Attached files
Exhibit 13
Killbuck Bancshares, Inc.
Corporate Profile
Killbuck Bancshares, Inc. (the Company) was incorporated under the laws of the State of Ohio for the primary purpose of acquiring and holding all of the outstanding shares of The Killbuck Savings Bank Company (the Bank). The principal office of the Company is located at 165 N. Main Street, Killbuck, Ohio.
The Killbuck Savings Bank Company was established under the banking laws of the State of Ohio in September of 1900. The Bank is headquartered in Killbuck, Ohio, in Holmes County. Holmes County is located in northeastern Ohio. The Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), and it is regulated by the Ohio Division of Financial Institutions (ODFI) and the Board of Governors of the Federal Reserve System (FRB).
The Bank provides customary retail and commercial banking services to its customers, including checking, savings and time deposit accounts, Health Savings Accounts (HSA), internet banking, bill payment, and safe deposit facilities, as well as a full complement of real estate, commercial and consumer loan products.
Stock Market Information
The Companys common shares are currently quoted by a number of quotation services, including the Over the Counter Bulletin Board (the OTCBB), the Pink Sheets Electronic Quotation Service (the Pink Sheets), and Community Banc Investments (CBI), each of which handles a limited amount of the Corporations stock transactions. The OTCBB and the Pink Sheets are both quotation services for over-the-counter securities, which are generally considered to be any equity securities not otherwise listed on a national exchange, such as NASDAQ, NYSE or Amex. CBI is a licensed intrastate securities dealer that specializes in marketing the stock of independent banks in Ohio. The Companys common shares are quoted on the OTCBB and the Pink Sheets under the trading symbol KLIB.
The common stock of the Company trades infrequently. Parties interested in buying or selling the Companys stock are generally referred to CBI. The quarterly share price information in the table below was obtained from CBI and the OTCBB.
Quarter Ended |
High | Low | Cash Dividends Paid |
|||||||||
2010 March 31 |
$ | 106.39 | $ | 104.74 | N/A | |||||||
June 30 |
107.59 | 106.72 | $ | 1.50 | ||||||||
September 30 |
108.83 | 107.45 | N/A | |||||||||
December 31 |
109.52 | 107.71 | $ | 1.55 | ||||||||
2009 March 31 |
$ | 116.36 | $ | 104.35 | N/A | |||||||
June 30 |
105.12 | 103.90 | $ | 1.45 | ||||||||
September 30 |
105.92 | 104.18 | N/A | |||||||||
December 31 |
106.40 | 104.67 | $ | 1.55 |
At December 31, 2010, the Company had approximately 1,001 shareholders of record.
Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for the Companys stock, these prices may not reflect the actual prices at which the stock would trade in a more active market.
Historically, the Company has paid dividends on a semi-annual basis.
Selected Consolidated Financial Data
The following table sets forth general information and ratios of the Company at the dates indicated (in thousands, except share data and shares).
Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
For The Year: |
||||||||||||||||||||
Total interest income |
$ | 14,911 | $ | 15,865 | $ | 18,856 | $ | 21,680 | $ | 20,038 | ||||||||||
Total interest expense |
4,068 | 4,477 | 6,514 | 8,068 | 5,919 | |||||||||||||||
Net interest income |
10,843 | 11,388 | 12,342 | 13,612 | 14,119 | |||||||||||||||
Provision for loan losses |
215 | 2 | 61 | 127 | 215 | |||||||||||||||
Net interest income after provision for loan losses |
10,628 | 11,386 | 12,281 | 13,485 | 13,904 | |||||||||||||||
Total noninterest income |
2,044 | 1,673 | 1,808 | 1,482 | 1,307 | |||||||||||||||
Total noninterest expense |
9,180 | 9,089 | 8,529 | 8,169 | 7,996 | |||||||||||||||
Income before income taxes |
3,492 | 3,970 | 5,560 | 6,798 | 7,215 | |||||||||||||||
Income tax expense |
513 | 835 | 1,104 | 1,893 | 1,992 | |||||||||||||||
Net income |
$ | 2,979 | $ | 3,135 | $ | 4,456 | $ | 4,905 | $ | 5,223 | ||||||||||
Per share data |
||||||||||||||||||||
Earnings |
$ | 4.83 | $ | 5.07 | $ | 7.12 | $ | 7.73 | $ | 8.14 | ||||||||||
Dividends |
$ | 3.05 | $ | 3.00 | $ | 2.95 | $ | 3.75 | $ | 3.50 | ||||||||||
Book value (at year end) |
$ | 70.91 | $ | 69.83 | $ | 69.09 | $ | 65.31 | $ | 61.28 | ||||||||||
Average no. of shares outstanding |
616,667 | 618,497 | 626,151 | 634,458 | 641,759 | |||||||||||||||
Year-end balances: |
||||||||||||||||||||
Loans receivable, net |
$ | 205,075 | $ | 207,575 | $ | 200,449 | $ | 196,520 | $ | 191,932 | ||||||||||
Securities |
115,377 | 100,422 | 83,718 | 83,668 | 64,746 | |||||||||||||||
Total assets |
405,070 | 371,979 | 341,338 | 336,337 | 313,205 | |||||||||||||||
Deposits |
356,189 | 321,295 | 288,947 | 285,451 | 264,301 | |||||||||||||||
Borrowings |
4,229 | 6,872 | 8,248 | 8,282 | 8,554 | |||||||||||||||
Shareholders equity |
43,680 | 43,063 | 42,935 | 41,118 | 39,134 | |||||||||||||||
Significant ratios: |
||||||||||||||||||||
Return on average assets |
0.77 | % | 0.89 | % | 1.32 | % | 1.51 | % | 1.74 | % | ||||||||||
Return on average shareholders equity |
7.14 | 7.67 | 11.41 | 12.88 | 14.57 | |||||||||||||||
Dividend payout |
63.13 | 59.17 | 41.43 | 48.51 | 43.00 | |||||||||||||||
Average shareholders equity to average assets |
10.81 | 11.65 | 11.54 | 11.75 | 11.96 | |||||||||||||||
Loan to deposits |
57.57 | 64.61 | 69.37 | 68.85 | 72.62 | |||||||||||||||
Allowance for loan losses to total loans |
1.28 | 1.16 | 1.26 | 1.23 | 1.11 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Killbuck Bancshares, Inc. is the holding company for its wholly-owned subsidiary, The Killbuck Savings Bank Company (the Bank) (hereinafter collectively the Company). The following discussion and analysis is intended to provide information about the financial condition and results of operations of the Company and should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, as well as other discussions appearing elsewhere in this Annual Report and the Companys Form 10-K.
Certain information presented in this discussion and analysis and other statements concerning future performance, developments or events, and expectations for growth and market forecasts constitute forward-looking statements which are subject to a number of risks and uncertainties, including interest rate fluctuations, changes in local or national economic conditions, and government and regulatory actions which might cause actual results to differ materially from stated expectations or estimates.
Critical Accounting Policies
The Companys accounting policies are integral to understanding the financial results reported. The Companys accounting policies are described in detail in the Notes to the Consolidated Financial Statements. Our most complex accounting policies require a high degree of managements judgment to ascertain the proper valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods which are well controlled and applied consistently from period to period. Further, the policies and procedures are intended to ensure that the process for changing accounting methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management judgment.
Allowance for Loan Losses
Determining the appropriate level of the allowance for loan losses involves a significant degree of managements judgment. The Companys allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan losses, as well as prevailing business and other economic environmental factors that may impact the portfolio in a manner currently unforeseen. The allowance is increased by the provision for loan losses and by recoveries of loans previously charged-off, and reduced by loans charged-off. For a more comprehensive discussion of the Companys methodology of assessing the adequacy of the allowance for loan losses, refer to Notes to Consolidated Financial Statements elsewhere herein.
Goodwill and Other Intangible Assets
The Company must assess goodwill and other intangible assets each year for impairment. The assessment process entails estimating cash flows for future periods. If the future cash flows are insufficient to recover the recorded goodwill and other intangible asset balances, the Company would be required to take a charge against earnings to reflect the assets at the lower carrying value.
Financial Overview
Events in the domestic and global financial markets during the three year period under review have presented significant challenges to the Company, as well as all other banking institutions in the United Sates.
Specifically, a worldwide liquidity crisis reached its apex in the first quarter of 2009. The specter of a continuing international liquidity crisis mandated that the Companys management carry excess liquid assets (cash and short term investments) throughout the years 2009 and 2010. This environmentally necessitated decision, integrated with the Feds easing of interest rates, negatively impacted the Companys income in 2009 and 2010, as yields on investments and Federal funds sold declined precipitously as compared to 2008.
In addition, despite an absence of deteriorating asset quality, and despite maintaining the Banks status as a high performance financial institution, the Company was forced to pay for the clean-up of the banking systems risk-takers. Over the past three years our FDIC insurance costs have gone from $39 thousand in 2008, to $563 thousand in 2009 and $366 thousand in 2010.
Earnings for 2010 were also impacted by the recognition of an other than temporary impairment of a mutual fund investment. An impairment loss of $457 thousand ($301 thousand after tax) was recognized and recorded in the 2010 consolidated statement of income.
The reported results of the Company, as further discussed below, are dependent on a variety of factors, including the general interest rate environment, competitive conditions in the industry, governmental policies and regulations and conditions in the markets for financial assets. Except as otherwise discussed herein, we are not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on liquidity, capital resources or operations. Net interest income is the largest component of net income, and consists of the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest income is primarily affected by the volume, interest rates and composition of interest-earning assets and interest-bearing liabilities
For 2010, we recorded net income of $3.0 million compared to $3.1 million for 2009 and $4.5 million for 2008.
Non-interest income was $2.0 million for 2010 compared to $1.7 million for 2009 and $1.8 million for 2008.
Total non-interest expenses were $9.2 million in 2010 compared to $9.1 million in 2009 and $8.5 million in 2008.
Earnings per share for 2010 were $4.83 compared to $5.07 for 2009 and $7.12 for 2008.
Comparison of Financial Condition at December 31, 2010 and 2009
The Companys assets at December 31, 2010 totaled $405.1 million, an increase of $33.1 million, or 8.9% over 2009 totals.
The asset growth during 2010 generally reflects a $34.9 million, or 10.9% increase in total deposits. Money market deposits, savings deposits and time deposits increased $15.2 million, $8.1 million and $15.4 million, respectively. The noninterest-bearing demand deposits and interest-bearing demand deposits decreased $0.5 million and $3.3 million, respectively. The increases are attributable to new deposit account growth and internal movement of existing accounts. The deposit growth is generally reflective of the Companys continuing marketing efforts directed at profitable organic growth.
Cash and cash equivalents and investment securities increased by $20.9 million and $15.0 million, respectively at December 31, 2010. The increase was generally reflective of two major components. First, as previously stated, management felt compelled to maintain higher liquid asset balances due to economic uncertainty in the environment. Secondly, the Companys deployment of growth to liquid assets was indicative of less than optimal commercial loan demand during 2010.
Loans receivable decreased during 2010 by $2.5 million, or 1.2%, totaling $205.1 million at year-end. The commercial real estate portfolio, the construction real estate portfolio and commercial and other loans decreased $6.6 million, $1.5 million and $1.1 million, respectively. The Company experienced growth of $6.0 million in the residential real estate portfolio and $0.7 million in the consumer and credit card loan portfolio. The growth in residential real estate can generally be attributable to the favorable residential mortgage rates available in 2010, while the reduction in commercial loans essentially mirrors the overall economic slowdown encountered during the period.
The Companys allowance for loan losses at December 31, 2010 totaled $2.7 million, or 1.28% of total loans, as compared to $2.4 million, or 1.16% of total loans at December 31, 2009. The slight increase in portfolio coverage during
2010 is principally attributable to the slight increase in nonperforming loans at December 31, 2010, as well as a small increase in other delinquent loan categories.
The allowance for loan losses is managements estimate of the amount of probable credit losses in the portfolio. The Company determines the allowance for loan losses based upon an ongoing evaluation. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans that may be susceptible to significant change. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.
The Companys allowance for loan losses is the accumulation of various components calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation performed according to either Financial Accounting Standards Board Accounting Standards Codification Topic 450-Contingencies, or Topic 310-Receivables. Managements estimate of each allowance component is based on certain observable data that management believes is the most reflective of the underlying loan losses being estimated. Changes in the amount of each component of the allowance for loan losses are directionally consistent with changes in the observable data and corresponding analyses. Some of the components that management factors in are current economic conditions, loan growth assumptions, credit concentrations, and levels of nonperforming loans.
A key element of the methodology for determining the allowance for loan losses is the Companys credit-risk-evaluation process, which includes credit-risk grading of individual commercial loans. Loans are assigned credit-risk grades based on an internal assessment of conditions that affect a borrowers ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrowers current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Certain commercial loans are reviewed on an annual or rotational basis or as management becomes aware of information affecting a borrowers ability to fulfill its obligation.
Funds generated in 2010 from deposit growth and operations were partially deployed to reduce amortizing Federal Home Loan Bank advances by approximately $568,000, and retire short-term borrowings by $2.1 million, or 36.7%.
Shareholders equity increased by approximately $616,000 during 2010, totaling $43.7 million at year-end, as compared to $43.1 million at December 31, 2009. The growth in shareholders equity during 2010 was comprised of period earnings of $3.0 million, which were partially offset by payment of $1.9 million in cash dividends, a $400,000 decrease in accumulated other comprehensive income and $82,000 of treasury share purchases. The Company purchases treasury shares pursuant to financial objectives and guidelines set forth in its strategic planning process.
The following table sets forth, for the periods indicated, information regarding the total dollar amounts of interest income from average interest-earning assets and the resulting yields, the total dollar amount of interest expense on average interest-bearing liabilities and the resulting rate paid, net interest income, interest rate spread and the net yield on interest-earning assets (dollars in thousands):
Average Balance Sheet and Net Interest Analysis
For the Year Ended December 31 | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Average Balance |
Interest | Yield/ Rate |
Average Balance |
Interest | Yield/ Rate |
Average Balance |
Interest | Yield/ Rate |
||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans (1)(2) |
$ | 210,091 | $ | 11,432 | 5.44 | % | $ | 207,846 | $ | 12,267 | 5.90 | % | $ | 201,179 | 14,136 | 7.03 | % | |||||||||||||||||||
Securities taxable (3) |
63,947 | 1,788 | 2.80 | % | 61,845 | 2,019 | 3.26 | % | 54,804 | 2,789 | 5.09 | % | ||||||||||||||||||||||||
Securities nontaxable |
38,652 | 1,499 | 3.88 | % | 34,385 | 1,427 | 4.15 | % | 31,171 | 1,342 | 4.31 | % | ||||||||||||||||||||||||
Securities equity (3)(4) |
1,885 | 84 | 4.45 | % | 1,756 | 102 | 5.80 | % | 1,707 | 96 | 5.60 | % | ||||||||||||||||||||||||
Federal funds sold |
7,165 | 9 | 0.13 | % | 6,231 | 9 | 0.14 | % | 22,343 | 493 | 2.21 | % | ||||||||||||||||||||||||
Due from Federal Reserve Bank |
40,478 | 99 | 0.24 | % | 15,373 | 41 | 0.27 | % | | | ||||||||||||||||||||||||||
Total interest - earnings assets |
362,218 | 14,911 | 4.12 | % | 327,436 | 15,865 | 4.85 | % | 311,204 | 18,856 | 6.06 | % | ||||||||||||||||||||||||
Noninterest-earning assets |
||||||||||||||||||||||||||||||||||||
Cash and due from other institutions |
9,555 | 10,066 | 14,080 | |||||||||||||||||||||||||||||||||
Premises and equipment, net |
5,882 | 6,152 | 6,484 | |||||||||||||||||||||||||||||||||
Accrued interest receivable |
1,355 | 1,295 | 1,401 | |||||||||||||||||||||||||||||||||
Other assets |
9,403 | 8,210 | 7,776 | |||||||||||||||||||||||||||||||||
Less allowance for loan losses |
(2,564 | ) | (2,505 | ) | (2,500 | ) | ||||||||||||||||||||||||||||||
Total |
$ | 385,849 | $ | 350,654 | $ | 338,445 | ||||||||||||||||||||||||||||||
Liabilities and Shareholders Equity |
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Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand |
27,126 | 41 | 0.15 | % | 26,303 | 40 | 0.15 | % | 26,889 | 108 | 0.40 | % | ||||||||||||||||||||||||
Money market accounts |
45,065 | 332 | 0.74 | % | 29,025 | 249 | 0.86 | % | 21,830 | 344 | 1.58 | % | ||||||||||||||||||||||||
Savings deposits |
45,776 | 181 | 0.40 | % | 41,248 | 171 | 0.42 | % | 38,979 | 276 | 0.71 | % | ||||||||||||||||||||||||
Time deposits |
159,752 | 3,447 | 2.16 | % | 151,181 | 3,915 | 2.59 | % | 150,375 | 5,642 | 3.75 | % | ||||||||||||||||||||||||
Short-term borrowings |
4,163 | 10 | 0.23 | % | 5,352 | 12 | 0.23 | % | 5,580 | 18 | 0.32 | % |
Average Balance Sheet and Net Interest Analysis (Continued)
For the Year Ended December 31 | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Average Balance |
Interest | Yield/ Rate |
Average Balance |
Interest | Yield/ Rate |
Average Balance |
Interest | Yield/ Rate |
||||||||||||||||||||||||||||
Federal Home Loan Bank Advances |
877 | 56 | 6.41 | % | 1,507 | 90 | 5.97 | % | 2,168 | 126 | 5.79 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities |
282,759 | 4,067 | 1.44 | % | 254,616 | 4,477 | 1.76 | % | 245,821 | 6,514 | 2.65 | % | ||||||||||||||||||||||||
Noninterest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
58,285 | 51,887 | 49,711 | |||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities |
3,096 | 3,283 | 3,849 | |||||||||||||||||||||||||||||||||
Shareholders equity |
41,709 | 40,868 | 39,064 | |||||||||||||||||||||||||||||||||
Total |
$ | 385,849 | $ | 350,654 | $ | 338,445 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 10,844 | $ | 11,388 | $ | 12,342 | ||||||||||||||||||||||||||||||
Interest rate spread (5) |
2.68 | % | 3.09 | % | 3.41 | % | ||||||||||||||||||||||||||||||
Net yield on interest-earning assets (6) |
2.99 | % | 3.48 | % | 3.97 | % | ||||||||||||||||||||||||||||||
(1) | The weighted average loan amounts outstanding are net of deferred loan origination fees. |
(2) | Nonaccrual loans are included in loan totals and do not have a material impact on the information presented. |
(3) | Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities. |
(4) | Equity securities are comprised of common stock of the Federal Home Loan Bank, Federal Reserve Bank, and Great Lakes Bankers Bank. |
(5) | Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
(6) | Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. |
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average volume). Changes which are not solely attributable to rate or volume are allocated to changes in rate due to rate sensitivity of interest-earning assets and interest-bearing liabilities (dollars in thousands).
2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
Increase (Decrease) Due To | Increase (Decrease) Due To | |||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
Interest income |
||||||||||||||||||||||||
Loans |
$ | 132 | $ | (967 | ) | $ | (835 | ) | $ | 469 | $ | (2,338 | ) | $ | (1,869 | ) | ||||||||
Securities-taxable |
69 | (300 | ) | (231 | ) | 358 | (1,128 | ) | (770 | ) | ||||||||||||||
Securities-nontaxable |
177 | (105 | ) | 72 | 139 | (54 | ) | 85 | ||||||||||||||||
Securities-equities |
7 | (25 | ) | (18 | ) | 3 | 3 | 6 | ||||||||||||||||
Federal funds sold |
1 | (1 | ) | | (356 | ) | (128 | ) | (484 | ) | ||||||||||||||
Due from Federal Reserve |
68 | (10 | ) | 58 | 41 | | 41 | |||||||||||||||||
Total interest-earning Assets |
454 | (1,408 | ) | (954 | ) | 654 | (3,645 | ) | (2,991 | ) | ||||||||||||||
Interest expense |
||||||||||||||||||||||||
Interest bearing demand |
1 | | 1 | (2 | ) | (66 | ) | (68 | ) | |||||||||||||||
Money market accounts |
138 | (55 | ) | 83 | 114 | (209 | ) | (95 | ) | |||||||||||||||
Savings deposits |
19 | (9 | ) | 10 | 16 | (121 | ) | (105 | ) | |||||||||||||||
Time deposits |
222 | (690 | ) | (468 | ) | 30 | (1,757 | ) | (1,727 | ) | ||||||||||||||
Short-term borrowing |
(3 | ) | 1 | (2 | ) | (1 | ) | (5 | ) | (6 | ) | |||||||||||||
Federal Home Loan Bank Advances |
(38 | ) | 4 | (34 | ) | (38 | ) | 2 | (36 | ) | ||||||||||||||
Total interest-bearing Liabilities |
339 | (749 | ) | (410 | ) | 119 | (2,156 | ) | (2,037 | ) | ||||||||||||||
Net change in interest income |
$ | 115 | $ | (659 | ) | $ | (544 | ) | $ | 535 | $ | (1,489 | ) | $ | (954 | ) | ||||||||
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2010 and 2009
Net Interest Income
The Companys net interest income for the year ended December 31, 2010 totaled $10.8 million, a reduction of approximately $545,000, or 4.8% from 2009 levels. The principal factor underlying the net decline was a reduction in average yields on loans and taxable investments, which were partially offset by a $34.8 million increase in the volume of interest-earning assets, and a 0.32% decrease in the average cost of interest-bearing liabilities in 2010 as compared to 2009.
Total interest income in 2010 decreased by $954,000, or 6.0%, due primarily to a $249,000 or 11.8% decline in interest on taxable investments and an $835,000, or 6.8%, reduction in interest on loans. These declines in interest income generally reflect the effects of overall reduction in interest rates in the economy resulting from the Feds easing of monetary policy.
Total interest expense for the year ended December 31, 2010 declined by $409,000 or 9.1%, as compared to 2009. The reduction was due to a $468,000, or 11.6%, decrease in the cost of time deposits. Similar to the earnings side, this decline in interest costs mirrors the overall reduction of interest rates in the economy. The interest expense on money market accounts and savings deposits increased $83,000 and $10,000, respectively, due to higher average volume in these type of accounts. Interest expense on Federal Home Loan advances decreased $34,000 or 37.8% due to repayment of the advances.
The foregoing factors culminated in the Companys attainment of an interest rate spread of 2.68% and a net yield on earning assets of 2.99% in 2010, compared to 3.09% and 3.48%, respectively, in 2009. Management believes the Companys reduction in spread and margin in 2010 primarily stems from the need to carry higher levels of liquidity during the year and the lack of commercial loan demand, and does not represent a material adverse trend.
Provision for Loan Losses
The provision for loan losses totaled $215,000 for 2010, as compared to $2,000 for 2009. The increased loss provision is principally attributable to the increase in nonperforming loans during 2010, as well as an overall increase in other delinquent loans year over year. As stated previously, the Company maintains the allowance at a level commensurate with the credit risks inherent in the portfolio.
Noninterest Income
Noninterest income increased by $372,000, or 22.2%, in 2010 as compared to 2009. The increase in income was principally related to a $147,000 increase in gains on sale of loans in the secondary market and a $237,000 increase in earnings and recoveries on bank-owned life insurance, which were partially offset by a $85,000 decrease in fees on deposit accounts. Residential loan originations were enhanced during 2010 by favorable long-term mortgage rates.
Noninterest Expense
The Companys management stringently monitors noninterest expenses. A continuation of these control efforts in 2010 culminated with a modest $92,000, or 1.0%, increase in all noninterest expense categories. Excluding an impairment loss of $457,000 recognized in 2010 on a mutual fund owned by the Company, total noninterest expenses declined $365,000 or 4.0%.
Income Taxes
Income tax expense declined to $513,000 in 2010, representing a $322,000, or 38.6%, reduction from the $835,000 of income tax expense recorded in 2009. The year over year decline is primarily attributable to a $478,000, or 12.0%, reduction in pre-tax income and a $73,000 or 5.1% increase in tax exempt income. The Companys effective tax rate was 14.7% in 2010, as compared to 21.1% in 2009. The principal difference between the Companys effective tax rate in 2010 and 2009 and the 34% statutory tax rate in effect for both years resulted from the beneficial effects of tax-exempt income.
Comparison of the Years Ended December 31, 2009 and 2008
Net Interest Income
The Companys net interest income for the year ended December 31, 2009 totaled $11.4 million, a reduction of approximately $954,000, or 7.7% from 2008 levels. The principal factor underlying the net decline was a significant reduction in average yields on taxable investments and Federal funds sold, which were partially offset by a $16.2 million increase in the volume of interest-earning assets, and a 0.89% decrease in the average cost of interest-bearing liabilities in 2009 as compared to 2008.
Total interest income in 2009 decreased by $3.0 million, or 15.9%, due primarily to a $1.2 million or 36.9% decline in interest on Federal funds sold and taxable investments and a $1.9 million, or 13.2%, reduction in interest on loans. These declines in interest income generally reflect the effects of overall reduction in interest rates in the economy resulting from the Federal Reserves easing of monetary policy. The greatest evidence of this trend in 2009 was depicted in the Companys $443,000, or 89.9%, decline in interest income on Federal funds sold and balances due from the Federal Reserve in 2009, despite a relatively insignificant $739,000, or 3.3%, reduction in the average balances outstanding year over year.
Total interest expense for the year ended December 31, 2009 declined by $2.0 million, or 31.2%, as compared to 2008. The preponderance of this 2009 reduction emanated from a $1.7 million, or 30.1%, decrease in the cost of time deposits. Similar to the earnings side, this decline in interest costs mirrors the overall reduction of interest rates in the economy. The remaining $300,000 of 2009 interest cost reductions were primarily attributable to accounts subject to daily repricing, e.g. interest-bearing demand, money market and savings deposits.
The foregoing factors culminated in the Companys attainment of an interest rate spread of 3.09% and a net yield on earning assets of 3.48% in 2009, compared to 3.41% and 3.97%, respectively, in 2008. Management believes the Companys reduction in spread and margin in 2009 primarily stems from the need to carry higher levels of liquidity during the year.
Provision for Loan Losses
The provision for loan losses totaled $2,000 for 2009, as compared to $61,000 for 2008. The reduced loss provision is principally attributable to the elimination of nonperforming loans during 2009, as well as an overall reduction in other delinquent loans year over year. As stated previously, the Company maintains the allowance at a level commensurate with the credit risks inherent in the portfolio.
Noninterest Income
Noninterest income declined by $135,000, or 7.5%, in 2009 as compared to 2008. The reduction in income was principally related to a $217,000 decrease in earnings and recoveries on bank-owned life insurance and a $43,000 decrease in fees on deposit accounts, which were partially offset by a $21,000 increase in ATM and interchange fees and a $103,000 increase in gains on sale of loans in the secondary market. Residential loan originations were enhanced during 2009 by favorable long-term mortgage rates.
Noninterest Expense
The Companys management stringently monitors noninterest expenses. A continuation of these control efforts in 2009 culminated with a modest $35,000, or 0.5%, increase in all noninterest expense categories with the exception of FDIC deposit insurance. The $524,000 increase in FDIC deposit insurance costs in 2009 comprised virtually all of the $559,000, or 6.6%, increase in noninterest expense compared with the prior year. In December of 2009, the Company prepaid $1.3 million in deposit premiums, constituting three years of premiums at current rates.
Income Taxes
Income tax expense declined to $835,000 in 2009, representing a $269,000, or 24.4%, reduction from the $1.1 million of income tax expense recorded in 2008. The year over year decline is primarily attributable to a $1.6 million, or 28.8%, reduction in pre-tax income. The Companys effective tax rate was 21.0% in 2009, as compared to 19.9% in 2008. The principal difference between the Companys effective tax rate in 2009 and 2008 and the 34% statutory tax rate in effect for both years resulted from the beneficial effects of tax-exempt income.
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The Companys primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Because of the nature of the Banks operations, the Bank is not subject to currency exchange or commodity price risk and, since the Bank has no trading portfolio, it is not subject to trading risk. The Banks loan portfolio, concentrated primarily within the surrounding market area, is subject to risks associated with the local economy. Since all of the interest-earning assets and interest-bearing liabilities are located at the Bank, all of the Companys interest rate risk resides at the Bank level. As a result, interest rate risk management is conducted at the Bank level.
The Bank actively manages interest rate sensitivity and asset/liability products through an Asset/Liability Management Committee. The principal purposes of asset-liability management are to maximize current net interest income while minimizing the risk to future earnings of negative fluctuations in net interest margin and to insure adequate liquidity exists to meet operational needs.
In an effort to reduce interest rate risk and protect itself from the negative effects of rapid or prolonged changes in interest rates, the Bank has instituted certain asset and liability management measures, including underwriting long-term fixed rate loans that are saleable in the secondary market, offering longer term deposit products and diversifying the loan portfolio into shorter term consumer and commercial business loans. In addition, since the mid-1980s, the Bank has originated variable rate loans and as of December 31, 2010, such loans comprised approximately 48% of the total loan portfolio.
One of the principal functions of the Banks asset/liability management program is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of this program is to manage the relationship between interest-earning assets and interest-bearing liabilities to minimize the fluctuations in the net interest spread and achieve consistent growth in net interest income during periods of changing interest rates.
Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing in a future period. These differences are known as interest sensitivity gaps. The Bank utilizes gap management as the primary means of measuring interest rate risk. Gap analysis identifies and quantifies the Banks exposure or vulnerability to changes in interest rates in relationship to the Banks interest rate sensitivity position. A rate sensitive asset or liability is one, which is capable of being repriced (i.e., the interest rate can be adjusted or principal can be reinvested) within a specified period of time. Subtracting total rate sensitive liabilities (RSL) from total rate sensitive assets (RSA) within specified time horizons nets the Banks gap positions. These gaps reflect the Banks exposure to changes in market interest rates, as discussed below.
Because many of the Banks deposit liabilities are capable of being immediately repriced, the Bank offers variable rate loan products in order to help maintain a proper balance in its ability to reprice various interest bearing assets and liabilities. Furthermore, the Banks deposit rates are not tied to an external index. As a result, although changing market interest rates impact repricing, the Bank has retained much of its control over repricing.
The Bank also conducts rate sensitivity analysis using a simulation model, which also monitors earnings at risk by projecting earnings of the Bank based upon an economic forecast of the most likely interest rate movement. The model also calculates earnings of the Bank based upon what are estimated to be the largest foreseeable rate increase and the largest foreseeable rate decrease. Such analysis translates interest rate movements and the Banks rate sensitivity position into dollar amounts by which earnings may fluctuate as a result of rate changes. Based on December 31, 2010 data, the latest date for which such information is available, a 2% immediate increase in interest rates would increase earnings by 16.45% and a 2% immediate decrease in interest rates would decrease earnings by 16.26%.
The data included in the table that follows indicates that the Bank is asset sensitive within one year. Generally, an asset sensitive gap could negatively affect net interest income in an environment of declining interest rates as a greater amount of interest-bearing assets could reprice at lower rates. During times of rising interest rates, an asset sensitive gap could positively affect net interest income, as rates would be increased on a larger volume of assets as compared to deposits. As a result, interest income would increase more rapidly than interest expense. A liability sensitive gap indicates that declining interest rates could positively affect net interest income, as expense of liabilities would decrease more rapidly than interest income would decline. Conversely, rising rates could negatively affect net interest income, as income from assets would increase less rapidly than deposit costs. Although rate sensitivity analysis enables the Bank to minimize interest rate risk, the magnitude of rate increases or decreases on assets versus liabilities may not correlate directly. As a result, fluctuations in interest spreads can occur even when repricing capabilities are perfectly matched.
It is the policy of the Bank to generally maintain a gap ratio within a range that is minus 10 percent to plus 20 percent of total assets for the time horizon of one year. When management believes that interest rates will increase, it can take actions to increase the RSA/RSL ratios. Conversely, when management believes interest rates will decline, it can take actions to decrease the RSA/RSL ratio.
Changes in market interest rates can also affect the Banks liquidity position through the impact rate changes may have on the market value of the Banks investment portfolio. Rapid increases in market rates can negatively impact the market values of investment securities. As securities values decline, it becomes more difficult to sell investments to meet liquidity demands without incurring a loss. The Bank can address this by increasing liquid funds, which may be utilized to meet unexpected liquidity needs when a decline occurs in the value of securities.
The following table presents the Banks interest rate sensitivity gap position as of December 31, 2010 (dollars in thousands):
INTEREST RATE SENSITIVITY GAPS
(In Thousands)
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | ||||||||||||||||||||||
Interest-earnings assets: |
||||||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||
Fixed |
$ | 29,173 | $ | 10,222 | $ | 8,759 | $ | 6,221 | $ | 4,427 | $ | 49,696 | $ | 108,498 | ||||||||||||||
Variable |
87,836 | 3,208 | 4,841 | 760 | 1,678 | 1,124 | 99,447 | |||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||
Fixed |
6,227 | 4,288 | 10,454 | 13,069 | 24,445 | 56,894 | 115,377 | |||||||||||||||||||||
Other interest-earning assets |
56,529 | | | | | | 56,529 | |||||||||||||||||||||
Total interest-earning assets |
179,765 | 17,718 | 24,054 | 20,050 | 30,550 | 107,714 | 379,851 | |||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||
Demand and savings deposits (1) |
29,811 | 29,811 | 29,811 | 29,812 | 29,812 | | 149,057 | |||||||||||||||||||||
Time deposits: |
||||||||||||||||||||||||||||
Fixed |
89,084 | 34,556 | 16,770 | 8,655 | 20,196 | 7 | 169,268 | |||||||||||||||||||||
Short-term borrowings |
3,585 | | | | | | 3,585 | |||||||||||||||||||||
FHLB advances |
242 | 172 | 86 | 67 | 59 | 18 | 644 | |||||||||||||||||||||
Total interest-bearing liabilities |
122,722 | 64,539 | 46,667 | 38,534 | 50,067 | 25 | 322,554 | |||||||||||||||||||||
Interest rate sensitivity gap |
57,043 | (46,821 | ) | (22,613 | ) | (18,484 | ) | (19,517 | ) | 107,689 | ||||||||||||||||||
Cumulative rate sensitivity gap |
$ | 57,043 | $ | 10,222 | $ | (12,391 | ) | $ | (30,875 | ) | $ | (50,392 | ) | $ | 57,297 | |||||||||||||
Cumulative interest rate sensitivity gap as a percent of interest-earning assets |
15.02 | % | 2.69 | % | -3.26 | % | -8.13 | % | -13.27 | % | 15.08 | % |
(1) | Computed based on a five year decay rate. |
Liquidity
Liquidity represents our ability to meet normal cash flow requirements of our customers for the funding of loans and repayment of deposits. Both short-term and long-term liquidity needs are generally derived from the repayments and maturities of loans and investment securities, and the receipt of deposits. Management monitors liquidity daily, and on a monthly basis incorporates liquidity management into its asset/liability program. The assets defined as liquid are cash, cash equivalents, and the available for sale security portfolio. The liquidity ratio as of December 31, 2010 and 2009 are 35.2% and 29.8%, respectively.
Operating activities, as presented in the Statement of Cash Flows in the accompanying Consolidated Financial Statements, provided $4.1 million and $2.1 million in cash flows during 2010 and 2009 respectively, principally generated from net income.
Investing activities utilized $13.5 million of the Companys cash flows during 2010. The preponderance of this total represents the funding of a $16.1 million increase in the investment securities portfolios offset by a $2.1 million decrease in loans receivable.
Financing activities in 2010 provided the Company with net cash inflows totaling $30.3 million. The vast majority of this total consists of a $34.9 million increase in deposits. This deposit growth was partially utilized in other financing activities to retire $2.6 million of borrowings and pay cash dividends of $1.9 million.
In addition to using the loan, investment, and deposit portfolios as sources of liquidity, we have access to funds from the Federal Home Loan Bank of Cincinnati. We also have a ready source of funds through the available-for-sale component of the investment securities portfolio.
Capital Resources
Capital adequacy is our ability to support growth while protecting the interests of shareholders and depositors. Bank regulatory agencies have developed certain capital adequacy requirements that are used to assist them in monitoring the safety and soundness of financial institutions. We continually monitor these capital requirements and believe the Company to be in compliance with these regulations at December 31, 2010.
Our regulatory capital position at December 31, 2010, as compared to the minimum regulatory capital requirements imposed on us by banking regulators at that date is presented in the Notes to the accompanying Consolidated Financial Statements. We are not aware of any actions contemplated by banking regulators, which would result in the Company being in non-compliance with the minimum capital requirements.
Impact of Inflation Changing Prices
The Consolidated Financial Statements and the accompanying Notes presented elsewhere in this document, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities are monetary in nature. The impact of inflation is reflected in the increased cost of operations. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Killbuck Bancshares, Inc.
Killbuck, Ohio
Audit Report
December 31, 2010
Killbuck Bancshares, Inc.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
Page Number |
||||
Report of Independent Registered Public Accounting Firm |
2 | |||
Financial Statements |
||||
Consolidated Balance Sheet |
3 | |||
Consolidated Statement of Income |
4 | |||
Consolidated Statement of Changes in Shareholders Equity |
5 | |||
Consolidated Statement of Cash Flows |
6 | |||
Notes to Consolidated Financial Statements |
7-35 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Killbuck Bancshares, Inc.
Killbuck, Ohio
We have audited the accompanying consolidated balance sheets of Killbuck Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated 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 consolidated 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 Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes 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, as well as 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 Killbuck Bancshares, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wheeling, West Virginia
March 4, 2011
2
Killbuck Bancshares, Inc.
CONSOLIDATED BALANCE SHEET
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and cash equivalents: |
||||||||
Cash and amounts due from depository institutions |
$ | 61,711,145 | $ | 42,575,944 | ||||
Federal funds sold |
4,713,000 | 2,938,000 | ||||||
Total cash and cash equivalents |
66,424,145 | 45,513,944 | ||||||
Investment securities: |
||||||||
Securities available for sale |
76,044,672 | 65,334,849 | ||||||
Securities held to maturity (fair value of $40,482,091 and $36,373,611) |
39,332,164 | 35,086,821 | ||||||
Total investment securities |
115,376,836 | 100,421,670 | ||||||
Loans (net of allowance for loan losses of $2,665,607 and $2,441,169) |
205,074,687 | 207,575,135 | ||||||
Loans held for sale, at lower of cost or market |
320,000 | 271,000 | ||||||
Premises and equipment, net |
5,751,540 | 6,009,442 | ||||||
Accrued interest receivable |
1,165,298 | 1,467,901 | ||||||
Goodwill, net |
1,329,249 | 1,329,249 | ||||||
Other assets |
9,628,598 | 9,391,044 | ||||||
Total assets |
$ | 405,070,353 | $ | 371,979,385 | ||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Noninterest bearing demand |
$ | 63,108,035 | $ | 63,636,376 | ||||
Interest bearing demand |
28,812,536 | 32,102,301 | ||||||
Money market |
43,906,637 | 28,669,992 | ||||||
Savings |
51,094,094 | 42,973,020 | ||||||
Time |
169,267,955 | 153,913,387 | ||||||
Total deposits |
356,189,257 | 321,295,076 | ||||||
Short-term borrowings |
3,585,000 | 5,660,000 | ||||||
Federal Home Loan Bank advances |
643,735 | 1,212,000 | ||||||
Accrued interest and other liabilities |
972,671 | 748,901 | ||||||
Total liabilities |
361,390,663 | 328,915,977 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock No par value: 1,000,000 shares authorized, 718,431 shares issued at December 31, 2010 and 2009 |
8,846,670 | 8,846,670 | ||||||
Retained earnings |
44,841,370 | 43,742,847 | ||||||
Accumulated other comprehensive income |
(383,669 | ) | 16,605 | |||||
Treasury shares, at cost (102,486 and 101,725 shares at December 31, 2010 and 2009, respectively) |
(9,624,681 | ) | (9,542,714 | ) | ||||
Total shareholders equity |
43,679,690 | 43,063,408 | ||||||
Total liabilities and shareholders equity |
$ | 405,070,353 | $ | 371,979,385 | ||||
See accompanying notes to the consolidated financial statements.
3
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
INTEREST INCOME |
||||||||||||
Interest and fees on loans |
$ | 11,432,293 | $ | 12,267,389 | $ | 14,136,505 | ||||||
Investment securities: |
||||||||||||
Taxable |
1,871,510 | 2,120,835 | 2,884,342 | |||||||||
Exempt from federal income tax |
1,499,193 | 1,426,623 | 1,342,204 | |||||||||
Federal funds sold and other |
108,238 | 50,291 | 493,224 | |||||||||
Total interest income |
14,911,234 | 15,865,138 | 18,856,275 | |||||||||
INTEREST EXPENSE |
||||||||||||
Deposits |
4,001,920 | 4,374,627 | 6,370,270 | |||||||||
Short term borrowings |
9,555 | 12,297 | 18,075 | |||||||||
Federal Home Loan Bank advances |
56,195 | 89,915 | 125,569 | |||||||||
Total interest expense |
4,067,670 | 4,476,839 | 6,513,914 | |||||||||
NET INTEREST INCOME |
10,843,564 | 11,388,299 | 12,342,361 | |||||||||
Provision for loan losses |
215,182 | 2,000 | 61,000 | |||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
10,628,382 | 11,386,299 | 12,281,361 | |||||||||
NONINTEREST INCOME |
||||||||||||
Service charges on deposit accounts |
129,846 | 136,599 | 138,438 | |||||||||
ATM and interchange fees |
300,101 | 252,246 | 231,272 | |||||||||
Fees on deposit accounts |
681,850 | 766,455 | 809,419 | |||||||||
Gain on sale of loans, net |
278,117 | 131,256 | 28,066 | |||||||||
Earnings and recoveries on bank-owned life insurance |
474,077 | 237,147 | 453,821 | |||||||||
Other income |
180,379 | 148,955 | 146,464 | |||||||||
Total noninterest income |
2,044,370 | 1,672,658 | 1,807,480 | |||||||||
NONINTEREST EXPENSE |
||||||||||||
Salaries and employee benefits |
4,902,669 | 5,005,181 | 4,942,680 | |||||||||
Occupancy and equipment |
960,570 | 1,010,928 | 1,070,303 | |||||||||
Impairment loss |
456,585 | | | |||||||||
Other expense |
2,860,389 | 3,072,453 | 2,516,212 | |||||||||
Total noninterest expense |
9,180,213 | 9,088,562 | 8,529,195 | |||||||||
INCOME BEFORE INCOME TAXES |
3,492,539 | 3,970,395 | 5,559,646 | |||||||||
Income taxes |
513,063 | 835,443 | 1,104,013 | |||||||||
NET INCOME |
$ | 2,979,476 | $ | 3,134,952 | $ | 4,455,633 | ||||||
EARNINGS PER SHARE |
$ | 4.83 | $ | 5.07 | $ | 7.12 | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
616,667 | 618,497 | 626,151 | |||||||||
See accompanying notes to the consolidated financial statements.
4
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Treasury Shares |
Total Shareholders Equity |
Comprehensive Income |
|||||||||||||||||||
BALANCE, JANUARY 1, 2008 |
$ | 8,846,670 | $ | 39,848,570 | $ | 498,651 | $ | (8,076,250 | ) | $ | 41,117,641 | |||||||||||||
Net income |
4,455,633 | 4,455,633 | $ | 4,455,633 | ||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Unrealized gain on available for sale securities, net of tax of $74,547 |
144,708 | 144,708 | 144,708 | |||||||||||||||||||||
Comprehensive income |
$ | 4,600,341 | ||||||||||||||||||||||
Cash dividends paid ($2.95 per share) |
(1,843,066 | ) | (1,843,066 | ) | ||||||||||||||||||||
Purchase of treasury shares, at cost (8,100 shares) |
(939,318 | ) | (939,318 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2008 |
8,846,670 | 42,461,137 | 643,359 | (9,015,568 | ) | 42,935,598 | ||||||||||||||||||
Net income |
3,134,952 | 3,134,952 | $ | 3,134,952 | ||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Unrealized loss on available for sale securities, net of tax benefits of $322,873 |
(626,754 | ) | (626,754 | ) | (626,754 | ) | ||||||||||||||||||
Comprehensive income |
$ | 2,508,198 | ||||||||||||||||||||||
Cash dividends paid ($3.00 per share) |
(1,853,242 | ) | (1,853,242 | ) | ||||||||||||||||||||
Purchase of treasury shares, at cost (4,776 shares) |
(527,146 | ) | (527,146 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2009 |
8,846,670 | 43,742,847 | 16,605 | (9,542,714 | ) | 43,063,408 | ||||||||||||||||||
Net income |
2,979,476 | 2,979,476 | $ | 2,979,476 | ||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Unrealized loss on available for sale securities, net of tax benefits of $206,202 |
(400,274 | ) | (400,274 | ) | (400,274 | ) | ||||||||||||||||||
Comprehensive income |
$ | 2,579,202 | ||||||||||||||||||||||
Cash dividends paid ($3.05 per share) |
(1,880,953 | ) | (1,880,953 | ) | ||||||||||||||||||||
Purchase of treasury shares, at cost (761 shares) |
(81,967 | ) | (81,967 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2010 |
$ | 8,846,670 | $ | 44,841,370 | $ | (383,669 | ) | $ | (9,624,681 | ) | $ | 43,679,690 | ||||||||||||
5
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 2,979,476 | $ | 3,134,952 | $ | 4,455,633 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Provision for loan losses |
215,182 | 2,000 | 61,000 | |||||||||
Depreciation, amortization and accretion, net |
411,015 | 1,058,352 | 439,697 | |||||||||
Gain on sale of loans, net |
(278,117 | ) | (131,256 | ) | (28,066 | ) | ||||||
Origination of loans held for sale |
(12,606,910 | ) | (15,462,950 | ) | (3,020,600 | ) | ||||||
Proceeds from the sale of loans |
12,836,026 | 15,323,206 | 3,218,666 | |||||||||
Impairment Loss |
456,585 | | | |||||||||
Bank-owned life insurance benefit income |
(474,077 | ) | | (234,396 | ) | |||||||
Federal Home Loan Bank stock dividends |
| | (53,600 | ) | ||||||||
Net changes in: |
||||||||||||
Accrued interest and other assets |
527,291 | (1,547,977 | ) | (742,464 | ) | |||||||
Accrued interest and other liabilities |
51,695 | (243,122 | ) | 17,134 | ||||||||
Net cash provided by operating activities |
4,118,166 | 2,133,205 | 4,113,004 | |||||||||
INVESTING ACTIVITIES |
||||||||||||
Investment securities available for sale: |
||||||||||||
Proceeds from maturities and repayments |
67,721,234 | 31,277,140 | 29,232,154 | |||||||||
Purchases |
(79,494,115 | ) | (46,609,702 | ) | (26,448,780 | ) | ||||||
Investment securities held to maturity: |
||||||||||||
Proceeds from maturities and repayments |
4,919,051 | 6,008,345 | 4,580,179 | |||||||||
Purchases |
(9,231,408 | ) | (8,967,419 | ) | (7,174,675 | ) | ||||||
Net (increase) decrease in loans |
2,132,766 | (7,150,927 | ) | (3,989,827 | ) | |||||||
Purchase of premises and equipment |
(108,599 | ) | (85,447 | ) | (243,084 | ) | ||||||
Proceeds from sale of other real estate owned |
175,000 | | | |||||||||
Bank-owned life insurance |
||||||||||||
Proceeds |
390,111 | | 395,915 | |||||||||
Purchases |
| | (2,000,000 | ) | ||||||||
Net cash used in investing activities |
(13,495,960 | ) | (25,528,010 | ) | (5,648,118 | ) | ||||||
FINANCING ACTIVITIES |
||||||||||||
Net increase in deposits |
34,894,180 | 32,348,171 | 3,495,565 | |||||||||
Net change in short-term borrowings |
(2,075,000 | ) | (725,000 | ) | 640,000 | |||||||
Repayment of Federal Home Loan Bank advances |
(568,265 | ) | (650,667 | ) | (674,184 | ) | ||||||
Purchase of treasury shares |
(81,967 | ) | (527,146 | ) | (939,318 | ) | ||||||
Cash dividends paid |
(1,880,953 | ) | (1,853,242 | ) | (1,843,066 | ) | ||||||
Net cash provided by financing activities |
30,287,995 | 28,592,116 | 678,997 | |||||||||
Increase (decrease) in cash and cash equivalents |
20,910,201 | 5,197,311 | (856,117 | ) | ||||||||
Cash and cash equivalents at beginning of year |
45,513,944 | 40,316,633 | 41,172,750 | |||||||||
Cash and cash equivalents at end of year |
$ | 66,424,145 | $ | 45,513,944 | $ | 40,316,633 | ||||||
See accompanying notes to the consolidated financial statements.
6
Killbuck Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
A summary of the significant accounting and reporting policies consistently applied in the presentation of the consolidated financial statements follows:
Nature of Operations and Basis of Presentation
Killbuck Bancshares, Inc. (the Company) is an Ohio corporation organized as the holding company of The Killbuck Savings Bank Company (the Bank). The Bank is an Ohio state-chartered bank. The Company and its subsidiary operate in the single industry of commercial banking and derive substantially all their income from banking and bank-related services which include interest earnings on residential real estate, commercial mortgage, commercial and consumer loan financing as well as interest earnings on investment securities and charges for deposit services to its customers through nine full service branches and one loan production office. The Board of Governors of the Federal Reserve System supervises the Company and Bank, while the Bank is also subject to regulation and supervision by the Ohio Division of Financial Institutions.
The consolidated financial statements of the Company include its wholly-owned subsidiary, the Bank. All intercompany transactions have been eliminated in consolidation. The investment in subsidiary on the parent company financial statements is carried at the parent companys equity in the underlying net assets.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and identification of other-than-temporary impairment of securities. Management believes that the allowance for loan losses represents its best estimate of losses known and inherent in the loan portfolio that are both probable and reasonable to estimate. Additionally, management believes that the evaluation for other-than-temporary impairment of securities has been performed in accordance with GAAP. Actual results may differ from these estimates. The estimate for the loan loss allowance is particularity susceptible to significant near-term changes, including possible material increases in the allowance mandated by the Banks primary regulator.
Investment Securities
Investment securities are classified, at the time of purchase, based upon managements intention and ability, as either securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount which are computed using the level yield method. Certain other debt and equity securities have been classified as available for sale to serve principally as a potential source of liquidity. Unrealized holding gains and losses on available for sale securities are reported as a separate component of shareholders equity, net of the related tax effects, until realized. Realized securities gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank, Federal Reserve Bank and Great Lakes Bankers Bank represent ownership in institutions which are wholly-owned by other financial institutions. These securities are accounted for at cost and are classified with other assets.
7
Investment Securities (Continued)
As a member of the Federal Home Loan Bank (FHLB) of Cincinnati, the Bank is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based on its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment by management. The stocks value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) The significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) Commitments by the FHLB to make payments required by law or regulation and the levels of such payments in relation to the operating performance (c) The impact of legislative and regulatory changes on the customer base of the FHLB and (d) The liquidity position of the FHLB.
While the Federal Home Loan Banks have been negatively impacted by the current economic conditions, the FHLB of Cincinnati has reported profits for 2010, remains in compliance with regulatory capital and liquidity requirements, continues to pay dividends on the stock and make redemptions at the par value. With consideration given to these factors, management concluded that the stock was not impaired at December 31, 2010 or 2009.
Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the securitys ability to recover any decline in its market value, and managements intent and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors that are considered in determining managements intent and ability is a review of the Companys capital adequacy, interest rate risk position and liquidity. The assessment of a securitys ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and managements intent and ability requires considerable judgment. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the Consolidated Statement of Income.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain key employees. Bank-owned life insurance is recorded at its cash surrender value or the amount that can be realized.
Loans
Loans are stated at their outstanding principal, less the allowance for loan losses and any net deferred loan origination fees. Interest income on loans is recognized on the accrual method. Accrual of interest on loans is generally discontinued when it is determined that a reasonable doubt exists as to the collectability of principal, interest, or both. Loans are returned to accrual status when past due interest is collected, and the collection of principal is probable.
Loan origination and commitment fees, as well as certain direct loan origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan origination fees is discontinued when a loan is placed on nonaccrual status.
Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or market value determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance through charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method. All loans are sold to the Federal Home Loan Mortgage Corporation (FHLMC).
8
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. Management uses a disciplined process and methodology to establish the allowance for loan losses. To determine the total allowance for loan losses, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. The allowance for loan losses consists of amounts applicable to: (i) the commercial loan portfolio; (ii) the commercial real estate portfolio; (iii) the real estate portfolio; (iv) the consumer loan portfolio. To determine the balance of the allowance account, loans are pooled by portfolio and losses are modeled using historical experience.
The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based upon managements periodic evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term.
Impaired loans are commercial and commercial real estate loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of impaired loans is not the same as the definition of nonaccrual loans, although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired, provided the loan is not a commercial or commercial real estate classification. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis, taking into consideration all of the circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.
Loan Charge-off Policies
Consumer loans are generally fully or partially charged down to the fair value of the collateral securing the asset when the loan is 180 days past due unless both well secured and in the process of collection.
Real estate loans are generally charged down to the net realizable value when the loan is 180 days past due.
Commercial real estate loans are generally charged down to the net realizable value when the loan is 180 days past due.
Commercial loans are generally charged-off when the loan is 180 days past due.
Other secured loans are generally fully or partially charged down to the net realizable value when the loan is 120 days past due.
9
Troubled Debt Restructurings (TDRs)
In situations where, for economic or legal reasons related to a borrowers financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principle forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from three to ten years for furniture, fixtures and equipment and twenty-five to fifty years for building premises. Leasehold improvements are amortized over the shorter of the estimated useful lives or the respective lease terms, which range from seven to fifteen years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.
Real Estate Owned
Real estate acquired in settlement of loans is stated at the lower of the recorded investment in the property or its fair value minus estimated costs of sale. Prior to foreclosure, the value of the underlying collateral is written down by a charge to the allowance for loan losses if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on disposition, are included in other expenses.
Goodwill
Goodwill represents the amount by which the market value of the Companys stock issued in an acquisition exceeded the fair value of the net assets acquired. Pursuant to the required accounting guidance, the Company employs a two-step process for testing the impairment of goodwill on at least an annual basis. This approach can cause volatility in the Companys reported net income because impairment losses could occur irregularly and in varying amounts. As of December 31, 2010 and 2009, respectively, net goodwill totaled $1.3 million.
Mortgage Servicing Rights (MSRs)
The Company has agreements for the express purpose of selling loans in the secondary market. The Company maintains all servicing rights for these loans. Originated MSRs are recorded by allocating total costs incurred between the loans and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. Impairment is evaluated based on the fair value of the right, based on portfolio interest rates and prepayment characteristics.
Employee Benefit Plan
The Bank maintains a profit sharing pension plan which is integrated with a 401(K) plan. The Banks contributions are based upon the plans contribution formula.
10
Income Taxes
Using the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. To the extent that currently available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
The Company follows FASB guidance which provides clarification on accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB ASC 740. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Companys evaluation of the FASB-issued guidance, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the year ended December 31, 2010. Our policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statement of Income. The Company recognized no interest or penalties during the year ended December 31, 2010.
The Company and Bank account for income tax expense pursuant to a tax-sharing agreement whereby the Bank remits, or is refunded, income tax expense based on the Banks separate company tax liability.
Concentrations of Risk
Financial instruments which potentially subject the Company and its subsidiary to concentrations of credit risk primarily consist of cash and cash equivalents and loans receivable. Cash and cash equivalents include deposits placed in other financial institutions. At December 31, 2010, the Company had $51.5 million on deposit with the Federal Reserve Bank of Cleveland and federal funds sold of $4.1 million with the Great Lakes Bankers Bank. The Banks lending activity is primarily concentrated in loans collateralized by real estate in northeastern Ohio. As a result, credit risk is broadly dependent on the real estate market and general economic conditions in that geographic area. Additionally, banking regulations and the Banks lending policies limit the amount of credit extended to any single borrower and their related interests thereby limiting the concentration of credit risk to any single borrower.
Earnings Per Share
The Company currently maintains a simple capital structure; therefore, there are no potential dilutive effects with respect to earnings per share. As a result, earnings per share are calculated using the weighted average number of shares outstanding for the period.
Comprehensive Income
The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other comprehensive income is comprised exclusively of net income and unrealized holding gains and losses on the available for sale securities portfolio. The Company has elected to report the effects of other comprehensive income as part of the Consolidated Statement of Changes in Shareholders Equity.
Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from financial institutions and federal funds sold. Cash payments for interest in 2010, 2009 and 2008 were $4.1 million, $4.5 million, and $6.7 million respectively. Cash payments for income taxes for 2010, 2009, and 2008 were $736,000, $907,000 and $1.3 million, respectively.
11
Recent Accounting Pronouncements
In December 2009, the FASB issued ASU 2009-16, Accounting for Transfer of Financial Assets. ASU 2009-16 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. ASU 2009-16 is effective for annual periods beginning after November 15, 2009 and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Companys financial position or results of operation.
In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash a consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The adoption of this guidance did not have a material impact on the Companys financial position or results of operation.
In January 2010, the FASB issued ASU 2010-05, Compensation Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. ASU 2010-05 updates existing guidance to address the SEC staffs views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. ASU 2010-05 is effective January 15, 2010. The adoption of this guidance did not have a material impact on the Companys financial position or results of operation.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Companys financial statements.
In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of this guidance did not have a material impact on the Companys financial position or results of operation.
In March 2010, the FASB issued ASU 2010-11, Derivatives and Hedging. ASU 2010-11 provides clarification and related additional examples to improve financial reporting by resolving potential ambiguity about the breadth of the embedded credit derivative scope exception in ASC 815-15-15-8. ASU 2010-11 is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance is not expected to have a significant impact on the Companys financial statements.
In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan is a Part of a Pool That is Accounted for as a Single Asset a consensus of the FASB Emerging Issues Task Force. ASU 2010-18 clarifies the treatment for a modified loan that was acquired as part of a pool of assets. Refinancing or restructuring the loan does not make it eligible for removal from the pool, the FASB said. The amendment will be effective for loans that are part of an asset pool and are modified during financial reporting periods that end July 15, 2010 or later and is not expected to have a significant impact on the Companys financial statements.
12
Recent Accounting Pronouncements (Continued)
In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entitys credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company is currently evaluating the impact the adoption of this guidance will have on the Companys financial position or results of operations.
In August, 2010, the FASB issued ASU 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This ASU amends various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules, and Codification of Financial Reporting Policies and is not expected to have a significant impact on the Companys financial statements.
In August, 2010, the FASB issued ASU 2010-22, Technical Corrections to SEC Paragraphs An announcement made by the staff of the U.S. Securities and Exchange Commission. This ASU amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics and is not expected to have a significant impact on the Companys financial statements.
In September, 2010, the FASB issued ASU 2010-25, Plan Accounting Defined Contribution Pension Plans. The amendments in this ASU require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The amendments in this update are effective for fiscal years ending after December 15, 2010 and are not expected to have a significant impact on the Companys financial statements.
In October, 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Companys financial statements.
In December, 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities. This ASU is not expected to have a significant impact on the Companys financial statements.
13
Recent Accounting Pronouncements (Continued)
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This ASU is not expected to have a significant impact on the Companys financial statements.
Reclassification of Comparative Amounts
Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on either shareholders equity or net income.
14
2. | INVESTMENT SECURITIES |
The amortized cost of securities and their estimated fair values are as follows:
Securities Available for Sale
2010 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
Obligations of U.S. Government Agencies and Corporations |
$ | 76,082,573 | $ | 414,509 | $ | 1,011,398 | $ | 75,485,684 | ||||||||
Mutual funds |
543,415 | 15,573 | | 558,988 | ||||||||||||
Total |
$ | 76,625,988 | $ | 430,082 | $ | 1,011,398 | $ | 76,044,672 | ||||||||
2009 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
Obligations of U.S. Government Agencies and Corporations |
$ | 64,309,692 | $ | 580,166 | $ | 48,906 | $ | 64,840,952 | ||||||||
Mutual funds |
1,000,000 | | 506,103 | 493,897 | ||||||||||||
Total |
$ | 65,309,692 | $ | 580,166 | $ | 555,009 | $ | 65,334,849 | ||||||||
Securities Held to Maturity | ||||||||||||||||
2010 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
Obligations of States and Political Subdivisions |
$ | 39,332,164 | $ | 1,368,278 | $ | 218,351 | $ | 40,482,091 | ||||||||
Total |
$ | 39,332,164 | $ | 1,368,278 | $ | 218,351 | $ | 40,482,091 | ||||||||
2009 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
Obligations of States and Political Subdivisions |
$ | 35,086,821 | $ | 1,328,071 | $ | 41,281 | $ | 36,373,611 | ||||||||
Total |
$ | 35,086,821 | $ | 1,328,071 | $ | 41,281 | $ | 36,373,611 | ||||||||
15
2. | INVESTMENT SECURITIES (CONTINUED) |
The amortized cost and fair values of debt securities at December 31, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
Available For Sale | Held to Maturity | |||||||||||||||
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
|||||||||||||
Due in one year or less |
$ | 2,484,488 | $ | 2,501,546 | $ | 3,724,780 | $ | 3,787,281 | ||||||||
Due after one year through five years |
38,038,829 | 38,243,884 | 14,012,953 | 14,606,708 | ||||||||||||
Due after five through ten years |
32,180,491 | 31,316,312 | 20,551,753 | 21,021,952 | ||||||||||||
Due after ten years |
3,922,180 | 3,982,930 | 1,042,678 | 1,066,150 | ||||||||||||
$ | 76,625,988 | $ | 76,044,672 | $ | 39,332,164 | $ | 40,482,091 | |||||||||
Investment securities with an approximate carrying value of $55.5 million and $50.4 million at December 31, 2010 and 2009, respectively, were pledged to secure public deposits, securities sold under agreement to repurchase and for other purposes as required or permitted by law.
The following tables show the Companys gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2010 and 2009. As of December 31, 2010, there were a total of 44 securities in an unrealized loss position.
December 31, 2010 | ||||||||||||||||||||||||||||||||
12 Months or Less | 12 Months or Greater | |||||||||||||||||||||||||||||||
Fair Value |
Gross Unrealized Loss |
Number of Impaired Securities |
Fair Value |
Gross Unrealized Loss |
Number of Impaired Securities |
Fair Value |
Gross Unrealized Loss |
|||||||||||||||||||||||||
U. S. Government Agencies and Corporations |
$ | 33,935,490 | $ | 1,011,398 | 18 | | | | $ | 33,935,490 | $ | 1,011,398 | ||||||||||||||||||||
Obligations of States and Political Subdivisions |
6,388,398 | 218,351 | 26 | | | | 6,388,398 | 218,351 | ||||||||||||||||||||||||
Total temporarily impaired debt securities |
40,323,888 | 1,229,749 | 44 | | | | 40,323,888 | 1,229,749 | ||||||||||||||||||||||||
Total of all securities |
$ | 40,323,888 | $ | 1,229,749 | 44 | | | | $ | 40,323,888 | $ | 1,229,749 | ||||||||||||||||||||
16
2. | INVESTMENT SECURITIES (CONTINUED) |
December 31, 2009 | ||||||||||||||||||||||||||||||||
12 Months or Less | 12 Months or Greater | |||||||||||||||||||||||||||||||
Fair Value |
Gross Unrealized Loss |
Number of Impaired Securities |
Fair Value |
Gross Unrealized Loss |
Number of Impaired Securities |
Fair Value |
Gross Unrealized Loss |
|||||||||||||||||||||||||
U. S. Government Agencies and Corporations |
$ | 5,954,780 | $ | 48,906 | 4 | | | | $ | 5,954,780 | $ | 48,906 | ||||||||||||||||||||
Obligations of States and Political Subdivisions |
3,767,311 | 41,281 | 17 | | | | 3,767,311 | 41,281 | ||||||||||||||||||||||||
Total temporarily impaired debt securities |
9,722,091 | 90,187 | 21 | | | | 9,722,091 | 90,187 | ||||||||||||||||||||||||
Mutual Funds |
| | | $ | 493,897 | $ | 506,103 | 1 | 493,897 | 506,103 | ||||||||||||||||||||||
Total temporarily impaired equity securities |
| | | 493,897 | 506,103 | 1 | 493,897 | 506,103 | ||||||||||||||||||||||||
Total of all securities |
$ | 9,722,091 | $ | 90,187 | 21 | $ | 493,897 | $ | 506,103 | 1 | $ | 10,215,988 | $ | 596,290 | ||||||||||||||||||
At least quarterly the corporation conducts a comprehensive security level impairment assessment on all securities in an unrealized loss position to determine if other than temporary impairment (OTTI) exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Under the current OTTI accounting model for debt securities, which was amended by FASB and adopted by the Corporation in 2009, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than not that the corporation will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between fair value and the amortized cost basis of the security. Even if the Corporation does not expect to sell the security, the Corporation must evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in the market interest rates, is recorded in other comprehensive income. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized. The security level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and whether Management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities for which the assessment shows the Corporation will recover the entire cost basis, Management does not intend to sell these securities and it is more likely than not that the Corporation will not be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in other comprehensive income, net of tax.
An impairment loss of $457,000 was recognized during 2010 on a mutual fund owned by the Company. The non-publically traded mutual fund is comprised solely of community and regional financial institution stocks. The Company performed an assessment of the decline in the fair value of the mutual fund and determined that it should be recognized as other than temporary impairment.
17
3. | LOANS |
Major classifications of loans are summarized as follows:
2010 | 2009 | |||||||
Real estate residential |
$ | 87,505,717 | $ | 81,505,153 | ||||
Real estate farm |
9,925,340 | 9,728,761 | ||||||
Real estate commercial |
51,310,626 | 57,924,239 | ||||||
Real estate construction |
10,406,156 | 11,872,968 | ||||||
Commercial and other loans |
41,931,142 | 43,068,368 | ||||||
Consumer and credit card loans |
6,866,408 | 6,139,962 | ||||||
207,945,389 | 210,239,451 | |||||||
Less allowance for loan losses |
(2,665,607 | (2,441,169 | ) | |||||
Less net deferred loan origination fees |
(205,095 | ) | (223,147 | ) | ||||
Loans, net |
$ | 205,074,687 | $ | 207,575,135 | ||||
2010 | ||||||||||||
Loans Individually Evaluated for Impairment |
Loans Collectively Evaluated for Impairment |
Total | ||||||||||
Real estate - residential and farm |
| $ | 97,431,057 | $ | 97,431,057 | |||||||
Real Estate - commercial and construction |
$ | 957,590 | 60,759,192 | 61,716,782 | ||||||||
Commercial and other Loans |
639,218 | 41,291,924 | 41,931,142 | |||||||||
Consumer and credit card loans |
| 6,866,408 | 6,866,408 | |||||||||
Total |
$ | 1,596,808 | $ | 206,348,581 | $ | 207,945,389 | ||||||
Loans held for sale at December 31, 2010 were $320,000 and were carried at cost. Real estate loans serviced for FHLMC, which are not included in the consolidated balance sheet, totaled $47.8 million and $49.3 million at December 31, 2010 and 2009, respectively. The Bank is currently collecting a fee of .25% for servicing these loans.
The Companys primary business activity is with customers located within its local trade area. Residential, commercial, personal, and agricultural loans are granted. The Company also selectively funds loans originated outside of its trade area provided such loans meet its credit policy guidelines. Although the Company has a diversified loan portfolio at December 31, 2010 and 2009, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.
The segments of the Banks loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential real estate loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The commercial real estate (CRE) loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by multifamily structures and owner-occupied commercial structures. The commercial and other loans segment consists of loans made for the purpose of financing the activities of commercial customers. The consumer loan segment consists primarily of installment loans (direct and indirect) and credit card loans.
18
3. | LOANS (CONTINUED) |
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $250,000 or is part of a relationship that is greater than $500,000, and if the loan either is in nonaccrual status, or is risk rated Substandard and is greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. 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 borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Corporation does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of larger relationship that is impaired, or are classified as a troubled debt restructuring agreement.
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loans effective interest rate; (b) the loans observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Corporations policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2010:
Impaired Loans with Specific Allowance |
Impaired Loans with No Specific Allowance |
Total Impaired Loans | ||||||||||||||||||
Recorded Investment |
Related Allowance |
Recorded Investment |
Recorded Investment |
Unpaid Principal Balance |
||||||||||||||||
Real estate - residential and farm |
| | | | | |||||||||||||||
Real Estate - commercial and construction |
$ | 957,590 | $ | 131,765 | | $ | 957,590 | $ | 957,590 | |||||||||||
Commercial and other Loans |
639,218 | 231,491 | | 639,218 | 639,218 | |||||||||||||||
Consumer and credit card loans |
| | | | | |||||||||||||||
Total Impaired Loans |
$ | 1,596,808 | $ | 363,256 | | $ | 1,596,808 | $ | 1,596,808 | |||||||||||
The following table presents the average recorded investment in impaired loans and related interest income recognized for the year 2010:
2010 | ||||
Average Investment in impaired loans |
$ | 1,512,576 | ||
Interest income recognized on an accrual basis on impaired loans |
$ | 104,552 | ||
Interest income recognized on a cash basis on impaired loans |
|
19
3. | LOANS (CONTINUED) |
Total nonaccrual loans and the related interest for the years ended December 31 are as follows.
2010 | 2009 | 2008 | ||||||||||
Principal outstanding |
$ | 107,402 | $ | | $ | 72,799 | ||||||
Contractual interest due |
$ | 3,524 | $ | | $ | 13,692 | ||||||
Interest income recognized |
$ | | $ | | $ | |
The following table presents loans that are troubled debt restructurings as of December 31, 2010:
Troubled Debt Restructurings at Period End |
New Troubled Debt Restructurings in YTD Period |
Troubled Debt Restructurings that Subsequently Defaulted during Prior Twelve Months |
||||||||||||||||||||||
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
|||||||||||||||||||
Real estate - residential and farm |
| | | | | | ||||||||||||||||||
Real Estate - commercial and construction |
| | | | | | ||||||||||||||||||
Commercial and other Loans |
3 | $ | 283,205 | 3 | $ | 292,482 | | | ||||||||||||||||
Consumer and credit card loans |
| | | | | | ||||||||||||||||||
Total |
3 | $ | 283,205 | 3 | $ | 292,482 | | | ||||||||||||||||
Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Banks Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships $250,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Bank has an experienced Loan Review Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and all criticized relationships. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
20
3. | LOANS (CONTINUED) |
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2010:
Pass | Special Mention |
Substandard | Doubtful | Total | ||||||||||||||||
Real estate - residential and farm |
$ | 94,542,356 | $ | 1,392,351 | $ | 1,496,350 | $ | 97,431,057 | ||||||||||||
Real Estate - commercial and construction |
50,610,705 | 6,559,073 | 4,547,004 | 61,716,782 | ||||||||||||||||
Commercial and other Loans |
39,304,012 | 688,352 | 1,803,409 | $ | 135,369 | 41,931,142 | ||||||||||||||
Consumer and credit card loans |
6,808,388 | 42,215 | 15,805 | 6,866,408 | ||||||||||||||||
Total |
$ | 191,265,461 | $ | 8,681,991 | $ | 7,862,568 | $ | 135,369 | $ | 207,945,389 | ||||||||||
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2010:
Current | 30-59 Days Past Due |
60-89 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Non- Accrual |
Total Loans | ||||||||||||||||||||||
Real estate - residential and farm |
$ | 97,253,887 | $ | 53,829 | $ | 15,939 | $ | 69,768 | $ | 107,402 | $ | 97,431,057 | ||||||||||||||||
Real Estate - commercial and construction |
60,618,420 | 1,098,362 | 1,098,362 | 61,716,782 | ||||||||||||||||||||||||
Commercial and other Loans |
41,734,675 | 178,788 | 17,679 | 196,467 | 41,931,142 | |||||||||||||||||||||||
Consumer and credit card loans |
6,858,090 | 5,585 | 1,055 | $ | 1,678 | 8,318 | 6,866,408 | |||||||||||||||||||||
Total |
$ | 206,465,072 | $ | 1,336,564 | $ | 34,673 | $ | 1,678 | $ | 1,372,915 | $ | 107,402 | $ | 207,945,389 | ||||||||||||||
The Bank entered into transactions with certain directors, executive officers, significant stockholders, and their affiliates. A summary of loan activity for those directors, executive officers, and their associates with loan balances in excess of $60,000 for the year ended December 31, 2010 is as follows:
Balance December 31, 2009 |
Additions | Amounts Collected | Balance December 31, 2010 |
|||||||||||
$ | 3,989,508 | $ | 385,547 | $ | 880,746 | $ | 3,494,309 | |||||||
4. | ALLOWANCE FOR LOAN LOSSES |
An allowance for loan losses (ALL) is maintained to absorb losses from the loan portfolio. The ALL is based on managements continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Banks methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Banks ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.
21
4. | ALLOWANCE FOR LOAN LOSSES (CONTINUED) |
The classes described above provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity for each class. A historical charge-off factor is calculated for each class utilizing a rolling 12 quarters.
Pass rated credits are segregated from Criticized credits for the application of qualitative factors. Management has identified a number of qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
An analysis of the change in the allowance for loan losses follows:
2010 | 2009 | 2008 | ||||||||||
Balance, January 1 |
$ | 2,441,169 | $ | 2,525,202 | $ | 2,510,011 | ||||||
Add: |
||||||||||||
Provision charged to operations |
215,182 | 2,000 | 61,000 | |||||||||
Loan recoveries |
69,651 | 46,811 | 67,082 | |||||||||
Less: Loans charged off |
(60,395 | ) | (132,844 | ) | (112,891 | ) | ||||||
Balance, December 31 |
$ | 2,665,607 | $ | 2,441,169 | $ | 2,525,202 | ||||||
The following table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2010. Activity in the allowance is presented for the twelve months ended December 31, 2010:
Real Estate Residential and Farm |
Real Estate Commercial and Construction |
Commercial and Other Loans |
Consumer and Credit Cards |
Total | ||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||
Beginning Balance |
$ | 904,967 | $ | 646,940 | $ | 793,020 | $ | 96,242 | $ | 2,441,169 | ||||||||||
Charge-offs |
(50,214 | ) | | | (10,181 | ) | (60,395 | ) | ||||||||||||
Recoveries |
563 | 44,345 | 18,470 | 6,273 | 69,651 | |||||||||||||||
Provision |
(183,670 | ) | 293,757 | 143,036 | (37,941 | ) | 215,182 | |||||||||||||
Ending Balance |
$ | 671,646 | $ | 985,042 | $ | 954,526 | $ | 54,393 | $ | 2,665,607 | ||||||||||
Ending Balance: individually evaluated for impairment |
$ | 0 | $ | 131,765 | $ | 231,491 | $ | 0 | $ | 363,256 | ||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 671,646 | $ | 853,277 | $ | 723,035 | $ | 54,393 | $ | 2,302,351 | ||||||||||
The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the breakdown of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.
22
5. | PREMISES AND EQUIPMENT |
Premises and equipment are summarized as follows:
2010 | 2009 | |||||||
Land |
$ | 2,050,242 | $ | 2,050,242 | ||||
Building and improvements |
5,520,696 | 5,510,684 | ||||||
Leasehold improvements |
78,761 | 78,761 | ||||||
Furniture, fixtures and equipment |
3,638,390 | 3,695,065 | ||||||
Other real estate owned |
| 22,500 | ||||||
11,288,089 | 11,357,252 | |||||||
Less accumulated depreciation |
(5,536,549 | ) | (5,347,810 | ) | ||||
Total |
$ | 5,751,540 | $ | 6,009,442 | ||||
Depreciation expense charged to operations was $329,456 for 2010, $392,000 for 2009, and $449,000 for 2008.
6. | GOODWILL |
As of December 31, 2010 and 2009, goodwill had a gross carrying amount of $1.6 million and an accumulated amortization amount of $0.3 million resulting in a net carrying value of $1.3 million.
The carrying value of goodwill was tested for impairment in the second quarter of 2010. Due to an increase in overall earnings and asset growth, operating profits and cash flows were greater than originally expected for the reporting unit. As a result, based on the fair value of the reporting unit, which was estimated using the expected present value of future cash flows, no goodwill impairment loss was recognized.
7. | DEPOSITS |
Time deposits include certificates of deposit in denominations of $100,000 or more. Such deposits aggregated $76.5 million and $66.2 million at December 31, 2010 and 2009, respectively.
Interest expense on certificates of deposit $100,000 and over amounted to $1.5 million in 2010, $1.5 million in 2009, and $2.1 million in 2008.
The following table sets forth the remaining maturity of time certificates of deposits of $100,000 or more at December 31, 2010.
3 months or less |
$ | 11,701,006 | ||
Over 3 through 6 months |
9,721,139 | |||
Over 6 through 12 months |
16,871,840 | |||
Over 12 months |
38,178,603 | |||
Total |
$ | 76,472,588 | ||
The following table sets forth the remaining maturity of all time deposits at December 31, 2010.
12 month or less |
$ | 89,084,441 | ||
12 months through 24 months |
34,555,975 | |||
24 months through 36 months |
16,769,627 | |||
36 months through 48 months |
8,655,074 | |||
48 months through 60 months |
20,196,278 | |||
Over 60 months |
6,560 | |||
$ | 169,267,955 | |||
23
8. | SHORT-TERM BORROWINGS |
Short-term borrowings consist of securities sold under agreements to repurchase. These retail repurchase agreements are with customers in the Companys respective market areas. These borrowings are collateralized with securities owned by the Company and held in their safekeeping account at an independent correspondent bank. The outstanding balances and related information for short-term borrowings are summarized as follows:
2010 | 2009 | |||||||
Short-term borrowings: |
||||||||
Ending balance |
$ | 3,585,000 | $ | 5,660,000 | ||||
Maximum month-end balance during the year |
5,020,000 | 6,345,000 | ||||||
Average month-end balance during the year |
4,065,000 | 5,390,000 | ||||||
Weighted average rate at year end |
0.23 | % | 0.23 | % | ||||
Weighted average rate during the year |
0.23 | % | 0.23 | % |
The Company has pledged investment securities with carrying values of $4.0 million and $5.1 million as of December 31, 2010 and 2009, respectively, as collateral for the repurchase agreements.
9. | FEDERAL HOME LOAN BANK ADVANCES |
The Federal Home Loan Bank advances have monthly principal and interest payments due with maturity dates from 2010 through 2017. The weighted average rate paid on the advances is 6.38%. The scheduled aggregate minimum future principal payments on the advances outstanding as of December 31, 2010 are as follows:
Year Ending December 31, |
Amount | |||
2011 |
$ | 241,939 | ||
2012 |
171,719 | |||
2013 |
86,093 | |||
2014 |
66,891 | |||
2015 |
59,252 | |||
2016 and thereafter |
17,841 | |||
Total |
$ | 643,735 | ||
The Bank maintains a credit arrangement with Federal Home Loan Bank of Cincinnati, Ohio (FHLB). The FHLB borrowings, when used, are collateralized by the Banks investment in Federal Home Loan Bank stock and a blanket collateral pledge agreement with the FHLB under which the Bank has pledged certain qualifying assets equal to 150 percent of the unpaid amount of the outstanding balances. At December 31, 2010, the Bank had additional borrowing capacity under the FHLB agreement of approximately $40.5 million.
24
10. | EMPLOYEE BENEFIT PLAN |
The Bank maintains a profit sharing pension plan which is integrated with a 401(k) plan. The plan covers substantially all employees who are 21 and have one years service.
Under the profit sharing pension plan contribution formula, the Bank, for each plan year, will contribute an amount equal to 8% of an employees compensation for the plan year and 5.7% of the amount of an employees excess compensation for the plan year. Excess compensation is a participants compensation in excess of the designated integration level. This designated integration level is 100% of the taxable wage base in effect at the beginning of the plan year. The federal government annually adjusts the taxable wage base. This plan does not permit nor require employees to make contributions to the plan.
The 401(k) plan allows employees to make salary reduction contributions to the plan up to the annual limit established by the IRS. For each plan year, the Bank may contribute to the plan an amount of matching contributions for a particular plan year. The Bank may choose not to make matching contributions for a particular plan year. For 2010 and 2009 the Bank matched 25% of the employees voluntary contributions up to 1% of the employees compensation.
The pension costs charged to operating expense for the years 2010, 2009 and 2008 amounted to $337,000, $352,000, and $343,000, respectively.
11. | OTHER OPERATING EXPENSE |
Other operating expense included the following:
2010 | 2009 | 2008 | ||||||||||
Professional fees |
$ | 295,939 | $ | 375,651 | $ | 371,839 | ||||||
Franchise tax |
526,623 | 522,588 | 502,008 | |||||||||
Insurance and Bond Expense |
452,524 | 603,360 | 78,956 | |||||||||
Telephone |
120,009 | 124,123 | 138,919 | |||||||||
Stationery, supplies and printing |
148,713 | 146,555 | 168,350 | |||||||||
Postage, express and freight |
206,703 | 202,223 | 186,504 | |||||||||
Data processing |
208,128 | 204,683 | 199,010 | |||||||||
Examination and Audit |
133,298 | 209,009 | 206,109 | |||||||||
Other |
768,452 | 684,261 | 664,517 | |||||||||
Total |
$ | 2,860,389 | $ | 3,072,453 | $ | 2,516,212 | ||||||
12. | OPERATING LEASES |
The Bank leases the space housing the branch located in Berlin, Ohio. The lease expires in four years, with an option to automatically renew for an additional ten year period. Minimum future rental payments are as follows:
Less than 1 year |
$ | 20,057 | ||
1 to 3 years |
41,325 | |||
Year 4 |
7,096 | |||
$ | 68,478 | |||
25
13. | INCOME TAXES |
The provision for federal income taxes for the years ended December 31 consist of:
2010 | 2009 | 2008 | ||||||||||
Current payable |
$ | 788,813 | $ | 818,542 | $ | 1,474,256 | ||||||
Deferred |
(275,750 | ) | 16,901 | (370,243 | ) | |||||||
Total provision |
$ | 513,063 | $ | 835,443 | $ | 1,104,013 | ||||||
The following is a reconciliation between the Companys provision for federal income taxes and the amount of income taxes computed at the 34% statutory rate in effect for all years presented.
2010 | 2009 | 2008 | ||||||||||||||||||||||
Amount | % of Pre-Tax Income |
Amount | % of Pre-Tax Income |
Amount | % of Pre-Tax Income |
|||||||||||||||||||
Provision at statutory rate |
$ | 1,187,463 | 34.0 | % | $ | 1,349,934 | 34.0 | % | $ | 1,890,280 | 34.0 | % | ||||||||||||
Tax exempt income |
(675,888 | ) | (19.4 | ) | (567,467 | ) | (14.3 | ) | (629,523 | ) | (11.3 | ) | ||||||||||||
Non-deductible interest |
||||||||||||||||||||||||
Expense |
40,853 | 1.2 | 42,271 | 1.1 | 40,852 | 0.7 | ||||||||||||||||||
Other, net |
(39,365 | ) | (1.1 | ) | 10,705 | 0.3 | (197,596 | ) | (3.5 | ) | ||||||||||||||
Tax expense and effective rate |
$ | 513,063 | 14.7 | % | $ | 835,443 | 21.1 | % | $ | 1,104,013 | 19.9 | % | ||||||||||||
The tax effects of deductible and taxable temporary differences that gave rise to significant portions of the net deferred tax assets and liabilities at December 31 are as follows:
2010 | 2009 | |||||||
Deferred Tax Assets: |
||||||||
Allowance for loan losses |
$ | 708,277 | $ | 631,967 | ||||
Net unrealized loss on securities |
202,942 | | ||||||
Other |
327,745 | 170,280 | ||||||
Deferred tax asset |
1,238,964 | 802,247 | ||||||
Deferred Tax Liabilities: |
||||||||
Premise and equipment |
233,102 | 253,402 | ||||||
Stock dividends |
243,814 | 243,814 | ||||||
Net unrealized gain on securities |
| 8,553 | ||||||
Other, net |
6,423 | 258 | ||||||
Deferred tax liabilities |
$ | 483,339 | $ | 506,027 | ||||
Net deferred tax assets |
$ | 755,625 | $ | 296,220 | ||||
No valuation allowance was established at December 31, 2010 in view of certain tax strategies coupled with the anticipated future taxable income as evidenced by the companys earnings potential.
26
14. | COMMITMENTS AND CONTINGENT LIABILITIES |
Commitments
In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheet.
These commitments were comprised of the following at December 31:
2010 | 2009 | |||||||
Commitments to extend credit |
$ | 42,833,000 | $ | 40,789,000 | ||||
Standby letters of credit |
1,185,000 | 1,235,000 | ||||||
Total |
$ | 44,018,000 | $ | 42,024,000 | ||||
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 payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, 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. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The fees earned from issuance of letters are recognized at the origination of the coverage period. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Companys policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
The Company has not been required to perform any financial guarantees during the past two years. The Company has not incurred any losses on its commitments in 2010, 2009 or 2008.
Contingent Liabilities
The Company and its subsidiary are subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company.
15. | REGULATORY MATTERS |
The approval of regulatory authorities is required if the total of all dividends declared by the Bank in any calendar year exceeds net profits as defined for that year combined with its retained net profits for the two preceding calendar years less any required transfers to surplus. Under this formula, the amount available for payment of dividends by the Bank to the Company at December 31, 2010, without the approval of the regulatory authorities is $3.8 million.
Included in cash and due from banks are required federal reserves of $4.1 million and $4.2 million at December 31, 2010 and 2009, respectively, for facilitating the implementation of monetary policy by the Federal Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of cash on hand and/or balances maintained directly with the Federal Reserve Bank.
27
15. | REGULATORY MATTERS (CONTINUED) |
Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific obligations. Further, such secured loans are limited in amount to ten percent of the Banks capital. The Company had no such borrowings at December 31, 2010 and 2009.
16. | REGULATORY CAPITAL REQUIREMENTS |
Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) established five capital categories ranging from well-capitalized to critically undercapitalized. Should any institution fail to meet the requirements to be considered adequately capitalized, it would become subject to a series of increasingly restrictive regulatory actions.
As of December 31, 2010 and 2009, the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be classified as a well-capitalized financial institution, Total risk-based, Tier I risk-based, and Tier I Leverage capital ratios must be at least ten percent, six percent, and five percent, respectively. There have been no conditions or events since notification that management believes have changed this category.
The Companys actual capital ratios are presented in the following table, which shows the Company met all regulatory capital requirements. The capital position of the Bank does not differ significantly from the Companys.
2010 | 2009 | |||||||||||||||
Amounts expressed in thousands | Amount | Ratio | Amount | Ratio | ||||||||||||
Total Risk Based Capital (to Risk Weighted Assets) |
||||||||||||||||
Actual |
$ | 45,400 | 19.61 | % | $ | 44,158 | 19.17 | % | ||||||||
For Capital Adequacy Purposes |
18,518 | 8.00 | 18,426 | 8.00 | ||||||||||||
To be well-capitalized |
23,148 | 10.00 | 23,033 | 10.00 | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
||||||||||||||||
Actual |
42,734 | 18.46 | % | 41,717 | 18.11 | % | ||||||||||
For Capital Adequacy Purposes |
9,259 | 4.00 | 9,213 | 4.00 | ||||||||||||
To be well-capitalized |
13,889 | 6.00 | 13,820 | 6.00 | ||||||||||||
Tier 1 Capital (to Average Assets) |
||||||||||||||||
Actual |
42,734 | 10.58 | % | 41,717 | 11.62 | % | ||||||||||
For Capital Adequacy Purposes |
16,160 | 4.00 | 14,357 | 4.00 | ||||||||||||
To be well-capitalized |
20,200 | 5.00 | 17,947 | 5.00 |
28
17. | FAIR VALUE MEASUREMENTS |
The Company utilizes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined under the literature are as follows:
Level I: |
Quoted prices are available in active markets for identical assets or liabilities as of the reported date. | |
Level II: |
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. | |
Level III: |
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. |
The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of December 31, 2010 by level within the fair value hierarchy. As required by the current accounting guidance, financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
December 31, 2010 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Assets measured on a recurring basis: |
||||||||||||||||
Securities available for sale: |
||||||||||||||||
U.S. Government and Agency Obligations |
$ | | $ | 75,486 | $ | | $ | 75,486 | ||||||||
Mutual Funds |
| 559 | | 559 | ||||||||||||
Assets measured on a nonrecurring basis: |
||||||||||||||||
Impaired loans |
$ | 1,596,808 | $ | 1,596,808 | ||||||||||||
December 31, 2009 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Assets measured on a recurring basis: |
||||||||||||||||
Securities available for sale: |
||||||||||||||||
U.S. Government and Agency Obligations |
$ | | $ | 64,841 | $ | | $ | 64,841 | ||||||||
Mutual Funds |
| 494 | | 494 | ||||||||||||
Assets measured on a nonrecurring basis: |
||||||||||||||||
Impaired loans |
$ | 144,947 | $ | 144,947 |
29
18. | FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS |
The carrying amounts and estimated fair values at December 31 are as follows:
2010 | 2009 | |||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
(In thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from depository institutions |
$ | 61,711 | $ | 61,711 | $ | 42,576 | $ | 42,576 | ||||||||
Federal funds sold |
4,713 | 4,713 | 2,938 | 2,938 | ||||||||||||
Securities available for sale |
76,045 | 76,045 | 65,335 | 65,335 | ||||||||||||
Securities held to maturity |
39,332 | 40,482 | 35,087 | 36,374 | ||||||||||||
Loans |
205,075 | 213,729 | 207,575 | 215,102 | ||||||||||||
Loans held for sale |
320 | 320 | 271 | 271 | ||||||||||||
Accrued interest receivable |
1,165 | 1,165 | 1,468 | 1,468 | ||||||||||||
Regulatory stock |
1,884 | 1,884 | 1,884 | 1,884 | ||||||||||||
Bank-owned life insurance |
5,727 | 5,727 | 5,662 | 5,662 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
$ | 356,189 | $ | 359,687 | $ | 321,295 | $ | 324,246 | ||||||||
Short term borrowings |
3,585 | 3,585 | 5,660 | 5,660 | ||||||||||||
Federal Home Loan Bank advances |
644 | 755 | 1,212 | 1,027 | ||||||||||||
Accrued interest payable |
185 | 185 | 183 | 183 |
Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial instruments should be based upon managements judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently
uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.
As certain assets and liabilities such as deferred tax assets and liabilities, premises and equipment and many other operational elements of the Company, are not considered financial instruments, but have value, this estimated fair value of financial instruments would not represent the full market value of the Company.
The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:
30
18. | FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) |
Cash and Due from Depository Institutions, Federal Funds Sold, Accrued Interest Receivable, Regulatory Stock, BOLI, Short-Term Borrowings, and Accrued Interest Payable
The fair value approximates the current carrying value.
Investment Securities and Loans Held for Sale
The fair value of investment securities and loans held for sale are equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.
Loans, Deposits, and Federal Home Loan Bank Advances
The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year end. The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented previously in the commitments and contingent liabilities note.
31
19. | PARENT COMPANY |
The following are parent company only condensed financial statements:
CONDENSED BALANCE SHEET
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash |
$ | 250,511 | $ | 325,298 | ||||
Investment in Bank |
42,769,534 | 42,139,648 | ||||||
Investments available for sale |
558,988 | 493,897 | ||||||
Total assets |
$ | 43,579,033 | $ | 42,958,843 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Dividend checks outstanding |
$ | 49,287 | $ | 67,510 | ||||
Deferred federal income tax payable |
(149,944 | ) | (172,075 | ) | ||||
Shareholders equity |
43,679,690 | 43,063,408 | ||||||
Total liabilities and shareholders equity |
$ | 43,579,033 | $ | 42,958,843 | ||||
CONDENSED STATEMENT OF INCOME
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
INCOME |
||||||||||||
Dividends from Bank |
$ | 1,950,000 | $ | 2,300,000 | $ | 2,950,000 | ||||||
Operating expenses |
65,586 | 63,203 | 70,135 | |||||||||
Impairment loss |
456,585 | | | |||||||||
Income before income tax benefit |
1,427,829 | 2,236,797 | 2,879,865 | |||||||||
Income tax benefit |
(177,181 | ) | (21,472 | ) | (23,829 | ) | ||||||
Income before equity in undistributed net income of subsidiary |
1,605,010 | 2,258,269 | 2,903,694 | |||||||||
Equity in undistributed net income of Bank |
1,374,466 | 876,683 | 1,551,939 | |||||||||
NET INCOME |
$ | 2,979,476 | $ | 3,134,952 | $ | 4,455,633 | ||||||
32
19. | PARENT COMPANY (CONTINUED) |
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 2,979,476 | $ | 3,134,952 | $ | 4,455,633 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Equity in undistributed net income of subsidiary |
(1,374,466 | ) | (876,683 | ) | (1,551,939 | ) | ||||||
Impairment loss on securities |
456,585 | | | |||||||||
Increase in other assets |
(155,239 | ) | | | ||||||||
Decrease in other liabilities |
(18,223 | ) | (9,941 | ) | (32,698 | ) | ||||||
Net cash provided by operating activities |
1,888,133 | 2,248,328 | 2,870,996 | |||||||||
INVESTING ACTIVITIES |
||||||||||||
Net cash used in investing activities |
| | | |||||||||
FINANCING ACTIVITIES |
||||||||||||
Purchase of treasury shares |
(81,967 | ) | (527,146 | ) | (939,318 | ) | ||||||
Dividends paid |
(1,880,953 | ) | (1,853,242 | ) | (1,843,066 | ) | ||||||
Net cash used in financing activities |
(1,962,920 | ) | (2,380,388 | ) | (2,782,384 | ) | ||||||
INCREASE (DECREASE) IN CASH |
(74,787 | ) | (132,060 | ) | 88,612 | |||||||
CASH AT BEGINNING OF YEAR |
325,298 | 457,358 | 368,746 | |||||||||
CASH AT END OF YEAR |
$ | 250,511 | $ | 325,298 | $ | 457,358 | ||||||
33
20. | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) |
(IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended | ||||||||||||||||
March 2010 |
June 2010 |
September 2010 |
December 2010 |
|||||||||||||
Total interest income |
$ | 3,721 | $ | 3,766 | $ | 3,726 | $ | 3,698 | ||||||||
Total interest expense |
994 | 1,008 | 1,034 | 1,032 | ||||||||||||
Net interest income |
2,727 | 2,758 | 2,692 | 2,666 | ||||||||||||
Provision for loan losses |
| 155 | 60 | | ||||||||||||
Net interest income after provision for loans losses |
2,727 | 2,603 | 2,632 | 2,666 | ||||||||||||
Total noninterest income |
629 | 423 | 455 | 537 | ||||||||||||
Total noninterest expense |
2,249 | 2,046 | 2,753 | 2,132 | ||||||||||||
Income before income taxes |
1,107 | 980 | 334 | 1,071 | ||||||||||||
Income taxes (benefit) |
165 | 164 | (73 | ) | 257 | |||||||||||
Net income |
$ | 942 | $ | 816 | $ | 407 | $ | 814 | ||||||||
Per share data: |
||||||||||||||||
Net earnings |
$ | 1.53 | $ | 1.32 | $ | 0.66 | $ | 1.32 | ||||||||
Weighted average shares outstanding |
616,706 | 616,706 | 616,706 | 616,551 |
34
20. | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED) |
(IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended | ||||||||||||||||
March 2009 |
June 2009 |
September 2009 |
December 2009 |
|||||||||||||
Total interest income |
$ | 4,116 | $ | 4,046 | $ | 3,893 | $ | 3,810 | ||||||||
Total interest expense |
1,215 | 1,136 | 1,083 | 1,043 | ||||||||||||
Net interest income |
2,901 | 2,910 | 2,810 | 2,767 | ||||||||||||
Provision for loan losses |
1 | 1 | | | ||||||||||||
Net interest income after provision for loans losses |
2,900 | 2,909 | 2,810 | 2,767 | ||||||||||||
Total noninterest income |
384 | 459 | 414 | 416 | ||||||||||||
Total noninterest expense |
2,235 | 2,201 | 2,280 | 2,373 | ||||||||||||
Income before income taxes |
1,049 | 1,167 | 944 | 810 | ||||||||||||
Income taxes |
229 | 281 | 200 | 125 | ||||||||||||
Net income |
$ | 820 | $ | 886 | $ | 744 | $ | 685 | ||||||||
Per share data: |
||||||||||||||||
Net earnings |
$ | 1.32 | $ | 1.43 | $ | 1.20 | $ | 1.12 | ||||||||
Weighted average shares outstanding |
620,269 | 618,960 | 617,932 | 616,827 |
35