UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2010
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-14412
Farmers Capital Bank Corporation | ||
(Exact name of registrant as specified in its charter) |
Kentucky | 61-1017851 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
P.O. Box 309 202 West Main St. | ||
Frankfort, Kentucky | 40601 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (502) 227-1600
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $.125 per share Par Value | The NASDAQ Global Select Market | |
(Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None | ||
(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☐ | No☒ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes☐ | No☒ |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒ | No☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes☒ | No☐ |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.☐ o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”,filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated | Accelerated filer | |
Non-accelerated | Smaller reporting |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)
Yes☐ | No☒ |
The aggregate market value of the registrant’s outstanding voting stock held by non-affiliates on June 30, 201028, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was $33.5$147 million based on the closing price per share of the registrant’s common stock reported on the NASDAQ.
As of March 7, 20111, 2014, there were 7,411,6767,479,614 shares of common stock outstanding.
Documents incorporated by reference:
Portions of the Registrant’s Proxy Statement relating to the Registrant’s 20112014 Annual Meeting of Shareholders are incorporated by reference into Part III.
An index of exhibits filed with this Form 10-K can be found on page 123.
FARMERS CAPITAL BANK CORPORATION
FORM 10-K
INDEX
Page | ||
Item 1. | 4 | |
Item 1A. | 23 | |
Item 1B. | 33 | |
Item 2. | 33 | |
Item 3. | 34 | |
Item 4. | Mine Safety Disclosures | 34 |
Item 5. | 35 | |
Item 6. | 37 | |
Item 7. | 38 | |
Item 7A. | 75 | |
Item 8. | 76 | |
Item 9. | 130 | |
Item 9A. | 130 | |
Item 9B. | 131 | |
Item 10. | 132 | |
Item 11. | 132 | |
Item 12. | 132 | |
Item 13. | and Director Independence | 132 |
Item 14. | 132 | |
Item 15. | 132 | |
135 | ||
136 |
PART I
PART I
The disclosures set forth in this item are qualified by Item 1A (“Risk Factors”) beginning on page 2723 and the section captioned“Forward-Looking Statements” in Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) beginning on page 4239 of this report and other cautionary statements containcontained elsewhere in this report.
Organization
Farmers Capital Bank Corporation (the “Registrant”, “Company”, “we”, “us”,“Registrant,” “Company,” “we,” “us,” or “Parent Company”) is a bank holding company with four wholly-owned bank subsidiaries. The Registrant was originally formed as a bank holding company under the Bank Holding Company Act of 1956, as amended, on October 28, 1982 under the laws of the Commonwealth of Kentucky. During 2000, the Federal Reserve Board granted the Company financial holding company status.Kentucky (“Commonwealth”). The Company withdrew its financial holding company election subsequent to the sale KHL Holdings, LLC (“KHL Holdings”) during the third quarter of 2009. The Company’s subsidiaries provideprovides a wide range of banking and bank-related services to customers throughout Central and Northern Kentucky. The Company’s four bank subsidiaries owned by the Company include Farmers Bank & Capital Trust Company ("Farmers Bank"), Frankfort, Kentucky; United Bank & Trust Company ("United Bank"), Versailles, Kentucky; First Citizens Bank (“First Citizens”), Elizabethtown, Kentucky; and Citizens Bank of Northern Kentucky, Inc. (“Citizens Northern”), Newport, Kentucky. The Lawrenceburg Bank and Trust Company ("Lawrenceburg Bank"), Lawrenceburg, Kentucky, which previously was a separate bank subsidiary of the Parent Company, was merged into Farmers Bank during the second quarter of 2010.
The Company also owns FCB Services, Inc., ("FCB Services"), a nonbank data processing subsidiary located in Frankfort, Kentucky; FFKT Insurance Services, Inc., (“FFKT Insurance”), a captive property and casualty insurance company in Frankfort, Kentucky; EKT Properties, Inc., established during 2008 to manage and liquidate certain real estate properties repossessed by the Company; and Farmers Capital Bank Trust I (“Trust I”), Farmers Capital Bank Trust II (“Trust II”), and Farmers Capital Bank Trust III (“Trust III”), which are unconsolidated trusts established to complete the private offering of trust preferred securities. In the case of Trust I and Trust II, the proceeds of the offerings were used to finance the cash portion of the acquisition in 2005 of Citizens Bancorp Inc. (“Citizens Bancorp”), the former parent company of Citizens Northern. For Trust III, the proceeds of the offering were used to finance the cost of acquiring Company shares under a share repurchase program during 2007.
The Company provides a broad range of financial services at its 36 locations in 23 communities throughout Central and Northern Kentucky to individual, business, agriculture, government, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential mortgage, commercial lending, and consumer installment loans. Substantially all loans and leases are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans and leases are expected to be repaid from cash flow from operations of businesses. Farmers Bank has served as the general depository for the Commonwealth of Kentucky for over 70 years and also provides investment and other services to the Commonwealth. Other services provided by the Company include, but are not limited to, cash management services, issuing letters of credit, safe deposit box rental, and providing funds transfer services. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.
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. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment. As of December 31, 2010,2013, the Company had $1.9$1.8 billion in consolidated total assets.
Organization Chart
Subsidiaries of Farmers Capital Bank Corporation at December 31, 20102013 are indicated in the table that follows. Percentages reflect the ownership interest held by the parent company of each of the subsidiaries. Tier 2 subsidiaries are direct subsidiaries of Farmers Capital Bank Corporation. Tier 3 subsidiaries are direct subsidiaries of the Tier 2 subsidiary listed immediately above them. Tier 4 subsidiaries are direct subsidiaries of the Tier 3 subsidiary listed immediately above them. Tier 5 subsidiaries are direct subsidiaries of the Tier 4 subsidiary listed immediately above them.
Tier | Entity | ||||
1 | Farmers Capital Bank Corporation, Frankfort, KY (Parent Company) | ||||
2 | United Bank & Trust Company, Versailles, KY 100% | ||||
3 | EGT Properties, Inc., Georgetown, KY 100% | ||||
4 | WCO, LLC, Versailles, KY 6.6% | ||||
4 | NUBT Properties, LLC, Georgetown, KY 83% | ||||
5 | Flowing Creek Realty, LLC, Bloomfield, IN 67% | ||||
2 | Farmers Bank & Capital Trust Company, Frankfort, KY 100% | ||||
3 | Farmers Bank Realty Co., Frankfort, KY 100% | ||||
3 | Leasing One Corporation, Frankfort, KY 100% | ||||
3 | EG Properties, Inc., Frankfort, KY 100% | ||||
4 | WCO, LLC, Versailles, KY | ||||
3 | FORE Realty, LLC, Frankfort, KY 100% | ||||
3 | |||||
Austin Park Apartments, LTD, Frankfort, KY 99% | |||||
3 | Frankfort Apartments II, LTD, Frankfort, KY 99.9% | ||||
3 | St. Clair Properties, LLC, Frankfort, KY 95% | ||||
3 | Farmers Capital Insurance Corporation, Frankfort, KY 100% | ||||
4 | Farmers Fidelity Insurance Agency, LLP, Lexington, KY 50% | ||||
2 | First Citizens Bank, Elizabethtown, KY 100% | ||||
3 | HBJ Properties, LLC, Elizabethtown, KY 100% | ||||
2 | Citizens Bank of Northern Kentucky, Inc., Newport, KY 100% | ||||
3 | ENKY Properties, Inc., Newport, KY 100% | ||||
4 | NUBT Properties, LLC, Georgetown, KY 17% | ||||
5 | Flowing Creek Realty, LLC, Bloomfield, IN 67% | ||||
2 | FCB Services, Inc., Frankfort, KY 100% | ||||
2 | FFKT Insurance Services, Inc., Frankfort, KY 100% | ||||
2 | Farmers Capital Bank Trust I, Frankfort, KY 100% | ||||
2 | Farmers Capital Bank Trust II, Frankfort, KY 100% | ||||
2 | Farmers Capital Bank Trust III, Frankfort, KY 100% | ||||
2 | EKT Properties, Inc. Frankfort, KY 100% |
Farmers Bank and Subsidiaries
Farmers Bank, originally organized in 1850, is a state chartered bank engaged in a wide range of commercial and personal banking activities, which include accepting savings, time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The bank's lending activities include making commercial, construction, mortgage, and personal loans and lines of credit. The bank serves as an agent in providing credit card loans. It acts as trustee of personal trusts, as executor of estates, as trustee for employee benefit trusts and as registrar, transfer agent and paying agent for bond issues.
Until mid-2011, Farmers Bank isserved as the general depository for the Commonwealth of Kentucky and has been for more than 70 years.
Farmers Bank conducts business at its principal office and four branches in Frankfort, the capital of Kentucky, as well as two branches in Anderson County, Kentucky, and one branch each in Mercer County, Kentucky and Boyle County, Kentucky.Counties. It is the largest bank operating in both Franklin and Anderson Counties based on total bank deposits. The market served by Farmers Bank is diverse, and includes government, commerce, finance, industry, medicine, education, and agriculture. The bank serves many individuals and corporations throughout Central Kentucky. On December 31, 2010,2013, it had total consolidated assets of $750$690 million, including loans net of unearned income of $422$324 million. On the same date, total deposits were $570$554 million and shareholders' equity totaled $67.2$66.2 million.
Farmers Bank had teneight active direct subsidiaries during 2010:at year-end 2013: Farmers Bank Realty Co. ("Farmers Realty"), Leasing One Corporation ("Leasing One"), Farmers Capital Insurance Corporation (“Farmers Insurance”), EG Properties, Inc. (“EG Properties”), FA Properties, Inc. (“FA Properties”), FORE Realty, LLC (“FORE Realty”), LORE Realty, LLC (“LORE Realty”), St. Clair Properties, LLC (“St. Clair Properties”), Austin Park Apartments, LTD (“Austin Park”), and Frankfort Apartments II, LTD (“Frankfort Apartments”).
Farmers Realty was incorporated in 1978 for the purpose of owning certain real estate used by the Company and Farmers Bank in the ordinary course of business. Farmers Realty had total assets of $3.8$3.6 million on December 31, 2010.
Leasing One was incorporated in August 1993 to operate as a commercial equipment leasing company. It is located in Frankfort and is licensed to conduct business in twelve states. At year-end 2010,2013, it had total assets of $14.7$6.8 million, including leases net of unearned income of $7.8 million. The$578 thousand. During 2010, the board of directors of Leasing One has reduced the staff and curtailed new lending for the present time.lending. Servicing existing leases and terming out residuals are the extent of its ongoing activity at the present time.
Farmers Insurance was organized in 1988 to engage in insurance activities permitted to the Company under federal and state law. Farmers Bank capitalized this corporation in December 1998. Farmers Insurance acts as an agent for Stewart Title Guarantyan otherwise unrelated title insurance company and offers title insurance coverage on property financed by the Company. At year-end 20102013, it had total assets of $241$515 thousand. Farmers Insurance holds a 50% interest in Farmers Fidelity Insurance Company,Agency, LLP (“Farmers Fidelity”). The Creech & Stafford Insurance Agency, Inc., an otherwise unrelated party to the Company, also holds a 50% interest in Farmers Fidelity. Farmers Fidelity is a direct writer of property and casualty coverage, both individual and commercial.
In November 2002, Farmers Bank incorporated EG Properties. EG Properties is involved in real estate management and liquidation for certain properties repossessed by Farmers Bank. ItEG Properties holds a 93.4% interest in WCO, LLC (“WCO”), which was formed during 2012 to hold certain real estate repossessed by Farmers Bank and United Bank. EG Properties had total assets of $6.2$18.4 million at December 31, 2010.
In July 2008, Farmers Bank incorporated FA Properties which, ownsprior to its dissolution during the fourth quarter of 2011, owned automobiles that arewere used by the Company and Farmers Bank in the ordinary course of business. It had total assets of $380 thousand at year-end 2010. FORE Realty and
LORE Realty were organized in December 2009 and February 2010, respectively, for the purpose of managing and liquidating certain other properties repossessed by Farmers Bank. At year-end 20102013, FORE Realty had total assets of $67$600 thousand; LORE Realty was dissolved effective January 1, 2011.
Farmers Bank is a limited partner in Austin Park and Frankfort Apartments, two low income housing tax credit partnerships located in Frankfort, Kentucky. These investments provide forprovided federal income tax credits to the Company. Farmers Bank’s aggregateCompany over a 10 year period and have been fully exhausted; however, the Company intends to maintain its investment in these partnerships was $417 thousand at year-end 2010.over a 15 year compliance period in order to avoid possible recapture of the tax credits. In December 2009, Farmers Bank became a limited partner in St. Clair Properties. The objective of St. Clair Properties is to restore and preserve certain qualifying historic structures in Frankfort for which the Company receivesreceived federal and state tax credits. Farmers Bank’s investment in St. Clair Properties was less than $10 thousandcumulative share of losses from the three partnerships at year-end 2010.
United Bank and Subsidiary
On February 15, 1985, the Company acquired United Bank, a state chartered bank originally organized in 1880. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. On November 1, 2008, the Company merged Farmers Bank & Trust Company (“Farmers Georgetown”) and Citizens Bank of Jessamine County (“Citizens Jessamine”) into United Bank. Each of these three banks was previously a wholly-owned subsidiary of the Company. United Bank conducts business in its principal office and two branches in Woodford County, Kentucky, four branches in Scott County, Kentucky, threetwo branches in Fayette County, Kentucky, and four branches in Jessamine County, Kentucky.County. Based on total bank deposits, in Woodford County, United Bank is the second largest bank operating in both Woodford County withand Scott Counties, and ranks as the second largest bank in Jessamine County. On December 31, 2013, United Bank had total consolidated assets of $614$540 million, including loans net of unearned income of $309 million. On the same date, total deposits were $411 million and total deposits of $448 million at December 31, 2010.
United Bank hadhas one direct subsidiary, during 2010, EGT Properties, Inc. (“EGT Properties”). EGT Properties was created in March 2008 and is involved in real estate management and liquidation for certain repossessed properties of United Bank. In addition, EGT Properties holds a 6.6% interest in WCO and an 83% interest in NUBT Properties, LLC (“NUBT”), the parent company of Flowing Creek Realty, LLC (“Flowing Creek”). Flowing Creek holds certain real estate that has been repossessed by United Bank and Citizens Northern along with parties unrelated to the Company. NUBT holds a 67% interest in Flowing Creek and unrelated financial institutions hold the remaining 33% interest. EGT Properties had total assets of $22.0$22.9 million at year-end 2010.
First Citizens
On March 31, 1986, the Company acquired First Citizens, a state chartered bank originally organized in 1964. It is engaged in a general banking business providing full service banking to individuals, businesses and governmental customers. It conducts business at its main office and three branches in Hardin County, Kentucky along with two branch offices in Bullitt County, Kentucky. During 2003County. First Citizens incorporated EHHBJ Properties, Inc. This company was involved in real estate managementLLC (“HBJ Properties”) during 2012 to hold, manage, and liquidation forliquidate certain properties repossessed by First Citizens prior to it being dissolved in January, 2007.
First Citizens acquired Financial National Electronic Transfer, Inc. (“FiNET”), a data processing company thatalso provides bill payment services under the name of FirstNet. This service specializes in the processing of federal benefit payments and military allotments, headquartered in Radcliff, Kentucky. Effective January 1, 2005 FiNET was merged into First Citizens. These services are now operated using the name of FirstNet.
Based on total bank deposits in Hardin County, First Citizens ranksis the third in size compared to all bankslargest bank operating in Hardin County. TotalOn December 31, 2013, First Citizens had total consolidated assets were $296of $319 million, andincluding loans net of unearned income of $204 million. On the same date, total deposits were $250$277 million at December 31, 2010.
Citizens Northern and Subsidiary
On December 6, 2005, the Company acquired Citizens Bancorp in Newport, Kentucky. Citizens Bancorp was subsequently merged into Citizens Acquisition, a former bank holding company subsidiary of the Company. During January 2007, Citizens Acquisition was merged into the Company, leaving Citizens Northern as a direct subsidiary of the Parent Company. Citizens Northern is a state chartered bank organized in 1993 and is engaged in a general banking business providing full service banking to individuals, businesses, and governmental customers. It conducts business in its principal office in Newport and
four branches in Campbell County, Kentucky, one branch in Boone County Kentucky and two branches in Kenton County, Kentucky.County. Based on total bank deposits in Campbell County, Citizens Northern ranks third in size compared to all banksas the second largest bank operating in Campbell County. At year-end 2010 it2013, Citizens Northern had total consolidated assets andof $253 million, including loans net of unearned income of $163 million. On the same date, total deposits of $250were $208 million and $201 million, respectively. Citizens Financial Services, formerly an investment brokerage subsidiary of Citizens Acquisition,shareholders’ equity was dissolved during 2006.
In March 2008, Citizens Northern incorporated ENKY Properties, Inc. (“ENKY”). ENKY was established to manage and liquidate certain real estate properties repossessed by Citizens Northern. In addition, ENKY also holds a 17% interest in NUBT, the parent company of Flowing Creek. Flowing Creek holds real estate that has been repossessed by Citizens Northern and United Bank along with parties unrelated to the Company. NUBT holds a 67% interest in Flowing Creek and unrelated financial institutions hold the remaining 33% interest. ENKY had total assets of $1.1$4.3 million at year-end 2010.
Nonbank Subsidiaries
FCB Services was organized in 1992 and provides data processing services and support for the Company and its subsidiaries. It is located in Frankfort, Kentucky. It also performsprovides data processing services for nonaffiliated entities. FCB Services had total assets of $3.2$4.1 million at December 31, 2010.
EKT was created in September 2008 to manage and liquidate certain real estate properties repossessed by the Company’s subsidiary banks. On December 31, 2010,2013, EKT had total assets of $4.1$3.0 million.
Trust I, Trust II, and Trust III are each separate Delaware statutory business trusts sponsored by the Company. The Company completed two private offerings of trust preferred securities during 2005 through Trust I and Trust II totaling $25.0 million. During 2007, the Company completed a private offering of trust preferred securities through Trust III totaling $22.5 million. The Company owns all of the common securities of each of the Trusts. The Company does not consolidate the Trusts into its financial statements consistent with applicable accounting standards.
FFKT Insurance was incorporated during 2005. It is a captive property and casualty insurance company insuring primarily deductible exposures and uncovered liability related to properties of the Company. ItFFKT Insurance had total assets of $3.3$3.6 million at December 31, 2010.
Lending Summary
A significant part of the Company’s operating activities include originating loans, approximately 87%89% of which are secured by real estate at December 31, 2010.2013. Real estate lending primarily includes loans secured by owner and non-owner occupied one-to-four family residential properties as well as commercial real estate mortgage loans to developers and owners of other commercial real estate. Real estate lending primarily includes both variable and adjustable rate products. Loan rates on variable rate loans generally adjust upward or downward immediately based on changes in the loan’s index, normally prime rate as published inby the Wall Street Journal. Rates on adjustable rate loans move upward or downward after an initial fixed term of normally one, three, or five years. Rate adjustments on adjustable rate loans are made annually after the initial fixed term expires and are indexed mainly to shorter-term Treasury indexes. Generally, variable and adjustable rate loans contain provisions that cap the amount of interest rate increases over the life of the loan of up to 600 basis points and lifetime floorsrate decreases of up to 100 basis points.points over the life of the loan. Over the past year, it has been increasingly common for the Company to set a floor equal to the initial rate without further downward adjustments. In addition to the lifetime caps and floors on rate adjustments, loans secured by residential real estate typically contain provisions that limit annual increases at a maximum of 100 basis points. There is typically no annual limit applied to loans secured by commercial real estate.
The Company also makes fixed rate commercial real estate loans to a lesser extent with repayment termsperiods generally not exceeding 12 months.ranging from three to five years. The Company’s subsidiary banks make first and second residential mortgage loans secured by real estate not to exceed 90% loan to value without seeking third party guarantees. Commercial real estate loans are made primarily to small and mid-sized businesses, secured by real estate not exceeding 80% loan to value. Other commercial loans are asset based loans secured by equipment and lines of credit secured by receivables and include lending across a diverse range of business types.
Commercial lending and real estate construction lending, including commercial leasing, generally includes a higher degree of credit risk than other loans, such as residential mortgage loans. Commercial loans, like other loans, are evaluated at the time of approval to determine the adequacy of repayment sources and collateral requirements. Collateral requirements vary to some degree among borrowers and depend on the borrower’s financial strength, the terms and amount of the loan, and collateral available to secure the loan. Credit risk results from the decreased ability or willingness to pay by a borrower. Credit risk also results when a liquidation of collateral occurs and there is a shortfall in collateral value as compared to a loan’s outstanding balance. For construction loans, inaccurate initial estimates of a project’s costs andor the property’s completed value could weaken the Company’s position and lead to the property having a value that is insufficient to satisfy full payment of the amount of funds advanced for the property. Secured and unsecured direct consumer loanslending generally areis made for automobiles, boats, and other motor vehicles. The Company does not presently engage in indirect consumer lending. Credit card lending is limited to one bank subsidiary and is considered nominal risk exposure due to extremely low volume. In most cases loans are restricted to the subsidiaries' general market area.
Loan Policy
The Company has a company-wide lending policy in place that is amended and approved from time to time as needed to reflect current economic conditions, law and regulatory changes, and product offerings in its markets. The policy has established minimum standards that each of its bank subsidiaries must adopt. Additionally, the policy is subject to amendment based on positive and negative trends observed within the lending portfolio as a whole. As anFor example, the loan to value limits and amortization terms contained within the policy were reduced during 2009 due to the declining economy and the attendantrelated real estate market decline. While new appraisals now reflect that decline, appraisal reviews and downward adjustments are a
The Company’s subsidiary banks may amend their lending policy so long as the amendment is no less stringent than the company-wide lending policy. These amendments are done within the control structure and oversight of the parent company. The Company’s board of directors voted in favor ofcontrol structure includes a recommendation from management during 2009 to create the position of Chief Credit Officer. This position oversees all lending at affiliate institutions where the size and risk of individual credits are deemed significant to the Company. The Chief Credit Officer also monitors trends in asset quality, portfolio composition, concentrations of credit, reports of examinations, internal audit reports, work-out strategies for large credits, and other responsibilities as matters evolve.
The Company’s Chief Credit Officer analyzes all loans in excess of $2.5 million prior to it being presented to the board of directors of the originating affiliate bank. All new loans, regardless of the amount, to an existing credit relationship in excess of $2.5 million are also analyzed by the Chief Credit Officer prior to being presented to the board of directors of the affiliate for consideration. The Chief Credit Officer reviews all loans to insiders for adherence to underwriting standards and regulatory compliance as well as credits identified as substandard.
Procedures
The lending policy lists the products and credit services offered by each of the Company’s subsidiary banks. Each product and service has an established written procedure to adhere to when transacting business with a customer. The lending policy also establishes pre-determined lending authorities for loan officers commensurate with their abilities and experience. Further, the policy establishes committees to review and approve or deny credit requests at various lending amounts. This includes subcommittees of the bank boards of directors and, at certain lending levels, the entire bank board.
Generally, for loans in excess of $1$2.5 million, the bank subsidiaries bank’s full board of directors will be presented with the loan request. This only occurs when the potential credit has first been recommended by the loan officer and chief credit officer of the subsidiary bank, and then by the directors’ loan committee.committee and the Chief Credit Officer. When loan requests are within policy guidelines and the amount requested is within their lending authority, lenders are permitted to approve and close the transaction. A review of the loan file and documentation takes place within 30 days to ensure policy and procedures are being followed. Approval authorities are under regular review for adjustment by affiliate management and the parent company.Parent Company. Loan requests outside of standard policy may be made on a case by case basis when justified, documented, and approved by either the board of directors of the subsidiary bank.bank, committee, or other authorized person as determined by the size of the
transaction. Procedures are in place that require ongoing monitoring subsequent to loan approval. For example, updated financial statements are required periodically for certain types of credits and risk ratings are re-evaluated at least annually for credit relationships in excess of $500 thousand, which includes analyzing updated cash flows and loan to value ratios. Annual site visits are made for credit relationships of $1.0 million or above.
Underwriting
Underwriting criteria for all types of loans are prescribed within the lending policy.
Residential Real Estate
Residential real estate mortgage lending makesmade up the largest portion of the loan portfolio. The outstanding balances in this classification of loans have been stable, representing roughly one-third of the portfolio in each of the previous five-year period. This component37% of the loan portfolio has experienced the least amount of delinquency and charge offs within the affiliated banks.
● | Monthly debt payments of the borrower to gross monthly income should not exceed 45% with stable |
● | Interest rate shocks are applied for variable rate loans to determine repayment capabilities at elevated |
● | Loan to value limits of up to 90%. Loan to value ratios exceeding 90% require additional third party |
● | A thorough credit investigation using the three nationally available credit |
● | Incomes and employment is |
● | Insurance is required in an amount to fully replace the improvements with the lending bank named as loss payee/ |
● | Flood certifications are procured to ensure the improvements are not in a flood plain or are insured if they are within the flood plain |
● | Collateral is investigated using current appraisals and is supplemented by the loan officer’s knowledge of the locale and salient factors of the local market. Only appraisers which are state certified or licensed and on the banks’ approved list are utilized to perform this |
● | Title attorneys and closing agents are required to maintain malpractice liability insurance and be on the banks approved |
● | Secondary market mortgages must meet the underwriting criteria of the purchasers, which is generally the Federal National Mortgage Association and the Federal Home Loan Mortgage |
● | Adjustable rate owner occupied home loans are tied to market based rates such as are published by the Federal Reserve Board (“Federal Reserve” or “FRB”), commonly the one year constant maturity Treasury bill is |
● | Residential real estate mortgage loans are made for terms not to exceed 30 years. |
The Company will strive to offer qualified mortgages as defined by the Consumer Financial Protection Bureau which go into effect beginning in 2014. However, the Company will also allow non-qualified mortgages with the review and approval of the Company’s Chief Credit Officer or Chief Executive Officer of the affiliate bank. The qualified mortgage rule applies to home loans and is designed to ensure that borrowers can afford to repay loans by prohibiting or limiting certain high risk products and features such as charging excessive upfront points and fees, prohibiting interest-only loans, negative amortizing loans, loans exceeding repayment terms of 30 years, and, in most cases, balloon loans. Qualified mortgages also limit the borrower’s debt to income ratio to 43%.
Commercial Real Estate
Commercial real estate lending made up 42% of the loan portfolio at year-end 2013. Commercial real estate lending underwriting criteria is documented in the lending policy.policy and includes loans secured by office buildings, retail stores, warehouses, hotels, and other commercial properties. Underwriting criteria and procedures for commercial real estate loans include:
● | Procurement of Federal income tax returns and financial statements for the past 3 years and related supplemental information deemed |
● | Detailed financial and credit analysis is performed and presented to various |
● | Cash investment from the applicant in an amount equal to 20% of cost (loan to value ratio not to exceed 80%). Additional collateral may be taken in lieu of a full 20% investment in limited |
● | Cash flows from the project financed and global cash flow of the principals and their entities must produce a minimum debt coverage ratio of 1.25: |
● | For non-profits, including churches, a 1.0:1 debt coverage minimum ratio; |
● | Past experience of the customer with the |
● | Experience of the investor in commercial real |
● | Tangible net worth |
● | Interest rate shocks for variable rate |
● | General and local commercial real estate |
● | Alternative uses of the security in the event of a |
● | Thorough analysis of |
● | References and resumes are procured for background knowledge of the principals/ |
● | Credit enhancements are utilized when necessary |
● | Frequent financial reporting is required for income generating real estate such as: rent rolls, tenant listings, average daily rates and occupancy rates for |
● | Commercial real estate loans are made with amortization terms not to exceed 20 |
● | For lending arrangements determined to be more complex, loan agreements with financial and collateral representations and warranties are employed to ensure the ongoing viability of the borrower. |
Real Estate Construction
The Company’s real estate construction lending has declined over the last several years due to recent economic conditions. Where the Company’s markets continue to demonstrate demand, construction lending is continuingcontinues with close monitoring of the borrower and the local economy. At year-end 2010,2013, real estate construction lending comprised approximately 13%10% of the total loan portfolio.
Real estate construction lending underwriting criteria is documented in the lending policy.policy and includes loans to individuals for home construction, loans to businesses primarily for the construction of owner-occupied commercial real estate, and for land development activities. Underwriting criteria and procedures for such lending include:
● | 20% capital injection from the applicant (loan to value ratio not to exceed 80%) |
● | 25% capital injection for land acquisition for development (loan to value ratio not to exceed 75%) |
● | Pre-sell, pre-lease, and |
● | Draw requests require documentation of |
● | On site progress inspections are completed to protect the lending bank |
● | Control procedures are in place to minimize risk on construction projects such as conducting lien searches and requiring |
● | Lender on site visits and periodic financial discussions with owners/ |
● | Real estate construction loans are made for terms not to exceed 12 months and 18 months for residential and commercial purposes, respectively. |
Commercial, Financial, and Agriculture
Commercial, financial, and agriculture lending underwriting criteria is documented in the lending policy.policy and includes loans to small and medium sized businesses secured by business assets, loans to financial institutions, and loans to farmers and for the production of agriculture. At year-end 2013, these loans made up approximately 9% of the total loan portfolio Underwriting criteria and procedures for such loans are detailed below.
For commercial loans secured by business assets, the following loan to value ratios and debt coverage are required by policy:
● | Inventory 50% |
● | Accounts receivable less than 90 days past due 75% |
● | Furniture, fixtures, and equipment 60% |
● | Borrowing-base certificates are required for monitoring asset based |
● | Stocks, bonds, and mutual funds are often pledged by business owners. Marketability and volatility is taken into account when valuing these types of collateral and lending is generally limited to 60% of their |
● | Debt coverage ratios from cash flows must meet the policy minimum of 1.25:1. This coverage applies to global cash flow and guarantors, if |
● | Commercial loans secured by business assets are made for terms to match the economic useful lives of the asset securing the loan. Loans secured by furniture, fixtures, and equipment are made for terms not to exceed seven years. Lien searches are performed to ensure lien priority for credits exceeding certain thresholds. |
Loans to financial institutions are generally secured by the capital stock of the financial institution with a loan to value ratio not to exceed 60% and repayment terms not exceeding 10 years. Capital stock values of non-public companies are determined by common metrics such as a multiple of tangible book value or by obtaining third party estimates. Financial covenants are also obtained that require the borrower to maintain certain levels of asset quality, capital adequacy, liquidity, profitability, and regulatory compliance. At year-end 2010,2013, loans to financial institutions were $16.4$12.7 million. The Company has not experienced any loan losses related to financial institutions.
Agricultural lending, such as for tobacco or corn, is limited to 75% of expected sales proceeds while lending for cattle and farm equipment is capped at 80% loan to value.
Interest Only Loans
Interest only loans are limited to construction lending and properties recently completed and undergoing an occupancy stabilization period. These loans are short-term in nature, usually with maturities of less than one year.
Installment Loans
Installment lending is a relatively small component of the Company’s portfolio mix, reflecting 2.4%less than 2% of outstanding loans at year-end 2010.2013. These loans predominantly are direct loans to established bank customers and primarily include the financing of automobiles, boats, and other consumer goods. The character, capacity, collateral, and conditions are evaluated using policy restraints. Installment loans are made for terms of up to 5 years.
Installment lending underwriting criteria and procedures for such financing include:
● | Required financial statement of the applicant for loans in excess of |
● | Past experience of the customer with the |
● | Monthly debt payments of the borrower to gross monthly income should not exceed 45% with stable |
● | Secured and unsecured loans are made with a definite repayment plan which coincides with the purpose of the |
● | Borrower’s unsecured debt must not exceed 25% of the borrower’s net |
● | Verification of borrower’s credit and income. |
Lease Financing
Lease financing is also a relatively small component of the Company’s portfolio, representing 1.3%less than 1% of outstanding loans at year-end 2010.2013. Lease receivables are generally obtained through indirect sources such as equipment brokers and dealers. The board of directors of the Company’s Leasing One subsidiary has reduced the staff and curtailed new lending in this environmentleasing transactions for the present time.foreseeable future. Servicing existing leases and terming out residuals are the extent of its ongoing activity at the present time.
Lease financing underwriting criteria is documented by policy. Underwriting criteria and procedures for such financing include:
● | Lessee must be a commercial |
● | Lessee must be in business for a minimum of two |
● | Leased equipment must be of essential use to lessee’s |
● | Residual positions taken will not exceed 20% of original equipment |
● | Leasing terms generally not to exceed five years; used equipment and computers not to exceed three |
● | Personal and/or corporate financial statements or tax returns required for all financing requests. Submission of updated financial statements |
● | Credit reports must be clear of judgments and bankruptcies and chronic delinquency paying |
● | Bank and trade references must report satisfactory references. |
Hybrid Loans
The Company and its subsidiary banks have a policy of not underwriting, originating, selling or holding hybrid loans. The Company does not currently hold hybrid loans. Hybrid loans include payment option adjustable rate mortgages, (ARM’s), negative amortization loans, and stated income/stated asset loans.
Appraisals
The valuevalues of real estate in the Company’s markets hasare beginning to stabilize, but overall levels have generally declined as a result ofduring the economic downturn beginningwhich accelerated in 2008. Net loan charge-offs have been negatively impacted in recent years by slower sales and excess inventory related to loans secured by real estate developments.estate. The slower sales and excess inventory has decreased the cash flow and financial prospects of many borrowers, particularly those in the real estate development and related industries, and reduced the estimated fair value of the collateral securing these loans.
The Company uses independent third party state-certifiedstate certified or licensed appraisers. These appraisers take into account local market conditions when preparing their estimate of a property’s fair value. However, management of the Company will often include refinements in the appraised value for estimated costs to sell as required under relevant accounting standards.
The Company considers appraisals it receives on one property as a means to extrapolate the estimated value for other collateral of similar characteristics if that property may not otherwise have a need for an appraisal. Should a borrower’s financial condition continue to deteriorate, an updated appraisal on that specific collateral will be obtained.
Appraisals obtained for construction and development lending purposes are performed by state licensed or state-certifiedstate certified appraisers who are credentialed and on the Company’s approved list. Plans and specifications are provided to the appraiser by bank personnel not directly involved in the credit approval process. The appraisals conform to the standards of appraisal practices established by the Appraisal Standards Board in effect at the time of the appraisal. This includes net present value accounting for construction and development loans on an “as completed” and “as is” basis.
Appraisal reviews are conducted internally by bank personnel familiar with the local market and who are not directly involved in the credit approval process.process and externally by state licensed and certified appraisers. Bank personnel do not increase the valuation from the appraisal but may, in some instances, make a reduction. Upon completion, a follow up site visit by the appraiser is completed to verify the property was improved perin accordance with the original plans and specifications and recertify, if appropriate, the original estimate of “as completed” market value. There are two circumstancesCircumstances where management may make adjustments to appraisals:
As discussed above, construction and development appraisals are on an “as completed” basis. If work remains to be completed on a financed project, management will reduce the estimated value in the appraisal by the estimated cost estimated to complete the work and, if required by the loan balance, establish reserves allocated to the loan or write down the loan based on the need to complete such work.
If an appraisal for given collateral is still valid (e.g. less than one year old, etc.), but due to market conditions and the bank’s familiarity with comparable property sales in the market the appraised value appears high, management may adjust downward from the last appraisal its estimate of the value of the collateral and, in turn, establish reserves allocated to the loan or write down the loan to reflect this downward adjustment.
Certain appraisals such as for subdivision development and for other projects expected to take over one year to liquidate, are required to include estimated costs to sell. For others, management adjusts the appraised value by the estimated selling costs when they are either absent or not required. Additional reserves or direct write downs are made to the loan to reflect these adjustments.
Loan to value ratios are typically well under 100% at inception, which gives the Company a cushion as collateral values fall. However, when updated appraisals reveal collateral exposure (i.e. the value of the collateral for a nonperforming loan is less than originally estimated and no longer supports the outstanding loan balance)amount), negotiations ensue with the borrower aimed at providing additional collateral support for the credit. This may be in many forms as determined by the financial holdings of the borrower. If not available, third party support for the credit is pursued (e.g., guarantors or equity investors). If negotiations fail to provide additional adequate collateral support, reserves are allocated to the loan or the loan is written down to the fair value of the collateral less the estimated costs to sell.
When a construction loan or development loan is downgraded, a new appraisal is ordered contemporaneously with the downgrade. The appraisers are instructed to give a fair value based upon both an “as is” basis and an “as completed” basis. The twofold purpose is to facilitate management’s decision making process in determining the cost benefits of completing a project vs.compared with marketing the project as is.
The carrying value of a downgraded loan or non performingnonperforming asset wherein the underlying collateral is an incomplete project is based on a freshan updated appraisal at the “as is” value. The current appraisal is a compilation of the most recent sales available and therefore includes the risk premium established by the market conditions. When the comparable sales are not deemed to be reliable or the adjustments are not satisfactory, management will make appropriate adjustments to the fair value which includes a risk premium (discount) deducted using the discounted cash flow framework. The reserve or write down is expended upon completion of the appraisal and other relevant information assessment.
Interest Reserves
Interest reserves represent funds loaned to a borrower for the payment of interest during the development phase on certain construction and development loans. Interest reserves were a common industry practice when banks were more actively lending in their markets and the
As a result of the overall decline in the real estate market has diminished over time,during the last several years, the Company has been less active in construction and development lending and the use of the interest reserves. For present and future construction and development loan requests, borrowers must show sufficient cash reserves and significant excess cash flow from all sources in addition to other underwriting criteria measures. The projects viability is a major consideration as well, along with the probability of its stabilization and/or sale.
Supervision and Regulation
The Company and its subsidiaries are subject to comprehensive supervision and regulation that affect virtually all aspects of their operations. TheseThe laws and regulations are primarily intended to protectfor the protection of depositors, borrowers, and borrowersfederal deposit insurance funds, and, to a lesser extent, stockholders.for the protection of stockholders and creditors. Changes in applicable laws, regulations, or in the policies of banking and other government regulators may have a material adverse effect on our current
or future business. The following summarizes certain of the more important aspects of the relevant statutory and regulatory provisions.
Supervisory Authorities
The Company is a bank holding company, registered with and regulated by the Federal Reserve Board (“FRB”).Reserve. All four of its subsidiary banks are Kentucky state-chartered banks. Two of the Company’s subsidiary banks are members of their regional Federal Reserve Bank. The Company and its subsidiary banks are subject to supervision, regulation and examination by the Federal Reserve, Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The Company and its subsidiary banks are required to file regular reports with the FRB, the FDIC and the KDFI. The regulatory authorities routinely examine the Company and its subsidiary banks to monitor their compliance with laws and regulations, financial condition, adequacy of capital and reserves, quality and documentation of loans, payment of dividends, adequacy of systems and controls, credit underwriting, and asset liability management, and the establishment of branches.
The Company is also subject to disclosure and its subsidiary banks are required to file regular reports withother regulatory requirements of the FRB, the FDICSecurities Act of 1933 and the KDFI,Securities Exchange Act of 1934 (as amended), as applicable.
Capital
The FRB, the FDIC, and the KDFI require the Company and its subsidiary banks to meet certain ratios of capital to assets in order to conduct their activities. To be well-capitalized, the institutions must generally maintain a Total Risk-based Capital ratio of 10% or greater, a Tier 1 Risk-based Capital ratio of 6% or greater, and a Tier 1 Leverage ratio of 5% or more. For the purposes of these tests, Tier 1 Capital consists of common equity and related surplus, retained earnings, and a limited amount of qualifying preferred stock, less goodwill (net of certain deferred tax liabilities) and certain core deposit intangibles. Tier 2 Capital consists of non-qualifying preferred stock, certain types of debt and a limited amount of other items. Total Capital is the sum of Tier 1 and Tier 2 Capital.
In measuring the adequacy of capital, assets are generally weighted for risk. Certain assets, such as cash and U.S. government securities, have a zero risk weighting. Others, such as commercial and consumer loans, have a 100% risk weighting. Risk weightings are also assigned for off-balance sheet items such as loan commitments. The various items are multiplied by the appropriate risk-weighting to determine risk-adjusted assets for the capital calculations. For the leverage ratio mentioned above, average quarterly assets (as defined) are used and are not risk-weighted.
If thean institution fails to remain well-capitalized, it will be subject to a series of restrictions that increase as the capital condition worsens. For instance, federal law generally prohibits a depository institution from making any capital distribution, including the payment of a dividend or paying any management fee to its holding company, if the depository institution would be undercapitalized as a result. Undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations, and are required to submit a capital restoration plan for approval, which must be guaranteed by the institution’s parent holding company. 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 institutions are subject to the appointment of a receiver or conservator.
In December 2010, the Basel Committee on Banking Supervision issued final rules related to global regulatory standards on bank capital adequacy and liquidity (commonly referred to as “Basel III”) previously agreed on by the Group of Governors and Heads of Supervision (the oversight body of the Basel Committee). TheU.S. federal banking agencies adopted final rules during July 2013 to bring U.S. banking organizations into compliance with Basel III. Under the new rules, present detailswhich are effective in 2015, the Company will be subject to new capital requirements that include: (i) creation of a new required ratio for common equity Tier 1 (“CET1”) capital, (ii) an increase to the minimum Tier 1 capital ratio, (iii) changes to risk-weightings of certain assets for purposes of the Basel III framework, which includes increasedrisk-based capital requirements and limitsratios, (iv) creation of an additional capital conservation buffer in excess of the types of instruments that can be included in Tier 1 capital.
required minimum ratiocapital ratios, and (v) changes to what qualifies as capital for purposes of common equity to risk weighted assets be increased to 4.5% from the current level of 2%, to be fully phased in by January 1, 2015, and (ii) that the minimum requirement for the Tier 1 Risk-basedmeeting these capital
The Company will be phased in betweenrequired to maintain a minimum CET1 ratio of 4.5% of risk-weighted assets. CET1 consists of common stock, related surplus, and retained earnings less certain deductions that primarily include goodwill, other intangible assets, and deferred tax assets. These deductions to CET1 will be phased-in over a four-year period beginning at 40% on January 1, 20162015 and Januaryan additional 20% per year thereafter. The minimum Tier 1 2019.capital ratio will increase to 6% from 4%, while the total capital ratio and leverage ratio remains unchanged at 8% and 4%, respectively. Changes to risk-weighted assets include: i) 150% risk weighting for non-residential mortgage loans past due more than 90 days or classified as nonaccrual; ii) 150% risk weighting (from 100%) for certain high volatility commercial real estate acquisition, development, and construction loans; iii) a 20% (from 0%) credit conversion factor for the unused portion of commitments with an original maturity of one year or less (except those unconditionally cancellable by the Company); and, iv) a 250% (from 100%) risk weighting for mortgage servicing and deferred tax assets that are not deducted from CET1.
In order to avoid restrictions on distributions, including dividend payments and discretionary bonus payments to its executives, the Company will be required to maintain a capital conservation buffer of an additional 2.5% of risk-weighted assets once fully phased in. The capital conservation buffer is designed to absorb losses in periods of financial and economic distress and, while banks are allowedcreate incentives for banking organizations to draw on the bufferconserve capital during periods of stress, ifeconomic stress. The addition of the capital conservation buffer effectively results in minimum ratios of 7%, 8.5%, and 10.5% for CET1, Tier 1 capital, and total capital, respectively, in order to avoid restrictions on distributions and discretionary bonus payments to executives. The capital conservation buffer is set to be phased in over a bank’sfour year period beginning in 2016 by increments of 0.625% annually until reaching 2.5%.
The new capital requirements include changes to how regulatory capital ratios approachis defined for purposes of calculating each of the minimum requirement,capital ratios. Under current capital standards, the effects of accumulated other comprehensive income items included in capital (primarily unrealized gains and losses on available for sale investment securities) are excluded for the purposes of determining regulatory capital ratios. Under the new capital rules, the effects of certain accumulated other comprehensive income items are not excluded; however, non-advanced approaches banking organizations, including the Company, can make a one-time permanent election to continue excluding these items comparable to their current treatment. The Company expects to make this election in order to avoid potentially significant fluctuations in its capital levels which can occur from the impact of changing market interest rates on the fair value of the Company’s investment securities portfolio.
The new capital rules also prohibit including certain hybrid and preferred securities in Tier 1 capital. However, the rules grandfather these non-qualifying capital instruments (subject to 25% of Tier 1 capital) of bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. Non-qualifying capital instruments under the final rule include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010, which are currently included in Tier 1 capital. As a result, beginning in 2015, the Company’s non-qualifying capital instruments will be subject to more stringent constraints on dividends and bonuses. In addition, Basel III includes a countercyclical bufferlimit of up to 2.5%, which could be imposed by countries to address economies that appear to be building excessive system-wide risks due to rapid growth.
The Company completed a pro forma analysis of its capital ratios under the new capital rules discussed above as of June 30, 2013. This pro forma analysis indicates the Company remains well-capitalized under the new rules, which require a CET1 ratio of 3% will be tested during6.5%, a parallel run period between JanuaryTier 1 2013capital ratio of 8.0%, a total capital ratio of 10%, and January 1, 2017. Based ona leverage ratio of 5%. The analysis also shows the results ofCompany meets the parallel run period, any final adjustments would be carried out in the first half of 2017.
Expansion and Activity Limitations
With prior regulatory approval, the Company may acquire other banks or bank holding companies and its subsidiaries may merge with other banks. Acquisitions of banks located in other states may be subject to certain deposit-percentage, age, or other restrictions. DuringTheCompany is restricted to those activities permissible under the third quarter of 2009, theBank Holding Company withdrew its financial company election with the sale of its KHL subsidiary. Financial holding companies and their subsidiaries are permitted to acquire or engage in activities suchAct, as insurance underwriting, securities underwriting and distribution, travel agency activities, broad insurance agency activities, merchant banking, and other nonbanking activities that the FRB determines to be financial in nature or complementary to these activities. The FRB normally requires some form of notice or application to engage in or acquire companies engaged in such activities.amended. Under the Bank Holding Company Act and Gramm-Leach-Bliley Act, the Company is generally prohibited from engaging in or acquiring direct or indirect
control of more than 5% of the voting shares of any company engaged in activities other than those referredthat are deemed not closely related to above.
Limitations on Acquisitions of Bank Holding Companies
In general, other companies seeking to acquire control of a bank holding company such as the Company would require the approval of the FRB under the Bank Holding Company Act. In addition, individuals or groups of individuals seeking to acquire control of a bank holding company such as the Company would need to file a prior notice with the FRB (which the FRB may disapprove under certain circumstances) under the Change in Bank Control Act. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control may exist under the Change in Bank Control Act if the individual or company acquires 10% or more of any class of voting securities of the bank holding company and no shareholder holds a larger percentage of the subject class of voting securities.
Deposit Insurance
Each of the Company’s subsidiary banks are members of the FDIC, and their deposits are insured by the FDIC’s Deposit Insurance Fund (“DIF”) up to the amount permitted by law. The Company’s subsidiary banks are thus subject to quarterly FDIC deposit insurance assessments.assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) requiresrequired changes to a number of components of the FDIC insurance assessment with an implementation date ofthat was effective April 1, 2011. The Dodd-Frank Act requiresrequired the FDIC to adopt a new DIF restoration plan to ensure that the reserve ratio increases to 1.35% from 1.15% of insured deposits by 2020. Under the new restoration plan, the FDIC will forego the uniform three-basis point increase in initial assessment rates scheduled to take place on January 1, 2011. The FDIC has proposed newadopted regulations that would redefineredefined the assessment base as average consolidated assets less average tangible equity. The proposed regulations would useequity (as defined) during the current assessment rate schedule with modificationsperiod. Since the new assessment base resulted in a larger overall base when compared to the unsecured debtprevious domestic deposits base methodology, overall assessment rates were lowered and brokered deposit adjustments, and eliminate the secured liability adjustment.adjustment was eliminated from the rate calculation in an attempt to make the new assessments revenue neutral. The new regulations retain the risk category system for depository institutions with less than $10 billion in assets. Under this system, each institution is assigned to one of four risk categories based upon the institution’s capital and supervisory evaluation. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, increase or decrease assessment rates. In establishing assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion.
To determine the Company’s deposit insurance premiums, each of its subsidiary banks compute their respective assessment base which is composed of average consolidated assets less average tangible equity (as defined) and then apply the applicable assessment rate. Assessment rates range from 2.5 to 9 basis points for banks designated in the lowest risk category and up to 30 to 45 basis points for banks designated in the highest risk category. The range of assessment rates applicable to each risk category varies depending on the level of the banks unsecured debt and brokered deposits. Graduated assessment rate decreases are set to phase in when the DIF reserve ratio exceeds 1.15%, 2.0%, and 2.5%.
The FDIC may terminate insurance for depository institutions upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound financial condition, or has violated an applicable law, rule, regulation, order, or condition imposed by the FDIC.
In addition to deposit insurance assessments, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 possessing assessment powers in addition to the FDIC. The FDIC acts as a collection agent for FICO, whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation. FICO assessment rates are determined quarterly and will continue until the FICO bonds mature in 2017.
Pursuant to the Dodd-Frank Act, that provide for temporary unlimited coverage for noninterest-bearing transaction accounts. The separate coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and terminates on December 31, 2012.
Other Statutes and Regulations
The Company and its subsidiary banks are subject to a myriad ofnumerous other statutes and regulations affecting their activities. Some of the more important are:
Anti-Money Laundering. Financial institutions are required to establish anti-money laundering programs that must include the development of internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test the performance of the programs. The Company and its subsidiary banks are also subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships in order to guard against money laundering and to report any suspicious transactions. Recent laws provide the law enforcement authorities with increased access to financial information maintained by banks.
Sections 23A and 23B of the Federal Reserve Act. The Company’s subsidiary banks are limited in their ability to lend funds or engage in transactions with the Company or other nonbank affiliates of the Company, and all transactions must be on an arms’-lengtharm’s-length basis and on terms at least as favorable to the subsidiary bank as prevailing at the time for transactions with unaffiliated companies.
Dividends. The Parent Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is the dividends that it receives from its subsidiary banks. Statutory and regulatory limitations apply to the subsidiary banks’ payments of dividends to the Parent Company as well as to the Parent Company’s payment of dividends to its shareholders. A depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. The federal banking agencies may prevent the payment of a dividend if they determine that the payment would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. The Parent Company and certain of its bank subsidiaries are currently under regulatory orders that restrict the payment of dividends. For further information please refer to the caption “Recent Regulatory Events and Increased Capital Requirements” below.
The Company’s participation in the Capital Purchase Program (“CPP”) beginning inoutstanding Series A preferred stock was issued during the first quarter of 2009 and includes certain restrictions on the Company’s ability to pay dividends to its common shareholders. The Company is unable to declare dividend payments on shares of its common stock if it is in arrears on the dividends on its Series A preferred stock issued in connection with its participation in the CPP. Additionally, until January 9, 2012 the Company must have approval from the U.S. Treasury (“Treasury”) before it can increase dividends on its common stock above the last quarterly cash dividend per share it declared prior to October 14, 2008, which was $.33 per share. This restriction no longer applies if all of the Series A preferred stock has been redeemed by the Company or transferred by the Treasury. Additional information about the CPP can be found under the caption titled stock.
“Emergency Economic Stabilization Act of 2008 (“EESA”)” that follows.
Insurance Regulation. The Company’s subsidiaries that may underwrite or sell insurance products are subject to regulation by the Kentucky Department of Insurance.
Consumer Regulation. The activities of the Company and its bank subsidiaries are subject to a variety of statutes and regulations designed to protect consumers. These laws and regulations:
● | limit the interest and other charges collected or contracted for by all of the Company’s subsidiary banks; |
● | govern disclosures of credit terms to consumer borrowers; |
● | require financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
● | prohibit discrimination on the basis of race, creed, or other prohibited factors in extending credit; |
● | require all of the Company’s subsidiary banks to safeguard the personal non-public information of its customers, provide annual notices to consumers regarding the usage and sharing of such information and limit disclosure of such information to third parties except under specific circumstances; and |
● | govern the manner in which consumer debts may be collected by collection agencies. |
The deposit operations of the Company’s subsidiary banks are also subject to laws and regulations that:
● | require disclosure of the interest rate and other terms of consumer deposit accounts; |
● | impose a duty to maintain the confidentiality of consumer financial records and prescribe procedures for complying with administrative subpoenas of financial records; and |
● | govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. |
Emergency Economic Stabilization Act of 2008 (“EESA”). EESA was signed into law on October 3, 2008 as a measure to stabilize and provide liquidity to the U.S. financial markets. Under EESA, the Troubled Asset Relief Program (“TARP”) was created. TARP granted the U.S. Treasury (“Treasury”) authority to, among other things, invest in financial institutions and purchase troubled assets in an aggregate amount up to $700 billion.
In connection with TARP, the CPPCapital Purchase Program (“CPP”) was launched on October 14, 2008. Under the CPP, the Treasury announced a plan to use up to $250 billion of TARP funds to purchase equity stakes in certain eligible financial institutions, including the Company. The Company was preliminarily approved for $30received $30.0 million of equity capital in December 2008 withunder the transaction closingCPP in January 2009. In the transaction, the Company issued 30 thousand shares of fixed-rate cumulative perpetual preferred stock to the Treasury. The Company must pay a 5% cumulative dividend during the first five years the preferred shares are outstanding, resetting to 9% thereafter, if not redeemed, and includes
During June 2012, the Treasury conducted an auction as part of ongoing efforts to wind down and recover its remaining CPP investments. The auction included preferred stock positions held by the Treasury of seven banks participating in the CPP, including the $30.0 million investment in the Company’s Series A preferred stock. The Treasury was successful in selling all of its investment in the Company’s Series A preferred stock to private investors through a registered public offering. The Company could not redeemreceived no proceeds as part of the transaction. Since the Treasury no longer owns the preferred shares duringstock, the first three years after issuance except withexecutive compensation and other restrictions put in place by the proceeds from a qualified equity offeringTreasury no longer apply. The Company continues to view the outstanding preferred stock as defined in the agreement. Subsequent regulations from Treasury allow CPP participants to now redeem the preferred shares at any time. As conditions relating to CPP evolve, Treasury may issue additional regulations as permitted under the program.
As required by the CPP, the Company also issued a warrant to the Treasury to purchase common shares equal to 15% of the value of the preferred stock, withstock. The warrant allowed the number of warrants and exercise price determined based on the 20-day average closing price of the common shares ending on the day prior to preliminary approval. The warrants allow the U.S. Treasury to purchase 223,992 shares of Company common stock at an exercise price of $20.09 per share. BothIn July 2012, the preferred shares and warrants are accounted for as additions toCompany repurchased the warrant from the Treasury at a mutually agreed upon price of $75 thousand. The repurchase of the warrant had no impact on the Company’s regulatory capital.
Dodd-Frank Act. On July 21, 2010, theAct.The Dodd-Frank Act was signed into law by President Obama.on July 21, 2010. The Dodd-Frank Act implements far-reaching changes to the regulation of the financial services industry, including provisions that will:that:
● | Centralize responsibility for consumer financial protection by creating the Consumer Financial Protection Bureau, a new agency responsible for implementing, examining, and enforcing compliance with federal consumer financial |
● | Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding |
● | Require the federal banking regulators to seek to make their capital requirements countercyclical, so that capital requirements increase in times of economic expansion and decreases in times of economic |
● | Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible |
● | Provide for new disclosure and other requirements relating to executive compensation and corporate |
● | Make permanent the $250 thousand limit for federal deposit |
● | Repeal the federal prohibitions on the payment of interest on commercial demand deposits, thereby permitting depository institutions to pay interest on business transaction and other |
● | Increase the authority of the Federal Reserve to examine non-bank |
● | Codify and expand the “source of strength” doctrine as a statutory requirement. The source of strength doctrine represents the long held policy view by the Federal Reserve that a bank holding company should serve as a source of financial strength for its subsidiary banks. The Parent Company, under this requirement, is expected to commit resources to support a distressed subsidiary bank. |
Volcker Rule.The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits certain ownership interests in and relationships with private equity and hedge funds (commonly referred to as the “Volcker Rule”). On December 10, 2013, U.S. financial regulators, including the Federal Reserve, adopted final rules to implement the Volcker Rule. The Final Rules are effective April 1, 2014, but the conformance period to bring activities and investments into compliance was extended until July 21, 2015. The Company has evaluated the implications of the Dodd-Frank Act are subjectfinal rules on its investments and does not expect any material financial impact.
Under the final rules, banking entities would have been prohibited from owning certain Collateralized Debt Obligations (“CDOs”) backed by trust preferred securities as of July 21, 2015, which could have required banking entities to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impactrecognize unrealized market losses based on the inability to hold any such investments to maturity. However, in January 2014, regulators issued an interim rule effective April 1, 2014 exempting trust preferred securities backed CDOs from the Volcker Rule if (i) the CDO was established prior to May 19, 2010, (ii) the banking entity reasonably believes that the offering proceeds of the CDO were used to invest primarily in trust preferred securities issued by banks with less than $15 billion in assets, and (iii) the banking entity acquired the CDO on or before December 10, 2013. The Company its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment of interest on commercial demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.
Recent Regulatory Events and Increased Capital Requirements
The Company’s subsidiary banks are subject to capital-based regulatory requirements. The Company has historically managed its banks’ capital levels with the goal of meeting the criteria established by its regulators for each bank subsidiaries to be “well-capitalized.” Historically, to be well-capitalized, a depository institution needed to have a Tier 1 leverage capitalLeverage ratio of at least 5%, a Tier 1 Risk-based Capital ratio of 6%, and a Total risk-based capitalRisk-based Capital ratio of 10%. As of December 31, 2010,2013, each of the Company’s four subsidiary banks satisfied these capital ratios.
Although each of the Company’s subsidiary banks wasmet the definition of well-capitalized as of December 31, 2010,2013, some of their capital levels have decreased in recentexperienced decreases during the earlier years as a result of the economic downturn that began in late 2007. Because of the turmoil in the banking markets and continued difficulty many banks arewere experiencing with their loan portfolios, bank regulatory agencies arehave increasingly requiring banks to maintainrequired higher capital reserves as a cushion for dealing with any further deterioration in their loan portfolios in order to maintain well-capitalized status.portfolios. Primarily as a result of examinations that took place starting in 2009, the Company’s banking regulators have required highercertain of its bank subsidiaries to increase their minimum capital ratios, that have requiredwhich resulted in capital infusions at certain ofinjections
from the Company’s banking subsidiariesParent Company. Capital requirements and have taken other supervisory actions. A summary of the capital requirementsactions resulting from the regulatory actionsexaminations are describedsummarized below. For a more complete discussion, and additional information regarding these regulatory actions, please refer to the section captioned “Capital Resources”Resources” under Item 7 “Management’sManagement's Discussion and Analysis of Financial Condition and Result of Operations”Operations” part of this Form 10-K.
Parent Company. In the summer of 2009 the FRB St. Louis conducted an examination of the Parent Company.Company. Primarily due to the regulatory actions and capital requirements at three of the Company’s subsidiary banks (asas further discussed below),below, the Federal Reserve Bank of St. Louis (“FRB St. LouisLouis”) and the KDFI proposed the Company enter into a Memorandum of Understanding (“Memorandum”). The Company’s board approved entry into the Memorandum at a regular board meeting during the fourth quarter of 2009. Pursuant to the Memorandum, the Company agreed that it would develop an acceptable capital plan to ensure that the consolidated organization remains well-capitalized and each of its subsidiary banks meet the capital requirements imposed by their regulator as summarized below.
The Company also agreed to reduce its common stock dividend in the fourth quarter of 2009 from $.25 per share down to $.10 per share and not make interest payments on the Company’s trust preferred securities or dividends on its common or preferred stock without prior approval from the FRB St. Louis and the KDFI. Representatives of the FRB St. Louis and the KDFI have indicated that any such approval for the payment of dividends will be predicated on a demonstration of adequate, normalized earnings on the part of the Company’s subsidiaries sufficient to support quarterly payments on the Company’s trust preferred securities and quarterly dividends on the Company’s common and preferred stock. While both regulatory agencies have granted approval of all subsequent quarterly Company requests to make interest payments on its trust preferred securities and dividends on its preferred stock, the Company has not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) sought regulatory approval for the payment of common stock dividends since the fourth quarter of 2009. Moreover, the Company will not pay any such dividends on its common stock in any subsequent quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted.
Other components in the regulatory order for the parent company include requesting and receiving regulatory approval for the payment of new salaries/bonuses or other compensation to insiders; assisting its subsidiary banks in addressing weaknesses identified in their reports of examinations; providing periodic reports detailing how it will meet its debt service obligations; and providing progress reports with its compliance with the regulatory Memorandum.
Farmers Bank. Farmers Bank was the subject In November of a regularly scheduled examination by2009, the KDFI which was conducted in mid-September 2009. As a result of this examination, the KDFI and FRB St. Louis and the KDFI entered into a Memorandum with Farmers Bank. The Memorandum requires that Farmers Bank obtain written consent prior to declaring or paying the Parent Companywas terminated in January 2013 following a cash dividend and to achieve and maintain a Tier 1 Leverage ratio of 8.0%joint examination by June 30, 2010. The Parent Company injected from its reserves $11 million in capital into Farmers Bank subsequent to the Memorandum.
United Bank on May 8, 2010.
Other components in the regulatory order include stricter oversight and reporting to its regulators in terms of complying with the Consent Order. It also includes an increase in the level of reporting by management to its board of directors of its financial results, budgeting, and liquidity analysis, as well as restricting the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination.
In January 2014, the Company received written notification from the FDIC and the KDFI that the formal Consent Order entered into during 2011 had been terminated and replaced with a stepped-down enforcement action in the form of an informal Memorandum. While the parties agreed to many of the same provisions included in the Consent Order, replacing it with a Memorandum represents an important step forward for the Company.
Citizens Northern. The FDIC and the KDFI entered into a Memorandum with Citizens Northern in September of 2010. The Memorandum was terminated July 7, 2013 upon the issuance of an updated Memorandum. The updated Memorandum contains many of the same provisions included in the terminated Memorandum, with a new requirement that Citizens Northern maintain a Tier 1 Leverageleverage ratio to equalat or exceed 7.5% prior to September 30, 2010above 9.0%. In addition, the updated Memorandum requires having and to achieveretaining qualified management in the areas of loan administration and maintain Tier 1 Leverage ratio to equal or exceed 8.0% prior to December 31, 2010. In December 2010, the Parent Company injected $250 thousand of capital intocollection. It also requires Citizens Northern to bring its Tier 1 Leverage ratio up toaddress credit underwriting and administration weaknesses identified in the minimum 8.0% asmost recent examination of year-end 2010 as requiredthe bank by the Order.FDIC and the KDFI. At December 31, 2010,2013, Citizens Northern had a Tier 1 Leverage ratio of 8.04%9.67% and a Total Risk-based Capital ratio of 12.68%14.82%.
Other parts of the regulatory order include the development and documentation of plans for reducing problem loans, providing progress reports on compliance with the Memorandum, and for the development and implementation of a written profit plan and strategic plans. It also restricts the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination.
Regulators continue to monitor the Company’s progress and compliance with the regulatory agreements through periodic on-site examinations, regular communications, and quarterly data analysis. At the Parent Company and at each of its bank subsidiaries, the Company believes it is adequately addressing all issues of the regulatory agreements to which it is subject. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements havehas been met. The Company believes that it and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of December 31, 2010, with the exception that the level of substandard loans at Farmers Bank exceed the target amount by $1.3 million. Regulators continue to monitor the Company’s progress and compliance with the agreements through periodic on-site examinations, regular communications, and quarterly data analysis. The results of these examinations and communications show satisfactory progress toward meeting the requirements included in the regulatory agreements.
The Parent Company maintains cash available to fund a certain amount of additional injections of capital to its bank subsidiaries as determined by management or if required by its regulators. If needed, further amounts in excess of available cash may be funded by future public or private sales of securities, although the Parent Company is currently under no directive by its regulators to raise any additional capital.
References under the caption “Supervision and Regulation” to applicable statutes and regulations are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto.
Competition
The Company and its subsidiaries face vigorous competition for banking services from various types of businesses other than commercial banks and savings and loan associations. These include, but are not limited to, credit unions, mortgage lenders, finance companies, insurance companies, stock and bond brokers, financial planning firms, and department stores which compete for one or more lines of banking business. The Company also competes for commercial and retail business not only with banks in Central and Northern Kentucky, but with banking organizations from Ohio, Indiana, Tennessee, Pennsylvania, and North Carolina which have banking subsidiaries located in Kentucky. These competing businesses may possess greater resources and offer a greater number of branch locations, higher lending limits, and may offer other services not provided by the Company. In addition, the Company’s competitors that are not depository institutions are generally not subject to the extensive regulations that apply to the Company and its subsidiary banks. The Company has attempted to offset some of the advantages of its competitors by arranging participations with other banks for loans above its legal lending limits, expanding into additional markets and
The Company competes primarily on the basis of quality of services, interest rates and fees charged on loans, and the rates of interest paid on deposit funds. The business of the Company is not dependent upon any one customer or on a few customers, and the loss of any one or a few customers would not have a material adverse effect on the Company.
No material portion of the business of the Company is seasonal. No material portion of the business of the Company is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government, though certain contracts are subject to such renegotiation or termination.
The Company is not engaged in operations in foreign countries.
Employees
As of December 31, 2010,2013, the Company and its subsidiaries had 512519 full-time equivalent employees. Employees are provided withoffered a variety of employee benefits. A salary savings plan, group life insurance, hospitalization, dental, vision, and major medical insurance along with postretirement health insurance benefits are available to eligible personnel. Employees are not represented by a union. Management and employee relations are considered good.
The Company maintains a Stock Option Plan (“Plan”) that grants certain eligible employees the option to purchase a limited number of the Company’s common stock. The Plan specifies the conditions and terms that the grantee must meet in order to exercise the options.
In 2004, the Company’s Board of Directors adopted an Employee Stock Purchase Plan (“ESPP”). The ESPP was subsequently approved by the Company’s shareholders and became effective July 1, 2004. Under the ESPP, at the discretion of the Board of Directors, employees of the Company and its subsidiaries can purchase Company common stock at a discounted price and without payment of brokerage costs or other fees and in the process benefit from the favorable tax treatment afforded such plans pursuant to Section 423 of the Internal Revenue Code.
Available Information
The Company makes available free of charge through its website (www.farmerscapital.com),(www.farmerscapital.com) its Code of Ethics and other filings with the Securities and Exchange Commission (“SEC”), including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with the SEC.
Item 1A. Risk Factors
Investing in the Company’s common stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of the Company’s common stock could decline significantly, and shareholders could lose all or part of their investment.
The Company operates in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations, including rules and policies applicable to participants in the U.S. Treasury’s TARP Capital Purchase Program.
The Company is subject to extensive regulation, supervision, and examination by federal and state banking authorities. Any change in applicable regulations or laws could have a substantial adverse impact on the Company and its operations. Additional legislation and regulations that could significantly affect the Company’s powers, authority, and operations may be enacted or adopted in the future, which could have a material adverse effect on the Company’s results of operations and financial condition. Further, in the performance of their supervisory duties and enforcement powers, the Company’s banking regulators have significant discretion and authority to prevent or remedy practices they deem as unsafe or unsound or violations of law.
of investment by the Treasury in our Series A preferred stock under the CPP, the Company is subject to current and future regulations of the Treasury and acts of Congress related to that program. The laws and policies applicable to recipients of capital under the CPP have been significantly revised and supplemented since the inception of that program, and continue to evolve.
The Company presently is subject to, and in the future may become subject to, additional supervisory actions and/or enhanced regulation that could have a material negative effect on its business, operating flexibility, financial condition and the value of its common stock.
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, the KDFI (for state-chartered banks), the Board of Governors of the Federal Reserve (the “Federal Reserve”) (for bank holding companies), and separately the FDIC as the insurer of bank deposits, have the authority to compel or restrict certain actions on the Company’s part if they determine that the Company has insufficient capital or areis otherwise operating in a manner that may be deemed to be inconsistent with safe and sound banking practices. Under this authority, bank regulators can require the Company to enter into informal or formal enforcement orders, including board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders, pursuant to which the Company would be required to take identified corrective actions to address cited concerns and to refrain from taking certain actions.
If the Company is unable to comply with the terms of its current regulatory orders, or is unable to comply with the terms of any future regulatory orders to which it may become subject, then weit could become subject to additional, heightened supervisory actions and orders, possibly including cease and desist orders, prompt corrective actions, and/or other regulatory enforcement actions. If the Company’s regulators were to take such additional supervisory actions, then we could, among other things, become subject to significant restrictions on our ability to develop any new business, as well as restrictions on our existing business, and we could be required to raise additional capital, dispose of certain assets and liabilities within a prescribed period of time, or both. If one or more of the Company’s banks were unable to comply with regulatory requirements, such banks could ultimately face failure. The terms of any such supervisory action could have a material negative effect on our business, operating flexibility, financial condition and the value of our common stock.
Our nonperforming assets adversely affect our results of operations and financial condition and take significant management time to resolve.
The Company’s level of December 31, 2010, nonperforming loans (which include restructured loans of $37.0 million) totaled $91.0 million or 7.6% of the Company’s loan portfolio. Nonperforming assets (which include foreclosed real estate) were $122 million or 6.3% of total assets at year-end 2010. In addition, loans past due 30-89 days and still accruing were $6.7 million as of December 31, 2010.performing restructured loans) continue to improve, but remain elevated. Nonperforming assets adversely affect the Company’s net income in various ways. If economic conditions do not improve or actually worsen in our markets, the Company could continue to incur additional losses relating to an increase in nonperforming assets. The Company does not record interest income on nonaccrual loans or other real estate owned, thereby adversely affecting interest income. When the Company takesrepossesses collateral in foreclosures and similar proceedings, it is required to markrecord the related loan to theproperty at its fair value of the collateral less estimated selling costs, which decreases earnings. Thesenet income.
Nonperforming loans and other real estate owned also increase our risk profile and the amount of capital the Company’s regulators believe is appropriate in light of such risks. While the Company seeks to reduce its problem loans through workouts, restructurings, and otherwise, decreases in the value of these assets, the underlying collateral, or our borrowers’ performance or financial conditions have adversely affected, and may continue to adversely affect, the Company’s results of operations and financial condition. Moreover, the resolution of nonperforming assets requires significant time commitments from management of our banks, which can be detrimental to the performance of their other responsibilities. There can be no assurance that the Company will not experience further increases in nonperforming loans in the future.
Losses from loan defaults may exceed the allowance established for that purpose, which will have an adverse effect on the Company’s financial condition.
Volatility and deterioration in the broader economy increases the Company’s risk of credit losses, which could have a material adverse effect on its operating results. If a significant number of loans in the Company’s portfolio are not repaid, it would have an adverse effect on its earnings and overall financial condition. Like all banks, the Company’s subsidiaries maintain an allowance for loan losses to provide for losses inherent in the loan portfolio. The allowance for loan losses reflects management of each subsidiary’s best estimate of probable incurred credit losses in their loan portfolio at the relevant balance sheet
date. This evaluation is primarily based upon a review of the bank’s and the banking industry’s historical loan loss experience, known risks contained in the bank’s loan portfolio, composition and growth of the bank’s loan portfolio, and economic factors. Additionally, a bank’s regulators may require additional provision for the loan portfolio in connection with regulatorytheir examinations, agreements, or orders. The determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. As a result, the Company’s allowance for loan losses may be inadequate to cover actual losses in its loan portfolio. Consequently, the Company risks having additional future provisionsprovision for loan losses that may continue to adverselymaterially affect its earnings.
If the Company’s local markets experience a prolonged recession or economic downturn, it may be required to make further increases in its allowance for loan losses and to charge off additional loans, which would adversely affect its results of operations and capital.
Substantially all of the Company’s loans are to businesses and individuals located in Kentucky. A continuing or prolonged decline in the economy of Central and Northern Kentucky economies could havenegatively impact demand for the Company’s products and services, the ability of customers to repay their loans, collateral values securing loans, and the stability of funding sources. This could result in a material adverse effect on the Company’s financial condition, results of operations and prospects.
Generally, the Company’s nonperforming loans and assets reflect operating difficulties of individual borrowers; however, more recently the deterioration in the general economyoverall economic decline of recent years and slow growth has become a significant contributing factor to the increased levels of delinquencies and nonperforming loans. SlowerSluggish sales and excess inventory in the residential housing market continue to exist and has been the primary cause of the increase inelevated delinquencies and foreclosures for residential construction and land development loans. As of December 31, 2010, the Company’s total nonperforming loans had increased to $91.0 million or 7.6% of loans compared to $76.3 million or 6.0% of loans at December 31, 2009.foreclosures. If current trends in the housing and real estate markets continue,worsen, the Company expects that it will continue to experience higher than normal delinquencies and credit losses. Moreover, the Company expects that a prolonged recession or economic downturn could severely impact economic conditions in its market areas and that it could experience significantly higherhigh levels of delinquencies and credit losses. As a result, the Company may be required to make further increases into its provision for loan losses and to charge off additional loans in the future, which could adversely affect the Company’s financial condition and results of operations, perhaps materially. If such additional provisions and charge-offs cause the Company to experience losses, it may be required to contribute additional capital to its bank subsidiaries to maintain capital ratios required by regulators.
The Company’s exposure to credit risk is increased by its real estate development lending.
Real estate development loans have dominated the Company’s increase in impaired loans. Substantially all of the Company’s $54.0 million nonaccrual loans outstanding at December 31, 2010 are secured by real estate. Development lending has historically been considered to be higher credit risk than that of other types of lending, such as for single-family residential lending. Suchproperties. At year-end 2013, 14% of the outstanding balance of real estate development loans was classified as impaired. Real estate development loans typically involve larger loan balances to a single borrower or related borrowers. SuchThese loans can be affected by adverse conditions in real estate markets or the economy in general because commercial real estate borrowers’ ability to repay their loans depends on successful development and, in most cases, sale of theirthe underlying property. These loans also involve greater risk because they generally are not fully amortized over the loan period, but have a balloon payment due at maturity of the loan. A borrower’s ability to make a balloon payment typically will dependdepends on being able to either refinance the loan or timely sell the underlying property. In the current economic environment, the ability of borrowers to refinance or sell newly developed property or vacant land has greatly diminished.remains challenging. If the real estate markets were to worsen or not improve, the Company would likely will experience increased credit losses and require additional provisions to our allowance for loan losses, which would adversely impact the Company’s earnings and financial condition.
The Company’s investment securities portfolio is comparatively larger than other community banks and it is more dependent on its investment portfolio to generate net income.
The Company relies more heavily on its investment securities portfolio as a source of interest income than many other community banks because it has a comparatively smallsmaller loan portfolio. If the Company is not able to successfully manage the interest rate spread on the investment
The Company may not have the same level of net gains (and may have net realized losses) in future periods on the sale ofperiodically sells investment securities which would reduce earnings.at irregular intervals in the normal course of business to execute its current asset/liability management strategies. This will result in the realization of either a net gain or loss. Moreover, due to the current interest rate environment, proceeds from recent sales may be reinvested in investment securities with lower yields, which maycould reduce future earnings from investment securities.
The Company cannot accurately predict the effect of the current economy on its future results of operations or the market price of its stock.
The national economy and the financial services sector in particular continue to face unique challenges.challenges stemming from the economic recession occurring between 2007 and 2009. The Company cannot accurately predict the severity or duration of the current economic downturn,slowdown, which has adversely impacted its performance and the markets it serves. Any further deterioration in the economies of the nation as a whole or in the Company’s local markets would have an adverse effect, which could be material, on the Company’s financial condition, results of operations, and prospects and could also cause the market price of the Company’s stock to decline. While it is impossible to predict how long these conditions may exist, the economic downturnslowdown could continue to present risks for some time for our industry and the Company.
Interest rate volatility could significantly harm the Company’s results of operations.
The Company’s results of operations are affected by the monetary and fiscal policies of the federal government, the policies of the Company’sits regulators, and the prevailing interest rates in the United States and the Company’s markets. In addition, it is increasingly common for the Company’s competitors, who may be aggressively seeking to attract deposits as a result of increased liquidity concerns arising from changing economic or other conditions, to pay rates on deposits that are much higher than normal market rates. A significant component of the Company’s earnings is the net interest income, of its subsidiary banks, which is the difference between the income from interest earning assets, such as loans, and the expense ofon interest bearing liabilities, such as deposits. A change in market interest rates could adversely affect the Company’s earnings if market interest rates change such that the interest it pays on deposits and borrowings increases faster than the interest it collects on loans and investments; or, alternatively, if interest rates earned on earning assets decline faster than those rates paid on interest paying liabilities. Consequently, as with most financial institutions, the Company is sensitive to interest rate fluctuations.
The FDIC has increasedperiodically amends its deposit insurance premiums to restore and maintain the federal deposit insurance fund,rate assessment structure, which has increasedcan increase costs to the Company.
Under the Federal Deposit Insurance Act, as amended by the Dodd-Frank Act, the FDIC must establish and implement a plan to restore the deposit insurance fund’s designated reserve ratio to 1.35% of insured deposits by 2020. The Dodd-Frank Act removed the previously established upper limit reserve ratio of 1.15%. The FDIC must continue to assess and consider the appropriate level of the reserve ratio annually by considering each of the following: risk of loss to the insurance fund; economic conditions affecting the banking industry; the prevention of sharp swings in the assessment rates; and any other factors the FDIC deems important. In December 2010 the FDIC announced that it had established theThe FDIC’s current fund management strategy includes a targeted long-term reserve ratio atof 2.0%.
The Dodd-Frank Act required changes to a number of components of the FDIC previously implementedinsurance assessment that were effective April 1, 2011. While these changes have resulted in a restoration plan that changed both its risk-based assessment system and its base assessment rates. As partlower amount of this plan, during the second quarter of 2009 it increased deposit insurance assessments for the Company, future changes in assessment rates generally and imposed a special assessment of five basis points on each insured institution’s total assets less Tier 1 capital. The special assessment in 2009, which was in addition to the regular quarterly risk-based assessment, totaled approximately $1.1 million for the Company.
The recent repeal of federal prohibitions on the payment of interest on demand deposits of business customers could increase the Company’s interest expense.
Federal prohibitions against financial institutions paying interest on demand deposit accounts of business customers were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions cancould offer to pay interest on commercial demand deposits to compete for customers. The Company cannot predict the interest rates other institutions may offer. The Company’sexpects that its interest expense is expected towould increase and its net interest margin is expected to decrease should it begin to pay interest on commercial demand deposits to attract additional customers or to keep current customers. This could result in a material adverse impact on the Company’s financial condition and results of operations.
Any future losses may require the Company to raise additional capital; however, such capital may not be available to us on favorable terms or at all.
The Company is required by federal and state regulatory authorities to maintain levels of capital to support its operations. Furthermore, in the wakeas a result of recent regularly scheduled examinations, regulators currently require two of three of its subsidiaries, the Company’s regulators have required these threesubsidiary banks to raise theirmaintain capital to levels significantly above the well-capitalized benchmark. The Company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time and on the Company’s future financial condition and performance. Accordingly, the Company cannot make assurances with respect to its ability to raise additional capital on favorable terms, or at all. If the Company cannot raise additional capital when needed, its ability to further expand its operations through internal growth and acquisitions could be materially impaired and its financial condition and liquidity could be materially and adversely affected. The Parent Company is currently under no directive by its regulators to raise any additional capital.
The tightening of available liquidity could limit the Company’s ability to replace deposits and fund loan demand, which could adversely affect its earnings and capital levels.
A tightening of the credit and liquidity markets and the Company’s inability to obtain adequate funding to replace deposits may negatively affect its earnings and capital levels. In addition to deposit growth, maturity of investment securities, and loan payments from borrowers, the Company relies from time to time on advances from the Federal Home Loan Bank and other wholesale funding sources to fund loans and replace deposits. In the event of a further downturn in the economy, these additional funding sources could be negatively affected which could limit the funds available to the Company. The Company’s liquidity position could be significantly constrained if it were unable to access funds from the Federal Home Loan Bank or other wholesale funding sources.
The Company’s financial condition and outlook may be adversely affected by damage to its reputation..
The Company’s financial condition and outlook is highly dependent upon perceptions of its business practices and reputation. Its ability to attract and retain customers and employees could be adversely affected to the extent its reputation is damaged. Negative public opinion could result from its actual or alleged conduct in any number of activities, including regulatory actions taken against the Company, lending practices, corporate governance, regulatory compliance, mergers of its subsidiaries, or sharing or inadequate protection of customer information. Damage to the Company’s reputation could give rise to loss of customers and legal risks, which could have an adverse impact on its financial condition.
The Company faces strong competition from financial services companies and other companies that offer banking services..
The Company conducts most of its operations in Central and Northern Kentucky. The banking and financial services businesses in these areas are highly competitive and increased competition in its primary market areas may adversely impact the level of its loans and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors. These competitors include national banks, regional banks, and other community banks. The Company also faces competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks, and other financial intermediaries. In particular, the
Company’s competitors include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers, and a range in quality of products and services provided, including new technology-driven products and services. If the Company is unable to attract and retain banking customers, it may be unable to continueincrease its loan growthloans and level of deposits.
The Company’s financial results could be adversely affected by changes in accounting standards or tax laws and regulations.
The Company cannot predict how its common stock will trade in the future. The market value of its common stock will likely continue to fluctuate in response to a number of factors including the following, most of which are beyond our control, as well as the other factors described in this “Risk Factors” section:
● | general economic conditions and conditions in the financial |
● | changes in global financial markets, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility, and other geopolitical |
● | conditions in our local and national credit, mortgage, and housing |
● | developments with respect to financial institutions generally, including government |
● | our dividend |
● | actual and anticipated quarterly fluctuations in our operating results and earnings. |
The market value of the Company’s common stock may also be affectedimpacted by conditions affecting the financial markets in general, including price and trading fluctuations. These conditions may result in: (1) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, the Company’s common stock and (2) sales of substantial amounts of the Company’s common stock in the market, in each case that could be unrelated or disproportionate to changes in the Company’s operating performance. These broad market fluctuations may adversely affect the market value of the Company’s common stock.
There may be future sales of additional common stock or other dilution of the Company’s equity, which may adversely affect the market price of the Company’s common stock.
The Company is not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market price of the Company’s common stock could decline as a result of sales by the Company of a large number of shares of common stock or preferred stock or similar securities in the market or from the perception that such sales could occur.
The Company’s board of directors is authorized generally to cause it to issue additional common stock, as well as series ofand preferred stock without any action on the part of the Company’s shareholders, except as may be required under the listing requirements of the NASDAQ Stock Market. In addition, the board has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences, and other terms. This could include preferences over the common stock with respect to dividends or upon liquidation. If the Company issues preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, or if the Company issues preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected. The Parent Company is currently under no directive by its regulators to raise any additional capital.
You may not receive dividends on the Company’s common stock.
Holders of the Company’s common stock are entitled to receive dividends only when, as, and if its board of directors declares them and as permitted by its regulators. Although the Company has (up through 2009) historically declared quarterly cash
dividends on its common stock, it is not required to do so. The Company’s board of directors reduced its quarterly common stock dividend in January 2009 from $.33 per share to $.25 per share and again in October 2009 to $.10 per share. The Company also agreed to not make interest payments on its trust preferred securities or dividends on its common or preferred stock without prior approval from the FRB St. Louis and the KDFI. Representatives of the FRB St. Louis and the KDFI have indicated that any such approval for the payment of dividends will be predicated on a demonstration of adequate, normalized earnings on the part of the Company’s subsidiaries sufficient to support quarterly payments on the Company’s trust preferred securities and quarterly dividends on the Company’s common and preferred stock. However, there can be no assurance the Company’s regulators will provide such approvals in the future.
While both regulatory agencies have granted approval of all subsequent quarterly Company requests to make interest payments on its trust preferred securities and dividends on its preferred stock, the Company has not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) sought regulatory approval for the payment of common stock dividends since the fourth quarter of 2009. Moreover, the Company will not pay any such dividends on its common stock in any subsequent quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted.
Dividends declared and discount accretion on the Company’s Series A preferred stock reduce the net income available to common stockholders and reduce earnings per common share. Moreover, under the terms of the Company’s articles of incorporation, it is unable to declare dividend payments on shares of its common stock if it is in arrears on the dividends on the Series A preferred stock. Further, until January 9, 2012, the Company must have the Treasury’s approval before it may increase dividends on its common stock above the amount of the last quarterly cash dividend per share we declared prior to October 14, 2008, which was $.33 per share. This restriction no longer applies if all the Series A preferred stock has been redeemed by the Company or transferred by the Treasury.
If the Company is in arrears on interest payments on its trust preferred securities, it may not pay dividends on its common stock until such interest obligations are brought current.
The Company’s ability to pay dividends depends upon the results of operations of its subsidiary banks and certain regulatory considerations.
The Parent Company is a bank holding company that conducts substantially all of its operations through its subsidiary banks. As a result, the Company’s ability to make dividend payments on its common stock depends primarily on certain federal and state regulatory considerations and the receipt of dividends and other distributions from its bank subsidiaries. There are various regulatoryalso restrictions on the ability of threetwo of our subsidiary banks to pay dividends or make other payments to the Parent Company and itsrelated to current regulatory agreements that are in effect, thus further restricting the Parent Company’s ability to make payments to its shareholders, including certain regulatory approvals of dividends or distributions. There can be no assurance that the Company will receive such approval or that it will resume paying dividends to shareholders.
The trading volume in the Company’s common stock is less than that of many other similar companies.
The Company’s common stock is listed for trading on the NASDAQ Global Select Stock Market. As of December 31, 20102013, the 50-day average trading volume of the Company’s common stock on NASDAQ was 7,14315,936 shares or .10%.21% of the total common shares outstanding of 7,411,676.7,478,706. An efficient public trading market is dependent upon the existence in the marketplace of willing buyers and willing sellers of a stock at any given time. The Company has no control over such individual decisions of investors and general economic and market conditions. Given the lower trading volume of the Company’s common stock, larger sales volumes of its common stock could cause the value of its common stock to decrease. Moreover, due to its lower trading volume it may take longer to liquidate your position in the Company’s common stock.
There can be no assurance when the Company’s Series A preferred stock and related warrant issued to the Treasury can be redeemed..
Subject to consultation with, and approval from, its banking regulators, the Company intends to repurchase the Series A preferred stock and potentially the warrant, it issued to the Treasury when it believes the credit metrics in its loan portfolio have improved for the long-term and the overall economy has rebounded. However, there can be no assurance when the Series A preferred stock and warrant held by the Treasury can be repurchased, if at all. Until such time as the Series A preferred stock areis repurchased, the Company will remain subject to the terms and conditions of those instruments,the instrument, which, among other things, limit the Company’s ability to repurchase or redeem common stock or increase the dividends on its common stock over $.33 per share prior to 2012. Further, the Company’s continued participation in the CPP subjects it to increased regulatory and legislative oversight, including with respect to executive compensation. These new and any future oversight and legal requirements and implementing standards under the CPP may have unforeseen or unintended adverse effects on the financial services industry as a whole, and particularly on CPP participants such as the Company.stock.
Holders of the Company’s Series A preferred stock have rights that are senior to those of the Company’s common stockholders..
The Company’s Series A preferred stock that the Company issued to the Treasury is senior to the Company’s shares of common stock, and holders of the Series A preferred stock have certain rights and preferences that are senior to holders of the Company’s common stock. The restrictions on the Company’s ability to declare and pay dividends to common stockholders are discussed above. In addition, the Company and its subsidiaries may not purchase, redeem, or otherwise acquire for consideration any shares of the Company’s common stock unless the Company has paid in full all accrued dividends on the Series A preferred stock for all prior dividend periods, other than in certain circumstances. Furthermore, the Series A preferred stock is entitled to a liquidation preference over shares of the Company’s common stock in the event of liquidation, dissolution, or winding up.
Holders of the Company’s Series A preferred stock have limited voting rights..
Except (1) in connection with the election of two directors to the Company’s board of directors if its dividends on the Series A preferred stock are in arrears and we have missed six quarterly dividends and (2) as otherwise required by law, holders of the Company’s Series A preferred stock have limited voting rights. In addition to any other vote or consent of shareholders required by law or the Company’s articles of incorporation, the vote or consent of holders owning at least 66 2/3% of the shares of Series A preferred stock outstanding is required for (1) any authorization or issuance of shares ranking senior to the Series A preferred stock; (2) any amendment to the rights of the Series A preferred stock that adversely affects the rights, preferences, privileges, or voting power of the Series A preferred stock; or (3) consummation of any merger, share exchange, or similar transaction unless the shares of Series A preferred stock remain outstanding or are converted into or exchanged for preference securities of the surviving entity other than the Company and have such rights, preferences, privileges and voting power as are not materially less favorable than those of the holders of the Series A preferred stock.
The Company’s common stock constitutes equity and is subordinate to its existing and future indebtedness and its Series A preferred stock, and is effectively subordinated to all the indebtedness and other non-common equity claims against its subsidiaries.
Shares of the Company’s common stock represent equity interests in our holding companythe Parent Company and do not constitute indebtedness. Accordingly, the shares of the Company’s common stock rank junior to all of its indebtedness and to other non-equity claims on Farmers Capital Bank
The Company’s right to participate in any distribution of assets of any of its subsidiaries upon the subsidiary’s liquidation or otherwise, and thus the ability of the Company’s common stockstockholders to benefit indirectly from such distribution, will be subject to the prior claims of creditors of that subsidiary. As a result, holders of the Company’s common stock will be effectively subordinated to all existing and future liabilities and obligations of its subsidiaries, including claims of depositors. As of December 31, 2010 our subsidiaries’ total deposits and borrowings were approximately $1.7 billion.
If the Company is unable to redeem its Series A preferred stock after an initial five-year period, the cost of this capital will increase substantially.
If the Company is unable to redeem its Series A preferred stock prior to February 15, 2014, the cost of this capital to us will increase from approximately $1.5 million annually (5.0% per annum of the Series A preferred stock liquidation value) to $2.7 million annually (9.0% per annum of the Series A preferred stock liquidation value). ThisThe increase in the annual dividend rate on the Series A preferred stock would have a material negative effect on the amount of earnings the Company can retain
for growth and to pay dividends on its common stock.
The current economic environment exposes the Company to higher credit losses and expenses and may result in lower earnings or increase the likelihood of losses.
Although the Company remains well-capitalized, it continues to operate in a very challenging and uncertain economic environment. Financial institutions, including the Company, arecontinue to being adversely effected by difficult economic conditions that have impacted not only local markets, but on a national and global scale. Substantial deterioration in real estate and other financial markets in recent years, although improving, have and may continue to adversely impact the Company’s financial performance. Continuing declinesDeclines in real estate values and home sales volumes, along with job losseshigh levels of unemployment and other economic stresses can decrease the value of collateral securing loans extended to borrowers, particularly that of real estate loans. Lower valuesA decrease in the value of real estate securing loans may make it more difficult for the Company to recover amounts it is owed in the event of default by a borrower.
Current economic conditions may result in a higher degree of financial stress on the Company’s borrowers and their customers which could impair the Company’s ability to collect payments on loans, potentially increasing loan delinquencies, nonperforming assets, foreclosures, and higher losses. Current market forces have and may in the future cause the value of investment securities or other assets held by the Company to deteriorate, resulting in impairment charges, higher losses, and lower regulatory capital levels.
Market volatility could adversely impact the Company’s results of operations, liquidity position, and access to additional capital.
The capital and credit markets experienced heavy volatility and disruptions during much of the recent economic downturn, with unprecedented levels of volatility and disruptions that took place beginning within the last few months of 2008. In many cases, this has led to downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If similar market disruptions and volatility continue or worsen, there can be no assurance thatrecur, the Company will notmay experience a material adverse effect on its results of operations and liquidity position or on its ability to access additional capital.
Risks associated with unpredictable economic and political conditions may be amplified as a result of limited market area.
Commercial banks and other financial institutions, including the Company, are affected by economic and political conditions, both domestic and international, and by governmental monetary policies. Conditions such as inflation, value of the dollar, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorismThese conditions and other factors beyond the Company’s control may adversely affect profitability. In addition, almost all of the Company’s primary business area is located in Central and Northern Kentucky. A significant downturnSignificant downturns in this regional economyeconomic region may result in among other things,a deterioration inof the Company’s credit quality or a reduced demand for credit and may harm the financial stability of the Company’s customers. Due to the Company’s regional market area, these negative conditions may have a more noticeable effect on the Company than would be experienced by an institution with a larger, more diverse market area.
The Company’s results of operations are significantly affected by the ability of its borrowers to repay their loans.
Lending money is an essential part of the banking business. However, borrowers do not always repay their loans. The risk of non-payment is affected by:
● | unanticipated declines in borrower income or cash flow; |
● | changes in economic and industry conditions; |
● | the duration of the loan; and |
● | in the case of a collateralized loan, uncertainties as to the future value of the collateral. |
Due to the fact that the outstanding principal balances can be larger for commercial loans than other types of loans, such loans present a greater risk to the Company than other types of loans when non-payment by a borrower occurs.
Consumer loans typically have shorter terms and lower balances with higher yields compared to real estate mortgage loans, but generally carry higher risks of frequency of default than real estate mortgage and commercial loans. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans.
Inability to hire or retain certain key professionals, management, and staff could adversely affect the Company’s revenues and net income.
The Company relies on key personnel to manage and operate its business, including major revenue generating functions such as its loan and deposit portfolios. The loss of key staff may adversely affect the Company’s ability to maintain and manage these portfolios effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income.
The Company’s controls and procedures may fail or be circumvented.
The Company’s management regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, can provide only reasonable, not absolute, assurances that the objectives of the system of controls are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material and adverse effect on the Company’s business, results of operations, and financial condition.
The Company offers online banking services and both sends and receives confidential customer information electronically. This activity is vulnerable to security breaches and computer viruses which could expose the Company to litigation and adversely affect our reputation and overall operations.
The secure transmission of confidential information over the Internet is a significant element of online banking. The Company’s computer network or those of its customers could be vulnerable to unauthorized access, computer viruses, phishing schemes, and other security problems. The Company could be required to commit additional resources to protect against the threat of security breaches and computer viruses, or to remedy problems caused by security breaches or viruses. To the extent that the Company’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose the Company to litigation and other possible liabilities. The inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Company’s systems and could adversely affect its reputation and overall operations.
The Company’s operations rely on certain external vendors.
The Company utilizes certain external vendors to provide products and services necessary to maintain its day-to-day operations. The Company is exposed to the risk that such vendors fail to perform under these arrangements. This could result in disruption to the Company’s business and have a material adverse impact on the Company’s results of operations and financial condition. There can be no assurance that the Company’s policies and procedures designed to monitor and mitigate vendor risks will be effective in preventing or limiting the effect of vendor non-performance.
The Company is subject to claims and litigation pertaining to fiduciary responsibility.
The Company’s customers or others may make claims and take legal action against us related to fiduciary responsibilities. If claims and legal action against the Company are not resolved in a favorable manner to the Company, it could result in a material financial liability or damage to our reputation.
The recently enacted Dodd-Frank Act may increase the Company’s costs of operations which could adversely impact the Company's results of operations, financial condition or liquidity.
The goals of the new legislationDodd-Frank Act include restoring public confidence in the financial system, that resulted from the recent financial and credit crises, preventing another financial crisis, and allowing regulators to identify failings in the system before another crisis can occur. As part of the reform, the Dodd-Frank Act createscreated the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will havehas broad regulatory and enforcement powers over consumer financial products and services. The Dodd-Frank Act also changes the responsibilities of the current federal banking regulators, imposes additional corporate governance and disclosure requirements in areas such as executive compensation and proxy access, and limits or prohibits proprietary trading and hedge fund and private equity activities of banks.
The scope of the Dodd-Frank Act impacts many aspects of the financial services industry and requires the development and adoption of manynumerous implementing regulations, over the next several months and years; consequently,some of which have yet to be finalized. Consequently, the effects of the Dodd-Frank Act on the financial services industry and the Company will depend, in large part, upon the extent to which regulators exercise the authority granted to them and the approaches taken to implement the regulations. The Company has beguncontinues to assess the potential impact of the Dodd-Frank Act on its business and operations and believes that compliance with these new laws and regulations will likely result in additional costs, but at this early stage, the probable impact cannot be predictedmeasured with a high degree of certainty. Compliance with the new laws and regulations could adversely impact the Company’s results of operations, financial condition, or liquidity, any of which may impact the market price of the Company’s common stock. The Company believes that the Dodd-Frank Act will most likely impact it in the areas of corporate governance, deposit insurance assessments, capital requirements, and restrictions on fees charges to consumers.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company through its subsidiaries, owns or leases buildings that are used in the normal course of its business. The corporate headquarters is located at 202 W. Main Street, Frankfort, Kentucky, in a building owned by the Company. The Company’s subsidiaries own or lease various other offices in the counties and cities in which they operate. See the Notes to Consolidated Financial Statements contained in Item 8,“Financial Statement and Supplementary Data,” of this Form 10-K for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases.
Unless otherwise indicated, the properties listed below are owned by the Company and its subsidiaries as of December 31, 2010.
Corporate Headquarters
202 – 208 W. Main Street, Frankfort, KY
Banking Offices | |
Farmers Bank: | |
125 W. Main Street, Frankfort, KY | |
555 Versailles Road, Frankfort, KY | |
1401 Louisville Road, Frankfort, KY | |
154 Versailles Road, Frankfort, KY | |
1301 US 127 South, Frankfort, KY (leased) | |
128 S. Main Street, Lawrenceburg, KY | |
201 West Park Shopping Center, Lawrenceburg, KY | |
838 N. College Street, Harrodsburg, KY | |
1035 Ben Ali Drive, Danville, KY |
United Bank: | |
100 United Drive, Versailles, KY | |
146 N. Locust Street, Versailles, KY | |
206 N. Gratz, Midway, KY | |
200 E. Main Street, Georgetown, KY | |
100 Farmers Bank Drive, Georgetown, KY (leased) | |
100 N. Bradford Lane, Georgetown, KY | |
3285 Main Street, Stamping Ground, KY | |
2509 Sir Barton Way, Lexington, KY | |
3098 Harrodsburg Road, Lexington, KY (leased) | |
201 N. Main Street, Nicholasville, KY | |
995 S. Main Street (Kroger Store), Nicholasville, KY (leased) | |
986 N. Main Street, Nicholasville, KY | |
106 S. Lexington Avenue, Wilmore, KY | |
First Citizens: | |
425 W. Dixie Avenue, Elizabethtown, KY | |
3030 Ring Road, Elizabethtown, KY | |
111 Towne Drive (Kroger Store), Elizabethtown, KY (leased) | |
645 S. Dixie Blvd., Radcliff, KY | |
4810 N. Preston Highway, Shepherdsville, KY | |
157 Eastbrooke Court, Mt. Washington, KY | |
Citizens Northern: | |
103 Churchill Drive, Newport, KY | |
7300 Alexandria Pike, Alexandria, KY | |
164 Fairfield Avenue, Bellevue, KY | |
8730 US Highway 42, Florence, KY | |
34 N. Ft. Thomas Avenue, Ft. Thomas, KY | |
2911 Alexandria Pike, Highland Heights, KY | |
2006 Patriot Way, Independence, KY | |
2774 Town Center Blvd., Crestview Hills, KY (leased) |
Data Processing Center
102 Bypass Plaza, Frankfort, KY
Other
201 W. Main Street, Frankfort, KY
The Company considers its properties to be suitable and adequate based on its present needs.
Item 3. Legal Proceedings
As of December 31, 2010,2013, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. Management,It is the opinion of management, after discussion with legal counsel, believes that these actions are without merit and that the disposition or ultimate liability resulting from theseresolution of such claims and legal actions and proceedings, if any, will not have a material adverse effect upon the consolidated financial statements of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
At various times, the Company’s Board of Directors has authorized the purchase of shares of the Company’s outstanding common stock. No stated expiration dates have been established under any of the previous authorizations. There were no shares of common stock repurchased by the Company during the quarter ended December 31, 2010. The maximum number of2013. There are 84,971 shares that may still be purchased under previously announced repurchase plans is 84,971.
Performance Graph
The following graph sets forth a comparison of the five-year cumulative total returns among the shares of Company Common Stock, the NASDAQ Composite Index ("broad market index"), and Southeastern Banks under 1Under $1 Billion Market-Capitalization ("peer group index"). Cumulative shareholder return is computed by dividing the sum of the cumulative amount of dividends for the measurement period and the difference between the share price at the end and the beginning of the measurement period by the share price at the beginning of the measurement period.
The broad market index includes over 3,000 domestic and international based common shares listed on The NASDAQ Stock Market. The peer group index consists of 4437 banking companies in the Southeastern United States. The Company is included among the 44 companies includedthose in the peer group index.
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||||||
Farmers Capital Bank Corporation | $ | 100.00 | $ | 44.10 | $ | 21.06 | $ | 19.37 | $ | 52.85 | $ | 93.84 | ||||||||||||
NASDAQ Composite | 100.00 | 144.88 | 170.58 | 171.30 | 199.99 | 283.39 | ||||||||||||||||||
Southeastern Banks Under $1 Billion Market-Capitalization | 100.00 | 75.91 | 89.69 | 92.08 | 105.08 | 149.42 |
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Farmers Capital Bank Corporation | $ | 100.00 | $ | 117.65 | $ | 97.31 | $ | 92.66 | $ | 40.86 | $ | 19.51 | ||||||||||||
NASDAQ Composite | 100.00 | 111.74 | 124.67 | 73.77 | 107.12 | 125.93 | ||||||||||||||||||
Southeastern Banks Under 1 Billion Market-Capitalization | 100.00 | 119.54 | 91.33 | 77.91 | 54.70 | 66.90 |
Corporate Address
The headquarters of Farmers Capital Bank Corporation is located at:
202 West Main Street
Frankfort, Kentucky 40601
Direct correspondence to:
Farmers Capital Bank Corporation
P.O. Box 309
Frankfort, Kentucky 40602-0309
Phone: (502) 227-1668
www.farmerscapital.com
Annual Meeting
The annual meeting of shareholders of Farmers Capital Bank Corporation will be held Tuesday, May 10, 201113, 2014 at 11:00 a.m. at the main office of Farmers Bank & Capital Trust Company, Frankfort, Kentucky.
Form 10-K
For a free copy of Farmers Capital Bank Corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission, please write:
C. Douglas Carpenter, Executive Vice President, Secretary, and Chief Financial Officer
Farmers Capital Bank Corporation
P.O. Box 309
Frankfort, Kentucky 40602-0309
Phone: (502) 227-1668
Web Site Access to Filings
All reports filed electronically by the Company towith the United States Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available at no cost on the Company’s Web sitewebsite at www.farmerscapital.com.
NASDAQ Market Makers | |
J.J.B. Hilliard, W.L. Lyons, | Morgan, Keegan |
(502) 588-8400 | (800) 260-0280 |
(800) 444-1854 | |
UBS Securities, LLC | Raymond James & |
(859) 269-6900 | (800) |
(502) 589-4000 |
The Transfer Agent and Registrar for Farmers Capital Bank Corporation is American Stock Transfer & Trust Company.
American Stock Transfer & Trust Company,
Shareholder Relations
59 Maiden Lane - Plaza Level
New York, NY 10038
Phone: (800) 937-5449
Fax: (718) 236-2641
Email: Info@amstock.com
Website: www.amstock.com
Additional information is set forth under the captions“Shareholder Information” and“Common Stock Price” on page 73 under Part II, Item 7 and Note 18 17“Regulatory Matters” in the notes to the Company's 20102013 audited consolidated financial statements on pages 105117 to 108120 of this Form 10-K and is hereby incorporated by reference.
Item 6.6. Selected Financial Data
Selected Financial Highlights
December 31, (In thousands, except per share data) | 2013 | 2012 | 2011 | 2010 |
| |||||||||||||||
Results of Operations | ||||||||||||||||||||
Interest income | $ | 66,733 | $ | 71,222 | $ | 78,349 | $ | 89,751 | $ | 100,910 | ||||||||||
Interest expense | 11,995 | 18,258 | 24,670 | 34,948 | 47,065 | |||||||||||||||
Net interest income | 54,738 | 52,964 | 53,679 | 54,803 | 53,845 | |||||||||||||||
Provision for loan losses | (2,600 | ) | 2,772 | 13,487 | 17,233 | 20,768 | ||||||||||||||
Noninterest income | 22,116 | 24,654 | 24,391 | 34,110 | 28,169 | |||||||||||||||
Noninterest expense1 | 61,573 | 59,787 | 62,492 | 62,711 | 115,141 | |||||||||||||||
Net income (loss) | 13,446 | 12,149 | 2,738 | 6,932 | (44,742 | ) | ||||||||||||||
Dividends and accretion on preferred shares | 1,951 | 1,922 | 1,896 | 1,871 | 1,802 | |||||||||||||||
Net income (loss) available to common shareholders | 11,495 | 10,227 | 842 | 5,061 | (46,544 | ) | ||||||||||||||
Per Common Share Data | ||||||||||||||||||||
Basic and diluted net income (loss) | $ | 1.54 | $ | 1.37 | $ | .11 | $ | .68 | $ | (6.32 | ) | |||||||||
Cash dividends declared | - | - | - | - | .85 | |||||||||||||||
Book value | 18.73 | 18.54 | 17.18 | 16.35 | 16.11 | |||||||||||||||
Tangible book value2 | 18.61 | 18.35 | 16.86 | 15.87 | 15.44 | |||||||||||||||
Selected Ratios | ||||||||||||||||||||
Percentage of net income (loss) to: | ||||||||||||||||||||
Average shareholders’ equity (ROE) | 7.97 | % | 7.38 | % | 1.77 | % | 4.55 | % | (22.68 | )% | ||||||||||
Average total assets (ROA) | .74 | .65 | .14 | .33 | (1.99 | ) | ||||||||||||||
Percentage of common dividends declared to net income | - | - | - | - | N/M | |||||||||||||||
Percentage of average shareholders’ equity to average total assets | 9.34 | 8.85 | 8.05 | 7.32 | 8.76 | |||||||||||||||
Total shareholders’ equity | $ | 170,055 | $ | 168,021 | $ | 157,057 | $ | 149,896 | $ | 147,227 | ||||||||||
Total assets | 1,809,555 | 1,807,232 | 1,883,590 | 1,935,693 | 2,171,562 | |||||||||||||||
Long term borrowings | 176,850 | 178,267 | 239,664 | 252,209 | 316,932 | |||||||||||||||
Senior perpetual preferred stock | 29,988 | 29,537 | 29,115 | 28,719 | 28,348 | |||||||||||||||
Weighted average common shares outstanding - basic and diluted | 7,474 | 7,457 | 7,424 | 7,390 | 7,365 |
1 | The Company recorded a $52.4 million pretax goodwill impairment charge during 2009, representing the entire amount of goodwill previously reported. |
2 | Represents total common equity less intangible assets divided by the number of common shares outstanding at the end of the period. |
N/M-Not meaningful.
Selected Financial Highlights | ||||||||||||||||||||
December 31, (In thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Results of Operations | ||||||||||||||||||||
Interest income | $ | 89,751 | $ | 100,910 | $ | 113,920 | $ | 114,257 | $ | 92,340 | ||||||||||
Interest expense | 34,948 | 47,065 | 55,130 | 56,039 | 41,432 | |||||||||||||||
Net interest income | 54,803 | 53,845 | 58,790 | 58,218 | 50,908 | |||||||||||||||
Provision for loan losses | 17,233 | 20,768 | 5,321 | 3,638 | 965 | |||||||||||||||
Noninterest income | 34,110 | 28,169 | 9,810 | 24,157 | 20,459 | |||||||||||||||
Noninterest expense | 62,711 | 115,141 | 60,098 | 58,823 | 53,377 | |||||||||||||||
Income (loss) from continuing operations | 6,932 | (44,742 | ) | 4,395 | 15,627 | 13,665 | ||||||||||||||
Income from discontinued operations1 | 7,707 | |||||||||||||||||||
Net income (loss) | 6,932 | (44,742 | ) | 4,395 | 15,627 | 21,372 | ||||||||||||||
Dividends and accretion on preferred shares | (1,871 | ) | (1,802 | ) | ||||||||||||||||
Net income (loss) available to common shareholders | 5,061 | (46,544 | ) | 4,395 | 15,627 | 21,372 | ||||||||||||||
Per Common Share Data | ||||||||||||||||||||
Basic: | ||||||||||||||||||||
Income (loss) from continuing operations | $ | .68 | $ | (6.32 | ) | $ | .60 | $ | 2.03 | $ | 1.82 | |||||||||
Net income(loss) | .68 | (6.32 | ) | .60 | 2.03 | 2.85 | ||||||||||||||
Diluted: | ||||||||||||||||||||
Income (loss) from continuing operations | .68 | (6.32 | ) | .60 | 2.03 | 1.82 | ||||||||||||||
Net income (loss) | .68 | (6.32 | ) | .60 | 2.03 | 2.84 | ||||||||||||||
Cash dividends declared | N/A | .85 | 1.32 | 1.32 | 1.43 | |||||||||||||||
Book value | 16.35 | 16.11 | 22.87 | 22.82 | 22.43 | |||||||||||||||
Tangible book value2 | 15.87 | 15.44 | 14.81 | 14.43 | 15.81 | |||||||||||||||
Selected Ratios | ||||||||||||||||||||
Percentage of income (loss) from continuing operations to: | ||||||||||||||||||||
Average shareholders’ equity (ROE) | 4.55 | % | (22.68 | )% | 2.62 | % | 8.88 | % | 8.49 | % | ||||||||||
Average total assets3 (ROA) | .33 | (1.98 | ) | .21 | .83 | .85 | ||||||||||||||
Percentage of common dividends declared to income from continuing operations | N/A | N/M | 220.96 | 64.52 | 78.89 | |||||||||||||||
Percentage of average shareholders’ equity to average total assets3 | 7.24 | 8.72 | 7.86 | 9.33 | 10.04 | |||||||||||||||
Total shareholders’ equity | $ | 149,896 | $ | 147,227 | $ | 168,296 | $ | 168,491 | $ | 177,063 | ||||||||||
Total assets | 1,935,693 | 2,171,562 | 2,202,167 | 2,068,247 | 1,825,108 | |||||||||||||||
Other term borrowings and notes payable | 252,209 | 316,932 | 335,661 | 316,309 | 87,992 | |||||||||||||||
Senior perpetual preferred stock | 28,719 | 28,348 | ||||||||||||||||||
Weighted Average Common Shares Outstanding | ||||||||||||||||||||
Basic | 7,390 | 7,365 | 7,357 | 7,706 | 7,511 | |||||||||||||||
Diluted | 7,390 | 7,365 | 7,357 | 7,706 | 7,526 |
1Includes gain on disposals of $6,417 during 2006.
Glossary of Financial Terms
Allowance for loan losses
A valuation allowance to offset credit losses specifically identified in the loan portfolio, as well as management’s best estimate of probable incurred losses in the remainder of the portfolio at the balance sheet date. Management estimates the allowance balance required using past loan loss experience, an assessment of the financial condition of individual borrowers, a determination of the value and adequacy of underlying collateral, the condition of the local economy, an analysis of the levels and trends of the loan portfolio, and a review of delinquent and classified loans. Actual losses could differ significantly from the amounts estimated by management.
Dividend payout
Cash dividends paid on common shares, divided by net income.
Basis points
Each basis point is equal to one hundredth of one percent. Basis points are calculated by multiplying percentage points times 100. For example: 3.7 percentage points equals 370 basis points.
Interest rate sensitivity
The relationship between interest sensitive earning assets and interest bearing liabilities.
Net charge-offs
The amount of total loans charged off net of recoveries of loans that have been previously charged off.
Net interest income
Total interest income less total interest expense.
Net interest margin
Taxable equivalent net interest income expressed as a percentage of average earning assets.
Net interest spread
The difference between the taxable equivalent yield on earning assets and the rate paid on interest bearing funds.
Other real estate owned
Real estate not used for banking purposes. For example, real estate acquired through foreclosure.
Provision for loan losses
The charge against current income needed to maintain an adequate allowance for loan losses.
Return on average assets (ROA)
Net income (loss) divided by average total assets. Measures the relative profitability of the resources utilized by the Company.
Return on average equity (ROE)
Net income (loss) divided by average shareholders’ equity. Measures the relative profitability of the shareholders' investment in the Company.
Tax equivalent basis (TE)
Income from tax-exempt loans and investment securities havehas been increased by an amount equivalent to the taxes that would have been paid if this income were taxable at statutory rates. In order to provide comparisons of yields and margins for all earning assets, the interest income earned on tax-exempt assets is increased to make them fully equivalent to other taxable interest income investments.
Weighted average number of common shares outstanding
The number of shares determined by relating (a) the portion of time within a reporting period that common shares have been outstanding to (b) the total time in that period.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following pages present management’s discussion and analysis of the consolidated financial condition and results of operations of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a bank holding company, and its bank and nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust Company (“Farmers Bank”) in Frankfort, KY, United Bank & Trust Company (“United Bank”) in Versailles, KY, First Citizens Bank (“First Citizens”) in Elizabethtown, KY, and its significant wholly-ownedCitizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) in Newport, KY.
At year-end 2013, Farmers Bank had three primary subsidiaries, which include EG Properties, Inc., Leasing One Corporation (“Leasing One”), and Farmers Capital Insurance Corporation (“Farmers Insurance”). EG Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Farmers Bank. Leasing One is a commercial leasing company in Frankfort, KY, and Farmers Insurance is an insurance agency in Frankfort, KY. The Lawrenceburg Bank and Trust Company, which previously was a separate bank subsidiary of the Parent Company, was merged into Farmers Bank on May 8, 2010; First Citizens Bank in Elizabethtown, KY; United Bank & Trust Company (“United Bank”) in Versailles, KY which, during 2008, was the surviving company after the merger with two sister companies of Farmers Bank and Trust Company (“Farmers Georgetown”) and Citizens Bank of Jessamine County; United Bank had one direct subsidiary at year-end 2010,2013, EGT Properties, Inc. EGT Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank; andBank. First Citizens Bank of Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”); Citizens Northern had one subsidiary at year-end 2010,2013, HBJ Properties, LLC. HBJ Properties, LLC is involved in real estate management and liquidation for certain repossessed properties of First Citizens. Citizens Northern had one direct subsidiary at year-end 2013, ENKY Properties, Inc. ENKY Properties, Inc., which is involved in real estate management and liquidation for certain repossessed properties of Citizens Northern.
The Company has three active nonbank subsidiaries, FCB Services, Inc. (“FCB Services”), FFKT Insurance Services, Inc. (“FFKT Insurance”), and EKT Properties, Inc. (“EKT”). FCB Services is a data processing subsidiary located in Frankfort, KY that provides services to the Company’s banks as well as unaffiliated entities. FFKT Insurance is a captive property and casualty insurance company insuring primarily deductible exposures and uncovered liability related to properties of the Company. EKT was created in 2008formed to manage and liquidate certain real estate properties repossessed by the Company. In addition, the Company has three subsidiaries organized as Delaware statutory trusts that are not consolidated into its financial statements. These trusts were formed for the purpose of issuing trust preferred securities. All significant intercompany transactions and balances are eliminated in consolidation.
For a complete list of the Company’s subsidiaries, please refer to the discussion under the heading“Organization” included in Part 1, Item 1 of this Form 10-K. The following discussion should be read in conjunction with the audited consolidated financial statements and related footnotes that follow.
Forward-Looking Statements
This report contains forward-looking statements with the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Statements in this report that are not statements of historical fact are forward-looking statements. In general, forward-looking statements relate to a discussion of future financial results or projections, future economic performance, future operational plans and objectives, and statements regarding the underlying assumptions of such statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.
Various risks and uncertainties may cause actual results to differ materially from those indicated by the Company’s forward-looking statements. In addition to the risks described under “Part 1, Item 1A“Risk Factors”Factors” in this report, factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate) and lower interest margins; competition for the Company’s customers from other providers of financial services; deposit outflows or reduced demand for financial services and loan products; government legislation, regulation, and changes in monetary and fiscal policies (which changes from time to time and over which the Company has no control); changes in interest rates; changes in prepayment speeds of loans or investment securities; inflation; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company’s customers; changes in the level of nonperformingnon-performing assets and charge-offs; changes in the number of common shares outstanding; the capability of the Company to successfully enter into a definitive agreement for and close anticipated transactions; the possibility that acquired entities may not perform as well as expected;
unexpected claims or litigation against the Company; technological or operational difficulties; the impact of new accounting pronouncements and changes in policies and practices that may be adopted by regulatory agencies; acts of war or terrorism; the ability of the parent company to receive dividends from its subsidiaries; the impact of larger or similar financial institutions encountering difficulties, which may adversely affect the banking industry or the Company; the Company or its subsidiary banks’ ability to maintain required capital levels and adequate funding sources and liquidity; and other risks or uncertainties detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.
The Company’s forward-looking statements are based on information available at the time such statements are made. The Company expressly disclaims any intent or obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or other changes.
Application of Critical Accounting Policies
The Company’s audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices applicable to the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility from period to period.between reporting periods. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
The most significant accounting policies followed by the Company are presented in Note 1 of the Company’s 20102013 audited consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this management’s discussionManagement’s Discussion and analysisAnalysis of financial conditionFinancial Condition and resultsResults of operations,Operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and fair value measurements and accounting for goodwill to be the accounting areas that requiresrequire the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
Allowance for Loan Losses
The allowance for loan losses represents credit losses specifically identified in the loan portfolio, as well as management's estimate of probable incurred credit losses in the loan portfolio at the balance sheet date. Determining the amount of the allowance for loan losses and the related provision for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.changes. The loan portfolio also represents the largest asset group on the consolidated balance sheets. Additional information related to the allowance for loan losses that describes the methodology and risk factors can be found under the captions“Asset Quality” and“Nonperforming Assets” in this management’s discussionManagement’s Discussion and analysisAnalysis of financial conditionFinancial Condition and resultsResults of operation,Operations, as well as Notes 1 and 43 of the Company’s 20102013 audited consolidated financial statements.
Fair Value Measurements
The carrying value of certain financial assets and liabilities of the Company is impacted by the application of fair value measurements, either directly or indirectly. Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit
(exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as investment securities classified as available for sale. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established.
The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. The Company characterizes activeActive markets asare those where transaction volumes are sufficient to provide objective pricing information with reasonably narrow bid/ask spreads and where received quoted prices do not vary widely. When the financial instruments are not actively traded, other observable market inputs such as quoted prices of securities with similar characteristics may be used, if available, to determine fair value. Inactive markets are characterized by low transaction volumes, price quotations that vary substantially among market participants, or in which minimal information is released publicly.
When observable market prices do not exist, the Company estimates fair value primarily by using cash flow and other financial modeling methods. The valuation methods may also consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Changes in these underlying factors, assumptions, or estimates in any of these areas could materially impact the amount of revenue or loss recorded.
Additional information regarding fair value measurements can be found in Notes 1 and 1918 of the Company’s 20102013 audited consolidated financial statements. The following is a summary of the Company’s more significant assets that may be affected by fair value measurements, as well as a brief description of the current accounting practices and valuation methodologies employed by the Company:
Available For Sale Investment Securities
Investment securities classified as available for sale are measured and reported at fair value on a recurring basis. Available for sale investment securities are valued primarily by independent third party pricing services under the market valuation approach that include, but are not limited to, the following inputs:
● | Mutual funds and |
● | Government-sponsored agency debt securities, obligations of states and political subdivisions, mortgage-backed securities, corporate bonds, and other similar investment securities are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources. |
At December 31, 2010,2013, all of the Company’s available for sale investment securities were measured using observable market data.
Other Real Estate Owned
Other real estate owned (“OREO”) includes properties acquired by the Company through, or in lieu of, actual loan foreclosures and is initially carried at fair value less estimated costs to sell. Fair value of OREO is generally based on third party appraisals of the property that includes comparable sales data compriseddata. The carrying value of significant unobservable inputs.each OREO property is updated at least annually and more frequently when market conditions significantly impact the value of the property. If the carrying amount of the OREO exceeds fair value less estimated costs to sell, an impairment loss is recorded through expense. OREO is subsequently accounted for at the lower of carrying amount or fair value less estimated costs to sell. At December 31, 20102013, OREO was $30.5$37.8 million compared to $31.2$52.6 million at year-end 2009.
Impaired Loans
Loans are considered impaired when full paymentit is probable that the Company will be unable to collect all amounts due under the contractual terms is not expected.of the loan agreement. Impaired loans are measured at the present value of expected future cash flows, discounted at the
loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral based on recent appraisals if the loan is collateral dependent. If the value of an impaired loan is less than the unpaid balance, the difference is credited to the allowance for loan losses with a corresponding charge to provision for loan losses. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of a loan is confirmed.
Appraisals used in connection with valuing collateral dependentcollateral-dependent loans may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraisers take absorption rates into consideration and adjustments are routinely made in the appraisal process to identify differences between the comparable sales and income data available. Such adjustments consist mainly of estimated costs to sell that are usually significant and typically include significant unobservable inputsnot included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for determining fair value.which a newer appraisal is available. These adjustments can be significant. Impaired loans were $130$58.3 million and $108$63.9 million at year-end 20102013 and 2009,2012, respectively.
During the fourth quarter of 2009, the Company determined that its previously recorded goodwill was fully impaired and recorded a pre-tax impairment charge of $52.4 million. See Note 22 “Goodwill and Intangible Assets” of the Company’s 2010 audited consolidated financial statements for further information.
The Company offers a variety of financial products and services at its 36 banking locations in 23 communities throughout Central and Northern Kentucky. The Company has four separately chartered commercial banks that operate under a community banking philosophy. This philosophy focuses primarily on understanding the banking needs of those in our local and surrounding communities and providing them with competitively priced products and a high level of personalized service. The most significant products and services the Company offers include consumer and commercialbusiness lending, receiving deposits,checking, savings, and other deposit accounts, automated teller machines, electronic bill payments, and providing trust services and offering other traditional banking products and services. The primary goals of the Company are to continually improve profitability and shareholder value, increase and maintain a strong capital position, provide excellent service to our customers through our community banking structure, and to provide a challenging and rewarding work environment for our employees.
The Company generates a significant amount of its revenue, cash flows, and net income from interest income and net interest income, respectively. Interest income is generated by earnings on the Company’s earning assets, primarily loans and investment securities. Net interest income is the excess of the interest income earned on earning assets over the interest expense paid on amounts borrowed to support those
The most significant issues to impact the Company��s operating results for 2013 continue to include elevated amounts of nonperforming loans, allowance forassets and the lack of high quality loan losses, and net loan charge-offs.
For 2014, the Company during 2010 and thatintends to add to the improvements made over the last few years. Reducing nonperforming assets will continue to havebe a focal point. Seeking out and funding high quality loan demand and improving profitability is also an impact beyond 2010:important goal. The Company plans to repay a portion of its outstanding preferred stock, although this is subject to approval by its banking regulators. United Bank, a subsidiary of the Company, in early 2014 received notice that the formal Consent Order it entered into with its regulators during 2011 had been terminated and replaced with a stepped-down enforcement action in the form of an informal Memorandum. Removal of formal enforcement actions by regulators, such as the Consent Order, is an important step toward being able to repay a portion of the preferred stock. The Company is diligently working to improve its overall financial condition and for the removal of all enforcement actions with its banking regulators.
RESULTS OF OPERATIONS
The Company reported net income of $6.9$13.4 million for 2013 an increase of $1.3 million or $.6810.7% compared to $12.1 million for 2012. On a per common share basis, net income was $1.54 and $1.37 for 2013 and 2012, respectively. Selected income statement amounts and related information is presented in 2010 comparedthe table below.
(In thousands, except per share data) | 2013 | 2012 | Increase | |||||||||
Interest income | $ | 66,733 | $ | 71,222 | $ | (4,489 | ) | |||||
Interest expense | 11,995 | 18,258 | (6,263 | ) | ||||||||
Net interest income | 54,738 | 52,964 | 1,774 | |||||||||
Provision for loan losses | (2,600 | ) | 2,772 | (5,372 | ) | |||||||
Net interest income after provision for loan losses | 57,338 | 50,192 | 7,146 | |||||||||
Noninterest income | 22,116 | 24,654 | (2,538 | ) | ||||||||
Noninterest expenses | 61,573 | 59,787 | 1,786 | |||||||||
Income before income taxes | 17,881 | 15,059 | 2,822 | |||||||||
Income tax expense | 4,435 | 2,910 | 1,525 | |||||||||
Net income | $ | 13,446 | $ | 12,149 | $ | 1,297 | ||||||
Less preferred stock dividends and discount accretion | 1,951 | 1,922 | 29 | |||||||||
Net income available to common shareholders | $ | 11,495 | $ | 10,227 | $ | 1,268 | ||||||
Basic and diluted net income per common share | $ | 1.54 | $ | 1.37 | $ | .17 | ||||||
Weighted average common shares outstanding – basic and diluted | 7,474 | 7,457 | 17 | |||||||||
Return on average assets | .74 | % | .65 | % | 9 bp | |||||||
Return on average equity | 7.97 | % | 7.38 | % | 59 bp |
bp = basis points.
The more significant components related to a net loss of $44.7 million or $6.32 per common share for 2009. This represents an improvement of $51.7 million or $7.00 per common share. The prior year net loss was mainly attributed to a one-time $46.5 million after tax non-cash goodwill charge representing the Company’s write offresults of its entire previously reported goodwill.
operations are included below.
|
Interest income results from interest earned on earning assets, which primarily includes loans and investment securities. Interest income is affected by volume (average balance), the composition of earning assets, and the related rates earned on those assets. Total interest income for 20102013 was $89.8$66.7 million, a decrease of $11.2$4.5 million or 11.1%6.3% compared to $101$71.2 million for 2009. Interest2012. With the exception of nontaxable investment securities, interest income decreased across all major earning asset categoriescategories. The decrease in interest income relates tolower interest on loans and was driven primarily by lower interest rates and, in the case for loans, a lower average volume. Rate declines were driven mainly byinvestment securities, which decreased due to a combination of continuing weak economic conditions inboth rate and volume declines. Rate declines continue to be driven by a slow-growth economy and related competitive factors combined with the Company’s markets as well asoverall strategy by the Company’s overall strategyCompany of being more selective in pricing depositsboth its loans and extending loans. Actions takendeposits. While longer-term market interest rates began to climb toward the last half of 2013, actions by the Federal Reserve Board has also(“Federal Reserve”) have kept the level of interest rates low, with the objective of holding short-term interest rates at near historic lows throughout 2010.exceptionally low levels until unemployment rates decline to a target of 6.5%. In general, the Company’s variable and floating rate assets and liabilities that have resetresetting since the prior year, as well as activity related to new earning assets and funding sources, have repriced downward to reflectin the overall lowercurrent interest rate environment. The Company’s tax equivalent yield on earning assets was 4.9%4.1% for 2010,2013, a decrease of 3812 basis points compared to 5.2%4.2% for 2009.
Interest Expense
Interest expense results from incurring interest on interest bearing liabilities, which are made up of interest bearing deposits, federal funds purchased, securities sold under agreements to repurchase, and other short and long-term borrowed funds. Interest expense is affected by volume, composition of interest bearing liabilities, and the related rates paid on those liabilities. Total interest expense was $34.9$12.0 million for 2010,2013, a decrease of $12.1$6.3 million or 25.7%34.3% compared to $47.1$18.3 million for 2009. Interest expense decreased mainly as a result of a lower average rate paid on deposits in an overall lower interest rate environment. Volume reductions, primarily on time deposits, also contributed to lower interest expense as the Company has made decisions to strategically reduce certain higher-rate deposits. The average rate paid on interest bearing liabilities was 2.1% for 2010, a decrease of 55 basis points compared to 2.6% for 2009.
expense for each of these items. For deposits, substantially all of the decrease in interest income as theexpense was related to time deposits. The Company has been ablecontinued to more aggressively reduce its funding costs, particularly relatedreprice higher-rate maturing time deposits downward to lower market rates or to allow them to mature without renewal. For long-term borrowings, the decrease in interest on deposits. The federalexpense reflects two events that occurred during the fourth quarter of 2012: a $50.0 million principal repayment of borrowed funds rate, which was at 4.25% atdrove down the beginning of 2008, fell to near zero percent by the end of 2008average balance for 2013 and has remained at that level for all of 2009 and 2010. New deposits and other borrowing arrangements as well as the repricing of existing deposits and borrowings$23.2 million of 6.60% fixed rate subordinated debt to a floating interest rate of three-month LIBOR plus 132 basis points. The interest rate in effect at lower market interest rates, particularlyyear-end 2013 for shorter-term instruments, contributed to the overall lower interest expense in the comparable periods.
Net Interest Income
Net interest income is the most significant component of the Company’s operating earnings. Net interest income is the excess of the interest income earned on earning assets over the interest paid for funds to support those assets. The two most common metrics used to analyze net interest income are net interest spread and net interest margin. Net interest spread represents the difference between the taxable-equivalenttaxable equivalent yields on earning assets and the rates paid on interest bearing liabilities. Net interest margin represents the percentage of taxable equivalent net interest income to average earning assets. Net interest margin will exceed net interest spread because of the existence of noninterest bearing sources of funds, principally demand deposits and shareholders’ equity, which are also available to fund earning assets. Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, their related yields, and the associated cost and composition of the interest bearing liabilities. Accordingly, portfolio size, composition, and the related yields earned and the average rates paid can have a significant impact on net interest spread and margin. The table following this discussion represents the major components of interest earning assets and interest bearing liabilities on a tax equivalent basis. To compare the tax-exempt asset yields to taxable yields, amounts in the table are adjusted to pretax equivalents based on the marginal corporate Federal tax rate of 35%.
Tax equivalent net interest income was $57.0$56.4 million for 2010,2013, an increase of $623 thousand$1.7 million or 1.1%3.1% compared to $56.4$54.7 million for 2009.2012. Net interest margin was 3.40%, an increase of 22 basis points from 3.18% for the prior year. The increase in net interest margin was 3.0%, andriven by a 27 basis point increase of 15 basis points from 2.85% in the prior year. Netnet interest spread, accountedwhich was 3.23% for 17 basis points of the higher net interest margin and was 2.78% for 20102013 compared to 2.61%2.96% for 2009. The impact of noninterest bearing sources of funds negatively impacted net interest margin by 2 basis points in the comparison. The effect of noninterest bearing sources of funds on net interest margin typically decreases as the average cost of funds declines.
The Company continues to actively monitormonitors and proactively managemanages the rate sensitive components of both its assets and liabilities in a continuously changing and difficult market environment. This task has become increasingly more difficult following the extreme market disruptions and economic downturn that began in 2008. Competition in the Company’s market areas continues to be intense. The overallintense, and while longer term interest rate environment remainsrates shifted upward during the last half of 2013, they remain low by historical measures. The Federal Reserve has kept its short-term federal funds target rate at near zero percent since mid-December 2008 and has indicated that it expects to maintain that rate at an exceptionally low level for an extended period of time.while unemployment rates remain above 6.5%. Yields on the 5-year, 10-year, and 30-year Treasury securities of mediumare up 102 basis points, 127 basis points, and longer-term maturity structures have decreased as of102 basis points at year-end 20102013, respectively, compared to a year earlier. The twoYields on the 3-month and 10-year notes decreased 542 basis points and 543 basis points, respectively in the comparison while the 30-year bond dropped 307 basis points.
Similar to the short-term federal funds target rate, the prime interest rate has not changed since December 2008. The Company uses the prime interest rate as part of its pricing model primarily on variable rate commercial real estate loans. The prime interest rate can have a significant impact on the Company’s interest income on loans that reprice based on changes to the prime interestthis rate. The Company’s variable interest rate loans contain provisions that limit the amount of increase or decrease in the interest rate during the life of thea loan. This will limit the increase or decrease in interest income on loans that have interest rates tied to the prime interest rate. For 2010,2013, the average yield earned on loans was 5.7%5.4%, which is in excess ofexceeded the prime interest rate of 3.25% at year-end 2010.year-end. Predicting the movement of future interest rates is uncertain.
During 2010,2013, the average ratesrate for two of the Company’s most significant components of net interest income, for the Company, loans and time deposits, both declined. As previously noted, theThe average rate earned on the Company’s loan portfolio for 2013 declined 1911 basis points to 5.7% for 2010. The5.4% and the average rate paid on time deposits decreased 8742 basis points to 2.5%1.0% compared to 2012. The Company expects its net interest margin to trend modestly upward in the annual comparison. Shouldnear term, primarily from a decrease in its cost of funds, according to internal modeling using expectations about future market interest rates, onthe maturity structure of the Company’s earning assets and interest paying liabilities, reprice lower, the Company’s yield on earning assetsand other factors. Future results, however, could potentially decrease fasterbe significantly different than its cost of funds. Should interest rates reprice higher, the Company’s cost of funds may also increase and could continue to increase faster than the yields on earning assets, resulting in a lower net interest margin.expectations.
Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential
Years Ended December 31, | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||||
(In thousands) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||
Earning Assets | ||||||||||||||||||||||||||||||||||||
Investment securities | ||||||||||||||||||||||||||||||||||||
Taxable | $ | 477,626 | $ | 10,575 | 2.21 | % | $ | 532,197 | $ | 12,872 | 2.42 | % | $ | 494,341 | $ | 14,387 | 2.91 | % | ||||||||||||||||||
Nontaxable1 | 109,861 | 3,726 | 3.39 | 88,369 | 3,313 | 3.75 | 63,837 | 2,848 | 4.46 | |||||||||||||||||||||||||||
Interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell | 66,686 | 154 | .23 | 66,757 | 160 | .24 | 106,037 | 241 | .23 | |||||||||||||||||||||||||||
Loans1,2,3 | 1,006,662 | 53,944 | 5.36 | 1,035,959 | 56,639 | 5.47 | 1,130,273 | 62,635 | 5.54 | |||||||||||||||||||||||||||
Total earning assets | 1,660,835 | $ | 68,399 | 4.12 | % | 1,723,282 | $ | 72,984 | 4.24 | % | 1,794,488 | $ | 80,111 | 4.46 | % | |||||||||||||||||||||
Allowance for loan losses | (22,968 | ) | (26,772 | ) | (29,856 | ) | ||||||||||||||||||||||||||||||
Total earning assets, net of allowance for loan losses | 1,637,867 | 1,696,510 | 1,764,632 | |||||||||||||||||||||||||||||||||
Nonearning Assets | ||||||||||||||||||||||||||||||||||||
Cash and due from banks | 23,435 | 25,165 | 19,349 | |||||||||||||||||||||||||||||||||
Premises and equipment, net | 36,319 | 37,612 | 39,319 | |||||||||||||||||||||||||||||||||
Other assets | 108,037 | 100,659 | 95,785 | |||||||||||||||||||||||||||||||||
Total assets | $ | 1,805,658 | $ | 1,859,946 | $ | 1,919,085 | ||||||||||||||||||||||||||||||
Interest Bearing Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||||||
Interest bearing demand | $ | 306,945 | $ | 216 | .07 | % | $ | 281,076 | $ | 240 | .09 | % | $ | 258,244 | $ | 355 | .14 | % | ||||||||||||||||||
Savings | 333,457 | 635 | .19 | 311,724 | 626 | .20 | 293,526 | 1,204 | .41 | |||||||||||||||||||||||||||
Time | 505,738 | 5,071 | 1.00 | 588,544 | 8,373 | 1.42 | 687,517 | 12,929 | 1.88 | |||||||||||||||||||||||||||
Federal funds purchased and other short-term borrowings | 29,440 | 74 | .25 | 26,134 | 96 | .37 | 38,043 | 191 | .50 | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase and other long-term borrowings | 176,891 | 5,999 | 3.39 | 223,722 | 8,923 | 3.99 | 246,153 | 9,991 | 4.06 | |||||||||||||||||||||||||||
Total interest bearing liabilities | 1,352,471 | $ | 11,995 | .89 | % | 1,431,200 | $ | 18,258 | 1.28 | % | 1,523,483 | $ | 24,670 | 1.62 | % | |||||||||||||||||||||
Noninterest Bearing Liabilities | ||||||||||||||||||||||||||||||||||||
Demand deposits | 256,518 | 238,443 | 217,357 | |||||||||||||||||||||||||||||||||
Other liabilities | 27,979 | 25,697 | 23,685 | |||||||||||||||||||||||||||||||||
Total liabilities | 1,636,968 | 1,695,340 | 1,764,525 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 168,690 | 164,606 | 154,560 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 1,805,658 | $ | 1,859,946 | $ | 1,919,085 | ||||||||||||||||||||||||||||||
Net interest income | 56,404 | 54,726 | 55,441 | |||||||||||||||||||||||||||||||||
TE basis adjustment | (1,666 | ) | (1,762 | ) | (1,762 | ) | ||||||||||||||||||||||||||||||
Net interest income | $ | 54,738 | $ | 52,964 | $ | 53,679 | ||||||||||||||||||||||||||||||
Net interest spread | 3.23 | % | 2.96 | % | 2.84 | % | ||||||||||||||||||||||||||||||
Impact of noninterest bearing sources of funds | .17 | .22 | .25 | |||||||||||||||||||||||||||||||||
Net interest margin | 3.40 | % | 3.18 | % | 3.09 | % |
1Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.
2Loan balances include principal balances on nonaccrual loans.
3Loan fees included in interest income amounted to $1.3 million, $1.1 million, and $912 thousand for 2013, 2012, and 2011, respectively.
Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
(In thousands) | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||||||||||
Earning Assets | ||||||||||||||||||||||||||||||||||||
Investment securities | ||||||||||||||||||||||||||||||||||||
Taxable | $ | 441,635 | $ | 16,565 | 3.75 | % | $ | 445,329 | $ | 20,424 | 4.59 | % | $ | 425,206 | $ | 22,894 | 5.38 | % | ||||||||||||||||||
Nontaxable1 | 82,327 | 4,149 | 5.04 | 97,960 | 5,186 | 5.29 | 86,784 | 4,653 | 5.36 | |||||||||||||||||||||||||||
Interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell | 133,586 | 280 | .21 | 129,092 | 302 | .23 | 65,477 | 1,199 | 1.83 | |||||||||||||||||||||||||||
Loans 1,2,3 | 1,236,202 | 70,946 | 5.74 | 1,306,800 | 77,522 | 5.93 | 1,302,394 | 87,509 | 6.72 | |||||||||||||||||||||||||||
Total earning assets | 1,893,750 | $ | 91,940 | 4.85 | % | 1,979,181 | $ | 103,434 | 5.23 | % | 1,879,861 | $ | 116,255 | 6.18 | % | |||||||||||||||||||||
Allowance for loan losses | (25,467 | ) | (18,965 | ) | (14,757 | ) | ||||||||||||||||||||||||||||||
Total earning assets, net of allowance for loan losses | 1,868,283 | 1,960,216 | 1,865,104 | |||||||||||||||||||||||||||||||||
Nonearning Assets | ||||||||||||||||||||||||||||||||||||
Cash and due from banks | 64,216 | 96,965 | 72,373 | |||||||||||||||||||||||||||||||||
Premises and equipment, net | 39,541 | 41,069 | 40,649 | |||||||||||||||||||||||||||||||||
Other assets | 129,618 | 163,804 | 159,228 | |||||||||||||||||||||||||||||||||
Total assets | $ | 2,101,658 | $ | 2,262,054 | $ | 2,137,354 | ||||||||||||||||||||||||||||||
Interest Bearing Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||||||
Interest bearing demand | $ | 258,674 | $ | 453 | .18 | % | $ | 247,235 | $ | 713 | .29 | % | $ | 256,129 | $ | 1,805 | .70 | % | ||||||||||||||||||
Savings | 272,080 | 1,663 | .61 | 256,063 | 1,976 | .77 | 261,692 | 3,499 | 1.34 | |||||||||||||||||||||||||||
Time | 807,730 | 20,257 | 2.51 | 902,066 | 30,508 | 3.38 | 793,561 | 33,741 | 4.25 | |||||||||||||||||||||||||||
Federal funds purchased and other short-term borrowings | 46,755 | 324 | .69 | 62,948 | 453 | .72 | 81,180 | 1,785 | 2.20 | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase and other long-term borrowings | 304,356 | 12,251 | 4.03 | 331,073 | 13,415 | 4.05 | 330,468 | 14,300 | 4.33 | |||||||||||||||||||||||||||
Total interest bearing liabilities | 1,689,595 | $ | 34,948 | 2.07 | % | 1,799,385 | $ | 47,065 | 2.62 | % | 1,723,030 | $ | 55,130 | 3.20 | % | |||||||||||||||||||||
Noninterest Bearing Liabilities | ||||||||||||||||||||||||||||||||||||
Commonwealth of Kentucky deposits | 1,347 | 34,992 | 37,025 | |||||||||||||||||||||||||||||||||
Other demand deposits | 209,020 | 191,656 | 177,347 | |||||||||||||||||||||||||||||||||
Other liabilities | 49,490 | 38,725 | 31,952 | |||||||||||||||||||||||||||||||||
Total liabilities | 1,949,452 | 2,064,758 | 1,969,354 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 152,206 | 197,296 | 168,000 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,101,658 | $ | 2,262,054 | $ | 2,137,354 | ||||||||||||||||||||||||||||||
Net interest income | 56,992 | 56,369 | 61,125 | |||||||||||||||||||||||||||||||||
TE basis adjustment | (2,189 | ) | (2,524 | ) | (2,335 | ) | ||||||||||||||||||||||||||||||
Net interest income | $ | 54,803 | $ | 53,845 | $ | 58,790 | ||||||||||||||||||||||||||||||
Net interest spread | 2.78 | % | 2.61 | % | 2.98 | % | ||||||||||||||||||||||||||||||
Effect of noninterest bearing sources of funds | .22 | .24 | .27 | |||||||||||||||||||||||||||||||||
Net interest margin | 3.00 | % | 2.85 | % | 3.25 | % |
The following table is an analysis of the change in net interest income.
Analysis of Changes in Net Interest Income (tax equivalent basis)
Variance | Variance Attributed to | Variance | Variance Attributed to | |||||||||||||||||||||
(In thousands) | 2010/2009 | 1 | Volume | Rate | 2009/2008 | 1 | Volume | Rate | ||||||||||||||||
Interest Income | ||||||||||||||||||||||||
Taxable investment securities | $ | (3,859 | ) | $ | (168 | ) | $ | (3,691 | ) | $ | (2,470 | ) | $ | 1,036 | $ | (3,506 | ) | |||||||
Nontaxable investment securities2 | (1,037 | ) | (800 | ) | (237 | ) | 533 | 594 | (61 | ) | ||||||||||||||
Interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell | (22 | ) | 8 | (30 | ) | (897 | ) | 631 | (1,528 | ) | ||||||||||||||
Loans2 | (6,576 | ) | (4,128 | ) | (2,448 | ) | (9,987 | ) | 296 | (10,283 | ) | |||||||||||||
Total interest income | (11,494 | ) | (5,088 | ) | (6,406 | ) | (12,821 | ) | 2,557 | (15,378 | ) | |||||||||||||
Interest Expense | ||||||||||||||||||||||||
Interest bearing demand deposits | (260 | ) | 31 | (291 | ) | (1,092 | ) | (61 | ) | (1,031 | ) | |||||||||||||
Savings deposits | (313 | ) | 117 | (430 | ) | (1,523 | ) | (73 | ) | (1,450 | ) | |||||||||||||
Time deposits | (10,251 | ) | (2,962 | ) | (7,289 | ) | (3,233 | ) | 4,235 | (7,468 | ) | |||||||||||||
Federal funds purchased and other short-term borrowings | (129 | ) | (111 | ) | (18 | ) | (1,332 | ) | (333 | ) | (999 | ) | ||||||||||||
Securities sold under agreements to repurchase and other long-term borrowings | (1,164 | ) | (1,097 | ) | (67 | ) | (885 | ) | 26 | (911 | ) | |||||||||||||
Total interest expense | (12,117 | ) | (4,022 | ) | (8,095 | ) | (8,065 | ) | 3,794 | (11,859 | ) | |||||||||||||
Net interest income | $ | 623 | $ | (1,066 | ) | $ | 1,689 | $ | (4,756 | ) | $ | (1,237 | ) | $ | (3,519 | ) | ||||||||
Percentage change | 100.0 | % | (171.1 | )% | 271.1 | % | 100.0 | % | 26.0 | % | 74.0 | % |
1The changes which are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and volume variances as a basis |
2Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of $5.9 million or 21.1% compared35%.
Provision for Loan Losses
The Company recorded a credit to $28.2 million for 2009. The increase in noninterest income was due primarily to a $5.4 million increase in net gains on the sale of investment securities. Significant other favorable increases included net gains on the sale of loans of $210 thousand or 20.3%, allotment processing fees of $170 thousand or 3.1%, non-deposit service charges, commissions, and fees of $152 thousand or 3.4%, and other income of $230 thousand or 190%. Decreases in noninterest income line items include service charges and fees on deposits of $176 thousand or 1.9% and trust income of $75 thousand or 4.3%.
Net charge-offs were $62.7$1.3 million and $6.6 million for 2010,2013 and 2012, respectively. This represents a decrease of $52.4$5.3 million or 45.5%80.8%. Net charge-offs were .13% of average loans outstanding for 2013 compared to $115 million.64% for 2009. the prior year.
Noninterest Income
The decrease incomponents of noninterest expense inincome are as follows for the comparison periods is mainly attributed to a $52.4 million one-time, non-cash goodwill impairment charge that was recorded in the fourth quarter of 2009. All other expenses, on a net basis, were unchanged for 2010 compared to 2009. Improvements continue to be made in aindicated:
(Dollars in thousands) | 2013 | 2012 | Increase | % | ||||||||||||
Service charges and fees on deposits | $ | 8,196 | $ | 8,124 | $ | 72 | 0.9 | % | ||||||||
Allotment processing fees | 4,922 | 5,215 | (293 | ) | (5.6 | ) | ||||||||||
Other service charges, commissions, and fees | 4,983 | 4,478 | 505 | 11.3 | ||||||||||||
Data processing income | 102 | 242 | (140 | ) | (57.9 | ) | ||||||||||
Trust income | 1,993 | 1,909 | 84 | 4.4 | ||||||||||||
Investment securities (losses) gains, net | (50 | ) | 1,209 | (1,259 | ) | (104.1 | ) | |||||||||
Gain on sale of mortgage loans, net | 1,036 | 1,918 | (882 | ) | (46.0 | ) | ||||||||||
Income from company-owned life insurance | 962 | 1,524 | (562 | ) | (36.9 | ) | ||||||||||
Other | (28 | ) | 35 | (63 | ) | (180.0 | ) | |||||||||
Total noninterest income | $ | 22,116 | $ | 24,654 | $ | (2,538 | ) | (10.3 | )% |
The more significant numberitems impacting noninterest income are included below.
● | The decrease in allotment processing fees is attributed primarily to volume declines, due in part to reductions in military troop levels and deployments. The Company expects the rate of decrease from its allotment fees to slow or modestly increase beginning mid-2014 from an anticipated pickup in volume, resulting from a large competing vendor that is exiting this line of business in the coming year. |
● | The increase in other service charges, commissions, and fees is attributed to higher interchange fees and loan servicing of $301 thousand or 12.8% and $90 thousand or 23.2%, respectively. The increase in interchange fees is due to higher debit card transaction volumes. Loan servicing income is up due to a $27.9 million or 16.2% growth in the mortgage loan servicing portfolio. |
● | Data processing income began to decrease sharply during 2011 as a result of the initial termination of the Company’s depository services contract with the Commonwealth of Kentucky (“Commonwealth”). Fees from the Commonwealth continued to decline over an additional one-year transition period as the contract wound down and ultimately terminated in June 2012. These fee reductions have been partially offset by decreases in related noninterest expenses spread over multiple line items categories. |
● | Investment securities include a $57 thousand loss for 2013 attributed to a single municipal bond where the issuer participated in the Build America Bond (“BAB”) program. BAB is a federal government program whereby the U.S. Treasury pays a direct subsidy to the issuer to support interest costs of qualified bonds. Federal budget sequestration events during 2013 reduced the subsidy to the issuer, triggering an extraordinary redemption feature related to these bonds. This bond had a carrying value in excess of its par value due to the unamortized premium. The issuer redeemed the bond at par value, which resulted in the loss. Given the current interest rate environment, the Company expects another bond issue related to the BAB program to be called during the first quarter of 2014, resulting in a loss of approximately $156 related to unamortized premiums. The net gain recorded in the prior year is attributed to normal asset/liability management strategies, as the Company periodically sells investment securities to lock in gains, increase yield, restructure expected future cash flows, and/or enhance its capital position. |
● | The decrease in net gains on the sale of mortgage loans is due to lower origination and refinancing activity. The volume of loans sold in 2013 decreased $34.7 million or 41.0% compared to 2012. Mortgage refinancing and home purchases rose sharply during 2012 fueled by interest rate declines. Those rates have since increased which has reduced customer demand. |
● | Income from company-owned life insurance decreased primarily because the prior year includes a nonrecurring gain in the amount of $529 thousand related to death benefit proceeds. Lower crediting rates represent the remaining decrease. |
● | Other income for 2013 includes a net loss of $306 thousand related to the Company’s equity interest in two low income tax credit partnerships. For 2012, the loss was $226 thousand. |
Noninterest Expense
The components of noninterest expense categories. are as follows for the periods indicated:
(Dollars in thousands) | 2013 | 2012 | Increase | % | ||||||||||||
Salaries and employee benefits | $ | 29,681 | $ | 28,190 | $ | 1,491 | 5.3 | % | ||||||||
Occupancy expenses, net | 4,767 | 4,757 | 10 | 0.2 | ||||||||||||
Equipment expenses | 2,398 | 2,364 | 34 | 1.4 | ||||||||||||
Data processing and communication expenses | 3,946 | 4,271 | (325 | ) | (7.6 | ) | ||||||||||
Bank franchise tax | 2,354 | 2,381 | (27 | ) | (1.1 | ) | ||||||||||
Amortization of intangibles | 540 | 1,014 | (474 | ) | (46.7 | ) | ||||||||||
Deposit insurance expense | 2,265 | 2,690 | (425 | ) | (15.8 | ) | ||||||||||
Other real estate expenses, net | 6,999 | 5,232 | 1,767 | 33.8 | ||||||||||||
Legal expenses | 780 | 1,220 | (440 | ) | (36.1 | ) | ||||||||||
Other | 7,843 | 7,668 | 175 | 2.3 | ||||||||||||
Total noninterest expense | $ | 61,573 | $ | 59,787 | $ | 1,786 | 3.0 | % |
The more significant decreases initems impacting noninterest expense categories in the comparison include salaries and employee benefits of $2.8 million or 9.4%, amortization of intangible assets of $515 thousand or 26.4%, equipment expense of $428 thousand or 13.9%, and correspondent banking fees of $391 thousand or 38.8%. Net expenses related to repossessed assets increased $4.0 million or 192%. Deposit insurance expense and bank franchise taxes were up $502 thousand or 13.3% and $217 thousand or 9.6%, respectively.
● | The increase in salaries and employee benefits was driven by a $996 thousand or 20.5% net increase in benefit expenses, mainly from higher claims related to the Company’s self-funded health insurance plan. Claims for 2013 were unusually high in comparison to recent years. The Company had 519 full time equivalent employees at year-end 2013, virtually unchanged from 518 a year earlier. |
● | Data processing and communication expenses mainly decreased due to cost savings related to an agreement the Company announced during the first quarter of 2012 to reduce its debit card processing expenses and to cost reductions associated with the termination of the Company’s depository services contract with the Commonwealth as previously discussed. |
● | Amortization of intangible assets declined as a result of actuarial determined reductions related to core deposit and customer relationship intangible assets arising from previous business acquisitions. Intangible assets are scheduled to fully amortize by 2015. |
● | Deposit insurance expense decreased during 2013 primarily as a result of the improved risk rating by the FDIC at the Company’s largest bank subsidiary. The better rating reduced the assessment rate used in determining the amount payable for deposit insurance. |
● | The increase in other real estate expenses was driven by higher impairment charges of $1.8 million or 46.8%. Total impairment charges for 2013 were $5.5 million, which includes $2.0 million related to a single residential real estate development project that had a carrying value of $2.9 million at year-end 2013. |
● | The decrease in legal expenses relates primarily to problem loan activity in the normal course of business. Also, the prior year includes nonrecurring expenses of $122 thousand related to registering the Company’s Series A preferred shares that were sold by the U.S. Treasury to third party investors. |
Income Tax
Income tax expense was $2.0$4.4 million for 2010 with2013, an increase of $1.5 million or 52.4% compared to $2.9 million for 2012. The effective income tax rates were 24.8% and 19.3% for 2013 and 2012, respectively. The increase in income tax expense and the effective tax rate for 2013 is attributed primarily to a combination of 22.7%. For 2009,lower tax credits and the relative amount of tax-free income to total income. Tax credits that have been utilized by the Company recorded an income tax benefitover a number of $9.2 million that was driven byyears related to Qualified Zone Academy Bonds were fully exhausted during 2012. In addition, the impact of the goodwill impairment charge recorded during the fourth quarter. Ataxable portion of the Company’s previously recorded goodwill was createdtotal revenues has increased more in taxable business combinations and therefore was able to record a tax benefit of $5.9 million attributedproportion to the impairment charge.
FINANCIAL CONDITION
The size of the Company’s balance sheet decreasedwas relatively unchanged at year-end 20102013, with total assets up .1% compared to year-end 2009.the prior year. The reduction is due primarily to the Company’s broad strategy to realign its balance sheet. The most significant partsoverall financial condition of the strategy has included a more cautiousCompany, however, continued to improve. Total nonperforming assets have declined in five consecutive quarters and measured approach to lending as well as a more focused effortare at the lowest level since the third quarter of 2009. Credit quality metrics and net interest margin improved in 2013, and banking regulators have recognized improvements by removing (during 2013) or reducing the Company’s overall cost of funds. For loans, the approach has been to be more selective, in terms of acceptable credit risk, in the credits that are underwritten. On the funding side, the approach has been to more aggressively reprice higher-rate time deposits downward as they mature or by electing to not renew. The strategy of reducing the overall size of the balance sheet is part(in early 2014) enforcement actions at two of the Company’s plansubsidiary banks. Regulatory capital levels remain significantly above the “well-capitalized” threshold. Quality loan demand, however, remains weak. Absent regulatory approval to improverepay a portion of its net interest margin, nonperforming asset levels, capital ratios, and overall profitability.
Total liabilitiesassets were $1.8 billion at December 31, 2010,2013, representing a .1% increase from year-end 2012. Cash and cash equivalents, OREO, and loans (net of unearned income) decreased $27.6 million or 28.8%, $14.7 million or 28.0%, and $5.1 million or .5%, respectively. Investment securities increased $39.7 million or 6.9%. Deposits and total liabilities were unchanged at $1.4 billion and $1.6 billion, respectively; shareholders’ equity increased $2.0 million or 1.2%.
Temporary Investments
Temporary investments consist of interest bearing deposits in other banks and federal funds sold and securities purchased under agreements to resell. The Company uses these funds in the management of liquidity and interest rate sensitivity or as a short-term holding prior to subsequent movement into other investments with higher yields or for other purposes. At December 31, 2013, temporary investments were $45.3 million, a decrease of $239$23.1 million or 11.8%33.7% compared to December 31, 2009. Net deposits decreased $170$68.4 million at year-end 2012.
Investment Securities
The investment securities portfolio is comprised primarily of residential mortgage-backed securities, tax-exempt securities of states and political subdivisions, and debt securities issued by U.S. government-sponsored agencies. Substantially all of the Company’s investment securities are designated as available for sale. Total investment securities had a carrying amount of $614 million at year-end 2013, an increase of $39.7 million or 10.4% while6.9% compared to $574 million at year-end 2012. Proceeds received from maturing or called investment securities not needed to fund higher-earning loans are either reinvested in similar investments or used to manage liquidity, such as for deposit outflows or other payment obligations. The Company periodically sells investment securities in response to its overall asset/liability management strategy to lock in gains, increase yield, restructure expected future cash flows, and/or enhance its capital position.
The increase in investment securities was driven by net borrowed funds decreased $64.5purchases of $64.8 million, or 17.7%. The netpartially offset by a decrease in depositsthe unrealized gain on available for sale securities in the amount of $20.1 million, which resulted in an overall net unrealized loss of $5.6 million at year-end. Net premium amortization was led by lower interest bearing deposits of $162$5.0 million or 11.4%. As discussed above, the decrease in interest bearing deposit balances is mainly attributed to the Company’s overall balance sheet realignment strategy and goal for reducing overall funding costs. For 2010, the Company’s average rate paid on interest bearing liabilities was 2.1%, a decrease of 55 basis points2013 compared to 2.6%$5.3 million for 2009. The average rate paid on interest bearing deposits was 1.7% for 2010 or 69 basis points lower than the previous year amount of 2.4%. Lowering the cost of funds has led to a reduction of higher-balance time deposits and many of these depositors that are seeking higher yields have withdrawn their balances at maturity in lieu of renewing at lower rates.
At year-end 2009 where2013, investment securities include $5.9 million amortized cost amounts of single-issuer trust preferred capital securities of a U.S. based global financial services firm with an estimated fair value of $4.8 million. The investment continues to perform according to contractual terms and is rated as investment grade by major rating agencies. The issuer of the securities announced in the first quarter of 2013 that it had passed stringent regulatory stress testing and received regulatory approval to both increase per share common dividend payments and increase its equity repurchase program. The Company does not intend to sell its investment in these securities, nor does the Company wrote offbelieve it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company believes these securities are not impaired due to reasons of credit quality or other factors, but rather the entire amount
unrealized loss is primarily attributed to general uncertainties in both international and domestic economies and continuing market volatility. The Company believes that it will collect all amounts due according to the contractual terms of its goodwill. Average earning assets decreased $85.4 millionthese securities and that the fair values of these securities will continue to recover as they approach their maturity dates.
The Company attributes the unrealized losses in other sectors of the investment securities portfolio to changes in market interest rates and volatility, and thus identifies them as temporary. As discussed further above, market interest rates rose sharply during the last half of 2013, particularly for the longer dated maturity periods. Investment securities with unrealized losses at December 31, 2013 are performing according to their contractual terms, and the Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company does not have the intent to sell these securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or 4.3% from year-end 2009. However, as a percentage of total average assets, average earning assets were 90.1% for 2010, an increase of 261 basis points from 87.5% for 2009. Average net loans decreased $70.6 million or 5.4%other factors.All investment securities in the comparison. Deposits averaged $1.5 billion for 2010, a decreaseCompany’s portfolio are currently performing.
Funds made available from sold, matured, or called bonds are redirected to fund higher yielding loan growth, reinvested to purchase additional investment securities, or otherwise employed to improve the composition of $83.2 million or 5.1% from 2009. Average noninterest bearing deposit balances declined $16.3 million or 7.2% in the comparison led by a sharp decrease in amountsbalance sheet and liquidity. The purchase of nontaxable obligations of states and political subdivisions is one of the primary means of managing the Company’s tax position. The impact of the alternative minimum tax related to the CommonwealthCompany’s ability to acquire tax-free obligations at an attractive yield is routinely monitored. The Company does not have direct exposure to the subprime mortgage market. The Company does not originate subprime mortgages nor has it invested in bonds that are secured by such mortgages.
The following table summarizes the carrying values of $33.6 million. All otherinvestment securities on December 31, 2013, 2012, and 2011. The investment securities are divided into available for sale and held to maturity securities. Available for sale securities are carried at estimated fair value and held to maturity securities are carried at amortized cost. Corporate debt securities consist primarily of debt issued by a large global financial services firm. Mutual funds and equity securities are attributed to the Company’s captive insurance subsidiary.
December 31, | 2013 | 2012 | 2011 | |||||||||||||||||||||
(In thousands) | Available for Sale | Held to Maturity | Available for Sale | Held to Maturity | Available for Sale | Held to Maturity | ||||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 93,750 | $ | - | $ | 76,095 | $ | - | $ | 96,163 | $ | - | ||||||||||||
Obligations of states and political subdivisions | 131,970 | 765 | 118,755 | 820 | 84,619 | 875 | ||||||||||||||||||
Mortgage-backed securities – residential | 378,077 | - | 370,439 | - | 408,863 | - | ||||||||||||||||||
Mortgage-backed securities – commercial | 689 | - | - | - | 209 | - | ||||||||||||||||||
Corporate debt securities | 6,257 | - | 5,826 | - | 6,364 | - | ||||||||||||||||||
Mutual funds and equity securities | 2,077 | - | 1,993 | - | 1,601 | - | ||||||||||||||||||
Total | $ | 612,820 | $ | 765 | $ | 573,108 | $ | 820 | $ | 597,819 | $ | 875 |
The following table presents an analysis of the contractual maturity and tax equivalent weighted average noninterest bearing deposits increased $17.4 millioninterest rates of investment securities at December 31, 2013. Available for sale securities are stated at estimated fair value and held to maturity securities are stated at amortized cost. Mortgage-backed securities are included in maturity categories based on their stated maturity dates. Expected maturities may differ from contractual maturities because issuers may have the right to call or 9.1%. Average interest bearing deposits decreased $66.9 million or 4.8% led by lower time deposits of $94.3 million or 10.5%.prepay obligations. Mutual funds and equity securities are attributed to the Company’s captive insurance subsidiary. These investments have no stated maturity date and are not included in the maturity schedule that follows.
Available for Sale
Within One Year | After One But Within Five Years | After Five But Within Ten Years | After Ten Years | |||||||||||||||||||||||||||||
(In thousands) | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | ||||||||||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | - | - | % | $ | 57,585 | 1.1 | % | $ | 33,457 | 1.8 | % | $ | 2,708 | 2.6 | % | ||||||||||||||||
Obligations of states and political subdivisions | 3,315 | 2.6 | 56,623 | 2.7 | 63,716 | 3.4 | 8,316 | 5.4 | ||||||||||||||||||||||||
Mortgage-backed securities – residential | - | - | - | - | 48,470 | 1.8 | 329,607 | 2.8 | ||||||||||||||||||||||||
Mortgage-backed securities – commercial | - | - | - | - | 689 | 2.3 | - | - | ||||||||||||||||||||||||
Corporate debt securities | 52 | 2.9 | 1,241 | 3.3 | 148 | 4.3 | 4,816 | 2.0 | ||||||||||||||||||||||||
Total | $ | 3,367 | 2.6 | % | $ | 115,449 | 1.8 | % | $ | 146,480 | 2.5 | % | $ | 345,447 | 2.9 | % |
Held to Maturity
Within One Year | After One But Within Five Years | After Five But Within Ten Years | After Ten Years | |||||||||||||||||||||||||||||
(In thousands) | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | ||||||||||||||||||||||||
Obligations of states and political subdivisions | $ | - | - | % | $ | - | - | % | $ | 765 | 4.4 | % | $ | - | - | % |
The calculation of the weighted average interest rates for each category is based on the weighted average costs of the securities. The weighted average tax rates on exempt state and political subdivisions are computed based on the marginal corporate Federal tax rate of 35%.
Loans
Loans, net of unearned income, were $1.2$1.0 billion at December 31, 2010,2013, a decrease of $79.1$5.1 million or 6.2%.5% compared to year-end 2009.2012. While the Company continues its efforts to strengthen customer relationships and business development initiatives, high quality loan demand remains soft. The Company continues to take a measured and cautious approach to loan originationslending strategy while executing its balance sheet realignment strategy and working throughit reduces high levels of nonperforming assets. Nonperforming assets increased sharply in the fourth quarter of 2009 and into the first quarter of 2010 as a result of the lingering effects of one of the most severe recessions in recent history. Loans secured by farmland and real estate of other commercial enterprises increased $5.6 million or 1.4% at year-end 2010 compared to year-end 2009. All other sectors of the loan portfolio experienced declines. Commercial, financial, and agricultural based lending decreased $5.7 million or 5.0%. Real estate construction and land development lending was down $57.5 million or 27.2% and loans secured by residential real estate decreased $4.4 million or .9% in the annual comparison. Consumer installment loans and commercial leasing decreased $7.7 million or 21.4% and $9.3 million or 38.4%, respectively in the yearly comparison.
The composition of the loan portfolio, net of unearned income, is summarized in the table below. Adjustments have been made among categoriesthat follows. Loans outstanding were negatively impacted during the fourth quarter of prior2013 by the payoff of four credit relationships totaling $14.1 million in the aggregate secured by similar commercial real estate properties. Based on economic forecasts and other available information, the Company expects minor improvement in the local and regional economy during 2014. An improving economy, particularly where the labor force participation rates increase, could slow the rate of decline experienced in outstanding loan balances in recent years to reclassify certain loans to conform to their current classification. Total loansor result in prior years did not change.
December 31, (In thousands) | 2013 | % | 2012 | % | 2011 | % | 2010 | % | 2009 | % | ||||||||||||||||||||||||||||||
Commercial, financial, and agricultural | $ | 92,827 | 9.3 | % | $ | 87,440 | 8.7 | % | $ | 93,807 | 8.7 | % | $ | 108,959 | 9.1 | % | $ | 114,687 | 9.0 | % | ||||||||||||||||||||
Real estate mortgage – construction and land development | 101,352 | 10.1 | 102,454 | 10.2 | 119,989 | 11.2 | 154,208 | 12.9 | 211,725 | 16.7 | ||||||||||||||||||||||||||||||
Real estate mortgage – residential | 371,582 | 37.2 | 368,762 | 36.7 | 397,357 | 37.1 | 424,995 | 35.6 | 435,294 | 34.2 | ||||||||||||||||||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 418,147 | 41.8 | 425,477 | 42.3 | 432,438 | 40.3 | 461,182 | 38.7 | 449,659 | 35.3 | ||||||||||||||||||||||||||||||
Installment | 15,092 | 1.5 | 18,247 | 1.8 | 21,365 | 2.0 | 28,532 | 2.4 | 36,280 | 2.9 | ||||||||||||||||||||||||||||||
Lease financing | 883 | .1 | 2,615 | .3 | 7,152 | .7 | 14,964 | 1.3 | 24,297 | 1.9 | ||||||||||||||||||||||||||||||
Total | $ | 999,883 | 100.0 | % | $ | 1,004,995 | 100.0 | % | $ | 1,072,108 | 100.0 | % | $ | 1,192,840 | 100.0 | % | $ | 1,271,942 | 100.0 | % |
December 31, (In thousands) | 2010 | % | 2009 | % | 2008 | % | 2007 | % | 2006 | % | |||||||||||||||||||||||||
Commercial, financial, and agricultural | $ | 108,959 | 9.1 | % | $ | 114,687 | 9.0 | % | $ | 116,816 | 8.9 | % | $ | 135,898 | 10.5 | % | $ | 176,910 | 14.8 | % | |||||||||||||||
Real estate – construction and land development | 154,208 | 12.9 | 211,725 | 16.7 | 260,434 | 19.8 | 254,788 | 19.7 | 176,779 | 14.8 | |||||||||||||||||||||||||
Real estate mortgage – residential | 469,273 | 39.3 | 473,644 | 37.2 | 453,695 | 34.6 | 416,477 | 32.3 | 393,345 | 32.8 | |||||||||||||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 416,904 | 35.0 | 411,309 | 32.3 | 409,909 | 31.2 | 403,167 | 31.2 | 361,004 | 30.1 | |||||||||||||||||||||||||
Installment | 28,532 | 2.4 | 36,280 | 2.9 | 44,504 | 3.4 | 51,393 | 4.0 | 56,344 | 4.7 | |||||||||||||||||||||||||
Lease financing | 14,964 | 1.3 | 24,297 | 1.9 | 27,222 | 2.1 | 30,262 | 2.3 | 33,454 | 2.8 | |||||||||||||||||||||||||
Total | $ | 1,192,840 | 100.0 | % | $ | 1,271,942 | 100.0 | % | $ | 1,312,580 | 100.0 | % | $ | 1,291,985 | 100.0 | % | $ | 1,197,836 | 100.0 | % |
On an average basis, loans represented 60.6% of earning assets for 2013, an increase of 50 basis points compared to 60.1% for 2012. As loan balances decline either as a result of lower demand or due to reasons such as for the Company’s plan to strategically shrink its balance sheet, thechanges, available funds are generally redirected toreallocated between temporary investments or investment securities, which typically involve a decrease in credit risk and produceresult in lower yields. The Company does not have direct exposure to the subprime mortgage market. The Company does not originate subprime mortgages nor has it invested in bonds that are secured by such mortgages. Subprime mortgage lending is defined by the Company generally as lending to a borrower that would not qualify for a mortgage loan at prevailing market rates or whereby the underwriting decision is based on limited or no documentation of the ability to repay.
The following table presents the amount of commercial, financial, and agricultural loans and loans secured by real estate outstanding at December 31, 20102013 which, based on remaining scheduled repayments of principal, are due in the periods indicated.
Loan Maturities
Within | After One But | After | ||||||||||||||
(In thousands) | One Year | Within Five Years | Five Years | Total | ||||||||||||
Commercial, financial, and agricultural | $ | 43,274 | $ | 45,474 | $ | 20,211 | $ | 108,959 | ||||||||
Real estate – construction and land development | 124,682 | 23,569 | 5,957 | 154,208 | ||||||||||||
Real estate mortgage – residential | 69,263 | 109,260 | 290,750 | 469,273 | ||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 77,387 | 189,897 | 149,620 | 416,904 | ||||||||||||
Total | $ | 314,606 | $ | 368,200 | $ | 466,538 | $ | 1,149,344 |
(In thousands) | Within One Year | After One But Within Five Years | After Five Years | Total | ||||||||||||
Commercial, financial, and agricultural | $ | 38,242 | $ | 29,677 | $ | 24,908 | $ | 92,827 | ||||||||
Real estate mortgage – construction and land development | 56,840 | 34,982 | 9,530 | 101,352 | ||||||||||||
Real estate mortgage – residential | 32,022 | 99,615 | 239,945 | 371,582 | ||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 76,470 | 170,669 | 171,008 | 418,147 | ||||||||||||
Total | $ | 203,574 | $ | 334,943 | $ | 445,391 | $ | 983,908 |
The table below presents the amount of commercial, financial, and agricultural loans and loans secured by real estate outstanding at December 31, 20102013 that are due after one year, classified according to sensitivity to changes in interest rates.
Interest Sensitivity
Fixed | Variable | |||||||
(In thousands) | Rate | Rate | ||||||
Due after one but within five years | $ | 289,718 | $ | 78,482 | ||||
Due after five years | 59,819 | 406,719 | ||||||
Total | $ | 349,537 | $ | 485,201 |
(In thousands) | Fixed Rate | Variable Rate | ||||||
Due after one but within five years | $ | 286,135 | $ | 48,808 | ||||
Due after five years | 78,993 | 366,398 | ||||||
Total | $ | 365,128 | $ | 415,206 |
Asset Quality
The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is mitigated by diversification within the portfolio, limiting exposure to any single customer or industry, rigorous lending policies and underwriting criteria, and collateral requirements. The Company maintains policies and procedures to ensure that the granting of credit is done in a sound and consistent manner. This includes policies on a company-wide basis that require certain minimum standards to be maintained.maintained by its subsidiary banks. However, the policies also permit the individual subsidiary companies authority to adopt standards that are no less stringent than those included in the company-wide policies. Credit decisions are made at the subsidiary bank level under guidelines established by policy. The Company’s internal audit department performs loan reviews at each subsidiary bank during the year. This loan review evaluates loan administration, credit quality, documentation, compliance with Company loan standards, and the adequacy of the allowance for loan losses on a consolidated and subsidiary basis.
The provision for loan losses represents charges or credits made to earnings to maintain an allowance for loan losses at ana level considered adequate level based on credit losses specifically identified in the loan portfolio, as well as management’s best estimate ofto provide for probable incurred loancredit losses in the remainder of the portfolio at the balance sheet date. The allowance for loan losses is a
valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses and related provision for loan losses generally fluctuate as the relative level of nonperforming and impaired loans vary, but other factors impact the amount of the allowance. The Company estimates the adequacy of the allowance balance required using a risk-rated methodology. Many factors are considered when estimatingmethodology based on the allowance. These include, but are not limited to,Company’s past loan loss experience, an assessmentknown and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the financial condition of individual borrowers, a determination of the value and adequacy ofany underlying collateral the condition of the local economy, an analysis of the levels and trendssecuring loans, composition of the loan portfolio, current economic conditions, and a reviewother relevant factors. This evaluation is inherently subjective as it requires significant judgment and the use of delinquent and classified loans. estimates that may be susceptible to change.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful.impaired. The general component covers non-classifiednon-impaired loans and is based on historical loss experience adjusted for current risk 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. Actual loan losses could differ significantly from the amounts estimated by management.
The Company’s risk-rated methodology includes segregating non-impaired watch list and past due loans from the general portfolio and allocating specific reservesa loss percentage to these loans depending on their status. For example, watch list loans, which may be identified by the internal loan review risk-rating process or by regulatory examiner classification, are assigned a certain loss percentage while loans past due 30 days or more are assigned a different loss percentage. Each of these percentages considers past experience as well as current factors. The remainder of the general loan portfolio is segregated into three componentsportfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, consumer loans, and real estateconsumer loans. Each of these componentsportfolio segments is assigned a loss percentage based on their respective rolling twelve quarter historical loss percentage. Additional allocationsrates, adjusted for qualitative risk factors. During the third quarter of 2013, the Company lengthened the look-back period it uses to determine historical loss rates to the previous 16 quarters from 12 quarters. The change in the look-back period is the result of the Company’s ongoing monitoring and evaluation of the adequacy of its allowance may then be made for subjective factors, such as those mentioned above, as determined by senior managers who are knowledgeable about these matters. During 2007,loan losses. The longer look-back period better reflects the Company further identified signs of deteriorationCompany’s loss estimates based on current market conditions. Lengthening the look-back period resulted in certain real estate development loans that have remained present into 2010 and specific allowances related to these loans were recorded.
The qualitative risk factors used in the methodology are consistent with the guidance in the most recent Interagency Policy Statement on the Allowance for Loan Losses issued. Each factor is supported by a detailed analysis performed at each subsidiary bank and is both measureable and supportable. Some factors include a minimum allocation in some instances where loss levels are extremely low and it is determined to be adequateprudent from a safety and soundness perspective. Qualitative risk factors that are used in the methodology include the following for each loan portfolio segment:
● | Delinquency trends |
● | Trends in net charge-offs |
● | Trends in loan volume |
● | Lending philosophy risk |
● | Management experience risk |
● | Concentration of credit risk |
● | Economic conditions risk |
A loan is impaired when, based on current information and events, it is probable that the information currently available, additional adjustmentsCompany will be unable to collect all amounts due according to the allowance may be necessary due to changescontractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the factors noted above. Borrowers may experience difficultyborrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in periods of economic deterioration,determining impairment include payment status, collateral value, and the levelprobability of nonperforming loans, charge-offs,collecting scheduled principal and delinquencies could riseinterest payments when due. Loans that experience insignificant payment delays and require additional increasespayment 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 the provision for loan losses. Regulatory agencies, as an integral part of their examinations, periodically review the allowance for loan losses. These reviews could result in additional adjustmentsrelation to the provision for loan losses based upon their judgments about relevant information available during their examination.principal and interest owed.
Although the level of nonperformingoverall economy continued improving during 2013, recovery from the 2007-2009 recession and impaired loans, as a percentage of net loans outstanding, increases.related financial crisis remains slow. The Company’s allowance for loan loss amount has heavily considered past loan loss experience to estimate current loan losses, but it also considers current trends within the portfolio that may not be indicative of past charge-off levels. Adjustments are made to the allowance for loan losses as needed when such matters are identified.
The overall improvement in the Company’s elevated amountscredit quality of the loan portfolio has resulted in the lowest level of nonperforming assets andsince the third quarter of 2009. Nonperforming loans have decreased $57.4 million or 53.2% since peaking at $108 million for the first quarter of 2010. Over half of the nonperforming loans at year-end 2013 are made up of accruing restructured loans. Despite these improvements, the level of nonperforming assets remains elevated. High levels of nonperforming assets generally result in loan charge-offs. These factors have also resulted in an increase in the allowancecharge-offs, provisions for loan losses, primarily related to real estate development and commercial real estate lending. Real estate markets, both residential and commercial, remain strained and unemployment rates are forecasted to remain high for the foreseeable future. A slowdown in real estate sales activity creates cash flow difficulties for those borrowers in real estate development and related businesses that primarily dependimpairment charges on the sale ofrepossessed real estate. The Company expects the lingering effects of the economic downturnrecent recession to continue to hinderhindering its efforts to improve asset quality in the short term.term, which could result in further deterioration. The impact on asset quality in future periods, however, cannot be predicted with a high degree of certainty. The Company works with its loan customers on an individual case-by-case basis in order to maximize loan repayments on its challenged credits and typically does not have a formal loan modification program.
Impaired loans are defined as loansthose in which the Company does not expect to receive full payment under the contractual terms. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral taking into consideration estimated costs to sell if the loan is collateral dependent. Collateral values are updated in accordance with policy guidelines by obtaining independent third party appraisals and monitoring sales activity of similar properties in our market area.
(In thousands) Loan Type | Unpaid Principal | Estimated Collateral Value | Collateral Type | ||||||
Real estate-construction and land development | $ | 58,750 | $ | 79,954 | Primarily residential real estate developments | ||||
Real estate mortgage-residential | 33,045 | 48,286 | Residential real estate, including single and multi-family use | ||||||
Real estate mortgage-farmland and other commercial enterprises | 37,674 | 61,642 | Commercial real estate, including farmland and other business enterprises | ||||||
Other | 551 | 235 | Business assets, inventory, accounts receivable, personal autos, and other vehicles | ||||||
Total | $ | 130,020 | $ | 190,117 |
At year-end 2010,2013, the Company had $6.0$4.1 million in specific reserves related to its impaired loans. Of this total, $2.8$1.5 million or 46.3%37.6% is attributed to a group of loans to a single creditor totaling $8.3 million secured by a combination of a real estate constructiondevelopment and land development lending and $2.1 million or 34.0% is attributed to loans secured by residential real estate. Two individualThese collateral dependent loans are classified as performing restructured loans at year-end 2013.
The Company recorded a credit relationships account for $3.3 million or 54.5% ofto the $6.0 million specific reserves. Both of these credits have been restructured and have an aggregate outstanding principal balance of $10.3 million.
Net loan charge-offs were $11.8$1.3 million for 2010,2013, a decrease of $2.4$5.3 million or 17.0%80.8% compared to 2012. Net charge-offs have declined in each of the last two years and are well below the $14.2 million forpeak recorded in the early part of the post-recession period of 2009. Charge-offsThe amount of $5.4 million or 45.8% of totalnet charge-offs for 2010 are attributed to four individual credit relationships that2013 represent primarily residential real estate development projects.the lowest point since 2006. Gross charge-offs and recoveries by loan category are detailed in the table that follows. Net charge-offs as a percentage of average loans were .96%.13% for 2010,2013, a decrease of 1351 basis points compared to 1.09%.64% for 2009. Although the provision for loan losses was lower in 2010 compared to the year before, the2012. The allowance for loan losses as a percentage of outstanding loans (net of unearned income) has increased to 2.41%was 2.06% and 2.43% at December 31, 2010 compared to 1.84%year-end 2013 and 2012, respectively. As a percentage of nonperforming loans, the allowance for loan losses was 40.7% and 45.4% at December 31, 2009. year-end 2013 and 2012, respectively.
The relatively low amount of the allowance for loan losses as a percentage of nonperforming loans was 31.6% and 30.6% at year-end 2010 and 2009, respectively.
Many of the nonaccrual loans outstanding at year-end 2010 include an aggregate amount2013 have previously been charged-down. These charge-offs have occurred mainly as a result of $19.0 million higher-balance loans representing five credit relationships that had specific reserves of $1.1 million priorthe Company’s ongoing effort to being classified as nonaccrual. The classification ofappropriately value the collateral securing these loans to nonaccrual status had a more limited impact onthrough timely appraisals and evaluating the overall financial condition of the borrower. The allowance for loan losses sinceas a reserve had already been established. Eachpercentage of thesenonaccrual loans were performingwas 86.3% and 89.2% at year-end 2009, but were identified as impaired on that date2013 and specific reserves were recorded. From this group of credits, loans totaling $16.0 million are secured primarily by real estate construction and land development projects and $3.0 million secured mainly by residential real estate properties.
The table below summarizes the loan loss experience for the past five years. Reclassifications have been made between categories of charge offs and recoveries in prior years in order to conform to current loan classifications. Total charge offs and recoveries in prior years did not change.
Allowance For Loan Losses
Years Ended December 31, (In thousands) | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Balance of allowance for loan losses at beginning of year | $ | 24,445 | $ | 28,264 | $ | 28,784 | $ | 23,364 | $ | 16,828 | ||||||||||
Loans charged off: | ||||||||||||||||||||
Commercial, financial, and agricultural | 257 | 216 | 1,113 | 869 | 1,618 | |||||||||||||||
Real estate mortgage - construction and land development | 251 | 2,549 | 6,785 | 7,599 | 4,176 | |||||||||||||||
Real estate mortgage - residential | 908 | 2,508 | 4,225 | 1,521 | 3,247 | |||||||||||||||
Real estate mortgage - farmland and other commercial enterprises | 274 | 1,823 | 2,768 | 1,557 | 2,304 | |||||||||||||||
Installment | 281 | 441 | 452 | 709 | 948 | |||||||||||||||
Lease financing | - | 99 | 10 | 135 | 2,475 | |||||||||||||||
Total loans charged off | 1,971 | 7,636 | 15,353 | 12,390 | 14,768 | |||||||||||||||
Recoveries of loans previously charged off: | ||||||||||||||||||||
Commercial, financial, and agricultural | 143 | 105 | 211 | 181 | 132 | |||||||||||||||
Real estate mortgage - construction and land development | 70 | 102 | 6 | 2 | - | |||||||||||||||
Real estate mortgage - residential | 200 | 246 | 192 | 42 | 82 | |||||||||||||||
Real estate mortgage - farmland and other commercial enterprises | 57 | 318 | 43 | 28 | 34 | |||||||||||||||
Installment | 221 | 234 | 245 | 286 | 216 | |||||||||||||||
Lease financing | 12 | 40 | 649 | 38 | 72 | |||||||||||||||
Total recoveries | 703 | 1,045 | 1,346 | 577 | 536 | |||||||||||||||
Net loans charged off | 1,268 | 6,591 | 14,007 | 11,813 | 14,232 | |||||||||||||||
Amount (credited) charged to provision for loan losses | (2,600 | ) | 2,772 | 13,487 | 17,233 | 20,768 | ||||||||||||||
Balance at end of year | $ | 20,577 | $ | 24,445 | $ | 28,264 | $ | 28,784 | $ | 23,364 | ||||||||||
Average loans net of unearned income | $ | 1,006,662 | $ | 1,035,959 | $ | 1,130,273 | $ | 1,236,202 | $ | 1,306,800 | ||||||||||
Ratio of net charge-offs during year to average loans, net of unearned income | .13 | % | .64 | % | 1.24 | % | .96 | % | 1.09 | % |
Years Ended December 31, (In thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Balance of allowance for loan losses at beginning of year | $ | 23,364 | $ | 16,828 | $ | 14,216 | $ | 11,999 | $ | 11,069 | ||||||||||
Acquisition of Citizens Jessamine | 1,066 | |||||||||||||||||||
Loans charged off: | ||||||||||||||||||||
Commercial, financial, and agricultural | 869 | 1,618 | 1,160 | 618 | 562 | |||||||||||||||
Real estate-construction and land development | 7,599 | 4,176 | 581 | 9 | ||||||||||||||||
Real estate mortgage-residential | 1,521 | 3,247 | 675 | 395 | 66 | |||||||||||||||
Real estate mortgage-farmland and other commercial enterprises | 1,557 | 2,304 | 817 | 258 | 134 | |||||||||||||||
Installment loans to individuals | 709 | 948 | 953 | 822 | 763 | |||||||||||||||
Lease financing | 135 | 2,475 | 356 | 52 | 254 | |||||||||||||||
Total loans charged off | 12,390 | 14,768 | 4,542 | 2,154 | 1,779 | |||||||||||||||
Recoveries of loans previously charged off: | ||||||||||||||||||||
Commercial, financial, and agricultural | 181 | 132 | 153 | 186 | 307 | |||||||||||||||
Real estate-construction and land development | 2 | 8 | 5 | |||||||||||||||||
Real estate mortgage-residential | 42 | 82 | 53 | 82 | 43 | |||||||||||||||
Real estate mortgage-farmland and other commercial enterprises | 28 | 34 | 991 | 153 | 38 | |||||||||||||||
Installment loans to individuals | 286 | 216 | 256 | 260 | 249 | |||||||||||||||
Lease financing | 38 | 72 | 372 | 47 | 41 | |||||||||||||||
Total recoveries | 577 | 536 | 1,833 | 733 | 678 | |||||||||||||||
Net loans charged off | 11,813 | 14,232 | 2,709 | 1,421 | 1,101 | |||||||||||||||
Additions to allowance charged to expense | 17,233 | 20,768 | 5,321 | 3,638 | 965 | |||||||||||||||
Balance at end of year | $ | 28,784 | $ | 23,364 | $ | 16,828 | $ | 14,216 | $ | 11,999 | ||||||||||
Average loans net of unearned income | $ | 1,236,202 | $ | 1,306,800 | $ | 1,302,394 | $ | 1,250,423 | $ | 1,051,002 | ||||||||||
Ratio of net charge-offs during year to average loans, net of unearned income | .96 | % | 1.09 | % | .21 | % | .11 | % | .10 | % |
The following table presents an estimate of the allocation of the allowance for loan losses by type for the datedates indicated. Although specific allocations exist, the entire allowance is available to absorb losses in any particular category. Adjustments have been made between categories of prior years related to classification changes of certain loans to conform to their current presentation. The total allowance for loan losses in previous years did not change.
December 31, (In thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||
Amount | % of Respective Loan Category | Amount | % of Respective Loan Category | Amount | % of Respective Loan Category | Amount | % of Respective Loan Category | Amount | % of Respective Loan Category | |||||||||||||||||||||||||||||||
Commercial, financial, and agricultural | $ | 2,876 | 2.6 | % | $ | 3,914 | 3.41 | % | $ | 1,992 | 1.71 | % | $ | 2,315 | 1.70 | % | $ | 2,091 | 1.18 | % | ||||||||||||||||||||
Real estate – construction and land development | 10,367 | 6.7 | 9,806 | 4.63 | 5,065 | 1.94 | 3,902 | 1.53 | 1,981 | 1.12 | ||||||||||||||||||||||||||||||
Real estate mortgage – residential | 10,017 | 2.1 | 4,749 | 1.00 | 3,337 | .74 | 3,146 | .76 | 2,989 | .76 | ||||||||||||||||||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 4,143 | 1.0 | 3,252 | .79 | 3,300 | .81 | 2,347 | .58 | 1,684 | .47 | ||||||||||||||||||||||||||||||
Installment loans to individuals | 997 | 3.5 | 1,005 | 2.77 | 2,333 | 5.24 | 1,975 | 3.84 | 2,291 | 4.07 | ||||||||||||||||||||||||||||||
Lease financing | 384 | 2.6 | 638 | 2.63 | 801 | 2.94 | 531 | 1.75 | 963 | 2.88 | ||||||||||||||||||||||||||||||
Total | $ | 28,784 | 2.41 | % | $ | 23,364 | 1.84 | % | $ | 16,828 | 1.28 | % | $ | 14,216 | 1.10 | % | $ | 11,999 | 1.00 | % |
December 31, (In thousands) | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||
Amount | % of Respective Loan Category | Amount | % of Respective Loan Category | Amount | % of Respective Loan Category | Amount | % of Respective Loan Category | Amount | % of Respective Loan Category | |||||||||||||||||||||||||||||||
Commercial, financial, and agricultural | $ | 1,389 | 1.50 | % | $ | 1,475 | 1.69 | % | $ | 3,268 | 3.48 | % | $ | 2,876 | 2.64 | % | $ | 3,914 | 3.41 | % | ||||||||||||||||||||
Real estate mortgage – construction and land development | 2,567 | 2.53 | 3,498 | 3.41 | 6,089 | 5.07 | 10,367 | 6.72 | 9,806 | 4.63 | ||||||||||||||||||||||||||||||
Real estate mortgage – residential | 6,200 | 1.67 | 6,184 | 1.68 | 11,111 | 2.80 | 10,017 | 2.36 | 4,749 | 1.09 | ||||||||||||||||||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 9,949 | 2.38 | 12,572 | 2.95 | 6,338 | 1.47 | 4,143 | .90 | 3,252 | .72 | ||||||||||||||||||||||||||||||
Installment | 452 | 2.99 | 678 | 3.72 | 1,218 | 5.70 | 997 | 3.49 | 1,005 | 2.77 | ||||||||||||||||||||||||||||||
Lease financing | 20 | 2.27 | 38 | 1.45 | 240 | 3.36 | 384 | 2.57 | 638 | 2.63 | ||||||||||||||||||||||||||||||
Total | $ | 20,577 | 2.06 | % | $ | 24,445 | 2.43 | % | $ | 28,264 | 2.64 | % | $ | 28,784 | 2.41 | % | $ | 23,364 | 1.84 | % |
In addition to the discussion above relating to lending activities, additionalAdditional information concerning the Company’s asset quality is discussedpresented under the caption“Nonperforming Assets” which follows and“Investment Securities” beginning on page 6490..
Nonperforming Assets
The Company’s nonperforming assets for the Company includeconsist of nonperforming loans, other real estate owned,OREO, and other foreclosed assets. Nonperforming loans consist ofinclude nonaccrual loans, restructured loans, and loans 90 days or more past due and still accruing interest. In general, theNonaccrual loans are considered to be an indicator of potential future losses. The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Restructuredcollection.Restructured loans occur when a lender, because of economic or legal reasons related to a borrower’s financial difficulty, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically include a reduction of the stated interest rate or an extension of the maturity date, among other possible concessions. For the Company, all of its restructured loans were granted rate concessions at the time of restructuring.
December 31, (In thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Loans accounted for on nonaccrual basis | $ | 53,971 | $ | 56,630 | $ | 21,545 | $ | 18,073 | $ | 1,462 | ||||||||||
Loans past due 90 days or more and still accruing | 42 | 1,807 | 3,913 | 2,977 | 2,856 | |||||||||||||||
Restructured loans | 36,978 | 17,911 | ||||||||||||||||||
Total nonperforming loans | 90,991 | 76,348 | 25,458 | 21,050 | 4,318 | |||||||||||||||
Other real estate owned | 30,545 | 31,232 | 14,446 | 6,044 | 5,031 | |||||||||||||||
Other foreclosed assets | 34 | 38 | 47 | 66 | 54 | |||||||||||||||
Total nonperforming assets | $ | 121,570 | $ | 107,618 | $ | 39,951 | $ | 27,160 | $ | 9,403 |
December 31, (In thousands) | 2010 | 2009 | ||||||
Nonaccrual Loans | ||||||||
Commercial, financial, and agriculture | $ | 658 | $ | 965 | ||||
Real estate-construction and land development | 35,893 | 35,648 | ||||||
Real estate mortgage-residential | 10,728 | 8,633 | ||||||
Real estate mortgage-farmland and other commercial enterprises | 6,528 | 11,038 | ||||||
Installment | 114 | 241 | ||||||
Lease financing | 50 | 105 | ||||||
Total nonaccrual loans | $ | 53,971 | $ | 56,630 | ||||
Restructured Loans | ||||||||
Commercial, financial, and agriculture | $ | 670 | ||||||
Real estate-construction and land development | $ | 16,793 | 11,047 | |||||
Real estate mortgage-residential | 9,147 | 2,053 | ||||||
Real estate mortgage-farmland and other commercial enterprises | 11,038 | 4,141 | ||||||
Total restructured loans | $ | 36,978 | $ | 17,911 | ||||
Past Due 90 Days or More and Still Accruing | ||||||||
Commercial, financial, and agriculture | $ | 450 | ||||||
Real estate-construction | 477 | |||||||
Real estate mortgage-residential | $ | 28 | 458 | |||||
Real estate mortgage-farmland and other commercial enterprises | 27 | |||||||
Installment | 5 | 395 | ||||||
Lease financing | 9 | |||||||
Total past due 90 days or more and still accruing | $ | 42 | $ | 1,807 | ||||
Total nonperforming loans | $ | 90,991 | $ | 76,348 | ||||
Ratio of total nonperforming loans to total loans (net of unearned income) | 7.6 | % | 6.0 | % |
Nonperforming assets were $88.4 million at year-end 2013, a decrease of $18.1 million or 17.0% compared to $106 million at year-end 2012. Nonperforming assets are at the lowest level since peaking at $135 million in the first quarter of 2010. Nonperforming assets increased sharply during 2009 and remain elevated mainly as a result of ongoing weaknesses in the overall economy, which continues to strain the Company and many of its customers.
Nonperforming assets by category are presented in the table below for the dates indicated.
December 31, (In thousands) | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Loans accounted for on nonaccrual basis | $ | 23,838 | $ | 27,408 | $ | 59,755 | $ | 53,971 | $ | 56,630 | ||||||||||
Loans past due 90 days or more and still accruing | 444 | 103 | 1 | 42 | 1,807 | |||||||||||||||
Restructured loans | 26,255 | 26,349 | 19,125 | 36,978 | 17,911 | |||||||||||||||
Total nonperforming loans | 50,537 | 53,860 | 78,881 | 90,991 | 76,348 | |||||||||||||||
Other real estate owned | 37,826 | 52,562 | 38,157 | 30,545 | 31,232 | |||||||||||||||
Other foreclosed assets | - | - | 36 | 34 | 38 | |||||||||||||||
Total nonperforming assets | $ | 88,363 | $ | 106,422 | $ | 117,074 | $ | 121,570 | $ | 107,618 | ||||||||||
Ratio of total nonperforming loans to total loans (net of unearned income) | 5.1 | % | 5.4 | % | 7.4 | % | 7.6 | % | 6.0 | % | ||||||||||
Ratio of total nonperforming assets to total assets | 4.9 | 5.9 | 6.2 | 6.3 | 5.0 |
Additional details related to nonperforming loans were as follows at year-end 2013 and 2012:
Nonperforming Loans
December 31, (In thousands) | 2013 | 2012 | ||||||
Nonaccrual Loans | ||||||||
Commercial, financial, and agriculture | $ | 160 | $ | 649 | ||||
Real estate mortgage - construction and land development | 5,821 | 7,700 | ||||||
Real estate mortgage - residential | 5,154 | 6,025 | ||||||
Real estate mortgage - farmland and other commercial enterprises | 12,677 | 12,878 | ||||||
Installment | 4 | 103 | ||||||
Lease financing | 22 | 53 | ||||||
Total nonaccrual loans | $ | 23,838 | $ | 27,408 | ||||
Restructured Loans | ||||||||
Real estate mortgage - construction and land development | $ | 4,391 | $ | 8,736 | ||||
Real estate mortgage - residential | 4,826 | 634 | ||||||
Real estate mortgage - farmland and other commercial enterprises | 16,987 | 16,940 | ||||||
Installment | 51 | 39 | ||||||
Total restructured loans | $ | 26,255 | $ | 26,349 | ||||
Past Due 90 Days or More and Still Accruing | ||||||||
Real estate mortgage - residential | $ | 10 | $ | - | ||||
Real estate mortgage - farmland and other commercial enterprises | 434 | 103 | ||||||
Total past due 90 days or more and still accruing | $ | 444 | $ | 103 | ||||
Total nonperforming loans | $ | 50,537 | $ | 53,860 |
The most significant components of nonperforming loans include nonaccrual and restructured loans. Activity during 2013 related to these two components was as follows:
(In thousands) | Nonaccrual | Restructured | ||||||
Balance at December 31, 2012 | $ | 27,408 | $ | 26,349 | ||||
Loans placed on nonaccrual status | 10,789 | (18 | ) | |||||
Loans restructured | - | 936 | ||||||
Principal paydowns | (6,941 | ) | (1,081 | ) | ||||
Transfers to other real estate owned | (5,507 | ) | - | |||||
Charge-offs | (1,260 | ) | - | |||||
Reclassification between nonperforming categories | (69 | ) | 69 | |||||
Reclassified to performing status | (582 | ) | - | |||||
Balance at December 31, 2013 | $ | 23,838 | $ | 26,255 |
The Company gives careful consideration to identifying which of its challenged credits merit a restructuring of terms that it believes will result in maximum loan repayments and mitigate possible losses. From time to time the Company’s affiliate banksCompany may modify a customer’s loan, but such modifications may or may not meet the criteria for classification ofas a restructured troubled debt. The primary reasons for such restructurings are:
● | repricing a loan to a current market rate of interest to a borrower with good credit and adequate collateral value in order to retain the |
● | changing the payment frequency from monthly to quarterly, semi-annually, or annually where the loan is performing, the borrower has good credit and adequate collateral value and the Company believes valid reasons exist for the |
● | extending the interest only payment period of a performing loan where the borrower has good credit and adequate collateral value in instances where a project may still be in a phase of development or leasing-up, |
As a modification ismodifications are made, management evaluates whether the modification meets the criteria to be classified as a troubled debt. ThisThese criteria hasinclude two components:
1. | The bank |
2. | The borrower is experiencing financial difficulty. |
The Company’s loan policy has been recently updated to provideprovides guidance to lending personnel as a result of the recent increase inregarding restructured loans to ensure those that are troubled debt are properly categorized.identified. Additional attention is being given to restructured loans through the oversight of the recently established position of Chief Credit Officer at the parent companyParent Company to ensure that modifications meeting criteria for restructured loans are identified and properly reported.
The table below sets forth on an aggregate basis at December 31, 2010,2013, the types of non-troubled debt restructurings by loan type, number of loans, average loan balance and modification type:
# of Loans | Loan Type | Average Loan Balance (in thousands) | Range of Loan Balances (in thousands) | Modification Type | |||||||
1 | Commercial, financial and agricultural | $13 | N/A | changed repayment frequency | |||||||
56 | Commercial, financial and agricultural | 39 | $0 - $470 | lowered interest rate to market rate to retain loan | |||||||
26 | Installment loan | 16 | 1 - 67 | lowered interest rate to market rate to retain loan | |||||||
2 | Installment loan | 4 | 3 - 6 | changed repayment frequency | |||||||
42 | Real estate mortgage – farmland and other commercial enterprises | 650 | 0 - 4,530 | lowered interest rate to market rate to retain loan | |||||||
4 | Real estate mortgage – farmland and other commercial enterprises | 1,412 | 1 - 2,919 | changed repayment frequency or extended interest only period | |||||||
68 | Real estate mortgage - residential | 194 | 7 - 5,135 | lowered interest rate to market to retain loan (in one case increased payment frequency) | |||||||
11 | Real estate mortgage - residential | 122 | 74 - 193 | changed repayment frequency (in one case modified payment terms for estates of deceased borrower at representative’s request) | |||||||
15 | Real estate – construction and land development | 184 | 13 - 741 | lowered interest rate to market rate to retain loan (in two cases extended interest only period) |
# of Loans | Loan Type | Average Loan Balance (in thousands) | Range of Loan Balances (in thousands) | Modification Type | ||||||||
1 | Real estate mortgage - residential | $ | 1,441 | $ | 1,441 | changed to more frequent repayments | ||||||
70 | Real estate mortgage - residential | 209 | 9 | - | 4,724 | lowered interest rate to market rate to retain loan | ||||||
1 | Real estate mortgage – farmland and other commercial enterprises | 1,096 | 1,096 | changed amortization period | ||||||||
31 | Real estate mortgage – farmland and other commercial enterprises | 616 | 13 | - | 2,843 | lowered interest rate to market rate to retain loan | ||||||
7 | Commercial | 34 | 1 | - | 94 | lowered interest rate to market rate to retain loan | ||||||
6 | Consumer | 21 | 2 | - | 59 | lowered interest rate to market rate to retain loan |
In each of the loan modifications identified in the table, management of the applicable bank determined the loan was not in troubled condition due to the financial status of the borrower and collateral.
The Company’s subsidiary banks have not engaged in loan splitting. Loan splitting is a practice that may occur in work-out situations whereby a loan is divided into two parts – a performing part and a nonperforming part. This benefits a lender by potentially replacing one impaired loan by one smaller good loan and one smaller bad loan. Overall charge-offs and reserve amounts are potentially reduced and the effects of adverse loan classifications may be diminished.
The Company’s comprehensive risk-grading and loan review program includes a review of loans to assess risk and assign a grade to those loans, a review of delinquencies, and an assessment of loans for needed charge-offs or placement on nonaccrual status. The Company had loans in the amount of $127$79.0 million and $105$104 million at year-end 20102013 and year-end 2009,2012, respectively, which were performing but considered potential problem loans and are not included in the nonperforming loan totals in the tabletables above. These loans, however, are considered in establishing an appropriate allowance for loan losses. The balance outstanding for potential problem credits is mainlyismainly a result of ongoing weaknesses in the overall economy that continue to strain the Company and many of its customers, particularly real estate development lending.the Company’s customers. Potential problem loans include a variety of borrowers and are secured primarily by various types of real estate.estate including commercial, construction properties, and residential real estate developments. The $25.0 million or 24.1% decrease since year-end in the level of potential problem loans is attributed primarily to an overall improvement in credit quality similar to that of the overall portfolio. At December 31, 20102013, the five largest potential problem credits were $35.9$16.7 million in the aggregate compared to $31.4$18.2 million at year-end 20092012 and secured by various types of real estate including commercial, construction properties, and residential real estate development.
Potential problem loans are identified on the Company’s watch list and consist of loans that require close monitoring by management. Credits may be considered as a potential problem loan for reasons that are temporary or correctable, such as for a deficiency in loan documentation or absence of current financial statements of the borrower. Potential problem loans may also include credits where adverse circumstances are identified that may affect the borrower’s ability to comply with the contractual terms of the loan. Other factors which might indicate the existence of a potential problem loan include the delinquency of a scheduled loan payment, deterioration in a borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment in which the borrower operates. Certain loans on the Company’s watch list are also considered impaired and specific allowances related to these loans were established in accordance with the appropriate accounting guidance.
Other real estate owned includes real estate properties acquired by the Company through, or in lieu of, interest bearing deposits in other banks and federal funds sold and securities purchased under agreements to resell. The Company uses these funds in the management of liquidity and interest rate sensitivity.actual loan foreclosures. At December 31, 2010, temporary investments were $158year-end 2013, OREO was $37.8 million, a decrease of $24.7$14.7 million or 13.5%28.0% compared to $182$52.6 million at year-end 2009. 2012.
OREO activity for 2013 was as follows:
(In thousands) | Amount | |||
Balance at December 31, 2012 | $ | 52,562 | ||
Transfers from loans | 6,110 | |||
Proceeds from sales | (15,169 | ) | ||
Loss on sales | (182 | ) | ||
Write downs and other decreases, net | (5,495 | ) | ||
Balance at December 31, 2013 | $ | 37,826 |
The decreasereduction in temporary investmentsOREO was driven by lower interest bearing deposit balances heldproperty sales and impairment charges of $15.4 million and $5.5 million, respectively, which more than offset new repossession activity. Seven larger-balance properties with a carrying value of $7.6 million in other banks of $36.0the aggregate were sold during 2013. This includes four real estate development projects totaling $4.1 million or 20.5%, primarily with the Federal Reserve banking system, partially offset byand three commercial real estate properties totaling $3.5 million. Impairment charges include $2.0 million attributed to a $11.3 million or 172% increase in federal funds sold and securities purchased under agreements to resell.
The following table summarizes the carrying values of investment securities on December 31, 2010, 2009, and 2008. The investment securities are divided into available for sale and held to maturity securities. Available for sale securities are carried at the estimated fair value and held to maturity securities are carried at amortized cost. Corporate debt securities consist primarily of debt issued by a large global financial services firm. Equity securities are attributed to the Company’s captive insurance subsidiary.Deposits
December 31, | 2010 | 2009 | 2008 | |||||||||||||||||||||
(In thousands) | Available for Sale | Held to Maturity | Available for Sale | Held to Maturity | Available for Sale | Held to Maturity | ||||||||||||||||||
Obligations of states and political subdivisions | $ | 74,799 | $ | 930 | $ | 108,958 | $ | 975 | $ | 90,838 | $ | 1,814 | ||||||||||||
Obligations of U.S. government-sponsored entities | 41,613 | 90,752 | 34,567 | |||||||||||||||||||||
Mortgage-backed securities – residential | 319,930 | 325,519 | 375,327 | |||||||||||||||||||||
U.S. Treasury securities | 1,044 | 3,002 | 10,256 | |||||||||||||||||||||
Money market mutual funds | 145 | 910 | 374 | |||||||||||||||||||||
Corporate debt securities | 6,606 | 18,732 | 13,991 | |||||||||||||||||||||
Equity securities | 45 | |||||||||||||||||||||||
Total | $ | 444,182 | $ | 930 | $ | 547,873 | $ | 975 | $ | 525,353 | $ | 1,814 |
After One But | After Five But | |||||||||||||||||||||||||||
Within One Year | Within Five Years | Within Ten Years | After Ten Years | |||||||||||||||||||||||||
(In thousands) | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | ||||||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 257 | 2.6 | % | $ | 24,201 | 1.2 | % | $ | 17,155 | 2.1 | % | ||||||||||||||||
Obligations of states and political subdivisions | 5,629 | 2.9 | 23,540 | 2.9 | 29,734 | 3.5 | $ | 15,895 | 3.7 | % | ||||||||||||||||||
Mortgage-backed securities – residential | 1,828 | 4.9 | 2,788 | 2.6 | 315,314 | 3.6 | % | |||||||||||||||||||||
U.S. Treasury securities | 1,044 | .9 | ||||||||||||||||||||||||||
Money market mutual funds | 145 | .2 | ||||||||||||||||||||||||||
Corporate debt securities | 609 | 5.9 | 905 | 5.8 | 104 | 5.5 | 4,989 | 2.0 | ||||||||||||||||||||
Total | $ | 7,684 | 2.8 | % | $ | 50,474 | 2.2 | % | $ | 49,781 | 2.9 | % | $ | 336,198 | 3.6 | % |
After One But | After Five But | |||||||||||||
Within One Year | Within Five Years | Within Ten Years | After Ten Years | |||||||||||
(In thousands) | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | ||||||
Obligations of states and political subdivisions | $ | 844 | 3.6 | % |
The Company’s primary source of funding for its lending and investment activities results from its customer deposits, which consist of noninterest and interest bearing demand, savings, and time deposits. On December 31, 2010 totalA summary of the Company’s deposits were $1.5 billion, a decrease of $170 million or 10.4% from year-end 2009. Both noninterest bearing and interest bearing deposits declinedis presented in the comparison. Noninterest bearing deposits decreased $7.6 million or 3.6% due to a $12.8 million or 95.2% lower balance from the Commonwealth of Kentucky. All other noninterest deposits increased $5.2 million or 2.6%. Interest bearing deposit balances decreased $162 million or 11.4%, led by lower time deposits outstanding of $191 million or 21.1% partially offset by higher savings account balances of $24.5 million or 9.5%.
funding costs, mainly by more aggressively repricingallowing higher-rate maturing certificates of deposit downward in an overall lower interest rate environment or by allowing them to roll off without renewing. Rate offerings on newor reprice at significantly lower interest rates. Many of those balances have been rolled into other types of interest bearing accounts or noninterest bearing demand accounts by the customer. As rates have decreased throughout the deposit portfolio, many customers have opted to transfer funds from maturing time deposits have also had an overall decline due to the low rate environment.or investments from other sources into short-term demand or savings accounts. The Company has not sought out or accepted brokered deposits in the past nor does it have plans to do so in the future.
A summary of the Company’s deposits is as follows for the dates indicated:
December 31, (In thousands) | 2013 | 2012 | Increase | |||||||||
Noninterest Bearing | $ | 277,294 | $ | 254,912 | $ | 22,382 | ||||||
Interest Bearing | ||||||||||||
Demand | 320,503 | 296,931 | 23,572 | |||||||||
Savings | 340,903 | 318,302 | 22,601 | |||||||||
Time | 471,515 | 540,665 | (69,150 | ) | ||||||||
Total interest bearing | 1,132,921 | 1,155,898 | (22,977 | ) | ||||||||
Total Deposits | $ | 1,410,215 | $ | 1,410,810 | $ | (595 | ) |
A summary of average balances for deposits by type and the related weighted average rates paid areis as follows for the periods presented:
Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||||||||||||||
(In thousands) | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | ||||||||||||||||||
Noninterest bearing demand | $ | 210,367 | $ | 226,648 | $ | 214,372 | ||||||||||||||||||
Interest bearing demand | 258,674 | .18 | % | 247,235 | .29 | % | 256,129 | .70 | % | |||||||||||||||
Savings | 272,080 | .61 | 256,063 | .77 | 261,692 | 1.34 | ||||||||||||||||||
Time | 807,730 | 2.51 | 902,066 | 3.38 | 793,561 | 4.25 | ||||||||||||||||||
Total Interest Bearing | 1,338,484 | 1.67 | 1,405,364 | 2.36 | 1,311,382 | 2.98 | ||||||||||||||||||
Total | $ | 1,548,851 | 1.44 | % | $ | 1,632,012 | 2.03 | % | $ | 1,525,754 | 2.56 | % |
Years Ended December 31, | 2013 | 2012 | 2011 | |||||||||||||||||||||
(In thousands) | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | ||||||||||||||||||
Noninterest bearing demand | $ | 256,518 | - | % | $ | 238,443 | - | % | $ | 217,357 | - | % | ||||||||||||
Interest bearing demand | 306,945 | .07 | 281,076 | .09 | 258,244 | .14 | ||||||||||||||||||
Savings | 333,457 | .19 | 311,724 | .20 | 293,526 | .41 | ||||||||||||||||||
Time | 505,738 | 1.00 | 588,544 | 1.42 | 687,517 | 1.88 | ||||||||||||||||||
Total Interest Bearing | 1,146,140 | .52 | 1,181,344 | .78 | 1,239,287 | 1.17 | ||||||||||||||||||
Total | $ | 1,402,658 | .42 | % | $ | 1,419,787 | .65 | % | $ | 1,456,644 | .99 | % |
Maturities of time deposits of $100,000 or more outstanding at December 31, 20102013 are summarized as follows.
(In thousands) | Amount | |||
3 months or less | $ | 29,741 | ||
Over 3 through 6 months | 20,052 | |||
Over 6 through 12 months | 39,116 | |||
Over 12 months | 67,292 | |||
Total | $ | 156,201 |
(In thousands) | Amount | ||||
3 months or less | $ | 42,396 | |||
Over 3 through 6 months | 37,200 | ||||
Over 6 through 12 months | 65,075 | ||||
Over 12 months | 96,797 | ||||
Total | $ | 241,468 |
Short-term Borrowings
Short-term borrowings include funding sources with an original maturity of one year or less. The Company’s short-term borrowings consist primarily of federal funds purchased and securities sold under agreements to repurchase, with year-end balances of $47.0 million, $46.9 million, and $73.2 million for 2010, 2009, and 2008, respectively. Such borrowingswhich are generally on an overnight basis. Other short-term borrowings consist of FHLB borrowings totaling $0, $0, and $3.5 million at year-end 2010, 2009, and 2008, respectively, and demand notes issued to the U.S. Treasury under the treasury tax and loan note option account totaling $420 thousand, $274 thousand, and $787 thousand for 2010, 2009, and 2008 respectively. A summary of short-term borrowings is as follows:
(In thousands) | 2010 | 2009 | 2008 | ||||||||||
Amount outstanding at year-end | $ | 47,409 | $ | 47,215 | $ | 77,474 | |||||||
Maximum outstanding at any month-end | 76,848 | 105,844 | 125,096 | ||||||||||
Average outstanding | 46,483 | 62,946 | 81,180 | ||||||||||
Weighted average rate at year-end | .56 | % | .79 | % | .74 | % | |||||||
Weighted average rate during the year | . 70 | .72 | 2.20 |
(In thousands) | 2013 | 2012 | 2011 | |||||||||
Amount outstanding at year-end | $ | 29,123 | $ | 24,083 | $ | 27,022 | ||||||
Maximum month-end balance during the year | 32,885 | 31,632 | 72,810 | |||||||||
Average outstanding | 29,440 | 26,134 | 38,043 | |||||||||
Weighted average rate during the year | .25 | % | .37 | % | .50 | % | ||||||
Weighted average rate at year-end | .25 | .29 | .53 |
Long-term Borrowings
Long-term borrowings include funding sources with an original maturity greater than one year. The Company’s long-term borrowings consist mainlyare comprised of securities sold under agreements to repurchase, FHLB advances, and subordinated notes payable to unconsolidated trusts. Long-term securities sold under agreements to repurchase primarily represent obligations related to the Company’s 2007 balance sheet leverage transaction.transaction that originated in 2007. In this transaction, the Company borrowed approximatelyCompanyborrowed $200 million through multiple fixed rate repurchase agreements and used the proceeds to purchase a like amount of fixed rate Government National Mortgage Association (“GNMA”) bonds that are pledged as collateral. The Company is required to secure the borrowed funds with GNMA bonds. At December 31, 2010,bonds valued at 106% of the amount outstanding under long-term repurchase agreements was $150principal balance of the borrowings. Principal payments have reduced the outstanding balance of the obligation to $100 million at year-end 2013, with a weighted average interest rate of 3.96%3.95%. Remaining maturities are $50.0 million which is due in November 2012 and the remaining $100 million is due in November 2017. At year-end 2010, $100 million of theThese borrowings are putable quarterly and the remaining $50.0 million is putable quarterly beginningmature in November 2017.
The Company has $754 thousand of other long-term repurchase agreements outstanding at year-end 2013 made in the fourth quarterordinary course of 2012.
FHLB advances to the Company’s subsidiary banks are secured by restricted holdings of FHLB stock that participating banks are required to own as well as certain mortgage loans as required by the FHLB. Such advances are made pursuant to several different credit programs which have their own interest rates and range of maturities. Interest rates on FHLB advances are generally fixed and range between 2.60%2.99% and 6.90%, with a weighted average rate of 4.01%4.14%. Remaining maturities of FHLB advances extend up to 10 years,over multiple time periods through 2020, with a weighted average remaining term of 3.6 years at year-end 2010. Long-term fixed rate advances from the FHLB totaling $10.0 million are convertible to a floating interest rate. These advances may convert to a floating interest rate, indexed to the three-month LIBOR, only if LIBOR equals or exceeds 7%. At year-end 2010, the three-month LIBOR was .30%.2.9 years. FHLB advances are generally used to increase the Company’s lending activities and to aid the efforts of asset and liability management by utilizing various repayment options offered by the FHLB. Long-term advances from the FHLB totaled $53.1$27.1 million and $29.3 million at December 31, 2010,2013 and 2012, respectively. This represents a decrease of $14.5$2.2 million or 21.4% compared7.4% and is attributed to $67.6 million at December 31, 2009.
In 2005 and 2007, the Company has previously completed three private offerings of trust preferred securities through three separate Delaware statutory trusts (the “Trusts”) sponsored by the Company in the aggregate amount of $47.5 million. The combined $25.0 million proceeds from the first
The Trusts used the proceeds from the sale of preferred securities, plus capital of $1.5 million contributed by the Company to establish the trusts, to purchase the Company’s subordinated notes in amounts and bearing terms that parallel the amounts and terms of the respective preferred securities. The subordinated notes ofAmounts and general terms related to the Trusts I and II mature in 2035 and bear a floating interest rate at current three-month LIBOR plus 150 basis points on a $10.3 million portion of the total and at current three-month LIBOR plus 165 basis points on a $15.5 million portion. The subordinated notes of Trust IIIyear-end 2013 are summarized in the amount of $23.2 million mature in 2037 and bear a fixed interest rate through 2012 of 6.60% and then convert to floating thereafter at three-month LIBOR plus 132 basis points. Interest on each of the notes is payable quarterly.table below.
(Dollars in thousands) | Trust I | Trust II | Trust III | |||||||||
Subordinated notes payable | $ | 10,310 | $ | 15,464 | $ | 23,196 | ||||||
Interest rate terms | 3-month LIBOR +150 BP | 3-month LIBOR +165 BP | 3-month LIBOR +132 BP | |||||||||
Interest rate in effect at year-end | 1.75 | % | 1.90 | % | 1.56 | % | ||||||
Stated maturity date | September 30, 2035 | September 30, 2035 | November 1, 2037 |
The subordinated notes of Trusts I and II became redeemable in whole or in part, without penalty, at the Company’s option beginning on September 30,during 2010. The subordinated notes of Trust III arebecame redeemable in whole or in part, without penalty, at the Company’s option on or after November 1,during 2012. The subordinated notes are junior in right of payment of all present and future senior indebtedness of the Company. At December 31, 2010, the aggregate balance of the subordinated notes payable to the Trusts was $49.0 million. The weighted average interest rate in effect as of the last determination date in 20102013 and 2012 was 4.11%1.71% and 1.77%, unchanged compared to a year earlierrespectively.
.
The Company’s contractual obligations to make future payments as of December 31, 20102013 are as follows:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations (In thousands) | Total | Less Than One Year | One to Three Years | Three to Five Years | More Than Five Years | |||||||||||||||
Time deposits | $ | 713,852 | $ | 425,985 | $ | 243,661 | $ | 37,880 | $ | 6,326 | ||||||||||
Long-term FHLB debt | 53,155 | 12,000 | 13,512 | 8,062 | 19,581 | |||||||||||||||
Subordinated notes payable | 48,970 | 48,970 | ||||||||||||||||||
Long-term securities sold under agreements to repurchase | 150,000 | 50,000 | 100,000 | |||||||||||||||||
Unfunded postretirement benefit obligations | 5,171 | 398 | 835 | 958 | 2,980 | |||||||||||||||
Operating leases | 3,904 | 451 | 803 | 725 | 1,925 | |||||||||||||||
Capital lease obligations | 84 | 84 | ||||||||||||||||||
Total | $ | 975,136 | $ | 438,918 | $ | 308,811 | $ | 47,625 | $ | 179,782 |
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations (In thousands) | Total | One Year or Less | One to Three Years | Three to Five Years | More Than Five Years | |||||||||||||||
Time deposits | $ | 471,515 | $ | 278,513 | $ | 145,929 | $ | 43,089 | $ | 3,984 | ||||||||||
Long-term FHLB debt | 27,126 | 8,012 | - | 18,000 | 1,114 | |||||||||||||||
Subordinated notes payable | 48,970 | - | - | - | 48,970 | |||||||||||||||
Long-term securities sold under agreements to repurchase | 100,754 | - | 754 | 100,000 | - | |||||||||||||||
Unfunded postretirement benefit obligations | 5,331 | 376 | 804 | 955 | 3,196 | |||||||||||||||
Operating leases | 1,680 | 349 | 557 | 237 | 537 | |||||||||||||||
Employment agreements | 2,748 | 943 | 1,417 | 388 | - | |||||||||||||||
Total | $ | 658,124 | $ | 288,193 | $ | 149,461 | $ | 162,669 | $ | 57,801 |
Long-term FHLB debt represents FHLB advances pursuant to several different credit programs. Long-term FHLB debt,, subordinated notes payable, and securities sold under agreements to repurchase are more fully described under the caption“Long-TermLong-term Borrowings” above and in Note 98 of the Company’s 20102013 audited consolidated financial statements. Payments for borrowings in the table above do not include interest. Postretirement benefit obligations are actuarially determined and estimated based on various assumptions with payouts projected over the next 10ten years. Estimates can vary significantly each year due to changes in significant assumptions. Capital lease obligations represent amounts relating to the acquisition of data processing hardware and software used in the Company’s operations. Operating leases include standard business equipment used in the Company’s day-to-day business as well as the lease of certain branch sites. Operating lease terms generally range from one to five years, with the ability to extend certain branch site leases at the Company’s option. Payments related to leases are based on actual payments specified in the underlying contracts. Employment agreements represent annual minimum base salary amounts payable by the Company to five employees. One of these agreements is with the Company’s Chief Executive Officer and includes aggregate payments of $385 thousand annually for a remaining term of four years, as amended. The other agreements are with key officers of the Company’s subsidiaries.
Guarantees
During 2007, the Parent Company entered into a guarantee agreement whereby it agreed to become unconditionally and irrevocably the guarantor of the obligations of three of its bank subsidiariessubsidiary banks in connection with the $200 million balance sheet leverage transaction. The amount of borrowings outstanding guaranteedPrincipal payments by the Parent Companybank subsidiaries have reduced the outstanding balance of the obligation to $100 million at December 31, 2010 was $150 million,year-end 2013, with various maturity dates ranging from two to seven years.the remaining portion maturing in 2017. The $150 million outstanding borrowings are required to be secured by GNMA bonds held by the Parent Company’s subsidiary banks valued at 106% of the outstanding borrowings, or $159 million.although the banks typically maintain an amount in excess of the required minimum. Should any of the subsidiary banks default on its borrowings under the agreement, the GNMA bonds securing the borrowings would be liquidated to satisfy amounts due. If the value of the GNMA bonds fall below the obligation under the contract, the Parent Company is obligated to cover any such shortfall in absence of the subsidiary banksbanks’ ability to do so. The Parent Company believes its subsidiary banks are fully capable of fulfilling their obligations under the borrowing arrangement and that the Parent Company will not be required to make any payments under the guarantee agreement.
Effects of Inflation
The majority of the Company’s assets and liabilities are monetary in nature. Therefore, the Company differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher
Market Risk Management
Market risk is the risk of loss arising from adverse changes in market prices and rates. The Company’s market risk is comprised primarily of interest rate risk created by its core banking activities of extending loans and receiving deposits. The Company’s success is largely dependent upon its ability to manage this risk. Interest rate risk is defined as the exposure of the Company’s net interest income to adverse movements in interest rates. Although the Company manages other risks, such as credit and liquidity risk, management considers interest rate risk to be its most significant risk, which could potentially have the largest and a material effect on the Company’s financial condition and results of operations. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates earned on assets and paid on liabilities do not change at the same speed, to the same extent, or on the same basis. Other events that could have an adverse impact on the Company’s performance include changes in general economic and financial conditions, general movements in market interest rates, and changes in consumer preferences. The Company’s primary purpose in managing interest rate risk is to effectively invest the Company’s capital and to manage and preserve the value created by its core banking business.
Management believes the most significant impact on financial and operating results is the Company’s ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.
The Parent Company and each of its subsidiary banks has a Corporate Asset and Liability Management Committee (“ALCO”). ALCO which monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity. The Parent Company ALCO also provides guidance and support to each ALCO of the Company’s subsidiary banks and is responsible for monitoring risks on a company-wide basis. The Parent Company ALCO has established minimum standards in its asset and liability management policy that each subsidiary bank must adopt. However, the subsidiary banks are permitted to deviate from these standards so long as the deviation is no less stringent than that of the Corporate policy.
The Company uses a simulation model as a tool to monitor and evaluate interest rate risk exposure. The model is designed to measure the sensitivity of net interest income and net income to changing interest rates during the next twelve months.over future periods. Forecasting net interest income and its sensitivity to changes in interest rates requires the Company to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with the Company’s estimate of the most likely rate environment to produce a forecast for the next twelve months. The forecasted results are then compared to the effect of a gradual 200 basis point increase and decrease in market interest rates on the Company’s net interest income and net income. Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income orand net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results.
At December 31, 2010,2013, the model indicated that if rates were to gradually increase by 200 basis points over the next twelve months, then net interest income (TE) and net income would increase 3.2%.05% and 8.6%.04%, respectively, compared to forecasted results. The model indicated that if rates were to gradually decrease by 200 basis points over the next twelve months, then net interest income (TE) and net income would decrease 1.2%1.24% and 8.5%3.07%, respectively, compared to forecasted results.
In the current relatively low interest rate environment, it is not practical or possible to reduce certain deposit rates by the same magnitude as rates on earning assets. The average rate paid on many of the Company’s deposits is below 2%. This situation magnifies the model’s predicted results when modeling a decrease in interest rates, as earning assets with higher yields have more of an opportunity to reprice at lower rates than lower-rate deposits.
LIQUIDITY
Liquidity measures the ability to meet current and future cash flow needs as they become due. For financial institutions, liquidity reflects the abilitycapacity to meet loan demand, to accommodate possible outflows in deposits, and to react and capitalize on interest rate market opportunities. A financial institution’s ability to meet its current financial obligations is dependent upon the structure of its balance sheet, its ability to liquidate assets, and its access to alternative sources of funds. The Company’s goal is to meet its near-term funding needs by maintaining a level of liquid funds through its asset/liability management. For the longer term, the liquidity position is managed by balancing the maturity structure of the balance sheet. This process allows for an orderly flow of funds over an extended period of time. The Company’s ALCOs, both at the bank subsidiary and consolidated level, meet regularly and monitor the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity.
The Company's objective as it relates to liquidity is to ensure that its subsidiary banks have funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the subsidiary banks have several sources of funds available on a daily basis that can be used for liquidity purposes. Thosebasis. For assets, those sources of funds include liquid assets that are readily marketable or that can be pledged, or which mature in the subsidiary banks' core deposits, consisting of both businessnear future. These assets primarily include cash and nonbusiness deposits;due from banks, federal funds sold, and cash flow generated by the repayment of principal and interest on loans and investment securities;securities. For liabilities, sources of funds primarily include the subsidiary banks' core deposits, FHLB and other borrowings;borrowings, and federal funds purchased and securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and investment securities are generally a predictable source of funds, deposit outflows and mortgage prepayments are influenced significantly by general interest rates, economic conditions, and competition in our local markets.
The Company uses a liquidity ratio metric to help measure its ability to meet its cash flow needs. This ratio is monitored by ALCO at both the bank and consolidated level. The liquidity ratio is based on current and projected levels of sources and uses of funds. This measure is useful in analyzing cash needs and formulating strategies to achieve desired results. For example, a low liquidity ratio could indicate that the Company’s ability to fund loans might become more difficult. A high liquidity ratio could indicate that the Company may have a disproportionate amount of funds in low yielding assets, which is more likely to occur during periods of sluggish loan demand or economic difficulties. The Company’s liquidity position, as measured by its liquidity ratio, was relatively unchangedhigher at year-end 20102013 compared to year-end 20092012 and is within its ALCO guidelines and considered by management to be at an adequate level.guidelines. The Company’s liquidity ratio remains relatively highelevated mainly as ita result of its overall net funding position and weak, quality loan demand. As loans have paid down, payments have been reinvested more into investments securities or other temporary investments. The Company also continues to take a measured and cautious lending strategy and work throughwhile continuing efforts to reduce its high level of problemnonperforming assets in ana slow growing economic environmentenvironment.
As of December 31, 2013, the Company had $228 million of additional borrowing capacity under various FHLB, federal funds, and other agreements. However, there is no guarantee that remains challenging.
Liquidity at the Parent Company level is primarily affected by the receipt of dividends from its subsidiary banks, (see Note 18 “Regulatory Matters” of the Company’s 2010 audited consolidated financial statements), cash balances maintained, short-term investments, investments in company-owned life insurance, and borrowings from nonaffiliated sources. Payment of dividends by the Company’s subsidiary banks is subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. In addition, Farmers Bank, United Bank and Citizens Northern each must obtain regulatory approval to declare or pay dividends to the Parent Company as a result of increased capital required in connection with recentprior regulatory exams. Capital ratios at each of the Company’s four subsidiary banks exceed regulatory established “well-capitalized” status at December 31, 20102013 under the prompt corrective action regulatory framework; however, Farmers Bank, United Bank,framework. See Note 17“Regulatory Matters” of the Company’s 2013 audited consolidated financial statements for further information regarding the restrictions on dividend payments and Citizens Northern areincreased capital required to maintain capital ratios at higher levelscertain of the Company’s bank subsidiaries as outlined in theirprior regulatory agreements.
The Parent Company’s primary uses of cash include the payment of dividends to its common and preferred shareholders, injecting capital into subsidiaries, paying interest expense on borrowings, and payingpayments for general operating expenses. Due to recentan agreement with its regulators, the Parent Company must obtain regulatory agreements,approval prior to making dividend payments on the Parent Company’sits preferred and common and preferred stock and interest payments on its trust preferred borrowings must have regulatory approval before being paid.borrowings. While regulatory agencies have so far granted approval to all of the Company’s requests to make dividend payments on its preferred stock and interest payments on its trust preferred securities, and dividends on its preferred stock, the Company didhas not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) seeksought regulatory approval for the payment ofto pay dividend on its common stock dividends.since the fourth quarter of 2009. Moreover, the Company will not pay any sucha dividend on its common stock in any subsequentfuture quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted. Reference is made to Note 18 17“Regulatory Matters” of the Company’s 20102013 audited consolidated financial statements, Item 1A“Risk Factors” of this Form 10-K, and the heading“Capital Resources” below for additional information on the Company’s restrictions and requirements related to the payment of interest and dividends.
The Parent Company had cash and cash equivalentsbalances of $16.2$36.5 million at December 31, 2010,year-end 2013, an increase of $8.7$11.7 million or 115% from $7.647.2% compared to $24.8 million at year-end 2009.2012. Significant cash receipts of the Parent Company during 20102013 include $8.6 million proceeds from the liquidation of company-owned life insurance at the Parent Company, $5.2 million in dividends from First Citizens Bank,banks subsidiaries in the amount of $14.5 million and management fees from subsidiaries of $3.5 million, $1.5 million in dividends from FFKT Insurance, and $1.2 million return of capital from FCB Services.$3.7 million. Significant cash payments by the Parent Company during 2010for 2013 include $3.4$2.3 million additional capital investment in bank subsidiaries, $2.2 million for the payment of common and preferred dividends, salaries, payroll taxes, and employee benefits, $1.5 million for the payment of $2.4 million,dividends on outstanding preferred stock, and $866 thousand for interest expense on borrowed funds of $2.0 million, and $800 thousand additional capital injected into EKT Properties. The Parent Company may fund any additional external capital requirements of any of its banking subsidiaries from future public or private sales of securities at an appropriate time or from existing resources of the Company, although the Parent Company is currently under no directive by its regulators to raise any additional capital.
Liquid assets consist of cash, cash equivalents, and available for sale investment securities. At December 31, 2010,2013, consolidated liquid assets were $626$681 million, a decreasean increase of $140$12.1 million or 18.3%1.8% from year-end 2009.2012. The decreaseincrease in liquid assets is attributed towas driven by a $104$39.7 million or 18.9% decrease6.9% increase in available for sale investment securities, combined withwhich offset a $36.3decrease in cash and cash equivalents of $27.6 million or 16.6% decrease in net cash and equivalents.
Net cash provided by operating activities was $28.1$24.0 million for 2010, an increase2013, a decrease of $3.1$4.4 million or 12.4% compared to $25.015.4% from $28.4 million for 2009.2012. Net cash provided byused in investing activities was $172$53.3 million for 20102013 compared to net cash used of $8.8 million for 2009. The $181 million higher net cash inflow in the comparison is mainly due to $121 million related to investment securities transactions, $44.2 million related to loan activity, $9.6 million attributed to foreclosed real estate sales, and $8.6 million in connection with the conversion to cash of a portion of company-owned life insurance. For investment securities transactions, the Company had a net cash inflow of $104$63.2 million in 2010 resulting from maturitiesfor 2012. The $116 million difference compared to a year ago relates mainly to investment securities and sales activity that exceeded purchases.loan activity. For 2009,investment securities, the Company had net cash outflows of $64.8 million for 2013 compared with net inflows of $21.3 million for 2012. Net cash outflow for investment securities in 2013 was driven by net purchase activity, which correlates to the increase in investment securities in the annual comparison. Since deposit levels were relatively unchanged for the year and quality loan demand remains weak, available funds have generally been reinvested more into investment securities. The Company had net principal collections related to investment securitiesloans of $16.9$5.5 million for 2013, a decrease of $24.3 million or 81.4% compared to 2012. Net principal collections on loans have declined to the lowest level since 2009 as purchases exceeded maturitiesthe balance between new loan originations and sales. repayment activity has narrowed.
Net cash repayments received on loans were $50.1 million for 2010 compared to $5.9 million for 2009 as funding new loans have decreased in the current year. The increase in cash received from foreclosed real estate activity is volume driven. The Company received $8.6 million proceeds during 2010 upon liquidation of part of its investment in company-owned life insurance at its cash surrender value to boost its cash available to inject into certain of its bank subsidiaries to strengthen their capital positions.
Information relating to off-balance sheet arrangementscommitments to extend credit is disclosed in Note 1514 of the Company’s 20102013 audited consolidated financial statements. These transactions are entered into in the ordinary course of providing traditional banking services and are considered in managing the Company’s liquidity position. The Company does not expect these commitments to significantly affect the liquidity position in future periods. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options, or similar instruments.
CAPITAL RESOURCES
Shareholders’ equity was $150$170 million at December 31, 2010, an increase of $2.72013 up $2.0 million or 1.8%1.2% compared to $147$168 million at December 31, 2009. Retained earningsyear-end 2012. Net income increased $5.1shareholders’ equity by $13.4 million, during 2010 due to net income of $6.9 millionbut was partially offset by dividends and accretion on preferred stocka decline in other comprehensive income in the amount of $1.9$10.1 million. There were no dividends declared on common stock in 2010. Other comprehensive income decreased $3.0 million mainly due to an overall net declinedeclined as a result of a decrease in the unrealized gain on available for sale investment securities. The decline in the overall netafter-tax unrealized gain on available for sale investment securities in the amount $13.0 million attributed to an overall increase in market interest rates. This was drivenpartially offset by an improvement of $3.0 million in the after-tax amount related to the Company’s liability for its postretirement medical benefits plan. The improvement was primarily the result of favorable interest rates impacting the year-end actuarial valuation of the plan. Since the discount rate used in determining the obligation under the plan increased to 4.9% from 4.0%, the present value decreased.
On January 9, 2009, the Company issued 30 thousand shares of Series A, no par value cumulative perpetual preferred stock. The Series A preferred shares pay a cumulative cash dividend quarterly at 5% per annum during the first five years the preferred shares are outstanding, resetting to 9% during the first quarter of 2014. The Company’s goal is to repay a portion of the preferred shares during 2014, using internally generated cash flows for the potential repurchase. Redemption of the preferred shares is subject to approval by the saleCompany’s banking regulators. The amount of securities inoutstanding preferred shares redeemed, if any, will be determined by the overall progress made under current yearregulatory agreements, the level of funds available, and related gains that were recorded in noninterest income.
At December 31, 20102013 and 2012, the Company’s tangible capital ratio was 7.57% compared to 6.56% at year-end 2009.9.35% and 9.23%, respectively. The tangible capital ratio is defined as tangible equity as a percentage of tangible assets. This ratio excludes amounts related to goodwill and other intangible assets. Tangible common equity to tangible assets, which further excludes outstanding preferred stock, was 6.09%7.70% at December 31, 2010year-end 2013, up 11 basis points compared to 5.25%7.59% at year-end 2009.
Consistent with the objective of operating a sound financial organization, the Company’s goal is to maintain capital ratios well above the regulatory minimum requirements. The Company's capital ratios as of December 31, 20102013 and the regulatory minimums were as follows:
Farmers Capital Bank Corporation | Regulatory Minimum | |||||||
Tier 1 Risk-based Capital1 | 18.95 | % | 4.00 | % | ||||
Total Risk-based Capital1 | 20.21 | 8.00 | ||||||
Tier 1 Leverage Capital2 | 11.90 | 4.00 |
1Tier 1 Risk-based and Total Risk-based Capital ratios are computed by dividing Tier 1 or Total Capital, as follows.
2Tier 1 Leverage ratio is computed by dividing Tier 1 Capital by total quarterly average assets, as defined by regulation.
In July 2013, banking regulators issued final rules to bring U.S. banking organization into compliance with the Basel III capital framework effective in 2015. The Company has completed a pro forma analysis of its capital ratios under the new capital framework. This analysis indicates the Company remains well-capitalized under the new rules, including meeting the effective minimum capital
Farmers Capital Bank Corporation | Regulatory Minimum | ||||||||
Tier 1 Risk-based Capital1 | 15.35 | % | 4.00 | % | |||||
Total Risk-based Capital1 | 16.61 | 8.00 | |||||||
Tier 1 Leverage Capital2 | 9.39 | 4.00 |
ratios with a fully phased-in capital conservation buffer. For further information, see discussion in Part I, Item 1 under the caption “Capital” beginning on page 15 of this Form 10-K.
The table below represents an analysis of dividend payout ratios and equity to asset ratios for the previous five years.
Years Ended December 31, | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Percentage of common dividends declared to income from continuing operations | N/A | N/M | 220.96 | % | 64.52 | % | 78.89 | % | ||||||||||||
Percentage of average shareholders’ equity to average total assets1 | 7.24 | % | 8.72 | % | 7.86 | 9.33 | 10.04 |
Years Ended December 31, | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Percentage of common dividends declared to net income | - | % | - | % | - | % | - | % | N/M | |||||||||||
Percentage of average shareholders’ equity to average total assets | 9.34 | 8.85 | 8.05 | 7.32 | 8.76 | % |
N/M-Not meaningful.
Primarily due to the summerregulatory actions during 2009 at certain of 2009the Company’s subsidiary banks as discussed further below, the Federal Reserve Bank of St. Louis (“FRB St. Louis”) conducted an examination ofand the Parent Company. Primarily due to the regulatory actions and capital requirements at three of the Company’s subsidiary banks (as discussed below), the FRB St. Louis and Kentucky Department of Financial Institutions (“KDFI”) proposed the Parent Company enter into a Memorandum of Understanding (“Memorandum”). The Company’s board approved entry into the Memorandum at a regular board meeting during the fourth quarter of 2009. Pursuant to the Memorandum, the Parent Company agreed that it would develop an acceptable capital plan to ensure that the consolidated organization remains well-capitalized and each of its subsidiary banks meet the capital requirements imposed by their regulator as summarized below.
The Company also agreed to reduce its common stock dividend in the fourth quarter of 2009 from $.25 per share down to $.10 per share and not make interest payments on the Company’s trust preferred securities or dividends on its common or preferred stock without prior approval from the FRB St. Louis and the KDFI. Representatives of the FRB St. Louis and the KDFI have indicated that any such approval for the payment of dividends will be predicated on a demonstration of adequate, normalized earnings on the part of the Company’s subsidiaries sufficient to support quarterly payments on the Company’s trust preferred securities and quarterly dividends on the Company’s common and preferred stock. While both regulatory agencies have granted approval of all subsequent quarterly Company requests to make interest payments on its trust preferred securities and dividends on its preferred stock, the Company has not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) sought regulatory approval for the payment of common stock dividends since the fourth quarter of 2009. Moreover, the Company will not pay any such dividends on its common stock in any subsequent quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted.
Additionally, under the Memorandum, the Parent Company agreed to:
● | utilize its financial and managerial resources to assist its subsidiary banks in addressing weaknesses identified at their most recent examinations and achieving and maintaining compliance with any regulatory supervisory actions respecting the subsidiary banks; |
● | not pay any new salaries, bonuses, management fees or make any other payments to insiders without prior approval of the FRB St. Louis and the KDFI; |
● | not incur additional debt or purchase or redeem any stock without the prior written approval of the FRB St. Louis and the KDFI; |
● | submit to the FRB St. Louis and the KDFI an acceptable plan detailing the source and timing of funds for meeting the Company’s debt service requirements and other parent company |
● | within thirty days of the end of each calendar quarter submit to the FRB St. Louis and the KDFI parent company financial statements along with a status report on compliance with the provisions of the Memorandum. |
Subsidiary Banks
The Company’s subsidiary banks are subject to capital-based regulatory requirements which place banks in one of five categories based upon their capital levels and other supervisory criteria. These five categories are: (1) well-capitalized, (2) adequately
capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5) critically undercapitalized. To be well-capitalized, a bank must have a Tier 1 Leverage Capital ratio of at least 5% and a Total Risk-based Capital ratio of at least 10%. As of December 31, 2010,2013, the Company’s four subsidiary banks had the following capital ratios for regulatory purposes:
Tier 1 Leverage Capital Ratio | Total Risk-based Capital Ratio | ||||||||
Farmers Bank | 8.55 | % | 16.86 | % | |||||
United Bank | 8.24 | 14.18 | |||||||
First Citizens Bank | 8.46 | 13.50 | |||||||
Citizens Northern | 8.04 | 12.68 |
Tier 1 Leverage Capital Ratio | Total Risk-based Capital Ratio | |||||||
Farmers Bank | 9.60 | % | 18.82 | % | ||||
United Bank | 9.67 | 16.33 | ||||||
First Citizens | 9.03 | 13.67 | ||||||
Citizens Northern | 9.67 | 14.82 |
Two of the Company’s subsidiary banks, due to their recent regulatory exams, areagreements, were required at year-end 2013 to maintain capital ratios in excess of the well-capitalized level under the prompt corrective action framework. The capital levels required for these three banks and other requirements for these two banks related to the applicabletheir regulatory examagreement are discussed below.
United Bank. In November of 2009, the FDIC, the KDFI, and FRB St. Louis entered into a Memorandum with Farmers Bank. The Memorandum requires that Farmers Bank obtain written consent prior to declaring or paying the Parent Company a cash dividend and to achieve and maintain a Tier 1 Leverage ratio of 8.0% by June 30, 2010. The Parent Company injected from its reserves $11 million in capital into Farmers Bank subsequent to the Memorandum.
(Dollars in thousands) | Activity Since Exam Date | ||||||||||||||||||||||||||||||
As of Exam Date | Increases | Decreases | December 31, 2010 | ||||||||||||||||||||||||||||
Number of Credits | Balance | Additional Credit/New Classifications | Number of Credits | Principal Payments | Charge Off’s | Transfers1 | Balance | Number of Credits | |||||||||||||||||||||||
20 | $ | 35,103 | $ | 26,112 | 14 | $ | 6,444 | $ | 3,930 | $ | 8,969 | $ | 41,872 | 29 |
Subsequent to year-end 2013, the Company received written notification from the FDIC and the KDFI that the formal Consent Order entered into in 2011 was terminated and replaced with a Tier 1 Leverage ratiostepped-down enforcement action in the form of 8.24% and a Total Risk-based Capital ratioan informal Memorandum. While many of 14.18%.
The terms of the Memorandum, significantly all of which were included in the prior Consent Order, requires United Bank to:
● | continue to |
(Dollars in thousands) | Activity Since Exam Date | ||||||||||||||||||||||||||||||
As of Exam Date | Increases | Decreases | December 31, 2010 | ||||||||||||||||||||||||||||
Number of Credits | Balance | Additional Credit/New Classifications | Number of Credits | Principal Payments | Charge Off’s | Transfers1 | Balance | Number of Credits | |||||||||||||||||||||||
15 | $ | 42,870 | $ | 51,509 | 18 | $ | 16,585 | $ | 7,122 | $ | 13,468 | $ | 57,204 | 27 |
a) | the dollar levels to which the bank will strive to reduce each line of credit within 6 and 12 months from the effective date of the Memorandum; and |
b) | provisions for the submission of monthly written progress reports to the bank's board of directors for review and notation in the board of director's minutes. |
● | within 10 days from the date of the Memorandum, the bank shall eliminate from its books, by collection, charge-off or other proper entries, all assets or portions of assets classified "Loss" in the most recent or any subsequent examination that have not been previously charged off or collected. |
● | while the Memorandum is in effect, the bank shall not extend, directly or |
● | while the Memorandum is in effect, the bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Substandard", or "Doubtful", or is listed for Special Mention in the most recent examination, or any subsequent examination or visitation, and is uncollected unless the bank's board of directors has adopted, prior to such extension of credit, a detailed written statement giving the reasons why such extension of credit is in the best interest of the bank. |
● | while the Memorandum is in effect, the bank shall continue its practice of having procedures for managing the bank's sensitivity to interest rate risk. The procedures shall comply with the Joint Agency Statement of Policy on Interest Rate Risk (June 26, 1996), and the Joint Supervisory Statement on Investment Securities and End-user Derivative Activities (April 23, 1998). The bank shall also implement within 60 days of the Memorandum the recommendations to enhance the bank's interest rate risk management policy and |
● | while the Memorandum remains in effect, the bank shall continue its practice of adopting, implementing, and adhering to a written profit plan and a |
a) | an identification of the major areas in, and means by which, the board will seek to improve the bank's operating performance; |
b) | realistic and comprehensive budgets; |
c) | a budget review process to monitor the income and expenses of the bank to compare actual figures with budgetary projections; |
d) | a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and |
e) | periodic salary review. |
Copies of the plans and budgets required by this provision shall be submitted to the FDIC and the KDFI. | ||
● | while the Memorandum is in effect, the bank shall maintain Tier 1 Capital and Total Risk-Based Capital at a level equal to or exceeding 9.0% and 13.0% of the bank's total assets, calculated in accordance with Part 325 of the FDIC Rules and Regulations. If such ratio is less than the aforementioned minimums as of each quarter end, while the Memorandum is in effect, the bank shall, within 30 days of such dates, present to the FDIC and the KDFI a plan for the restoration of these capital ratios. |
● | while the Memorandum is in effect, the bank shall not declare or pay any dividends without the prior written consent of the FDIC and the KDFI. |
● | within 30 days following each calendar quarter after the date of the Memorandum, progress reports covering each of the provisions of the Memorandum shall be submitted to the FDIC and the KDFI, until notification by the supervisory authorities that the reports need no longer be submitted. The board shall review all reports prior to submission and note their considerations in the minutes. |
Following is a summary of the activity during 2013 of substandard loans that meet the reporting requirements included in the Consent Order.
Substandard Loans
(Dollars in thousands) | Activity During 2013 | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2012 | Increases | Decreases | December 31, 2013 | ||||||||||||||||||||||||||||||||||||||||
Balance | Number | Additional Credit/New Classifications | Number of New Credits | Principal Payments | Charge Offs | Transfersto OREO | Amounts Upgraded and No Longer Classified as Substandard | Other | Balance | Number | |||||||||||||||||||||||||||||||||
$ | 36,417 | 14 | $ | 1,620 | - | $ | 6,639 | $ | 211 | $ | 1,650 | $ | 791 | $ | 71 | $ | 28,675 | 10 |
At December 31, 2013, United Bank had ten credit relationships with an aggregate outstanding balance of $28.7 million that meet the risk identification criteria established in the Consent Order. The aggregate amount of substandard loans meeting the reporting criteria exceeded the target level established by United Bank due to the anticipated sale of collateral and related paydown that did not occur prior to year end. Target levels are established based on projections of individual substandard loan amounts and will fluctuate depending on the actual amount of newly classified loans, principal reductions, or repossession activity.
Citizens Northern. The FDIC and the KDFI entered into a Memorandum with Citizens Northern on September 8, 2010. That Memorandum was terminated July 7, 2013 upon the issuance of an updated Memorandum. The updated Memorandum is substantially the same as the replaced Memorandum, including the requirement to obtain regulatory approval prior to declaring or paying a dividend, but raised the required minimum Tier I Leverage to 9.0% from 8.0%. At year-end 2013, Citizens Northern had a Tier I Leverage ratio of 9.67% and a Total Risk-based Capital ratio of 14.82%.
Under the Memorandum, Citizens Northern agreed to:
● | have and retain qualified management, with particular emphasis on its loan administration and collection needs. Every member of management shall have the qualifications and experience commensurate with his or her duties and responsibilities. The qualifications of management shall be assessed on management’s ability to: |
a) | Affect reasonable improvements to the condition of the institution, including improvements in asset quality and earnings; |
b) | Comply with applicable laws, rules, regulations, and regulatory policies; and |
c) | Comply with the requirements of this Memorandum; |
● | within 60 days from the date of this Memorandum, to formulate, adopt and submit to the Regional Director and the Commissioner for review and comment a written plan of action to lessen the risk position in each asset which was classified “Substandard” in the most recent examination, and which aggregated $250,000 or more. Such plan shall include: |
a) | dollar levels to which it will strive to reduce each line of credit within six and twelve months from the effective date of this Memorandum; and |
b) | provisions for the submission of monthly written progress reports to its board of directors for review and notation in the board of director’s minutes; |
● | not extend any additional credit to, or for the benefit of, any borrower who is already obligated in any manner on any extension of credit (including any portion thereof) that: |
a) | has been charged off or classified “Loss” in the most recent examination or in any subsequent review by consultants or by a regulatory body so long as such credit remains uncollected; or |
b) | has been classified “Substandard” or “Doubtful” in the most recent examination, on the bank’s internal watch list, or in any subsequent review by its consultants, and is uncollected, unless the board of directors |
or loan committee has adopted, prior to such extension of credit, a detailed written statement giving reasons why such extension of credit is in the best interest of the bank. A copy of the statement, including a thorough financial analysis gauging the borrower’s financial condition and overall ability to service the existing and new debt, shall be placed in the appropriate loan file and shall be incorporated in the minutes of the applicable loan committee; |
● | within 60 days from the date of this Memorandum, take all steps necessary to correct the credit underwriting and administration weaknesses listed in the most recent examination. Corrective actions will include a revision of procedures for assessing borrower repayment capacity. The revised procedures will include obtaining and evaluating current financial information; considering delinquent property taxes; and incorporating material changes to the balance sheet accounts such as account receivables, inventories, fixed assets, and accounts payable into cash flow analyses for commercial borrowers; |
● | within 30 days from the date of this Memorandum, revise its Allowance for Loan and Lease Losses (“ALLL”) methodology consistent with the comments in the most recent examination. Ensure that when assessing impairment under Accounting Standards Codification Topic 310 using the fair value of collateral method, assessments are based on current valuations of the pledged collateral; |
(Company Note: The ALLL methodology is structurally sound. The comments referred to in the most recent examination pertain to documentation exceptions for two impaired credit relationships consisting of eight real estate properties with an aggregate outstanding balance of $1.7 million. Documentation supporting certain of these properties was stale as of the examination date. However, appraisals received subsequent to the examination date confirm that the estimated discount applied to the stale appraisals resulted in an allowance that was adequate. Additional procedures for adhering to and monitoring compliance over the ALLL have been revisited and refined to assure that the ALLL is fully documented and adequately supported in a timely fashion).
● | prior to submission or publication of all Reports of Condition and income required by the FDIC after the effective date of this Memorandum, the board of directors shall review the adequacy of the ALLL, shall provide an adequate allowance, and shall report such allowance on the Reports of Condition and income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of increase in the allowance recommended, if any, and the basis for determination of the amount of the allowance provided; |
● | within 60 days from the date of this Memorandum, formulate and implement a written Profit Plan. The Profit Plan shall be consistent with the loan, investment and funds management policies. This Plan shall be submitted to the Regional Director and Commissioner for review and comment, and shall address, at a minimum, goals and strategies for improving and sustaining earnings including: |
a) | an identification of the major areas in, and means by which, the board will seek to improve the operating performance; |
b) realistic and comprehensive budgets;
c) | a budget review process to monitor the income and expenses to compare actual figures with budgetary projections; |
d) | a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and |
e) periodic salary review;
● | within 30 days from the date of this Memorandum, take all steps necessary to correct the violations scheduled in the most recent examination. In addition, adopt procedures to assure future compliance with all applicable laws, rules and regulations; |
● | while this Memorandum is in effect, maintain Tier I capital at a level equal to or exceeding 9.0% of the total assets which shall be calculated in accordance with Part 325 of the FDIC Rules and Regulations. If such ratio is less than 9.0% as of March 31, June 30, September 30 or December 31 of each calendar year, while this Memorandum is in effect, within 30 days of such dates, present to the Regional Director and Commissioner a plan for the augmentation of the capital accounts or other measures to bring the ratio to 9.0%; |
● | while this Memorandum is in effect, written consent of the Regional Director and the Commissioner is required to declare or pay any dividends; and |
● | within 30 days following each calendar quarter after the date of this Memorandum, progress reports covering each of the provisions of this Memorandum shall be submitted to the Regional Director and Commissioner until notification by the supervisory authorities that the reports need no longer be submitted. The board of directors shall review all reports prior to submission and note their |
Following is a summary of the levelactivity during 2013 of substandard loans that meet the reporting requirements included in the Memorandum.
Substandard Loans | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Activity Since Exam Date | ||||||||||||||||||||||||||||||
As of Exam Date | Increases | Decreases | December 31, 2010 | ||||||||||||||||||||||||||||
Number of Credits | Balance | Additional Credit/New Classifications | Number of Credits | Principal Payments | Charge Off’s | Transfers1 | Balance | Number of Credits | |||||||||||||||||||||||
8 | $ | 11,857 | $ | 3,843 | 3 | $ | 763 | $ | 751 | $ | 200 | $ | 13,986 | 10 |
1 Substandard LoansRepresents repossession activity to other real estate owned.
(Dollars in thousands) | Activity During 2013 | ||||||||||||||||||||||||||||||||||
December 31, 2012 | Increases | Decreases | December 31, 2013 | ||||||||||||||||||||||||||||||||
Balance | Number | Additional Credit/New Classifications | Number of New Credits | Principal Payments | Charge Offs | Amounts Upgraded and No Longer Classified as Substandard | Balance | Number | |||||||||||||||||||||||||||
$ | 8,295 | 7 | $ | 3,966 | 4 | $ | 2,157 | $ | 10 | $ | 892 | $ | 9,202 | 10 |
At December 31, 20102013, Citizens Northern had 10ten credit relationships with an aggregate outstanding balance of $14.0$9.2 million that meet the risk identification criteria established in the Memorandum. There was no related target level established at year-end 2010.
At the Parent Company and at each of its bank subsidiaries, the Company believes it is adequately addressing all issues of the regulatory agreements to which it is subject.subject and is in compliance with those agreements as of December 31, 2013. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements have been met. The Company and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of December 31, 2010, with the exception that the level of substandard loans at Farmers Bank exceed the target amount by $1.3 million. Regulators continue to monitor the Company’s progress and compliance with the agreements through periodic on-site examinations, regular communications, and quarterly data analysis. The results of these examinations and communications show satisfactory progress toward meeting the requirements included in the regulatory agreements.
The Parent Company maintains cash available to fund a certain amount of additional injections of capital to its bank subsidiaries if required by its regulators. If needed, further amounts in excess of available cash may be funded by future public or private sales of securities, although the Parent Company is currently under no directive by its regulators to raise any additional capital.
Share Buy Back Program
At various times, the Company’s Board of Directors has authorized the purchase of shares of the Company’s outstanding common stock. No stated expiration dates have been established under any of the previous authorizations. There are 84,971 shares that may still be purchased under the various authorizations. The Company’s participation inHowever, as discussed under the Treasury’s CPP in early 2009 restrictscaption“Capital Resources” above, the Company’s ability to purchaseCompany must be granted permission by the FRB St. Louis and the KDFI before it can repurchase or redeem any of its outstanding common stock. Until January 9, 2012 the Company generally must have the Treasury’s approval before it can purchase its outstanding common stock, unless all of the Series Aor preferred stock issued under the CPP has been redeemed by the Company or transferred
Shareholder Information
As of February 22, 2011,18, 2014, the Company had 3,0382,919 shareholders of record.
Common Stock Price
Farmers Capital Bank Corporation’sThe Company’s common stock is traded on the NASDAQ Stock Market LLC exchange in the Global Select Market tier, with sales prices reported under the symbol: FFKT. The table below lists the common stockhigh and low sales prices and dividends declared for 2010 and 2009.
High | Low | Dividends Declared1 | |||||||||||
2010 | |||||||||||||
Fourth Quarter | $ | 5.10 | $ | 4.50 | |||||||||
Third Quarter | 6.54 | 4.50 | |||||||||||
Second Quarter | 9.38 | 4.90 | |||||||||||
First Quarter | 10.52 | 6.59 | |||||||||||
2009 | |||||||||||||
Fourth Quarter | $ | 18.04 | $ | 9.08 | $ | .10 | |||||||
Third Quarter | 26.90 | 17.10 | .25 | ||||||||||
Second Quarter | 27.11 | 14.62 | .25 | ||||||||||
First Quarter | 25.99 | 11.10 | .25 |
High | Low | |||||||
2013 | ||||||||
Fourth Quarter | $ | 24.00 | $ | 19.14 | ||||
Third Quarter | 26.98 | 18.62 | ||||||
Second Quarter | 23.00 | 17.50 | ||||||
First Quarter | 19.00 | 11.80 | ||||||
2012 | ||||||||
Fourth Quarter | $ | 13.50 | $ | 9.76 | ||||
Third Quarter | 10.50 | 6.46 | ||||||
Second Quarter | 7.32 | 5.63 | ||||||
First Quarter | 6.74 | 4.02 |
The closing price per share of the Company’s common stock on December 31, 2010,2013, the last trading day of the Company’s fiscal year, was $4.88. Dividends$21.75. There have been no dividends declared peron the Company’s common share were $0 and $.85 for 2010 and 2009, respectively.
Recently Issued But Not Yet Effective Accounting Standards” in Note 1
In February 2013, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04,Liabilities (Topic 405) - Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Company’s 2010 auditedObligation Is Fixed at the Reporting Date.ThisASU establishes guidance for the recognition, measurement, and disclosure of obligations arising from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date (for example, debt arrangements, other contractual obligations, settled litigation, and judicial rulings). Under joint and several liability, the total amount of an obligation is enforceable against any and all parties to the arrangement. Each obligor is considered primarily responsible for the entire obligation.
Under the new guidance, the amount to be recognized is equal to the sum of (1) the amount that the entity agreed to pay based on its arrangement with co-obligors, and (2) any additional amount expected to be paid on behalf of the co-obligors using a “best estimate.” In addition, disclosure is required of the nature and amount of each covered obligation, including the nature of any recourse provisions which may allow recovery from other entities. This ASU does not apply to certain obligations where specific accounting guidance already exists under accounting principles generally accepted in the U.S., such as for contingencies, guarantees, compensation-retirement benefits, and income taxes.
The amendments in ASU No. 2013-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU's scope that exist at the beginning of an entity’s fiscal year of adoption. The Company does not expect there to be a material impact on its consolidated financial statements.position or results of operations upon adoption.
In January 2014, the FASB issued ASU 2014-04,Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. The ASU clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures about foreclosed residential real estate property are also required.
The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The Company does not expect there to be a material impact on its consolidated financial position or results of operations upon adoption.
2012 Compared to 2008
The Company reported net loss for 2009income of $44.7$12.1 million or $6.32$1.37 per common share in 2012 compared to net income of $4.4$2.7 million or $.60$.11 per common share for 2008. On a pretax basis, the goodwill impairment charge was $52.42011. This represents an increase of $9.4 million and recorded during the fourth quarter of 2009 and represents the entire amount of goodwill previously reported. The goodwill impairment charge had a negative impact of $6.31or $1.26 per common share. The goodwill impairment chargeincrease in net income for 2012 was primarily the result ofdue to a prolonged declinedecrease in the Company’s stock price, a situation similar to manyprovision for loan losses of its peer banks$10.7 million or 79.4% and other financial institutions at that time. Lower stock prices were mainly attributed tononinterest expenses of $2.7 million or 4.3%, partially offset by an increase in income tax expense of $3.6 million. Net interest income decreased $715 thousand or 1.3%.
For 2012, the continuing economic weaknesses and increased market concern surrounding the credit risk and capital positions of financial institutions that begandecrease in late 2007.
The provision for loan losses increased $15.4for 2012 was $2.8 million, in 2009 to $20.8a decrease of $10.7 million or 79.4% compared to $5.3$13.5 million for 2008.2011. The increasedecrease in the provision for loan losses was attributed to an overall improvement in the credit quality of the loan portfolio and a decrease in loan balances outstanding. Nonperforming loans, loans past due 30-89 days, and watch list loans all decreased during 2012. Historical loss rates, adjusted for current risk factors, also improved as lower recent charge-off activity replaced the higher levels that spiked upward starting in 2009. The high charge-offs from that period began to a higher levelroll out of nonperformingthe three-year look-back period the Company used when evaluating its allowance for loan losses.
Nonperforming loans primarily nonaccrual and restructured loans which trended upward as the overall economic environment and certain customers’ ability to repay their loans deteriorated.decreased $25.0 million or 31.7% in 2012. The allowance for loan losses was $24.4 million at year-end 2009 was $23.42012 and $28.3 million or 1.84%at year-end 2011. As a percentage of loans net of unearned income. At year-end 2008,income, the allowance for loan losses was $16.8 million or 1.28% of loans net of unearned income.
Noninterest income for 20092012 was $28.2$24.7 million, an increase of $18.4 million$263 thousand or 187%1.1% compared to $9.8$24.4 million for 2008.2011. The increase in noninterest income was duedriven by higher net gains on the sale of mortgage loans of $936 thousand or 95.3% and income from company-owned life insurance of $585 thousand or 62.3%. The increase in net gains on the sale of mortgage loans was attributable to an increase in the volume of loans sold of $43.6 million or 106%. The interest rate environment during 2012 declined beyond the already low levels that existed during 2011, which led to a spike in home refinancing and purchasing activity during 2012. The increase in income from company-owned life insurance was mainly the result of a $529 thousand gain related to the impactdeath benefit proceeds received during 2012. There was no similar transaction in 2011.
The more significant components of an other-than-temporary impairment charge recordednoninterest income that decreased were data processing income by $550 thousand or 69.4% and service charges and fees on deposits by $493 thousand or 5.7%. The decrease in 2008data processing income was driven by a decrease in fees related to the Company’s investment in preferred stockswinding down of the Federal Home Loan Mortgage Companydepository services contract with the Commonwealth. The decrease in service charges and the Federal National Mortgage Association. This non-cash impairment charge reducedfees on deposits was driven by a decline in fees from overdraft/insufficient funds related to lower transaction volume.
Total noninterest income during 2008 by $14.0 million.expenses were $59.8 million for 2012, a decrease of $2.7 million or 4.3% compared to $62.5 million for 2011. The increasedecrease in noninterest income between 2009expenses was made up primarily by a $2.1 million or 28.9% decrease in expenses associated with repossessed real estate, a $514 thousand decrease related to a deposit fraud loss recorded in the prior year (net of a $186 thousand recovery), a $365 thousand or 7.9% decrease in data processing and 2009communications expense, and a $258 thousand or 8.8% decrease in deposit insurance expense. Partially offsetting these noninterest expense decreases was also positively impacted by an increase in net investment securities gainssalaries and employee benefits of $3.7 million.
The $2.1 million decrease in expenses were $55.0 million higher in 2009 comparedrelated to 2008. The increase in noninterest expensesrepossessed real estate is mainly due to a $1.7 million or 30.9% decline in impairment charges. The $514 thousand deposit fraud loss relates to a transaction on a deposit account involving one of the $52.4 million goodwill impairment charge mentioned above combinedCompany’s customers that occurred during the first quarter of 2011. Data processing and communications expenses decreased $365 thousand mainly as a result of cost savings related to the winding down of the Company’s contract with the Commonwealth as well as an increaseagreement the Company announced during the first quarter to reduce its debit card processing expenses during 2012 and 2013.
The $258 thousand decrease in deposit insurance expense is mainly attributed to changes in the FDIC’s assessment base and rate structure that went into effect during the second quarter of $2.7 million. The2011. Salaries and employee benefits increased $1.2 million in the comparison mainly as a result of a larger workforce, including additions in credit administration and nonperforming asset management positions in early 2012, higher deposit insurance expense is due in part to the special assessment imposed by the FDIC during 2009 as part of its plan to replenish the Deposit Insurance Fund. The Company was able to offset a portion of its deposit insurance expense in 2008 with a one-time assessment credit it received during 2006. There were no credits remaining after 2008.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to Part II, Item 7 under the caption “Market Risk Management” beginning on page 6563 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Farmers Capital Bank Corporation has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include amounts that are based on management’s best estimates and judgments. Management also prepared other information in the annual report and is responsible for its accuracy and consistency with the financial statements.
The Company’s 20102013 consolidated financial statements have been audited by Crowe HorwathBKD, LLP (“BKD”) independent accountants. Management has made available to Crowe Horwath LLPBKD all financial records and related data, as well as the minutes of Boards of Directors’ meetings. Management believes that all representations made to Crowe Horwath LLPBKD during the audit were valid and appropriate.
Lloyd C. Hillard, Jr. | C. Douglas Carpenter |
President and Chief Executive Officer | Executive Vice President, Secretary, and Chief Financial Officer |
March |
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors
and Shareholders
Farmers Capital Bank Corporation
Frankfort, Kentucky
We have audited Farmers Capital Bank Corporation’s (Company) internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company and our report dated March 6, 2014, expressed an unqualified opinion thereon.
Louisville, Kentucky
March 6, 2014
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors
and Stockholders
Farmers Capital Bank Corporation
Frankfort, Kentucky
We have audited the accompanying consolidated balance sheets of Farmers Capital Bank Corporation (Company) as of December 31, 20102013 and 20092012, and the related consolidated statements of operations,income, comprehensive income, changes in shareholders’ equity comprehensive income (loss) and cash flows for each of the three years in the two-year period ended December 31, 2010.2013. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe 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, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2014, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Louisville, Kentucky
March 6, 2014
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Farmers Capital Bank Corporation
Frankfort, Kentucky
We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of Farmers Capital Bank Corporation for the year ended December 31, 2011. Farmers Capital Bank Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our auditsaudit in accordance with the 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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above of Farmers Capital Bank Corporation present fairly, in all material respects, the financial position of Farmers Capital Bank Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the periodyear ended December 31, 2010,2011, in conformity with U.S. generally accepted accounting principles.
Crowe Horwath LLP |
Louisville, Kentucky
March 8, 2011
Consolidated Balance Sheets
December 31, (In thousands, except share data) | 2010 | 2009 | ||||||
Assets | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 24,268 | $ | 35,841 | ||||
Interest bearing deposits in other banks | 139,902 | 175,926 | ||||||
Federal funds sold and securities purchased under agreements to resell | 17,886 | 6,569 | ||||||
Total cash and cash equivalents | 182,056 | 218,336 | ||||||
Investment securities: | ||||||||
Available for sale, amortized cost of $440,580 (2010) and $537,873 (2009) | 444,182 | 547,873 | ||||||
Held to maturity, fair value of $844 (2010) and $922 (2009) | 930 | 975 | ||||||
Total investment securities | 445,112 | 548,848 | ||||||
Loans, net of unearned income | 1,192,840 | 1,271,942 | ||||||
Allowance for loan losses | (28,784 | ) | (23,364 | ) | ||||
Loans, net | 1,164,056 | 1,248,578 | ||||||
Premises and equipment, net | 39,612 | 39,121 | ||||||
Company-owned life insurance | 28,791 | 36,626 | ||||||
Other intangible assets, net | 3,552 | 4,989 | ||||||
Other real estate owned | 30,545 | 31,232 | ||||||
Other assets | 41,969 | 43,832 | ||||||
Total assets | $ | 1,935,693 | $ | 2,171,562 | ||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest bearing | $ | 206,887 | $ | 214,518 | ||||
Interest bearing | 1,256,685 | 1,418,915 | ||||||
Total deposits | 1,463,572 | 1,633,433 | ||||||
Federal funds purchased and other short-term borrowings | 47,409 | 47,215 | ||||||
Securities sold under agreements to repurchase and other long-term borrowings | 203,239 | 267,962 | ||||||
Subordinated notes payable to unconsolidated trusts | 48,970 | 48,970 | ||||||
Dividends payable | 188 | 925 | ||||||
Other liabilities | 22,419 | 25,830 | ||||||
Total liabilities | 1,785,797 | 2,024,335 | ||||||
Commitments and contingencies (Notes 15 and 17) | ||||||||
Shareholders’ Equity | ||||||||
Preferred stock, no par value 1,000,000 shares authorized; 30,000 Series A shares issued and outstanding; Liquidation preference of $30,000 | 28,719 | 28,348 | ||||||
Common stock, par value $.125 per share; 14,608,000 shares authorized; 7,411,676 and 7,378,605 shares issued and outstanding at December 31, 2010 and 2009, respectively | 926 | 922 | ||||||
Capital surplus | 50,675 | 50,476 | ||||||
Retained earnings | 68,678 | 63,617 | ||||||
Accumulated other comprehensive income | 898 | 3,864 | ||||||
Total shareholders’ equity | 149,896 | 147,227 | ||||||
Total liabilities and shareholders’ equity | $ | 1,935,693 | $ | 2,171,562 |
December 31, (In thousands, except share data) | 2013 | 2012 | ||||||
Assets | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 22,925 | $ | 27,448 | ||||
Interest bearing deposits in other banks | 41,749 | 65,675 | ||||||
Federal funds sold and securities purchased under agreements to resell | 3,579 | 2,732 | ||||||
Total cash and cash equivalents | 68,253 | 95,855 | ||||||
Investment securities: | ||||||||
Available for sale, amortized cost of $618,395 (2013) and $558,630 (2012) | 612,820 | 573,108 | ||||||
Held to maturity, fair value of $827 (2013) and $956 (2012) | 765 | 820 | ||||||
Total investment securities | 613,585 | 573,928 | ||||||
Loans, net of unearned income | 999,883 | 1,004,995 | ||||||
Allowance for loan losses | (20,577 | ) | (24,445 | ) | ||||
Loans, net | 979,306 | 980,550 | ||||||
Premises and equipment, net | 36,273 | 36,183 | ||||||
Company-owned life insurance | 28,899 | 27,973 | ||||||
Intangible assets, net | 854 | 1,394 | ||||||
Other real estate owned | 37,826 | 52,562 | ||||||
Other assets | 44,559 | 38,787 | ||||||
Total assets | $ | 1,809,555 | $ | 1,807,232 | ||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest bearing | $ | 277,294 | $ | 254,912 | ||||
Interest bearing | 1,132,921 | 1,155,898 | ||||||
Total deposits | 1,410,215 | 1,410,810 | ||||||
Federal funds purchased and other short-term borrowings | 29,123 | 24,083 | ||||||
Securities sold under agreements to repurchase and other long-term borrowings | 127,880 | 129,297 | ||||||
Subordinated notes payable to unconsolidated trusts | 48,970 | 48,970 | ||||||
Dividends payable | 188 | 188 | ||||||
Other liabilities | 23,124 | 25,863 | ||||||
Total liabilities | 1,639,500 | 1,639,211 | ||||||
Commitments and contingencies(Notes 14 and 16) | ||||||||
Shareholders’ Equity | ||||||||
Preferred stock, no par value 1,000,000 shares authorized; 30,000 Series A shares issued and outstanding; Liquidation preference of $30,000 | 29,988 | 29,537 | ||||||
Common stock, par value $.125 per share; 14,608,000 shares authorized;7,478,706 and 7,469,813 shares issued and outstanding atDecember 31, 2013 and 2012, respectively | 935 | 934 | ||||||
Capital surplus | 51,102 | 50,934 | ||||||
Retained earnings | 91,242 | 79,747 | ||||||
Accumulated other comprehensive (loss) income | (3,212 | ) | 6,869 | |||||
Total shareholders’ equity | 170,055 | 168,021 | ||||||
Total liabilities and shareholders’ equity | $ | 1,809,555 | $ | 1,807,232 |
See accompanying notes to consolidated financial statements.
(In thousands, except per share data) | ||||||||||||
Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
Interest Income | ||||||||||||
Interest and fees on loans | $ | 70,071 | $ | 76,614 | $ | 86,596 | ||||||
Interest on investment securities: | ||||||||||||
Taxable | 16,565 | 20,424 | 22,894 | |||||||||
Nontaxable | 2,835 | 3,570 | 3,231 | |||||||||
Interest on deposits in other banks | 272 | 278 | 133 | |||||||||
Interest on federal funds sold and securities purchased under agreements to resell | 8 | 24 | 1,066 | |||||||||
Total interest income | 89,751 | 100,910 | 113,920 | |||||||||
Interest Expense | ||||||||||||
Interest on deposits | 22,373 | 33,197 | 39,045 | |||||||||
Interest on federal funds purchased and other short-term borrowings | 324 | 453 | 1,785 | |||||||||
Interest on subordinated notes payable to unconsolidated trusts | 2,035 | 2,178 | 2,865 | |||||||||
Interest on securities sold under agreements to purchase and other long-term borrowings | 10,216 | 11,237 | 11,435 | |||||||||
Total interest expense | 34,948 | 47,065 | 55,130 | |||||||||
Net interest income | 54,803 | 53,845 | 58,790 | |||||||||
Provision for loan losses | 17,233 | 20,768 | 5,321 | |||||||||
Net interest income after provision for loan losses | 37,570 | 33,077 | 53,469 | |||||||||
Noninterest Income | ||||||||||||
Service charges and fees on deposits | 9,171 | 9,347 | 9,847 | |||||||||
Allotment processing fees | 5,573 | 5,403 | 4,791 | |||||||||
Other service charges, commissions, and fees | 4,566 | 4,414 | 4,346 | |||||||||
Data processing income | 1,328 | 1,317 | 1,087 | |||||||||
Trust income | 1,688 | 1,763 | 2,032 | |||||||||
Investment securities gains (losses), net | 8,889 | 3,488 | (166 | ) | ||||||||
Other-than-temporary impairment of investment securities | (13,962 | ) | ||||||||||
Gains on sale of mortgage loans, net | 1,244 | 1,034 | 407 | |||||||||
Income from company-owned life insurance | 1,300 | 1,282 | 1,235 | |||||||||
Other | 351 | 121 | 193 | |||||||||
Total noninterest income | 34,110 | 28,169 | 9,810 | |||||||||
Noninterest Expense | ||||||||||||
Salaries and employee benefits | 27,026 | 29,816 | 30,174 | |||||||||
Occupancy expenses, net | 4,849 | 4,991 | 4,515 | |||||||||
Equipment expenses | 2,647 | 3,075 | 3,187 | |||||||||
Data processing and communications expenses | 5,448 | 5,568 | 5,423 | |||||||||
Bank franchise tax | 2,482 | 2,265 | 2,158 | |||||||||
Correspondent bank fees | 618 | 1,009 | 1,040 | |||||||||
Goodwill impairment | 52,408 | |||||||||||
Amortization of intangibles | 1,437 | 1,952 | 2,602 | |||||||||
Deposit insurance expense | 4,279 | 3,777 | 1,038 | |||||||||
Other real estate expenses, net | 6,054 | 2,074 | 606 | |||||||||
Other | 7,871 | 8,206 | 9,355 | |||||||||
Total noninterest expense | 62,711 | 115,141 | 60,098 | |||||||||
Income (loss) before income taxes | 8,969 | (53,895 | ) | 3,181 | ||||||||
Income tax expense (benefit) | 2,037 | (9,153 | ) | (1,214 | ) | |||||||
Net income (loss) | 6,932 | (44,742 | ) | 4,395 | ||||||||
Dividends and accretion on preferred shares | (1,871 | ) | (1,802 | ) | ||||||||
Net income (loss) available to common shareholders | $ | 5,061 | $ | (46,544 | ) | $ | 4,395 | |||||
Per Common Share | ||||||||||||
Net income (loss) – basic and diluted | $ | .68 | $ | (6.32 | ) | $ | .60 | |||||
Cash dividends declared | N/A | .85 | 1.32 | |||||||||
Weighted Average Shares Outstanding | ||||||||||||
Basic and diluted | 7,390 | 7,365 | 7,357 |
Consolidated Statements of Income
(In thousands, except per share data) | ||||||||||||
Years Ended December 31, | 2013 | 2012 | 2011 | |||||||||
Interest Income | ||||||||||||
Interest and fees on loans | $ | 53,492 | $ | 55,942 | $ | 61,783 | ||||||
Interest on investment securities: | ||||||||||||
Taxable | 10,575 | 12,872 | 14,387 | |||||||||
Nontaxable | 2,512 | 2,248 | 1,938 | |||||||||
Interest on deposits in other banks | 150 | 156 | 237 | |||||||||
Interest on federal funds sold and securities purchased under agreements to resell | 4 | 4 | 4 | |||||||||
Total interest income | 66,733 | 71,222 | 78,349 | |||||||||
Interest Expense | ||||||||||||
Interest on deposits | 5,922 | 9,239 | 14,488 | |||||||||
Interest on federal funds purchased and other short-term borrowings | 74 | 96 | 191 | |||||||||
Interest on securities sold under agreements to repurchase and other long-term borrowings | 5,135 | 7,044 | 7,965 | |||||||||
Interest on subordinated notes payable to unconsolidated trusts | 864 | 1,879 | 2,026 | |||||||||
Total interest expense | 11,995 | 18,258 | 24,670 | |||||||||
Net interest income | 54,738 | 52,964 | 53,679 | |||||||||
Provision for loan losses | (2,600 | ) | 2,772 | 13,487 | ||||||||
Net interest income after provision for loan losses | 57,338 | 50,192 | 40,192 | |||||||||
Noninterest Income | ||||||||||||
Service charges and fees on deposits | 8,196 | 8,124 | 8,617 | |||||||||
Allotment processing fees | 4,922 | 5,215 | 5,346 | |||||||||
Other service charges, commissions, and fees | 4,983 | 4,478 | 4,248 | |||||||||
Data processing income | 102 | 242 | 792 | |||||||||
Trust income | 1,993 | 1,909 | 2,085 | |||||||||
Investment securities (losses) gains, net | (50 | ) | 1,209 | 1,355 | ||||||||
Gains on sale of mortgage loans, net | 1,036 | 1,918 | 982 | |||||||||
Income from company-owned life insurance | 962 | 1,524 | 939 | |||||||||
Other | (28 | ) | 35 | 27 | ||||||||
Total noninterest income | 22,116 | 24,654 | 24,391 | |||||||||
Noninterest Expense | ||||||||||||
Salaries and employee benefits | 29,681 | 28,190 | 26,986 | |||||||||
Occupancy expenses, net | 4,767 | 4,757 | 4,846 | |||||||||
Equipment expenses | 2,398 | 2,364 | 2,503 | |||||||||
Data processing and communications expenses | 3,946 | 4,271 | 4,636 | |||||||||
Bank franchise tax | 2,354 | 2,381 | 2,572 | |||||||||
Amortization of intangibles | 540 | 1,014 | 1,143 | |||||||||
Deposit insurance expense | 2,265 | 2,690 | 2,948 | |||||||||
Other real estate expenses, net | 6,999 | 5,232 | 7,355 | |||||||||
Legal expenses | 780 | 1,220 | 821 | |||||||||
Other | 7,843 | 7,668 | 8,682 | |||||||||
Total noninterest expense | 61,573 | 59,787 | 62,492 | |||||||||
Income before income taxes | 17,881 | 15,059 | 2,091 | |||||||||
Income tax expense (benefit) | 4,435 | 2,910 | (647 | ) | ||||||||
Net income | 13,446 | 12,149 | 2,738 | |||||||||
Less preferred stock dividends and discount accretion | 1,951 | 1,922 | 1,896 | |||||||||
Net income available to common shareholders | $ | 11,495 | $ | 10,227 | $ | 842 | ||||||
Per Common Share | ||||||||||||
Net income – basic and diluted | $ | 1.54 | $ | 1.37 | $ | .11 | ||||||
Cash dividends declared | - | - | - | |||||||||
Weighted Average Common Shares Outstanding | ||||||||||||
Basic and diluted | 7,474 | 7,457 | 7,424 |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive (Loss) Income
(In thousands) | ||||||||||||
Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
Net income (loss) | $ | 6,932 | $ | (44,742 | ) | $ | 4,395 | |||||
Other comprehensive income (loss): | ||||||||||||
Unrealized holding (loss) gain on available for sale securities arising during the period on securities held at end of period, net of tax of $377, $2,028, and $2,613, respectively | (701 | ) | 3,767 | 4,853 | ||||||||
Reclassification adjustment for prior period unrealized (gain) loss previously reported in other comprehensive income recognized during current period, net of tax of $1,863, $1,187, and $85, respectively | (3,459 | ) | (2,204 | ) | (158 | ) | ||||||
Change in unfunded portion of postretirement benefit obligations, net of tax of $643, $234, and $613, respectively | 1,194 | (434 | ) | 1,146 | ||||||||
Other comprehensive (loss) income | (2,966 | ) | 1,129 | 5,841 | ||||||||
Comprehensive income (loss) | $ | 3,966 | $ | (43,613 | ) | $ | 10,236 |
(In thousands) | ||||||||||||
Years Ended December 31, | 2013 | 2012 | 2011 | |||||||||
Net income | $ | 13,446 | $ | 12,149 | $ | 2,738 | ||||||
Other comprehensive (loss) income: | ||||||||||||
Unrealized holding (loss) gain on available for sale securities arising during the period on securities held at end of period, net of tax of $(6,996), $543, and $3,677, respectively | (12,992 | ) | 1,009 | 6,829 | ||||||||
Reclassification adjustment for prior period unrealized gain previously reported in other comprehensive income recognized during current period, net of tax of $23, $330, and $84, respectively | (42 | ) | (612 | ) | (156 | ) | ||||||
Change in unfunded portion of postretirement benefit obligations, net of tax of $1,589, $(92), and $(500), respectively | 2,953 | (171 | ) | (928 | ) | |||||||
Other comprehensive (loss) income | (10,081 | ) | 226 | 5,745 | ||||||||
Comprehensive income | $ | 3,365 | $ | 12,375 | $ | 8,483 |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands, except per share data) | Accumulated Other | Total | ||||||||||||||||||||||||||
Years Ended | Preferred | Common Stock | Capital | Retained | Comprehensive | Shareholders’ | ||||||||||||||||||||||
December 31, 2010, 2009, and 2008 | Stock | Shares | Amount | Surplus | Earnings | (Loss) Income | Equity | |||||||||||||||||||||
Balance at January 1, 2008 | 7,385 | $ | 923 | $ | 48,176 | $ | 122,498 | $ | (3,106 | ) | $ | 168,491 | ||||||||||||||||
Net income | 4,395 | 4,395 | ||||||||||||||||||||||||||
Other comprehensive income | 5,841 | 5,841 | ||||||||||||||||||||||||||
Cash dividends declared, $1.32 per share | (9,711 | ) | (9,711 | ) | ||||||||||||||||||||||||
Purchase of common stock | (43 | ) | (5 | ) | (281 | ) | (763 | ) | (1,049 | ) | ||||||||||||||||||
Stock options exercised, including related tax benefits | 1 | 30 | 30 | |||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | 14 | 2 | 250 | 252 | ||||||||||||||||||||||||
Expense related to employee stock purchase plan and stock options | 47 | 47 | ||||||||||||||||||||||||||
Balance at December 31, 2008 | 7,357 | 920 | 48,222 | 116,419 | 2,735 | 168,296 | ||||||||||||||||||||||
Issuance of 30,000 shares of Series A preferred stock | $ | 28,008 | 28,008 | |||||||||||||||||||||||||
Issuance of common stock warrant | 1,952 | 1,952 | ||||||||||||||||||||||||||
Net loss | (44,742 | ) | (44,742 | ) | ||||||||||||||||||||||||
Other comprehensive income | 1,129 | 1,129 | ||||||||||||||||||||||||||
Cash dividends declared-common, $.85 per share | (6,258 | ) | (6,258 | ) | ||||||||||||||||||||||||
Cash dividends declared-preferred, $48.73 per share | (1,462 | ) | (1,462 | ) | ||||||||||||||||||||||||
Preferred stock discount accretion | 340 | (340 | ) | |||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | 22 | 2 | 247 | 249 | ||||||||||||||||||||||||
Expense related to employee stock purchase plan | 55 | 55 | ||||||||||||||||||||||||||
Balance at December 31, 2009 | 28,348 | 7,379 | 922 | 50,476 | 63,617 | 3,864 | 147,227 | |||||||||||||||||||||
Net income | 6,932 | 6,932 | ||||||||||||||||||||||||||
Other comprehensive loss | (2,966 | ) | (2,966 | ) | ||||||||||||||||||||||||
Cash dividends declared-preferred, $50.00 per share | (1,500 | ) | (1,500 | ) | ||||||||||||||||||||||||
Preferred stock discount accretion | 371 | (371 | ) | |||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | 33 | 4 | 153 | 157 | ||||||||||||||||||||||||
Expense related to employee stock purchase plan | 46 | 46 | ||||||||||||||||||||||||||
Balance at December 31, 2010 | $ | 28,719 | 7,412 | $ | 926 | $ | 50,675 | $ | 68,678 | $ | 898 | $ | 149,896 |
(In thousands, except per share data) | Accumulated Other | Total | ||||||||||||||||||||||||||
Years Ended | Preferred | Common Stock | Capital | Retained | Comprehensive | Shareholders’ | ||||||||||||||||||||||
December 31, 2013, 2012, and 2011 | Stock | Shares | Amount | Surplus | Earnings | Income (Loss) | Equity | |||||||||||||||||||||
Balance at January 1, 2011 | $ | 28,719 | 7,412 | $ | 926 | $ | 50,675 | $ | 68,678 | $ | 898 | $ | 149,896 | |||||||||||||||
Net income | - | - | - | - | 2,738 | - | 2,738 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 5,745 | 5,745 | |||||||||||||||||||||
Cash dividends declared-preferred, $50.00 per share | - | - | - | - | (1,500 | ) | - | (1,500 | ) | |||||||||||||||||||
Preferred stock discount accretion | 396 | - | - | - | (396 | ) | - | - | ||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | - | 34 | 5 | 131 | - | - | 136 | |||||||||||||||||||||
Expense related to employee stock purchase plan | - | - | - | 42 | - | - | 42 | |||||||||||||||||||||
Balance at December 31, 2011 | 29,115 | 7,446 | 931 | 50,848 | 69,520 | 6,643 | 157,057 | |||||||||||||||||||||
Net income | - | - | - | - | 12,149 | - | 12,149 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 226 | 226 | |||||||||||||||||||||
Cash dividends declared-preferred, $50.00 per share | - | - | - | - | (1,500 | ) | - | (1,500 | ) | |||||||||||||||||||
Preferred stock discount accretion | 422 | - | - | - | (422 | ) | - | - | ||||||||||||||||||||
Repurchase of common stock warrant | - | - | - | (75 | ) | - | - | (75 | ) | |||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | - | 24 | 3 | 125 | - | - | 128 | |||||||||||||||||||||
Expense related to employee stock purchase plan | - | - | - | 36 | - | - | 36 | |||||||||||||||||||||
Balance at December 31, 2012 | 29,537 | 7,470 | 934 | 50,934 | 79,747 | 6,869 | 168,021 | |||||||||||||||||||||
Net income | - | - | - | - | 13,446 | - | 13,446 | |||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (10,081 | ) | (10,081 | ) | |||||||||||||||||||
Cash dividends declared-preferred, $50.00 per share | - | - | - | - | (1,500 | ) | - | (1,500 | ) | |||||||||||||||||||
Preferred stock discount accretion | 451 | - | - | - | (451 | ) | - | - | ||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | - | 9 | 1 | 132 | - | - | 133 | |||||||||||||||||||||
Expense related to employee stock purchase plan | - | - | - | 36 | - | - | 36 | |||||||||||||||||||||
Balance at December 31, 2013 | $ | 29,988 | 7,479 | $ | 935 | $ | 51,102 | $ | 91,242 | $ | (3,212 | ) | $ | 170,055 |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended December 31, (In thousands) | 2013 | 2012 | 2011 | |||||||||
Cash Flows from Operating Activities | ||||||||||||
Net income | $ | 13,446 | $ | 12,149 | $ | 2,738 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 4,114 | 4,543 | 4,798 | |||||||||
Net premium amortization of available for sale investment securities | 5,027 | 5,312 | 3,916 | |||||||||
Provision for loan losses | (2,600 | ) | 2,772 | 13,487 | ||||||||
Deferred income tax benefit | (473 | ) | (1,043 | ) | (2,227 | ) | ||||||
Noncash employee stock purchase plan expense | 36 | 36 | 42 | |||||||||
Mortgage loans originated for sale | (52,016 | ) | (84,496 | ) | (41,128 | ) | ||||||
Proceeds from sale of mortgage loans | 50,957 | 86,563 | 41,981 | |||||||||
Gains on sale of mortgage loans, net | (1,036 | ) | (1,918 | ) | (982 | ) | ||||||
Loss on disposal and write downs of premises and equipment, net | 7 | 257 | 3 | |||||||||
Net loss on sale and write downs of other real estate | 5,702 | 4,084 | 5,945 | |||||||||
Net loss (gain) on sale of available for sale investment securities | 50 | (1,209 | ) | (1,355 | ) | |||||||
Increase in cash surrender value of company-owned life insurance | (926 | ) | (961 | ) | (918 | ) | ||||||
Death benefits in excess of cash surrender value on company-owned life insurance | - | (529 | ) | - | ||||||||
Decrease in accrued interest receivable | 173 | 545 | 639 | |||||||||
(Increase) decrease in other assets | (241 | ) | 1,296 | 372 | ||||||||
Decrease in accrued interest payable | (233 | ) | (1,005 | ) | (1,436 | ) | ||||||
Increase in other liabilities | 2,036 | 2,014 | 2,187 | |||||||||
Net cash provided by operating activities | 24,023 | 28,410 | 28,062 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Proceeds from maturities and calls of investment securities: | ||||||||||||
Available for sale | 123,231 | 219,141 | 191,345 | |||||||||
Held to maturity | 55 | 55 | 55 | |||||||||
Proceeds from sale of available for sale investment securities | 2,233 | 135,193 | 201,093 | |||||||||
Purchases of available for sale investment securities | (190,306 | ) | (333,116 | ) | (538,370 | ) | ||||||
Principal collected on loans originated for investment, net | 5,540 | 29,818 | 83,463 | |||||||||
Proceeds from surrender of company-owned life insurance | - | - | 2,248 | |||||||||
Proceeds from death benefits of company-owned life insurance | - | 1,051 | - | |||||||||
Purchases of premises and equipment | (3,525 | ) | (1,675 | ) | (2,679 | ) | ||||||
Proceeds from sale of other real estate | 9,458 | 12,278 | 9,834 | |||||||||
Proceeds from disposals of equipment | 28 | 429 | 5 | |||||||||
Net cash (used in) provided by investing activities | (53,286 | ) | 63,174 | (53,006 | ) | |||||||
Cash Flows from Financing Activities | ||||||||||||
Net decrease in deposits | (595 | ) | (24,255 | ) | (28,507 | ) | ||||||
Net increase (decrease) in federal funds purchased and other short-term borrowings | 5,040 | (2,939 | ) | (20,387 | ) | |||||||
Proceeds from securities sold under agreements to repurchase and other long-term borrowings | 754 | - | - | |||||||||
Repayments of securities sold under agreements to repurchase and other long-term borrowings | (2,171 | ) | (61,397 | ) | (12,545 | ) | ||||||
Dividends paid, preferred | (1,500 | ) | (1,500 | ) | (1,500 | ) | ||||||
Repurchase of common stock warrant | - | (75 | ) | - | ||||||||
Shares issued under employee stock purchase plan | 133 | 128 | 136 | |||||||||
Net cash provided by (used in) financing activities | 1,661 | (90,038 | ) | (62,803 | ) | |||||||
Net (decrease) increase in cash and cash equivalents | (27,602 | ) | 1,546 | (87,747 | ) | |||||||
Cash and cash equivalents at beginning of year | 95,855 | 94,309 | 182,056 | |||||||||
Cash and cash equivalents at end of year | $ | 68,253 | $ | 95,855 | $ | 94,309 | ||||||
Supplemental Disclosures | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 12,228 | $ | 19,263 | $ | 26,106 | ||||||
Income taxes | 6,150 | 3,800 | 2,900 | |||||||||
Transfers from loans to other real estate | 6,110 | 33,913 | 26,586 | |||||||||
Transfers from premises to other real estate | - | 212 | - | |||||||||
Sale and financing of other real estate | 5,711 | 3,358 | 3,195 |
See accompanying notes to consolidated financial statements.
Years Ended December 31, (In thousands) | 2010 | 2009 | 2008 | |||||||||
Cash Flows from Operating Activities | ||||||||||||
Net income (loss) | $ | 6,932 | $ | (44,742 | ) | $ | 4,395 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 5,359 | 6,077 | 6,642 | |||||||||
Net premium amortization (discount accretion) of investment securities: | ||||||||||||
Available for sale | 2,232 | 955 | (179 | ) | ||||||||
Held to maturity | (1 | ) | ||||||||||
Provision for loan losses | 17,233 | 20,768 | 5,321 | |||||||||
Goodwill impairment | 52,408 | |||||||||||
Deferred income tax benefit | (3,392 | ) | (9,905 | ) | (2,046 | ) | ||||||
Noncash stock option expense and employee stock purchase plan expense | 46 | 55 | 47 | |||||||||
Mortgage loans originated for sale | (50,084 | ) | (45,806 | ) | (17,347 | ) | ||||||
Proceeds from sale of mortgage loans | 50,761 | 46,994 | 16,185 | |||||||||
Gains on sale of mortgage loans, net | (1,244 | ) | (1,034 | ) | (407 | ) | ||||||
Loss on disposal of premises and equipment, net | (30 | ) | 183 | 17 | ||||||||
Net loss (gain) on sale and write downs of repossessed real estate | 4,878 | 1,074 | (149 | ) | ||||||||
Net (gain) loss on sale of available for sale investment securities | (8,889 | ) | (3,488 | ) | 166 | |||||||
Other-than-temporary impairment of investment securities | 13,962 | |||||||||||
Decrease in accrued interest receivable | 2,123 | 2,787 | 1,169 | |||||||||
Income from company-owned life insurance | (1,044 | ) | (1,230 | ) | (1,225 | ) | ||||||
Death benefits in excess of cash surrender value on company-owned life insurance | (241 | ) | ||||||||||
Decrease (increase) in other assets | 5,054 | (1,027 | ) | (5,666 | ) | |||||||
Decrease in accrued interest payable | (1,874 | ) | (1,126 | ) | (634 | ) | ||||||
Increase in other liabilities | 320 | 2,095 | 432 | |||||||||
Net cash provided by operating activities | 28,140 | 25,037 | 20,683 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Proceeds from maturities and calls of investment securities: | ||||||||||||
Available for sale | 315,480 | 239,192 | 219,724 | |||||||||
Held to maturity | 45 | 840 | 2,030 | |||||||||
Proceeds from sale of available for sale investment securities | 311,243 | 183,002 | 34,055 | |||||||||
Purchases of available for sale investment securities | (522,774 | ) | (439,777 | ) | (251,687 | ) | ||||||
Purchase of restricted stock investments | (368 | ) | (206 | ) | (480 | ) | ||||||
Loans originated for investment less (greater) than principal collected | 50,085 | 5,920 | (36,357 | ) | ||||||||
Proceeds from liquidation of company-owned life insurance | 8,567 | |||||||||||
Proceeds from death benefits of company-owned life insurance | 446 | |||||||||||
Purchases of premises and equipment | (4,298 | ) | (2,165 | ) | (10,640 | ) | ||||||
Proceeds from sale of repossessed real estate | 13,564 | 3,978 | 6,348 | |||||||||
Proceeds from disposals of equipment | 60 | 422 | 2,357 | |||||||||
Net cash provided by (used in) investing activities | 172,050 | (8,794 | ) | (34,650 | ) | |||||||
Cash Flows from Financing Activities | ||||||||||||
Net (decrease) increase in deposits | (169,861 | ) | 39,318 | 120,018 | ||||||||
Net increase (decrease) in federal funds purchased and other short-term borrowings | 194 | (30,259 | ) | (3,281 | ) | |||||||
Proceeds from securities sold under agreements to purchase and other long-term debt | 27,000 | |||||||||||
Repayments of securities sold under agreements to purchase and other long-term debt | (64,723 | ) | (18,729 | ) | (7,648 | ) | ||||||
Proceeds from issuance of preferred stock, net of issue costs | 29,961 | |||||||||||
Dividends paid, common and preferred stock | (2,237 | ) | (9,222 | ) | (9,720 | ) | ||||||
Purchase of common stock | (1,049 | ) | ||||||||||
Shares issued under Employee Stock Purchase Plan | 157 | 249 | 252 | |||||||||
Stock options exercised and related tax benefits | 30 | |||||||||||
Net cash (used in) provided by financing activities | (236,470 | ) | 11,318 | 125,602 | ||||||||
Net (decrease) increase in cash and cash equivalents | (36,280 | ) | 27,561 | 111,635 | ||||||||
Cash and cash equivalents at beginning of year | 218,336 | 190,775 | 79,140 | |||||||||
Cash and cash equivalents at end of year | $ | 182,056 | $ | 218,336 | $ | 190,775 | ||||||
Supplemental Disclosures | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 36,822 | $ | 48,191 | $ | 55,764 | ||||||
Income taxes | 2,989 | 2,450 | 6,600 | |||||||||
Transfers from loans to other real estate | 17,771 | 20,332 | 14,622 | |||||||||
Transfers from premises to other real estate | 1,506 | |||||||||||
See accompanying notes to consolidated financial statements. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Farmers Capital Bank Corporation and subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general practices applicable to the banking industry. Significant accounting policies are summarized below.
Principles of Consolidation and Nature of Operations
The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a bank holding company, and its bank and nonbank subsidiaries. Banksubsidiaries.Bank subsidiaries include Farmers Bank & Capital Trust Company (“Farmers Bank”) in Frankfort, KY, United Bank & Trust Company (“United Bank”) in Versailles, KY, First Citizens Bank (“First Citizens”) in Elizabethtown, KY, and itsCitizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) in Newport, KY.
Farmers Bank’s significant wholly-owned subsidiaries include EG Properties, Inc., Leasing One Corporation (“Leasing One”), and Farmers Capital Insurance Corporation (“Farmers Insurance”). EG Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Farmers Bank. Leasing One is a commercial leasing company in Frankfort, KY, and Farmers Insurance is an insurance agency in Frankfort, KY. The Lawrenceburg Bank and Trust Company, which previously was a separate bank subsidiary of the Parent Company, was merged into Farmers Bank during the second quarter of 2010; First Citizens Bank in Elizabethtown, KY; United Bank & Trust Company (“United Bank”) in Versailles, KY which, during 2008, was the surviving company after the merger with two sister companies of Farmers Bank and Trust Company and Citizens Bank of Jessamine County; United Bank hadhas one wholly-owned subsidiary, at year-end 2010, EGT Properties, Inc. EGT Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank;Bank. First Citizens has one wholly-owned subsidiary, HBJ Properties, LLC. HBJ Properties, LLC is involved in real estate management and Citizens Bankliquidation for certain repossessed properties of Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”);First Citizens. Citizens Northern hadhas one wholly-owned subsidiary, at year-end 2010, ENKY Properties, Inc. ENKY Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Citizens Northern.
The Company has three active nonbank subsidiaries, FCB Services, Inc. (“FCB Services”), FFKT Insurance Services, Inc. (“FFKT Insurance”), and EKT Properties, Inc. (“EKT”). FCB Services is a data processing subsidiary located in Frankfort, KY that provides services to the Company’s banks as well as unaffiliated entities. FFKT Insurance is a captive property and casualty insurance company insuring primarily deductible exposures and uncovered liability related to properties of the Company. EKT was created in 2008formed to manage and liquidate certain real estate properties repossessed by the Company. In addition, theThe Company has three subsidiaries organized as Delaware statutory trusts that are not consolidated into its financial statements. These trusts were formed for the purpose of issuing trust preferred securities. All significant intercompany transactions and balances are eliminated in consolidation.
The Company provides financial services at its 36 locations in 23 communities throughout Central and Northern Kentucky to individual, business, agriculture, government, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential mortgage, commercial lending, and consumer installment loans. Substantially all loans and leases are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans and leases are expected to be repaid from cash flow from operations of businesses. Farmers Bank has served as the general depository for the Commonwealth of Kentucky for over 70 years and also provides investment and other services to the Commonwealth. Other services include, but are not limited to, cash management services, issuing letters of credit, safe deposit box rental, and providing funds transfer services. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements. The allowance for loan losses,
carrying value of other real estate owned, actuarial assumptions used to calculate postretirement benefits, and the fair values of financial instruments are estimates that are particularly subject to change.
Reclassifications
Certain amounts in the accompanying consolidated financial statements presented for prior years have been reclassified to conform to the 20102013 presentation. These reclassifications do not affect net income or total shareholders’ equity as previously reported.
Segment Information
The Company provides a broad range of financial services to individuals, corporations, and others through its 36 banking locations throughout Central and Northern Kentucky. These services primarily include the activities of lending, receiving deposits, providing cash management services, safe deposit box rental, and trust activities. Whileactivities.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. Operating segments are aggregated
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include the following: cash on hand, deposits from other financial institutions that have an initial maturity of less than 90 days when acquired by the Company, federal funds sold, and securities purchased under agreements to resell. Generally, federal funds sold and securities purchased under agreements to resell are purchased and sold for one-day periods. Net cash flows are reported for loan,, deposit, and short-term borrowing transactions.
Investment Securities
Investments in debt and equity securities are classified into three categories. Securities that management has the positive intent and ability to hold until maturity are classified as held to maturity. Securities that are bought and held specifically for the purpose of selling them in the near term are classified as trading securities. The Company had no securities classified as trading during 2010, 2009,2013, 2012, or 2008.2011. All other securities are classified as available for sale. Securities are designated as available for sale if they might be sold before maturity. Securities classified as available for sale are carried at estimated fair value. Unrealized holding gains and losses for available for sale securities are reported net of deferred income taxes in other comprehensive income. Investments classified as held to maturity are carried at amortized cost.
Interest income includes amortization and accretion of purchase premiums or discounts. Premiums and discounts on securities are amortized using the interest method over the expected life of the securities without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Realized gains and losses on the sales of securities are recorded on the trade date and computed on the basis of specific identification of the adjusted cost of each security and are included in noninterest income.
The Company evaluates investment securities for other-than-temporary impairment (“OTTI”)OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. A decline in the market value of investment securities below cost that is deemed other-than-temporary results in a charge to earnings and the establishment of a new cost basis for the security. Substantially all of the Company’s investment securities are debt securities. Insecurities.In estimating OTTI for debt securities, management considers each of the following: (1) the length of time and extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether 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 in fair value. The assessment of whether an OTTI charge exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at a point in time.
Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under Financial Accounting Standard Board (“FASB”) Accounting Standards CodificationTM (“ASC”) 320, “Investments-DebtTopic320, “Investments-Debt and Equity Securities”.Securities.” In determining OTTI under ASC Topic 320 the Company considers many factors, including those enumerated above. When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Company 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.basis. If the Company 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 beis 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 the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current-period loss, OTTI is 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.
Federal Home Loan Bank and Federal Reserve BoardBank Stock
Federal Home Loan Bank (“FHLB”) and Federal Reserve BoardBank stock is carried at cost on the consolidated balance sheets under the caption “Other assets”.assets.” These stocks are classified as restricted securities and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The amountsamount outstanding at December 31, 20102013 and 2009 were $9,515,000 and $9,148,000, respectively.
Loans and Interest Income
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their unpaid principal amount outstanding adjusted for any charge-offs and any deferred fees or costs on originated loans. Interest income on loans is recognized using the interest method based on loan principal amounts outstanding during the period. Interest income also includes amortization and accretion of any premiums or discounts over the expected life of acquired loans at the time of purchase or business acquisition. NetLoan origination fees, and incrementalnet of certain direct origination costs, associated with loan origination are deferred and amortized as yield adjustments over the contractual term of the loans.
The Company to disaggregatedisaggregates certain disclosure information related to loans, the related allowance for loan losses, and credit quality measures by either portfolio segment or by loan class. The Company segregates its loan portfolio segments based on similar risk characteristics and are as follows: real estate loans, commercial loans, and consumer loans. Portfolio segments are further disaggregated into classes for certain required disclosures as follows:
Portfolio Segment | Class |
Real estate loans | Real estate Real estate mortgage - residential Real estate |
Commercial loans | Commercial and industrial Depository institutions Agriculture production and other loans to farmers States and political subdivisions Leases Other |
Consumer loans | Secured Unsecured |
Loan disclosures beginning at year-end 2010 include presenting certain disaggregated information based on recorded investment. The recorded investment in a loan includes its principal amount outstanding adjusted for certain items that include net deferred loan costs or fees, unamortized premiums or discounts, charge offs, and accrued interest. The Company had a total of $856,000$492 thousand and $574 thousand of net deferred loan costs at year-end 20102013 and 2012, respectively, included in the carrying
amount of loans on the balance sheet, which represents .07%.05% and .06% of average loans outstanding for 2010.2013 and 2012. The amount of net deferred loans costs are not material and are omitted from the computation of the recorded investment included in Note 43 that follows. Similarly, accrued interest receivable on loans was $7,258,000$3.4 million and $3.7 million at year-end 20102013 and 2012, respectively, or .6%.3% and .4% of average loans outstanding for 2010 and has also been omitted from certain information presented in Note 4.
The Company’sCompany has a loan policy in place that is amended and approved from time to time as needed to reflect current economic conditions and product offerings in its markets. The policy establishes written procedures concerning areas such as the lending authorities of loan officers, committee review and approval of certain credit requests, underwriting criteria, policy exceptions, appraisal requirements, and loan review. Credit is extended to borrowers based primarily on their ability to repay as demonstrated by income and cash flow analysis.
Loans secured by real estate make up the largest segment of the Company’s loan portfolio. If a borrower fails to repay a loan secured by real estate, the Company may liquidate the collateral in order to satisfy the amount owed. Determining the value of real estate is a key component to the lending process for real estate backed loans. If the fair value of real estate (less estimated cost to sell) securing a collateral dependent loan declines below the outstanding loan amount, the Company will write down the carrying value of the loan and thereby incur a loss. The Company uses independent third party state-certifiedstate certified or licensed appraisers in accordance with its loan policy to mitigate risk when underwriting real estate loans. Cash flow analysis of the borrower, loan to value limits as adopted by loan policy, and other customary underwriting standards are also in place which are designed to maximize credit quality and mitigate risks associated with real estate lending.
Commercial loans are made to businesses and are secured mainly by assets such as inventory, accounts receivable, machinery, fixtures and equipment, or other business assets. Commercial lending involves significant risk, as loan repayments are more dependent on the successful operation or management of the business and its cash flows. Consumer lending includes loans to individuals mainly for personal autos, boats, or a variety of other personal uses and may be secured or unsecured. Loan repayment associated with consumer loans is highly dependent upon the borrower’s continuing financial stability, which is heavily influenced by local unemployment rates. The Company mitigates its risk exposure to each of its loan segments by analyzing the borrower’s repayment capacity, imposing restrictions on the amount it will loan compared to estimated collateral values, limiting the payback periods, and following other customary underwriting practices as adopted in its loan policy.
The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. All interestInterest accrued but not received for loansa loan placed on nonaccrual status is reversed against interest income. Cash payments received on nonaccrual loans generally are applied to principal and interest income is only recorded once principal recovery is reasonably assured.until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company’s policy for placing a loan on nonaccrual status or subsequently returning a loan to accrual status does not differ based on its portfolio class or segment.
Commercial and real estate loans delinquent in excess of 120 days and consumer loans delinquent in excess of 180 days are charged off,, unless the collateral securing the debt is of such value that any loss appears to be unlikely. In all cases, loans are charged off at an earlier date if classified as loss under its loan grading process or as a result of regulatory examination. The Company’s charge-off policy for impaired loans does not differ from the charge-off policy for loans outside the definition of impairedimpaired.
.
The Company’s operations include a limited amount of mortgage banking. Mortgage banking activities include the origination of fixed-rate residential mortgage loans for sale to various third-party investors. Mortgage loans originated and intended for sale in the secondary market, principally under programs with the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and other commercial lending institutions are carried at the lower of cost or estimated fair value determined in the aggregate and included in net loans on the balance sheet until sold.
These loans are sold with the related servicing rights either retained or released by the Company depending on the economic conditions present at the time of origination. Mortgage loans held for sale included in net loans totaled $2,466,000$4.1 million and $1,951,000$2.5 million at December 31, 20102013 and December 31, 2009,2012, respectively. Mortgage banking revenues, including origination fees, servicing fees, net gains or losses on sales of mortgages,mortgage loans, and other fee income were 1.20%1.6%, .97%2.4%, and .44%1.28% of the Company’s total revenue for the years ended December 31, 2010, 2009,2013, 2012, and 20082011, respectively.
.
The provision for loan losses represents charges or credits made to earnings to maintain an allowance for loan losses at ana level considered adequate level based on credit losses specifically identified in the loan portfolio, as well as management’s best estimate ofto provide for probable incurred loancredit losses in the remainder of the portfolio at the balance sheet date. The allowance for loan losses is a valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company estimates the adequacy of the allowance balance required using a risk-rated methodology. Many factors are considered when estimatingmethodology which is based on the allowance. These include, but are not limited to,Company’s past loan loss experience, an assessmentknown and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the financial condition of individual borrowers, a determination of the value and adequacy ofany underlying collateral the condition of the local economy, an analysis of the levels and trendssecuring loans, composition of the loan portfolio, current economic conditions, and a reviewother relevant factors. This evaluation is inherently subjective as it requires significant judgment and the use of delinquent and classified loans. estimates that may be susceptible to change.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful.impaired. The general component covers non-classifiednon-impaired loans and is based on historical loss experience adjusted for current risk 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. Actual loan losses could differ significantly from the amounts estimated by management.
The Company’s risk-rated methodology includes segregating non-impaired watch list and past due loans from the general portfolio and allocating specific amountsa loss percentage to these loans depending on their status. For example, watch list loans, which may be identified by the internal loan review risk-rating process or by regulatory examiner classification, are assigned a certain loss percentage while loans past due 30 days or more are assigned a different loss percentage. Each of these percentages considers past experience as well as current factors. The remainder of the general loan portfolio is segregated into portfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, and consumer loans. Each of these portfolio segments is assigned a loss percentage based on their respective rolling twelve quarter historical loss percentage. Additional allocationsrates, adjusted for qualitative risk factors. During the third quarter of 2013, the Company lengthened the look-back period it uses to determine historical loss rates to the previous 16 quarters from 12 quarters. The change in the look-back period is the result of the Company’s ongoing monitoring and evaluation of the adequacy of its allowance may thenfor loan losses. The longer look-back period better reflects the Company’s loss estimates based on current market conditions. Lengthening the look-back period resulted in a $320 thousand increase in the allowance for loan losses.
The qualitative risk factors used in the methodology are consistent with the guidance in the most recent Interagency Policy Statement on the Allowance for Loan Losses issued. Each factor is supported by a detailed analysis performed at each subsidiary bank and is both measureable and supportable. Some factors include a minimum allocation in some instances where loss levels are extremely low and it is determined to be madeprudent from a safety and soundness perspective. Qualitative risk factors that are used in the methodology include the following for subjective factors, such as those mentioned above, as determined by senior managers who are knowledgeable about these matters. During 2007,each loan portfolio segment:
● | Delinquency trends |
● | Trends in net charge-offs |
● | Trends in loan volume |
● | Lending philosophy risk |
● | Management experience risk |
● | Concentration of credit risk |
● | Economic conditions risk |
A loan is impaired when, based on current information and events, it is probable that the Company further identified signswill be unable to collect all amounts due according to the contractual terms of deterioration in certain real estate development loans that have remained present into 2010 and specific allowances related to these loansthe loan agreement. Loans for which the terms have been recorded.
The Company accounts for impaired loans in accordance with ASC Topic 310, ““Receivables”Receivables.” ASC Topic 310 requires that impaired loans be measured at the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. A loan is impaired when full payment under the contractual terms is not expected. Generally, impairedImpaired loans aremay also in nonaccrual status.be classified as nonaccrual. In certainmany circumstances, however, the Company may continuecontinues to accrue interest on an impaired loan. Cash receipts on accruing impaired loans are typically applied to the recorded investment in the loan, including any accrued interest receivable. Cash payments received on nonaccrual impaired loans generally are applied to principal until qualifying for return to accrual status. Loans that are part of a large group of smaller-balance homogeneous loans, such as residential mortgage,, consumer, and smaller-balance commercial loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures.impairment. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception, or at the fair value of collateral. The Company determines the amount of reserve for troubled debt restructurings that subsequently default in accordance with its accounting policy for the allowance for loan losses.
Mortgage Servicing Rights
Mortgage servicing rights are recognized in other assets on the Company’s consolidated balance sheet at their initial fair value on loans sold.sold with servicing retained. Fair value is based on market priceprices for comparable mortgage servicing contracts.contracts when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Mortgage servicing rights are subsequently measured using the amortization method in which the mortgage servicing right is expensed in proportion to, and over the period of, the estimated future net servicing revenues.income of the underlying loans. Impairment is evaluated based on the fair value of the rights, using groupings ofgrouping the underlying loans as toby interest rates. Any impairmentImpairment of a grouping is reported as a valuation allowance. Capitalized mortgage servicing rights were $597,000$785 thousand and $463,000$795 thousand at December 31, 20102013 and 2009.2012, respectively. No impairment of the asset was determined to exist on either of these dates.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19.18. 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.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, thatwhich are 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.
Intangible Assets
Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Such intangible assets consist of core deposit and acquired customer relationship intangible assets arising from business acquisitions. TheyIntangible assets are initially measured at fair value and then are amortized on an accelerated method over their estimated
useful lives, which range between seven and 10 years.
Other Real Estate Owned
Other real estate owned (“OREO”) and held for sale in the accompanying consolidated balance sheets includes properties acquired by the Company through, or in lieu of, actual loan foreclosures. OREO is initially carried at fair value less estimated costs to sell. Fair value of assets is generally based on third party appraisals of the property that includes comparable sales data. If the carrying amount exceeds fair value less estimated costs to sell, an impairment loss is recorded through expense. CostsThese assets are subsequently accounted for at the lower of carrying amount or fair value less estimated costs to sell. Operating costs after acquisition are expensed.
Income Taxes
Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities, except for the deferred tax assets and liabilities related to business combinations or components of other comprehensive income. Deferredincome.Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. 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 files a consolidated federal income tax return with its subsidiaries. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis.
Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily on the straight-line method over the estimated useful lives generally ranging from two to seven years for furniture and equipment and generally ten to 40 years for buildings and related components. Leasehold improvements are amortized over the shorter of the estimated useful lives or terms of the related leases on the straight-line method. Maintenance, repairs, and minor improvements are charged to operating expenses as incurred and major improvements are capitalized. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in noninterest income. Land is carried at cost.
Company-owned Life Insurance
The Company has purchased life insurance policies on certain key employees with their knowledge and written consent. Company-owned life insurance is recorded on the consolidated balance sheet at its cash surrender value, i.e.which is the amount that can be realized under the insurance contract onat the consolidated balance sheet.sheet date. The related change in cash surrender value and proceeds received under the policies are reported on the consolidated statementstatements of income under the caption “Income from company-owned life insurance”.
Related Party Transactions
In the ordinary course of business, the Company offers loan and deposit products to its directors, executive officers, and principal shareholders-includingshareholders - including affiliated companies of which they are principal owners (“Related Parties”). These products are offered on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties, and these receivables and deposits are included in loans and deposits in the Company’s consolidated balance sheets. Additional information related to these transactions can be found in Note 3 and Note 7 to these audited consolidated financial statements.6.
The Company makes payments to Related Parties in the normal course of business for various services, primarily related to legal fees. For example, certain directors of the Parent Company and its subsidiary banks are partners in law firms that act as counsel to the Company. The following table represents the amount and type of payments to Related Parties, other than director fees, for the periods indicated:
(In thousands) Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
Legal fees | $ | 499 | $ | 532 | $ | 370 | ||||||
Insurance commissions | 5 | |||||||||||
Premises rental | 10 | |||||||||||
Other | 16 | 19 | 16 | |||||||||
Total | $ | 520 | $ | 551 | $ | 396 |
(In thousands) Years Ended December 31, | 2013 | 2012 | 2011 | |||||||||
Legal fees | $ | 169 | $ | 445 | $ | 310 | ||||||
Commissions and fees related to the sale of repossessed commercial real estate and property management | 9 | 140 | - | |||||||||
Insurance commissions | 8 | 24 | 28 | |||||||||
Premises rental | - | - | 3 | |||||||||
Other | 6 | - | 8 | |||||||||
Total | $ | 192 | $ | 609 | $ | 349 |
Retirement Plans
The Company maintains a 401(k) salary savings plan and records expense based on the amount of its matching contributions of employee deferrals. The Company also has a nonqualified supplemental retirement plan for certain key employees that it acquired in connection with the Citizens Northern acquisition. Supplemental retirement plan expense allocates the benefits over years of service.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is determined by dividing net income (loss) available to common shareholders by the weighted average total number of common shares issued and outstanding. Net income (loss) available to common shareholders represents net income (loss) adjusted for preferred stock dividends including dividends declared, accretion of discounts on preferred stock issuances, and cumulative dividends related to the current dividend period that have not been declared as of the end of the period.
Diluted net income per common share is determined by dividing net income available to common shareholders by the total weighted average number of common shares issued and outstanding plus amounts representing the dilutive effect of stock options outstanding and outstanding warrants. The effects of stock options and outstanding warrants are excluded from the computation of diluted earnings per common share in periods in which the effect would be antidilutive. Dilutive potential common shares are calculated using the treasury stock method.
Net income (loss) per common share computations were as follows atfor the years ended December 31, 2010, 2009,2013, 2012, and 2008:
(In thousands, except per share data) Years Ended December 31, | 2010 | 2009 | 2008 | |||||||||
Net income (loss), basic and diluted | $ | 6,932 | $ | (44,742 | ) | $ | 4,395 | |||||
Preferred stock dividends and discount accretion | (1,871 | ) | (1,802 | ) | ||||||||
Net income (loss) available to common shareholders, basic and diluted | $ | 5,061 | $ | (46,544 | ) | $ | 4,395 | |||||
Average common shares outstanding, basic and diluted | 7,390 | 7,365 | 7,357 | |||||||||
Net income (loss) per common share, basic and diluted | $ | .68 | $ | (6.32 | ) | $ | .60 |
(In thousands, except per share data) Years Ended December 31, | 2013 | 2012 | 2011 | |||||||||
Net income, basic and diluted | $ | 13,446 | $ | 12,149 | $ | 2,738 | ||||||
Less preferred stock dividends and discount accretion | 1,951 | 1,922 | 1,896 | |||||||||
Net income available to common shareholders, basic and diluted | $ | 11,495 | $ | 10,227 | $ | 842 | ||||||
Average common shares outstanding, basic and diluted | 7,474 | 7,457 | 7,424 | |||||||||
Net income per common share, basic and diluted | $ | 1.54 | $ | 1.37 | $ | .11 |
Stock options for 22,049, 24,049, 57,621, and 59,62124,049 shares of common stock for 2010, 2009, and 2008, respectively, were not included in the determination of dilutive earningsdiluted net income per common share for 2013, 2012, and 2011, respectively, because they were antidilutive. Thereantidilutive.There were 223,992 potential common shares associated with a warrant issued to the U.S. Treasury that were excluded from the computation of earningsdiluted net income per common share for 2010 and 20092011 because they were antidilutive. There were no warrants outstanding prior to 2009.The Company repurchased the warrant from the Treasury during the third quarter of 2012.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the Company this includes net income, (loss), the after tax effect of changes in the net unrealized gains and losses on available for sale investment securities, and the after tax changes into the funded status of postretirement benefit plansplans.
.
Banking regulations require maintaining certain capital levels and currentlywhich limit the amount of dividends paid to the Company by its bank subsidiaries or bysubsidiaries. In addition, the Parent Company and two of its subsidiary banks must obtain regulatory approval to its shareholders.
Restrictions on Cash
The Company is required to maintain funds in interest bearing deposits in other bankscash and/or on the consolidated balance sheets are certain amounts that are held atdeposit with the Federal Reserve Bank in accordance with reserve requirements specified by the Federal Reserve Board of Governors. The required reserve requirement was $15,461,000$19.9 million and $12,827,000$17.0 million at December 31, 20102013 and 2009,2012, respectively.
Equity
Outstanding common shares purchased by the Company are retired. When common shares are purchased, the Company allocates a portion of the purchase price of the common shares that are retired to each of the following balance sheet line items: common stock, capital surplus, and retained earnings.
Trust Assets
Assets of the Company’s trust departments, other than cash on deposit at our subsidiaries,subsidiary banks, are not included in the accompanying financial statements because they are not assets of the Company.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
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.
Stock-Based Compensation
The Company recognizes compensation cost for its Employee Stock Purchase Plan (“ESPP”) and for stock options granted 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 ESPP and stock option awards. Compensation cost is recognized over the required service period, generally defined as the vesting period, on a straight-line basis.
The Company’s ESPP was approved by its shareholders at the Company’s 2004 annual meeting.shareholders in 2004. The purpose of the ESPP is to provide a means by which eligible employees may purchase, at a discount, shares of the Company’s common stock of the Company through payroll withholding. The purchase price of the shares is equal to 85% of their fair market value on specified dates as defined in the plan. The ESPP was effective
Following are the weighted average assumptions used and estimated fair market value for the ESPP, which is considered a compensatory plan under ASC Topic 718, “Compensation-Stock Compensation”Compensation.”
ESPP | |||||||||||||
2010 | 2009 | 2008 | |||||||||||
Dividend yield | 0 | % | 4.63 | % | 4.24 | % | |||||||
Expected volatility | 66.0 | 56.8 | 24.1 | ||||||||||
Risk-free interest rate | .15 | .14 | 1.85 | ||||||||||
Expected life (in years) | .25 | .25 | .25 | ||||||||||
Fair value | $ | 1.45 | $ | 3.67 | $ | 4.05 |
ESPP | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Expected volatility | 45.7 | % | 53.5 | % | 65.2 | % | ||||||
Dividend yield | - | - | - | |||||||||
Risk-free interest rate | .06 | .07 | .06 | |||||||||
Expected life (in years) | .25 | .25 | .25 | |||||||||
Fair value | $ | 4.01 | $ | 1.54 | $ | 1.19 |
Adoption of New Accounting Standards
ASC Topic 860, “Transfers and Servicing”.Effective January 1, 2010,2013, the Company adopted new accounting guidance under ASC Topic 860 that requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures about continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial position or results of operations.
(In thousands) Year Ended December 31, 2013 | Unrealized Gains and Losses on Available for Sale Investment Securities | Postretirement Benefit Obligation | Total | |||||||||
Beginning balance | $ | 9,411 | $ | (2,542 | ) | $ | 6,869 | |||||
Other comprehensive (loss) income before reclassifications | (12,992 | ) | 2,778 | (10,214 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income | (42 | ) | 175 | 133 | ||||||||
Net current-period other comprehensive (loss) income | (13,034 | ) | 2,953 | (10,081 | ) | |||||||
Ending balance | $ | (3,623 | ) | $ | 411 | $ | (3,212 | ) |
The following table presents amounts reclassified out |
(In thousands) Year Ended December 31, 2013 | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statement Where Net Income is Presented | |||
Unrealized gains and losses on available for sale investment securities | $ | 65 | Investment securities gains, net | ||
(23 | ) | Income tax expense | |||
$ | 42 | Net of tax | |||
Amortization related to postretirement benefits | |||||
Prior service costs | $ | (257 | ) | Salaries and employee benefits | |
Actuarial losses | (12 | ) | Salaries and employee benefits | ||
(269 | ) | Total before tax | |||
94 | Income tax benefit | ||||
$ | (175 | ) | Net of tax | ||
Total reclassifications for the period | $ | (133 | ) | Net of tax |
ASC Topic 310, “Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”2. Investment Securities The FASB issued accounting guidance under ASU No. 2010-20 that requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The objectives of the new guidance are intended to improve transparency regarding credit losses and the credit quality of loan and lease receivables. The new guidance requires the allowance for loan losses to be disclosed by portfolio segment, while credit quality information, impaired loans, and age analysis are to be presented by class. Disclosure of the nature and extent of troubled debt restructurings is also required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance.
The following tables summarize the amortized cost and estimated fair values of the securities portfolio at December 31, 20102013 and 20092012 and the corresponding amounts of gross unrealized gains and losses. The summary is divided into available for sale and held to maturity securities.
December 31, 2013 (In thousands) | Amortized | Gross Unrealized | Gross Unrealized | Estimated | ||||||||||||
Available For Sale | ||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 96,750 | $ | 155 | $ | 3,155 | $ | 93,750 | ||||||||
Obligations of states and political subdivisions | 132,311 | 2,056 | 2,397 | 131,970 | ||||||||||||
Mortgage-backed securities – residential | 379,238 | 5,071 | 6,232 | 378,077 | ||||||||||||
Mortgage-backed securities – commercial | 748 | - | 59 | 689 | ||||||||||||
Corporate debt securities | 7,266 | 40 | 1,049 | 6,257 | ||||||||||||
Mutual funds and equity securities | 2,082 | 15 | 20 | 2,077 | ||||||||||||
Total securities – available for sale | $ | 618,395 | $ | 7,337 | $ | 12,912 | $ | 612,820 | ||||||||
Held To Maturity | ||||||||||||||||
Obligations of states and political subdivisions | $ | 765 | $ | 62 | $ | - | $ | 827 |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
December 31, 2010 (In thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
Available For Sale | ||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 42,103 | $ | 58 | $ | 548 | $ | 41,613 | ||||||||
Obligations of states and political subdivisions | 75,004 | 923 | 1,128 | 74,799 | ||||||||||||
Mortgage-backed securities – residential | 314,799 | 7,527 | 2,396 | 319,930 | ||||||||||||
U.S. Treasury securities | 1,043 | 1 | 1,044 | |||||||||||||
Money market mutual funds | 145 | 145 | ||||||||||||||
Corporate debt securities | 7,441 | 835 | 6,606 | |||||||||||||
Equity securities | 45 | 45 | ||||||||||||||
Total securities – available for sale | $ | 440,580 | $ | 8,509 | $ | 4,907 | $ | 444,182 | ||||||||
Held To Maturity | ||||||||||||||||
Obligations of states and political subdivisions | $ | 930 | $ | 0 | $ | 86 | $ | 844 |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
December 31, 2009 (In thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
Available For Sale | ||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 90,889 | $ | 162 | $ | 299 | $ | 90,752 | ||||||||
Obligations of states and political subdivisions | 107,190 | 2,423 | 655 | 108,958 | ||||||||||||
Mortgage-backed securities – residential | 315,546 | 10,446 | 473 | 325,519 | ||||||||||||
U.S. Treasury securities | 2,997 | 5 | 3,002 | |||||||||||||
Money market mutual funds | 910 | 910 | ||||||||||||||
Corporate debt securities | 20,341 | 195 | 1,804 | 18,732 | ||||||||||||
Total securities – available for sale | $ | 537,873 | $ | 13,231 | $ | 3,231 | $ | 547,873 | ||||||||
Held To Maturity | ||||||||||||||||
Obligations of states and political subdivisions | $ | 975 | $ | 53 | $ | 922 |
December 31, 2012 (In thousands) | Amortized | Gross Unrealized | Gross Unrealized | Estimated | ||||||||||||
Available For Sale | ||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 75,945 | $ | 216 | $ | 66 | $ | 76,095 | ||||||||
Obligations of states and political subdivisions | 113,986 | 4,943 | 174 | 118,755 | ||||||||||||
Mortgage-backed securities – residential | 360,099 | 10,596 | 256 | 370,439 | ||||||||||||
Corporate debt securities | 6,638 | 44 | 856 | 5,826 | ||||||||||||
Mutual funds and equity securities | 1,962 | 33 | 2 | 1,993 | ||||||||||||
Total securities – available for sale | $ | 558,630 | $ | 15,832 | $ | 1,354 | $ | 573,108 | ||||||||
Held To Maturity | ||||||||||||||||
Obligations of states and political subdivisions | $ | 820 | $ | 136 | $ | - | $ | 956 |
At year-end 20102013 and 2009,2012, the Company held no investment securities of any single issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
The amortized cost and estimated fair value of the securities portfolio at December 31, 2010,2013, by contractual maturity, are detailed below. The summary is divided into available for sale and held to maturity securities. Expected maturities may differ from contractual maturities because borrowersissuers may have the right to call or prepay obligations with or without call or prepayment penalties. EquityMutual funds and equity securities in the available
Mortgage-backed securities are stated separately due to the nature of payment and prepayment characteristics of these securities, as principal is not due at a single date.
Available For Sale | Held To Maturity | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
December 31, 2010 (In thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Due in one year or less | $ | 7,634 | $ | 7,684 | ||||||||||||
Due after one year through five years | 48,507 | 48,646 | ||||||||||||||
Due after five years through ten years | 47,448 | 46,993 | ||||||||||||||
Due after ten years | 22,147 | 20,884 | $ | 930 | $ | 844 | ||||||||||
Mortgage-backed securities – residential | 314,799 | 319,930 | ||||||||||||||
Total | $ | 440,535 | $ | 444,137 | $ | 930 | $ | 844 |
Available For Sale | Held To Maturity | |||||||||||||||
December 31, 2013 (In thousands) | Amortized | Estimated | Amortized | Estimated | ||||||||||||
Due in one year or less | $ | 3,357 | $ | 3,367 | $ | - | $ | - | ||||||||
Due after one year through five years | 115,652 | 115,449 | - | - | ||||||||||||
Due after five years through ten years | 100,109 | 97,321 | 765 | 827 | ||||||||||||
Due after ten years | 17,209 | 15,840 | - | - | ||||||||||||
Mortgage-backed securities | 379,986 | 378,766 | - | - | ||||||||||||
Total | $ | 616,313 | $ | 610,743 | $ | 765 | $ | 827 |
Gross realized gains and losses on the sale of available for sale investment securities were as follows for the year indicated.
(In thousands) | 2010 | 2009 | 2008 | ||||||||||
Gross realized gains | $ | 9,166 | $ | 3,560 | $ | 713 | |||||||
Gross realized losses | 277 | 72 | 879 | ||||||||||
Net realized gain (loss) | $ | 8,889 | $ | 3,488 | $ | (166 | ) | ||||||
Income tax provision (benefit) related to net realized gains (losses) | $ | 3,111 | $ | 1,221 | $ | (58 | ) | ||||||
Proceeds from sales and calls of available for sale investment securities | $ | 548,551 | $ | 314,623 | $ | 94,039 |
(In thousands) | 2013 | 2012 | 2011 | |||||||||
Gross realized gains | $ | 14 | $ | 1,349 | $ | 1,529 | ||||||
Gross realized losses | 64 | 140 | 174 | |||||||||
Net realized (loss) gain | $ | (50 | ) | $ | 1,209 | $ | 1,355 | |||||
Income tax (benefit) provision related to net realized (loss) gain | $ | (18 | ) | $ | 423 | $ | 474 |
Investment securities with a carrying value of $301,385,000$277 million and $389,001,000$285 million at December 31, 20102013 and 20092012 were pledged to secure public and trust deposits, repurchase agreements, and for other purposes.
Investment securities with unrealized losses at year-end 20102013 and 20092012 not recognized in income are presented in the tables below. The tables segregate investment securities that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or more. The table also includes the fair value of the related securities.
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2010 (In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 32,000 | $ | 548 | $ | 32,000 | $ | 548 | ||||||||||||||||
Obligations of states and political subdivisions | 22,517 | 1,028 | $ | 5,733 | $ | 186 | 28,250 | 1,214 | ||||||||||||||||
Mortgage-backed securities – residential | 165,426 | 2,396 | 165,426 | 2,396 | ||||||||||||||||||||
Corporate debt securities | 4,989 | 835 | 4,989 | 835 | ||||||||||||||||||||
Total | $ | 219,943 | $ | 3,972 | $ | 10,722 | $ | 1,021 | $ | 230,665 | $ | 4,993 |
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2009 (In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 39,445 | $ | 299 | $ | 39,445 | $ | 299 | ||||||||||||||||
Obligations of states and political subdivisions | 22,795 | 552 | $ | 3,605 | $ | 156 | 26,400 | 708 | ||||||||||||||||
Mortgage-backed securities – residential | 41,120 | 473 | 41,120 | 473 | ||||||||||||||||||||
Corporate debt securities | 11,710 | 1,804 | 11,710 | 1,804 | ||||||||||||||||||||
Total | $ | 103,360 | $ | 1,324 | $ | 15,315 | $ | 1,960 | $ | 118,675 | $ | 3,284 |
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2013 (In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 65,094 | $ | 2,434 | $ | 11,830 | $ | 721 | $ | 76,924 | $ | 3,155 | ||||||||||||
Obligations of states and political subdivisions | 48,715 | 1,594 | 15,095 | 803 | 63,810 | 2,397 | ||||||||||||||||||
Mortgage-backed securities – residential | 219,032 | 5,199 | 16,306 | 1,033 | 235,338 | 6,232 | ||||||||||||||||||
Mortgage-backed securities – commercial | 689 | 59 | - | - | 689 | 59 | ||||||||||||||||||
Corporate debt securities | 80 | - | 4,816 | 1,049 | 4,896 | 1,049 | ||||||||||||||||||
Mutual funds and equity securities | 716 | 17 | 22 | 3 | 738 | 20 | ||||||||||||||||||
Total | $ | 334,326 | $ | 9,303 | $ | 48,069 | $ | 3,609 | $ | 382,395 | $ | 12,912 |
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2012 (In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 26,433 | $ | 66 | $ | - | $ | - | $ | 26,433 | $ | 66 | ||||||||||||
Obligations of states and political subdivisions | 17,199 | 174 | - | - | 17,199 | 174 | ||||||||||||||||||
Mortgage-backed securities – residential | 39,659 | 256 | - | - | 39,659 | 256 | ||||||||||||||||||
Corporate debt securities | - | - | 4,994 | 856 | 4,994 | 856 | ||||||||||||||||||
Mutual funds and equity securities | 299 | 2 | - | - | 299 | 2 | ||||||||||||||||||
Total | $ | 83,590 | $ | 498 | $ | 4,994 | $ | 856 | $ | 88,584 | $ | 1,354 |
Unrealized losses included in the tables above have not been recognized in income since they have been identified as temporary. The Company evaluates investment securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant. Many factors are considered, 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 effected 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 OTTI charge exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at a point in time.
At December 31, 2010,2013, the Company’s investment securities portfolio had gross unrealized losses of $5.0 million.$12.9 million, an increase of $11.6 million compared to year-end 2012. Of the total gross unrealized losses $1.0at December 31, 2013, $3.6 million is relatedor 28.0% relates to investments that have been in a continuous loss position for 12 months or more. Unrealized losses on corporate debt securities account for $835 thousandand mortgage-backed securities each make up $1.0 million of the total unrealized loss on investment securities in a continuous loss position of 12 months or more. This represents an improvement of $969 thousand or 53.7% from December 31, 2009. During the second quarter of 2010, the Company sold $12.1 million amortized cost amount of its corporate debt securities for a net loss of $168 thousand and another $1.0 million matured. These debt securities, although still rated as investment grade, were downgraded during 2009 and sold in the second quarter of 2010 after a careful analysis of their short and long-term prospects determined they no longer suited the Company’s investment preferences.
Corporate debt securities in the Company’s investment securities portfolio at December 31, 2010 consist primarily of2013 include single-issuer trust preferred capital securities with a carrying value of $4.8 million. These securities were issued by a national and global financial services firm. Each of thesefirm and were purchased by the Company during 2007.The securities isare currently performing and the issuer of these securities continuescontinue to be rated as investment grade by major rating agencies, although downgrades occurred within this groupagencies. The issuer of holdings during 2009.the securities announced in the first quarter of 2013 that it had passed stringent regulatory stress testing and received regulatory approval to both increase per share common dividend payments and increase its equity repurchase program. The Company does not intend to sell these
securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company believes these securities are not impared due to reasons of credit quality or other factors, but rather the unrealized loss on corporate debt securities is primarily attributed to continuing uncertainties in both international and domestic economies and market volatility. The Company believes that it will collect all amounts due according to the general decline in financial marketscontractual terms of these securities and illiquidity events that began in 2008 and is not due to adverse changes in the expected cash flowsfair values of the individual securities. Overall market declines, particularly of banking and financial institutions, are a result of significant stress throughout the regional and national economy that began during 2008 that, while beginning to improve, has not fully stabilized.
The Company attributes the unrealized losses in other sectors of its investment securities portfolio to changes in market interest rates. In general, market rates and volatility. Market interest rates rose sharply during the second and fourth quarters of 2013 as measured by the yields on Treasury bonds, particularly for thesethe longer dated maturity periods. Investment securities exceedwith unrealized losses at December 31, 2013 are performing according to their contractual terms, and the yield available at the time many of the securities in the portfolio were purchased. The Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company’s current intent is to hold these securities until recovery.
3. Loans and Allowance for Loan Losses
Major classifications of loans are summarized in the following tables. Duringtable.
December 31, (In thousands) | 2013 | 2012 | ||||||
Real Estate: | ||||||||
Real estate mortgage – construction and land development | $ | 101,352 | $ | 102,454 | ||||
Real estate mortgage – residential | 371,582 | 368,762 | ||||||
Real estate mortgage – farmland and other commercial enterprises | 418,147 | 425,477 | ||||||
Commercial: | ||||||||
Commercial and industrial | 47,426 | 46,812 | ||||||
States and political subdivisions | 21,561 | 21,472 | ||||||
Lease financing | 902 | 2,732 | ||||||
Other | 23,840 | 19,156 | ||||||
Consumer: | ||||||||
Secured | 8,579 | 11,732 | ||||||
Unsecured | 6,513 | 6,515 | ||||||
Total loans | 999,902 | 1,005,112 | ||||||
Less unearned income | 19 | 117 | ||||||
Total loans, net of unearned income | $ | 999,883 | $ | 1,004,995 |
Loans with a carrying value of $484 million and $466 million at December 31, 2013 and December 31, 2012, respectively, were pledged to secure borrowings and lines of credit. Such borrowings primarily include FHLB advances and short-term borrowing arrangements with the transition year, the amounts for 2010 and 2009 are presented in separate tables as a result of the expanded disclosures categories required by ASU No. 2010-20.
December 31, (In thousands) | 2010 | ||||
Real Estate: | |||||
Real estate – construction and land development | $ | 154,208 | |||
Real estate mortgage – residential | 469,273 | ||||
Real estate mortgage – farmland and other commercial enterprises | 416,904 | ||||
Commercial: | |||||
Commercial and industrial | 57,029 | ||||
States and political subdivisions | 26,302 | ||||
Lease financing | 16,187 | ||||
Other | 25,628 | ||||
Consumer: | |||||
Secured | 22,607 | ||||
Unsecured | 5,925 | ||||
Total loans | 1,194,063 | ||||
Less unearned income | (1,223 | ) | |||
Total loans, net of unearned income | $ | 1,192,840 |
December 31, (In thousands) | 2009 | ||||
Commercial, financial, and agricultural | $ | 146,530 | |||
Real estate – construction | 211,744 | ||||
Real estate mortgage – residential | 466,018 | ||||
Real estate mortgage – farmland and other commercial enterprises | 386,626 | ||||
Installment loans | 36,727 | ||||
Lease financing | 26,765 | ||||
Total loans | 1,274,410 | ||||
Less unearned income | (2,468 | ) | |||
Total loans, net of unearned income | $ | 1,271,942 |
Loans to directors, executive officers, and principal shareholders of the Parent Company and its subsidiaries (including loans to affiliated companies of which they are principal owners) and loans to members of the immediate family of such persons were $23,188,000 and $24,767,000$18.1 million at December 31, 2010 and 2009, respectively.2013. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectability.collectability. An analysis of the activity with respect to these loans is presented in the table below.
(In thousands) | Amount | ||||
Balance, December 31, 2009 | $ | 24,767 | |||
New loans | 17,200 | ||||
Repayments | (11,406 | ) | |||
Loans no longer meeting disclosure requirements, new loans meeting disclosure requirements, and other adjustments, net | (7,373 | ) | |||
Balance, December 31, 2010 | $ | 23,188 |
(In thousands) | Amount | |||
Balance at December 31, 2012 | $ | 19,987 | ||
New loans | 5,170 | |||
Repayments | (6,434 | ) | ||
Loans no longer meeting disclosure requirements, new loans meeting disclosure requirements, and other adjustments, net | (658 | ) | ||
Balance at December 31, 2013 | $ | 18,065 |
Activity in the allowance for loan losses by portfolio segment was as follows:
Years Ended December 31, (In thousands) | 2010 | 2009 | 2008 | |||||||||
Balance, beginning of year | $ | 23,364 | $ | 16,828 | $ | 14,216 | ||||||
Provision for loan losses | 17,233 | 20,768 | 5,321 | |||||||||
Recoveries | 577 | 536 | 1,833 | |||||||||
Loans charged off | (12,390 | ) | (14,768 | ) | (4,542 | ) | ||||||
Balance, end of year | $ | 28,784 | $ | 23,364 | $ | 16,828 |
(In thousands) | Real Estate | Commercial | Consumer | Total | ||||||||||||
2013 | ||||||||||||||||
Balance at beginning of period | $ | 22,254 | $ | 1,513 | $ | 678 | $ | 24,445 | ||||||||
Provision for loan losses | (2,432 | ) | (2 | ) | (166 | ) | (2,600 | ) | ||||||||
Recoveries | 327 | 155 | 221 | 703 | ||||||||||||
Loans charged off | (1,433 | ) | (257 | ) | (281 | ) | (1,971 | ) | ||||||||
Balance at end of period | $ | 18,716 | $ | 1,409 | $ | 452 | $ | 20,577 | ||||||||
2012 | ||||||||||||||||
Balance at beginning of period | $ | 23,538 | $ | 3,508 | $ | 1,218 | $ | 28,264 | ||||||||
Provision for loan losses | 4,930 | (1,825 | ) | (333 | ) | 2,772 | ||||||||||
Recoveries | 666 | 145 | 234 | 1,045 | ||||||||||||
Loans charged off | (6,880 | ) | (315 | ) | (441 | ) | (7,636 | ) | ||||||||
Balance at end of period | $ | 22,254 | $ | 1,513 | $ | 678 | $ | 24,445 | ||||||||
2011 | ||||||||||||||||
Balance at beginning of period | $ | 24,527 | $ | 3,260 | $ | 997 | $ | 28,784 | ||||||||
Provision for loan losses | 12,548 | 511 | 428 | 13,487 | ||||||||||||
Recoveries | 241 | 860 | 245 | 1,346 | ||||||||||||
Loans charged off | (13,778 | ) | (1,123 | ) | (452 | ) | (15,353 | ) | ||||||||
Balance at end of period | $ | 23,538 | $ | 3,508 | $ | 1,218 | $ | 28,264 |
December 31, (In thousands) | 2010 | 2009 | |||||||
Year-end loans with no allocated allowance for loan losses | $ | 58,235 | $ | 47,746 | |||||
Year-end loans with allocated allowance for loan losses | 71,785 | 60,723 | |||||||
Total | $ | 130,020 | $ | 108,469 | |||||
Amount of the allowance for loan losses allocated | $ | 6,033 | $ | 7,374 |
Years Ended December 31, (In thousands) | 2010 | 2009 | 2008 | |||||||||
Average of individually impaired loans during year | $ | 119,596 | $ | 70,845 | $ | 34,364 | ||||||
Interest income recognized during impairment | 4,022 | 3,866 | 1,070 | |||||||||
Cash-basis interest income recognized | 3,933 | 3,257 | 880 |
The following table presentstables present individually impaired loans by class of loans as of December 31, 2010:for the dates indicated.
As of and for the Year Ended December 31, 2013 | Unpaid Balance | Recorded | Recorded | Total Recorded Investment | Allowance for | Average | Interest Income Recognized | Cash Basis Interest Recognized | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||||||||||
Real estate mortgage – construction and land development | $ | 17,234 | $ | 9,742 | $ | 4,699 | $ | 14,441 | $ | 930 | $ | 17,314 | $ | 509 | $ | 461 | ||||||||||||||||
Real estate mortgage – residential | 11,595 | 2,871 | 8,612 | 11,483 | 1,443 | 12,727 | 460 | 445 | ||||||||||||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 32,102 | 12,262 | 19,746 | 32,008 | 1,443 | 32,785 | 1,546 | 1,519 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial and industrial | 311 | 24 | 293 | 317 | 200 | 994 | 40 | 40 | ||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Secured | 18 | - | 18 | 18 | 15 | 19 | 1 | 1 | ||||||||||||||||||||||||
Unsecured | 71 | - | 72 | 72 | 71 | 147 | 9 | 9 | ||||||||||||||||||||||||
Total | $ | 61,331 | $ | 24,899 | $ | 33,440 | $ | 58,339 | $ | 4,102 | $ | 63,986 | $ | 2,565 | $ | 2,475 |
As of and for the Year Ended December 31, 2012 | Unpaid Balance | Recorded | Recorded | Total Recorded Investment | Allowance for | Average | Interest Income Recognized | Cash Basis Interest Recognized | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||||||||||
Real estate mortgage – construction and land development | $ | 26,831 | $ | 12,712 | $ | 11,068 | $ | 23,780 | $ | 2,075 | $ | 34,880 | $ | 871 | $ | 804 | ||||||||||||||||
Real estate mortgage – residential | 7,474 | 2,215 | 5,259 | 7,474 | 1,069 | 13,754 | 333 | 324 | ||||||||||||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 33,491 | 13,294 | 18,803 | 32,097 | 1,588 | 38,077 | 1,859 | 1,876 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial and industrial | 210 | - | 207 | 207 | 198 | 403 | 17 | 17 | ||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Secured | 21 | - | 21 | 21 | 17 | 66 | 6 | 6 | ||||||||||||||||||||||||
Unsecured | 309 | - | 310 | 310 | 196 | 271 | 17 | 16 | ||||||||||||||||||||||||
Total | $ | 68,336 | $ | 28,221 | $ | 35,668 | $ | 63,889 | $ | 5,143 | $ | 87,451 | $ | 3,103 | $ | 3,043 |
Year Ended December 31, 2010 (In thousands) | Recorded Investment | Unpaid Principal Balance | Allowance for Loan Losses Allocated | |||||||||
Impaired loans with no related allowance recorded: | ||||||||||||
Real Estate | ||||||||||||
Real estate – construction and land development | $ | 27,350 | $ | 27,298 | ||||||||
Real estate mortgage – residential | 13,103 | 13,059 | ||||||||||
Real estate mortgage – farmland and other commercial enterprises | 17,895 | 17,864 | ||||||||||
Commercial | ||||||||||||
Commercial and industrial | 14 | 14 | ||||||||||
Total | $ | 58,362 | $ | 58,235 | ||||||||
Impaired loans with an allowance recorded: | ||||||||||||
Real Estate | ||||||||||||
Real estate – construction and land development | $ | 31,529 | $ | 31,452 | $ | 2,793 | ||||||
Real estate mortgage – residential | 20,147 | 19,986 | 2,051 | |||||||||
Real estate mortgage – farmland and other commercial enterprises | 19,897 | 19,810 | 824 | |||||||||
Commercial | ||||||||||||
Commercial and industrial | 447 | 444 | 310 | |||||||||
Consumer | ||||||||||||
Secured | 93 | 93 | 55 | |||||||||
Total | $ | 72,113 | $ | 71,785 | $ | 6,033 |
Year Ended December 31, 2011 | Average | Interest Income Recognized | Cash Basis Interest Recognized | |||||||||
Real Estate | ||||||||||||
Real estate mortgage – construction and land development | $ | 51,226 | $ | 719 | $ | 716 | ||||||
Real estate mortgage – residential | 28,732 | 1,282 | 1,271 | |||||||||
Real estate mortgage – farmland and other commercial enterprises | 67,565 | 2,847 | 2,768 | |||||||||
Commercial | ||||||||||||
Commercial and industrial | 4,174 | 205 | 164 | |||||||||
Consumer | ||||||||||||
Secured | 66 | 6 | 4 | |||||||||
Unsecured | 9 | - | - | |||||||||
Total | $ | 151,772 | $ | 5,059 | $ | 4,923 |
The following table presentstables present the balance of the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of December 31, 2010:2013 and 2012.
December 31, 2013 (In thousands) | Real Estate | Commercial | Consumer | Total | ||||||||||||
Allowance for Loan Losses | ||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||
Individually evaluated for impairment | $ | 3,816 | $ | 200 | $ | 86 | $ | 4,102 | ||||||||
Collectively evaluated for impairment | 14,900 | 1,209 | 366 | 16,475 | ||||||||||||
Total ending allowance balance | $ | 18,716 | $ | 1,409 | $ | 452 | $ | 20,577 | ||||||||
Loans | ||||||||||||||||
Loans individually evaluated for impairment | $ | 57,932 | $ | 317 | $ | 90 | $ | 58,339 | ||||||||
Loans collectively evaluated for impairment | 833,149 | 93,393 | 15,002 | 941,544 | ||||||||||||
Total ending loan balance, net of unearned income | $ | 891,081 | $ | 93,710 | $ | 15,092 | $ | 999,883 |
December 31, 2012 (In thousands) | Real Estate | Commercial | Consumer | Total | ||||||||||||
Allowance for Loan Losses | ||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||
Individually evaluated for impairment | $ | 4,732 | $ | 198 | $ | 213 | $ | 5,143 | ||||||||
Collectively evaluated for impairment | 17,522 | 1,315 | 465 | 19,302 | ||||||||||||
Total ending allowance balance | $ | 22,254 | $ | 1,513 | $ | 678 | $ | 24,445 | ||||||||
Loans | ||||||||||||||||
Loans individually evaluated for impairment | $ | 63,351 | $ | 207 | $ | 331 | $ | 63,889 | ||||||||
Loans collectively evaluated for impairment | 833,342 | 89,848 | 17,916 | 941,106 | ||||||||||||
Total ending loan balance, net of unearned income | $ | 896,693 | $ | 90,055 | $ | 18,247 | $ | 1,004,995 |
December 31, 2010 (In thousands) | Real Estate | Commercial | Consumer | Total | ||||||||||||
Allowance for Loan Losses | ||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||
Individually evaluated for impairment | $ | 5,668 | $ | 310 | $ | 55 | $ | 6,033 | ||||||||
Collectively evaluated for impairment | 18,859 | 2,950 | 942 | 22,751 | ||||||||||||
Total ending allowance balance | $ | 24,527 | $ | 3,260 | $ | 997 | $ | 28,784 | ||||||||
Loans | ||||||||||||||||
Loans individually evaluated for impairment | $ | 129,469 | $ | 458 | $ | 93 | $ | 130,020 | ||||||||
Loans collectively evaluated for impairment | 910,916 | 123,465 | 28,439 | 1,062,820 | ||||||||||||
Total ending loan balance, net of unearned income | $ | 1,040,385 | $ | 123,923 | $ | 28,532 | $ | 1,192,840 |
December 31, (In thousands) | 2010 | 2009 | |||||||
Nonaccrual loans | $ | 53,971 | $ | 56,630 | |||||
Restructured loans | 36,978 | 17,911 | |||||||
Loans past due 90 days or more and still accruing | 42 | 1,807 | |||||||
Total nonperforming loans | $ | 90,991 | $ | 76,348 |
The following table presentstables present the recorded investment in nonperforming loans by class of loans as of December 31, 2010:
December 31, 2010 (In thousands) | Nonaccrual | Restructured Loans | Loans Past Due 90 Days or More and Still Accruing | |||||||||
Real Estate: | ||||||||||||
Real estate – construction and land development | $ | 35,893 | $ | 16,793 | ||||||||
Real estate mortgage – residential | 10,728 | 9,147 | $ | 28 | ||||||||
Real estate mortgage – farmland and other commercial enterprises | 6,528 | 11,038 | ||||||||||
Commercial: | ||||||||||||
Commercial and industrial | 627 | |||||||||||
Lease financing | 50 | 9 | ||||||||||
Other | 31 | |||||||||||
Consumer: | ||||||||||||
Secured | 109 | |||||||||||
Unsecured | 5 | 5 | ||||||||||
Total | $ | 53,971 | $ | 36,978 | $ | 42 |
December 31, 2013 (In thousands) | Nonaccrual | Restructured Loans | Loans Past Due 90 Days or More and Still Accruing | |||||||||
Real Estate: | ||||||||||||
Real estate mortgage – construction and land development | $ | 5,821 | $ | 4,391 | $ | - | ||||||
Real estate mortgage – residential | 5,154 | 4,826 | 10 | |||||||||
Real estate mortgage – farmland and other commercial enterprises | 12,677 | 16,987 | 434 | |||||||||
Commercial: | ||||||||||||
Commercial and industrial | 160 | - | - | |||||||||
Lease financing | 22 | - | - | |||||||||
Consumer: | ||||||||||||
Secured | 3 | - | - | |||||||||
Unsecured | 1 | 51 | - | |||||||||
Total | $ | 23,838 | $ | 26,255 | $ | 444 |
December 31, 2012 (In thousands) | Nonaccrual | Restructured Loans | Loans Past Due 90 Days or More and Still Accruing | |||||||||
Real Estate: | ||||||||||||
Real estate mortgage – construction and land development | $ | 7,700 | $ | 8,736 | $ | - | ||||||
Real estate mortgage – residential | 6,025 | 634 | - | |||||||||
Real estate mortgage – farmland and other commercial enterprises | 12,878 | 16,940 | 103 | |||||||||
Commercial: | ||||||||||||
Commercial and industrial | 649 | - | - | |||||||||
Lease financing | 53 | - | - | |||||||||
Consumer: | ||||||||||||
Secured | 9 | - | - | |||||||||
Unsecured | 94 | 39 | - | |||||||||
Total | $ | 27,408 | $ | 26,349 | $ | 103 |
The Company has allocated $3,675,000$2.7 million and $2.9 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings and that are in compliance with those terms as of December 31, 2010.2013 and 2012, respectively. The Company has committedhad no commitments to lend additional amounts totaling up to $46,000 to customers with outstanding loans that are classified as troubled debt restructurings at December 31, 2013 and 2012.
During 2013, the Company had eight credits that were modified as troubled debt restructurings.
During 2012, the Company had three credits that were modified as troubled debt restructurings. One restructuring includes a commercial real estate credit whereby the stated interest rate was reduced to 5.0% from 7.25% and repayment terms that include an initial six month interest only component. One restructuring includes a residential real estate credit
whereby the stated interest rate was reduced to 4.125% from 6.0% and the due date extended by three months. The remaining restructured credit represents a secured consumer loans in which the maturity date was extended.
The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2013 and 2012.
(Dollars in thousands) | Pre-Modification Outstanding | Post-Modification Outstanding | ||||||||||
Troubled Debt Restructurings: | Number of Loans | Recorded Investment | Recorded Investment | |||||||||
2013 | ||||||||||||
Real Estate: | ||||||||||||
Real estate mortgage – residential | 3 | $ | 309 | $ | 309 | |||||||
Real estate mortgage – farmland and other commercial enterprises | 1 | 598 | 598 | |||||||||
Commercial: | ||||||||||||
Commercial and industrial | 1 | 13 | 13 | |||||||||
Consumer: | ||||||||||||
Secured | 3 | 16 | 16 | |||||||||
Total | 8 | $ | 936 | $ | 936 | |||||||
2012 | ||||||||||||
Real Estate: | ||||||||||||
Real estate mortgage – residential | 1 | $ | 72 | $ | 72 | |||||||
Real estate mortgage – farmland and other commercial enterprises | 1 | 8,796 | 8,717 | |||||||||
Consumer: | ||||||||||||
Unsecured | 1 | 38 | 38 | |||||||||
Total | 3 | $ | 8,906 | $ | 8,827 |
The troubled debt restructurings identified above increased the allowance for loan losses by $37 thousand and $442 thousand for 2013 and 2012, respectively. There were no charge-offs related to loans restructured in 2013 or 2012.
The Company had one restructured credit in 2013 for which there was a payment default within twelve months following the modification. This credit is secured by residential real estate with an outstanding balance of $15 thousand at year-end 2013. No charge-offs have been recorded for this credit.
The Company had one restructured credit in 2012 for which there was a payment default within twelve months following the modification. This credit had an outstanding balance of $72 thousand at December 31, 2012 and is secured by residential real estate. This credit had a specific reserve allocation of $5 thousand at year-end 2012. There were no charge-offs recorded during 2012 related to this credit.
The tabletables below presentspresent an age analysis of past due loans 30 days or more by class of loans as of December 31, 2010.the dates indicated. Past due loans that are also classified as nonaccrual are included in their respective past due category.category.
December 31, 2010 (In thousands) | 30-89 Days Past Due | 90 Days or More Past Due | Total | Current | Total Loans | |||||||||||||||
Real Estate: | ||||||||||||||||||||
Real estate – construction and land development | $ | 394 | $ | 23,418 | $ | 23,812 | $ | 130,396 | $ | 154,208 | ||||||||||
Real estate mortgage – residential | 5,187 | 7,167 | 12,354 | 456,919 | 469,273 | |||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 1,595 | 6,266 | 7,861 | 409,043 | 416,904 | |||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | 194 | 538 | 732 | 56,297 | 57,029 | |||||||||||||||
States and political subdivisions | 26,302 | 26,302 | ||||||||||||||||||
Lease financing, net | 276 | 59 | 335 | 14,629 | 14,964 | |||||||||||||||
Other | 114 | 3 | 117 | 25,511 | 25,628 | |||||||||||||||
Consumer: | ||||||||||||||||||||
Secured | 145 | 102 | 247 | 22,360 | 22,607 | |||||||||||||||
Unsecured | 69 | 12 | 81 | 5,844 | 5,925 | |||||||||||||||
Total | $ | 7,974 | $ | 37,565 | $ | 45,539 | $ | 1,147,301 | $ | 1,192,840 |
December 31, 2013 (In thousands) | 30-89 Days Past Due | 90 Days or More Past Due | Total | Current | Total Loans | |||||||||||||||
Real Estate: | ||||||||||||||||||||
Real estate mortgage – construction and land development | $ | 58 | $ | 613 | $ | 671 | $ | 100,681 | $ | 101,352 | ||||||||||
Real estate mortgage – residential | 1,225 | 2,502 | 3,727 | 367,855 | 371,582 | |||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 3,548 | 7,978 | 11,526 | 406,621 | 418,147 | |||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | 71 | 53 | 124 | 47,302 | 47,426 | |||||||||||||||
States and political subdivisions | - | - | - | 21,561 | 21,561 | |||||||||||||||
Lease financing, net | - | 22 | 22 | 861 | 883 | |||||||||||||||
Other | 56 | - | 56 | 23,784 | 23,840 | |||||||||||||||
Consumer: | ||||||||||||||||||||
Secured | 41 | 3 | 44 | 8,535 | 8,579 | |||||||||||||||
Unsecured | 58 | 1 | 59 | 6,454 | 6,513 | |||||||||||||||
Total | $ | 5,057 | $ | 11,172 | $ | 16,229 | $ | 983,654 | $ | 999,883 |
December 31, 2012 (In thousands) | 30-89 Days Past Due | 90 Days or More Past Due | Total | Current | Total Loans | |||||||||||||||
Real Estate: | ||||||||||||||||||||
Real estate mortgage– construction and land development | $ | 908 | $ | 1,361 | $ | 2,269 | $ | 100,185 | $ | 102,454 | ||||||||||
Real estate mortgage – residential | 2,303 | 2,500 | 4,803 | 363,959 | 368,762 | |||||||||||||||
Real estate mortgage – farmland and other commercial enterprises | 1,990 | 10,724 | 12,714 | 412,763 | 425,477 | |||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial and industrial | 108 | 53 | 161 | 46,651 | 46,812 | |||||||||||||||
States and political subdivisions | - | - | - | 21,472 | 21,472 | |||||||||||||||
Lease financing, net | 1 | 53 | 54 | 2,561 | 2,615 | |||||||||||||||
Other | 38 | 399 | 437 | 18,719 | 19,156 | |||||||||||||||
Consumer: | ||||||||||||||||||||
Secured | 69 | - | 69 | 11,663 | 11,732 | |||||||||||||||
Unsecured | 137 | - | 137 | 6,378 | 6,515 | |||||||||||||||
Total | $ | 5,554 | $ | 15,090 | $ | 20,644 | $ | 984,351 | $ | 1,004,995 |
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 and conditions. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes large-balance loans and
Special Mention.Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the borrowers borrower’s
repayment ability, weaken the collateral or inadequately protect the Company’s credit position at some future date. These credits pose elevated risk, but their weaknesses do not yet justify a substandard classification.
Substandard.Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent of those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above which are analyzed individually as part of the above described process are considered to be pass rated loans. Asloans, which are considered to have a low risk of December 31, 2010, and basedloss. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:follows for the dates indicated. Each of the following tables excludes immaterial amounts attributed to accrued interest receivable.
Real Estate | Commercial | |||||||||||||||||||||||||||
December 31, 2013 | Real Estate Mortgage -Construction and Land Development | Real Estate Mortgage -Residential | Real Estate Mortgage -Farmland and Other Commercial Enterprises | Commercial and Industrial | States and Political Subdivisions | Lease Financing | Other | |||||||||||||||||||||
Credit risk profile by internally assigned rating grades: | ||||||||||||||||||||||||||||
Pass | $ | 77,873 | $ | 334,104 | $ | 352,238 | $ | 45,652 | $ | 21,561 | $ | 861 | $ | 23,820 | ||||||||||||||
Special Mention | 7,755 | 15,120 | 29,156 | 963 | - | - | - | |||||||||||||||||||||
Substandard | 15,724 | 22,358 | 36,753 | 735 | - | 22 | 20 | |||||||||||||||||||||
Doubtful | - | - | - | 76 | - | - | - | |||||||||||||||||||||
Total | $ | 101,352 | $ | 371,582 | $ | 418,147 | $ | 47,426 | $ | 21,561 | $ | 883 | $ | 23,840 |
Real Estate | Commercial | |||||||||||||||||||||||||||
December 31, 2012 | Real Estate Mortgage -Construction and Land Development | Real Estate Mortgage-Residential | Real Estate Mortgage-Farmland and Other Commercial Enterprises | Commercial and Industrial | States and Political Subdivisions | Lease Financing | Other | |||||||||||||||||||||
Credit risk profile by internally assigned rating grades: | ||||||||||||||||||||||||||||
Pass | $ | 68,721 | $ | 328,214 | $ | 348,918 | $ | 41,527 | $ | 21,472 | $ | 2,615 | $ | 18,592 | ||||||||||||||
Special Mention | 7,562 | 18,485 | 35,027 | 4,201 | - | - | 559 | |||||||||||||||||||||
Substandard | 26,171 | 21,984 | 41,532 | 1,008 | - | - | 5 | |||||||||||||||||||||
Doubtful | - | 79 | - | 76 | - | - | - | |||||||||||||||||||||
Total | $ | 102,454 | $ | 368,762 | $ | 425,477 | $ | 46,812 | $ | 21,472 | $ | 2,615 | $ | 19,156 |
Real Estate | Commercial | |||||||||||||||||||||||||||
December 31, 2010 (In thousands) | Real Estate- Construction and Land Development | Real Estate Mortgage-Residential | Real Estate Mortgage- Farmland and Other Commercial Enterprises | Commercial and Industrial | States and Political Subdivisions | Lease Financing | Other | |||||||||||||||||||||
Credit risk profile by internally assigned rating grades: | ||||||||||||||||||||||||||||
Pass | $ | 79,535 | $ | 407,317 | $ | 341,684 | $ | 52,961 | $ | 26,302 | $ | 14,905 | $ | 24,360 | ||||||||||||||
Special Mention | 14,180 | 18,858 | 31,747 | 2,531 | 1,199 | |||||||||||||||||||||||
Substandard | 57,477 | 41,704 | 37,938 | 1,255 | 59 | 69 | ||||||||||||||||||||||
Doubtful | 3,016 | 1,394 | 5,535 | 282 | ||||||||||||||||||||||||
Total | $ | 154,208 | $ | 469,273 | $ | 416,904 | $ | 57,029 | $ | 26,302 | $ | 14,964 | $ | 25,628 |
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the consumer loans outstanding based on payment activity as of December 31, 2010:
Consumer | ||||||||
December 31, 2010 (In thousands) | Secured | Unsecured | ||||||
Credit risk profile based on payment activity: | ||||||||
Performing | $ | 22,498 | $ | 5,915 | ||||
Nonperforming | 109 | 10 | ||||||
Total | $ | 22,607 | $ | 5,925 |
December 31, 2013 | December 31, 2012 | |||||||||||||||
Consumer | Consumer | |||||||||||||||
(In thousands) | Secured | Unsecured | Secured | Unsecured | ||||||||||||
Credit risk profile based on payment activity: | ||||||||||||||||
Performing | $ | 8,576 | $ | 6,461 | $ | 11,723 | $ | 6,382 | ||||||||
Nonperforming | 3 | 52 | 9 | 133 | ||||||||||||
Total | $ | 8,579 | $ | 6,513 | $ | 11,732 | $ | 6,515 |
4. Other Real Estate Owned
OREO was as follows as of the date indicated:
December 31, 2010 (In thousands) | 2010 | 2009 | ||||||
Construction and land development | $ | 18,016 | $ | 17,909 | ||||
Residential real estate | 3,203 | 3,041 | ||||||
Farmland and other commercial enterprises | 9,326 | 10,282 | ||||||
Total | $ | 30,545 | $ | 31,232 |
(In thousands) | 2010 | 2009 | ||||||
Beginning balance | $ | 31,232 | $ | 14,446 | ||||
Transfers from loans | 17,771 | 20,332 | ||||||
Transfers from premises | 1,506 | |||||||
Proceeds from sales | (13,564 | ) | (3,978 | ) | ||||
Loss on sales | (799 | ) | (366 | ) | ||||
Write downs and other decreases, net | (4,096 | ) | (708 | ) | ||||
Ending balance | $ | 30,544 | $ | 31,232 |
December 31, (In thousands) | 2013 | 2012 | ||||||
Construction and land development | $ | 23,504 | $ | 32,360 | ||||
Residential real estate | 2,695 | 4,605 | ||||||
Farmland and other commercial enterprises | 11,627 | 15,597 | ||||||
Total | $ | 37,826 | $ | 52,562 |
OREO activity for 2013 and 2012 was as follows:
(In thousands) | 2013 | 2012 | ||||||
Beginning balance | $ | 52,562 | $ | 38,157 | ||||
Transfers from loans | 6,110 | 33,913 | ||||||
Transfers from premises | - | 212 | ||||||
Proceeds from sales, net | (15,169 | ) | (15,636 | ) | ||||
Loss on sales | (182 | ) | (324 | ) | ||||
Write downs and other decreases, net | (5,495 | ) | (3,760 | ) | ||||
Ending balance | $ | 37,826 | $ | 52,562 |
5. Premises and Equipment
Premises and equipment consist of the following.
December 31, (In thousands) | 2010 | 2009 | ||||||
Land, buildings, and leasehold improvements | $ | 56,744 | $ | 53,324 | ||||
Furniture and equipment | 19,935 | 20,406 | ||||||
Total premises and equipment | 76,679 | 73,730 | ||||||
Less accumulated depreciation and amortization | (37,067 | ) | (34,609 | ) | ||||
Premises and equipment, net | $ | 39,612 | $ | 39,121 |
December 31, (In thousands) | 2013 | 2012 | ||||||
Land, buildings, and leasehold improvements | $ | 58,770 | $ | 57,772 | ||||
Furniture and equipment | 18,561 | 17,501 | ||||||
Total premises and equipment | 77,331 | 75,273 | ||||||
Less accumulated depreciation and amortization | 41,058 | 39,090 | ||||||
Premises and equipment, net | $ | 36,273 | $ | 36,183 |
Depreciation and amortization of premises and equipment was $3,777,000, $3,979,000,$3.4 million, $3.4 million, and $3,883,000 in 2010, 2009,$3.5 million for 2013, 2012, and 2008,2011, respectively.
6. Deposit Liabilities
Major classifications of deposits are summarized as follows for the dates indicated:
December 31, (In thousands) | 2013 | 2012 | ||||||
Noninterest Bearing | $ | 277,294 | $ | 254,912 | ||||
Interest Bearing | ||||||||
Demand | 320,503 | 296,931 | ||||||
Savings | 340,903 | 318,302 | ||||||
Time | 471,515 | 540,665 | ||||||
Total interest bearing | 1,132,921 | 1,155,898 | ||||||
Total Deposits | $ | 1,410,215 | $ | 1,410,810 |
At December 31, 20102013, the scheduled maturities of time deposits were as follows.
(In thousands) | Amount | ||||
2011 | $ | 425,985 | |||
2012 | 177,770 | ||||
2013 | 65,891 | ||||
2014 | 28,980 | ||||
2015 | 8,900 | ||||
Thereafter | 6,326 | ||||
Total | $ | 713,852 |
(In thousands) | Amount | ||||
2014 | $ | 278,513 | |||
2015 | 87,786 | ||||
2016 | 58,143 | ||||
2017 | 34,419 | ||||
2018 | 8,670 | ||||
Thereafter | 3,984 | ||||
Total | $ | 471,515 |
Time deposits of $100,000$100 thousand or more at December 31, 20102013 and 20092012 were $241,468,000$156 million and $326,832,000,$181 million, respectively. Interest expense on time deposits of $100,000$100 thousand or more was $7,111,000, $11,159,000,$1.8 million, $2.9 million, and $11,575,000$4.5 million for 2010, 2009,2013, 2012, and 2008,2011, respectively.
During 2010, the Federal Deposit Insurance Corporation (“FDIC”) permanently raised its standard maximum insurance amount per depositor from $100,000$100 thousand to $250,000.$250 thousand. At December 31, 2010,2013 and 2012, the Company had $44,831,000$30.4 million and $32.2 million, respectively, of time deposits outstanding in amounts of $250,000$250 thousand or more.
Deposits from directors, executive officers, and principal shareholders of the Parent Company and its subsidiaries (including deposits from affiliated companies of which they are principal owners) and deposits from members of the immediate family of such persons were $19,217,000$19.0 million and $30,025,000$19.1 million at December 31, 20102013 and 2009,2012, respectively. Such deposits were accepted in the normal course of business on substantially the same terms as those prevailing at the time for comparable transactions with other customers.
7. Federal Funds Purchased and Other Short-term Borrowings
Federal funds purchased and other short-term borrowings represent borrowings with an original maturity of less than one year. Substantially allAll of the totalCompany’s short-term borrowings are made up of federal funds purchased and securities sold under agreements to repurchase,, which representsrepresent borrowings that generally mature one business day following the date of the transaction. Information on federal funds purchased and other short-term borrowings is as follows:
December 31, (Dollars in thousands) | 2013 | 2012 | ||||||
Federal funds purchased and securities sold under agreement to repurchase | $ | 29,123 | $ | 24,083 | ||||
Total short-term | $ | 29,123 | $ | 24,083 | ||||
Average balance during the year | $ | 29,440 | $ | 26,134 | ||||
Maximum month-end balance during the year | 32,885 | 31,632 | ||||||
Average interest rate during the year | .25 | % | .37 | % | ||||
Average interest rate at year-end | .25 | .29 |
8. Securities Sold Under Agreements to Repurchase and Other Long-term Borrowings
December 31, (Dollars in thousands) | 2010 | 2009 | |||||||
Federal funds purchased and securities sold under agreement to repurchase | $ | 46,989 | $ | 46,941 | |||||
Other | 420 | 274 | |||||||
Total short-term | $ | 47,409 | $ | 47,215 | |||||
Average balance during the year | $ | 46,483 | $ | 62,946 | |||||
Maximum month-end balance during the year | 76,848 | 105,844 | |||||||
Average interest rate during the year | .70 | % | .72 | % | |||||
Average interest rate at year-end | .56 | .79 |
Long-term securities sold under agreements to repurchase and other borrowings represent borrowings with an original maturity of one year or more. The table below displays a summary of the ending balance and average rate for borrowed funds on the dates indicated.
Average | Average | |||||||||||||||
December 31, (Dollars in thousands) | 2010 | Rate | 2009 | Rate | ||||||||||||
Federal Home Loan Bank advances | $ | 53,155 | 4.01 | % | $ | 67,630 | 3.98 | % | ||||||||
Subordinated notes payable | 48,970 | 4.11 | 48,970 | 4.11 | ||||||||||||
Securities sold under agreements to repurchase | 150,000 | 3.96 | 200,000 | 3.95 | ||||||||||||
Other | 84 | 2.32 | 332 | 2.32 | ||||||||||||
Total long-term | $ | 252,209 | 4.00 | % | $ | 316,932 | 3.98 | % |
December 31, (Dollars in thousands) | 2013 | Average Rate | 2012 | Average Rate | ||||||||||||
Federal Home Loan Bank advances | $ | 27,126 | 4.14 | % | $ | 29,297 | 4.04 | % | ||||||||
Subordinated notes payable | 48,970 | 1.71 | 48,970 | 1.77 | ||||||||||||
Securities sold under agreements to repurchase | 100,754 | 3.92 | 100,000 | 3.95 | ||||||||||||
Total long-term borrowings | $ | 176,850 | 3.34 | % | $ | 178,267 | 3.36 | % |
Long-term Federal Home Loan Bank (“FHLB”)FHLB advances are made pursuant to several different credit programs, which have their own interest rates and range of maturities. InterestAt December 31, 2013, interest rates on all FHLB advances totaling $53,155,000 are fixed and range between 2.60%2.99% and 6.90%, averaging 4.01%4.14%, over a remaining maturity period of up to 10 years as ofseven years. At December 31, 2010.2012, interest rates on FHLB advances ranged between 2.60% and 6.90%, averaging 4.04%, over a remaining maturity period of up to eight years. Long-term FHLB borrowings totaling $35,000,000of $26.0 million and $28.0 million at year-end 2010 are2013 and 2012, respectively, were putable quarterly. Long-termNone of the long-term FHLB advances of $10,000,000 are convertible to a floating interest rate. These advances may convert, at FHLB’s option, to a floating interest rate indexed to the three-month LIBOR only if LIBOR equals or exceeds 7%. At year-end 2010, three-month LIBOR was at .30%.
For FHLB advances, the subsidiary banks pledge FHLB stock and fully disbursed, otherwise unencumbered, 1-4 family first mortgage loans as collateral for these advances as required by the FHLB. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to an additional $46,784,000$101 million from the FHLB at year-end 2010.2013.
During 2005, the Company completed two private offerings of trust preferred securities through two separate Delaware statutory trusts sponsored by the Company. Farmers Capital Bank Trust I (“Trust I”) sold $10,000,000$10.0 million of preferred securities and Farmers Capital Bank Trust II (“Trust II”) sold $15,000,000$15.0 million of preferred securities. The proceeds from the offerings were used to fund the cash portion of the acquisition of Citizens Bancorp, Inc., the former parent company of Citizens Northern.
Farmers Capital Bank Trust III (“Trust III”), a Delaware statutory trust sponsored by the Company, was formed during 2007 for the purpose of financing the cost of acquiring Company shares under a share repurchase program. Trust III sold $22,500,000$22.5 million of trust preferred securities to the public with an initial fixed rate of 6.60% (fixed through NovemberOctober 2012, thereafter
at a variable rate of interest, reset quarterly, equal to the 3-month LIBOR plus a predetermined spread of 132 basis points) trust preferred securities to the public.. The trust preferred securities which pay interest quarterly, mature on November 1, 2037 mayand can now be redeemed at any time by the Trust at par any time on or after November 1, 2012.par. Trust I, Trust II, and Trust III are hereafter collectively referred to as the “Trusts”.
The Trusts used the proceeds from the sale of preferred securities, plus capital contributed to establish the trusts, to purchase the Company’s subordinated notes in amounts and bearing terms that parallel the amounts and terms of the respective preferred securities. The subordinated notes to Trust I and Trust II mature in 2035 and in 2037 for Trust III, and bear a floating interest rate (current three-month LIBOR plus 150 basis points in the case of the notes held by Trust I, current three-month LIBOR plus 165 basis points in the case of the notes held by Trust II, and current three-month LIBOR plus 132 basis points in the case of the notes held by Trust III). Interest on the notes is payable quarterly. Interest payments to the Trusts and distributions to preferred shareholders by the Trusts may be deferred for 20 consecutive quarterly periods.
The subordinated notes are redeemable in whole or in part, without penalty, at the Company’s option on or after September 30, 2010 and mature on September 30, 2035 with respect to Trust I and Trust II. For Trust III, the subordinated notes are redeemable in whole or in part, without penalty, at the Company’s option on or after November 1, 2012.option. The notes are junior in right of payment of all present and future senior indebtedness. At December 31, 20102013 and 20092012 the balance of the subordinated notes payable to Trust I, Trust II, and Trust III was $10,310,000, $15,464,000,$10.3 million, $15.5 million, and $23,196,000,$23.2 million, respectively. The interest rates in effect as of the last determination date in 2010for 2013 were 1.79%1.75%,
The Company is not considered the primary beneficiary of the Trusts; therefore the Trusts are not consolidated into its financial statements. Accordingly, the Company does not report the securities issued by the Trusts as liabilities, but instead reports as liabilities the subordinated notes issued by the Company and held by the Trusts. The Company, which owns all of the common securities of the Trusts, accounts for its investment in each of the Trusts as other assets. The Company records interest expense on the corresponding notes issued to the Trusts on its statementstatements of income.
The subordinated notes, net of the Company’s investment in the Trusts, may be included in Tier 1 capital (with certain limitations applicable) under current regulatory capital guidelines and interpretations. The net amount of subordinated notes in excess of the limit may be included in Tier 2 capital, subject to restrictions.
During 2007, the Company entered into a balance sheet leverage transaction whereby it borrowed $200,000,000$200 million in multiple fixed rate term repurchase agreements with an initial weighted average cost of 3.95% and invested the proceeds in Government National Mortgage Association (“GNMA”) bonds, which were pledged as collateral. The Company is required to secure the borrowed funds by GNMA bonds valued at 106% of the outstanding principal balance. The borrowings have an outstanding balance of $150,000,000$100 million at December 31, 2010 with remaining maturities as follows: $50,000,000 due November 2012 and the remaining $100,000,000 due November 2017. At December 31, 2010 $100,000,000 of the borrowings2013, are putable on a quarterly basis, and the remaining $50,000,000 are putable quarterly beginningmature in the fourth quarter of 2012.November 2017. The repurchase agreements are held by each of the Company’s three subsidiary banks that are participating in the transaction and are guaranteed by the Parent Company.
Maturities of long-term borrowings at December 31, 20102013 are as follows:
(In thousands) | Amount | |||
2014 | $ | 8,012 | ||
2015 | 251 | |||
2016 | 503 | |||
2017 | 115,000 | |||
2018 | 3,000 | |||
Thereafter | 50,084 | |||
Total | $ | 176,850 |
(In thousands) | Amount | ||||
2011 | $ | 12,084 | |||
2012 | 61,512 | ||||
2013 | 2,000 | ||||
2014 | 8,062 | ||||
2015 | |||||
Thereafter | 168,551 | ||||
Total | $ | 252,209 |
9. Income Taxes
The components of income tax expense are as follows:
December 31, (In thousands) | 2010 | 2009 | 2008 | |||||||||
Currently payable | $ | 5,429 | $ | 752 | $ | 832 | ||||||
Deferred | (3,392 | ) | (9,905 | ) | (2,046 | ) | ||||||
Total applicable to operations | 2,037 | (9,153 | ) | (1,214 | ) | |||||||
Deferred tax charged (credited) to components of shareholders’ equity: | ||||||||||||
Unfunded status of postretirement benefits | 643 | (234 | ) | 617 | ||||||||
Net unrealized securities gains | (2,239 | ) | 841 | 2,528 | ||||||||
Total income taxes | $ | 441 | $ | (8,546 | ) | $ | 1,931 |
December 31, (In thousands) | 2013 | 2012 | 2011 | |||||||||
Currently payable | $ | 4,908 | $ | 3,953 | $ | 1,580 | ||||||
Deferred | (473 | ) | (1,043 | ) | (2,227 | ) | ||||||
Total applicable to operations | 4,435 | 2,910 | (647 | ) | ||||||||
Deferred tax charged (credited) to components of shareholders’ equity: | ||||||||||||
Unfunded status of postretirement benefits | 1,589 | (92 | ) | (500 | ) | |||||||
Net unrealized securities (losses) gains | (7,019 | ) | 214 | 3,593 | ||||||||
Total income taxes | $ | (995 | ) | $ | 3,032 | $ | 2,446 |
An analysis of the difference between the effective income tax rates and the statutory federal income tax rate follows.
December 31, | 2010 | 2009 | 2008 | |||||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Changes from statutory rates resulting from: | ||||||||||||
Tax-exempt interest | (15.3 | ) | 3.0 | (48.1 | ) | |||||||
Nondeductible interest to carry tax-exempt obligations | 1.3 | (.3 | ) | 5.7 | ||||||||
Goodwill impairment | (22.7 | ) | ||||||||||
Tax credits | (2.5 | ) | .8 | (14.6 | ) | |||||||
Premium income not subject to tax | (3.9 | ) | .6 | (9.2 | ) | |||||||
Company-owned life insurance | 8.2 | .8 | (13.5 | ) | ||||||||
Dividend exclusion | (4.8 | ) | ||||||||||
Other, net | (.1 | ) | (.2 | ) | 11.3 | |||||||
Effective tax rate on pretax income | 22.7 | % | 17.0 | % | (38.2 | )% |
December 31, | 2013 | 2012 | 2011 | |||||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Changes from statutory rates resulting from: | ||||||||||||
Tax-exempt interest | (6.3 | ) | (7.6 | ) | (51.5 | ) | ||||||
Nondeductible interest to carry tax-exempt obligations | .3 | .4 | 3.6 | |||||||||
Nondeductible legal expense | - | .5 | - | |||||||||
Tax credits | - | (1.8 | ) | (13.0 | ) | |||||||
Premium income not subject to tax | (1.3 | ) | (2.5 | ) | (5.5 | ) | ||||||
Company-owned life insurance | (1.8 | ) | (3.5 | ) | (15.2 | ) | ||||||
Uncertain tax position | (.5 | ) | (.9 | ) | 14.3 | |||||||
Other, net | (.6 | ) | (.3 | ) | 1.4 | |||||||
Effective tax rate on pretax income | 24.8 | % | 19.3 | % | (30.9 | )% |
The tax effects of the significant temporary differences that comprise deferred tax assets and liabilities at December 31, 20102013 and 2009 follows.
December 31, (In thousands) | 2013 | 2012 | ||||||
Assets | ||||||||
Allowance for loan losses | $ | 7,217 | $ | 8,571 | ||||
Deferred directors’ fees | 285 | 281 | ||||||
Postretirement benefit obligations | 4,459 | 5,633 | ||||||
Other real estate owned | 3,568 | 2,398 | ||||||
Partnership investments | 1,508 | �� | 1,444 | |||||
Self-funded insurance | 213 | 164 | ||||||
Paid time off | 701 | 705 | ||||||
Depreciation | 798 | 676 | ||||||
Intangibles | 3,179 | 3,526 | ||||||
Unrealized losses on available for sale investment securities, net | 1,951 | - | ||||||
Other | 232 | 44 | ||||||
Total deferred tax assets | 24,111 | 23,442 | ||||||
Liabilities | ||||||||
Unrealized gains on available for sale investment securities, net | - | 5,066 | ||||||
Prepaid expenses | 596 | 505 | ||||||
Federal Home Loan Bank stock dividends | 1,097 | 1,087 | ||||||
Deferred loan fees | 772 | 811 | ||||||
Lease financing operations | 136 | 366 | ||||||
Total deferred tax liabilities | 2,601 | 7,835 | ||||||
Net deferred tax asset | $ | 21,510 | $ | 15,607 |
December 31, (In thousands) | 2010 | 2009 | ||||||
Assets | ||||||||
Allowance for loan losses | $ | 10,089 | $ | 8,192 | ||||
Deferred directors’ fees | 280 | 269 | ||||||
Postretirement benefit obligations | 4,159 | 4,419 | ||||||
Other real estate owned | 1,150 | 307 | ||||||
Partnership investments | 470 | 337 | ||||||
Self-funded insurance | 172 | 167 | ||||||
Paid time off | 651 | 712 | ||||||
Alternative minimum tax credits | 814 | |||||||
Low income housing credits | 38 | |||||||
Intangibles | 3,919 | 4,002 | ||||||
Other | 60 | 63 | ||||||
Total deferred tax assets | 20,950 | 19,320 | ||||||
Liabilities | ||||||||
Depreciation | 360 | |||||||
Unrealized gains on available for sale investment securities, net | 1,261 | 3,500 | ||||||
Prepaid expenses | 647 | 616 | ||||||
Discount on investment securities | 1,078 | 1,098 | ||||||
Deferred loan fees | 1,041 | 1,187 | ||||||
Lease financing operations | 1,372 | 1,996 | ||||||
Total deferred tax liabilities | 5,399 | 8,757 | ||||||
Net deferred tax asset | $ | 15,551 | $ | 10,563 |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences at December 31, 2010.
(In thousands) | 2010 | 2009 | ||||||
Change in Benefit Obligation | ||||||||
Obligation at beginning of year | $ | 565 | $ | 498 | ||||
Service cost | 35 | 34 | ||||||
Interest cost | 33 | 30 | ||||||
Actuarial loss | 29 | 8 | ||||||
Benefit payments | (16 | ) | (5 | ) | ||||
Obligation at end of year | $ | 646 | $ | 565 |
(In thousands) | 2010 | 2009 | ||||||
Service cost | $ | 35 | $ | 34 | ||||
Interest cost | 33 | 30 | ||||||
Recognized net actuarial loss | 4 | 6 | ||||||
Net periodic benefit cost | $ | 72 | $ | 70 | ||||
Major assumptions: | ||||||||
Discount rate used to determine net period benefit cost | 6.00 | % | 6.00 | % | ||||
Discount rate used to determine benefit obligation at year end | 5.55 | 6.00 |
(In thousands) | Supplemental Retirement Plan | ||||
2011 | $ | 27 | |||
2012 | 27 | ||||
2013 | 27 | ||||
2014 | 27 | ||||
2015 | 27 | ||||
2016-2020 | 165 | ||||
Total | $ | 300 |
(In thousands) | 2010 | 2009 | ||||||
Unrecognized net actuarial loss | $ | 125 | $ | 100 | ||||
Total | $ | 125 | $ | 100 |
(In thousands) | Supplemental Retirement Plan | ||||
Unrecognized net actuarial loss | $ | 2 | |||
Total | $ | 2 |
2010 | |||||||||
Weighted | |||||||||
Average | |||||||||
Shares | Price | ||||||||
Outstanding at January 1 | 57,621 | $ | 32.56 | ||||||
Expired | (25,572 | ) | 29.75 | ||||||
Forfeited | (8,000 | ) | 34.80 | ||||||
Outstanding at December 31 | 24,049 | $ | 34.80 | ||||||
Options exercisable at year-end | 24,049 | $ | 34.80 |
Outstanding | Exercisable | |||||||||||||||||||
Weighted Average | ||||||||||||||||||||
Remaining Contractual | Weighted Average | Weighted Average | ||||||||||||||||||
Exercise Price | Number | Life (Years) | Exercise Price | Number | Exercise Price | |||||||||||||||
$34.80 | 24,049 | 3.83 | $ | 34.80 | 24,049 | $ | 34.80 |
(In thousands) | 2010 | 2009 | 2008 | ||||||||||
Tax benefit realized from options exercised | $ | 0 | $ | 0 | $ | 0 | |||||||
Total intrinsic value of options exercised | 0 | 0 | 1 | ||||||||||
Cash received from options exercised | 0 | 0 | 30 |
(In thousands) | 2010 | 2009 | ||||||
Change in Benefit Obligation | ||||||||
Obligation at beginning of year | $ | 12,524 | $ | 10,550 | ||||
Service cost | 396 | 454 | ||||||
Interest cost | 607 | 695 | ||||||
Actuarial (gain) loss | (1,523 | ) | 1,104 | |||||
Participant contributions | 76 | 71 | ||||||
Benefit payments | (320 | ) | (350 | ) | ||||
Obligation at end of year | $ | 11,760 | $ | 12,524 |
(In thousands) | 2010 | 2009 | ||||||
Service cost | $ | 397 | $ | 454 | ||||
Interest cost | 607 | 695 | ||||||
Amortization of transition obligation | 101 | 101 | ||||||
Recognized prior service cost | 257 | 257 | ||||||
Recognized net actuarial loss | 81 | |||||||
Net periodic benefit cost | $ | 1,362 | $ | 1,588 | ||||
Major assumptions: | ||||||||
Discount rate used to determine net periodic benefit cost | 6.00 | % | 6.00 | % | ||||
Discount rate used to determine benefit obligation as of year end | 5.55 | 6.00 | ||||||
Retiree participation rate (Plan 1) | 100.00 | 100.00 | ||||||
Retiree participation rate (Plan 2) | 72.00 | 72.00 |
(In thousands) | 1% Increase | 1% Decrease | ||||||
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost | $ | 238 | $ | (183 | ) | |||
Effect on accumulated postretirement benefit obligation | 2,225 | (1,766 | ) |
(In thousands) | Postretirement Medical Benefits | |||
2011 | $ | 371 | ||
2012 | 375 | |||
2013 | 406 | |||
2014 | 447 | |||
2015 | 457 | |||
2016-2020 | 2,815 | |||
Total | $ | 4,871 |
(In thousands) | 2010 | 2009 | ||||||
Unrecognized net actuarial loss | $ | 719 | $ | 2,242 | ||||
Unrecognized transition obligation | 203 | 305 | ||||||
Unrecognized prior service cost | 1,153 | 1,410 | ||||||
Total | $ | 2,075 | $ | 3,957 |
(In thousands) | Postretirement Medical Benefits | |||
Transition obligation | $ | 101 | ||
Unrecognized prior service cost | 257 | |||
Total | $ | 358 |
(In thousands) | Operating Leases | Capital Lease | ||||||
2011 | $ | 451 | $ | 84 | ||||
2012 | 413 | |||||||
2013 | 390 | |||||||
2014 | 382 | |||||||
2015 | 343 | |||||||
Thereafter | 1,925 | |||||||
Total | $ | 3,904 | 84 | |||||
Less: amount representing interest | 1 | |||||||
Long-term obligation under capital lease | $ | 83 |
December 31, | 2010 | 2009 | ||||||||||||||
(In thousands) | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | ||||||||||||
Commitments to extend credit, including unused lines of credit | $ | 45,695 | $ | 81,069 | $ | 35,646 | $ | 103,892 | ||||||||
Standby letters of credit | 3,893 | 14,175 | 3,812 | 14,309 | ||||||||||||
Total | $ | 49,588 | $ | 95,244 | $ | 39,458 | $ | 118,201 |
To Be Well-Capitalized | ||||||||||||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
December 31, 2010 (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Tier 1 Risk-based Capital1 | ||||||||||||||||||||||||
Consolidated | $ | 187,237 | 15.35 | % | $ | 48,794 | 4.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank & Capital Trust Company | 66,013 | 15.59 | 16,935 | 4.00 | $ | 25,402 | 6.00 | % | ||||||||||||||||
First Citizens Bank | 25,969 | 12.76 | 8,143 | 4.00 | 12,214 | 6.00 | ||||||||||||||||||
United Bank & Trust Company | 51,347 | 12.91 | 15,908 | 4.00 | 23,863 | 6.00 | ||||||||||||||||||
Citizens Bank of Northern Kentucky, Inc. | 20,552 | 11.42 | 7,196 | 4.00 | 10,795 | 6.00 | ||||||||||||||||||
Total Risk-based Capital 1 | ||||||||||||||||||||||||
Consolidated | $ | 202,652 | 16.61 | % | $ | 97,588 | 8.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank & Capital Trust Company | 71,386 | 16.86 | 33,870 | 8.00 | $ | 42,337 | 10.00 | % | ||||||||||||||||
First Citizens Bank | 27,481 | 13.50 | 16,286 | 8.00 | 20,357 | 10.00 | ||||||||||||||||||
United Bank & Trust Company | 56,408 | 14.18 | 31,817 | 8.00 | 39,771 | 10.00 | ||||||||||||||||||
Citizens Bank of Northern Kentucky, Inc. | 22,812 | 12.68 | 14,393 | 8.00 | 17,991 | 10.00 | ||||||||||||||||||
Tier 1 Leverage Capital 2 | ||||||||||||||||||||||||
Consolidated | $ | 187,237 | 9.39 | % | $ | 79,761 | 4.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank & Capital Trust Company | 66,013 | 8.55 | 30,868 | 4.00 | $ | 38,586 | 5.00 | % | ||||||||||||||||
First Citizens Bank | 25,969 | 8.46 | 12,285 | 4.00 | 15,356 | 5.00 | ||||||||||||||||||
United Bank & Trust Company | 51,347 | 8.24 | 24,935 | 4.00 | 31,168 | 5.00 | ||||||||||||||||||
Citizens Bank of Northern Kentucky, Inc. | 20,552 | 8.04 | 10,227 | 4.00 | 12,784 | 5.00 |
To Be Well-Capitalized | ||||||||||||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
December 31, 2009 (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Tier 1 Risk-based Capital1 | ||||||||||||||||||||||||
Consolidated | $ | 185,874 | 13.95 | % | $ | 53,310 | 4.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank & Capital Trust Co. | 61,767 | 13.22 | 18,691 | 4.00 | $ | 28,037 | 6.00 | % | ||||||||||||||||
First Citizens Bank | 24,295 | 12.02 | 8,082 | 4.00 | 12,124 | 6.00 | ||||||||||||||||||
United Bank & Trust Co. | 56,376 | 12.49 | 18,051 | 4.00 | 27,077 | 6.00 | ||||||||||||||||||
Citizens Bank of Northern Kentucky | 18,443 | 9.70 | 7,606 | 4.00 | 11,049 | 6.00 | ||||||||||||||||||
Total Risk-based Capital 1 | ||||||||||||||||||||||||
Consolidated | $ | 202,616 | 15.20 | % | $ | 106,620 | 8.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank & Capital Trust Co. | 67,664 | 14.48 | 37,382 | 8.00 | $ | 46,728 | 10.00 | % | ||||||||||||||||
First Citizens Bank | 25,787 | 12.76 | 16,165 | 8.00 | 20,206 | 10.00 | ||||||||||||||||||
United Bank & Trust Co. | 62,051 | 13.75 | 36,103 | 8.00 | 45,128 | 10.00 | ||||||||||||||||||
Citizens Bank of Northern Kentucky | 20,829 | 10.95 | 15,213 | 8.00 | 19,016 | 10.00 | ||||||||||||||||||
Tier 1 Leverage Capital 2 | ||||||||||||||||||||||||
Consolidated | $ | 185,874 | 8.15 | % | $ | 91,186 | 4.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank & Capital Trust Co. | 61,767 | 7.05 | 35,049 | 4.00 | $ | 43,811 | 5.00 | % | ||||||||||||||||
First Citizens Bank | 24,295 | 7.96 | 12,214 | 4.00 | 15,268 | 5.00 | ||||||||||||||||||
United Bank & Trust Co. | 56,376 | 7.35 | 30,673 | 4.00 | 38,342 | 5.00 | ||||||||||||||||||
Citizens Bank of Northern Kentucky | 18,443 | 6.23 | 11,839 | 4.00 | 14,799 | 5.00 |
Fair Value Measurements Using | ||||||||||||||||
(In thousands) Available For Sale Investment Securities | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
December 31, 2010 | ||||||||||||||||
U.S. Treasury securities | $ | 1,044 | $ | 1,044 | ||||||||||||
Obligations of U.S. government-sponsored entities | 41,613 | $ | 41,613 | |||||||||||||
Obligations of states and political subdivisions | 74,799 | 74,799 | ||||||||||||||
Mortgage-backed securities – residential | 319,930 | 319,930 | ||||||||||||||
Money market mutual funds | 145 | 145 | ||||||||||||||
Corporate debt securities | 6,606 | 6,606 | ||||||||||||||
Equity securities | 45 | 45 | ||||||||||||||
Total | $ | 444,182 | $ | 1,234 | $ | 442,948 | $ | 0 | ||||||||
December 31, 2009 | ||||||||||||||||
U.S. Treasury securities | $ | 3,002 | $ | 3,002 | ||||||||||||
Obligations of U.S. government-sponsored entities | 90,752 | $ | 90,752 | |||||||||||||
Obligations of states and political subdivisions | 108,958 | 108,958 | ||||||||||||||
Mortgage-backed securities – residential | 325,519 | 325,519 | ||||||||||||||
Money market mutual funds | 910 | 910 | ||||||||||||||
Corporate debt securities | 18,732 | 18,732 | ||||||||||||||
Total | $ | 547,873 | $ | 3,912 | $ | 543,961 | $ | 0 |
Fair Value Measurements Using | ||||||||||||||
(In thousands) Description | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Impairment Charge | |||||||||
December 31, 2010 | ||||||||||||||
Impaired Loans | ||||||||||||||
Real estate-construction and land development | $ | 12,573 | $ | 12,573 | $ | 52 | ||||||||
Real estate mortgage-residential | 10,376 | 10,376 | 359 | |||||||||||
Real estate mortgage-farmland and other commercial enterprises | 9,331 | 9,331 | 505 | |||||||||||
Commercial and industrial | 133 | 133 | 27 | |||||||||||
Consumer-secured | 38 | 38 | ||||||||||||
Total-Impaired Loans | $ | 32,451 | $ | 32,451 | $ | 943 | ||||||||
OREO | ||||||||||||||
Real estate-construction and land development | $ | 12,381 | $ | 12,381 | $ | 3,144 | ||||||||
Real estate mortgage-residential | 630 | 630 | 294 | |||||||||||
Real estate mortgage-farmland and other commercial enterprises | 2,810 | 2,810 | 428 | |||||||||||
Total-OREO | $ | 15,821 | $ | 15,821 | $ | 3,866 | ||||||||
December 31, 2009 | ||||||||||||||
Impaired loans | $ | 54,961 | $ | 54,961 | $ | 5,762 | ||||||||
OREO | 11,140 | 11,140 | 877 | |||||||||||
Total | $ | 66,101 | $ | 66,101 | $ | 6,639 |
December 31, | 2010 | 2009 | ||||||||||||||
(In thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 182,056 | $ | 182,056 | $ | 218,336 | $ | 218,336 | ||||||||
Investment securities: | ||||||||||||||||
Available for sale | 444,182 | 444,182 | 547,873 | 547,873 | ||||||||||||
Held to maturity | 930 | 844 | 975 | 922 | ||||||||||||
FHLB and similar stock | 9,515 | N/A | 9,148 | N/A | ||||||||||||
Loans, net | 1,164,056 | 1,157,606 | 1,248,578 | 1,246,151 | ||||||||||||
Accrued interest receivable | 7,258 | 7,258 | 9,381 | 9,381 | ||||||||||||
Liabilities | ||||||||||||||||
Deposits | 1,463,572 | 1,470,277 | 1,633,433 | 1,640,933 | ||||||||||||
Federal funds purchased and other short-term borrowings | 47,409 | 47,409 | 47,215 | 47,215 | ||||||||||||
Securities sold under agreements to repurchase and other long-term borrowings | 203,239 | 219,709 | 267,962 | 285,093 | ||||||||||||
Subordinated notes payable to unconsolidated trusts | 48,970 | 27,234 | 48,970 | 28,528 | ||||||||||||
Accrued interest payable | 2,811 | 2,811 | 4,685 | 4,685 |
December 31, (In thousands) | 2010 | 2009 | ||||||||||
Assets | ||||||||||||
Cash and cash equivalents | $ | 16,249 | $ | 7,554 | ||||||||
Investment in subsidiaries | 183,158 | 180,367 | ||||||||||
Other assets | 3,752 | 11,392 | ||||||||||
Total assets | $ | 203,159 | $ | 199,313 | ||||||||
Liabilities | ||||||||||||
Dividends payable | $ | 188 | $ | 925 | ||||||||
Subordinated notes payable to unconsolidated trusts | 48,970 | 48,970 | ||||||||||
Other liabilities | 4,105 | 2,191 | ||||||||||
Total liabilities | 53,263 | 52,086 | ||||||||||
Shareholders’ Equity | ||||||||||||
Preferred stock | 28,719 | 28,348 | ||||||||||
Common stock | 926 | 922 | ||||||||||
Capital surplus | 50,675 | 50,476 | ||||||||||
Retained earnings | 68,678 | 63,617 | ||||||||||
Accumulated other comprehensive income | 898 | 3,864 | ||||||||||
Total shareholders’ equity | 149,896 | 147,227 | ||||||||||
Total liabilities and shareholders’ equity | $ | 203,159 | $ | 199,313 |
Years Ended December 31, (In thousands) | 2010 | 2009 | 2008 | |||||||||
Income | ||||||||||||
Dividends from subsidiaries | $ | 6,627 | $ | 7,465 | $ | 9,566 | ||||||
Interest | 12 | 53 | 60 | |||||||||
Other noninterest income | 3,637 | 3,457 | 3,217 | |||||||||
Total income | 10,276 | 10,975 | 12,843 | |||||||||
Expense | ||||||||||||
Interest expense-subordinated notes payable to unconsolidated trusts | 2,035 | 2,178 | 2,865 | |||||||||
Interest expense on other borrowed funds | 2 | |||||||||||
Noninterest expense | 3,689 | 4,097 | 3,986 | |||||||||
Total expense | 5,726 | 6,275 | 6,851 | |||||||||
Income before income tax expense (benefit) and equity in undistributed income of subsidiaries | 4,550 | 4,700 | 5,992 | |||||||||
Income tax expense (benefit) | 411 | (949 | ) | (1,189 | ) | |||||||
Income before equity in undistributed income of subsidiaries | 4,139 | 5,649 | 7,181 | |||||||||
Equity in undistributed income (loss) of subsidiaries | 2,793 | (50,391 | ) | (2,786 | ) | |||||||
Net income (loss) | $ | 6,932 | $ | (44,742 | ) | $ | 4,395 |
Years Ended December 31, (In thousands) | 2010 | 2009 | 2008 | |||||||||
Cash Flows From Operating Activities | ||||||||||||
Net income (loss) | $ | 6,932 | $ | (44,742 | ) | $ | 4,395 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Equity in undistributed (income) loss of subsidiaries | (2,793 | ) | 50,391 | 2,786 | ||||||||
Noncash stock option expense and employee stock purchase plan expense | 2 | 5 | 5 | |||||||||
Change in other assets and liabilities, net | 1,917 | (1,043 | ) | (891 | ) | |||||||
Deferred income tax (benefit) expense | (850 | ) | 253 | (67 | ) | |||||||
Net cash provided by operating activities | 5,208 | 4,864 | 6,228 | |||||||||
Cash Flows From Investing Activities | ||||||||||||
Proceeds from sale of available for sale investment securities | 1,000 | |||||||||||
Purchase of available for sale investment securities | (1,000 | ) | ||||||||||
Return of equity from nonbank subsidiary | 1,150 | |||||||||||
Investment in nonbank subsidiaries | (800 | ) | (100 | ) | (4,051 | ) | ||||||
Investment in bank subsidiaries | (3,350 | ) | (22,500 | ) | (2,362 | ) | ||||||
Proceeds from liquidation of company-owned life insurance | 8,567 | |||||||||||
Net cash provided by (used in) investing activities | 5,567 | (22,600 | ) | (6,413 | ) | |||||||
Cash Flows From Financing Activities | ||||||||||||
Proceeds from issuance of preferred stock, net of issue costs | 29,961 | |||||||||||
Dividends paid, common and preferred stock | (2,237 | ) | (9,222 | ) | (9,720 | ) | ||||||
Purchase of common stock | (1,049 | ) | ||||||||||
Shares issued under Employee Stock Purchase Plan | 157 | 249 | 252 | |||||||||
Stock options exercised | 30 | |||||||||||
Net cash (used in) provided by financing activities | (2,080 | ) | 20,988 | (10,487 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 8,695 | 3,252 | (10,672 | ) | ||||||||
Cash and cash equivalents at beginning of year | 7,554 | 4,302 | 14,974 | |||||||||
Cash and cash equivalents at end of year | $ | 16,249 | $ | 7,554 | $ | 4,302 |
(In thousands, except per share data) | ||||||||||||||||
Quarters Ended 2010 | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||
Interest income | $ | 23,382 | $ | 23,475 | $ | 22,105 | $ | 20,789 | ||||||||
Interest expense | 9,932 | 9,198 | 8,478 | 7,340 | ||||||||||||
Net interest income | 13,450 | 14,277 | 13,627 | 13,449 | ||||||||||||
Provision for loan losses | 1,926 | 5,490 | 6,244 | 3,573 | ||||||||||||
Net interest income after provision for loan losses | 11,524 | 8,787 | 7,383 | 9,876 | ||||||||||||
Noninterest income | 7,490 | 9,869 | 10,324 | 6,427 | ||||||||||||
Noninterest expense | 16,497 | 15,205 | 15,927 | 15,082 | ||||||||||||
Income before income taxes | 2,517 | 3,451 | 1,780 | 1,221 | ||||||||||||
Income tax expense | 572 | 610 | 525 | 330 | ||||||||||||
Net income | 1,945 | 2,841 | 1,255 | 891 | ||||||||||||
Dividends and accretion on preferred shares | (466 | ) | (466 | ) | (469 | ) | (470 | ) | ||||||||
Net income available to common shareholders | $ | 1,479 | $ | 2,375 | $ | 786 | $ | 421 | ||||||||
Net income per common share, basic and diluted | $ | .20 | $ | .32 | $ | .11 | $ | .06 | ||||||||
Weighted average shares outstanding, basic and diluted | 7,379 | 7,384 | 7,393 | 7,402 |
(In thousands, except per share data) | ||||||||||||||||
Quarters Ended 2009 | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||
Interest income | $ | 26,329 | $ | 25,479 | $ | 25,381 | $ | 23,721 | ||||||||
Interest expense | 12,090 | 12,076 | 11,879 | 11,020 | ||||||||||||
Net interest income | 14,239 | 13,403 | 13,502 | 12,701 | ||||||||||||
Provision for loan losses | 1,676 | 5,940 | 6,653 | 6,499 | ||||||||||||
Net interest income after provision for loan losses | 12,563 | 7,463 | 6,849 | 6,202 | ||||||||||||
Noninterest income | 6,725 | 7,825 | 6,528 | 7,091 | ||||||||||||
Noninterest expense1 | 15,112 | 16,163 | 15,299 | 68,567 | ||||||||||||
Income (loss) before income taxes | 4,176 | (875 | ) | (1,922 | ) | (55,274 | ) | |||||||||
Income tax expense (benefit) | 871 | (74 | ) | (1,748 | ) | (8,202 | ) | |||||||||
Net income (loss)2 | 3,305 | (801 | ) | (174 | ) | (47,072 | ) | |||||||||
Dividends and accretion on preferred shares | (414 | ) | (462 | ) | (462 | ) | (464 | ) | ||||||||
Net income (loss) available to common shareholders | $ | 2,891 | $ | (1,263 | ) | $ | (636 | ) | $ | (47,536 | ) | |||||
Net income (loss) per common share, basic and diluted | $ | .39 | $ | (.17 | ) | $ | (.09 | ) | $ | (6.45 | ) | |||||
Weighted average shares outstanding, basic and diluted | 7,357 | 7,363 | 7,367 | 7,371 |
(In thousands) | 2010 | 2009 | 2008 | |||||||||||||
Beginning of year | $ | 0 | $ | 52,408 | $ | 52,408 | ||||||||||
Impairment losses | (52,408 | ) | ||||||||||||||
End of year | $ | 0 | $ | 0 | $ | 52,408 |
December 31, 2009 | September 30, 2009 | June 30, 2009 | March 31, 2009 | December 31, 2008 | ||||||||||||||||
Stock price at end of period | $ | 10.22 | $ | 17.88 | $ | 25.17 | $ | 15.67 | $ | 24.42 | ||||||||||
Weighted average closing stock price for quarter | 11.64 | 20.23 | 21.36 | 17.80 | 22.07 | |||||||||||||||
Book value per common share | 16.11 | 23.13 | 22.60 | 23.08 | 22.87 | |||||||||||||||
2010 | 2009 | |||||||||||||||
Amortized Intangible Assets (In thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||
Core deposit intangibles | $ | 12,765 | $ | 10,050 | $ | 12,765 | $ | 8,916 | ||||||||
Other customer relationship intangibles | 3,689 | 2,852 | 3,689 | 2,549 | ||||||||||||
Total | $ | 16,454 | $ | 12,902 | $ | 16,454 | $ | 11,465 |
(In thousands) | Amount | ||||
2011 | $ | 1,143 | |||
2012 | 1,014 | ||||
2013 | 540 | ||||
2014 | 405 | ||||
2015 | 450 |
The Internal Revenue Code grants preferential treatment to the interest income derived from debt issued by states and political subdivisions in that it is not subject to Federal taxation. As a financial institution, the Company is not allowed a tax deduction for a pro rata portion of the interest expense incurred to purchase debt with tax-free attributes. The amount of disallowed interest expense is determined by the total amount of debt issued during the calendar year by the issuer and dependent upon the issuer being considered a qualified small issuer. Debt purchased by a financial institution that meets the requirements to be designated a “qualified tax exempt obligation” has a lower interest expense disallowance than debt that does not meet the “qualified tax exempt obligation” designation. As part of the normal due diligence for a loan with tax-free attributes, the Company relies on the attestation of the borrower, legal counsel for the borrower, and the legal counsel for the Company concerning the representations of the borrower for their debt. During the fourth quarter of 2010, the Company became aware that the qualified status of the debt issued by a customer was being reviewed by the Internal Revenue Service (“IRS”). The customer had previously made representations that their debt was qualified.
During the first quarter of 2011, the Company became aware that this customer had received verbal notification of the IRS’s intent to issue an adverse ruling regarding the qualified status of the financing. TheAt that time, the Company hashad a potential accumulated tax liability of $402,000$402 thousand at risk related to the determination for the tax years 2007 through 2010. Under ASC Topic 740, “Income“Income Taxes,”, the Company is required to recognize a tax position when it is more likely than not that the position would be sustained in a tax examination, with the tax examination being presumed to have occurred.occur. Additionally, ASC Topic 740 indicates that a subsequent change in facts and circumstances should be recognized in the period in which the change occurs. As such, the Company will recordrecorded an accrual of $449 thousand including the accrual$402 thousand accumulated tax liability and interest of $47 thousand in the first quarter of 2011.
The original loan contract contains provisions that the customer will indemnify the Company for any penalties, taxes or interest thereon for which the Company becomes liable as a result of a determination of taxability. The Company intends to exercise its rights under the contract; however, due to the contingent nature of the indemnification provisions, the Company will not record the effects of the indemnification until it is realized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In thousands) | 2013 | 2012 | ||||||
Balance at beginning of year | $ | 154 | $ | 266 | ||||
Reductions to tax positions of prior years | (88 | ) | (112 | ) | ||||
Balance at end of year | $ | 66 | $ | 154 |
The $66 thousand at year-end 2013 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.
The Company’s policy is to record the accrual of interest or penalties relative to unrecognized tax benefits, if any, in its income tax expense accounts. The total amount of interest recorded in the income tax expense (benefit) line item of the income statement for the year ended December 31, 2011 was $32 thousand. This interest amount was reduced by $9 thousand during 2012 and $11 thousand during 2013 due to the statute of limitations expiring on a portion of the potential
tax payment. The amount accrued for interest at December 31, 2013 and 2012 was $12 thousand and $23 thousand, respectively. No penalties were accrued or recorded during any year in the three years ended December 31, 2013.
The Company files U.S. federal and various state income tax returns. The Company is no longer subject to income tax examinations by taxing authorities for the years before 2010.
10. Retirement Plans
The Company maintains a salary savings plan that covers substantially all of its employees. The Company matches voluntary tax deferred employee contributions at 50% of eligible deferrals up to a maximum of 6% of the participants’ compensation. The Company may, at the discretion of its Board, contribute an additional amount based upon a percentage of covered employees’ salaries. The Company did not make a discretionary contribution during 2013, 2012, or 2011. Discretionary contributions are allocated among participants in the ratio that each participant’s compensation bears to all participants’ compensation. Eligible employees are presented with various investment alternatives related to the salary savings plan. Those alternatives include various stock and bond mutual funds ranging from traditional growth funds to more stable income funds as well as an option to invest in bank certificates of deposits. Company shares are not an available investment alternative in the salary savings plan. The total retirement plan expense for 2013, 2012, and 2011 was $528 thousand, $485 thousand, and $470 thousand, respectively.
In connection with its acquisition of Citizens Northern, the Company acquired nonqualified supplemental retirement plans for certain key employees. Benefits provided under these plans are unfunded, and payments to plan participants are made by the Company.
The following schedules set forth a reconciliation of the changes in the supplemental retirement plans’ benefit obligation and funded status for the years ended December 31, 2013 and 2012.
(In thousands) | 2013 | 2012 | ||||||
Change in Benefit Obligation | ||||||||
Obligation at beginning of year | $ | 741 | $ | 706 | ||||
Service cost | 28 | 26 | ||||||
Interest cost | 29 | 29 | ||||||
Actuarial loss | 3 | 8 | ||||||
Benefit payments | (27 | ) | (28 | ) | ||||
Obligation at end of year | $ | 774 | $ | 741 |
The following table provides disclosure of the net periodic benefit cost as of December 31 for the years indicated.
(In thousands) | 2013 | 2012 | ||||||
Service cost | $ | 28 | $ | 26 | ||||
Interest cost | 29 | 29 | ||||||
Recognized net actuarial loss | 12 | 8 | ||||||
Net periodic benefit cost | $ | 69 | $ | 63 | ||||
Major assumptions: | ||||||||
Discount rate used to determine net period benefit cost | 4.03 | % | 4.39 | % | ||||
Discount rate used to determine benefit obligation at year end | 4.06 | 4.03 |
The following table presents estimated future benefit payments in the period indicated.
(In thousands) | Supplemental Retirement Plan | |||
2014 | $ | 36 | ||
2015 | 36 | |||
2016 | 36 | |||
2017 | 36 | |||
2018 | 36 | |||
2019-2023 | 287 | |||
Total | $ | 467 |
Amounts recognized in accumulated other comprehensive income as of December 31, 2013 and 2012 are as follows:
(In thousands) | 2013 | 2012 | ||||||
Unrecognized net actuarial loss | $ | 148 | $ | 157 | ||||
Total | $ | 148 | $ | 157 |
The estimated cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is as follows:
(In thousands) | Supplemental Retirement Plan | |||
Unrecognized net actuarial gain | $ | (4 | ) | |
Total | $ | (4 | ) |
11. Common Stock Options
During 1997, the Company’s Board of Directors approved a nonqualified stock option plan (the “Plan”), subsequently approved by the Company’s shareholders, that has provided for the granting of stock options to key employees and officers of the Company. The Plan provides for the granting of options to purchase up to 450,000 shares of the Company’s common stock at a price equal to the fair value of the Company’s common stock on the date the option is granted. The options expire after ten years from the grant date and must be held for a minimum of one year before they can be exercised. Forfeited options are available for the granting of additional stock options under the Plan. Options forfeited from the initial grant in 1997 were used to grant options during 2000 and 2004. Total options granted were 450,000, 54,000, and 40,049 in the years 1997, 2000, and 2004, respectively. Unexercised options granted during 1997 and 2000 have expired. All outstanding options granted under the Plan are vested. At December 31, 2013, there were 54,172 options available for future grants under the Plan.
A summary of the activity in the Company’s Plan for 2013 is presented below.
2013 | ||||||||
Shares | Weighted Average Exercise Price | |||||||
Options outstanding at beginning of year | 24,049 | $ | 34.80 | |||||
Forfeited | (2,000 | ) | 34.80 | |||||
Options outstanding at year-end | 22,049 | $ | 34.80 | |||||
Options exercisable at year-end | 22,049 | $ | 34.80 |
Options outstanding at year-end 2013 have a remaining contractual life of .83 years. Aggregate options outstanding and exercisable at December 31, 2013 had no intrinsic value since the exercise price was in excess of the market price of the
Company’s stock. There were no options exercised or granted in any year in the three-year periods ending December 31, 2013, nor were there any modifications or cash paid to settle stock option awards during those periods.
12. Postretirement Medical Benefits
Prior to 2003, the Company provided lifetime medical and dental benefits upon retirement for certain employees meeting the eligibility requirements as of December 31, 1989 (“Plan 1”). During 2003, the Company implemented an additional postretirement health insurance program (“Plan 2”). Under Plan 2, any employee meeting the service requirement of 20 years of full time service to the Company and is at least age 55 years of age upon retirement is eligible to continue their health insurance coverage. Under both plans, retirees not yet eligible for Medicare have coverage identical to the coverage offered to active employees. Under both plans, Medicare-eligible retirees are provided with a Medicare Advantage plan. The Company pays 100% of the cost of Plan 1. The Company and the retirees each pay 50% of the cost under Plan 2. Both plans are unfunded.
The following schedules set forth a reconciliation of the changes to the benefit obligation and funded status of the plans for the years ended December 31, 2013 and 2012.
(In thousands) | 2013 | 2012 | ||||||
Change in Benefit Obligation | ||||||||
Obligation at beginning of year | $ | 15,935 | $ | 14,294 | ||||
Service cost | 630 | 617 | ||||||
Interest cost | 551 | 608 | ||||||
Actuarial (gain) loss | (4,277 | ) | 674 | |||||
Participant contributions | 97 | 85 | ||||||
Benefit payments | (348 | ) | (343 | ) | ||||
Obligation at end of year | $ | 12,588 | $ | 15,935 |
The following table provides disclosure of the net periodic benefit cost as of December 31 for the years indicated.
(In thousands) | 2013 | 2012 | ||||||
Service cost | $ | 630 | $ | 617 | ||||
Interest cost | 551 | 608 | ||||||
Amortization of transition obligation | - | 102 | ||||||
Recognized prior service cost | 257 | 257 | ||||||
Amortization of net actuarial loss | - | 56 | ||||||
Net periodic benefit cost | $ | 1,438 | $ | 1,640 | ||||
Major assumptions: | ||||||||
Discount rate used to determine net periodic benefit cost | 4.03 | % | 4.39 | % | ||||
Discount rate used to determine benefit obligation as of year end | 4.93 | 4.03 | ||||||
Retiree participation rate (Plan 1) | 100.00 | 100.00 | ||||||
Retiree participation rate (Plan 2) | 72.00 | 72.00 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. For measurement purposes, the rate of increase in pre-Medicare medical care claims costs was 8% and 7% for 2014 and 2015, respectively, then grading down by .5% annually to 5% for 2019 and thereafter. For dental claims cost, it was 5% for 2014 and thereafter. A 1% change in the assumed health care cost trend rates would have the following incremental effects:
(In thousands) | 1% Increase | 1% Decrease | ||||||
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost | $ | 252 | $ | (194 | ) | |||
Effect on accumulated postretirement benefit obligation | 2,444 | (1,934 | ) |
The following table presents estimated future benefit payments in the period indicated.
(In thousands) | Postretirement Medical Benefits | |||
2014 | $ | 340 | ||
2015 | 355 | |||
2016 | 377 | |||
2017 | 422 | |||
2018 | 461 | |||
2019-2023 | 2,909 | |||
Total | $ | 4,864 |
Amounts recognized in accumulated other comprehensive income as of December 31, 2013 and 2012 are as follows:
(In thousands) | 2013 | 2012 | ||||||
Unrecognized net actuarial (gain) loss | $ | (1,190 | ) | $ | 3,087 | |||
Unrecognized prior service cost | 383 | 639 | ||||||
Total | $ | (807 | ) | $ | 3,726 |
The estimated costs that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are as follows:
(In thousands) | Postretirement Medical Benefits | ||||
Unrecognized prior service cost | $ | 207 | |||
Unrecognized net actuarial gain | (63 | ) | |||
Total | $ | 144 |
13. Leases
The Company leases certain branch sites and banking equipment under various operating leases. Branch site leases have renewal options of varying lengths and terms. The following table presents estimated future minimum rental commitments under these leases for the period indicated.
(In thousands) | Operating Leases | |||
2014 | $ | 349 | ||
2015 | 313 | |||
2016 | 244 | |||
2017 | 124 | |||
2018 | 113 | |||
Thereafter | 537 | |||
Total | $ | 1,680 |
Rent expense was $399 thousand, $424 thousand, and $451 thousand for 2013, 2012, and 2011, respectively.
14.Financial Instruments With Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The financial instruments include commitments to extend credit in the form of unused lines of credit and standby letters of credit.
These financial instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Total commitments to extend credit were $140 million and $129 million at December 31, 2013 and 2012, respectively. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit, if deemed necessary by the Company, is based on management’s credit evaluation of the counter-party. Collateral held varies, but may include accounts receivable, marketable securities, inventory, premises and equipment, residential real estate, and income producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that received when extending credit to customers. The fair value of these instruments is not considered material for disclosure. The Company had $23.4 million and $24.4 million in irrevocable letters of credit outstanding at December 31, 2013 and 2012, respectively.
The contractual amount of financial instruments with off-balance sheet risk was as follows at year-end:
December 31, | 2013 | 2012 | ||||||||||||||
(In thousands) | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | ||||||||||||
Commitments to extend credit, including unused lines of credit | $ | 56,884 | $ | 82,934 | $ | 51,447 | $ | 77,176 | ||||||||
Standby letters of credit | 2,578 | 20,816 | 2,647 | 21,740 | ||||||||||||
Total | $ | 59,462 | $ | 103,750 | $ | 54,094 | $ | 98,916 |
15. Concentration of Credit Risk
The Company’s bank subsidiaries actively engage in lending, primarily in their home counties around Central and Northern Kentucky and adjacent areas. Collateral is received to support these loans as deemed necessary. The more significant categories of collateral include cash on deposit with the Company’s banks, marketable securities, income producing properties, commercial real estate, home mortgages, and consumer durables. Loans outstanding, commitments to make loans, and letters of credit range across a large number of industries and individuals. The obligations are significantly diverse and reflect no material concentration in one or more areas, other than most of the Company’s loans are in Kentucky and secured by real estate and thus significantly affected by changes in the Kentucky economy.
16.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. As of December 31, 2013, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. It is the opinion of management, after discussion with legal counsel, that the disposition or ultimate resolution of such claims and legal actions will not have a material effect upon the consolidated financial statements of the Company.
17.Regulatory Matters
The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements will initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the banks must meet specific capital guidelines that involve quantitative measures of the banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and its subsidiary banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum amounts and ratios (set forth in the tables below) of Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). As of December 31, 2013, the most recent notification from the FDIC categorized the banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the banks must maintain minimum Tier 1 Risk-based, Total Risk-based, and Tier 1 Leverage ratios as set forth in the tables. There are no conditions or events since that notification that management believes have changed the institutions’ category. As noted below under the caption “Summary of Regulatory Agreements,” two of the Company’s subsidiary banks are required to maintain certain capital ratios that exceed the regulatory established well-capitalized status.
The regulatory capital amounts and ratios of the consolidated Company and its subsidiary banks are presented in the following tables for the dates indicated.
(Dollars in thousands) | Actual | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||
December 31, 2013 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Tier 1 Risk-based Capital1 | ||||||||||||||||||||||||
Consolidated | $ | 216,162 | 18.95 | % | $ | 45,623 | 4.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank | 67,409 | 17.56 | 15,351 | 4.00 | $ | 23,026 | 6.00 | % | ||||||||||||||||
United Bank2 | 51,336 | 15.06 | 13,634 | 4.00 | 20,450 | 6.00 | ||||||||||||||||||
First Citizens | 28,814 | 12.92 | 8,917 | 4.00 | 13,376 | 6.00 | ||||||||||||||||||
Citizens Northern2 | 24,455 | 13.57 | 7,208 | 4.00 | 10,812 | 6.00 | ||||||||||||||||||
Total Risk-based Capital 1 | ||||||||||||||||||||||||
Consolidated | $ | 230,497 | 20.21 | % | $ | 91,245 | 8.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank | 72,231 | 18.82 | 30,702 | 8.00 | $ | 38,377 | 10.00 | % | ||||||||||||||||
United Bank2 | 55,664 | 16.33 | 27,267 | 8.00 | 34,084 | 10.00 | ||||||||||||||||||
First Citizens | 30,485 | 13.67 | 17,835 | 8.00 | 22,294 | 10.00 | ||||||||||||||||||
Citizens Northern2 | 26,708 | 14.82 | 14,415 | 8.00 | 18,019 | 10.00 | ||||||||||||||||||
Tier 1 Leverage Capital 3 | ||||||||||||||||||||||||
Consolidated | $ | 216,162 | 11.90 | % | $ | 72,677 | 4.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank | 67,409 | 9.60 | 28,077 | 4.00 | $ | 35,096 | 5.00 | % | ||||||||||||||||
United Bank2 | 51,336 | 9.67 | 21,233 | 4.00 | 26,542 | 5.00 | ||||||||||||||||||
First Citizens | 28,814 | 9.03 | 12,768 | 4.00 | 15,960 | 5.00 | ||||||||||||||||||
Citizens Northern2 | 24,455 | 9.67 | 10,113 | 4.00 | 12,641 | 5.00 | ||||||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||
Tier 1 Risk-based Capital1 | ||||||||||||||||||||||||
Consolidated | $ | 206,470 | 18.27 | % | $ | 45,215 | 4.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank2 | 69,582 | 17.94 | 15,515 | 4.00 | $ | 23,273 | 6.00 | % | ||||||||||||||||
United Bank2 | 51,695 | 15.41 | 13,420 | 4.00 | 20,130 | 6.00 | ||||||||||||||||||
First Citizens | 29,017 | 13.57 | 8,552 | 4.00 | 12,828 | 6.00 | ||||||||||||||||||
Citizens Northern2 | 23,553 | 12.97 | 7,264 | 4.00 | 10,896 | 6.00 | ||||||||||||||||||
Total Risk-based Capital 1 | ||||||||||||||||||||||||
Consolidated | $ | 220,741 | 19.53 | % | $ | 90,431 | 8.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank2 | 74,475 | 19.20 | 31,030 | 8.00 | $ | 38,788 | 10.00 | % | ||||||||||||||||
United Bank2 | 55,980 | 16.69 | 26,839 | 8.00 | 33,549 | 10.00 | ||||||||||||||||||
First Citizens | 30,908 | 14.46 | 17,104 | 8.00 | 21,380 | 10.00 | ||||||||||||||||||
Citizens Northern2 | 25,826 | 14.22 | 14,528 | 8.00 | 18,159 | 10.00 | ||||||||||||||||||
Tier 1 Leverage Capital 3 | ||||||||||||||||||||||||
Consolidated | $ | 206,470 | 11.24 | % | $ | 73,479 | 4.00 | % | N/A | N/A | ||||||||||||||
Farmers Bank2 | 69,582 | 9.68 | 28,768 | 4.00 | $ | 35,960 | 5.00 | % | ||||||||||||||||
United Bank2 | 51,695 | 9.45 | 21,878 | 4.00 | 27,347 | 5.00 | ||||||||||||||||||
First Citizens | 29,017 | 9.42 | 12,327 | 4.00 | 15,409 | 5.00 | ||||||||||||||||||
Citizens Northern2 | 23,553 | 9.36 | 10,063 | 4.00 | 12,579 | 5.00 |
1Tier 1 Risk-based and Total Risk-based Capital ratios are computed by dividing a bank’s Tier 1 or Total Capital, as defined by regulation, by a risk-weighted sum of the bank’s assets, with the risk weighting determined by general standards established by regulation. The safest assets (e.g., government obligations) are assigned a weighting of 0% with riskier assets receiving higher ratings (e.g., ordinary commercial loans are assigned a weighting of 100%).
2See discussion below under the caption“Summary of Regulatory Agreements” for minimum capital ratios required as part of the bank’s regulatory agreement.
3Tier 1 Leverage ratio is computed by dividing a bank’s Tier 1 Capital by its total quarterly average assets, as defined by regulation.
Payment of dividends by the Company’s subsidiary banks is subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. Generally, capital distributions are limited to undistributed net income for the current and prior two years, subject to the capital requirements as summarized above. Furthermore, at December 31, 2013, two of the Company’s subsidiary banks are required to obtain regulatory approval before declaring or paying a dividend to the Parent Company as a result of agreements entered into with their primary regulator. The payment of dividends by the Parent Company to its shareholders is also subject to approval as a result of its regulatory agreement.
Summary of Regulatory Agreements
Below is a summary of the regulatory agreements that the Parent Company and two of its subsidiary banks have entered into with their primary regulators. The agreement entered into during 2009 between Farmers Bank and its primary regulator was terminated in January 2013 as a result of satisfactory compliance.
Parent Company
Primarily due to regulatory actions during 2009 at certain of the Company’s subsidiary banks (further discussed below), the Federal Reserve Bank of St. Louis (“FRB St. Louis”) and the Kentucky Department of Financial Institutions (“KDFI”) proposed the Company enter into a Memorandum of Understanding (“Memorandum”). The Company’s board approved entry into the Memorandum at a regular board meeting during the fourth quarter of 2009. Pursuant to the Memorandum, the Company agreed that it would develop an acceptable capital plan to ensure that the consolidated organization remains well-capitalized and each of its subsidiary banks meet the capital requirements imposed by their regulator as summarized below.
The Company also agreed to reduce its common stock dividend in the fourth quarter of 2009 from $.25 per share down to $.10 per share and not make interest payments on the Company’s trust preferred securities or dividends on its common or preferred stock without prior approval from FRB St. Louis and the KDFI. Representatives of the FRB St. Louis and the KDFI have indicated that any such approval for the payment of dividends will be predicated on a demonstration of adequate, normalized earnings on the part of the Company’s subsidiaries sufficient to support quarterly payments on the Company’s trust preferred securities and quarterly dividends on the Company’s common and preferred stock. While both regulatory agencies have granted approval of all subsequent quarterly Company requests to make interest payments on its trust preferred securities and dividends on its preferred stock, the Company has not (based on the assessment by Company management of both the Company’s capital position and the earnings of its subsidiaries) sought regulatory approval for the payment of common stock dividends since the fourth quarter of 2009. Moreover, the Company will not pay any such dividends on its common stock in any subsequent quarter until the regulator’s assessment of the earnings of the Company’s subsidiaries, and the Company’s assessment of its capital position, both yield the conclusion that the payment of a Company common stock dividend is warranted.
Other components in the regulatory order for the parent company include requesting and receiving regulatory approval for the payment of new salaries/bonuses or other compensation to insiders; assisting its subsidiary banks in addressing weaknesses identified in their reports of examinations; providing periodic reports detailing how it will meet its debt service obligations; and providing progress reports with its compliance with the regulatory Memorandum.
United Bank
In November of 2009, the FDIC and the KDFI entered into a Cease and Desist Order (“C&D”) with United Bank primarily as a result of its level of nonperforming assets. The C&D was terminated in December 2011 coincident with the issuance of a Consent Order (“Consent Order”) entered into between the parties. The Consent Order is substantially the same as the C&D, with the primary exception being that United Bank must achieve and maintain a Tier 1 Leverage ratio of 9.0% and a Total Risk-based Capital ratio of 13.0% no later than March 31, 2012.
Other components in the regulatory order include stricter oversight and reporting to its regulators in terms of complying with the Consent Order. It also includes an increase in the level of reporting by management to its board of directors of its financial results, budgeting, and liquidity analysis, as well as restricting the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination. There is also a requirement to obtain written consent prior to declaring or paying a dividend and to develop a written contingency plan if the bank is unable to meet the capital levels established in the Consent Order.
During January 2014, the Company received written notification from the FDIC and KDFI that the formal Consent Order entered into during 2011 with United Bank had been terminated and replaced with a stepped-down enforcement action in
the form of an informal Memorandum. The informal Memorandum includes substantially the same provisions covered by the Consent Order.
Citizens Northern
The FDIC and the KDFI entered into a Memorandum with Citizens Northern in September 2010. The Memorandum was terminated July 7, 2013 upon the issuance of an updated Memorandum. The updated Memorandum contains many of the same provisions included in the terminated Memorandum, with a new requirement that Citizens Northern maintain a Tier 1 leverage ratio at or above 9.0%. In addition, the updated Memorandum requires having and retaining qualified management in the areas of loan administration and collection. It also requires Citizens Northern to address credit underwriting and administration weaknesses identified in the most recent examination of the bank by the FDIC and the KDFI.
Other parts of the regulatory order include the development and documentation of plans for reducing problem loans, providing progress reports on compliance with the Memorandum, and for the development and implementation of a written profit plan and strategic plans. It also restricts the bank from extending additional credit to borrowers with credits classified as substandard, doubtful or special mention in the report of examination.
Regulators continue to monitor the Company’s progress and compliance with the regulatory agreements through periodic on-site examinations, regular communications, and quarterly data analysis. At the Parent Company and at each of its bank subsidiaries, the Company believes it is adequately addressing all issues of the regulatory agreements to which it is subject. However, only the respective regulatory agencies can determine if compliance with the applicable regulatory agreements has been met. The Company believes that it and its subsidiary banks are in compliance with the requirements identified in the regulatory agreements as of December 31, 2013.
The Parent Company maintains cash available to fund a certain amount of additional injections of capital to its bank subsidiaries as determined by management or if required by its regulators. If needed, further amounts in excess of available cash may be funded by future public or private sales of securities, although the Parent Company is currently under no directive by its regulators to raise any additional capital.
18. Fair Value Measurements
ASC Topic 820,“Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements. ASC Topic 825,“Financial Instruments,” allows entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any of its financial assets or liabilities.
ASC Topic 820 defines fair value as the price that would be received to sell 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 at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This Topic describes three levels of inputs that may be used to measure fair value:
Level 1: | Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access at 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 for substantially the full term of the assets or liabilities. |
Level 3: | Significant unobservable inputs that reflect a reporting entity’s own assumptions supported by little or no market activity, about the assumptions that market participants would use in pricing the asset or liability. |
Following is a description of the valuation method used for instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities that meet the requirement.
Available for sale investment securities
Valued primarily by independent third party pricing services under the market valuation approach that include, but are not limited to, the following inputs:
● | Mutual funds and equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities and are considered Level 1 inputs. |
● | Government-sponsored agency debt securities, obligations of states and political subdivisions, mortgage-backed securities, corporate bonds, and other similar investment securities are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources and are considered Level 2 inputs. |
Available for sale investment securities are the Company’s only balance sheet item that meets the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures as of December 31, 2013 and 2012 are as follows:
Fair Value Measurements Using | ||||||||||||||||
(In thousands) | Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||
December 31, 2013 | ||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 93,750 | $ | - | $ | 93,750 | $ | - | ||||||||
Obligations of states and political subdivisions | 131,970 | - | 131,970 | - | ||||||||||||
Mortgage-backed securities – residential | 378,077 | - | 378,077 | - | ||||||||||||
Mortgage-backed securities – commercial | 689 | - | 689 | - | ||||||||||||
Corporate debt securities | 6,257 | - | 6,257 | - | ||||||||||||
Mutual funds and equity securities | 2,077 | 2,077 | - | - | ||||||||||||
Total | $ | 612,820 | $ | 2,077 | $ | 610,743 | $ | - | ||||||||
December 31, 2012 | ||||||||||||||||
Obligations of U.S. government-sponsored entities | $ | 76,095 | $ | - | $ | 76,095 | $ | - | ||||||||
Obligations of states and political subdivisions | 118,755 | - | 118,755 | - | ||||||||||||
Mortgage-backed securities – residential | 370,439 | - | 370,439 | - | ||||||||||||
Corporate debt securities | 5,826 | - | 5,826 | - | ||||||||||||
Mutual funds and equity securities | 1,993 | 1,993 | - | - | ||||||||||||
Total | $ | 573,108 | $ | 1,993 | $ | 571,115 | $ | - |
The Company is required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis in periods following their initial recognition. The Company’s disclosure about assets and liabilities measured at fair value on a nonrecurring basis consists of impaired loans and OREO. The carrying value of these assets are adjusted to fair value on a nonrecurring basis through impairment charges as described more fully below.
Impairment charges on collateral-dependent loans are recorded by either an increase to the provision for loan losses and related allowance or by direct loan charge-offs. The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is measured based on recent appraisals of the underlying collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the
income approach. Appraisers take absorption rates into consideration and adjustments are routinely made in the appraisal process to identify differences between the comparable sales and income data available. Such adjustments consist mainly of estimated costs to sell that are not included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for which a newer appraisal is available. These adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.
OREO includes properties acquired by the Company through, or in lieu of, actual loan foreclosures and is carried at fair value less estimated costs to sell. Fair value of OREO at acquisition is generally based on third party appraisals of the property that includes comparable sales data and is considered as Level 3 inputs. The carrying value of each OREO property is updated at least annually and more frequently when market conditions significantly impact the value of the property. If the carrying amount of the OREO exceeds fair value less estimated costs to sell, an impairment loss is recorded through noninterest expense.
The following table represents the carrying amount of assets measured at fair value on a nonrecurring basis and still held by the Company as of the dates indicated. The amounts in the table only represent assets whose carrying amount has been adjusted by impairment charges during the period in a manner as described above; therefore, these amounts will differ from the total amounts outstanding. Collateral-dependent impaired loan amounts in the tables below exclude restructured loans since they are measured based on present value techniques, which are outside the scope of the fair value reporting framework.
Fair Value Measurements Using | ||||||||||||||||
(In thousands) | Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||
December 31, 2013 | ||||||||||||||||
Collateral-dependent Impaired Loans | ||||||||||||||||
Real estate mortgage - construction and land development | $ | 334 | $ | - | $ | - | $ | 334 | ||||||||
Real estate mortgage - residential | 2,085 | - | - | 2,085 | ||||||||||||
Real estate mortgage - farmland and other commercial enterprises | 3,152 | - | - | 3,152 | ||||||||||||
Commercial and industrial | 88 | - | - | 88 | ||||||||||||
Total | $ | 5,659 | $ | - | $ | - | $ | 5,659 | ||||||||
OREO | ||||||||||||||||
Construction and land development | $ | 14,465 | $ | - | $ | - | $ | 14,465 | ||||||||
Residential real estate | 1,116 | - | - | 1,116 | ||||||||||||
Farmland and other commercial enterprises | 9,152 | - | - | 9,152 | ||||||||||||
Total | $ | 24,733 | $ | - | $ | - | $ | 24,733 |
Fair Value Measurements Using | ||||||||||||||||
(In thousands) | Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||
December 31, 2012 | ||||||||||||||||
Collateral-dependent Impaired Loans | ||||||||||||||||
Real estate mortgage - construction and land development | $ | 17,921 | $ | - | $ | - | $ | 17,921 | ||||||||
Real estate mortgage - residential | 2,273 | - | - | 2,273 | ||||||||||||
Real estate mortgage - farmland and other commercial enterprises | 3,523 | - | - | 3,523 | ||||||||||||
Commercial and industrial | 9 | - | - | 9 | ||||||||||||
Consumer - secured | 4 | - | - | 4 | ||||||||||||
Consumer - unsecured | 113 | - | - | 113 | ||||||||||||
Total | $ | 23,843 | $ | - | $ | - | $ | 23,843 | ||||||||
OREO | ||||||||||||||||
Construction and land development | $ | 15,873 | $ | - | $ | - | $ | 15,873 | ||||||||
Residential real estate | 1,483 | - | - | 1,483 | ||||||||||||
Farmland and other commercial enterprises | 3,826 | - | - | 3,826 | ||||||||||||
Total | $ | 21,182 | $ | - | $ | - | $ | 21,182 |
The following table presents impairment charges recorded in earnings on assets measured at fair value on a nonrecurring basis.
(In thousands) Years Ended December 31, | 2013 | 2012 | ||||||
Impairment charges: | ||||||||
Collateral-dependent impaired loans | $ | 787 | $ | 4,755 | ||||
OREO | 4,689 | 3,120 | ||||||
Total | $ | 5,476 | $ | 7,875 |
The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level 3 measurements.
(In thousands) | Fair Value at | Valuation Technique | Unobservable Inputs | Range | Weighted Average | |||||||||
Collateral-dependent impaired loans | $ | 5,659 | Discounted appraisals | Marketability discount | 0% | - | 6.3% | 1.6 | % | |||||
OREO | $ | 24,733 | Discounted appraisals | Marketability discount | .8% | - | 67.5% | 11.3 | % |
As previously discussed, the fair value of real estate securing collateral-dependent impaired loans and OREO are based on current third party appraisals. It is often necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO. These discounts relate primarily to marketing and other holding costs that are not included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. Discounts also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table above for 2013. The upper end of the range identified in the table above related to OREO is the result of a few outlier transactions of small dollar properties written down to the contracted sales price, which magnified the percentage. The weighted average column is more of an indicator of the discounts applied to the appraisals.
Fair Value of Financial Instruments
The table that follows represents the estimated fair values of the Company’s financial instruments made in accordance with the requirements of ASC Topic 825,“Financial Instruments.” ASC Topic 825 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet for which it is practicable to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and present value or other valuation techniques. These derived fair values are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments not presented elsewhere for which it is practicable to estimate that value.
Cash and Cash Equivalents, Accrued Interest Receivable, and Accrued Interest Payable
The carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization or settlement.
Investment Securities Held to Maturity
Fair value is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities orwith available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources.
Loans
The fair value of loans is estimated by discounting expected future cash flows using current discount rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Expected future cash flows are projected based on contractual cash flows adjusted for estimated prepayments.
Federal Home Loan Bank and Federal Reserve Bank Stock
It is not practical to determine the fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date and fair value approximates carrying value. The fair value of fixed maturity certificates of deposit is estimated by discounting the expected future cash flows using the rates currently offered for certificates of deposit with similar remaining maturities.
Federal Funds Purchased and Other Short-term Borrowings
The carrying amount is the estimated fair value for these borrowings which reprice frequently in the near term.
Securities Sold Under Agreements to Repurchase, Subordinated Notes Payable, and Other Long-term Borrowings
The fair value of these borrowings is estimated by discounting the expected future cash flows using rates currently available for debt with similar terms and remaining maturities. For subordinated notes payable, the Company uses its best estimate to determine an appropriate discount rate since active markets for similar debt transactions are very limited.
Commitments to Extend Credit and Standby Letters of Credit
Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding, compensating balance, and other covenants or requirements. Loan commitments generally
have fixed expiration dates, variable interest rates and contain termination and other clauses that provide for relief from funding in the event there is a significant deterioration in the credit quality of the customer. Many loan commitments are expected to, and typically do, expire without being drawn upon. The rates and terms of the Company’s commitments to lend and standby letters of credit are competitive with others in the various markets in which the Company operates. There are no unamortized fees relating to these financial instruments, as such the carrying value and fair value are both zero.
The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013 and 2012. Information for available for sale investment securities is presented within this footnote in greater detail above.
Fair Value Measurements Using | ||||||||||||||||||||
(In thousands) | Carrying | Fair | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 68,253 | $ | 68,253 | $ | 68,253 | $ | - | $ | - | ||||||||||
Held to maturity investment securities | 765 | 827 | - | 827 | - | |||||||||||||||
Loans, net | 979,306 | 977,846 | - | - | 977,846 | |||||||||||||||
Accrued interest receivable | 5,901 | 5,901 | - | 5,901 | - | |||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank Stock | 9,516 | N/A | - | - | - | |||||||||||||||
Liabilities | ||||||||||||||||||||
Deposits | 1,410,215 | 1,412,572 | 938,700 | - | 473,872 | |||||||||||||||
Federal funds purchased and other short-term borrowings | 29,123 | 29,123 | - | 29,123 | - | |||||||||||||||
Securities sold under agreements to repurchase and other long-term borrowings | 127,880 | 139,375 | - | 139,375 | - | |||||||||||||||
Subordinated notes payable to unconsolidated trusts | 48,970 | 26,070 | - | - | 26,070 | |||||||||||||||
Accrued interest payable | 1,137 | 1,137 | - | 1,137 | - | |||||||||||||||
December 31, 2012 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 95,855 | $ | 95,855 | $ | 95,855 | $ | - | $ | - | ||||||||||
Held to maturity investment securities | 820 | 956 | - | 956 | - | |||||||||||||||
Loans, net | 980,550 | 979,301 | - | - | 979,301 | |||||||||||||||
Accrued interest receivable | 6,074 | 6,074 | - | 6,074 | - | |||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank Stock | 9,516 | N/A | - | - | - | |||||||||||||||
Liabilities | ||||||||||||||||||||
Deposits | 1,410,810 | 1,414,395 | 870,145 | - | 544,250 | |||||||||||||||
Federal funds purchased and other short-term borrowings | 24,083 | 24,083 | - | 24,083 | - | |||||||||||||||
Securities sold under agreements to repurchase and other long-term borrowings | 129,297 | 148,680 | - | 148,680 | - | |||||||||||||||
Subordinated notes payable to unconsolidated trusts | 48,970 | 21,015 | - | - | 21,015 | |||||||||||||||
Accrued interest payable | 1,370 | 1,370 | - | 1,370 | - |
19. Parent Company Financial Statements
Condensed Balance Sheets
December 31, (In thousands) | 2013 | 2012 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 36,471 | $ | 24,776 | ||||
Investment in subsidiaries | 185,668 | 196,406 | ||||||
Other assets | 851 | 862 | ||||||
Total assets | $ | 222,990 | $ | 222,044 | ||||
Liabilities | ||||||||
Dividends payable | $ | 188 | $ | 188 | ||||
Subordinated notes payable to unconsolidated trusts | 48,970 | 48,970 | ||||||
Other liabilities | 3,777 | 4,865 | ||||||
Total liabilities | 52,935 | 54,023 | ||||||
Shareholders’ Equity | ||||||||
Preferred stock | 29,988 | 29,537 | ||||||
Common stock | 935 | 934 | ||||||
Capital surplus | 51,102 | 50,934 | ||||||
Retained earnings | 91,242 | 79,747 | ||||||
Accumulated other comprehensive (loss) income | (3,212 | ) | 6,869 | |||||
Total shareholders’ equity | 170,055 | 168,021 | ||||||
Total liabilities and shareholders’ equity | $ | 222,990 | $ | 222,044 |
Condensed Statements of Income and Comprehensive Income
Years Ended December 31, (In thousands) | 2013 | 2012 | 2011 | |||||||||
Income | ||||||||||||
Dividends from subsidiaries | $ | 14,566 | $ | 12,012 | $ | 4,511 | ||||||
Interest | 29 | 19 | 16 | |||||||||
Other noninterest income | 3,740 | 3,476 | 3,369 | |||||||||
Total income | 18,335 | 15,507 | 7,896 | |||||||||
Expense | ||||||||||||
Interest expense- subordinated notes payable to unconsolidated trusts | 864 | 1,879 | 2,026 | |||||||||
Interest expense on other borrowed funds | - | - | 2 | |||||||||
Noninterest expense | 3,980 | 3,875 | 3,484 | |||||||||
Total expense | 4,844 | 5,754 | 5,512 | |||||||||
Income before income tax benefit and equity in undistributed income of subsidiaries | 13,491 | 9,753 | 2,384 | |||||||||
Income tax benefit | (428 | ) | (759 | ) | (854 | ) | ||||||
Income before equity in undistributed income of subsidiaries | 13,919 | 10,512 | 3,238 | |||||||||
Equity in undistributed (loss) income of subsidiaries | (473 | ) | 1,637 | (500 | ) | |||||||
Net income | 13,446 | 12,149 | 2,738 | |||||||||
Other comprehensive (loss) income | (10,081 | ) | 226 | 5,745 | ||||||||
Comprehensive income | $ | 3,365 | $ | 12,375 | $ | 8,483 |
Condensed Statements of Cash Flows
Years Ended December 31, (In thousands) | 2013 | 2012 | 2011 | |||||||||
Cash Flows From Operating Activities | ||||||||||||
Net income | $ | 13,446 | $ | 12,149 | $ | 2,738 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Equity in undistributed loss (income) of subsidiaries | 473 | (1,637 | ) | 500 | ||||||||
Noncash employee stock purchase plan expense | 4 | 3 | 3 | |||||||||
Change in other assets and liabilities, net | (799 | ) | (590 | ) | 1,253 | |||||||
Deferred income tax (benefit) expense | (62 | ) | (64 | ) | 735 | |||||||
Net cash provided by operating activities | 13,062 | 9,861 | 5,229 | |||||||||
Cash Flows From Investing Activities | ||||||||||||
Return of equity from nonbank subsidiary | - | 500 | - | |||||||||
Investment in bank subsidiaries | - | (2,500 | ) | (4,000 | ) | |||||||
Proceeds from liquidation of company-owned life insurance | - | - | 2,248 | |||||||||
Net cash used in investing activities | - | (2,000 | ) | (1,752 | ) | |||||||
Cash Flows From Financing Activities | ||||||||||||
Dividends paid, preferred | (1,500 | ) | (1,500 | ) | (1,500 | ) | ||||||
Repurchase of common stock warrant | - | (75 | ) | - | ||||||||
Shares issued under employee stock purchase plan | 133 | 128 | 136 | |||||||||
Net cash used in financing activities | (1,367 | ) | (1,447 | ) | (1,364 | ) | ||||||
Net increase in cash and cash equivalents | 11,695 | 6,414 | 2,113 | |||||||||
Cash and cash equivalents at beginning of year | 24,776 | 18,362 | 16,249 | |||||||||
Cash and cash equivalents at end of year | $ | 36,471 | $ | 24,776 | $ | 18,362 |
20.Quarterly Financial Data (Unaudited)
(In thousands, except per share data) | ||||||||||||||||
Quarters Ended 2013 | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||
Interest income | $ | 16,742 | $ | 16,631 | $ | 16,563 | $ | 16,797 | ||||||||
Interest expense | 3,166 | 3,038 | 2,953 | 2,838 | ||||||||||||
Net interest income | 13,576 | 13,593 | 13,610 | 13,959 | ||||||||||||
Provision for loan losses | (632 | ) | (362 | ) | (586 | ) | (1,020 | ) | ||||||||
Net interest income after provision for loan losses | 14,208 | 13,955 | 14,196 | 14,979 | ||||||||||||
Noninterest income | 5,411 | 5,441 | 5,678 | 5,586 | ||||||||||||
Noninterest expense | 14,509 | 14,722 | 15,984 | 16,358 | ||||||||||||
Income before income taxes | 5,110 | 4,674 | 3,890 | 4,207 | ||||||||||||
Income tax expense | 1,318 | 1,127 | 855 | 1,135 | ||||||||||||
Net income | 3,792 | 3,547 | 3,035 | 3,072 | ||||||||||||
Less preferred stock dividends and discount accretion | 485 | 487 | 489 | 490 | ||||||||||||
Net income available to common shareholders | $ | 3,307 | $ | 3,060 | $ | 2,546 | $ | 2,582 | ||||||||
Net income per common share, basic and diluted | $ | .44 | $ | .41 | $ | .34 | $ | .35 | ||||||||
Weighted average common shares outstanding, basic and diluted | 7,470 | 7,473 | 7,475 | 7,477 |
(In thousands, except per share data) | ||||||||||||||||
Quarters Ended 2012 | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||
Interest income | $ | 18,410 | $ | 18,087 | $ | 17,578 | $ | 17,147 | ||||||||
Interest expense | 5,203 | 4,720 | 4,511 | 3,824 | ||||||||||||
Net interest income | 13,207 | 13,367 | 13,067 | 13,323 | ||||||||||||
Provision for loan losses | 977 | 1,341 | (256 | ) | 710 | |||||||||||
Net interest income after provision for loan losses | 12,230 | 12,026 | 13,323 | 12,613 | ||||||||||||
Noninterest income | 6,028 | 6,412 | 6,166 | 6,048 | ||||||||||||
Noninterest expense | 14,593 | 14,401 | 15,347 | 15,446 | ||||||||||||
Income before income taxes | 3,665 | 4,037 | 4,142 | 3,215 | ||||||||||||
Income tax expense | 356 | 890 | 1,051 | 613 | ||||||||||||
Net income | 3,309 | 3,147 | 3,091 | 2,602 | ||||||||||||
Less preferred stock dividends and discount accretion | 478 | 480 | 481 | 483 | ||||||||||||
Net income available to common shareholders | $ | 2,831 | $ | 2,667 | $ | 2,610 | $ | 2,119 | ||||||||
Net income per common share, basic and diluted | $ | .38 | $ | .36 | $ | .35 | $ | .28 | ||||||||
Weighted average common shares outstanding, basic and diluted | 7,447 | 7,454 | 7,461 | 7,466 |
21. Intangible Assets
Acquired core deposit and customer relationship intangible assets were as follows as of December 31 for the years indicated.
2013 | 2012 | |||||||||||||||||||||||
Amortized Intangible Assets (In thousands) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||
Core deposit intangibles | $ | 4,524 | $ | 3,910 | $ | 614 | $ | 6,398 | $ | 5,444 | $ | 954 | ||||||||||||
Other customer relationship intangibles | 2,414 | 2,174 | 240 | 3,689 | 3,249 | 440 | ||||||||||||||||||
Total | $ | 6,938 | $ | 6,084 | $ | 854 | $ | 10,087 | $ | 8,693 | $ | 1,394 |
Aggregate amortization expense of core deposit and customer relationship intangible assets was $540 thousand, $1.0 million, and $1.1 million for 2013, 2012, and 2011, respectively. Core deposit intangibles and customer relationship intangibles in the amount of $1.9 million and $1.3 million, respectively, recorded in connection with a prior business acquisition during 2006 have been removed from the gross carrying amount and accumulated amortization for 2013 due to being fully amortized. Core deposit and customer relationship intangible assets are scheduled to be fully amortized by 2015. Estimated expense over the remaining amortization period is as follows:
(In thousands) | Amount | |||
2014 | $ | 405 | ||
2015 | 449 |
22. Preferred Stock and Warrant
On January 9, 2009, as part of the U.S. Department of Treasury’s (“Treasury”) Capital Purchase Program (“CPP”), the Company issued 30 thousand shares of Series A, no par value cumulative perpetual preferred stock to the Treasury for $30.0 million. The Company also issued a warrant to the Treasury as part of the CPP allowing it to purchase 223,992 shares of the Company’s common stock at an exercise price of $20.09. In June 2012, the Treasury conducted an auction in which it sold all of its investment in the Company’s Series A preferred stock to private investors. The Company received no proceeds as part of the transaction. In July 2012, the Company repurchased the warrant issued to the Treasury at a
mutually agreed upon price of $75 thousand. Upon settlement of the warrent repurchase, the Treasury has no remaining equity stake in the Company.
The Company accounted for the allocation of the proceeds received from the issuance of the preferred shares, net of transaction costs, on a pro rata basis between the Series A preferred stock and the warrant based on their relative fair values. The Company used the Black-Scholes model to estimate the fair value of the warrant. The fair value of the Series A preferred stock was estimated using a discounted cash flow methodology with a discount rate of 13%. The Company assigned $2.0 million and $28.0 million to the warrant and the Series A preferred stock, respectively. The resulting discount on the Series A preferred stock is being accreted up to the $30.0 million liquidation amount over the initial five year expected life of the Series A preferred stock. The discount accretion is being recorded as additional preferred stock dividends, resulting in an effective dividend rate of 6.56%.
The Series A preferred shares have a liquidation preference of $1 thousand per share (plus any accrued and unpaid dividends) and pay a cumulative cash dividend quarterly at 5% per annum during the first five years, resetting to 9% thereafter. The Company may not pay dividends on the preferred shares without prior approval from its banking regulators. So long as the preferred shares are outstanding, the Company may not declare or pay a dividend or other distribution on its common stock, and generally may not purchase, redeem or otherwise acquire any shares of its common stock, unless all accrued and unpaid dividends on the preferred shares for all past dividend periods are paid in full. Holders of the preferred shares generally have no voting rights. However, if the Company defers dividend payments on its Series A preferred shares for an aggregate of six quarterly dividend periods, the authorized number of directors of the Company will increase by two and the holders of the Series A preferred shares will have the right to elect directors to fill such director positions at the Company’s next annual meeting of stockholders or special meeting called for that purpose. The Company may redeem the preferred shares for 100% of the liquidation preference amount at any time, in whole or in part, subject to obtaining prior approval of its banking regulators.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On September 14, 2011, the Audit Committee of the Registrant dismissed Crowe Horwath LLP (“Crowe”) and engaged BKD, LLP (“BKD”) as its independent accountants. Crowe’s service terminated at the completion of its audit and issuance of its related report on the Company’s financial statements filed on Form 10-K for the Company’s fiscal year ended December 31, 2011. The change in the Registrant's independent accountants was the result of a competitive bidding process involving several accounting firms.
In connection with the audits of the two fiscal years ended December 31, 2010, and the subsequent interim period through September 14, 2011, there were no disagreements with Crowe on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Crowe would have caused Crowe to make reference to the subject matter of the disagreements in connection with its reports. Crowe’s audit reports on the consolidated financial statements of the Company as of and for the years ended December 31, 2010 and 2009 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the Company’s two most recent fiscal years and the subsequent interim period through September 14, 2011.
During the two most recent fiscal years, and any subsequent interim period prior to engaging BKD, neither the Company, nor anyone on its behalf, consulted BKD regarding (i) either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, and either a written report was provided to the Company or oral advice was provided that BKD concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation S-K).
The Company requested that Crowe furnish it with a letter addressed to the Securities and Exchange Commission (“SEC”) stating whether it agrees with the above statements. A copy of Crowe’s letter to the SEC dated September 20, 2011 is attached as an exhibit to this report.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures and internal control over financial reporting are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no changes in the Company’s internal control over financial reporting or in other factors that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting or any corrective actions with regard to significant deficiencies and material weaknesses in internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management Responsibility.Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable
assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the presentation of published financial statements. However, all internal control systems, no matter how well designed, have inherent limitations.
General Description of Internal Control over Financial Reporting.Internal control over financial reporting refers to a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Company assets; |
● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Company’s receipts and expenditures are being made only in accordance with the authorization of Company’s management and members of the Company’s Board of Directors; and |
● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, uses or dispositions of Company assets that could have a material effect on the Company’s financial statements. |
Inherent Limitations in Internal Control over Financial Reporting.Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented or overridden by collusion or other improper activities. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management’s Assessment of the Company’s Internal Control over Financial Reporting.Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.2013. In making this assessment, the Company’s management used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework (1992).
As a result of our assessment of the Company’s internal control over financial reporting, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 20102013 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. This annual report does not include an attestation report of
BKD, LLP, the Company’sindependent registered public accounting firm regardingthat audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting. Management’sreporting as of December 31, 2013. The audit report was not subject to attestation byon the effectiveness of the Company’s registered public accounting
Item 9B. Other Information
None.
PART
IIIItem 10. Directors, Executive Officers and Corporate Governance
Executive Officer1 | Age | Positions and Offices With the Registrant | Years of Service |
With the | |||
Lloyd C. Hillard, Jr. | 67 | President and Chief | |
Executive Officer, Director2 | 213 |
1 | R. Terry Bennett, Chairman of the Company’s board of directors, is considered an executive officer in name only for purposes of Regulation O. |
2 | Also a director of Farmers Bank, United Bank, First Citizens, Citizens Northern, FCB Services, Farmers Insurance (Chairman), FFKT Insurance, EGT Properties, EKT Properties, and an administrative trustee of Farmers Capital Bank Trust I, Farmers Capital Bank Trust II, and Farmers Capital Bank Trust III. |
3 | Includes years of service with the Company and its subsidiaries. |
The Company has adopted a Code of Ethics that applies to the Company’s directors, officers, and employees, including the Company’s chief executive officer and chief financial officer. The Company makes available its Code of Ethics on its Internet website at www.farmerscapital.com.
Additional information required by Item 10 is hereby incorporated by reference from the Company's definitive proxy statement in connection with its annual meeting of shareholders scheduled for May 10, 2011,13, 2014, which will be filed with the Commission on or about April 1, 2011,2014, pursuant to Regulation 14A.
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
The information required by Items 11 through 14 is hereby incorporated by reference from the Company's definitive proxy statement in connection with its annual meeting of shareholders scheduled for May 10, 2011,13, 2014, which will be filed with the Commission on or about April 1, 2011,2014, pursuant to Regulation 14A.
PART
IVItem 15. Exhibits, Financial Statement Schedules
(a)1. |
The following consolidated financial statements and report of independent registered public accounting firm of the Company is included in Part II, Item 8 on pages 76 through 129: | |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets | |
Consolidated Statements of Income | |
Consolidated Statements of Comprehensive Income | |
Consolidated Statements of Changes in Shareholders’ Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements | |
(a)2. | Financial Statement Schedules |
All schedules are omitted for the reason they are not required, or are not applicable, or the required information is disclosed elsewhere in the financial statements and related notes thereto. |
(a)3. | Exhibits: |
3.1 | Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 (File No. 000-14412)). |
3.2 | Articles of Amendment to Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation dated January 6, 2009 (incorporated by reference to the |
3.3 | Articles of Amendment to Second Amended and Restated Articles of Incorporation of Farmers Capital Bank Corporation dated November 16, 2009 (incorporated by reference to the Current Report on Form 8-K dated November 17, 2009 (File No. 000-14412)). |
3.4 | Amended and Restated Bylaws of Farmers Capital Bank Corporation (incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, |
4.1* | Junior Subordinated Indenture, dated as of July 21, 2005, between Farmers Capital Bank Corporation and Wilmington Trust Company, as Trustee, relating to unsecured junior subordinated deferrable interest notes that mature in 2035. |
4.2* | Amended and Restated Trust Agreement, dated as of July 21, 2005, among Farmers Capital Bank Corporation, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein). |
4.3* | Guarantee Agreement, dated as of July 21, 2005, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. |
4.4* | Junior Subordinated Indenture, dated as of July 26, 2005, between Farmers Capital Bank Corporation and Wilmington Trust Company, as Trustee, relating to unsecured junior subordinated deferrable interest notes that mature in 2035. |
4.5* | Amended and Restated Trust Agreement, dated as of July 26, 2005, among Farmers Capital Bank Corporation, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein). |
4.6* | Guarantee Agreement, dated as of July 26, 2005, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. |
4.7* | Indenture, dated as of August 14, 2007 between Farmers Capital Bank Corporation, as Issuer, and Wilmington Trust Company, as Trustee, relating to fixed/floating rate junior subordinated debt due 2037. |
4.8* | Amended and Restated Declaration of Trust, dated as of August 14, 2007, by Farmers Capital Bank Corporation, as Sponsor, Wilmington Trust Company, as Delaware and Institutional Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein). |
4.9* | Guarantee Agreement, dated as of August 14, 2007, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. |
4.10 | Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A |
4.11 | |
Letter Agreement, dated January 9, 2009, between Farmers Capital Bank Corporation and the United States Treasury, with respect to the issuance and sale of the Series A preferred stock and the Warrant, | |
10.1 | Employee Stock Purchase Plan of |
10.2 | Nonqualified Stock Option Plan |
10.3 | Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation |
10.4 | Amendment No. 1 to Employment agreement dated December 10, 2012 between Farmers Capital Bank Corporation and Lloyd C. Hillard, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 30, 2013). |
10.5 | |
16** | Letter re Change in Certifying Accountant |
21** | Subsidiaries of the Registrant |
23.1** | Consent of Independent Registered Public Accounting Firm (BKD, LLP) |
23.2** | |
31.1** | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2** | |
32** | |
101 | |
Interactive Data Files |
* | Exhibit not included pursuant to Item 601(b)(4)(iii) and (v) of Regulation S-K. The Company will provide a copy of such exhibit to the Securities and Exchange Commission upon request. |
** | Filed with this Annual Report on Form 10-K. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FARMERS CAPITAL BANK CORPORATION | |||
By: | /s/ Lloyd C. Hillard, Jr. | ||
Lloyd C. Hillard, Jr. | |||
President and Chief Executive Officer | |||
Date: | March |
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 and on the dates indicated.
/s/ Lloyd C. Hillard, Jr. | President, Chief Executive Officer | March |
Lloyd C. Hillard, Jr. | and Director (principal executive | |
officer of the Registrant) | ||
/s/ | Chairman | February |
R. Terry Bennett | ||
/s/ | Vice Chairman | February |
J. Barry Banker | ||
/s/ | Director | February 25, 2014 |
Michael J. Crawford | ||
/s/ John R. | Director | February |
John R. | ||
/s/ | Director | February |
Dr. William C. Nash | ||
/s/ David R. O’Bryan | Director | February |
David R. O’Bryan | ||
/s/ | Director | February 26, |
Fred N. Parker | ||
/s/ | Director | February |
David Y. Phelps | ||
/s/ Marvin E. Strong, Jr. | Director | February |
Marvin E. Strong, Jr. | ||
/s/ | Director | February |
Fred Sutterlin | ||
/s/ | Director | February |
Shelley S. Sweeney | ||
/s/ Doug Carpenter | Executive Vice President, Secretary, | March |
C. Douglas Carpenter | and Chief Financial Officer | |
Exhibit | Page | |
16 | Letter re Change in Certifying Accountant | 137 |
21 | Subsidiaries of the Registrant | 138 |
23.1 | Consent of Independent Registered Public Accounting Firm | 139 |
23.2 | Consent of Independent Registered Public Accounting Firm | 140 |
31.1 | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 141 |
31.2 | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 142 |
32 | CEO and CFO Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted | 143 |