinated debentures. This increase was due to compounding of deferred interest amounts.
Net interest margin was 3.18% in 2014, an increase of 13 bps from 3.05% in 2013. The increase in net interest margin was primarily due to the decrease in the average balances and average rate paid on deposits and other borrowings. The decrease in interest expense was somewhat offset by decreases in loan interest income. The average rate earned on loans was 5.20% in 2014 compared to 5.42% in 2013.
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Average Balance Sheets, Net Interest Income
Changes in Interest Income and Interest Expense
The following table shows the average daily balances of each principal category of our assets, liabilities and stockholders’ equity and an analysis of net interest income for each of the three years ended December 31, 2015.
| | 2015 | | | 2014 | | | 2013 | |
| | Average Balance | | | Interest Rate | | | Revenue/ Expense | | | Average Balance | | | Interest Rate | | | Revenue/ Expense | | | Average Balance | | | Interest Rate | | | Revenue/ Expense | |
Gross loans (1) (2) | | $ | 263,228 | | | | 5.58 | % | | $ | 14,684 | | | $ | 264,229 | | | | 5.20 | % | | $ | 13,733 | | | $ | 292,344 | | | | 5.42 | % | | $ | 15,839 | |
Taxable securities available for sale (3) | | | 103,193 | | | | 2.02 | % | | | 2,082 | | | | 87,164 | | | | 2.07 | % | | | 1,807 | | | | 65,178 | | | | 1.83 | % | | | 1,195 | |
Tax exempt securities available for sale (3) | | | 1,643 | | | | 2.92 | % | | | 48 | | | | 2,485 | | | | 3.06 | % | | | 76 | | | | 4,206 | | | | 3.30 | % | | | 139 | |
Federal funds sold and other | | | 52,468 | | | | 0.69 | % | | | 362 | | | | 54,316 | | | | 0.59 | % | | | 320 | | | | 73,372 | | | | 0.37 | % | | | 271 | |
Total interest earning assets | | | 420,532 | | | | 4.08 | % | | | 17,176 | | | | 408,194 | | | | 3.90 | % | | | 15,936 | | | | 435,100 | | | | 4.01 | % | | | 17,444 | |
Cash and due from banks | | | 3,149 | | | | | | | | | | | | 2,933 | | | | | | | | | | | | 3,538 | | | | | | | | | |
Other nonearning assets | | | 36,030 | | | | | | | | | | | | 41,982 | | | | | | | | | | | | 60,676 | | | | | | | | | |
Allowance for loan losses | | | (4,758 | ) | | | | | | | | | | | (6,652 | ) | | | | | | | | | | | (9,232 | ) | | | | | | | | |
Total assets | | $ | 454,953 | | | | | | | | | | | $ | 446,457 | | | | | | | | | | | $ | 490,082 | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOW & money market investments | | $ | 131,763 | | | | 0.38 | % | | $ | 506 | | | $ | 126,646 | | | | 0.41 | % | | $ | 516 | | | $ | 113,822 | | | | 0.52 | % | | $ | 588 | |
Savings | | | 28,592 | | | | 0.10 | % | | | 28 | | | | 26,397 | | | | 0.10 | % | | | 26 | | | | 22,697 | | | | 0.11 | % | | | 25 | |
Time deposits $100 and over | | | 91,618 | | | | 0.86 | % | | | 785 | | | | 87,778 | | | | 0.93 | % | | | 814 | | | | 112,311 | | | | 1.10 | % | | | 1,239 | |
Other time deposits | | | 87,439 | | | | 0.79 | % | | | 692 | | | | 104,000 | | | | 0.79 | % | | | 817 | | | | 127,009 | | | | 1.05 | % | | | 1,332 | |
Total interest-bearing deposits | | | 339,412 | | | | 0.59 | % | | | 2,011 | | | | 344,821 | | | | 0.63 | % | | | 2,173 | | | | 375,839 | | | | 0.85 | % | | | 3,184 | |
Federal Home Loan Bank advances | | | — | | | | 0.00 | % | | | — | | | | — | | | | 0.00 | % | | | — | | | | 4,370 | | | | 2.47 | % | | | 108 | |
Subordinated debentures | | | 23,000 | | | | 3.42 | % | | | 786 | | | | 23,000 | | | | 3.47 | % | | | 798 | | | | 23,000 | | | | 3.43 | % | | | 789 | |
Repurchase agreements | | | — | | | | 0.00 | % | | | — | | | | — | | | | 0.00 | % | | | — | | | | 2,819 | | | | 3.33 | % | | | 94 | |
Federal funds purchased and other | | | — | | | | 0.00 | % | | | — | | | | — | | | | 0.00 | % | | | — | | | | 12 | | | | 0.00 | % | | | — | |
Total interest-bearing liabilities | | | 362,412 | | | | 0.77 | % | | | 2,797 | | | | 367,821 | | | | 0.81 | % | | | 2,971 | | | | 406,040 | | | | 1.03 | % | | | 4,175 | |
Noninterest-bearing liabilities | | | 80,246 | | | | | | | | | | | | 68,726 | | | | | | | | | | | | 74,670 | | | | | | | | | |
Total liabilities | | | 442,658 | | | | | | | | | | | | 436,547 | | | | | | | | | | | | 480,710 | | | | | | | | | |
Shareholders’ equity | | | 12,295 | | | | | | | | | | | | 9,910 | | | | | | | | | | | | 9,372 | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 454,953 | | | | | | | | | | | $ | 446,457 | | | | | | | | | | | $ | 490,082 | | | | | | | | | |
Net interest income | | | | | | | | | | $ | 14,379 | | | | | | | | | | | $ | 12,965 | | | | | | | | | | | $ | 13,269 | |
Net interest margin (4) | | | | | | | 3.42 | % | | | | | | | | | | | 3.18 | % | | | | | | | | | | | 3.05 | % | | | | |
(1) | Interest income includes fees on loans of $582, $492, and $511 in 2015, 2014 and 2013, respectively. |
(2) | Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest income. |
(3) | Amortization cost is included in the calculation of yields on securities available for sale. |
(4) | Net interest income to average interest earning assets. |
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The following table reflects how changes in the volume of interest earning assets and interest-bearing liabilities and changes in interest rates have affected our interest income, interest expense, and net interest income for the periods indicated. Information is provided in each category with respect to changes attributable to (1) changes in volume (changes in volume multiplied by prior rate); (2) changes in rate (changes in rate multiplied by prior volume); and (3) changes in rate/volume (changes in rate multiplied by change in volume). The changes attributable to the combined impact of volume and rate have all been allocated to the changes due to rate.
Analysis of Changes in Net Interest Income
| | 2015 to 2014 | | | 2014 to 2013 | |
| | Due to Volume (1) | | | Due to Rate (2) | | | Total (3) | | | Due to Volume (1) | | | Due to Rate (2) | | | Total (3) | |
Interest Income: | | | | | | | | | | | | | | | | | | | | | | | | |
Gross loans (a) (b) | | $ | (52 | ) | | $ | 1,003 | | | $ | 951 | | | | (1,523 | ) | | | (583 | ) | | | (2,106 | ) |
Taxable securities available for sale | | | 332 | | | | (57 | ) | | | 275 | | | | 403 | | | | 209 | | | | 612 | |
Tax exempt securities available for sale | | | (26 | ) | | | (2 | ) | | | (28 | ) | | | (57 | ) | | | (6 | ) | | | (63 | ) |
Federal funds sold and other | | | (11 | ) | | | 53 | | | | 42 | | | | (70 | ) | | | 119 | | | | 49 | |
Total interest earning assets | | | 243 | | | | 997 | | | | 1,240 | | | | (1,247 | ) | | | (261 | ) | | | (1,508 | ) |
Interest Expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
NOW & money market | | $ | 21 | | | $ | (31 | ) | | $ | (10 | ) | | $ | 66 | | | $ | (138 | ) | | $ | (72 | ) |
Savings | | | 2 | | | | — | | | | 2 | | | | 4 | | | | (3 | ) | | | 1 | |
Time deposits $100 and over | | | 36 | | | | (65 | ) | | | (29 | ) | | | (270 | ) | | | (155 | ) | | | (425 | ) |
Other time deposits | | | (131 | ) | | | 6 | | | | (125 | ) | | | (242 | ) | | | (273 | ) | | | (515 | ) |
Total interest-bearing deposits | | | (72 | ) | | | (90 | ) | | | (162 | ) | | | (442 | ) | | | (569 | ) | | | (1,011 | ) |
Federal Home Loan Bank advances | | | — | | | | — | | | | — | | | | (108 | ) | | | — | | | | (108 | ) |
Subordinated debentures | | | — | | | | (12 | ) | | | (12 | ) | | | — | | | | 9 | | | | 9 | |
Repurchase agreements | | | — | | | | — | | | | 0 | | | | (94 | ) | | | — | | | | (94 | ) |
Total interest-bearing liabilities | | | (72 | ) | | | (102 | ) | | | (174 | ) | | | (644 | ) | | | (560 | ) | | | (1,204 | ) |
Net interest income | | $ | 315 | | | $ | 1,099 | | | $ | 1,414 | | | $ | (603 | ) | | $ | 299 | | | $ | (304 | ) |
(a) | Interest income includes fees on loans of $582, $492, and $511 in 2015, 2014 and 2013, respectively. |
(b) | Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest income. |
(1) | Changes in volume multiplied by prior rate |
(2) | Changes in rate multiplied by prior volume |
(3) | Changes in rate multiplied by change in volume |
Noninterest Income
Noninterest income is derived from sources other than fees and interest on earnings assets. The Company’s primary sources of noninterest income are service charges on deposit accounts, mortgage banking activities, investment service income, earnings on bank owned life insurance policies (BOLI), and other noninterest income.
2015 compared to 2014
Total noninterest income was $2,514 in 2015, a decrease of $154 or 5.8% from $2,668 in 2014. The decrease is due to a reduction in gain on sale of securities, ATM income, and investment service income offset by an increase in other service charges and service charges on deposit accounts.
In 2015, the Bank sold a group of securities that resulted in a gain on sale of $10 compared to a gain on sale of $221 in 2014.
ATM income was $81 in 2015 compared to $129 in 2014. This decrease is due to the ATM network in which the Bank participates adding issuers of government benefit payment cards to the network, which has led to a decrease in the number of ATM transactions for which the Bank can charge non-customer fees.
Investment service income was $101 in 2015 compared to $130 in 2014. This decrease is due to lower demand for investment advisory services.
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Other service charges, commissions and fees was $87 in 2015 compared to $12 in 2014. This increase is primarily due to a one-time gain associated with the redemption of Properties’ preferred shares on December 31, 2015.
Service charges on deposit accounts was $1,776 in 2015 compared to $1,727 in 2014. This increase is primarily due to the full year’s effect of analysis charges on commercial deposit accounts that were implemented in late 2014.
2014 compared to 2013
Total noninterest income was $2,668 in 2014, a decrease of $19, or 0.7%, from $2,687 in 2013. The decrease was due to a decrease in other service charges, check printer income, mortgage banking activities and earnings on bank owned life insurance policies offset by an increase in gain on sale of securities and service charges on deposit accounts.
Other service charges, commissions and fees was $12 in 2014 compared to $42 in 2013. This decrease was primarily due to the dissolution of our Appalachian Fund investment. The Appalachian Fund was a qualified Community Development Entity in which the Bank invested. The partnership provided development loans to underserved markets. Participation in the partnership provided the Bank with certain federal tax credits and credit towards Community Reinvestment Act requirements.
Check printer income was $6 in 2014 compared to $27 in 2013. This decrease was due to our relationship with a new vendor.
Income recognized from sale of traditional single family mortgages totaled $82 in 2014 compared to $94 in 2013. The decrease was due to a decline in demand for mortgage loans during 2014 compared to 2013.
Earnings on bank-owned life insurance policies was $261 in 2014 compared in $272 in 2013. This decrease was due to the decrease in yield on the underlying securities.
In 2014, the Bank sold a group of securities that resulted in a gain on sale of $221 compared to a gain on sale of $182 in 2013.
Service charges on deposit accounts was $1,727 in 2014 compared to $1,702 in 2013. This increase was primarily due to the implementation of analysis charges on commercial deposit accounts late in 2014.
The table below shows noninterest income for each of the three years ended December 31:
| | 2015 | | | 2014 | | | 2013 | |
Service charges on deposit accounts | | $ | 1,776 | | | $ | 1,727 | | | $ | 1,702 | |
Gain on sale of loans | | | 101 | | | | 82 | | | | 94 | |
Net gains on sale of securities | | | 10 | | | | 221 | | | | 182 | |
Other: | | | | | | | | | | | | |
Earnings on bank-owned life insurance policies | | | 268 | | | | 261 | | | | 272 | |
Investment services income | | | 101 | | | | 130 | | | | 136 | |
Other service charges, commissions, and fees | | | 87 | | | | 12 | | | | 42 | |
ATM income | | | 81 | | | | 129 | | | | 128 | |
Other customer fees | | | 50 | | | | 49 | | | | 53 | |
Safe deposit box rental | | | 30 | | | | 31 | | | | 29 | |
Credit life insurance commissions | | | 6 | | | | 7 | | | | 6 | |
Check printer income | | | 4 | | | | 6 | | | | 27 | |
Other equity investment income | | | — | | | | 13 | | | | 16 | |
Total noninterest income | | $ | 2,514 | | | $ | 2,668 | | | $ | 2,687 | |
Noninterest Expense
Noninterest expense represents all expenses other than the provision for loan losses and interest costs associated with deposits and other interest-bearing liabilities. Noninterest expense consists of salaries and employee benefits, net occupancy, furniture and equipment, data processing, advertising and public relations, other real estate owned expenses, regulatory and compliance expense, and other operating expenses.
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2015 compared to 2014
Total noninterest expense was $14,438 in 2015, an increase of $198 or 1.4% from $14,240 in 2014. The increase is primarily due to increases in salary and employee benefits, occupancy expense, data processing expense, operational expense, legal expense and ATM expense offset by decreases in regulatory and compliance expense and insurance expense.
Salaries and employee benefits, which totaled $6,997 in 2015, increased by $183 or 2.7% from $6,814 in 2014. The increase in these expenses is primarily due to cost of living increases and higher lender incentives paid in 2015.
Occupancy expense totaled $974 in 2015, an increase of $133 or 15.8% from $841 in 2014. The increase in occupancy expense is primarily due to the unusually low expense in 2014 resulting from a one-time reversal of expense related to termination of a lease for a parcel of land used as a branch location in conjunction with the purchase of the land.
Data processing expense was $1,242 in 2015 compared to $1,160 in 2014. This increase is due to the Bank’s increased utilization of online and mobile banking products in 2015.
Operational expense was $483 in 2015 compared to $406 in 2014. This increase is due to a new network administration agreement entered into during 2015.
Legal expense was $130 in 2015 compared to $70 in 2014. This increase is due to additional expenses related to the Company’s efforts to redeem and restructure its Preferred Stock during 2015.
ATM expense totaled $701 in 2015, an increase of $41 or 6.2% from $660 in 2014. The increase is primarily due to a change in interchange fees paid by the Bank.
Regulatory and compliance expense totaled $628 in 2015, a decrease of $330 or 34.4% from $958 in 2014. The decrease is primarily due to a decrease in our FDIC insurance expense due the lifting of the regulatory agreements and improvements in the Bank’s regulatory rating.
Insurance expense totaled $309 in 2015, a decrease of $81 or 20.8% from $390 in 2014. The decrease is primarily due to a decrease in corporate insurance premiums due to the lifting of the regulatory agreements and improvements in the Company’s risk profile.
Other real estate expense is composed of three types of charges: maintenance, marketing and selling costs; valuation adjustments based on new appraisals; and gains or losses on disposition. These charges are offset by rental income on our foreclosed properties. Other real estate expenses totaled $871 in 2015, an increase of $1 or 0.1% from $870 in 2014. Maintenance, marketing, and selling costs totaled $394, valuation adjustments based on new appraisals totaled $907, losses on sale of other real estate totaled $185, and rental income totaled $615 in 2015 compared to $898, $622, $177 and $827, respectively, in 2014. Beginning in 2011 and continuing into 2015, management made an effort to ensure that all qualifying properties were occupied by renters. This effort resulted in some increased maintenance expenses as the properties were maintained to a higher standard, but this effort also resulted in a significant increase in rental income for the Bank. Valuation adjustments increased in 2015 when compared to 2014 due to some reappraisals on large commercial properties. Losses on disposition increased slightly in 2015 when compared to 2014 due to management’s decision to accept losses on some properties in order to remove them from the portfolio. The balance of other real estate owned, net of valuation allowance decreased 43.0% to $7,828 at December 31, 2015 compared to $13,734 at December 31, 2014.
2014 compared to 2013
Total noninterest expense was $14,240 in 2014, an increase of $57 or 0.4% from $14,183 in 2013. The increase was primarily due to increases in salary and employee benefits, data processing expense and other real estate expense offset by decreases in regulatory and compliance expense, loss on other investment and occupancy expense.
Salaries and employee benefits, which totaled $6,814 in 2014, increased by $458 or 7.2% from $6,356 in 2013. The increase in these expenses was primarily due to an increase in deferred compensation expense combined with cost of living increases.
Data processing expense was $1,160 in 2014 compared to $1,084 in 2013. This was due to the Bank’s increased utilization of online and mobile banking products in 2014.
Other real estate expense is composed of three types of charges: maintenance, marketing and selling costs; valuation adjustments based on new appraisals; and gains or losses on disposition. These charges are offset by rental income on our foreclosed properties. Other real estate expenses totaled $870 in 2014, an increase of $71 or 8.9% from $799 in 2013. Maintenance, marketing, and selling
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costs totaled $898, valuation adjustments based on new appraisals totaled $622, losses on sale of other real estate totaled $177, and rental income totaled $827 in 2014 compared to $1,010, $834, $(116) and $929, respectively, in 2013. Beginning in 2011 and continuing into 2014, management made an effort to ensure that all qualifying properties were occupied by renters. This effort resulted in some increased maintenance expenses as the properties were maintained to a higher standard, but this effort also resulted in a significant increase in rental income for the Bank. Valuation adjustments decreased in 2014 when compared to 2013 due to some stabilization of real estate prices in the Bank’s market area. Losses on disposition increased in 2014 when compared to 2013 due to management’s decision to accept losses on some properties in order to remove them from the portfolio. The balance of other real estate owned, net of valuation allowance decreased 25.0% to $13,734 at December 31, 2014 compared to $18,314 at December 31, 2013.
Regulatory and compliance expense totaled $958 in 2014, a decrease of $186 or 16.3% from $1,144 in 2013. The decrease was primarily due to a decrease in our FDIC insurance expense due to a smaller deposit base and the lifting of a formal regulatory agreement with the FDIC and Department.
Loss on other investment was $5 in 2014 compared to $166 in 2013. These were both one-time losses on other investments that both were dissolved in 2014.
Occupancy expense totaled $841 in 2014, a decrease of $129 or 13.3% from $970 in 2013. The decrease in occupancy expense was primarily due to the termination of a lease for a parcel of land used as a branch location in conjunction with the purchase of the land.
The table below shows noninterest expense for each of the three years ended December 31:
| | 2015 | | | 2014 | | | 2013 | |
Salaries and employee benefits | | $ | 6,997 | | | $ | 6,814 | | | $ | 6,356 | |
Data processing | | | 1,242 | | | | 1,160 | | | | 1,084 | |
Occupancy expense | | | 974 | | | | 841 | | | | 970 | |
Other real estate expense | | | 871 | | | | 870 | | | | 799 | |
ATM expense | | | 701 | | | | 660 | | | | 612 | |
Regulatory and compliance expense | | | 628 | | | | 958 | | | | 1,144 | |
Operational expenses | | | 483 | | | | 406 | | | | 419 | |
Audit, accounting and legal | | | 457 | | | | 402 | | | | 526 | |
Furniture and equipment expense | | | 323 | | | | 314 | | | | 389 | |
Insurance expense | | | 309 | | | | 390 | | | | 389 | |
Postage and freight | | | 239 | | | | 291 | | | | 258 | |
Director expense | | | 233 | | | | 244 | | | | 226 | |
Advertising and public relations | | | 212 | | | | 190 | | | | 124 | |
Amortization of intangible asset | | | 137 | | | | 137 | | | | 137 | |
Other employee expenses | | | 81 | | | | 97 | | | | 86 | |
Loan expense | | | 67 | | | | 37 | | | | 61 | |
Loss on other investment | | | — | | | | 5 | | | | 166 | |
Other | | | 484 | | | | 424 | | | | 437 | |
| | $ | 14,438 | | | $ | 14,240 | | | $ | 14,183 | |
Provisions for Loan Losses
The Bank reversed $2,257 in provision for loan losses in 2015, compared to a reversal in provision of $1,014 in 2014 and provision expense of $45 in 2013. The allowance for loan losses was 1.62% of gross loans (“AFLL Ratio”) at December 31, 2015, compared to 2.02% at December 31, 2014.
Management’s determination of the appropriate level of the provision for loan losses and the adequacy of the allowance for loan losses is based, in part, on an evaluation of specific loans, as well as the consideration of historical loss, which management believes is representative of probable incurred loan losses. Other factors considered by management include the composition of the loan portfolio, economic conditions, results of regulatory examinations, reviews of updated real estate appraisals, and the creditworthiness of the Bank’s borrowers and other qualitative factors.
Nonperforming loans decreased from $10,794 at December 31, 2014 to $7,266 at December 31, 2015. The decrease in nonperforming loans is due to foreclosure and charge-off activity during 2015 and successful resolution of problem loan relationships. Management
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has been focused on reducing the Bank’s overall level of problem assets. Elimination of those problem assets often requires foreclosure of problem loans, resulting in some charge-off and the balance of the loan moving to other real estate owned. Once the Bank has control of the collateral, it is then able to liquidate the assets. This increased focus on eliminating problem assets contributed to the decrease in nonperforming loans during 2015. The ratio of allowance to nonperforming loans was 58.84% at December 31, 2015, compared to 47.91% at December 31, 2014. The portion of the allowance attributable to impaired loans was $340 at December 31, 2015, an increase of $93 from December 31, 2014. Total impaired loans totaled $7,964 at December 31, 2015 compared to $9,885 at December 31, 2014. Also included in impaired loans are relationships classified as troubled debt restructurings totaling $7,932. The decrease in impaired loans was primarily due to charge offs and transfers to other real estate. The amounts charged off during 2015 approximated the specific allocations for certain collateral dependent individual impaired loans.
The portion of the allowance attributable to historical and environmental factors has decreased on an absolute basis and as a percentage of gross loans during 2015. Management’s evaluation of the allowance for loan losses, in addition to specific loan allocations, is based on volume of non-impaired loans and changes in credit quality and environmental factors. The balance of non-impaired loans decreased during 2014 due to the reduction in gross loans and the transfer of newly impaired relationships to the impaired loans component.
The total allowance for loan losses was $4,275 or 1.62% of gross loans at December 31, 2015 compared to $5,171 or 2.02% of gross loans at December 31, 2014. The decrease in the allowance was based on factors indicating improving trends in asset quality including reductions in past due loans, impaired loans, and mixed economic indicators relating to environmental factors that can bear an impact on loan losses such as economic conditions in the Bank’s market area. Management considers the decrease in the AFLL ratio to be directionally consistent with changes in risks associated with the loan portfolio as measured by various metrics.
The table below illustrates changes in the AFLL ratio over the past five quarters and the changes in related risk metrics over the same periods:
Quarter Ended | | December 31, 2015 | | | September 30, 2015 | | | June 30, 2015 | | | March 31, 2015 | | | December 31, 2014 | |
AFLL Ratio | | | 1.62 | % | | | 1.65 | % | | | 1.71 | % | | | 1.85 | % | | | 2.02 | % |
ASC 450 allowance ratio (1) | | | 1.53 | % | | | 1.49 | % | | | 1.64 | % | | | 1.78 | % | | | 2.00 | % |
Specifically Impaired Loans (ASC 310 component) | | $ | 340 | | | $ | 484 | | | $ | 289 | | | $ | 377 | | | $ | 247 | |
Historical and environmental (ASC 450-10 component) | | | 3,935 | | | | 3,870 | | | | 4,251 | | | | 4,450 | | | | 4,924 | |
Total allowance for loan loss | | $ | 4,275 | | | $ | 4,354 | | | $ | 4,540 | | | $ | 4,827 | | | $ | 5,171 | |
Nonperforming loans to gross loans (2) | | | 2.75 | % | | | 1.69 | % | | | 2.42 | % | | | 5.00 | % | | | 4.21 | % |
Impaired loans to gross loans | | | 3.01 | % | | | 1.57 | % | | | 2.43 | % | | | 4.52 | % | | | 3.85 | % |
Allowance to nonperforming loans ratio | | | 58.84 | % | | | 98.11 | % | | | 70.46 | % | | | 36.92 | % | | | 47.91 | % |
Quarter-to-date net charge offs to average gross loans | | | (0.16 | )% | | | (0.19 | )% | | | (0.31 | )% | | | (0.40 | )% | | | 0.35 | % |
(1) | Historical and environmental component as a percentage of non-impaired loans. |
(2) | Nonaccrual loans and loans past due 90 or more days still accruing interest as a percentage of gross loans. |
Income Taxes
The effective income tax rates were (269)% for 2015 and 0.0% for 2014 and 2013.
Due to economic condition and losses recognized between 2008 and 2011, the Company established a valuation allowance against all of its deferred tax assets. During the fourth quarter of 2015, the Company determined that it is more likely than not that the asset can be realized through current and future taxable income. As a result, the Company was able to reinstate all of its unrecognized deferred tax assets as of December 31, 2015. The Company has approximately $51,619 in net operating losses for state tax purposes and $23,820 for federal tax purposes to be utilized by future earnings.
The Company currently has no unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. The Company does not expect any unrecognized tax benefits to significantly increase or decrease in the next twelve months. It is the Company’s policy to recognize any interest accrued related to unrecognized tax benefits in interest expense, with any penalties recognized as operating expenses.
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Analysis of Financial Condition
Total assets at December 31, 2015 were $469,940, an increase of $26,385 or 5.9% from $443,555 at December 31, 2014. Average assets for 2015 were $454,953, an increase of $8,496 or 1.9% from $446,457 for 2014. The increase in total assets in 2015 is primarily due to an increase in securities available for sale combined with increases in deferred tax assets and net loans owned offset by decreases in cash and due from banks and other real estate owned. Total liabilities at December 31, 2015 were $446,975, an increase of $14,306 or 3.3% from $432,669 at December 31, 2014. The increase in total liabilities was primarily due to increases in interest-bearing and noninterest-bearing deposits offset by a decrease in accrued interest payable. Total shareholder’s equity at December 31, 2015 was $22,965, an increase of $12,079 or 111.0% from $10,886 at December 31, 2014. The increase in shareholders’ equity is primarily due to an increase in retained earnings as a result of the net income for 2015 and the elimination of accrued but unpaid dividends and a portion of the liquidation preference on the shares of Series A Preferred Stock redeemed on December 31, 2015, offset in part by the amounts paid to redeem these shares of Series A Preferred Stock and all of the shares of Series B Preferred Stock.
Loans
Net loans (excluding loans held for sale) were $260,194 at December 31, 2015, an increase of $8,929 or 3.6% from $251,265 at December 31, 2014. Loans held for sale, at fair value totaled $156 at December 31, 2015, an increase of $50 or 47.2% from $106 at December 31, 2014.
The overall increase in loans was primarily due to an increase in demand for new loans for most of 2015. The increase in loan demand is due to an uptick in the economy in the Bank’s market areas. The most significant increases in loans were in commercial real estate, tax exempt and commercial, financial and agricultural. The most significant decreases in loans were in the real estate construction, 1-4 family residential, and other loans segments. The continuing effects of the challenging economic environment reduced the number of new construction loans during 2014, resulting in a significant drop in real estate construction loans. Decreases in other loan categories are primarily the result of regular loan payments and a significant decrease in loan demand in these categories as well.
Of total loans of $264,469 in the portfolio as of year-end 2015, $37,262 or 14.1% were variable rate loans, $226,832 or 85.8% were fixed rate loans, and $375 or 0.1% were nonaccrual. The increase in fixed rate loans in the Bank’s portfolio could have a negative impact on the Bank’s income if interest rates were to increase significantly during 2016, as those loans would not earn the same rate of interest as loans made in a higher-rate environment.
On December 31, 2015, the Company’s loan to deposit ratio (including loans held for sale at fair value and loans held for sale at net book value) was 63.5%, compared to 64.4% at December 31, 2014. The decrease in the loan to deposit ratio was due to deposit growth outpacing loan growth during the year. Gross loans increased 3.1% to $264,469 at December 31, 2015 from $256,436 at December 31, 2014. Management expects continued improvement in loan demand during 2016. If the Company’s deposit growth among core deposit customers continues to outpace its loan demand, the Company’s net interest margin may be adversely affected as the funds from these deposits may be invested in securities and other interest earning assets that offer lower yields than loans.
The following table presents various categories of loans contained in our loan portfolio for the periods indicated and the total amount of all loans as of the end of such period:
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Real estate construction | | $ | 21,369 | | | $ | 25,902 | | | $ | 30,138 | | | $ | 36,648 | | | $ | 53,440 | |
1-4 family residential | | | 100,500 | | | | 102,691 | | | | 110,822 | | | | 112,934 | | | | 121,755 | |
Commercial real estate | | | 111,364 | | | | 99,333 | | | | 97,090 | | | | 115,592 | | | | 152,531 | |
Other real estate secured | | | 6,369 | | | | 5,825 | | | | 4,800 | | | | 5,726 | | | | 7,405 | |
Commercial, financial and agricultural | | | 18,237 | | | | 15,514 | | | | 23,185 | | | | 27,908 | | | | 30,786 | |
Tax exempt | | | 6,476 | | | | 31 | | | | 51 | | | | 72 | | | | 52 | |
Consumer | | | 4 | | | | 5,641 | | | | 5,474 | | | | 5,707 | | | | 7,430 | |
Other | | | 150 | | | | 1,499 | | | | 2,147 | | | | 2,294 | | | | 7,797 | |
Total loans | | $ | 264,469 | | | $ | 256,436 | | | $ | 273,707 | | | $ | 306,881 | | | $ | 381,196 | |
Allowance for loan losses | | | (4,275 | ) | | | (5,171 | ) | | | (8,039 | ) | | | (9,767 | ) | | | (19,546 | ) |
Total loans (net of allowance) | | $ | 260,194 | | | $ | 251,265 | | | $ | 265,668 | | | $ | 297,114 | | | $ | 361,650 | |
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The following is a presentation of an analysis of maturities of loans as of December 31, 2015:
| | Due in 1 | | | Due in 1 | | | Due after | | | | | |
Loan Segments | | year or less | | | to 5 years | | | 5 Years | | | Total | |
Real estate construction | | $ | 12,102 | | | $ | 8,250 | | | $ | 1,017 | | | $ | 21,369 | |
1-4 family residential | | | 8,663 | | | | 66,438 | | | | 25,490 | | | | 100,591 | |
Commercial real estate | | | 9,559 | | | | 85,202 | | | | 16,290 | | | | 111,051 | |
Other real estate secured | | | 95 | | | | 6,273 | | | | — | | | | 6,368 | |
Commercial, financial and agricultural | | | 7,689 | | | | 10,524 | | | | 248 | | | | 18,461 | |
Tax exempt | | | 4 | | | | — | | | | — | | | | 4 | |
Consumer | | | 2,320 | | | | 4,215 | | | | 90 | | | | 6,625 | |
Other | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 40,432 | | | $ | 180,902 | | | $ | 43,135 | | | $ | 264,469 | |
The following is a presentation of an analysis of sensitivities of loans to changes in interest rates as of December 31, 2015 for the loan types mentioned above:
Loans with predetermined interest rates | | $ | 226,832 | |
Loans with floating, or adjustable interest rates, at floor | | | 18,527 | |
Loans with floating, or adjustable interest rates, not at floor | | | 18,735 | |
Nonaccrual loans | | | 375 | |
Total | | $ | 264,469 | |
As market rates dropped during the economic recession, management implemented rate floors for many variable rate loans in an attempt to protect the Bank’s net interest margin. As of December 31, 2015, $18,527 in variable rate loans have reached their floor rate. As a result, when market rates begin to rise, loans at their floor will not reprice at higher rates until market rates rise above their contractual floor rates. Only the loans noted above that have variable rates not at a floor rate will reprice with the first increase in market rates. The existence of these rate floors may negatively impact our net interest margin when rates begin to rise, at least until rates rise above these floors.
Allowance for Loan Loss and Asset Quality
The allowance for loan losses was $4,275 or 1.62% of gross loans at December 31, 2015 compared to $5,171 or 2.02% of gross loans at December 31, 2014. The decrease in the allowance was based on factors indicating improving trends in asset quality including reductions in past due loans, impaired loans, and mixed economic indicators relating to environmental factors that can bear an impact on loan losses such as economic conditions in the Bank’s market area.
Management’s determination of the appropriate level of the provision for loan losses and the adequacy of the allowance for loan losses is based, in part, on an evaluation of specific loans, as well as the consideration of historical loss, which management believes is representative of probable incurred loan losses. Other factors considered by management include the composition of the loan portfolio, economic conditions, results of internal and external loan review, regulatory examinations, reviews of updated real estate appraisals, and the creditworthiness of the Bank’s borrowers and other qualitative factors.
Between 2008 and 2012, the Bank experienced significant increases in past due loans, impaired loans, adversely classified loans and charge-offs as a result of the economic downturn. Historically, more than half of the Bank’s loan portfolio has been secured by real estate of some form, whether residential, commercial, or development, with a significant portion of those loans being residential developments. One of the most significant impacts of the economic downturn in the Bank’s market area was the collapse of the housing market and subsequent decline in market values for existing properties, particularly higher end properties. Those impacts caused several of the Bank’s borrowers who had proven track records as residential and commercial developers to find themselves owning larger parcels of partially developed land with virtually no demand for finished properties. Developers became unable to service their debt causing the loans to become past due. At the same time, the decline in activity in the housing market caused significant reductions in market values, causing collateral values for many loans to fall below the outstanding loan balance. From 2008 to 2011, the Bank experienced increases in problem loans in virtually all segments of the loan portfolio; however, the effect of the economic downturn on the residential real estate market has been the primary cause of the majority of the Bank’s impaired loans and charge-offs over the past five years. Foreclosures from this segment have also primarily become the reason for the elevated levels of other real estate owned by the Bank during 2013 and 2012. The Bank’s pace of new foreclosures decreased significantly during 2014 and 2015 at the same time as the Bank was making progress toward selling properties on which the Bank had previously
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foreclosed or acquired through deeds in lieu of foreclosure. This has contributed significantly to improvements in overall asset quality.
Impaired loans totaled $7,964 at December 31, 2015 compared to $9,885 at December 31, 2014, a decrease of $1,921.
Problem loans that are not impaired are categorized into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Pass. Loans in this category are to persons or entities with good balance sheets, acceptable liquidity, and acceptable or strong earnings. Guarantors have reasonable or strong net worth, liquidity and earnings. Collateral is acceptable or strong, and is at or below policy advance rates. These borrowers have acceptable quality management if they are entities and have handled previous obligations with the Bank substantially within agreed-upon terms. Cash flow is adequate to service long-term debt. These entities may be minimally profitable now, with projections indicating continued profitability into the foreseeable future. Overall, these loans are basically sound.
Watch. Loans characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced operating losses and declining financial condition. The borrower has satisfactorily handled debts with the Bank in the past, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, the borrower’s margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit the Bank’s exposure. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity is limited.
Special Mention. Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the repayment source or in the Bank’s credit position in the future.
Substandard. Loans inadequately protected by the payment capacity of the borrower or the pledged collateral.
Doubtful. Loans with the same characteristics as substandard loans with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values. These are poor quality loans in which neither the collateral nor the financial condition of the borrower presently ensures collectability in full in a reasonable period of time or evidence of permanent impairment in the collateral securing the loan.
Impaired loans are evaluated separately from other loans in the Bank’s portfolio. Credit quality information related to impaired loans was presented above and is excluded from the tables below.
As of December 31, 2015, and based on the most recent analysis performed, the risk category of loans by segment of loans is as follows:
| | Pass | | | Watch | | | Special Mention | | | Substandard | | | Doubtful | |
Real estate construction | | $ | 19,330 | | | $ | 92 | | | $ | 7 | | | $ | 1,891 | | | $ | — | |
1-4 family residential | | | 87,253 | | | | 10,141 | | | | — | | | | 925 | | | | — | |
Commercial real estate | | | 100,323 | | | | 3,472 | | | | — | | | | 2,081 | | | | — | |
Other real estate loans | | | 6,369 | | | | — | | | | — | | | | — | | | | — | |
Commercial, financial and agricultural | | | 16,495 | | | | 1,109 | | | | — | | | | 400 | | | | — | |
Consumer | | | 6,438 | | | | 16 | | | | — | | | | 8 | | | | — | |
Tax exempt | | | 4 | | | | — | | | | — | | | | — | | | | — | |
Other loans | | | 150 | | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 236,362 | | | $ | 14,830 | | | $ | 7 | | | $ | 5,305 | | | $ | — | |
Classified loans, excluding impaired loans, totaled $20,142 at December 31, 2015 compared to $40,426 at December 31, 2014.
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The following table presents information regarding impaired, nonaccrual, past due and restructured loans at the dates indicated:
| | December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Loans considered by management as impaired: | | | | | | | | | | | | | | | | | | | | |
Number | | | 28 | | | | 24 | | | | 40 | | | | 53 | | | | 81 | |
Amount | | $ | 7,964 | | | $ | 9,885 | | | $ | 26,071 | | | $ | 33,555 | | | $ | 44,849 | |
Loans accounted for on nonaccrual basis: | | | | | | | | | | | | | | | | | | | | |
Number | | | 12 | | | | 17 | | | | 18 | | | | 48 | | | | 87 | |
Amount | | $ | 375 | | | $ | 8,655 | | | $ | 18,152 | | | $ | 24,975 | | | $ | 40,831 | |
Accruing loans (including consumer loans) which are contractually past due 90 days or more as to principal and interest payments: | | | | | | | | | | | | | | | | | | | | |
Number | | | — | | | | — | | | | — | | | | — | | | | — | |
Amount | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Loans defined as “troubled debt restructurings” still accruing | | | | | | | | | | | | | | | | | | | | |
Number | | | 24 | | | | 15 | | | | 21 | | | | 14 | | | | 1 | |
Amount | | $ | 6,729 | | | $ | 2,140 | | | $ | 9,014 | | | $ | 9,038 | | | $ | 958 | |
Other classified loans not classified as impaired | | $ | 20,142 | | | $ | 40,426 | | | $ | 36,332 | | | $ | 74,177 | | | $ | 109,961 | |
There are no other loans which are not disclosed above where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.
As discussed previously, management’s consideration of environmental factors impacts the amount of allowance for loan loss that is needed for classified and pass rated loans. Below are some of the factors considered by management:
The commercial real estate market has declined significantly as a result of the local and national economic recession that began during 2008 and the resulting sluggish economic conditions that remained throughout 2015, though some slight improvements were felt during 2015. Real estate related loans, including commercial real estate loans, residential construction and residential development and 1-4 family residential loans, comprised 90.6% of the Company’s loan portfolio at December 31, 2015. Market conditions for residential development and residential construction have seen substantial declines due to the effects of the recession on individual developers, contractors and builders. In addition, the local market, particularly in Maury County, has seen significantly weaker demand for residential housing. During 2015, the market began to improve nationally and in the Bank’s local market, though activity has not recovered to pre-recession levels.
Although our loan portfolio is concentrated in Middle Tennessee, management does not believe this geographic concentration presents an abnormally high risk. At December 31, 2015 the following loan concentrations exceeded 10% of total loans: 1-4 family residential loans, real estate construction loans, and commercial real estate. Management does not believe that this loan concentration presents an abnormally high risk. Loan concentrations are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions.
Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
The following table presents information regarding loans included as nonaccrual and the gross income that would have been recorded in the period if the loans had been current.
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Nonaccrual interest | | $ | 396 | | | $ | 722 | | | $ | 238 | | | $ | 1,120 | | | $ | 2,668 | |
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Nonperforming loans are defined as nonaccrual loans, loans still accruing but past due 90 days or more, and troubled debt restructured loans still accruing. The following table presents information regarding nonperforming loans at the dates indicated:
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Loans secured by real estate | | $ | 7,011 | | | $ | 9,436 | | | $ | 23,516 | | | $ | 31,521 | | | $ | 33,004 | |
Commercial, financial and agricultural | | | 233 | | | | — | | | | 1,785 | | | | 627 | | | | 859 | |
Consumer | | | 22 | | | | 7 | | | | 12 | | | | 12 | | | | 229 | |
Other | | | — | | | | 1,351 | | | | 1,853 | | | | 1,853 | | | | 7,697 | |
Total | | $ | 7,266 | | | $ | 10,794 | | | $ | 27,166 | | | $ | 34,013 | | | $ | 41,789 | |
Management classifies commercial and commercial real estate loans as nonaccrual loans when principal or interest is past due 90 days or more and the loan is not adequately collateralized. Loans also are classified as nonaccrual when, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation and the loan is not in the process of collection. Nonaccrual loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain. Loans are categorized as restructured if the original interest rate, repayment terms, or both were modified due to deterioration in the financial condition of the borrower.
Summary of Loan Loss Experience
An analysis of our loss experience is presented in the following table for each of the periods ended December 31, as well as a breakdown of the allowance for loan losses:
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Balance at beginning of period | | $ | 5,171 | | | $ | 8,039 | | | $ | 9,767 | | | $ | 19,546 | | | $ | 18,167 | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Real estate construction | | | — | | | | (103 | ) | | | — | | | | (3,139 | ) | | | (7,155 | ) |
1-4 family residential | | | (246 | ) | | | (341 | ) | | | (759 | ) | | | (1,317 | ) | | | (1,943 | ) |
Commercial real estate | | | — | | | | (25 | ) | | | (639 | ) | | | (2,390 | ) | | | (493 | ) |
Other real estate loans | | | — | | | | — | | | | — | | | | — | | | | (95 | ) |
Commercial, financial and agricultural | | | (25 | ) | | | (489 | ) | | | (600 | ) | | | (652 | ) | | | (1,076 | ) |
Consumer | | | (6 | ) | | | (1 | ) | | | (5 | ) | | | (115 | ) | | | (15 | ) |
Tax exempt | | | — | | | | — | | | | — | | | | — | | | | — | |
Other loans | | | (45 | ) | | | (1,102 | ) | | | (51 | ) | | | (5,896 | ) | | | (113 | ) |
| | | (322 | ) | | | (2,061 | ) | | | (2,054 | ) | | | (13,509 | ) | | | (10,890 | ) |
Recoveries: | | | | | | | | | | | | | | | | | | | | |
Real estate construction | | | 128 | | | | 44 | | | | 21 | | | | 36 | | | | 63 | |
1-4 family residential | | | 161 | | | | 31 | | | | 73 | | | | 281 | | | | 40 | |
Commercial real estate | | | 620 | | | | 30 | | | | 38 | | | | 77 | | | | 6 | |
Other real estate loans | | | — | | | | — | | | | — | | | | — | | | | 3 | |
Commercial, financial and agricultural | | | 259 | | | | 51 | | | | 111 | | | | 51 | | | | 162 | |
Consumer | | | 5 | | | | 9 | | | | 8 | | | | 7 | | | | 29 | |
Tax exempt | | | — | | | | — | | | | — | | | | — | | | | — | |
Other loans | | | 510 | | | | 42 | | | | 30 | | | | 25 | | | | 21 | |
| | | 1,683 | | | | 207 | | | | 281 | | | | 477 | | | | 324 | |
Net (charge-offs) recoveries | | | 1,361 | | | | (1,854 | ) | | | (1,773 | ) | | | (13,032 | ) | | | (10,566 | ) |
Transfer due to branch sale | | | — | | | | — | | | | — | | | | 553 | | | | (1,084 | ) |
Provision for loan losses | | | (2,257 | ) | | | (1,014 | ) | | | 45 | | | | 2,700 | | | | 13,029 | |
Balance at year-end | | $ | 4,275 | | | $ | 5,171 | | | $ | 8,039 | | | $ | 9,767 | | | $ | 19,546 | |
Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period | | | (0.52 | )% | | | 0.35 | % | | | 0.61 | % | | | 3.42 | % | | | 2.17 | % |
Ratio of nonperforming loans to gross loans | | | 2.75 | % | | | 4.21 | % | | | 9.93 | % | | | 11.08 | % | | | 10.96 | % |
Ratio of impaired loans to gross loans | | | 3.01 | % | | | 3.85 | % | | | 9.53 | % | | | 10.93 | % | | | 11.77 | % |
Ratio of allowance for loan losses to total loans | | | 1.62 | % | | | 2.02 | % | | | 2.94 | % | | | 3.18 | % | | | 5.13 | % |
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At December 31st of each period presented below, the allowance was allocated as follows:
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Real estate construction | | $ | 873 | | | $ | 892 | | | $ | 1,249 | | | $ | 1,938 | | | $ | 4,809 | |
1-4 family residential | | | 1,679 | | | | 2,332 | | | | 3,235 | | | | 4,133 | | | | 5,564 | |
Commercial real estate | | | 720 | | | | 994 | | | | 1,273 | | | | 1,226 | | | | 3,505 | |
Other real estate loans | | | 12 | | | | 22 | | | | 33 | | | | 226 | | | | 244 | |
Commercial, financial and agricultural | | | 588 | | | | 399 | | | | 704 | | | | 994 | | | | 1,394 | |
Consumer | | | 17 | | | | 22 | | | | 24 | | | | 14 | | | | 84 | |
Tax exempt | | | — | | | | — | | | | — | | | | — | | | | — | |
Other loans | | | — | | | | — | | | | 929 | | | | 658 | | | | 3,337 | |
Unallocated | | | 386 | | | | 510 | | | | 592 | | | | 577 | | | | 609 | |
Total | | $ | 4,275 | | | $ | 5,171 | | | $ | 8,039 | | | $ | 9,766 | | | $ | 19,546 | |
At December 31st of each period presented below, loan balances by category as a percentage of gross loans were as follows:
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Real estate construction | | | 8.1 | % | | | 10.1 | % | | | 11.0 | % | | | 11.9 | % | | | 14.0 | % |
1-4 family residential | | | 38.0 | % | | | 40.1 | % | | | 40.4 | % | | | 36.8 | % | | | 32.0 | % |
Commercial real estate | | | 42.1 | % | | | 38.7 | % | | | 35.5 | % | | | 37.7 | % | | | 40.1 | % |
Other real estate secured loans | | | 2.4 | % | | | 2.3 | % | | | 1.8 | % | | | 1.9 | % | | | 1.9 | % |
Commercial, financial and agricultural | | | 6.9 | % | | | 6.0 | % | | | 8.5 | % | | | 9.1 | % | | | 8.1 | % |
Consumer | | | 2.4 | % | | | 2.2 | % | | | 2.0 | % | | | 1.9 | % | | | 1.9 | % |
Tax exempt | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Other loans | | | 0.1 | % | | | 0.6 | % | | | 0.8 | % | | | 0.7 | % | | | 2.0 | % |
Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Time Deposits in Other Financial Institutions
Time deposits in other financial institutions totaled $24,305 at December 31, 2015 compared to $22,177 at December 31, 2014. Management has begun utilizing time deposits in other financial institutions in conjunction with the Bank’s securities portfolio in order to maximize yield and maintain a reasonable total duration for the Bank’s assets outside of the loan portfolio. Original maturities of time deposits in other financial institutions range from ten months to five years. Most of the CDs with maturities beyond three years are callable with minimal early withdrawal penalties. All of the deposits are in FDIC or National Credit Union Administration insured institutions and the amount on deposit with each individual institution does not exceed the deposit insurance limit of $250. As of December 31, 2015, time deposits in other financial institutions had a weighted average rate of 1.076% and a weighted average remaining life of 0.725 years.
Securities
At December 31, 2015, securities available-for-sale totaled $118,824, an increase of $27,384 or 29.9% from $91,440 at year-end 2014. The Company’s securities portfolio represents 25.3% of total assets at December 31, 2015 compared to 20.6% at December 31, 2014. All of the Company’s securities are classified as available for sale. The Company’s investment portfolio is used to provide interest income and liquidity and for pledging purposes to secure public fund deposits.
Net unrealized losses in the securities portfolio at December 31, 2015 were $418 compared to a net unrealized gain of $233 at December 31, 2014. The decrease in market value is primarily due to changes in interest rates during 2015.
Unrealized losses on the Bank’s securities have not been recognized into income because the securities are of high credit quality, management does not have the intent to sell and it is not more likely than not the Bank will be required to sell the investment before its anticipated recovery, and the decline in fair value is largely due to changes in market interest rates. The fair value is expected to recover as the securities approach their maturity date.
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis and the investment committee makes such an evaluation on an annual basis. These evaluations are made more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the Company’s intent to sell, or whether it is more likely than not that it
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will be required to sell the security before its anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
At year-end 2015, the Company’s portfolio consisted of 94 securities, 50 of which were in an unrealized loss position, compared to a total of 94 securities, 32 of which were in an unrealized loss position at December 31, 2014. In the event that the Company were to sell securities for liquidity purposes, management believes there are sufficient holdings not in an unrealized loss position that could be sold, so that the Company would not be forced to sell the securities reporting an unrealized loss. The Company is further limited in the amount of securities that can be sold due to pledging requirements for Bank liabilities. Management considers security holdings in excess of our pledging requirement to be available for liquidity purposes. Sale of such holdings would not impair our ability to hold the securities reporting an unrealized loss until the loss is recovered or until maturity.
The Company did not hold securities of any one issuer, other than U.S. Government sponsored entities, with a face amount greater than 10% of shareholders’ equity as of December 31, 2015 or 2014.
The carrying value of securities at December 31 is summarized as follows:
| | December 31, 2015 | | | December 31, 2014 | |
| | Amount | | | % of Total | | | Amount | | | % of Total | |
U.S. Government sponsored entities | | $ | — | | | | 0.0 | % | | $ | 15,352 | | | | 16.8 | % |
Mortgage-backed securities | | | 116,094 | | | | 97.7 | % | | | 74,014 | | | | 80.9 | % |
State and municipals | | | 2,730 | | | | 2.3 | % | | | 2,074 | | | | 2.3 | % |
Total | | $ | 118,824 | | | | 100.0 | % | | $ | 91,440 | | | | 100.0 | % |
| | December 31, 2013 | |
| | Amount | | | % of Total | |
U.S. Government sponsored entities | | $ | 33,357 | | | | 40.7 | % |
Mortgage-backed securities | | | 42,281 | | | | 51.6 | % |
State and municipals | | | 6,288 | | | | 7.7 | % |
Total | | $ | 81,926 | | | | 100.0 | % |
From 2013 to 2015, the mix of securities held by the Company has changed significantly. As of December 31, 2015 the Company’s mortgage-backed securities accounted for 97.7% of the total portfolio, up from 80.9% and 51.6% at December 31, 2014 and 2013, respectively. As of December 31, 2015, the Company’s U.S. Government sponsored entities securities accounted for 0% of the total portfolio, down from 16.8% at December 31, 2014, which was down from 40.7% at December 31, 2013. This change over the past year is primarily due to management’s effort to reduce the duration of the portfolio in anticipation of rising market rates and to help with the Bank’s asset/liability management and cash flow planning. The Company sold all of its U.S. Government sponsored entities securities during 2015 with the proceeds being reinvested in mortgage-backed securities. The Company realized $10 in gains from the sale of the U.S. Government sponsored entities securities. The repositioning of the portfolio should reduce the impact of a rising rate environment on the market value of the portfolio. Rising rates could also lead to some extension of duration in the mortgage-backed securities portfolio, but that extension is expected to be less than the total duration of the U.S. Government sponsored entities securities that were sold.
The following table presents the carrying value by maturity distribution of the investment portfolio, along with weighted average yields thereon, as of December 31, 2015:
| | Within | | | 1-5 | | | 5-10 | | | Beyond | | | | | |
| | 1 Year | | | Years | | | Years | | | 10 Years | | | Total | |
State and municipals | | $ | 595 | | | $ | 510 | | | $ | 532 | | | $ | 1,093 | | | $ | 2,730 | |
Total debt securities | | $ | 595 | | | $ | 510 | | | $ | 532 | | | $ | 1,093 | | | $ | 2,730 | |
Weighted average yield(tax equivalent) | | | 3.064 | % | | | 4.902 | % | | | 3.298 | % | | | 4.478 | % | | | 4.019 | % |
Mortgage-backed securities- residential | | | | | | | | | | | | | | | | | | $ | 116,094 | |
Weighted average yield | | | | | | | | | | | | | | | | | | | 2.269 | % |
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Premises and Equipment
Premises and equipment totaled $11,673 at December 31, 2015, a decrease of $159 or 1.3% from $11,832 at December 31, 2014. The decrease is primarily due to normal depreciation that occurred during the year.
Rent expense was $69 in 2015, compared to $(21) in 2014. The increase in rent expense is due to the reversal of deferred rent in conjunction with the cancellation of the lease for a parcel of land on which a branch was located that was purchased in 2014.
Other Real Estate Owned
At December 31, 2015, OREO totaled $7,828, a decrease of $5,906 from $13,734 at December 31, 2014. The balance of OREO is comprised of properties acquired through or by deed in lieu of foreclosure on real estate loans, property acquired by the Company for future Bank branch locations that is no longer intended for that purpose and is currently held for sale, and loans made to facilitate the sale of OREO that are required to be reported as OREO (“FAS 66 Loans”). The balances recorded for each individual property are based on appraisals that are not more than twelve months old, discounted by an additional 15%. The additional 15% discount was adopted by the Company beginning in the third quarter of 2010 based on an analysis of actual recoveries of OREO balances, including selling costs. Based on that analysis, the Company recorded a valuation allowance of $346 (recognized through OREO expense) in the third quarter of 2010. In addition, the Company began applying the additional 15% discount in its determination of specific reserves for impaired loans that are collateral dependent. As a result, the majority of the financial loss incurred by the Company as a result of the 15% discount has been recognized through loan charge-offs and the provision for loan losses at the time the property is transferred to OREO, with the foreclosed property being transferred into OREO at the discounted value. The Company annually updates its analysis regarding the additional 15% discount. Should such updates indicate that a change in the 15% discount is warranted, the Company would implement the change accordingly and that change would be applied to all properties that are subsequently moved into OREO. Additional write-downs of individual properties typically occur when the results of updated appraisals and further application of the 15% discount on the value reflected in the updated appraisal indicates that the value of the respective property has declined. The Company obtains updated appraisals for OREO properties at least annually. These write-downs are recognized in the quarterly period in which the appraisal is accepted by the Company.
The Company actively markets the properties within its OREO portfolio utilizing both Bank personnel and third parties (brokers, agents, etc.). All OREO properties are classified into one of four categories: rental properties, non-rental properties, auction properties, and land. Rental properties consist of any property that can be leased or rented in order to produce income for the Company while the Company is pursuing the sale of the property. Non-rental properties consist of improved real estate that the Company’s management has concluded would not be attractive to a renter or that management believes will be most efficiently sold unoccupied. Auction properties are typically properties of lower value that the Company is willing to accept the risk of an auction in order to sell. These properties are typically auctioned off within six to twelve months of the property being transferred into OREO; however, circumstances related to a particular property may warrant holding the property for a longer period. Auction properties are typically auctioned off in absolute auctions with no minimum reserves. Land generally consists of unimproved raw land, though some properties may have some infrastructure work completed for housing development. Properties within the land category of OREO are typically held for longer periods of time than other OREO properties as the marketing of these properties, particularly large parcels, often extends for over six months.
The following table shows a breakdown of the OREO portfolio by category as of the end of the periods indicated:
| | December 31, 2015 | | | September 30, 2015 | | | June 30, 2015 | | | March 31, 2015 | | | December 31, 2014 | |
Rental | | $ | 3,984 | | | | 51 | % | | $ | 4,413 | | | | 50.7 | % | | $ | 4,947 | | | | 48.4 | % | | $ | 5,217 | | | | 41.2 | % | | $ | 5,949 | | | | 43.3 | % |
Non-rental | | | 941 | | | | 12 | % | | | 940 | | | | 10.8 | % | | | 941 | | | | 9.2 | % | | | 1,556 | | | | 12.3 | % | | | 1,904 | | | | 13.9 | % |
Land | | | 2,903 | | | | 37 | % | | | 3,351 | | | | 38.5 | % | | | 4,338 | | | | 42.4 | % | | | 5,881 | | | | 46.5 | % | | | 5,881 | | | | 42.8 | % |
Total | | $ | 7,828 | | | | 100.0 | % | | $ | 8,704 | | | | 100.0 | % | | $ | 10,226 | | | | 100.0 | % | | $ | 12,654 | | | | 100.0 | % | | $ | 13,734 | | | | 100.0 | % |
The Company makes every effort to sell OREO as quickly as feasible while still recovering as much of the original investment as possible. Management also considers the cost associated with holding individual properties in determining how aggressively it markets an individual property. The Company’s OREO that is classified as rental properties generally consists of 1-4 family properties, though some are commercial real estate. Rental income generated by this group has typically exceeded the holding costs of the respective properties. The majority of the rental properties are listed for sale with real estate agents; however properties in this group are not the primary focus of management’s marketing efforts given the income producing nature of the property. The Company’s OREO that is classified as auction properties are marketed aggressively with dates set for auctions and most auction properties being allowed to sell without a reserve price. The Company’s other OREO properties are being marketed, though there is no definite date as to when they may be expected to be sold.
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The following table provides activity within the OREO portfolio in terms of individual parcels for the years ended on the dates indicated:
| | Rental | | | Non-rental | | | Auction | | | Land | |
December 31, 2015 | | | | | | | | | | | | | | | | |
Foreclosures | | | 1 | | | | 2 | | | | — | | | | 1 | |
Sales | | | 6 | | | | 5 | | | | — | | | | 6 | |
Weighted average age of properties held at period end (months) | | | 46.0 | | | | 32.2 | | | | — | | | | 52.3 | |
December 31, 2014 | | | | | | | | | | | | | | | | |
Foreclosures | | | 2 | | | | 5 | | | | — | | | | 1 | |
Sales | | | 12 | | | | 3 | | | | 3 | | | | 14 | |
Weighted average age of properties held at period end (months) | | | 33.4 | | | | 10.8 | | | | — | | | | 39.8 | |
The following table sets forth information related to the largest five OREO properties held by the Company as of December 31, 2015:
Property Description | | Original loan classification | | Original Loan Amount | | | Charge-off prior to transfer into OREO | | | Write- down after transfer into OREO | | | Carrying Balance | |
Unimproved land | | Real estate construction | | $ | 5,000 | | | $ | 905 | | | $ | 801 | | | $ | 1,828 | |
Unimproved land | | Real estate construction | | | 1,134 | | | | 402 | | | | — | | | | 799 | |
Mini storage facility | | Commercial real estate | | | 3,934 | | (1) | | — | | | | 82 | | | | 782 | |
Unimproved land | | Real estate construction | | | 3,934 | | (1) | | — | | | | 203 | | | | 644 | |
Mixed Use Commercial Property | | Commercial real estate | | | 731 | | | | — | | | | 104 | | | | 627 | |
(1) | These two properties were pledged as collateral for the same loan relationship. |
The following table sets forth information related to the largest five OREO properties held by the Company as of December 31, 2014:
Property Description | | Original loan classification | | Original Loan Amount | | | Charge-off prior to transfer into OREO | | | Write- down after transfer into OREO | | | Carrying Balance | |
Unimproved land | | Real estate construction | | $ | 5,000 | | | $ | 905 | | | $ | 536 | | | $ | 2,949 | |
Unimproved land | | Real estate construction | | | 3,103 | | | | 1,896 | | | | 204 | | | | 961 | |
Mini storage facility | | Commercial real estate | | 3,934 | | (1) | | — | | | | — | | | | 848 | |
Unimproved land | | Real estate construction | | | 1,134 | | | | 402 | | | | — | | | | 799 | |
Mixed Use Commercial Property | | Commercial real estate | | 3,934 | | (1) | | — | | | | 82 | | | | 765 | |
(1) | These two properties were pledged as collateral for the same loan relationship. |
Each of the OREO properties identified in the December 31, 2015 table above is listed with a real estate agent and is also listed as available for sale on the Bank’s website. The three properties classified as unimproved land were, at the time the loans were made, intended to be developed. The property carried at $1,828 is commercial property located in an area that remains significantly and negatively impacted by the downturn in the real estate market. The property is currently under contract; however, there is a lengthy due diligence period and the sale of the property may not ultimately be consummated. If so, the Company will continue to actively market the property. The property carried at $799 is located in a residential area that was also negatively impacted by the downturn in the economy. Although there are some positive indicators of improvements in the local market where the property is located, management believes it will likely require a significant amount of time to sell the property. The single family residence property carried at $627 is currently an income producing rental property. The Company is actively marketing the property; however, since the home is more high-end than the typical home in our market, we anticipate that it could take a significant amount of time to sell the property. The commercial real estate properties are income producing rental properties that are being managed by a third party property manager on behalf of the Company. The Company continues to market these rental properties, but because of the income producing nature of the properties, it is likely that management will resist selling the properties in the near term for less than the current carrying value of the properties.
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Deposits
The following table sets forth the composition of deposits at December 31:
| | 2015 | | | 2014 | |
| | Amount | | | % of Total | | | Amount | | | % of Total | |
Noninterest-bearing demand accounts | | $ | 71,875 | | | | 17.2 | % | | $ | 60,780 | | | | 15.3 | % |
Interest-bearing demand accounts | | | 141,129 | | | | 33.9 | % | | | 129,152 | | | | 32.4 | % |
Savings accounts | | | 31,255 | | | | 7.5 | % | | | 27,709 | | | | 7.0 | % |
Time deposits greater than $100 | | | 85,620 | | | | 20.5 | % | | | 83,633 | | | | 21.0 | % |
Other time deposits | | | 86,835 | | | | 20.8 | % | | | 96,806 | | | | 24.3 | % |
Total | | $ | 416,714 | | | | 100.0 | % | | $ | 398,080 | | | | 100.0 | % |
A significant percentage of our deposits continue to be in time deposits, though there was a decrease of $7,984 in total time deposits during 2015. The decrease in time deposits is primarily due to the Bank’s continued focus on reducing reliance on wholesale funding sources and a general market shift away from time deposits toward demand deposits as rates on time deposits continue to be comparable to rates for interest-bearing demand accounts. Wholesale funding sources are any deposits that are attained through means other than direct customer contact. Wholesale funding sources utilized by the Bank include brokered CDs and national market time deposits.
The following table shows the breakdown of time deposits at December 31, 2015 and 2014:
| | December 31 | |
| | 2015 | | | 2014 | |
Personal CDs | | $ | 119,979 | | | $ | 131,314 | |
Non-Personal CDs | | | 8,337 | | | | 7,576 | |
Public Funds CDs | | | 14,951 | | | | 10,941 | |
National market time deposits | | | 5,855 | | | | 7,240 | |
Brokered CDs | | | 1,392 | | | | — | |
IRAs | | | 21,941 | | | | 23,368 | |
Total | | $ | 172,455 | | | $ | 180,439 | |
The following table sets forth all time deposits greater than $100 broken down by remaining maturity at December 31, 2015:
Less than three months | | $ | 19,565 | |
Three months through twelve months | | | 33,619 | |
One year through three years | | | 25,554 | |
More than three years | | | 6,882 | |
Total | | $ | 85,620 | |
The total of wholesale funding sources at December 31, 2015 was $7,247, an increase of $7 from $7,240 at December 31, 2014. The average rate paid for national market time deposits in 2015 was 0.96% compared to 1.08% in 2014. The decrease in average rate paid on national market time deposits was primarily due to the fact that management decided to begin accepting national market time deposits again in 2015, which they had not done since 2012. Due to this, the national market time deposits in the portfolio were opened at rates lower than pre-2012 rates, which resulted in a lower average rate as the portfolio grows.
The Bank has policies in place to ensure that total wholesale funding is maintained at a reasonable level. With the removal of its formal regulatory agreement, the Bank is no longer under any additional restrictions regarding the use of wholesale funding. Management believes that wholesale funding can be a viable source of funds and plans to use this source going forward to the extent that loan demand outpaces the growth in the Bank’s core deposits and available for sale investment securities are not liquidated to fund loan growth, but management intends to utilize a measured and planned approach regarding wholesale funding that should not significantly impact cost of funds or overall liquidity risk.
At December 31, 2015, we had $150,350 in time deposits maturing within two years. Time deposits maturing within one year of December 31, 2015 were $117,215, or 68.0% of total time deposits. If we are not able to retain these deposits at maturity, or attract additional deposits at comparable rates, we may be required to seek higher cost deposits to replace these deposits which could negatively impact our net interest margin. The weighted average cost of all deposit accounts was 0.49% in 2015 compared to 0.54% in 2014. The weighted average rate on time deposits was 0.82% in 2015, compared to 0.85% in 2014. Management intends to
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continue seeking some longer term time deposits in an effort to take advantage of the current low interest rate environment. These efforts, if successful, are expected to reduce interest rate risk and expand our net interest margin.
The following tables present, at December 31 for each of the periods indicated, the average amount of and average rate paid on each of the following deposit categories:
| | 2015 | | | 2014 | | | 2013 | |
| | | | | | Average | | | | | | | Average | | | | | | | Average | |
| | Average | | | Rate | | | Average | | | Rate | | | Average | | | Rate | |
| | Amount | | | Paid | | | Amount | | | Paid | | | Amount | | | Paid | |
Noninterest-bearing demand deposits | | $ | 67,110 | | | n/a | | | $ | 58,446 | | | n/a | | | $ | 50,012 | | | n/a | |
Interest-bearing demand accounts | | | 131,763 | | | | 0.38 | % | | | 126,646 | | | | 0.41 | % | | | 113,823 | | | | 0.52 | % |
Savings deposits | | | 28,592 | | | | 0.10 | % | | | 26,397 | | | | 0.10 | % | | | 22,697 | | | | 0.11 | % |
Time deposits $100 and over | | | 87,439 | | | | 0.90 | % | | | 87,777 | | | | 0.93 | % | | | 112,312 | | | | 1.10 | % |
Other time deposits | | | 91,613 | | | | 0.75 | % | | | 104,005 | | | | 0.79 | % | | | 127,007 | | | | 1.05 | % |
Contractual Obligations
The Company has the following contractual obligations as of December 31, 2015:
| | Less than 1 year | | | 1 - 3 years | | | 3 - 5 years | | | More than 5 years | | | Total | |
Operating leases | | $ | 62 | | | $ | 17 | | | $ | — | | | $ | — | | | $ | 79 | |
Time deposits | | | 117,214 | | | | 43,905 | | | | 11,336 | | | | — | | | | 172,455 | |
Long term borrowings (1) | | | — | | | | — | | | | — | | | | 23,000 | | | | 23,000 | |
Total | | $ | 117,276 | | | $ | 43,922 | | | $ | 11,336 | | | $ | 23,000 | | | $ | 195,534 | |
(1) | Due to the uncertainty of future interest rates on borrowings under the Company’s subordinated debentures, future interest payments on such obligations are not included in the above table. At December 31, 2015, the Company had issued subordinated debentures of approximately $23,000 outstanding. During the year ended December 31, 2015, the interest rate on the subordinated debentures issued in 2002, 2005 and 2007, ranged from 3.75% to 4.0%, 1.73% to 2.01% and 3.24% to 3.51%, respectively. During the year ended December 31, 2015, the Company accrued interest expense of $151, $121 and $542, respectively, on its subordinated debentures issued in 2002, 2005 and 2007. |
Subordinated Debentures
In 2002, the Company issued $3,000 of floating rate mandatory redeemable subordinated debentures through a special purpose entity as part of a private offering of trust preferred securities. The securities mature on December 31, 2032; however, the Company can currently repay the securities at any time without penalty, subject to approval from the FRB. The interest rate on the subordinated debentures as of December 31, 2015 was 4.00%. The subordinated debentures bear interest at a floating rate equal to the New York Prime rate plus 50 bps. The Company has the right from time to time, without causing an event of default, to defer payments of interest on the debentures for up to 20 consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet but count as Tier 1 capital for regulatory capital purposes, subject to certain limitations on the amount of these securities that may be counted as Tier 1 capital. Debt issuance costs of $74 have been capitalized and are being amortized over the term of the securities. Certain of the Company’s principal officers, directors, and their affiliates owned $700 of the $3,000 subordinated debentures at year-end 2015 and 2014. The proceeds from this offering were utilized to increase the Bank’s capital by $3,000.
In 2005, the Company issued $5,000 of floating rate mandatory redeemable subordinated debentures through a special purpose entity as part of a pooled offering of trust preferred securities. These securities mature on September 15, 2035, however, the Company can currently repay the securities at any time without penalty, subject to approval from the FRB. The interest rate on the subordinated debentures as of December 31, 2015 was 2.012%. The subordinated debentures bear interest at a floating rate equal to the 3-Month LIBOR plus 1.50%. The Company has the right from time to time, without causing an event of default, to defer payments of interest on the debentures for up to 20 consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet but count as Tier 1 capital for regulatory purposes, subject to certain limitations on the amount of these securities that may be counted as Tier 1 capital. There was no debt issuance cost in obtaining the subordinated debentures. The proceeds from the pooled offering were used to increase the Bank’s capital.
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In 2007, the Company issued $15,000 of redeemable subordinated debentures through a special purpose entity as part of a pooled offering of trust preferred securities. These subordinated debentures mature in 2037; however, the Company can currently repay the securities at any time subject to approval from the FRB. The interest rate on the subordinated debentures was 7.96% until December 15, 2012, and thereafter the subordinated debentures bear interest at a floating rate equal to the 3-month LIBOR plus 3.0%. As of December 31, 2015, the interest rate was 3.512%. The Company has the right from time to time, without causing an event of default, to defer payments of interest on the debentures for up to 20 consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet but $8,300 of the debentures count as Tier 1 capital and the remaining $6,700 is considered as Tier 2 capital for regulatory purposes. There was no debt issuance cost in obtaining the subordinated debentures. The proceeds were used to help fund the acquisition of First National.
The portion of the subordinated debentures qualifying as Tier 1 capital is limited to 25% of total Tier 1 capital. Subordinated debentures in excess of the Tier 1 capital limitation generally qualify as Tier 2 capital. Under the Dodd-Frank Act and the federal regulations issued implementing Basel III, these subordinated debentures will, subject to the limitations described in the preceding sentence, continue to qualify as Tier 1 capital.
Distributions on the subordinated debentures are payable quarterly; however, the Company cannot pay interest on the subordinated debentures or dividends on its Common Stock or Series A Preferred Stock without the prior consent of the FRB. On January 27, 2011, the FRB denied the Company’s request to make the March 15, 2011 quarterly interest payment due on the subordinated debentures that mature in 2032, and the Company began deferring such payments. Under the terms of the indentures pursuant to which the debentures were issued, if the Company defers payment of interest on the debentures it may not, during such a deferral period, pay dividends on its Common Stock or Preferred Stock or interest on any of the other subordinated debentures issued by the Company. Furthermore, the indentures pursuant to which the debentures issued in 2005 and 2007 were issued provide that the Company’s subsidiaries are similarly prohibited from paying dividends on the subsidiaries’ common and preferred stock not held by the Company or its subsidiaries. During the fourth quarter of 2015, the FRB granted permission to the Company to make interest payments on the Company’s subordinated debentures and these payments were made that month. Therefore, as of December 31, 2015, the Company is current on all interest payments due under the debentures and is not subject to the restrictions outlined in this paragraph.
On December 31, 2015, the deferral period on the Company’s subordinated debentures ended as a result of the Company paying current all interest payments then due. This ended an existing restriction on Properties’ ability to pay dividend payments on its preferred stock. As a result, on December 31, 2015, Properties paid dividends to the holders of its preferred stock other than the Bank totaling $86 which brought current all dividend amounts owed to those holders as of December 31, 2015. In addition, Properties redeemed at face value all of its outstanding preferred stock on December 31, 2015. It is the Company’s intent to dissolve Properties and absorb all of its operations into the Bank at some point in the future. The dissolution of Properties and combination with the Bank will not have an impact on the Company’s consolidated financial statements.
Liquidity
Our liquidity, primarily represented by cash and cash equivalents, is a result of our operating, investing and financing activities. These activities are summarized below for the three years ended December 31:
| | 2015 | | | 2014 | | | 2013 | |
Net income | | $ | 17,407 | | | $ | 2,407 | | | $ | 1,728 | |
Adjustments to reconcile net income to net cash from operating activities | | | (16,453 | ) | | | 3,354 | | | | 3,770 | |
Net cash from operating activities | | | 954 | | | | 5,761 | | | | 5,498 | |
Net cash from (used in) investing activities | | | (33,563 | ) | | | (7,090 | ) | | | 10,073 | |
Net cash used in financing activities | | | 13,740 | | | | (9,451 | ) | | | (61,412 | ) |
Net change in cash and cash equivalents | | | (18,869 | ) | | | (10,780 | ) | | | (45,841 | ) |
Cash and cash equivalents at beginning of period | | | 38,256 | | | | 49,036 | | | | 94,877 | |
Cash and cash equivalents at end of period | | $ | 19,387 | | | $ | 38,256 | | | $ | 49,036 | |
The significant adjustments to reconcile net income to net cash from operating activities in 2015 were the reinstatement of our deferred tax assets of $12,755, decrease in accrued interest payable of $4,487, mortgage loans originated for sale of $3,192 and reversal of provision of loan losses of $2,257 offset by proceeds from sale of mortgage loans of $3,475, net collected loan recoveries of $1,361 and net write-downs and losses on sale of other real estate of $1,085. The significant components of investing activities in 2015 were total securities purchases of $67,322; sale of securities of $23,000; maturities, prepayments and calls of securities of $15,420; net increase in loans of $6,919; proceeds from sale of other real estate owned of $4,857; and increase in time deposits in
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other financial institutions of $2,128. The most significant component of financing activities in 2015 was the increase in deposits of $18,634, offset by the redemption of all of the outstanding shares of Series B Preferred Stock and 5,901 shares of Series A Preferred Stock of $4,431 and dividends paid on preferred shares of $484.
The significant adjustments to reconcile net income to net cash from operating activities in 2014 were proceeds from sale of mortgage loans of $3,245, net write-downs and losses on sale of other real estate of $799, increase in accrued interest payable of $634, and depreciation of premises and equipment of $551 offset by reversal of provision of loan losses of $1,014 and mortgage loans originated for sale of $3,269. The significant components of investing activities in 2014 were total securities purchases of $50,233; sale of securities of $34,427; increase in time deposits in other financial institutions of $15,677; net decrease in loans of $14,085; maturities, prepayments and calls of securities of $12,027; and proceeds from sale of other real estate owned of $4,629. The most significant component of financing activities in 2014 was the decrease in deposits of $9,452, which was principally the result of management’s then efforts to reduce the Bank’s reliance on wholesale funds.
The significant adjustments to reconcile net income to net cash from operating activities in 2013 were proceeds from sale of mortgage loans of $5,248, net write-downs and losses on sale of other real estate of $832, increase in accrued interest payable of $659, and depreciation of premises and equipment of $621 offset by mortgage loans originated for sale of $4,248. The significant components of investing activities in 2013 were total securities purchases of $43,184; maturities, prepayments and calls of securities of $25,116; net decrease in loans of $23,699; proceeds from sale of other real estate owned of $8,340; and sale of securities of $3,675. The most significant components of financing activities in 2013 were the decrease in deposits of $41,414, repayment of FHLB advances of $13,000 and repayment of the repurchase agreement of $7,000.
Liquidity refers to our ability to fund loan demand, meet deposit customers’ withdrawal needs and provide for operating expenses. As summarized in the statement of cash flows, our main sources of cash flow are receipts of deposits from our customers and, to a lesser extent, repayment of loan principal and interest income on loans and securities.
The primary uses of cash are lending to the Company’s borrowers and investing in securities and short-term interest earning assets. In 2015, higher deposits helped fund the increased loan demand. In 2014 and 2013, loan repayments were greater than demand for new loans, which provided additional liquidity to pay off outstanding liabilities such as federal funds purchased, FHLB advances, wholesale deposits and other borrowed money.
We consider our liquidity sufficient to meet our outstanding short and long-term needs. We expect to be able to fund or refinance, on a timely basis, our material commitments and long-term liabilities.
Off-Balance Sheet Arrangements
In the normal course of business, the Bank commits to extensions of credit and issues letters of credit. The Company uses the same credit policies in making commitments to lend funds and conditional obligations as it does for other credit products. In the event of nonperformance by the customer, the Company’s exposure to credit loss is represented by the contractual amount of the instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At December 31, 2015, we had unfunded loan commitments outstanding of $30,876 and unfunded letters of credit of $1,858. If we needed to fund these outstanding commitments, we have the ability to liquidate time deposits in other financial institutions or securities available for sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. Additionally, we could sell participations in these or other loans to correspondent banks.
Capital Resources
Our total shareholders’ equity at December 31, 2015 was $22,965 compared to $10,886 at December 31, 2014, and $8,616 at December 31, 2013. This increase in the year ended December 31, 2015 was primarily due to an increase in net income in 2015 and the redemption of all of our Series B Preferred Stock and 5,901 shares of our Series A Preferred Stock.
On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides the U. S. Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the EESA is the CPP, which provided for direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends.
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The Company applied to participate in the program during the fourth quarter of 2008 and received notification of approval for the program in the first quarter of 2009. Under the terms of the program, the U.S. Treasury purchased $17,806 in Series A Preferred Stock on February 27, 2009. The Series A Preferred Stock had a cumulative dividend rate of 5% per year, until May 15, 2014, and a dividend rate of 9% thereafter. In addition, under the terms of the agreement, the Company issued warrants to the U.S. Treasury to purchase Series B Preferred Stock equal to 5% of the investment in Series A Preferred Stock at a discounted exercise price. The U.S. Treasury exercised the warrants immediately upon investment in the Series A Preferred Stock. The Series B Preferred Stock had a cumulative dividend rate of 9% per year until redeemed. Dividends on both the Series A Preferred Stock and the Series B Preferred Stock are required to be paid quarterly.
As of December 31, 2015, ours and the Bank’s capital levels were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action. Our consolidated total capital to risk-weighted assets ratios for year-end 2015 and 2014 were 11.91% and 9.83%, respectively. Our consolidated Tier 1 to risk-weighted assets ratios were 7.09% and 5.71% at year-end 2015 and 2014, respectively. Also, our Tier 1 to average assets ratios were 4.82% and 3.52% at year-end 2015 and 2014, respectively. Because the Company’s total assets were less than $1,000,000 at December 31, 2015, it is not subject to capital requirements on a consolidated basis, but had it been, it would have been considered “well-capitalized” under applicable regulations Despite improvements in our consolidated capital levels, a significant portion of our capital on a consolidated basis consists of preferred stock and subordinated debentures which require repayments.
In late 2010, the Basel Committee on Banking Supervision issued “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”), a new capital framework for banks and bank holding companies. Basel III imposes a stricter definition of capital, with more focus on common equity for those banks to which it is applicable. In July 2013, the federal bank regulatory agencies, including the Federal Reserve and the FDIC, adopted final rules that revised their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in Basel III and certain provisions of the Dodd-Frank Act. The rules, which became effective January 1, 2015, apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $1,000,000 or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules establish a new common equity Tier 1 minimum capital requirement of 4.5%, a minimum Tier 1 risk-based capital requirement of 6% (up from 4%), a total risk-based capital requirement of 8% and a Tier 1 leverage capital requirement of 4%. In addition, the new rules assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status. In order to be considered “well-capitalized”, the Bank must maintain at least the following minimum capital ratios: common equity Tier 1 capital of 6.5%; tier 1 risked-based capital of 8% (up from 6%); total risk-based capital of 10%; and tier 1 leverage capital of 5%. The rules limit a banking organization’s capital distributions and certain discretionary bonus payments as well as a banking organization’s ability to repurchase its own shares if the banking organization does not hold a “capital conservation buffer” consisting of an additional 2.5% of capital (when the buffer is fully phased in) in addition to the amount necessary to meet its minimum risk-based capital requirements. As a result, when fully phased in, the capital requirements, inclusive of the capital conservation buffer, would be a Tier 1 leverage ratio of 4%, a Tier 1 common risk-based equity capital ratio of 7%, a Tier 1 equity risk-based capital ratio of 8.5% and a total risk-based capital ratio of 10.5%. Beginning on January 1, 2016, 0.625% of the capital conservation buffer had been phased in. Under the new rules Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions, cumulative preferred stock and trust preferred securities (including associated subordinated debentures) issued after May 19, 2010 will no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010 (like our subordinated debentures) including, in the case of bank holding companies with less than $15,000,000 in total assets, trust preferred securities issued prior to that date will continue to count as Tier 1 capital subject to certain quantitative limitations. Our Series A Preferred Stock qualified as Tier 1 capital at December 31, 2015 and continues to qualify as Tier 1 capital following the effectiveness of the Charter Amendments. Common equity Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions. The final rules allow banks and their holding companies with less than $250,000,000 in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in Accumulated Other Comprehensive Income. We and the Bank have opted out. Because the Company’s total consolidated assets are below $1,000,000, these capital rules are not applicable to the Company on a consolidated basis. Should the Company’s total consolidated assets increase to more than $1,000,000, the Company would then be subject to these rules.
As a result of improvements in the Bank’s and the Company’s financial condition, management sought approval from its regulators to allow the Bank to pay dividends to the Company in an amount sufficient to allow the Company to pay all accrued but unpaid interest payments on its subordinated debentures during the fourth quarter of 2015. The Company received all of the required regulatory approvals and in December 2015 made interest payments totaling $5,444 to the holders of the subordinated debt. As of December 31, 2015, the Company was current on all interest payments due related to its subordinated debentures.
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Also during the fourth quarter of 2015, the Company and Bank received permission for the Bank to pay additional dividends to the Company sufficient to allow it to redeem certain holders of the Company’s Series A Preferred Stock and fully redeem the Series B Preferred Stock. On December 23, 2015, the Company entered into redemption agreements with certain of the holders of the Series A Preferred Stock who collectively held 5,901 shares of the Series A Preferred Stock. The Company agreed to pay $600 per share to redeem the shares. The shares were redeemed on December 31, 2015. Upon redemption, $2,360 of the Company’s equity that was attributable to the redeemed shares of Series A Preferred Stock was transferred to common equity as a result of the cash redemption amount being less than the face value of the redeemed shares. Due to the restrictions on the Company’s ability to pay dividends, a total of $2,114 of dividends had been accrued as of the redemption date for the 5,901 shares that were redeemed. Upon redemption, the accrued dividends were reversed, which increased the Company’s retained earnings.
Also on December 31, 2015, the Company redeemed all of its Series B Preferred Stock for full face value and accrued dividends. The Company paid a total of $1,374 for the redemption of the Series B Preferred Stock.
As a result of these redemptions, at December 31, 2015 the Company had accumulated $4,265 in deferred dividends on the 11,905 shares of the Series A Preferred Stock that were not redeemed. As a result of the Charter Amendments, these deferred dividends were reversed in the first quarter of 2016, resulting in an increase of a like amount to the Company’s retained earnings. Under the terms of the Series A Preferred Stock, failure to pay dividends for six dividend periods triggers the holders’ right to elect two directors to an institution’s board. Since the Company has deferred payments of dividends on the Series A Preferred Stock for more than six quarters, the holders of the Series A Preferred Stock have the right to elect up to two directors to the Company’s board of directors.
Additionally, because the Company had, until December 2015, deferred the payment of interest on its subordinated debentures, Properties was also prohibited from paying dividends on its issued and outstanding preferred stock and common stock until such time as the Company is current on the payment of interest on its subordinated debt. On December 31, 2015, Properties paid $778 to the holders of its outstanding preferred stock inclusive of $562 paid to the Bank. The payment was for accrued but unpaid dividends on the preferred stock and also fully redeemed the shares at face value. As of December 31, 2015, Properties had no shares of preferred stock outstanding.
As of December 31, 2015, the Company had total consolidated equity of $22,965. The outstanding face value of the Company’s preferred stock was $11,905, resulting in equity attributable to common stock of $11,060. As a result, the Company’s Tier 1 common equity ratio would have been reported as 0.73% as of December 31, 2015. Unless the Company significantly changes its current capital structure, it is possible that we could be required to report this ratio at an unsatisfactory level if the Company were to become subject to the capital rules adopted implementing Basel III.
On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of February 29, 2016. As a result of the termination, the Company is no longer required to seek additional regulatory approvals for payment of interest on its subordinated debt or dividends on its preferred stock. The Company anticipates that it will be able to make the required interest payments on the subordinated debt and the 5% noncumulative dividend payments on the Series A Preferred Stock, provided the earnings and financial condition of the Bank continue to allow dividends to be paid from the Bank to the Company to fund interest payments on the subordinated debt and dividend payments on the Series A Preferred Stock.
58
At December 31, 2015 and December 31, 2014, the Bank’s and the Company’s risk-based capital ratios and the minimums to be considered well-capitalized under applicable regulatory provisions and the ratios required by the Consent Order were as follows:
| | Actual | | | For Capital Adequacy Purposes | | | To Be Well Capitalized Under Regulatory Provisions(1) | |
2015 | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total Capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 44,057 | | | | 14.35 | % | | $ | 24,559 | | | | 8.00 | % | | $ | 30,699 | | | | 10.00 | % |
Consolidated | | | 36,896 | | | | 11.91 | % | | | 24,779 | | | | 8.00 | % | | | 30,974 | | | | 10.00 | % |
Tier 1 Capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 40,159 | | | | 13.08 | % | | $ | 12,280 | | | | 4.00 | % | | $ | 18,419 | | | | 6.00 | % |
Consolidated | | | 21,963 | | | | 7.09 | % | | | 12,389 | | | | 4.00 | % | | | 18,584 | | | | 6.00 | % |
Tier 1 Capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 40,159 | | | | 8.79 | % | | $ | 18,274 | | | | 4.00 | % | | $ | 22,843 | | | | 5.00 | % |
Consolidated | | | 21,963 | | | | 4.82 | % | | | 18,242 | | | | 4.00 | % | | N/A | | | N/A | |
2014 | | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 44,173 | | | | 16.32 | % | | $ | 21,654 | | | | 8.00 | % | | $ | 27,068 | | | | 10.00 | % |
Consolidated | | | 26,624 | | | | 9.83 | % | | | 21,668 | | | | 8.00 | % | | | 27,086 | | | | 10.00 | % |
Tier 1 Capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 40,768 | | | | 15.06 | % | | $ | 10,827 | | | | 4.00 | % | | $ | 16,241 | | | | 6.00 | % |
Consolidated | | | 15,477 | | | | 5.71 | % | | | 10,834 | | | | 4.00 | % | | | 16,251 | | | | 6.00 | % |
Tier 1 Capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 40,768 | | | | 9.32 | % | | $ | 17,490 | | | | 4.00 | % | | $ | 21,862 | | | | 5.00 | % |
Consolidated | | | 15,477 | | | | 3.52 | % | | | 17,586 | | | | 4.00 | % | | N/A | | | N/A | |
(1) | Because the Company’s total assets were less than $1,000,000 at December 31, 2015, the Company was not, at that date, subject to capital level requirements at that level. |
At the request of the FRB, the Board of Directors of the Company, on January 18, 2011, adopted a board resolution (which has been replaced by the Written Agreement) agreeing that the Company would not, among other things, incur additional debt, pay dividends on any of its common stock or preferred stock, or redeem treasury stock without approval from the FRB. The Company requested permission to make dividend payments on its Preferred Stock and interest payments on its subordinated debentures that were scheduled for the first quarter of 2011. In the first quarter of 2011, the FRB granted the Company permission to pay the dividends on its Preferred Stock that were due on February 15, 2011, but denied the Company permission to make interest payments on its subordinated debentures. As a result of the FRB’s decision, the Company was required to begin the deferral of interest payments on each of its three issuances of subordinated debentures during the first quarter of 2011. The Company has the right to defer the payment of interest on the subordinated debentures at any time, for a period not to exceed 20 consecutive quarters. During the period in which it is deferring the payment of interest on its subordinated debentures, the indentures governing the subordinated debentures provide that the Company cannot pay any dividends on its Common Stock or Preferred Stock. Accordingly, the Company was required to suspend its dividend payments on its Preferred Stock beginning in the second quarter of 2011. On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of that date.
Return on Equity and Assets
Returns on average consolidated assets and average consolidated equity, the ratio of average equity to average assets and the dividend payout ratio for the periods indicated are as follows:
| | 2015 | | | 2014 | | | 2013 | |
Return on average assets | | | 3.83 | % | | | 0.54 | % | | | 0.35 | % |
Return on average equity | | | 141.58 | % | | | 24.29 | % | | | 18.44 | % |
Average equity to average assets ratio | | | 2.70 | % | | | 2.22 | % | | | 1.913 | % |
Common stock dividend payout ratio | | n/a | | | n/a | | | n/a | |
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ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
Management uses a gap simulation model to evaluate interest rate sensitivity that takes cash flows into consideration. These include mortgage-backed securities, loan prepayments, and expected calls on securities. Non-maturing balances such as money markets, savings, and NOW accounts have no contractual or stated maturities. A challenge in the rate risk analysis is to determine the impact of the non-maturing balances on the net interest margin as the interest rates change. Because these balances do not “mature” it is difficult to know how they will reprice as rates change. It is possible to glean some understanding by reviewing our pricing history on these categories relative to interest rates. Using the interest rate history from the Asset Liability Management software database spanning up to 20 quarters of data, we can derive the relationship between interest rates changes and the offering rates themselves. The analysis uses the T-Bill rate as an indicator of rate changes. The gap analysis uses beta factors to spread balances to reflect repricing speed. In the gap analysis the model considers deposit rate movements to determine what percentage of interest-bearing deposits is actually repriceable within a year. Our cumulative one-year gap position at December 31, 2015, was 0.73% of total assets. Our policy states that our cumulative one-year gap should not exceed 15% of total assets.
At year-end 2015, $140,892 of $467,893 of interest earning assets will reprice or mature within one year. Loans maturing or repricing within one year totaled $90,420, or 34.7% of total loans at December 31, 2015. We had $242,028 of loans maturing or repricing within five years as of December 31, 2015. As of December 31, 2015, we had $119,879 in time deposits maturing or repricing within one year.
Gap analysis only shows the dollar volume of assets and liabilities that mature or reprice. It does not provide information on how frequently they will reprice. To more accurately capture the Company’s interest rate risk, we measure the actual effects the repricing opportunities have on earnings through income simulation models such as rate shocks of economic value of equity and rate shock interest income simulations.
To truly evaluate the impact of rate change on income, we believe the rate shock simulation of interest income is the best technique because variables are changed for the various rate conditions. The interest income change in each category of earning assets and liabilities is calculated as rates move up and down. In addition, the prepayment speeds and repricing speeds are changed. Rate shock is a method for stress testing the net interest margin over the next four quarters under several rate change levels. These levels span four 100 basis point increments up and down from the current interest rate. Our policy guideline is that the maximum percentage change in net interest income cannot exceed plus or minus 10% on a 100 basis point interest rate change or 15% on a 200 basis point interest rate change.
Although interest rates are currently very low, the Company believes a -200 basis point rate shock is an effective and realistic test since interest rates on many of the Company's loans still have the ability to decline 200 basis points. For those loans that have floors above the -200 basis point rate shock, the interest rate would be at the floor rate. All deposit account rates would likely fall to their floors under the -200 basis point rate shock as well. This simulation analysis assumes that NOW and savings accounts have a lower correlation to changes in market interest rates than do loans, securities, and time deposits.
December 31, 2015 | | | | | | | | | | | | | | | | |
Basis Point Change | | +200 bps | | | +100 bps | | | -100 bps | | | -200 bps | |
Increase (decrease) in net interest income | | | (3.24 | )% | | | (0.97 | )% | | | (2.86 | )% | | | (7.73 | )% |
December 31, 2014 | | | | | | | | | | | | | | | | |
Basis Point Change | | +200 bps | | | +100 bps | | | -100 bps | | | -200 bps | |
Increase (decrease) in net interest income | | | (8.55 | %) | | | (3.11 | %) | | | (1.13 | %) | | | (5.64 | %) |
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Our Economic Value of Equity simulation measures our long-term interest rate risk. The economic value is the difference between the market value of the assets and the liabilities and, technically, it is our liquidation value. The technique is to apply rate changes and compute the value. The slope of the change between shock levels is a measure of the volatility of value risk. The slope is called duration. The greater the slope, the greater the impact or rate change on our long-term performance. Our policy guideline is that the maximum percentage change on economic value of equity cannot exceed plus or minus 10% on 100 bps change and 20% on 200 bps change. The following illustrates our equity at risk in the economic value of equity model.
December 31, 2015 | | | | | | | | | | | | | | | | |
Basis Point Change | | +200 bps | | | +100 bps | | | -100 bps | | | -200 bps | |
Increase (decrease) in equity at risk | | | (11.44 | )% | | | (4.94 | )% | | | 1.59 | % | | | 0.89 | % |
December 31, 2014 | | | | | | | | | | | | | | | | |
Basis Point Change | | +200 bps | | | +100 bps | | | -100 bps | | | -200 bps | |
Increase (decrease) in equity at risk | | | (13.33 | %) | | | (5.53 | %) | | | 2.05 | % | | | (0.64 | %) |
One of management’s objectives in managing our balance sheet for interest rate sensitivity is to reduce volatility in the net interest margin by matching, as closely as possible, the timing of the repricing of the Company’s interest rate sensitive assets with its interest rate sensitive liabilities.
Management’s modeling for interest rate sensitivity and economic value of equity indicates that the Company’s balance sheet contains less risk as of December 31, 2015 compared to its position at December 31, 2014. The decrease in risk as measured by our model is the result of several factors that changed during 2015. The most significant factors are: $18,869 decrease in cash, $8,033 increase in loans, $27,384 increase in securities available for sale, and $18,634 increase in deposits. The Company’s model assumes that cash on hand is immediately available to invest as rates increase. The lower amount of cash held in 2015 compared to 2014 caused the Company’s earnings potential in an increasing rate environment to be weaker. On average, the model reprices deposits more quickly than debt. This causes the model to assume that the cost of funds will increase more quickly in a rising rate environment as of 2015 than it did at 2014. The Company could improve the results of the model by obtaining some additional long-term fixed rate debt to balance against some of the longer term assets. However, given the Company’s strong liquidity position, management does not believe that additional debt would ultimately benefit the Company. The decreased risk associated with Company’s economic value of equity as estimated by the model is driven by the same factors that affected the interest rate sensitivity. In addition, the economic value of equity model was affected by the increase in securities as a percentage of total assets during 2015.
Impact of Inflation
The consolidated financial statements and related notes presented elsewhere in this report have been prepared in accordance with accounting principles generally accepted in the United States. This requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. During the last three years, the effects of inflation have not had a material impact on the Company.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following consolidated financial statements of the Company, together with the Notes thereto and the Management Report on Internal Control over Financial Reporting and Reports of Independent Registered Public Accounting Firm thereon, are included on pages F-1 to F-73 of this Annual Report on Form 10-K and are incorporated herein by reference:
| · | Balance Sheets as of December 31, 2015 and 2014 |
| · | Statements of Operations for the three years ended December 31, 2015 |
| · | Statements of Changes in Shareholders’ Equity for the three years ended December 31, 2015 |
| · | Statements of Cash Flows for the three years ended December 31, 2015 |
| · | Notes to Consolidated Financial Statements. |
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(d) promulgated under the Exchange Act , that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to its management, including its President (the Company’s principal executive officer) and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its President and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the President and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
The report of the Company’s management on the Company’s internal control over financial reporting is set forth on page F-1 of this Annual Report on Form 10-K.
There were no changes in the Company’s internal controls over financial reporting during the Company’s fiscal quarter ended December 31, 2015 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
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PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information required by this Item 10 will appear in, and is hereby incorporated by reference to, the information under the headings “Proposal 1: Election of Directors-Directors Standing For Election and-Directors Continuing in Office,” “Executive Officers,” “Corporate Governance-Meetings and Committees of the Board of Directors-Audit Committee,” and “Security Ownership of Certain Beneficial Owners and Management-Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for the 2016 annual meeting of shareholders.
The Company has adopted a code of conduct for its senior executive and financial officers (the “Code of Conduct”), a copy of which is available under the “Disclosures” section on the Company’s website at www.cfbk.com. The Company will make any legally required disclosures regarding amendments to or waivers of, provisions of its Code of Conduct on its website at www.cfbk.com.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 will appear in, and is hereby incorporated by reference to, the information under the headings “Executive and Director Compensation” and “Corporate Governance-Compensation Committee Interlocks and Insider Participation” in our definitive proxy statement for the 2016 annual meeting of shareholders.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Certain of the information required by this Item 12 will appear in, and is hereby incorporated by referenced from, the information under the heading “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for the 2016 annual meeting of shareholders.
The information regarding equity compensation plan information required by Item 201(d) of Regulation S-K will appear in, and is hereby incorporated by reference to, our definitive proxy statement for the 2016 annual meeting of shareholders.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item 13 will appear in, and is hereby incorporated by reference to, the information under the headings “Corporate Governance-Certain Relationships and Related Transactions and -Director Nomination Procedure and Director Independence” in our definitive proxy statement for the 2015 annual meeting of shareholders.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item 14 will appear in, and is hereby incorporated by reference to, the information under the heading “Proposal 3-Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive proxy statement for the 2016 annual meeting of shareholders.
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) (1)Financial Statements. See Item 8.
(a) (2)Financial Statement Schedule. Not applicable.
(a) (3)Exhibits. See Exhibit Index following the signature pages.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | COMMUNITY FIRST, INC. |
| | |
Date: March 9, 2016 | By: | /s/ Louis E. Holloway |
| | Louis E. Holloway |
| | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
Signature | | Title | Date |
| | | |
/s/ Eslick E. Daniel | | Chairman of the Board | March 9, 2016 |
Eslick E. Daniel | | | |
| | | |
/s/ Louis E. Holloway | | Chief Executive Officer | March 9, 2016 |
Louis E. Holloway | | (Principal Executive Officer) | |
| | | |
/s/ Jon Thompson | | Chief Financial Officer | March 9, 2016 |
Jon Thompson | | (Principal Financial and Accounting Officer) | |
| | | |
/s/Martin Maguire | | Director | March 9, 2016 |
Martin Maguire | | | |
| | | |
/s/ W. Roger Witherow | | Director | March 9, 2016 |
W. Roger Witherow | | | |
| | | |
/s/ Bernard Childress | | Director | March 9, 2016 |
Bernard Childress | | | |
| | | |
/s/ Stephen F. Walker | | Director | March 9, 2016 |
Stephen F. Walker | | | |
| | | |
/s/ Randy A. Maxwell | | Director | March 9, 2016 |
Randy A. Maxwell | | | |
| | | |
/s/ Michael D. Penrod | | Director | March 9, 2016 |
Michael D. Penrod | | | |
| | | |
/s/ Dinah C. Vire | | Director | March 9, 2016 |
Dinah C. Vire | | | |
| | | |
/s/ Vasant (Vince) G. Hari | | Director | March 9, 2016 |
Vasant (Vince) G. Hari | | | |
| | | |
/s/ Ruskin A. Vest | | Director | March 9, 2016 |
Ruskin A. Vest | | | |
| | | |
/s/ Robert E. Daniel | | Director | March 9, 2016 |
Robert E. Daniel | | | |
EXHIBIT INDEX
The following exhibits are filed as a part of or incorporated by reference in this report:
Exhibit No. | | Description |
| | |
2.1 | | Agreement and Plan of Reorganization and Share Exchange, dated as of July 31, 2007, by and between Community First, Inc. and The First National Bank of Centerville (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules of this agreement are omitted, but a supplemental copy will be furnished to the Securities and Exchange Commission upon request.) (Incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2007 (File No. 000-49966)). |
| | |
2.2 | | Purchase and Assumption Agreement, dated September 17, 2012, by and between Community First Bank & Trust and First Citizens National Bank (incorporated by reference herein to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2012 (File No. 000-49966)). |
| | |
3.1 | | Amended and Restated Charter of the Company (restated for SEC filing purposes only) (incorporated by reference herein to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 16, 2010 (File No. 000-49966)). |
| | |
3.2 | | Amended and Restated Bylaws of the Company.** |
| | |
4.1. | | See Exhibits 3.1 and 3.2 for provisions defining the rights of holders of Common Stock. |
| | |
4.2 | | Series A Preferred Stock Certificate.** |
| | |
10.1 | | The Community First, Inc. Stock Option Plan (incorporated by reference herein to the Company’s Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004 (File No. 000-49966)).+ |
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10.2 | | Form of Management Stock Option Agreement pursuant to the Community First, Inc. Stock Option Plan. * + |
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10.3 | | Form of Organizers Stock Option Agreement pursuant to the Community First, Inc. Stock Option Plan. * + |
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10.4 | | Form of Employee Stock Option Agreement pursuant to the Community First, Inc. Stock Option Plan. *+ |
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10.5 | | The Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the SEC on April 29, 2005 (File No. 000-49966)).+ |
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10.6 | | Amendment to the Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the SEC on January 4, 2008 (File No. 000-49966)).+ |
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10.7 | | Form of Incentive Stock Option Agreement (incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the SEC on January 4, 2008 (File No. 000-49966)).+ |
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10.8 | | Form of Non-Qualified Stock Option Agreement for Directors (incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the SEC on July 20, 2006 (File No. 000-49966)).+ |
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10.9 | | Form of Non-Qualified Stock Option Agreement pursuant to the Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference herein to the Company’s Quarterly Report on Form 10-QSB filed with the SEC on May 13, 2005 (File No. 000-49966)).+ |
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10.10 | | Form of Incentive Stock Option Agreement pursuant to the Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference herein to the Company’s Quarterly Report on Form 10-QSB filed with the SEC on May 13, 2005 (File No. 000-49966)).+ |
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10.11 | | Form of Restricted Stock Agreement under the Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2006 (File No. 000-49966)).+ |
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10.12 | | Community First Bank & Trust Supplemental Executive Retirement Plan (incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the SEC on August 22, 2005 (File No. 000-49966)).+ |
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10.13 | | Amended and Restated Participation Agreement, dated December 27, 2010, with James Bratton pursuant to the Community First Bank & Trust Supplemental Executive Retirement Plan (incorporated by reference herein to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed March 15, 2013 (File No. 000-49966)).+ |
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10.14 | | Community First, Inc. Employee Stock Purchase Plan (incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the SEC on April 30, 2008 (File No. 000-49966)).+ |
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Exhibit No. | | Description |
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10.15 | | First Amendment to Community First Bank and Trust Supplemental Executive Retirement Plan (incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the SEC on January 6, 2009 (File No. 000-49966)).+ |
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10.16 | | Form of Redemption Agreement for Series A Preferred Stock Redemption. |
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10.17 | | Form of Redemption Agreement for Series B Preferred Stock Redemption. |
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10.18 | | Amended and Restated Community First Bank and Trust Management Incentive Compensation Plan (incorporated by reference herein to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed March 16, 2009 (File No. 000-49966)).+ |
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21.1 | | List of Subsidiaries. |
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23.1 | | Consent of HORNE LLP. |
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31.1 | | Certification of the Chief Executive Officer (Principal Executive Officer) Pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | | Certification of the Chief Financial Officer Pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 | | Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 | | Certification of the Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
* | Incorporated herein by reference to the Company’s Annual Report in Form 10-KSB for the year ended December 31, 2002 filed with the SEC on March 28, 2003 (File No. 000-49966). |
** | Incorporated herein by reference to the Company’s Current Report on Form 8-K filed on March 5, 2009 (File No. 000-49966). |
+ | Management compensatory plan or arrangement. |
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Community First, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013 framework).
Based on this assessment management believes that, as of December 31, 2015, the Company’s internal control over financial reporting was effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting because that requirement under Section 404 of the Sarbanes Oxley Act of 2002 was permanently removed for non-accelerated filers, like the Company, pursuant to the provisions of Section 989(G) set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
/s/ Louis E. Holloway | | /s/ Jon Thompson | |
Louis E. Holloway | | Jon Thompson | |
Chief Executive Officer | | President and Chief Financial Officer | |
March 9, 2016 | | March 9, 2016 | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Community First, Inc.
We have audited the accompanying consolidated balance sheets of Community First, Inc. and its Subsidiaries, (the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and 2014, and the results of their operations, and cash flows for each of the years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
HORNE LLP
Memphis, Tennessee
March 9, 2016
F-2
COMMUNITY FIRST, INC.
CONSOLIDATED BALANCE SHEETS
December 31
(Dollar amounts in thousands, except per share data)
| | December 31 | |
| | 2015 | | | 2014 | |
ASSETS | | | | | | | | |
Cash and due from financial institutions | | $ | 19,387 | | | $ | 38,256 | |
Time deposits in other financial institutions | | | 24,305 | | | | 22,177 | |
Securities available for sale, at fair value | | | 118,824 | | | | 91,440 | |
Loans held for sale in secondary market, at fair value | | | 156 | | | | 106 | |
Loans | | | 264,469 | | | | 256,436 | |
Allowance for loan losses | | | (4,275 | ) | | | (5,171 | ) |
Net loans | | | 260,194 | | | | 251,265 | |
Restricted equity securities, at cost | | | 1,727 | | | | 1,727 | |
Premises and equipment, net | | | 11,673 | | | | 11,832 | |
Core deposit and customer relationship intangibles, net | | | 941 | | | | 1,078 | |
Accrued interest receivable | | | 1,140 | | | | 1,034 | |
Bank owned life insurance | | | 10,132 | | | | 9,864 | |
Other real estate owned, net | | | 7,828 | | | | 13,734 | |
Other assets | | | 13,633 | | | | 1,042 | |
Total assets | | $ | 469,940 | | | $ | 443,555 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Deposits | | | | | | | | |
Noninterest-bearing | | $ | 71,874 | | | $ | 60,780 | |
Interest-bearing | | | 344,840 | | | | 337,300 | |
Total deposits | | | 416,714 | | | | 398,080 | |
| | | | | | | | |
Subordinated debentures | | | 23,000 | | | | 23,000 | |
Accrued interest payable | | | 434 | | | | 4,921 | |
Other liabilities | | | 6,827 | | | | 6,668 | |
Total liabilities | | | 446,975 | | | | 432,669 | |
| | | | | | | | |
Shareholders’ equity | | | | | | | | |
Senior Preferred shares, no par value; 9% cumulative; liquidation value of $16,170 and $21,849 at December 31, 2015 and 2014, respectively. Authorized 2,500,000 shares; 11,905 and 17,806 shares issued and outstanding at December 31, 2015 and 2014, respectively. | | | 11,905 | | | | 17,806 | |
Warrant Preferred shares, no par value; 9% cumulative; liquidation value of $0 and $1,211 at December 31, 2015 and 2014, respectively; 0 and 890 shares issued and outstanding at December 31, 2015 and 2014, respectively. | | | — | | | | 890 | |
Total preferred shares | | | 11,905 | | | | 18,696 | |
Common stock, no par value; 10,000,000 shares authorized; 3,275,900 and 3,274,946 shares issued and outstanding at December 31, 2015 and 2014, respectively. | | | 30,972 | | | | 28,591 | |
Accumulated deficit | | | (18,066 | ) | | | (34,957 | ) |
Accumulated other comprehensive loss, net | | | (1,846 | ) | | | (1,444 | ) |
Total shareholders’ equity | | | 22,965 | | | | 10,886 | |
Total liabilities and shareholders’ equity | | $ | 469,940 | | | $ | 443,555 | |
* | Commitments and contingent liabilities (Note 17) |
See accompanying notes to consolidated financial statements.
F-3
COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31
(Dollar amounts in thousands, except per share data)
| | 2015 | | | 2014 | | | 2013 | |
Interest income | | | | | | | | | | | | |
Loans, including fees | | $ | 14,684 | | | $ | 13,733 | | | $ | 15,839 | |
Taxable securities | | | 2,082 | | | | 1,807 | | | | 1,195 | |
Tax exempt securities | | | 48 | | | | 76 | | | | 139 | |
Federal funds sold and other | | | 362 | | | | 320 | | | | 271 | |
Total interest income | | | 17,176 | | | | 15,936 | | | | 17,444 | |
| | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | |
Deposits | | | 2,011 | | | | 2,173 | | | | 3,184 | |
Federal Home Loan Bank advances and federal funds purchased | | | — | | | | — | | | | 108 | |
Subordinated debentures and other | | | 786 | | | | 798 | | | | 883 | |
Total interest expense | | | 2,797 | | | | 2,971 | | | | 4,175 | |
| | | | | | | | | | | | |
Net interest income | | | 14,379 | | | | 12,965 | | | | 13,269 | |
(Reversal of) provision for loan losses | | | (2,257 | ) | | | (1,014 | ) | | | 45 | |
Net interest income after provision for loan losses | | | 16,636 | | | | 13,979 | | | | 13,224 | |
| | | | | | | | | | | | |
Noninterest income | | | | | | | | | | | | |
Service charges on deposit accounts | | | 1,776 | | | | 1,727 | | | | 1,702 | |
Gain on sale of loans | | | 101 | | | | 82 | | | | 94 | |
Net gains on sale of securities available for sale | | | 10 | | | | 221 | | | | 182 | |
Investment services income | | | 101 | | | | 130 | | | | 136 | |
Earnings on bank-owned life insurance policies | | | 268 | | | | 261 | | | | 272 | |
ATM income | | | 81 | | | | 129 | | | | 128 | |
Other customer fees | | | 50 | | | | 49 | | | | 53 | |
Other noninterest income | | | 127 | | | | 69 | | | | 120 | |
Total noninterest income | | | 2,514 | | | | 2,668 | | | | 2,687 | |
See accompanying notes to consolidated financial statements.
F-4
COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31
(Dollar amounts in thousands, except per share data)
| | 2015 | | | 2014 | | | 2013 | |
Noninterest expenses | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 6,997 | | | $ | 6,814 | | | $ | 6,356 | |
Other real estate expense | | | 871 | | | | 870 | | | | 799 | |
Occupancy expense | | | 974 | | | | 841 | | | | 970 | |
Regulatory and compliance expenses | | | 628 | | | | 958 | | | | 1,144 | |
Data processing | | | 1,242 | | | | 1,160 | | | | 1,084 | |
Furniture and equipment expense | | | 323 | | | | 314 | | | | 389 | |
Audit, accounting and legal | | | 457 | | | | 402 | | | | 526 | |
Operational expenses | | | 483 | | | | 406 | | | | 419 | |
ATM expense | | | 701 | | | | 660 | | | | 612 | |
Advertising and public relations | | | 212 | | | | 190 | | | | 124 | |
Postage and freight | | | 239 | | | | 291 | | | | 258 | |
Insurance expense | | | 309 | | | | 390 | | | | 389 | |
Amortization of intangible asset | | | 137 | | | | 137 | | | | 137 | |
Director expense | | | 233 | | | | 244 | | | | 226 | |
Loan expense | | | 67 | | | | 37 | | | | 61 | |
Other employee expenses | | | 81 | | | | 97 | | | | 86 | |
Loss on other investment | | | — | | | | 5 | | | | 166 | |
Other | | | 484 | | | | 424 | | | | 437 | |
Total noninterest expenses | | | 14,438 | | | | 14,240 | | | | 14,183 | |
| | | | | | | | | | | | |
Income before income taxes | | | 4,712 | | | | 2,407 | | | | 1,728 | |
Income tax expense (benefit) | | | (12,695 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net Income | | | 17,407 | | | | 2,407 | | | | 1,728 | |
Preferred stock dividends | | | (2,499 | ) | | | (1,571 | ) | | | (970 | ) |
Preferred stock dividends relieved upon redemption of Series A Preferred Stock | | | 2,114 | | | | — | | | | — | |
Accretion of preferred stock discount | | | — | | | | (33 | ) | | | (199 | ) |
Net income available to common shareholders | | $ | 17,022 | | | $ | 803 | | | $ | 559 | |
| | | | | | | | | | | | |
Income per share available to common shareholders | | | | | | | | | | | | |
Basic | | $ | 5.20 | | | $ | 0.25 | | | $ | 0.17 | |
Diluted | | | 5.20 | | | | 0.25 | | | | 0.17 | |
| | | | | | | | | | | | |
Weighted average common shares | | | | | | | | | | | | |
Basic | | | 3,275,361 | | | | 3,274,867 | | | | 3,274,608 | |
Diluted | | | 3,275,361 | | | | 3,274,867 | | | | 3,274,608 | |
See accompanying notes to consolidated financial statements.
F-5
COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31
(Dollar amounts in thousands, except per share data)
| | 2015 | | | 2014 | | | 2013 | |
Comprehensive Income (Loss) | | | | | | | | | | | | |
Net Income | | $ | 17,407 | | | $ | 2,407 | | | $ | 1,728 | |
Reclassification adjustment for realized gains included in net income, net of income taxes of $0 in 2015, 2014 and 2013 | | | (10 | ) | | | (221 | ) | | | (182 | ) |
Change in unrealized gain on securities available for sale, net of income taxes of $0 in 2015, 2014, and 2013 | | | (392 | ) | | | 1,654 | | | | (2,298 | ) |
Comprehensive income (loss) | | $ | 17,005 | | | $ | 3,840 | | | $ | (752 | ) |
See accompanying notes to consolidated financial statements.
F-6
COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share data)
| | Common Shares | | | Preferred Stock | | | Common Stock | | | Retained Earnings (Accumulated Deficit) | | | Accumulated Other Comprehensive Income (Loss) | | | Total Shareholders’ Equity | |
Balance at December 31, 2012 | | | 3,274,305 | | | $ | 18,464 | | | $ | 28,588 | | | $ | (36,319 | ) | | $ | (397 | ) | | $ | 10,336 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Sale of shares of common stock | | | 472 | | | | — | | | | 2 | | | | — | | | | — | | | | 2 | |
Preferred stock dividends | | | — | | | | — | | | | — | | | | (970 | ) | | | — | | | | (970 | ) |
Accretion of discount on preferred stock | | | — | | | | 199 | | | | — | | | | (199 | ) | | | — | | | | — | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | 1,728 | | | | — | | | | 1,728 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification adjustment for realized gains included in net income, net of $0 income taxes | | | — | | | | — | | | | — | | | | — | | | | (182 | ) | | | (182 | ) |
Change in unrealized gain on securities available for sale, net of $0 income taxes | | | — | | | | — | | | | — | | | | — | | | | (2,298 | ) | | | (2,298 | ) |
Balance at December 31, 2013 | | | 3,274,777 | | | $ | 18,663 | | | $ | 28,590 | | | $ | (35,760 | ) | | $ | (2,877 | ) | | $ | 8,616 | |
See accompanying notes to consolidated financial statements.
F-7
COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share data)
| | Common Shares | | | Preferred Stock | | | Common Stock | | | Retained Earnings (Accumulated Deficit) | | | Accumulated Other Comprehensive Income (Loss) | | | Total Shareholders’ Equity | |
Balance at December 31, 2013 | | | 3,274,777 | | | $ | 18,663 | | | $ | 28,590 | | | $ | (35,760 | ) | | $ | (2,877 | ) | | $ | 8,616 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Sale of shares of common stock | | | 169 | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | |
Preferred stock dividends | | | — | | | | — | | | | — | | | | (1,571 | ) | | | — | | | | (1,571 | ) |
Accretion of discount on preferred stock | | | — | | | | 33 | | | | — | | | | (33 | ) | | | — | | | | — | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | 2,407 | | | | — | | | | 2,407 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification adjustment for realized gains included in net income, net of $0 income taxes | | | — | | | | — | | | | — | | | | — | | | | (221 | ) | | | (221 | ) |
Change in unrealized gain on securities available for sale, net of $0 income taxes | | | — | | | | — | | | | — | | | | — | | | | 1,654 | | | | 1,654 | |
Balance at December 31, 2014 | | | 3,274,946 | | | $ | 18,696 | | | $ | 28,591 | | | $ | (34,957 | ) | | $ | (1,444 | ) | | $ | 10,886 | |
See accompanying notes to consolidated financial statements.
F-8
COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share data)
| | Common Shares | | | Preferred Stock | | | Common Stock | | | Retained Earnings (Accumulated Deficit) | | | Accumulated Other Comprehensive Income (Loss) | | | Total Shareholders’ Equity | |
Balance at December 31, 2014 | | | 3,274,946 | | | $ | 18,696 | | | $ | 28,591 | | | $ | (34,957 | ) | | $ | (1,444 | ) | | $ | 10,886 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Sale of shares of common stock | | | 954 | | | | — | | | | 21 | | | | — | | | | — | | | | 21 | |
Redemption of Series A Preferred Stock at $600 per share | | | — | | | | (5,901 | ) | | | 2,360 | | | | — | | | | — | | | | (3,541 | ) |
Redemption of Series B Preferred Stock | | | — | | | | (890 | ) | | | — | | | | — | | | | — | | | | (890 | ) |
Preferred stock dividends | | | — | | | | — | | | | — | | | | (2,015 | ) | | | — | | | | (2,015 | ) |
Dividends paid upon redemption of Series B Preferred Stock | | | — | | | | — | | | | — | | | | (484 | ) | | | — | | | | (484 | ) |
Dividends relieved upon redemption of Series A Preferred Stock | | | — | | | | — | | | | — | | | | 2,114 | | | | — | | | | 2,114 | |
Redemption of REIT Preferred Shares | | | — | | | | — | | | | — | | | | (125 | ) | | | — | | | | (125 | ) |
REIT Preferred Dividends Declared | | | — | | | | — | | | | — | | | | (6 | ) | | | — | | | | (6 | ) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | 17,407 | | | | — | | | | 17,407 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification adjustment for realized gains included in net income, net of $6 income taxes | | | — | | | | — | | | | — | | | | — | | | | (10 | ) | | | (10 | ) |
Change in unrealized gain on securities available for sale, net of $243 income taxes | | | — | | | | — | | | | — | | | | — | | | | (392 | ) | | | (392 | ) |
Balance at December 31, 2015 | | | 3,275,900 | | | $ | 11,905 | | | $ | 30,972 | | | $ | (18,066 | ) | | $ | (1,846 | ) | | $ | 22,965 | |
See accompanying notes to consolidated financial statements.
F-9
COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(Dollar amounts in thousands, except per share data)
| | 2015 | | | 2014 | | | 2013 | |
Cash flows from operating activities | | | | | | | | | | | | |
Net income | | $ | 17,407 | | | $ | 2,407 | | | $ | 1,728 | |
Adjustments to reconcile net income to net cash from operating activities | | | | | | | | | | | | |
Depreciation of premises and equipment | | | 591 | | | | 551 | | | | 621 | |
Amortization on securities, net | | | 877 | | | | 520 | | | | 349 | |
Amortization of core deposit and customer relationship intangibles | | | 137 | | | | 137 | | | | 137 | |
(Reversal of) provision for loan losses | | | (2,257 | ) | | | (1,014 | ) | | | 45 | |
Mortgage loans originated for sale | | | (3,192 | ) | | | (3,269 | ) | | | (4,248 | ) |
Proceeds from sale of loans | | | 3,243 | | | | 3,245 | | | | 5,248 | |
Gain on sale of mortgage loans | | | (101 | ) | | | (82 | ) | | | (94 | ) |
Gain on sale of securities | | | (10 | ) | | | (221 | ) | | | (182 | ) |
Other real estate write-downs and losses on sale | | | 1,085 | | | | 799 | | | | 832 | |
(Increase)/Decrease in accrued interest receivable | | | (106 | ) | | | 191 | | | | 152 | |
(Decrease)/Increase in accrued interest payable | | | (4,487 | ) | | | 634 | | | | 659 | |
Earnings on bank owned life insurance policies | | | (268 | ) | | | (261 | ) | | | (272 | ) |
Deferred tax benefit | | | (12,755 | ) | | | — | | | | — | |
Other, net | | | (440 | ) | | | 2,124 | | | | 523 | |
Net cash from operating activities | | | (276 | ) | | | 5,761 | | | | 5,498 | |
Cash flows from investing activities | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | |
Sale of securities: | | | | | | | | | | | | |
Mortgage-backed securities | | | 7,474 | | | | 8,766 | | | | 3,087 | |
Other | | | 15,526 | | | | 25,661 | | | | 588 | |
Purchases: | | | | | | | | | | | | |
Mortgage-backed securities | | | (66,236 | ) | | | (49,700 | ) | | | (21,810 | ) |
Other | | | (1,086 | ) | | | (5,133 | ) | | | (21,374 | ) |
Maturities, prepayments, and calls: | | | | | | | | | | | | |
Mortgage-backed securities | | | 15,035 | | | | 9,342 | | | | 7,901 | |
Other | | | 385 | | | | 2,685 | | | | 17,215 | |
Net (increase)/decrease in loans | | | (6,919 | ) | | | 14,085 | | | | 23,699 | |
Net collected loan recoveries | | | 1,361 | | | | — | | | | — | |
Proceeds from sale of other real estate owned | | | 4,857 | | | | 4,629 | | | | 8,340 | |
Additions to premises and equipment, net | | | (471 | ) | | | (1,748 | ) | | | (2,073 | ) |
Net change in time deposits in other financial institutions | | | (2,128 | ) | | | (15,677 | ) | | | (5,500 | ) |
Net cash (used in) from investing activities | | | (32,202 | ) | | | (7,090 | ) | | | 10,073 | |
Cash flows from financing activities | | | | | | | | | | | | |
Increase/(decrease) in deposits | | | 18,634 | | | | (9,452 | ) | | | (41,414 | ) |
Repayment of Federal Home Loan Bank advances | | | — | | | | — | | | | (13,000 | ) |
Repayment of repurchase agreement | | | — | | | | — | | | | (7,000 | ) |
Redemption of Series A Preferred Stock | | | (3,541 | ) | | | — | | | | — | |
Redemption of Series B Preferred Stock | | | (890 | ) | | | — | | | | — | |
Cash paid for preferred stock dividends | | | (484 | ) | | | — | | | | — | |
Dissolution of REIT preferred stock shares | | | (125 | ) | | | — | | | | — | |
Cash paid for REIT preferred stock dividends | | | (6 | ) | | | — | | | | — | |
Proceeds from issuance of common stock | | | 21 | | | | 1 | | | | 2 | |
Net cash from (used in) financing activities | | | 13,609 | | | | (9,451 | ) | | | (61,412 | ) |
Net change in cash and cash equivalents | | | (18,869 | ) | | | (10,780 | ) | | | (45,841 | ) |
Cash and cash equivalents at beginning of year | | | 38,256 | | | | 49,036 | | | | 94,877 | |
Cash and cash equivalents at end of year | | $ | 19,387 | | | $ | 38,256 | | | $ | 49,036 | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid during year for: | | | | | | | | | | | | |
Interest | | $ | 7,284 | | | $ | 2,337 | | | $ | 3,516 | |
Net income taxes paid | | | 30 | | | | 21 | | | | — | |
Supplemental noncash disclosures | | | | | | | | | | | | |
Forgiveness of Series A Preferred Stock dividend | | | 2,113 | | | | — | | | | — | |
Forgiveness of Series A Preferred Stock face value | | | 2,360 | | | | — | | | | — | |
Transfer from loans to other real estate owned | | | 247 | | | | 1,332 | | | | 7,717 | |
Preferred dividends accrued but not paid | | | 385 | | | | 1,571 | | | | 970 | |
Subordinated debenture interest accrued but not paid | | | 26 | | | | 798 | | | | 789 | |
See accompanying notes to consolidated financial statements.
F-10
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Community First, Inc. is a bank holding company organized under the laws of the State of Tennessee. The Company provides a wide range of financial services through its wholly-owned subsidiary, Community First Bank & Trust. The sole subsidiary of Community First Bank & Trust is Community First Properties, Inc., which was originally established as a Real Estate Investment Trust (“REIT”) but which terminated its REIT election in the first quarter of 2012. Community First Bank & Trust together with its subsidiary is referred to herein as the “Bank”. Community First, Inc., together with the Bank, is referred to herein as the “Company.” On March 30, 2012, the Company dissolved two of the Bank’s previously existing subsidiaries, Community First Title, Inc. and CFBT Investments, Inc. The assets of these two subsidiaries were distributed to the Bank.
The Bank conducts its banking activities in Maury, Williamson and Hickman Counties, in Tennessee. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flows from operations of businesses. The significant loan concentrations that exceed 10% of total loans are as follows: commercial real estate loans, 1-4 family residential loans, and construction loans. The customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the Company’s market areas. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.
Principles of Consolidation: The accompanying audited Consolidated Financial Statements and related footnotes have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for year-end financial information and with the Securities and Exchange Commission’s (“SEC”) instructions for Form 10-K, and conform to the general practices within the financial services industry. All intercompany balances and transactions are eliminated in consolidation. The Consolidated Financial Statements refer to “management” within the disclosures. The Company’s definition of management is the executive management team of the Company and its subsidiaries.
Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, carrying values of other real estate owned, deferred tax assets and related valuation allowance, assumptions for retirement plans, and fair values of financial instruments are particularly subject to change.
Cash Flows: Cash and cash equivalents include cash, demand deposits with other financial institutions, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, time deposits in other financial institutions, and federal funds purchased and repurchase agreements.
Interest-Earning Time Deposits in Other Financial Institutions: Interest‑earning time deposits in other financial institutions mature within one to three years and are carried at cost.
Securities: Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
F-11
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Loans Held for Sale in Secondary Market: Loans held for sale in secondary market, at fair value include mortgage loans, consisting of primarily residential real estate loans, that the Bank originates or identifies as loans it expects to sell prior to maturity. When loans are originated or identified to be sold, they are recorded as loans held for sale and reported at fair value. Fair value adjustments, as well as realized gains and loss are recorded in current earnings. Generally, the fair value for loans held for sale on the secondary market is determined by outstanding commitments from third party investors and adjusted for certain direct loan origination costs. In the normal course of business, at the time of funding the loan held for sale by the Company, there is a commitment from a third party investor to purchase the loan. All loans held for sale in secondary market are sold with the servicing rights released and with a service release premium. Any loan origination fees and discounts on the loans sold are recorded in earnings. A secondary market mortgage loan’s cost basis includes unearned deferred fees and costs, and premiums and discounts. If a loan has been reported as held for sale and is then determined that it is unlikely to be sold, the loan is reclassified to loans at the lower of cost or fair value.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase discounts and an allowance for loan losses. Interest income is accrued on the unpaid principal balance.
Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans originated to facilitate the sale of other real estate owned that exceed a loan balance to collateral value ratio of more than a certain percentage, depending on the loan type, are reclassified as other real estate owned on the balance sheet. When the loan balance to collateral value becomes less than the threshold for that particular loan type, the loans are reported with other loans. Interest income on loans reported in other real estate owned is included in loan interest income.
Concentration of Credit Risk: Most of the Company’s business activity is with customers located within Maury, Hickman, and Williamson Counties of Tennessee. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the real estate market condition and economy in those counties.
Allowance for Loan Losses: Credit risk is inherent in the business of extending loans to borrowers. This credit risk is addressed through a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management determines that the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
F-12
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is identified as impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be collected when due according to the contractual terms of the loan agreement. However, there are some loans that are termed impaired because of doubt regarding collectability of interest and principal according to the contractual terms, which are both fully secured by collateral and are current in their interest and principal payments. Additionally, loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans over $250 that are unlikely to collect under existing terms are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component of the allowance covers loans collectively evaluated for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan portfolio segments have been identified with a discussion of the risk characteristics of these portfolio segments:
Real Estate Construction loans consist of loans made for both residential and commercial construction and land development. Residential real estate construction loans are loans secured by real estate to build 1-4 family dwellings. These are loans made to borrowers obtaining loans in their personal name for the personal construction of their own dwellings, or loans to builders for the purpose of constructing homes for resale. These loans to builders can be for speculative homes for which there is no specific homeowner for which the home is being built, as well as loans to builders that have a pre-sale contract to another individual.
Commercial construction loans are loans extended to borrowers secured by and to build commercial structures such as churches, retail strip centers, industrial warehouses or office buildings. Land development loans are granted to commercial borrowers to finance the improvement of real estate by adding infrastructure so that ensuing construction can take place. Construction and land development loans are generally short term in maturity to match the expected completion of a particular project. These loan types are generally more vulnerable to changes in economic conditions in that they project there will be a demand for the project. They require monitoring to ensure the project is progressing in a timely manner within the expected budgeted amount. This monitoring is accomplished via periodic physical inspections by an outside third party.
1-4 Family Residential loans consist of both open end and closed end loans secured by first or junior liens on 1-4 family improved residential dwellings. Open end loans are home equity lines of credit that allow the borrower to use equity in the real estate to borrow and repay as the need arises. First and junior lien residential real estate loans are closed end loans with a specific maturity that
F-13
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
generally does not exceed 7 years. Economic conditions can affect the borrower’s ability to repay the loans and the value of the real estate securing the loans can change over the life of the loan.
Commercial Real Estate loans consist of loans secured by farmland or by improved commercial property. Farmland includes all land known to be used or usable for agricultural purposes, such as crop and livestock production, grazing, or pasture land. Improved commercial property can be owner occupied or non-owner occupied secured by commercial structures such as churches, retail strip centers, hotels, industrial warehouses or office buildings. The repayment of these loans tends to depend upon the operation and management of a business or lease income from a business, and therefore adverse economic conditions can affect the ability to repay.
Other Real Estate Secured Loans consist of loans secured by five or more multi-family dwelling units. These loans are typically exemplified by apartment buildings or complexes. The ability to manage and rent units affects the income that usually provides repayment for this type of loan.
Commercial, Financial, and Agricultural loans consist of loans extended for the operation of a business or a farm. They are not secured by real estate. Commercial loans are used to provide working capital, acquire inventory, finance the carrying of receivables, purchase equipment or vehicles, or purchase other capital assets. Agricultural loans are typically for purposes such as planting crops, acquiring livestock, or purchasing farm equipment. The repayment of these loans comes from the cash flow of a business or farm and is generated by sales of crops or inventory or providing of services. The collateral tends to depreciate over time and is difficult to monitor. Frequent statements are required from the borrower pertaining to inventory levels or receivables aging.
Consumer loans consist largely of loans extended to individuals for purposes such as to purchase a vehicle or other consumer goods. These loans are not secured by real estate but are frequently collateralized by the consumer items being acquired with the loan proceeds. This type of collateral tends to depreciate and therefore the term of the loan is tailored to fit the expected value of the collateral as it depreciates, along with specific underwriting policies and guidelines.
Tax exempt loans consist of loans that are extended to entities such as municipalities. These loans tend to be dependent on the ability of the borrowing entity to continue to collect taxes to repay the indebtedness.
Other Loans consist of those loans which are not elsewhere classified in these categories and are not secured by real estate.
Other Real Estate Owned: Real estate acquired through or instead of loan foreclosure is reported as other real estate owned and initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs after acquisition are expensed as incurred.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Premises and equipment that have been identified for future sale or other disposal, if any, are reported as held for sale at fair value.
Restricted Equity Securities: These securities consist of Federal Home Loan Bank (“FHLB”) stock. The Bank is a member of the FHLB system. Members of the FHLB are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. These securities are carried at cost, classified as restricted equity securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Bank Owned Life Insurance: Bank owned life insurance (“BOLI”) is life insurance purchased by the Bank on certain current or former key executives. The Bank is the owner and beneficiary of the policies. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Intangible Assets: Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Intangible assets consist of core deposit and acquired customer relationship intangible assets arising from the Company’s acquisition of the First National Bank of Centerville, in Centerville, Tennessee (“First National”) in 2007. These assets are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which were determined to be 15 years.
F-14
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market are accounted for as free standing derivatives and recorded at fair value. Fair values of these mortgage derivatives are estimated based on the anticipated gain from the sale of the underlying loan. Changes in the fair values of these derivatives are included in noninterest income as gain on sale of loans.
Long-Term Assets: Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Retirement Plans: Supplemental employee retirement plan (“SERP”) expense is the net of service and interest cost. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. The Company has matched 100% of the first 3% and 50% of the next 2% the employee contributes to their 401(k) annually.
Employee Stock Purchase Plan: During 2008, the Company approved the Community First, Inc. Employee Stock Purchase Plan (the “Plan”). Under the Plan, eligible employees may elect for the Company to withhold a portion of their periodic compensation and purchase common shares of the Company at a purchase price equal to 95% of the closing market price of the shares of common stock on the last day of the three-month trading period. Expenses for the plan consist of administrative fees from the Company’s transfer agent and are immaterial.
Earnings per Common Share: Basic earnings per share available to common shareholders is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share available to common shareholders include the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
F-15
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. At December 31, 2015, the Bank was in compliance with its reserve requirements.
Dividend Restriction: The Company’s primary source of funds to pay dividends to shareholders is the dividends it receives from the Bank. Applicable state laws and the regulations of the Federal Reserve Bank and the Federal Deposit Insurance Corporation regulate the payment of dividends. Under the state regulations, the amount of dividends that may be paid by the Bank to the Company without prior approval of the Commissioner of the Tennessee Department of Financial Institutions is limited in any one calendar year to an amount equal to the net income in the calendar year of declaration plus retained net income for the preceding two years; however, future dividends will be dependent on the level of earnings, capital and liquidity requirements and considerations of the Bank and Company.
Fair Value of Financial Instruments: Fair value of financial instruments is estimated using relevant market information and other assumptions, as more fully disclosed in Note 7. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. All of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.
NOTE 2 - SECURITIES AVAILABLE FOR SALE
The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at December 31, 2015 and 2014 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
2015 | | | | | | | | | | | | | | | | |
Mortgage-backed - residential | | $ | 116,537 | | | $ | 176 | | | $ | (619 | ) | | $ | 116,094 | |
State and municipals | | | 2,705 | | | | 26 | | | | (1 | ) | | | 2,730 | |
Total | | $ | 119,242 | | | $ | 202 | | | $ | (620 | ) | | $ | 118,824 | |
| | | | | | | | | | | | | | | | |
2014 | | | | | | | | | | | | | | | | |
U.S. government sponsored entities | | $ | 15,618 | | | $ | — | | | $ | (266 | ) | | $ | 15,352 | |
Mortgage-backed - residential | | | 73,576 | | | | 530 | | | | (92 | ) | | | 74,014 | |
State and municipals | | | 2,012 | | | | 62 | | | | — | | | | 2,074 | |
Total | | $ | 91,206 | | | $ | 592 | | | $ | (358 | ) | | $ | 91,440 | |
The proceeds from sales of securities and the associated gains and losses for the three most recently completed fiscal years are listed below:
| | 2015 | | | 2014 | | | 2013 | |
Proceeds | | $ | 23,000 | | | $ | 34,427 | | | $ | 3,675 | |
Gross gains | | | 103 | | | | 483 | | | | 182 | |
Gross losses | | | (93 | ) | | | (262 | ) | | | — | |
Tax provision related to the net realized gains was $6 for 2015 and $0 for 2014 and 2013.
F-16
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.
| | December 31, 2015 | |
| | Amortized Cost | | | Fair Value | |
Due in one year or less | | $ | 589 | | | $ | 595 | |
Due after one through five years | | | 503 | | | | 510 | |
Due after five through ten years | | | 529 | | | | 532 | |
Due after ten years | | | 1,084 | | | | 1,093 | |
Mortgage-backed - residential | | | 116,537 | | | | 116,094 | |
Total | | $ | 119,242 | | | $ | 118,824 | |
Securities pledged at December 31, 2015 and 2014 had carrying amounts of $46,757 and $41,829, respectively, and were pledged to secure public deposits and repurchase agreements.
The Company did not hold securities of any one issuer, other than U.S. Government sponsored entities, with a face amount greater than 10% of shareholders’ equity as of December 31, 2015 or 2014.
The following table summarizes the investment securities with unrealized losses at December 31, 2015 and 2014 aggregated by major security type and length of time in a continuous unrealized loss position:
| | Less than 12 Months | | | 12 Months or More | | | Total | |
2015 | | | | | | | | | | | | | | | | | | | | | | | | |
Description of Securities | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
Mortgage-backed - residential | | $ | 91,293 | | | $ | (614 | ) | | $ | 311 | | | $ | (5 | ) | | $ | 91,604 | | | $ | (619 | ) |
State and municipals | | | 403 | | | | (1 | ) | | | — | | | | — | | | | 403 | | | | (1 | ) |
Total temporarily impaired | | $ | 91,696 | | | $ | (615 | ) | | $ | 311 | | | $ | (5 | ) | | $ | 92,007 | | | $ | (620 | ) |
| | Less than 12 Months | | | 12 Months or More | | | Total | |
2014 | | | | | | | | | | | | | | | | | | | | | | | | |
Description of Securities | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
U.S. Government sponsored entities | | $ | 246 | | | $ | (4 | ) | | $ | 15,106 | | | $ | (262 | ) | | $ | 15,352 | | | $ | (266 | ) |
Mortgage-backed - residential | | | 6,869 | | | | (26 | ) | | | 6,963 | | | | (66 | ) | | | 13,832 | | | | (92 | ) |
Total temporarily impaired | | $ | 7,115 | | | $ | (30 | ) | | $ | 22,069 | | | $ | (328 | ) | | $ | 29,184 | | | $ | (358 | ) |
Other-Than-Temporary Impairment
Management evaluates securities for other-than-temporary impairment (“OTTI”) quarterly, and more frequently when economic or market conditions warrant such an evaluation. Securities classified as available for sale are generally evaluated for OTTI under the provisions of ASC 320-10, Investments - Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When OTTI is identified, the amount of the OTTI that will be recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the
F-17
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
As of December 31, 2015, the Company’s securities portfolio consisted of 94 securities, 50 of which were in an unrealized loss position. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is not more likely than not that it will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2015.
NOTE 3 - LOANS
Loans outstanding by category at December 31, 2015 and 2014 were as follows:
| | 2015 | | | 2014 | |
Real estate construction: | | | | | | | | |
Residential construction | | $ | 11,191 | | | $ | 9,382 | |
Other construction | | | 10,178 | | | | 16,520 | |
1-4 family residential: | | | | | | | | |
Revolving, open ended | | | 15,278 | | | | 17,147 | |
First liens | | | 83,441 | | | | 83,618 | |
Junior liens | | | 1,781 | | | | 1,926 | |
Commercial real estate: | | | | | | | | |
Farmland | | | 7,855 | | | | 7,495 | |
Owner occupied | | | 50,334 | | | | 42,383 | |
Non-owner occupied | | | 53,175 | | | | 49,455 | |
Other real estate secured loans | | | 6,369 | | | | 5,825 | |
Commercial, financial and agricultural: | | | | | | | | |
Agricultural | | | 1,053 | | | | 855 | |
Commercial and industrial | | | 17,184 | | | | 14,659 | |
Consumer | | | 6,476 | | | | 5,641 | |
Tax exempt | | | 4 | | | | 31 | |
Other | | | 150 | | | | 1,499 | |
| | $ | 264,469 | | | $ | 256,436 | |
Residential mortgage loans intended to be sold to secondary market investors that were not subsequently sold totaled $0 at December 31, 2015 and 2014. However, prior to 2014, the Bank did have some loans that met this criteria and are still retained in the Bank’s portfolio. These loans were transferred at fair value to the Bank’s held for investment loan portfolio. The principal balance and carrying value of the previously mentioned loans reclassified from held for sale to portfolio loans was $513 and $529 at December 31, 2015 and 2014, respectively.
Changes in the allowance for loan losses were as follows:
| | 2015 | | | 2014 | | | 2013 | |
Balance at beginning of year | | $ | 5,171 | | | $ | 8,039 | | | $ | 9,767 | |
(Reversal of) provision for loan losses | | | (2,257 | ) | | | (1,014 | ) | | | 45 | |
Loans charged off | | | (322 | ) | | | (2,061 | ) | | | (2,054 | ) |
Recoveries | | | 1,683 | | | | 207 | | | | 281 | |
Balance at end of year | | $ | 4,275 | | | $ | 5,171 | | | $ | 8,039 | |
F-18
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The following tables present activity in allowance for loan losses and the outstanding loan balance by portfolio segment and based on impairment method as of December 31, 2015. The balances for “recorded investment” in the following tables related to credit quality do not include approximately $792 and $744 in accrued interest receivable at December 31, 2015 and 2014, respectively. Accrued interest receivable is a component of the Company’s recorded investment in loans.
| | Real Estate Construction | | | 1-4 Family Residential | | | Commercial Real Estate | | | Other Real Estate Secured Loans | | | Commercial, Financial and Agricultural | | | Consumer | | | Tax Exempt | | | Other Loans | | | Unallocated | | | Total | |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 892 | | | $ | 2,332 | | | $ | 994 | | | $ | 22 | | | $ | 399 | | | $ | 22 | | | $ | — | | | $ | — | | | $ | 510 | | | $ | 5,171 | |
Charge-offs | | | — | | | | (246 | ) | | | — | | | | — | | | | (25 | ) | | | (6 | ) | | | — | | | | (45 | ) | | | — | | | | (322 | ) |
Recoveries | | | 128 | | | | 161 | | | | 620 | | | | — | | | | 259 | | | | 5 | | | | — | | | | 510 | | | | — | | | | 1,683 | |
(Reversal of) provision | | | (147 | ) | | | (568 | ) | | | (894 | ) | | | (10 | ) | | | (45 | ) | | | (4 | ) | | | — | | | | (465 | ) | | | (124 | ) | | | (2,257 | ) |
Total ending allowance balance | | $ | 873 | | | $ | 1,679 | | | $ | 720 | | | $ | 12 | | | $ | 588 | | | $ | 17 | | | $ | — | | | $ | — | | | $ | 386 | | | $ | 4,275 | |
December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 1,249 | | | $ | 3,235 | | | $ | 1,273 | | | $ | 33 | | | $ | 704 | | | $ | 24 | | | $ | — | | | $ | 929 | | | $ | 592 | | | $ | 8,039 | |
Charge-offs | | | (103 | ) | | | (341 | ) | | | (25 | ) | | | — | | | | (489 | ) | | | (1 | ) | | | — | | | | (1,102 | ) | | | — | | | | (2,061 | ) |
Recoveries | | | 44 | | | | 31 | | | | 30 | | | | — | | | | 51 | | | | 9 | | | | — | | | | 42 | | | | — | | | | 207 | |
(Reversal of) provision | | | (298 | ) | | | (593 | ) | | | (284 | ) | | | (11 | ) | | | 133 | | | | (10 | ) | | | — | | | | 131 | | | | (82 | ) | | | (1,014 | ) |
Total ending allowance balance | | $ | 892 | | | $ | 2,332 | | | $ | 994 | | | $ | 22 | | | $ | 399 | | | $ | 22 | | | $ | — | | | $ | — | | | $ | 510 | | | $ | 5,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 1,938 | | | $ | 4,133 | | | $ | 1,514 | | | $ | 226 | | | $ | 994 | | | $ | 14 | | | $ | — | | | $ | 368 | | | $ | 580 | | | $ | 9,767 | |
Charge-offs | | | — | | | | (759 | ) | | | (639 | ) | | | — | | | | (600 | ) | | | (5 | ) | | | — | | | | (51 | ) | | | — | | | | (2,054 | ) |
Recoveries | | | 21 | | | | 73 | | | | 38 | | | | — | | | | 111 | | | | 8 | | | | — | | | | 30 | | | | — | | | | 281 | |
(Reversal of) provision | | | (710 | ) | | | (212 | ) | | | 360 | | | | (193 | ) | | | 199 | | | | 7 | | | | — | | | | 582 | | | | 12 | | | | 45 | |
Total ending allowance balance | | $ | 1,249 | | | $ | 3,235 | | | $ | 1,273 | | | $ | 33 | | | $ | 704 | | | $ | 24 | | | $ | — | | | $ | 929 | | | $ | 592 | | | $ | 8,039 | |
Ending allowance balance attributable to loans at December 31, 2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | — | | | $ | 84 | | | $ | 134 | | | $ | — | | | $ | 121 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 340 | |
Collectively evaluated for Impairment | | | 873 | | | | 1,595 | | | | 586 | | | | 12 | | | | 467 | | | | 16 | | | | — | | | | — | | | | 386 | | | | 3,935 | |
Total ending allowance balance | | $ | 873 | | | $ | 1,679 | | | $ | 720 | | | $ | 12 | | | $ | 588 | | | $ | 17 | | | $ | — | | | $ | — | | | $ | 386 | | | $ | 4,275 | |
Ending allowance balance attributable to loans at December 31, 2014: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 66 | | | $ | 126 | | | $ | 55 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 247 | |
Collectively evaluated for Impairment | | | 826 | | | | 2,206 | | | | 939 | | | | 22 | | | | 399 | | | | 22 | | | | — | | | | — | | | | 510 | | | | 4,924 | |
Total ending allowance balance | | $ | 892 | | | $ | 2,332 | | | $ | 994 | | | $ | 22 | | | $ | 399 | | | $ | 22 | | | $ | — | | | $ | — | | | $ | 510 | | | $ | 5,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans at December 31, 2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 50 | | | $ | 2,179 | | | $ | 5,488 | | | $ | — | | | $ | 233 | | | $ | 14 | | | $ | — | | | $ | — | | | | | | | $ | 7,964 | |
Collectively evaluated for impairment | | | 21,319 | | | | 98,321 | | | | 105,876 | | | | 6,369 | | | | 18,004 | | | | 6,462 | | | | 4 | | | | 150 | | | | | | | | 256,505 | |
Total loans balance | | $ | 21,369 | | | $ | 100,500 | | | $ | 111,364 | | | $ | 6,369 | | | $ | 18,237 | | | $ | 6,476 | | | $ | 4 | | | $ | 150 | | | | | | | $ | 264,469 | |
Loans at December 31, 2014: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 5,250 | | | $ | 1,499 | | | $ | 1,778 | | | $ | — | | | $ | — | | | $ | 7 | | | $ | — | | | $ | 1,351 | | | | | | | $ | 9,885 | |
Collectively evaluated for impairment | | | 20,652 | | | | 101,192 | | | | 97,555 | | | | 5,825 | | | | 15,514 | | | | 5,634 | | | | 31 | | | | 148 | | | | | | | | 246,551 | |
Total loans balance | | $ | 25,902 | | | $ | 102,691 | | | $ | 99,333 | | | $ | 5,825 | | | $ | 15,514 | | | $ | 5,641 | | | $ | 31 | | | $ | 1,499 | | | | | | | $ | 256,436 | |
F-19
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2015:
| | Unpaid Principal Balance | | | Recorded Investment | | | Allowance for Loan Losses Allocated | | | Average Recorded Investment | | | Income Recognized | | | Cash Basis Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Other construction | | | 45 | | | | 45 | | | | — | | | | 1,476 | | | | 4 | | | | 4 | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 56 | | | | 56 | | | | — | | | | 54 | | | | 3 | | | | 3 | |
First liens | | | 383 | | | | 383 | | | | — | | | | 76 | | | | 42 | | | | 35 | |
Junior liens | | | — | | | | — | | | | — | | | | 32 | | | | 4 | | | | 5 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Farmland | | | 82 | | | | 82 | | | | — | | | | 16 | | | | 3 | | | | 3 | |
Owner occupied | | | 1,185 | | | | 1,185 | | | | — | | | | 237 | | | | 55 | | | | 56 | |
Non-owner occupied | | | 31 | | | | 31 | | | | — | | | | 510 | | | | 3 | | | | 3 | |
Other real estate loans | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 13 | | | | 9 | | | | — | | | | 2 | | | | — | | | | — | |
Consumer | | | 3 | | | | 3 | | | | — | | | | 4 | | | | — | | | | — | |
Other loans | | | — | | | | — | | | | — | | | | 811 | | | | — | | | | — | |
Total with no related allowance recorded | | | 1,798 | | | | 1,794 | | | | — | | | | 3,218 | | | | 114 | | | | 109 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Other construction | | | 5 | | | | 5 | | | | — | | | | 834 | | | | — | | | | — | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 33 | | | | 33 | | | | 29 | | | | 35 | | | | 2 | | | | 2 | |
First liens | | | 1,707 | | | | 1,707 | | | | 55 | | | | 1,822 | | | | 91 | | | | 96 | |
Junior liens | | | — | | | | — | | | | — | | | | 35 | | | | — | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Farmland | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Owner occupied | | | 3,093 | | | | 3,093 | | | | 108 | | | | 1,050 | | | | 168 | | | | 152 | |
Non-owner occupied | | | 1,097 | | | | 1,097 | | | | 26 | | | | 772 | | | | 62 | | | | 60 | |
Other real estate loans | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 224 | | | | 224 | | | | 121 | | | | 90 | | | | 17 | | | | 13 | |
Consumer | | | 11 | | | | 11 | | | | 1 | | | | 3 | | | | 1 | | | | 1 | |
Other loans | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Total with an allocated allowance recorded | | | 6,170 | | | | 6,170 | | | | 340 | | | | 4,641 | | | | 341 | | | | 324 | |
Total | | $ | 7,968 | | | $ | 7,964 | | | $ | 340 | | | $ | 7,859 | | | $ | 455 | | | $ | 433 | |
F-20
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2014:
| | Unpaid Principal Balance | | | Recorded Investment | | | Allowance for Loan Losses Allocated | | | Average Recorded Investment | | | Income Recognized | | | Cash Basis Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction | | $ | — | | | $ | — | | | $ | — | | | $ | 821 | | | $ | — | | | $ | — | |
Other construction | | | 3,952 | | | | 3,849 | | | | — | | | | 5,102 | | | | — | | | | — | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 54 | | | | 54 | | | | — | | | | 42 | | | | 3 | | | | 3 | |
First liens | | | — | | | | — | | | | — | | | | 774 | | | | 6 | | | | 6 | |
Junior liens | | | 108 | | | | 108 | | | | — | | | | 69 | | | | — | | | | (1 | ) |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Owner occupied | | | — | | | | — | | | | — | | | | 353 | | | | — | | | | — | |
Non-owner occupied | | | 3,188 | | | | 1,233 | | | | — | | | | 1,518 | | | | 3 | | | | 3 | |
Other real estate loans | | | — | | | | — | | | | — | | | | 88 | | | | — | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | — | | | | — | | | | — | | | | 28 | | | | — | | | | — | |
Consumer | | | 4 | | | | 4 | | | | — | | | | 3 | | | | — | | | | — | |
Other loans | | | 6,652 | | | | 1,351 | | | | — | | | | 676 | | | | — | | | | — | |
Total with no related allowance recorded | | | 13,958 | | | | 6,599 | | | | — | | | | 9,474 | | | | 12 | | | | 11 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction | | | — | | | | — | | | | — | | | | 925 | | | | 55 | | | | 56 | |
Other construction | | | 1,402 | | | | 1,402 | | | | 66 | | | | 2,842 | | | | 1 | | | | 1 | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 37 | | | | 37 | | | | 33 | | | | 94 | | | | 3 | | | | 4 | |
First liens | | | 1,299 | | | | 1,299 | | | | 93 | | | | 2,474 | | | | 65 | | | | 69 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Owner occupied | | | 545 | | | | 545 | | | | 55 | | | | 734 | | | | 64 | | | | 66 | |
Non-owner occupied | | | — | | | | — | | | | — | | | | 604 | | | | — | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | — | | | | — | | | | — | | | | 92 | | | | — | | | | — | |
Consumer | | | 3 | | | | 3 | | | | — | | | | 9 | | | | — | | | | — | |
Other loans | | | — | | | | — | | | | — | | | | 926 | | | | — | | | | — | |
Total with an allocated allowance recorded | | | 3,286 | | | | 3,286 | | | | 247 | | | | 8,700 | | | | 188 | | | | 196 | |
Total | | $ | 17,244 | | | $ | 9,885 | | | $ | 247 | | | $ | 18,174 | | | $ | 200 | | | $ | 207 | |
F-21
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2013:
| | Unpaid Principal Balance | | | Recorded Investment | | | Allowance for Loan Losses Allocated | | | Average Recorded Investment | | | Income Recognized | | | Cash Basis Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction | | $ | — | | | $ | — | | | $ | — | | | $ | 633 | | | $ | — | | | $ | — | |
Other construction | | | 6,564 | | | | 6,564 | | | | — | | | | 7,507 | | | | 1 | | | | 1 | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 110 | | | | 110 | | | | — | | | | 184 | | | | 4 | | | | 5 | |
First liens | | | 1,163 | | | | 1,163 | | | | — | | | | 1,751 | | | | 29 | | | | 33 | |
Junior liens | | | 83 | | | | 83 | | | | — | | | | 70 | | | | 4 | | | | 3 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Farmland | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Owner occupied | | | 1,411 | | | | 1,411 | | | | — | | | | 1,159 | | | | 58 | | | | 64 | |
Non-owner occupied | | | 3,582 | | | | 1,627 | | | | — | | | | 1,354 | | | | — | | | | — | |
Other real estate loans | | | 119 | | | | 119 | | | | — | | | | 123 | | | | — | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | 1 | | | | 1 | | | | — | | | | 93 | | | | — | | | | — | |
Commercial and industrial | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | |
Consumer | | | 1 | | | | 1 | | | | — | | | | — | | | | — | | | | — | |
Other loans | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Total with no related allowance recorded | | | 13,034 | | | | 11,079 | | | | — | | | | 12,875 | | | | 96 | | | | 106 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction | | | 2,515 | | | | 2,515 | | | | 62 | | | | 2,868 | | | | — | | | | — | |
Other construction | | | 2,291 | | | | 2,291 | | | | 414 | | | | 2,866 | | | | 15 | | | | 15 | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 179 | | | | 179 | | | | 132 | | | | 377 | | | | 3 | | | | 5 | |
First liens | | | 6,122 | | | | 6,122 | | | | 460 | | | | 5,167 | | | | 272 | | | | 255 | |
Junior liens | | | — | | | | — | | | | — | | | | 87 | | | | — | | | | — | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Owner occupied | | | 1,845 | | | | 1,845 | | | | 276 | | | | 1,862 | | | | 129 | | | | 126 | |
Non-owner occupied | | | — | | | | — | | | | — | | | | 1,224 | | | | — | | | | — | |
Other real estate loans | | | — | | | | — | | | | — | | | | 1,100 | | | | — | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 176 | | | | 176 | | | | 176 | | | | 374 | | | | (35 | ) | | | — | |
Consumer | | | 11 | | | | 11 | | | | — | | | | 7 | | | | 1 | | | | 1 | |
Other loans | | | 6,227 | | | | 1,853 | | | | 926 | | | | 1,853 | | | | — | | | | — | |
Total with an allocated allowance recorded | | | 19,366 | | | | 14,992 | | | | 2,446 | | | | 17,785 | | | | 385 | | | | 402 | |
Total | | $ | 32,400 | | | $ | 26,071 | | | $ | 2,446 | | | $ | 30,660 | | | $ | 481 | | | $ | 508 | |
Troubled Debt Restructurings
The Company has allocated $311 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2015 compared to $214 at December 31, 2014. The Company lost $43 and $143 of interest income in 2015 and 2014, respectively, that would have been recorded in interest income if the specific loans had not been restructured. The Bank had no commitments to lend additional funds to loans classified as troubled debt restructurings at December 31, 2015 and December 31, 2014.
F-22
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
During 2015, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.
Modifications involving a reduction of the stated interest rate and extension of the maturity date of the loan were for periods ranging from six months to two years.
Changes in the Company’s restructured loans are set forth in the table below:
| | Number of Loans | | | Recorded Investment | |
Totals at January 1, 2015 | | | 31 | | | $ | 16,071 | |
Additional loans with concessions | | | 10 | | | | 3,312 | |
Reductions due to: | | | | | | | | |
Reclassified as nonperforming | | | — | | | | — | |
Paid in full | | | (11 | ) | | | (8,869 | ) |
Charge-offs | | | (1 | ) | | | (4 | ) |
Transfer to other real estate owned | | | (1 | ) | | | (7 | ) |
Principal paydowns | | | — | | | | (234 | ) |
Lapse of concession period | | | — | | | | — | |
TDR reclassified as performing loan | | | (1 | ) | | | (2,337 | ) |
Totals at December 31, 2015 | | | 27 | | | $ | 7,932 | |
The following table presents loans by class modified as troubled debt restructurings that occurred during 2015 and 2014:
December 31, 2015 | | Number of Contracts | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | |
Real estate construction: | | | | | | | | | | | | |
Other construction | | | 1 | | | $ | 52 | | | $ | 52 | |
1-4 family residential: | | | | | | | | | | | | |
Revolving, open ended | | | 1 | | | | 4 | | | | 4 | |
First liens | | | 2 | | | | 1,677 | | | | 1,677 | |
Commercial real estate: | | | | | | | | | | | | |
Farmland | | | 1 | | | | 82 | | | | 82 | |
Owner occupied | | | 1 | | | | 136 | | | | 136 | |
Non-owner occupied | | | 1 | | | | 1,113 | | | | 1,113 | |
Commercial, financial, and agricultural | | | | | | | | | | | | |
Commercial and industrial | | | 2 | | | | 237 | | | | 237 | |
Consumer | | | 1 | | | | 11 | | | | 11 | |
Total | | | 10 | | | | 3,312 | | | | 3,312 | |
F-23
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
December 31, 2014 | | Number of Contracts | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | |
1-4 family residential: | | | | | | | | | | | | |
Revolving, open ended | | | 2 | | | $ | 55 | | | $ | 55 | |
First liens | | | 2 | | | | 310 | | | | 310 | |
Commercial real estate: | | | | | | | | | | | | |
Owner occupied | | | 2 | | | | 545 | | | | 545 | |
Non-owner occupied | | | 1 | | | | 35 | | | | 35 | |
Commercial, financial, and agricultural | | | | | | | | | | | | |
Commercial and industrial | | | 3 | | | | 38 | | | | 38 | |
Consumer | | | 1 | | | | 425 | | | | 425 | |
Total | | | 11 | | | $ | 1,408 | | | $ | 1,408 | |
Total troubled debt restructurings had an outstanding balance of $7,932 and had $311 in specific allocations of the allowance for loan losses at December 31, 2015. Total troubled debt restructurings increased the allowance for loan losses by $0 in 2015 and 2014. Troubled debt restructurings still accruing interest totaled $6,729 and $2,140 at December 31, 2015 and 2014, respectively.
The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during 2015 and 2014.
December 31, 2015 | | Number of Contracts | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | |
Commercial, financial, and agricultural | | | | | | | | | | | | |
Commercial and industrial | | | 1 | | | $ | 224 | | | $ | 224 | |
Total | | | 1 | | | $ | 224 | | | $ | 224 | |
December 31, 2014 | | Number of Contracts | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | |
Real estate construction: | | | | | | | | | | | | |
Other construction | | | 1 | | | $ | 263 | | | $ | 263 | |
Commercial, financial, and agricultural | | | | | | | | | | | | |
Commercial and industrial | | | 1 | | | | 221 | | | | 221 | |
Total | | | 2 | | | $ | 484 | | | $ | 484 | |
A loan is considered to be in payment default once it is more than 90 days contractually past due under the modified terms. Troubled debt restructurings that subsequently defaulted as described above increased the allowance for loan losses by $0 and resulted in charge-offs of $0 during 2015 and 2014.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed in accordance with the Company’s internal loan policy. Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
F-24
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2015 and 2014:
| | December 31, 2015 | | | December 31, 2014 | |
| | Nonaccrual | | | Loans past due over 90 days still accruing | | | Nonaccrual | | | Loans past due over 90 days still accruing | |
Real estate construction: | | | | | | | | | | | | | | | | |
Residential construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Other construction | | | 16 | | | | — | | | | 5,236 | | | | — | |
1-4 family residential: | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 82 | | | | — | | | | 78 | | | | — | |
First liens | | | 173 | | | | — | | | | 359 | | | | — | |
Junior liens | | | — | | | | — | | | | — | | | | — | |
Commercial real estate: | | | | | | | | | | | | | | | | |
Farmland | | | 82 | | | | — | | | | — | | | | — | |
Owner occupied | | | — | | | | — | | | | 324 | | | | — | |
Non-owner occupied | | | — | | | | — | | | | 1,199 | | | | — | |
Other real estate loans | | | — | | | | — | | | | 108 | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | |
Agricultural | | | — | | | | — | | | | — | | | | — | |
Commercial and industrial | | | 12 | | | | — | | | | — | | | | — | |
Consumer | | | — | | | | — | | | | — | | | | — | |
Other loans | | | 10 | | | | — | | | | 1,351 | | | | — | |
Total | | $ | 375 | | | $ | — | | | $ | 8,655 | | | $ | — | |
The following table presents the aging of the recorded investment in past due loans, including nonaccrual loans as of December 31, 2015 and 2014 by class of loans:
December 31, 2015 | | 30 - 59 Days Past Due | | | 60 - 89 Days Past Due | | | Greater than 90 Days Past Due | | | Total Past Due | | | Loans Not Past Due | | | Total | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,191 | | | $ | 11,191 | |
Other construction | | | 5 | | | | 23 | | | | — | | | | 28 | | | | 10,150 | | | | 10,178 | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 117 | | | | 75 | | | | 23 | | | | 215 | | | | 15,063 | | | | 15,278 | |
First liens | | | 712 | | | | — | | | | 122 | | | | 834 | | | | 82,607 | | | | 83,441 | |
Junior liens | | | — | | | | — | | | | — | | | | — | | | | 1,781 | | | | 1,781 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Farmland | | | — | | | | — | | | | — | | | | — | | | | 7,855 | | | | 7,855 | |
Owner occupied | | | 221 | | | | — | | | | — | | | | 221 | | | | 50,113 | | | | 50,334 | |
Non-owner occupied | | | — | | | | 350 | | | | — | | | | 350 | | | | 52,825 | | | | 53,175 | |
Other real estate secured loans | | | — | | | | — | | | | — | | | | — | | | | 6,369 | | | | 6,369 | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | — | | | | — | | | | 10 | | | | 10 | | | | 1,043 | | | | 1,053 | |
Commercial and industrial | | | — | | | | 400 | | | | — | | | | 400 | | | | 16,784 | | | | 17,184 | |
Consumer | | | 4 | | | | — | | | | — | | | | 4 | | | | 6,472 | | | | 6,476 | |
Tax exempt | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | 4 | |
Other loans | | | — | | | | — | | | | — | | | | — | | | | 150 | | | | 150 | |
Total | | $ | 1,059 | | | $ | 848 | | | $ | 155 | | | $ | 2,062 | | | $ | 262,407 | | | $ | 264,469 | |
F-25
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
December 31, 2014 | | 30 - 59 Days Past Due | | | 60 - 89 Days Past Due | | | Greater than 90 Days Past Due | | | Total Past Due | | | Loans Not Past Due | | | Total | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,382 | | | $ | 9,382 | |
Other construction | | | 66 | | | | 8 | | | | — | | | | 74 | | | | 16,446 | | | | 16,520 | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 4 | | | | 74 | | | | 78 | | | | 156 | | | | 16,991 | | | | 17,147 | |
First liens | | | 1,111 | | | | 215 | | | | 359 | | | | 1,685 | | | | 81,933 | | | | 83,618 | |
Junior liens | | | — | | | | — | | | | — | | | | — | | | | 1,926 | | | | 1,926 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Farmland | | | — | | | | — | | | | — | | | | — | | | | 7,495 | | | | 7,495 | |
Owner occupied | | | — | | | | — | | | | — | | | | — | | | | 42,383 | | | | 42,383 | |
Non-owner occupied | | | 72 | | | | — | | | | — | | | | 72 | | | | 49,383 | | | | 49,455 | |
Other real estate secured loans | | | 108 | | | | — | | | | — | | | | 108 | | | | 5,717 | | | | 5,825 | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | — | | | | — | | | | — | | | | — | | | | 855 | | | | 855 | |
Commercial and industrial | | | 31 | | | | — | | | | — | | | | 31 | | | | 14,628 | | | | 14,659 | |
Consumer | | | 35 | | | | — | | | | — | | | | 35 | | | | 5,606 | | | | 5,641 | |
Tax exempt | | | — | | | | — | | | | — | | | | — | | | | 31 | | | | 31 | |
Other loans | | | — | | | | — | | | | 926 | | | | 926 | | | | 573 | | | | 1,499 | |
Total | | $ | 1,427 | | | $ | 297 | | | $ | 1,363 | | | $ | 3,087 | | | $ | 253,349 | | | $ | 256,436 | |
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The Company assigns an initial credit risk rating on every loan. All loan relationships with aggregate debt greater than $250 are reviewed at least annually or more frequently if performance of the loan or other factors warrant review. Smaller balance loans are reviewed and evaluated based on changes in loan performance, such as becoming past due or upon notifying the Bank of a change in the borrower’s financial status. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Pass. Loans in this category are to persons or entities with good balance sheets, acceptable liquidity, and acceptable or strong earnings. Guarantors have reasonable or strong net worth, liquidity and earnings. Collateral is acceptable or strong, and is at or below policy advance rates. These borrowers have acceptable quality management if they are entities and have handled previous obligations with the Bank substantially within agreed-upon terms. Cash flow is adequate to service long-term debt. These entities may be minimally profitable now, with projections indicating continued profitability into the foreseeable future. Overall, these loans are basically sound.
Watch. Loans characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced operating losses and declining financial condition. The borrower has satisfactorily handled debts with the Bank in the past, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, the borrower’s margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit the Bank’s exposure. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity is limited.
Special Mention. Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the repayment source or in the Bank’s credit position in the future.
Substandard. Loans inadequately protected by the payment capacity of the borrower or the pledged collateral.
F-26
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Doubtful. Loans with the same characteristics as substandard loans with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values. These are poor quality loans in which neither the collateral nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time or evidence of permanent impairment in the collateral securing the loan.
Impaired loans are evaluated separately from other loans in the Bank’s portfolio. Credit quality information related to impaired loans was presented above and is excluded from the tables below.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of December 31, 2015 and 2014, and based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:
December 31, 2015 | | Pass | | | Watch | | | Special Mention | | | Substandard | | | Doubtful | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | |
Residential construction | | $ | 11,147 | | | $ | 45 | | | $ | — | | | $ | — | | | $ | — | |
Other construction | | | 8,182 | | | | 47 | | | | 7 | | | | 1,891 | | | | — | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 14,816 | | | | 77 | | | | — | | | | 295 | | | | — | |
First liens | | | 70,656 | | | | 10,064 | | | | — | | | | 630 | | | | — | |
Junior liens | | | 1,783 | | | | — | | | | — | | | | — | | | | — | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | |
Farmland | | | 5,897 | | | | 185 | | | | — | | | | 1,691 | | | | — | |
Owner occupied | | | 43,953 | | | | 2,104 | | | | — | | | | — | | | | — | |
Non-owner occupied | | | 50,473 | | | | 1,183 | | | | — | | | | 390 | | | | — | |
Other real estate loans | | | 6,369 | | | | — | | | | — | | | | — | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | 1,043 | | | | 10 | | | | — | | | | — | | | | — | |
Commercial and industrial | | | 15,452 | | | | 1,099 | | | | — | | | | 400 | | | | — | |
Consumer | | | 6,438 | | | | 16 | | | | — | | | | 8 | | | | — | |
Tax exempt | | | 4 | | | | — | | | | — | | | | — | | | | — | |
Other loans | | | 150 | | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 236,363 | | | $ | 14,830 | | | $ | 7 | | | $ | 5,305 | | | $ | — | |
F-27
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
December 31, 2014 | | Pass | | | Watch | | | Special Mention | | | Substandard | | | Doubtful | |
Real estate construction: | | | | | | | | | | | | | | | | | | | | |
Residential construction | | $ | 6,250 | | | $ | 3,132 | | | $ | — | | | $ | — | | | $ | — | |
Other construction | | | 6,673 | | | | 3,756 | | | | — | | | | 840 | | | | — | |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | |
Revolving, open ended | | | 16,664 | | | | 32 | | | | — | | | | 359 | | | | — | |
First liens | | | 66,655 | | | | 11,256 | | | | — | | | | 4,408 | | | | — | |
Junior liens | | | 1,819 | | | | — | | | | — | | | | — | | | | — | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | |
Farmland | | | 4,963 | | | | 905 | | | | — | | | | 1,626 | | | | — | |
Owner occupied | | | 37,204 | | | | 4,634 | | | | — | | | | — | | | | — | |
Non-owner occupied | | | 39,867 | | | | 5,535 | | | | — | | | | 2,821 | | | | — | |
Other real estate loans | | | 5,825 | | | | — | | | | — | | | | — | | | | — | |
Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | 786 | | | | 12 | | | | — | | | | 56 | | | | — | |
Commercial and industrial | | | 13,626 | | | | 978 | | | | — | | | | 56 | | | | — | |
Consumer | | | 5,614 | | | | 3 | | | | — | | | | 17 | | | | — | |
Tax exempt | | | 31 | | | | — | | | | — | | | | — | | | | — | |
Other loans | | | 148 | | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 206,125 | | | $ | 30,243 | | | $ | — | | | $ | 10,183 | | | $ | — | |
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2015 and 2014 were as follows:
| | 2015 | | | 2014 | |
Land | | $ | 5,025 | | | $ | 5,025 | |
Buildings and improvements | | | 8,688 | | | | 8,699 | |
Furniture and equipment | | | 4,812 | | | | 4,395 | |
Construction in process | | | — | | | | 37 | |
| | | 18,525 | | | | 18,156 | |
Less: Accumulated depreciation | | | (6,852 | ) | | | (6,324 | ) |
| | $ | 11,673 | | | $ | 11,832 | |
Depreciation expense for the years ended 2015, 2014, and 2013 was $591, $551 and $621, respectively.
The Bank leases certain branch properties and equipment under operating leases. Rent expense for 2015, 2014, and 2013 was $69, $(21), and $181, respectively. Rent commitments under noncancelable operating leases including renewal options expected to be exercised are as follows:
2016 | | | 62 | |
2017 | | | 15 | |
2018 | | | 2 | |
2019 | | | — | |
2020 | | | — | |
Thereafter | | | — | |
| | $ | 79 | |
F-28
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
During 2014, the Bank purchased a parcel of land that had been previously leased for use as a branch location. This purchase resulted in an increase in the carrying balance of land and a reduction in rent expense during 2014. The decrease in rent expense is due to the reversal of deferred rent in conjunction with the cancellation of the lease for the purchased parcel of land.
NOTE 5 – INTANGIBLE ASSETS
Acquired intangible asset resulting from the Company’s acquisition of First National in 2007 were as follows at December 31, 2015 and 2014:
| | 2015 | | | 2014 | |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
Amortized intangible assets: | | | | | | | | | | | | | | | | |
Core deposit intangible | | $ | 2,812 | | | $ | (1,871 | ) | | $ | 2,812 | | | $ | (1,734 | ) |
Amortization expenses of $137 were recognized in each of 2015, 2014 and 2013.
Estimated amortization expense is $137 per year throughout the remaining estimated life of the intangible asset.
NOTE 6 – OTHER REAL ESTATE OWNED
The carrying amount of other real estate owned is comprised of foreclosed properties, loans made to facilitate the sale of other real estate owned, and a parcel of land purchased by the Bank for construction of a new branch facility that was held for disposal at December 31, 2015. Foreclosed properties totaled $10,105 offset by a valuation allowance of $2,277 at December 31, 2015 and $15,519 offset by a valuation allowance of $1,785 at December 31, 2014. There were no loans made to facilitate the sale of other real estate owned at December 31, 2015 and 2014. Bank properties held for disposal were $0 at December 31, 2015 and 2014.
Expenses related to foreclosed assets include:
| | 2015 | | | 2014 | | | 2013 | |
Net loss (gain) on sales | | $ | 185 | | | $ | 177 | | | $ | (116 | ) |
Operating expenses, net of rental income | | | (214 | ) | | | 71 | | | | 81 | |
Other real estate owned valuation write-downs | | | 900 | | | | 622 | | | | 834 | |
| | | | | | | | | | | | |
Total expenses | | $ | 871 | | | $ | 870 | | | $ | 799 | |
Activity in the valuation allowance was as follows:
| | 2015 | | | 2014 | | | 2013 | |
Beginning of year | | $ | 1,785 | | | $ | 1,819 | | | $ | 1,577 | |
Additions charged to expense | | | 907 | | | | 622 | | | | 834 | |
Direct write downs | | | (415 | ) | | | (656 | ) | | | (592 | ) |
| | | | | | | | | | | | |
End of year | | $ | 2,277 | | | $ | 1,785 | | | $ | 1,819 | |
F-29
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
NOTE 7 - FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on matrix pricing which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities’ relationship to other benchmark quoted securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using estimates of current market rates for each type of security. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Loans Held for Sale in Secondary Market: Generally, the fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics or based on an agreed upon sales price with third party investors and typically result in a Level 2 classification of the inputs for determining fair value.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Other Real Estate Owned: Real estate acquired through foreclosure on a loan or by surrender of the real estate in lieu of foreclosure is called “OREO”. OREO is initially recorded at the fair value of the property less estimated costs to sell, which establishes a new cost basis. OREO is subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Valuation adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Valuation adjustments are also required when the listing price to sell a parcel of OREO has had to be reduced below the current carrying value. If there is a decrease in the fair value of the property from the last valuation, the decrease in value is charged to noninterest expense. All income produced from, changes in fair values in, and gains and losses on OREO is also included in noninterest expense. During the time the property is held, all related operating and maintenance costs are expensed as incurred.
Appraisals for both collateral dependent impaired loans and OREO are performed by certified general appraisers, certified residential appraisers or state licensed appraisers whose qualifications and licenses are annually reviewed and verified by the Bank. Once received, either Bank personnel or an independent review appraiser reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value, and determines whether the appraisal is reasonable. Appraisals for collateral dependent impaired loans and OREO are updated annually. On an annual basis, the Company compares the actual selling costs of collateral that has been liquidated to the selling price to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The Company’s analysis indicated that an additional discount of 15% should be applied to properties with appraisals performed within 12 months.
F-30
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on the anticipated gain from the sale of the underlying loan. Changes in the fair values of these derivatives are included in noninterest income as gain on sale of loans.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | | | | Fair Value Measurements at December 31, 2015 using | |
| | Carrying Value | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | |
Mortgage-backed - residential | | $ | 116,094 | | | $ | 116,094 | | | $ | — | |
State and municipal | | | 2,730 | | | | 2,629 | | | | 101 | |
Total available for sale securities | | | 118,824 | | | | 118,723 | | | | 101 | |
Loans held for sale, in secondary market | | | 156 | | | | 156 | | | | — | |
| | | | | | Fair Value Measurements at December 31, 2014 using | |
| | Carrying Value | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | |
U.S. Government sponsored entities | | $ | 15,352 | | | $ | 15,352 | | | $ | — | |
Mortgage-backed - residential | | | 74,014 | | | | 74,014 | | | | — | |
State and municipal | | | 2,074 | | | | 1,971 | | | | 103 | |
Total available for sale securities | | | 91,440 | | | | 91,337 | | | | 103 | |
Loans held for sale, in secondary market | | | 106 | | | | 106 | | | | — | |
Loans held for sale, at fair value had a carrying amount of $153 at December 31, 2015 compared to $104 at December 31, 2014. The carrying amount includes an adjustment to fair value resulting in additional income of $3 at December 31, 2015.
The following table summarizes the differences between the fair value and the principal balance for loans held for sale measured at fair value as of December 31, 2015:
| | Aggregate Fair Value | | | Aggregate Unpaid Principal Balance | | | Difference | |
Loans held for sale, in secondary market | | $ | 156 | | | $ | 153 | | | $ | 3 | |
F-31
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for each of the periods ended December 31, 2015 and 2014:
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | State and County Municipal securities | |
| | 2015 | | | 2014 | |
Balance at beginning of period | | $ | 103 | | | $ | 105 | |
Change in fair value | | | (2 | ) | | | (2 | ) |
Balance at end of period | | $ | 101 | | | $ | 103 | |
The following methods and assumptions were used by the Company in generating its fair value disclosures:
U.S. Government Sponsored Entities and Mortgage-Backed Securities:
The Company uses an independent third party to value its U.S. government sponsored entities and mortgage-backed securities, which are obligations that are not backed by the full faith and credit of the United States government and consist of Government Sponsored Entities that either issue the securities or guarantee the collection of principal and interest payments thereon. The third party’s valuation approach uses relevant information generated by recently executed transactions that have occurred in the market place that involve similar assets, as well as using cash flow information when necessary. These inputs are observable, either directly or indirectly in the market place for similar assets. The Company considers these valuations to be Level 2 pricing; however, when the securities are added to the portfolio after the third party’s system-wide market value monthly update, the valuations are considered Level 3 pricing.
State and Municipal Securities:
The valuation of the Company’s state and municipal securities is supported by analysis prepared by an independent third party. Their approach to determining fair value involves using recently executed transactions for similar securities and market quotations for similar securities. For these securities that are rated by the rating agencies and have recent trades, the Company considers these valuations to be Level 2 pricing. For these securities that are not rated by the rating agencies and for which trading volumes are thin, the valuations are considered Level 3 pricing.
Corporate Securities:
For corporate securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3 inputs) as determined by an independent third party. The significant unobservable inputs used in the valuation model include discount rates and yields or current spreads to U.S. Treasury rates.
F-32
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Assets and Liabilities Measured on a Non-recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
| | December 31, 2015 | |
| | Carrying Value | | | Fair Value Measurements Using Other Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | |
Impaired loans: | | | | | | | | |
1-4 family residential | | $ | 6 | | | $ | 6 | |
Commercial real estate | | | 206 | | | | 206 | |
Commercial, financial and agricultural | | | 112 | | | | 112 | |
Total impaired loans | | | 324 | | | | 324 | |
Other real estate owned: | | | | | | | | |
Construction and development | | | 2,104 | | | | 2,104 | |
1-4 family residential | | | 665 | | | | 665 | |
Non-farm, non-residential | | | 3,551 | | | | 3,551 | |
Total other real estate owned | | | 6,320 | | | | 6,320 | |
| | December 31, 2014 | |
| | Carrying Value | | | Fair Value Measurements Using Other Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | |
Impaired loans: | | | | | | | | |
Real estate construction | | $ | 727 | | | $ | 727 | |
1-4 family residential | | | 244 | | | | 244 | |
Commercial real estate | | | 1,410 | | | | 1,410 | |
Other loans | | | 926 | | | | 926 | |
Total impaired loans | | | 3,307 | | | | 3,307 | |
Other real estate owned: | | | | | | | | |
Construction and development | | | 4,815 | | | | 4,815 | |
1-4 family residential | | | 710 | | | | 710 | |
Non-farm, non-residential | | | 3,557 | | | | 3,557 | |
Total other real estate owned | | | 9,082 | | | | 9,082 | |
Impaired loans with specific allocations, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had, at December 31, 2015, a principal balance of $490 with a valuation allowance of $166 resulting in an immaterial impact on the allowance for loan losses for the year ended December 31, 2015. At December 31, 2014, impaired loans with specific allocations had a principal balance of $3,373, with a valuation allowance of $66 resulting in no additional provision for loan losses for the year ended December 31, 2014.
Other real estate owned, measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $6,320, which is made up of the outstanding balance of $8,188, net of a valuation allowance of $1,868 at December 31, 2015, resulting in a write-down of $447 charged to expense in the year ended December 31, 2015. Net carrying amount was $9,082 at December 31, 2014, which was made up of the outstanding balance of $10,681, net of a valuation allowance of $1,599, resulting in a write-down of $415 charged to expense during 2014.
F-33
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The following table presents quantitative information about Level 3 fair value measurements for financial instruments at fair value on a non-recurring basis at December 31, 2015:
| | Fair Value | | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) (1) |
Impaired Loans: | | | | | | | | | | |
1-4 Family residential | | $ | 6 | | | Sales comparison approach | | Adjustment for differences between the comparable sales | | (0.0%) – (0.0%) (0.0%) |
Commercial real estate | | | 206 | | | Sales comparison approach | | Adjustment for differences between the comparable sales | | (8.0%) – (8.0%) (8.0%) |
Commercial, financial and agricultural | | | 112 | | | Sales comparison approach | | Adjustment for differences between the comparable sales | | (0.0%) – (0.0%) (0.0%) |
Other real estate owned: | | | | | | | | | | |
Construction and development | | | 2,104 | | | Sales comparison approach | | Adjustment for differences between the comparable sales | | (0.0%) – (0.0%) (0.0%) |
Non-farm, non-residential | | | 665 | | | Sales comparison approach | | Adjustment for differences between the comparable sales | | (0.0%) – (0.0%) (0.0%) |
1-4 Family residential | | | 3,551 | | | Sales comparison approach | | Adjustment for differences between the comparable sales | | (0.0%) – (8.25%) (0.4%) |
(1) | The range presented in the table reflects the discounts applied by the independent appraiser in arriving at their conclusion of market value. Management applies an additional 15% discount to the appraiser’s conclusion of market value to arrive at fair value. |
Carrying amount and estimated fair values of significant financial instruments at December 31, 2015 and 2014 were as follows:
| | December 31, 2015 | |
| | Carrying Amount | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 19,387 | | | $ | 19,387 | | | $ | 19,387 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | | | 24,305 | | | | 24,281 | | | | — | | | | 24,281 | | | | — | |
Securities available for sale | | | 118,824 | | | | 118,824 | | | | — | | | | 118,723 | | | | 101 | |
Loans held for sale | | | 156 | | | | 156 | | | | — | | | | 156 | | | | — | |
Loans, net of allowance | | | 260,194 | | | | 252,881 | | | | — | | | | — | | | | 252,881 | |
Restricted equity securities | | | 1,727 | | | NA | | | NA | | | NA | | | NA | |
Accrued interest receivable | | | 1,140 | | | | 1,140 | | | | 28 | | | | 320 | | | | 792 | |
Financial liabilities | | | | | | | | | | | | | | | | | | | | |
Deposits with stated maturities | | | 203,902 | | | | 204,866 | | | | — | | | | 204,866 | | | | — | |
Deposits without stated maturity | | | 212,812 | | | | 212,812 | | | | 212,812 | | | | — | | | | — | |
Accrued interest payable | | | 434 | | | | 434 | | | | 1 | | | | 407 | | | | 26 | |
Subordinated debentures | | | 23,000 | | | | 23,000 | | | | — | | | | — | | | | 23,000 | |
F-34
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
| | December 31, 2014 | |
| | Carrying Amount | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 38,256 | | | $ | 38,256 | | | $ | 38,256 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | | | 22,177 | | | | 21,999 | | | | — | | | | 21,999 | | | | — | |
Securities available for sale | | | 91,440 | | | | 91,440 | | | | — | | | | 91,337 | | | | 103 | |
Loans held for sale | | | 106 | | | | 106 | | | | — | | | | 106 | | | | — | |
Loans, net of allowance | | | 251,265 | | | | 246,506 | | | | — | | | | — | | | | 246,506 | |
Restricted equity securities | | | 1,727 | | | NA | | | NA | | | NA | | | NA | |
Accrued interest receivable | | | 1,034 | | | | 1,034 | | | | 21 | | | | 269 | | | | 744 | |
Financial liabilities | | | | | | | | | | | | | | | | | | | | |
Deposits with stated maturities | | | 208,386 | | | | 209,376 | | | | — | | | | 209,376 | | | | — | |
Deposits without stated maturity | | | 189,694 | | | | 189,694 | | | | 189,694 | | | | — | | | | — | |
Accrued interest payable | | | 4,921 | | | | 4,921 | | | | 1 | | | | 400 | | | | 4,520 | |
Subordinated debentures | | | 23,000 | | | | 11,500 | | | | — | | | | — | | | | 11,500 | |
Carrying amount is the estimated fair value for cash and cash equivalents, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully resulting in a Level 1 classification. Fair value for accrued interest receivable and payable is based on the contractual terms of the facility, resulting in a Level 1, Level 2 or Level 3 classification based on the classification of the respective facility. The method for determining fair values of securities is discussed above. Restricted equity securities do not have readily determinable fair values due to their restrictions on transferability, therefore no fair value is presented. For fixed rate loans and variable rate loans with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk resulting in a Level 3 classification. For fixed and variable rate deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk resulting in a Level 2 classification. Fair value of impaired loans is estimated using discounted cash flow analysis or underlying collateral values resulting in a Level 3 classification. Fair value of loans held for sale is based on market quotes resulting in a Level 2 classification. Fair value of FHLB advances is based on discounted cash flows using current rates for similar financing resulting in a Level 2 classification. Fair value of subordinated debentures is based on discounted cash flows using current rates for similar financing resulting in a Level 3 classification. The fair value of off-balance-sheet items is not considered material.
NOTE 8 - DEPOSITS
Deposits at December 31, 2015 and 2014 are summarized as follows:
| | 2015 | | | 2014 | |
Noninterest-bearing demand accounts | | $ | 71,874 | | | $ | 60,780 | |
Interest-bearing demand accounts | | | 141,129 | | | | 129,152 | |
Savings accounts | | | 31,255 | | | | 27,709 | |
Time deposits greater than $100 | | | 85,621 | | | | 83,633 | |
Other time deposits | | | 86,835 | | | | 96,806 | |
| | | | | | | | |
| | $ | 416,714 | | | $ | 398,080 | |
At December 31, 2015, scheduled maturities of time deposits are as follows:
2016 | | $ | 117,215 | |
2017 | | | 33,135 | |
2018 | | | 10,770 | |
2019 | | | 4,822 | |
2020 | | | 6,514 | |
Thereafter | | | — | |
| | $ | 172,456 | |
F-35
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Included in other time deposits above are brokered time deposits of $1,392 with a weighted rate of 0.90% at December 31, 2015. No brokered time deposits were held at December 31, 2014. These deposits represent funds which the Bank obtained, directly, or indirectly, through a deposit broker. A deposit broker places deposits from third parties with insured depository institutions or places deposits with an institution for the purpose of selling an interest in those deposits to third parties. As of December 31, 2015, the Bank’s entire portfolio of brokered deposits is scheduled to mature in 2017.
In addition, the Bank has $5,855 in national market time deposits which are purchased by customers through a third-party internet site at December 31, 2015 compared to $7,240 at December 31, 2014. All of these national market time deposits mature by 2018.
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
The Bank has established a line of credit with the FHLB, which is secured by a blanket pledge of the Bank’s 1-4 family residential mortgage loans, commercial real estate loans and open end home equity loans as collateral. The extent of the line is dependent, in part, on available collateral. The arrangement is structured so that the carrying value of the loans pledged amounts to 130% on residential 1-4 family loans, 125% on commercial real estate, and 151% of open end home equity loans of the principal balance of the advances from the FHLB.
To participate in this program, the Bank is required to be a member of the FHLB and own stock in the FHLB. The Bank held $1,727 of such stock at December 31, 2015 and 2014, to satisfy this requirement. Qualifying loans totaling $202,134 were pledged as security under a blanket pledge agreement with the FHLB at December 31, 2015. At December 31, 2015, the Bank was eligible to borrow an additional $84,686 from the FHLB.
The Bank has a cash management line of credit with the FHLB totaling $10,000 that will mature September 2016. At December 31, 2015 and 2014 $0 was drawn on the line. The interest rate on the line varies daily based on the federal funds rate. The rate for the line of credit was 0.45% at December 31, 2015.
NOTE 10 - SUBORDINATED DEBENTURES
In 2002, the Company issued $3,000 of floating rate mandatory redeemable subordinated debentures through a special purpose entity as part of a private offering of trust preferred securities. The securities mature on December 31, 2032; however, the Company can currently repay the securities at any time without penalty, subject to approval from the FRB. The interest rate on the subordinated debentures as of December 31, 2015 was 4.00%. The subordinated debentures bear interest at a floating rate equal to the New York Prime rate plus 50 basis points. The Company has the right from time to time, without causing an event of default, to defer payments of interest on the debentures for up to 20 consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet but count as Tier 1 capital for regulatory capital purposes. Debt issuance costs of $74 have been capitalized and are being amortized over the term of the securities. Certain of the Company’s principal officers, directors, and their affiliates owned $700 of the $3,000 subordinated debentures at year-end 2015 and 2014. The proceeds from this offering were utilized to increase the Bank’s capital.
In 2005, the Company issued $5,000 of floating rate mandatory redeemable subordinated debentures through a special purpose entity as part of a pool offering of trust preferred securities. These securities mature on September 15, 2035, however, the Company can currently repay the securities at any time without penalty, subject to approval from the FRB. The interest rate on the subordinated debentures as of December 31, 2015 was 2.012%. The subordinated debentures bear interest at a floating rate equal to the 3-Month LIBOR plus 1.50%. The Company has the right from time to time, without causing an event of default, to defer payments of interest on the debentures for up to 20 consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet but count as Tier 1 capital for regulatory purposes. There was no debt issuance cost in obtaining the subordinated debentures. The proceeds from the pooled offering were used to increase the Bank’s capital.
In 2007, the Company issued $15,000 of redeemable subordinated debentures through a special purpose entity as part of a pooled offering of trust preferred securities. These subordinated debentures mature in 2037; however, the Company can currently repay the securities at any time without penalty, subject to approval from the FRB. The interest rate on the subordinated debentures was 7.96% until December 15, 2012, and thereafter the subordinated debentures bear interest at a floating rate equal to the 3-month LIBOR plus 3.0%. At December 31, 2015, the interest rate was 3.512%. The Company has the right from time to time, without causing an event
F-36
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
of default, to defer payments of interest on the debentures for up to 20 consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet but $8,300 of the debentures count as Tier 1 capital and the remaining $6,700 is considered as Tier 2 capital for regulatory purposes. There was no debt issuance cost in obtaining the subordinated debentures. The proceeds were used to help fund the acquisition of First National.
The portion of the subordinated debentures qualifying as Tier 1 capital is limited to 50% of total Tier 1 capital. Subordinated debentures in excess of the Tier 1 capital limitation generally qualify as Tier 2 capital. Under the Dodd-Frank Act and the federal regulations issued implementing Basel III, these subordinated debentures will, subject to the limitations described in the preceding sentence, continue to qualify as Tier 1 capital.
Distributions on the subordinated debentures are payable quarterly, and the Company has committed to the FRB in a written agreement dated April 19, 2012 (the “Written Agreement”) that it will not pay interest on the subordinated debentures or dividends on its common or preferred stock without the prior consent of the FRB. On January 27, 2011, the FRB denied the Company’s request to make the March 15, 2011 quarterly interest payment due on the subordinated debentures that mature in 2032, and the Company began deferring interest on all of its subordinated debentures since that date. During the fourth quarter of 2015, the Company received permission to make interest payments on each of the subordinated debt issuances equal to all of the accrued and outstanding interest payments then owing during December 2015. On December 15, 2015, the Company paid $4,809 and on December 31, 2015 the Company paid $635 of interest payments owed but not previously paid on the Company’s subordinated debentures. As of December 31, 2015, the Company was current in the payment of all interest payments due on its subordinated debentures and the Company was no longer in a deferral period as defined by the indentures.
On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of February 29, 2016. As of February 29, 2016, the Company and the Bank have no outstanding enforcement agreements with any of their regulators.
Under the terms of the indenture pursuant to which the debentures were issued, if the Company defers payment of interest on the debentures it may not, during such a deferral period, pay dividends on its common stock or preferred stock or interest on any of the other subordinated debentures issued by the Company. Furthermore, the indentures pursuant to which the debentures issued in 2005 and 2007 were issued provide that the Company’s subsidiaries are similarly prohibited from paying dividends on the subsidiaries’ common and preferred stock not held by the Company or its subsidiaries. On December 31, 2015, the deferral period on the Company’s subordinated debentures ended as a result of the Company paying current all interest payments then due. This ended an existing restriction on Community First Properties, Inc.’s ability to pay dividend payments on its preferred stock. As a result, on December 31, 2015, Community First Properties, Inc. paid dividends to the holders of its preferred stock totaling $86 which brought current all dividend amounts owed to those holders as of December 31, 2015. In addition, Community First Properties, Inc. redeemed at face value all of its outstanding preferred stock on December 31, 2015. It is the Company’s intent to dissolve Community First Properties, Inc. and absorb all of its operations into the Bank at some point in the future. The dissolution of Community First Properties, Inc. and combination with the Bank will not have an impact on the Company’s consolidated financial statements.
NOTE 11 – OTHER BENEFIT PLANS
401(k) Plan: A 401(k) benefit plan allows employee contributions up to 15% of their compensation, of which the Company has matched 100% of the first 3% and 50% of the next 2% the employee contributes to their 401(k) annually for all periods presented. Expense for 2015, 2014 and 2013 was $147, $146 and $136, respectively.
Deferred Compensation and Supplemental Retirement Plans: Deferred compensation and SERP expense allocates the benefits over years of service. The Bank approved the SERP in 2006. The SERP will provide certain current and former officers of the Company or the Bank with benefits upon retirement, death, or disability in certain prescribed circumstances. SERP expense was $39 in 2015, $195 in 2014 and $(13) in 2013, resulting in a deferred compensation liability of $1,293, $1,293 and $1,134 at December 31, 2015, 2014 and 2013, respectively.
NOTE 12 – PREFERRED STOCK
On February 29, 2009, as part of the Capital Purchase Program (“CPP”) of the Troubled Asset Relief Program (“TARP”), the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“U.S. Treasury”), pursuant to which the Company sold 17,806 shares of newly authorized
F-37
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value (the “Series A Preferred Stock”) and also issued warrants (the “Warrants”) to the U.S. Treasury to acquire 890 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B no par value (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, the “Preferred Stock”) for an aggregate purchase price of $17,806 in cash. Upon closing, the U.S. Treasury exercised the Warrants and the Company issued 890 shares of the Series B Preferred Stock.
The Series A Preferred Stock qualified as Tier 1 capital and provided for cumulative dividends at a rate of 5.00% per annum for the first five years, and 9.00% per annum thereafter. Beginning on May 15, 2014, the dividend rate on Series A Preferred Stock increased to 9% per annum. The Series B Preferred Stock also qualified as Tier 1 capital and provided for cumulative dividends at a rate of 9.00% per annum.
As described in Notes 10 and 13, the Company may not pay dividends on its Preferred Stock without the approval of the FRB. In addition, under the terms of the indentures pursuant to which the Company has issued its subordinated debentures, it may not, at any time when it is deferring the payment of interest on its subordinated debentures, as it did from March 15, 2011 to December 15, 2015 or December 31, 2015, as applicable, pay dividends on the Preferred Stock.
On April 14, 2014, the U.S. Treasury, the holder of all the Series A Preferred Stock and Series B Preferred Stock issued by the Company, closed on the sale of the securities in a modified Dutch auction. The clearing price for the Series A Preferred Stock was $300.50 per share and the clearing price for the Series B Preferred Stock was $521.75 per share. The sale was to unaffiliated third party investors as well as certain directors and executive officers of the Company.
The Company received none of the proceeds from the sale of the Series A Preferred Stock or the Series B Preferred Stock by the U.S. Treasury. The sale of the securities had no effect on the terms of the outstanding securities, including the Company’s obligation to satisfy accrued and unpaid dividends or the holders’ right to elect two members to the board of directors of the Company. Further, the sale of the securities had no effect on the Company’s capital, regulatory capital, financial condition or results of operations. Upon the closing of the sale of the securities, the Company was no longer subject to various executive compensation and corporate governance requirements to which participants in the CPP were subject while the U.S. Treasury held the securities.
During the fourth quarter of 2015, the Company received permission for the Bank to pay dividends to the Company and for the Company to utilize those dividends combined with available cash on hand to make interest payments in December 2015 on each of the subordinated debt issuances equal to all of the accrued and outstanding interest as of the payment date. On December 15, 2015, the Company paid $4,809 and on December 31, 2015 the Company paid $635 of interest payments owed but not previously paid on the Company’s subordinated debt. As of December 31, 2015, the Company was current in the payment of all interest payments due on its subordinated debentures and the Company was no longer in a deferral period as defined by the indentures. By virtue of no longer being in a deferral period under the indentures, as of December 31, 2015, the Company was at that date no longer subject to the restrictions outlined above that are a result of deferring interest on the Company’s subordinated debt.
Also during the fourth quarter of 2015, the Company received permission for the Bank to pay additional dividends to the Company for the purpose of redeeming a portion of the outstanding shares of Series A Preferred Stock and all of the outstanding shares of Series B Preferred Stock. On December 23, 2015, the Company entered into redemption agreements (the “Series B Redemption Agreements”) with the holders of the Series B Preferred Stock pursuant to which the Company redeemed all of the outstanding shares of Series B Preferred Stock (the “Series B Redemption”) for a per share redemption price (the “Series B Redemption Price”) equal to the sum of $1,000 and the amount of any accrued but unpaid dividends through the date the shares were redeemed. The outstanding shares of Series B Preferred Stock were redeemed on December 31, 2015. The total Series B Redemption Price per share was $1,543.34. As of December 31, 2015, there are no outstanding shares of Series B Preferred Stock.
On December 23, 2015, the Company entered into redemption agreements (the “Series A Redemption Agreements” and together with the Series B Redemption Agreements, the “Redemption Agreements”) with the holders of 5,901 of the 17,806 outstanding shares of Series A Preferred Stock pursuant to which the Company agreed to redeem these 5,901 outstanding shares of Series A Preferred Stock (the “Series A Redemption” and together with the Series B Redemption the “Redemptions”) for a per share redemption price (the “Series A Redemption Price”) equal to $600. The Company redeemed the 5,901 shares of Series A Preferred Stock on December 31, 2015. Following the Series A Redemption, 11,905 shares of Series A Preferred Stock, the holders of which consented to the Redemptions, remain outstanding.
F-38
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Under the terms of the Written Agreement, the Company was prohibited from declaring dividends without the prior consent of the FRB. As a result of the Company’s deteriorating financial condition, at the request of the FRB, the Company informally agreed, through a board resolution adopted by the Board of Directors on January 18, 2011, that the Company would not incur additional debt, pay common or preferred dividends, pay interest or redeem treasury stock without the prior approval of the FRB. The Company requested permission to make dividend payments on its Preferred Stock and interest payments on its subordinated debentures that were scheduled for the first quarter of 2011. The FRB granted permission to pay the preferred dividends that were due on February 15, 2011, but denied permission to make interest payments on the Company’s subordinated debt. As a result of the FRB’s decision, the Company was required to begin the deferral of interest payments on each of its three subordinated debentures during the first quarter of 2011. The Company has the right to defer the payment of interest on the subordinated debentures at any time, for a period not to exceed 20 consecutive quarters. During the period in which it is deferring the payment of interest on its subordinated debentures, the Company may not pay any dividends on its common stock or Preferred Stock and the Company’s subsidiaries may not pay dividends on the subsidiaries’ common or preferred stock owned by entities other than the Company and its subsidiaries. Accordingly, the Company was required to suspend dividend payments on the Preferred Stock beginning with the dividend payment due on May 15, 2011 and since such date the Company has been unable to secure the approval of the FRB to make dividend payments on the Preferred Stock.
As a result of the Series A Redemption, $2,360 of the Company’s capital was reclassified from the Preferred Stock element of capital to Common Stock as a result of the shares having a face value of $1,000 per share and the Company redeeming those shares for $600 per share. In addition, the 5,901 shares that were redeemed had accumulated and outstanding dividends totaling $2,114 that were no longer payable upon redemption of the shares. The Company reduced the amount of Preferred Stock dividends that had been accrued in 2015 by that amount, which increased the Company’s retained earnings.
On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of February 29, 2016.
At December 31, 2015, the Company had accumulated $4,265 in deferred dividends on the Series A Preferred Stock.
NOTE 13 – REGULATORY MATTERS
Bank holding companies with total consolidated assets in excess of $1 billion and banks are subject to regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off‑balance‑sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate regulatory actions that could have a direct material effect on the financial statements.
Prompt corrective action regulations classify banks into one of five capital categories depending on how well they meet their minimum capital requirements. Although these terms are not used to represent the overall financial condition of a bank, the classifications are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. If adequately capitalized or worse, or subject to a written agreement, consent order, or cease and desist order requiring higher minimum capital levels, regulatory approval was required for the Bank to accept, renew or rollover brokered deposits. If a bank is classified as undercapitalized or worse, its capital distributions are restricted, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2015, the Bank’s and the Company’s capital ratios were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action. Because the Company’s total assets were less than $1,000,000 at December 31, 2015, the Company is not required to maintain certain consolidated capital levels.
Under the terms of the Written Agreement, the Company agreed to, among other things, take the following actions:
| · | Take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure that the Bank complies with the Consent Order; |
| · | Submit within 60 days of April 19, 2012 a written plan to maintain sufficient capital at the Company on a consolidated basis, and within 10 days of approval of the plan by the FRB, adopt the approved capital plan; |
| · | Submit within 60 days of April 19, 2012 a written statement of the Company’s planned sources and uses of cash for debt service, operating expenses, and other purposes for 2012; |
F-39
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
| · | Provide notice in compliance with applicable federal law and regulations, of any changes in directors or senior executive officer of the Company; |
| · | Comply with applicable federal law and regulations restricting indemnification and severance payments; and |
| · | Provide within 45 days after the end of each calendar quarter, a written progress report detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement. |
In addition, under the terms of the Written Agreement, the Company has agreed to, among other things:
| · | Refrain from declaring or paying any dividends without prior approval of the FRB; |
| · | Not directly or indirectly take dividends or any other form of payment representing a reduction in capital from the Bank without prior approval; |
| · | Not (along with the Company’s non-bank subsidiary) make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior approval; |
| · | Not (along with the Company’s non-bank subsidiary) directly or indirectly incur, increase, or guarantee any debt without prior approval; and |
| · | Not directly or indirectly purchase or redeem any shares of its stock without prior approval. |
As of December 31, 2015, all of the plans required to be submitted to the FRB have been submitted and approved. Management believes that the Company is in compliance with the requirements of the Written Agreement as of December 31, 2015. On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of February 29, 2016.
The Company’s principal source of funds for dividend and/or interest payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid by the Bank in any calendar year without approval from the Commissioner of the Tennessee Department of Financial Institutions is limited to the current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements described above. The Company is also restricted in the types and amounts of dividends it can pay pursuant to the terms of the Series A Preferred Stock.
F-40
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
Bank holding companies and banks are subject to various regulatory capital requirements administered by State and Federal banking agencies. The Company’s and the Bank’s capital amounts and ratios at December 31, 2015 and 2014, were as follows:
| | Actual | | | For Capital Adequacy Purposes | | | To Be Well Capitalized Under Applicable Regulatory Provisions(1) | |
December 31, 2015 | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total Capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 44,057 | | | | 14.35 | % | | $ | 24,559 | | | | 8.00 | % | | $ | 30,699 | | | | 10.00 | % |
Consolidated | | | 36,896 | | | | 11.91 | % | | | 24,779 | | | | 8.00 | % | | | 30,974 | | | | 10.00 | % |
Tier 1 Capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 40,159 | | | | 13.08 | % | | $ | 12,280 | | | | 4.00 | % | | $ | 18,419 | | | | 6.00 | % |
Consolidated | | | 21,963 | | | | 7.09 | % | | | 12,389 | | | | 4.00 | % | | | 18,584 | | | | 6.00 | % |
Tier 1 Capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 40,159 | | | | 8.79 | % | | $ | 18,274 | | | | 4.00 | % | | $ | 22,843 | | | | 5.00 | % |
Consolidated | | | 21,963 | | | | 4.82 | % | | | 18,242 | | | | 4.00 | % | | N/A | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 44,173 | | | | 16.32 | % | | $ | 21,654 | | | | 8.00 | % | | $ | 27,068 | | | | 10.00 | % |
Consolidated | | | 26,624 | | | | 9.83 | % | | | 21,668 | | | | 8.00 | % | | | 27,086 | | | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 40,768 | | | | 15.06 | % | | $ | 10,827 | | | | 4.00 | % | | $ | 16,241 | | | | 6.00 | % |
Consolidated | | | 15,477 | | | | 5.71 | % | | | 10,834 | | | | 4.00 | % | | | 16,251 | | | | 6.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | |
Community First Bank & Trust | | $ | 40,768 | | | | 9.32 | % | | $ | 17,490 | | | | 4.00 | % | | $ | 21,862 | | | | 5.00 | % |
Consolidated | | | 15,477 | | | | 3.52 | % | | | 17,586 | | | | 4.00 | % | | N/A | | | N/A | |
(1) | Because the Company’s total assets were less than $1,000,000 at December 31, 2015, the Company was not, at that date, subject to capital level requirements at that level. |
The Bank’s capital ratios at December 31, 2015 were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action.
Because the Company’s total assets were less than $1,000,000 at December 31, 2015, the Company is not required to meet certain consolidated capital level requirements. Had the Company’s assets exceeded $1,000,000 at that date, the Company’s capital levels at December 31, 2015 would have been considered “well capitalized”.
F-41
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
In July 2013, the Federal banking regulators, in response to the statutory requirements of The Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted new regulations implementing the Basel Capital Adequacy Accord (“Basel III”) and the related minimum capital ratios. The new capital requirements which are effective January 1, 2015 and apply to banks and bank holding companies with in excess of $1,000,000 in assets, include a new “Common Equity Tier 1 Ratio”, which has stricter rules as to what qualifies as Common Equity Tier 1 Capital. A summary of the changes to the regulatory capital ratios are as follows:
| | Guideline in Effect | | | | |
| | At December 31, 2014 | | | Basel III Requirements | |
| | Adequately | | | Well | | | Adequately | | | Well | |
| | Capitalized | | | Capitalized | | | Capitalized | | | Capitalized | |
Common Equity Tier 1 Ratio (Common Equity to Risk Weighted Assets) | | Not Applicable | | | Not Applicable | | | | 4.5 | % | | | 6.5 | % |
| | | | | | | | | | | | | | | | |
Tier 1 Capital to Risk Weighted Assets | | | 4 | % | | | 6 | % | | | 6 | % | | | 8 | % |
Total Capital to Risk Weighted Assets | | | 8 | % | | | 10 | % | | | 8 | % | | | 10 | % |
| | | | | | | | | | | | | | | | |
Tier 1 Leverage Ratio | | | 4 | % | | | 5 | % | | | 4 | % | | | 5 | % |
The guidelines under Basel III also establish a 2.5% capital conservation buffer requirement that is phased in over four years beginning January 1, 2016. The buffer is related to risk weighted assets. The Basel III minimum requirements for capital adequacy after giving effect to the buffer are as follows:
| | 2016 | | | 2017 | | | 2018 | | | 2019 | |
Common Equity Tier 1 Ratio | | | 5.125 | % | | | 5.75 | % | | | 6.375 | % | | | 7.0 | % |
| | | | | | | | | | | | | | | | |
Tier 1 Capital to Risk-Weighted Assets Ratio | | | 6.625 | % | | | 7.25 | % | | | 7.875 | % | | | 8.5 | % |
| | | | | | | | | | | | | | | | |
Total Capital to Risk-Weighted Assets Ratio | | | 8.625 | % | | | 9.25 | % | | | 9.875 | % | | | 10.5 | % |
As described above, because the Company’s total assets are less than $1,000,000, the Company will not be required to comply with these new capital guidelines required under Basel III until its total assets exceed $1,000,000.
In order to avoid limitations on capital distributions such as dividends and certain discretionary bonus payments to executive officers, a banking organization must maintain capital ratios above the minimum ratios including the buffer. The requirements of Basel III also place additional restrictions on the inclusion of deferred tax assets and capitalized mortgage servicing rights as a percentage of Tier 1 Capital. In addition, the risk weights assigned to certain assets such as past due loans and certain real estate loans have been increased. The requirements of Basel III allowed banks and bank holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank each opted out of this requirement.
NOTE 14 – STOCK BASED COMPENSATION
Prior to the Company’s bank holding company reorganization, the Bank had in place the Community First Bank & Trust Stock Option Plan for organizers of the Bank and certain members of management and employees. In connection with the bank holding company reorganization, this plan was amended and replaced in its entirety by the Community First, Inc. Stock Option Plan in October 2002. There were 342,000 shares authorized by the Stock Option Plan in 2002. Additionally, the Community First, Inc. 2005 Stock Incentive Plan was approved at the stockholders meeting on April 26, 2005 authorizing shares of 450,000. The plans allow for the grant of options and other equity securities to key employees and directors. The exercise price for stock options is the market price at the date of grant. The organizer options vested ratably over three years and other non-qualified options vest ratably over four years. The employee options vest ratably from two to four years and the management options vest ratably over six years. All options expire within ten years from the date of grant. The Company has 411,309 authorized shares available for grant as of December 31, 2015. The Company recognized no compensation expense resulting from stock options and no compensation expense resulting from restricted stock awards in 2015, 2014, and 2013. There was no income tax benefit from non-qualified stock options in 2015, 2014, or 2013.
F-42
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The fair value of each option is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company granted no new options in 2015, 2014, or 2013.
A summary of option activity under the Company’s stock incentive plans for 2015 is presented in the following table:
| | Shares | | | Weighted Average Exercise Price/Share | | | Weighted Average Remaining Contractual Term in Years | | | Aggregate Intrinsic Value | |
Options outstanding January 1, 2015 | | | 48,100 | | | $ | 26.44 | | | | | | | | | |
Granted | | | — | | | | — | | | | | | | | | |
Options exercised | | | — | | | | — | | | | | | | | | |
Forfeited or expired | | | 7,700 | | | | 25.26 | | | | | | | | | |
Options outstanding December 31, 2015 | | | 40,400 | | | $ | 26.66 | | | | 1.77 | | | $ | n/a | |
| | | | | | | | | | | | | | | | |
Vested or expected to vest | | | 40,400 | | | $ | 26.66 | | | | 1.77 | | | $ | n/a | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2015 | | | 40,400 | | | $ | 26.66 | | | | 1.77 | | | $ | n/a | |
As of December 31, 2015 there was no unrecognized compensation cost related to nonvested stock options granted under the Company’s stock incentive plans.
The Company has also issued shares of restricted stock under the stock incentive plans. Restricted stock is issued to certain officers on a discretionary basis. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock was determined using the market price on the day of issuance.
Restricted stock typically vests over a 2-3 year period. Vesting occurs ratably on the anniversary day of the issuance. At December 31, 2015, there was no unrecognized compensation cost or any unvested shares of restricted stock.
F-43
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
NOTE 15 – EARNINGS PER SHARE
The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The factors used in the earnings per share computation follow:
| | 2015 | | | 2014 | | | 2013 | |
Basic | | | | | | | | | | | | |
Net income | | $ | 17,407 | | | $ | 2,407 | | | $ | 1,728 | |
Less: Earnings allocated to preferred stock | | | (385 | ) | | | (1,571 | ) | | | (970 | ) |
Less: Accretion of preferred stock discount | | | — | | | | (33 | ) | | | (199 | ) |
Net earnings allocated to common stock | | | 17,022 | | | | 803 | | | | 559 | |
| | | | | | | | | | | | |
Weighted common shares outstanding including participating securities | | | 3,275,361 | | | | 3,274,867 | | | | 3,274,608 | |
Less: Participating securities | | | — | | | | — | | | | — | |
Weighted average shares | | | 3,275,361 | | | | 3,274,867 | | | | 3,274,608 | |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 5.20 | | | $ | 0.25 | | | $ | 0.17 | |
| | 2015 | | | 2014 | | | 2013 | |
Net earnings allocated to common stock | | $ | 17,022 | | | $ | 803 | | | $ | 559 | |
| | | | | | | | | | | | |
Weighted average shares | | | 3,275,361 | | | | 3,274,867 | | | | 3,274,608 | |
Add: Diluted effects of assumed exercises of stock options | | | — | | | | — | | | | — | |
Average shares and dilutive potential common shares | | | 3,275,361 | | | | 3,274,867 | | | | 3,274,608 | |
| | | | | | | | | | | | |
Dilutive earnings per share | | $ | 5.20 | | | $ | 0.25 | | | $ | 0.17 | |
At years ended 2015, 2014, and 2013 there were 40,400, 48,100, and 59,600 antidilutive stock options, respectively. As of December 31, 2015, 2014 and 2013, there were no vested options with an exercise price lower than the market value of the Company’s common stock. As a result, all outstanding options were antidilutive for the fiscal years ended December 31, 2015, 2014 and 2013.
NOTE 16 – INCOME TAXES
The components of income tax expense (benefit) are summarized as follows:
| | 2015 | | | 2014 | | | 2013 | |
Current | | | | | | | | | | | | |
Federal | | $ | 60 | | | $ | — | | | $ | — | |
State | | | — | | | | — | | | | — | |
Total current taxes | | | 60 | | | | — | | | | — | |
| | | | | | | | | | | | |
Deferred | | | | | | | | | | | | |
Federal | | | 1,361 | | | | 632 | | | | 413 | |
State | | | 317 | | | | 136 | | | | 125 | |
Total deferred taxes | | | 1,678 | | | | 768 | | | | 538 | |
| | | | | | | | | | | | |
Change in valuation allowance | | | (14,433 | ) | | | (768 | ) | | | (538 | ) |
| | | | | | | | | | | | |
Income tax expense (benefit) | | $ | (12,695 | ) | | $ | — | | | $ | — | |
F-44
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
A reconciliation of actual income tax expense (benefit) in the financial statements to the expected tax benefit (computed by applying the statutory Federal income tax rate of 34% to income (loss) before income taxes) is as follows:
| | 2015 | | | 2014 | | | 2013 | |
Federal statutory rate times financial statement income (loss) before income taxes | | $ | 1,602 | | | $ | 820 | | | $ | 590 | |
Effect of: | | | | | | | | | | | | |
Bank owned life insurance | | | (91 | ) | | | (89 | ) | | | (93 | ) |
Tax-exempt income | | | (16 | ) | | | (26 | ) | | | (48 | ) |
State income taxes, net of federal income effect | | | 209 | | | | 90 | | | | 83 | |
Expenses not deductible for U.S. income taxes | | | 6 | | | | 6 | | | | 5 | |
Compensation expense related to incentive stock options | | | — | | | | — | | | | — | |
General business tax credit | | $ | — | | | $ | (30 | ) | | $ | — | |
Change in valuation allowance | | | (14,433 | ) | | | (768 | ) | | | (538 | ) |
Other expense (benefit), net | | | 28 | | | | (3 | ) | | | 1 | |
| | | | | | | | | | | | |
Income tax (benefit) expense | | $ | (12,695 | ) | | $ | — | | | $ | — | |
The major components of the temporary differences that give rise to deferred tax assets and liabilities at December 31, 2015 and 2014 were as follows:
| | 2015 | | | 2014 | |
Deferred tax assets: | | | | | | | | |
Allowance for loan losses | | $ | 1,637 | | | $ | 1,980 | |
Net operating loss carryforward | | | 10,313 | | | | 11,708 | |
Deferred compensation | | | 495 | | | | 534 | |
Tax credit carryforwards | | | 823 | | | | 758 | |
Unrealized gain on securities | | | 160 | | | | — | |
Other | | | 801 | | | | 894 | |
| | | 14,229 | | | | 15,874 | |
Deferred tax liabilities: | | | | | | | | |
Prepaids | | $ | (85 | ) | | $ | (84 | ) |
Depreciation | | | (700 | ) | | | (777 | ) |
Restricted equity securities dividends | | | (79 | ) | | | (79 | ) |
Core deposit intangible | | | (360 | ) | | | (412 | ) |
Unrealized gain on securities | | | — | | | | (89 | ) |
| | | (1,224 | ) | | | (1,441 | ) |
| | | | | | | | |
Valuation allowance | | | (0 | ) | | | (14,433 | ) |
| | | | | | | | |
Balance at end of year | | $ | 13,005 | | | $ | — | |
Due to economic conditions and losses recognized between 2008 and 2015, the Company established a valuation allowance against materially all of its deferred tax assets. Due to improvements in the Company’s performance and overall condition, management determined during the fourth quarter of 2015 that it is more likely than not that the Company’s deferred tax asset can be realized through current and future taxable income. The Company has approximately $51,619 in net operating losses for state tax purposes that begin to expire in 2020 and $23,820 for federal tax purposes that begin to expire in 2031 to be utilized by future earnings.
During 2015 and per ASC 740-20-45-7, the Company’s income tax expense related to changes in the unrealized gains and losses on investment securities available-for-sale totaled $243. The expense was recorded through accumulated other comprehensive income and increased our deferred tax assets.
F-45
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
The Company currently has no unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. The Company does not expect any unrecognized tax benefits to significantly increase or decrease in the next twelve months. It is the Company’s policy to recognize any interest accrued related to unrecognized tax benefits in interest expense, with any penalties recognized as operating expenses.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Tennessee. The Company is no longer subject to examination by taxing authorities for tax years prior to 2009.
NOTE 17 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance sheet risk was as follows at year-end 2015 and 2014:
| | 2015 | | | 2014 | |
| | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | |
Unused lines of credit | | $ | 12,357 | | | $ | 18,205 | | | $ | 3,521 | | | $ | 19,090 | |
Letters of credit | | | 424 | | | | 1,434 | | | | — | | | | 1,623 | |
Commitments to make loans | | | 2,894 | | | | — | | | | 10,078 | | | | — | |
These commitments are generally made for periods of one year or less. The fixed rate unused lines of credit have interest rates ranging from 2.50% to 8.50% and maturities ranging from 1 month to 30.8 years.
NOTE 18 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2015 were as follows:
Beginning balance | $ | 4,923 | |
New loans | | 489 | |
Repayments | | (2,159 | ) |
Ending balance | $ | 3,253 | |
Deposits from principal officers, directors, and their affiliates at year-end 2015 and 2014 were $8,085 and $5,893, respectively. Principal officers, directors, and their affiliates owned $700 of the $3,000 subordinated debentures due December 31, 2032 at year-end 2015 and 2014. At December 31, 2015, the approved available unused lines of credit on related party loans were $1,155.
F-46
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of the Company follows:
CONDENSED BALANCE SHEET
December 31
| | 2015 | | | 2014 | |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 849 | | | $ | 2,629 | |
Investment in banking subsidiary | | | 46,755 | | | | 40,315 | |
Other assets | | | 3,180 | | | | 756 | |
| | | | | | | | |
Total assets | | $ | 50,784 | | | $ | 43,700 | |
| | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | |
Subordinated debentures | | $ | 23,000 | | | $ | 23,000 | |
Accrued interest payable | | | 26 | | | | 4,520 | |
Preferred stock dividends accrued but unpaid | | | 4,265 | | | | 4,363 | |
Other liabilities | | | 528 | | | | 931 | |
Total liabilities | | | 27,819 | | | | 32,814 | |
Shareholders’ equity | | | 22,965 | | | | 10,886 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 50,784 | | | $ | 43,700 | |
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31
| | 2015 | | | 2014 | | | 2013 | |
Interest income | | $ | 6 | | | $ | 6 | | | $ | 6 | |
Dividends from subsidiary | | | 9,514 | | | | — | | | | — | |
Total income | | | 9,520 | | | | 6 | | | | 6 | |
| | | | | | | | | | | | |
Interest expense | | | 786 | | | | 798 | | | | 789 | |
Other expenses | | | 393 | | | | 334 | | | | 376 | |
Total expenses | | | 1,179 | | | | 1,132 | | | | 1,165 | |
| | | | | | | | | | | | |
Income (loss) before income tax and undistributed subsidiary income | | | 8,341 | | | | (1,126 | ) | | | (1,159 | ) |
Income tax benefit | | | 2,095 | | | | 586 | | | | 444 | |
Equity in undistributed income of subsidiary | | | 6,971 | | | | 2,947 | | | | 2,443 | |
| | | | | | | | | | | | |
Net income | | $ | 17,407 | | | $ | 2,407 | | | $ | 1,728 | |
| | | | | | | | | | | | |
Preferred stock dividends | | | (385 | ) | | | (1,571 | ) | | | (970 | ) |
Accretion of preferred stock discount | | | — | | | | (33 | ) | | | (199 | ) |
Net income allocated to common shareholders | | $ | 17,022 | | | $ | 803 | | | $ | 559 | |
F-47
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
| | 2015 | | | 2014 | | | 2013 | |
Cash flows from operating activities | | | | | | | | | | | | |
Net income | | $ | 17,407 | | | $ | 2,407 | | | $ | 1,728 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | | | | | |
Equity in undistributed income of subsidiary | | | (16,485 | ) | | | (2,947 | ) | | | (2,443 | ) |
Dividends from subsidiary | | | 9,514 | | | | — | | | | — | |
Interest paid on subordinated debentures | | | (5,444 | ) | | | — | | | | — | |
Reinstatement of deferred tax assets | | | (2,095 | ) | | | — | | | | — | |
Change in other, net | | | 348 | | | | 861 | | | | 381 | |
Net cash from operating activities | | | 3,245 | | | | 321 | | | | (334 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
Net change in time deposits in other financial institutions | | | — | | | | — | | | | — | |
Net cash from investing activities | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
Proceeds from issuance of common stock | | | 21 | | | | 1 | | | | 2 | |
Redemption of Series A Preferred Stock | | | (3,541 | ) | | | — | | | | — | |
Redemption of Series B Preferred Stock | | | (890 | ) | | | — | | | | — | |
Cash paid for Preferred Stock dividends | | | (484 | ) | | | — | | | | — | |
REIT preferred dividend | | | (6 | ) | | | — | | | | — | |
REIT preferred dissolution | | | (125 | ) | | | — | | | | — | |
Net cash (used in) from financing activities | | | (5,025 | ) | | | 1 | | | | 2 | |
| | | | | | | | | | | | |
Net change in cash and cash equivalents | | | (1,780 | ) | | | 322 | | | | (332 | ) |
| | | | | | | | | | | | |
Beginning cash and cash equivalents | | | 2,629 | | | | 2,307 | | | | 2,639 | |
| | | | | | | | | | | | |
Ending cash and cash equivalents | | $ | 849 | | | $ | 2,629 | | | $ | 2,307 | |
| | | | | | | | | | | | |
Supplemental disclosures: | | | | | | | | | | | | |
Cash paid during year for interest | | | 5,444 | | | | — | | | | — | |
Dividends declared not paid | | | 385 | | | | 1,571 | | | | 970 | |
Forgiveness of Series A Preferred Stock dividend | | | 2,113 | | | | — | | | | — | |
Forgiveness of Series A Preferred Stock face value | | | 2,360 | | | | — | | | | — | |
Preferred dividends accrued but not paid | | | 385 | | | | 1,571 | | | | 970 | |
Subordinated debenture interest accrued but not paid | | | 26 | | | | 798 | | | | 789 | |
F-48
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
December 31, 2015
(Dollar amounts in thousands, except per share data)
NOTE 20 – QUARTERLY FINANCIAL DATA (UNAUDITED)
| | | | | | | | | | | | | | Earnings (loss) Per Share | |
| | Interest Income | | | Net Interest Income | | | Net Income | | | Basic | | | Diluted | |
2015 | | | | | | | | | | | | | | | | | | | | |
First quarter | | $ | 3,985 | | | $ | 3,292 | | | $ | 938 | | | $ | 0.16 | | | $ | 0.16 | |
Second quarter | | | 4,042 | | | | 3,339 | | | | 1,503 | | | | 0.33 | | | | 0.33 | |
Third quarter | | | 4,901 | | | | 4,035 | | | | 1,778 | | | | 0.21 | | | | 0.21 | |
Fourth quarter | | | 4,248 | | | | 3,713 | | | | 13,188 | | | | 4.50 | | | | 4.50 | |
| | | | | | | | | | | | | | | | | | | | |
2014 | | | | | | | | | | | | | | | | | | | | |
First quarter | | $ | 3,990 | | | $ | 3,208 | | | $ | 794 | | | $ | 0.14 | | | $ | 0.14 | |
Second quarter | | | 4,013 | | | | 3,260 | | | | 798 | | | | 0.12 | | | | 0.12 | |
Third quarter | | | 3,997 | | | | 3,272 | | | | 232 | | | | (0.06 | ) | | | (0.06 | ) |
Fourth quarter | | | 3,936 | | | | 3,225 | | | | 583 | | | | 0.05 | | | | 0.05 | |
NOTE 21 – SUBSEQUENT EVENTS
On February 25, 2016 holders of the Company’s Series A Preferred Stock and Common Stock approved a collection of amendments to the Company’s charter (the “Charter Amendments”) to modify the terms of the Series A Preferred Stock to, among other things, (i) cancel the amount of undeclared dividends in respect of the Series A Preferred Stock; (ii) reduce the liquidation preference on the Series A Preferred Stock to $650 per share plus the amount of any declared and unpaid dividends, without accumulation of any undeclared dividends; (iii) reduce the dividend rate payable on the Series A Preferred Stock from 9% per annum to 5% per annum; (iv) change the designation of the Series A Preferred Stock from “Cumulative” to “Non-Cumulative” and change the rights of the holders of the Series A Preferred Stock such that dividends or distributions on the Series A Preferred Stock will not accumulate unless declared by the Company’s board of directors and subsequently not paid; and (v) eliminate the restrictions on the Company’s ability to pay dividends or make distributions on, or repurchase, shares of its common stock or other junior stock or stock ranking in parity with the Series A Preferred Stock prior to paying accumulated but undeclared dividends or distributions on the Series A Preferred Stock. The Charter Amendments were effective on February 26, 2016. As a result of the Charter Amendments, the Company reversed $4,386 of accrued dividends on the Series A Preferred Stock that increased the Company’s retained earnings by the same amount and $4,167 of face value that increased the Company’s additional paid-in capital by the same amount.
On February 29, 2016, the Company was notified by the FRB that the Written Agreement had been terminated as of February 29, 2016. As of February 29, 2016, the Company and the Bank have no outstanding enforcement agreements with any of their regulators.
F-49
