Attached files
| file | filename |
|---|---|
| 8-K/A - AMENDMENT TO FORM 8-K - LANDMARK BANCORP INC | v365536_8ka.htm |
| EX-99.3 - EXHIBIT 99.3 - LANDMARK BANCORP INC | v365536_ex99-3.htm |
| EX-23.1 - EXHIBIT 23.1 - LANDMARK BANCORP INC | v365536_ex23-1.htm |
| EX-99.2 - EXHIBIT 99.2 - LANDMARK BANCORP INC | v365536_ex99-2.htm |
| EX-99.4 - EXHIBIT 99.4 - LANDMARK BANCORP INC | v365536_ex99-4.htm |
FIRST CAPITAL CORPORATION
AND SUBSIDIARIES
Financial Statements and
Independent Auditors’ Report
For the Years Ended
December 31, 2012 and 2011
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
| PAGE | |
| NUMBER | |
| Independent Auditors’ Report | 1 - 2 |
| Consolidated Balance Sheets | 3 |
| Consolidated Statements of Income and Comprehensive Income | 4 - 5 |
| Consolidated Statements of Changes in Stockholders Equity | 6 |
| Consolidated Statements of Cash Flows | 7 - 8 |
| Notes to Financial Statements | 9 - 33 |
| Supplemental Information | |
| Consolidating Balance Sheet | 34 |
| Consolidating Statement of Income | 35 - 36 |
Diehl
Banwart
Bolton
Certified Public Accountants PA
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders
First Capital Corporation
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of the First Capital Corporation and Subsidiaries which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with the accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
| - 1 - |
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the First Capital Corporation and Subsidiaries as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedules as listed in the table of contents are presented for the purposes of additional analysis and are not a required part of the financial statements. The supplemental schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. This information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements taken as a whole.
DIEHL, BANWART, BOLTON, CPAs PA
April 5, 2013
Fort Scott, Kansas
| - 2 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2012 and 2011
(In Thousands)
| 2012 | 2011 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 5,261 | $ | 3,881 | ||||
| Investment securities - Available for sale | 119,758 | 115,790 | ||||||
| Investment in stock of other banks | 4,433 | 4,325 | ||||||
| Loans less allowance for loan losses of $2,802 and $2,958 | 118,978 | 128,218 | ||||||
| Land, furniture, fixtures and equipment, net | 9,464 | 9,664 | ||||||
| Accrued interest receivable | 1,222 | 1,456 | ||||||
| Other real estate owned | 4,923 | 3,662 | ||||||
| Bank owned life insurance | 6,947 | 6,729 | ||||||
| Other assets | 918 | 1,002 | ||||||
| TOTAL ASSETS | $ | 271,904 | $ | 274,727 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Deposits | ||||||||
| Demand | $ | 44,533 | $ | 37,326 | ||||
| NOW accounts | 55,582 | 54,093 | ||||||
| Money market deposit accounts | 10,574 | 10,534 | ||||||
| Savings | 16,355 | 14,685 | ||||||
| Time deposits | 32,108 | 48,225 | ||||||
| Time deposits over $100,000 | 16,746 | 16,516 | ||||||
| Total Deposits | 175,898 | 181,379 | ||||||
| Securities sold under repurchase agreements | 4,451 | 5,276 | ||||||
| Federal Home Loan Bank Line of Credit | 11,529 | 3,331 | ||||||
| Federal Home Loan Bank Advances | 42,274 | 49,274 | ||||||
| Other liabilities | 2,026 | 1,902 | ||||||
| Accrued interest payable | 34 | 61 | ||||||
| Notes payable | 8,295 | 8,033 | ||||||
| Total Liabilities | 244,507 | 249,256 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, Class A | 100 | 100 | ||||||
| Common stock, Class B | 1,765 | 1,765 | ||||||
| Treasury stock | (1,799 | ) | (1,799 | ) | ||||
| Paid in capital | 1,278 | 1,278 | ||||||
| Retained earnings | 21,635 | 19,490 | ||||||
| Accumulated other comprehensive income | 4,418 | 4,637 | ||||||
| Total Stockholders’ Equity | 27,397 | 25,471 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 271,904 | $ | 274,727 | ||||
The accompanying notes are an integral part of these financial statements.
| - 3 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31, 2012 and 2011
(In Thousands)
| 2012 | 2011 | |||||||
| INTEREST AND DIVIDEND INCOME | ||||||||
| Interest and fees on loans | $ | 6,765 | $ | 8,387 | ||||
| Interest and dividends on investment securities | ||||||||
| U.S. Treasury securities | - | 78 | ||||||
| Obligations of U.S. government agencies and corporations | 3,856 | 3,866 | ||||||
| Obligations of state and political subdivisions | 389 | 576 | ||||||
| Other securities | 129 | 116 | ||||||
| Interest on Federal funds sold | 7 | 6 | ||||||
| Total Interest Income | 11,146 | 13,029 | ||||||
| INTEREST EXPENSE | ||||||||
| Interest on deposits | 747 | 1,237 | ||||||
| Interest on other borrowings | 2,320 | 2,504 | ||||||
| Total Interest Expense | 3,067 | 3,741 | ||||||
| Net Interest Income | 8,079 | 9,288 | ||||||
| Provision for loan losses | 675 | 3,248 | ||||||
| Net Interest Income after Provision for Loan Losses | 7,404 | 6,040 | ||||||
| OTHER INCOME | ||||||||
| Fees on deposit accounts and other services | 1,607 | 2,054 | ||||||
| Fair value adjustment - gain (loss) on interest rate cap agreements | 245 | (104 | ) | |||||
| Investment security gains | 924 | 956 | ||||||
| Loss on OREO property | (157 | ) | (3,066 | ) | ||||
| Rent | 630 | 307 | ||||||
| Mortgage banking revenue | 2,339 | 517 | ||||||
| Other miscellaneous | 611 | 248 | ||||||
| Total Other Income | 6,199 | 912 | ||||||
| OTHER EXPENSES | ||||||||
| Salaries | 4,453 | 3,631 | ||||||
| Employee benefits | 874 | 675 | ||||||
| Occupancy expenses, net | 1,429 | 1,431 | ||||||
| FHLB prepayment penalty | 1,049 | - | ||||||
| Other operating expenses | 2,969 | 3,107 | ||||||
| Total Other Expenses | 10,774 | 8,844 | ||||||
The accompanying notes are an integral part of these financial statements.
| - 4 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31, 2012 and 2011
(In Thousands)
| 2012 | 2011 | |||||||
| INCOME (LOSS) BEFORE PROVISION FOR INCOME TAX EXPENSE | $ | 2,829 | $ | (1,892 | ) | |||
| Provision for Income Tax Expense | 100 | 95 | ||||||
| NET INCOME (LOSS) | 2,729 | (1,987 | ) | |||||
| OTHER COMPREHENSIVE INCOME | ||||||||
| Unrealized gain (loss) on securities available for sale, net of deferred income taxes | (219 | ) | 2,748 | |||||
| COMPREHENSIVE INCOME | $ | 2,510 | $ | 761 | ||||
The accompanying notes are an integral part of these financial statements.
| - 5 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2012 and 2011
(In Thousands)
| COMMON STOCK CLASS A | COMMON STOCK CLASS B | TREASURY STOCK | PAID IN CAPITAL | RETAINED EARNINGS | ACCUMULATED OTHER COMPREHENSIVE INCOME | TOTALS | ||||||||||||||||||||||
| Balance, December 31, 2010 | $ | 100 | $ | 1,765 | $ | (1,679 | ) | $ | 1,278 | $ | 21,477 | $ | 1,889 | $ | 24,830 | |||||||||||||
| Common Stock retired | - | - | (120 | ) | - | - | - | (120 | ) | |||||||||||||||||||
| Comprehensive Income- | ||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | (1,987 | ) | - | (1,987 | ) | |||||||||||||||||||
| Other Comprehensive Income (Loss)- Unrealized gain (loss) on securities available for sale, net of applicable deferred income taxes of $108 | - | - | - | - | - | 2,748 | 2,748 | |||||||||||||||||||||
| Balance, December 31, 2011 | 100 | 1,765 | (1,799 | ) | 1,278 | 19,490 | 4,637 | 25,471 | ||||||||||||||||||||
| Comprehensive Income- | ||||||||||||||||||||||||||||
| Net Income | - | - | - | - | 2,729 | - | 2,729 | |||||||||||||||||||||
| Other Comprehensive Income (Loss)- Unrealized gain (loss) on securities available for sale, net of applicable deferred income taxes of $10 | - | - | - | - | - | (219 | ) | (219 | ) | |||||||||||||||||||
| Dividends Paid | - | - | - | - | (584 | ) | - | (584 | ) | |||||||||||||||||||
| Balance, December 31, 2012 | $ | 100 | $ | 1,765 | $ | (1,799 | ) | $ | 1,278 | $ | 21,635 | $ | 4,418 | $ | 27,397 | |||||||||||||
The accompanying notes are an integral part of these financial statements.
| - 6 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012 and 2011
(In Thousands)
| 2012 | 2011 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Income (Loss) | $ | 2,729 | $ | (1,987 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 393 | 471 | ||||||
| Provision for loan losses | 675 | 3,248 | ||||||
| Net amortization (accretion) of securities | 668 | 317 | ||||||
| Gain on investment securities sales | (924 | ) | (956 | ) | ||||
| (Gain) Loss on sales of furniture and fixtures | - | (1 | ) | |||||
| (Gain) Loss on sales of other real estate | (18 | ) | 98 | |||||
| Decrease in interest receivable | 235 | 67 | ||||||
| (Increase) decrease in other real estate | (334 | ) | - | |||||
| (Increase) decrease in other assets | (99 | ) | 178 | |||||
| (Increase) decrease in deferred tax benefit | (135 | ) | 43 | |||||
| Increase (decrease) in interest payable | (28 | ) | (47 | ) | ||||
| Increase in other liabilities | 124 | 603 | ||||||
| Total adjustments | 557 | 4,021 | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 3,286 | 2,034 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Available for sale securities sold | 20,152 | 25,126 | ||||||
| Available for sale securities matured | 35,744 | 24,058 | ||||||
| Available for sale securities purchased | (59,839 | ) | (71,069 | ) | ||||
| Net decrease in loans | 7,481 | 26,511 | ||||||
| Cash proceeds from sale of other real estate | 176 | 929 | ||||||
| Furniture and fixtures purchased | (242 | ) | (149 | ) | ||||
| Furniture and fixtures sold | 52 | 40 | ||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | 3,524 | 5,446 | ||||||
The accompanying notes are an integral part of these financial statements.
| - 7 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012 and 2011
(In Thousands)
| 2012 | 2011 | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net increase (decrease) in deposits | $ | (5,481 | ) | $ | 4,251 | |||
| Net increase (decrease) in repo agreements | (825 | ) | 119 | |||||
| Net increase (decrease) in FHLB line of credit | 8,198 | (8,714 | ) | |||||
| Payments on FHLB advances | (7,000 | ) | (2,902 | ) | ||||
| Proceeds from long-term notes payable | 467 | 33 | ||||||
| Payments on notes payable | (205 | ) | - | |||||
| Treasury stock purchased | - | (120 | ) | |||||
| Dividends paid | (584 | ) | - | |||||
| NET CASH USED BY FINANCING ACTIVITIES | (5,430 | ) | (7,333 | ) | ||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,380 | 147 | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 3,881 | 3,734 | ||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 5,261 | $ | 3,881 | ||||
| Cash paid during the year for: | ||||||||
| Interest expense | $ | 3,095 | $ | 3,788 | ||||
| Interest Tax | 87 | - | ||||||
The accompanying notes are an integral part of these financial statements.
| - 8 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
For the Years Ended December 31, 2012 and 2011
| 1. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES |
Nature of Operations
First Capital Corporation (“Corporation”) is a Kansas bank holding company headquartered in Fort Scott, Kansas. A wholly owned subsidiary of the Corporation –Citizens Bank N.A. (“Bank”), ” provides a variety of financial services, including loans and deposit accounts to individuals and corporate customers through its main bank in Fort Scott, Kansas, and branches in Pittsburg, Lenexa, Overland Park, Mound City, Iola and Kincaid, Kansas. The Bank’s assets and revenues represent approximately 99% of consolidated assets and revenues. A wholly owned subsidiary of the Bank, CINAB, Inc., manages other real estate owned by the Bank. The accounting and reporting policies of the Corporation and its subsidiaries conform to accounting principles generally accepted in the United States of America in all material respects. The following is a description of the more significant of those policies.
Basis of Presentation
The Corporation’s accounting and reporting policies are in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Such estimates are subject to change in the future as additional information becomes available or previously existing circumstances are modified. Actual results could differ from those estimates. In management’s opinion, all adjustments have been made for a fair presentation of the results of operations in these financial statements. The Corporation has no unconsolidated subsidiaries or unconsolidated special purpose entities.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Corporation considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include cash, due from bank accounts, cash items, cash letters in process of collection, in-transit clearing, and federal funds sold. Although cash is frequently in excess of amounts insured by the Federal Deposit Insurance Corporation, the risk to the Corporation is considered minimal.
Investment Securities
Securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Securities that may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or other factors, and marketable equity securities, are classified as available-for-sale and carried at fair value. The unrealized gains and losses on these securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive income/(loss), a component of stockholders’ equity. Management determines the appropriate classification of securities at the time of purchase, and at each reporting date, management reassesses the appropriateness of the classification.
| - 9 - |
| 1. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) |
Investment Securities (Continued)
Interest income on securities, including amortization of premiums and accretion of discounts, is recognized using the level yield method over the lives of the individual securities. Realized gains and losses on sales of securities are computed using the specific identification method. The cost basis of individual available-for-sale securities is reduced through write-downs to reflect other- than-temporary impairments in value.
Loans
Loans are stated at the principal amount outstanding, less the allowance for loan losses. Interest income is recognized using the interest method or a method that approximates a level rate of return over the loan term. Unearned income and net deferred loan fees and costs are recognized in interest income over the loan term as a yield adjustment.
Loans are generally placed on non-accrual status when payments become 90 days past due, unless they are well secured and in the process of collection. Loans may also be placed on non-accrual status if management has doubt as to the collectability of interest and principal prior to a loan becoming 90 days past due. Interest and fees previously accrued, but not collected, are generally reversed and charged against interest income at the time a loan is placed on non-accrual status. Interest payments received on non-accrual loans are recorded as reductions of principal if, in management’s judgment, principal repayment is doubtful. Loans may be reinstated to an accrual or performing status if future payments of principal and interest are reasonably assured and the loan has a demonstrated period of performance.
Troubled Debt Restructurings
In certain circumstances, the Corporation may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or expected to experience financial difficulties in the near-term. Concessionary modifications are classified as TDR’s unless the modification results in only an insignificant delay in payments to be received. The Corporation accrues interest on TDR’s if the borrower complies with the revised terms and conditions as agreed upon with the Corporation and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Loans classified as TDR’s are considered impaired loans for reporting and measurement purposes. The Corporation determines the TDR designation on a loan by loan basis in connection with its ongoing loan collection processes. Modifications that may qualify for TDR status include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate, which may not be deemed a market rate of interest. The Corporation may also work with borrowers in identifying other changes that mitigate loss to the Corporation which may include additional collateral or guarantees to support the loan. The Corporation may also waive contractual principal in certain situations in order to mitigate loss. The Corporation classifies these concessions as TDR’s to the extent the Corporation determines that the borrower is experiencing financial difficulty.
| - 10 - |
| 1. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) |
Impaired Loans
For all loan classes, a loan is considered to be impaired when, based on current events and information, it is probable the Corporation will be unable to collect all amounts due per the contractual terms of the loan agreement. Impaired loans include all nonaccrual and TDR loans. Interest income on TDR loans is recognized under the modified terms and conditions if the borrower has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Interest income is not recognized on other impaired loans until the loans are paid off or the financial condition of the borrower has improved such that full collection of principal and interest are considered probable under contractual terms.
Factors used by the Corporation in determining whether all principal and interest payments due on loans will be collected, include but are not limited to, the financial condition of the borrower, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on industry, geographic location and certain financial ratios. The evaluation for impairment is also driven by delinquency status and whether a loan has been modified.
Provision and Allowance for Loan Losses
The allowance for loan losses is available to cover probable losses inherent in the current loan portfolio. Loans, or portions thereof, deemed uncollectible are charged to the allowance for loan losses, while recoveries, if any, of amounts previously charged off are added to the allowance. Amounts are charged off after giving consideration to such factors as the customer’s financial condition, underlying collateral values and guarantees, and general economic conditions.
The evaluation process for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require prompt attention. Conditions giving rise to such action are business combinations or other acquisitions or dispositions of large quantities of loans, dispositions of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend. Recognition is also given to the changed risk profile resulting from previous business combinations, customer knowledge, results of ongoing credit-quality monitoring processes and the cyclical nature of economic and business conditions.
The initial allocation or specific-allowance methodology commences with loan officers grading the quality of their loans on a risk classification scale. Loans identified as below investment grade are placed on a watch list for further analysis and identification of those factors that may ultimately affect the full recovery or collectability of principal and/or interest. These loans are subject to continuous review and monitoring while they remain in a criticized category. Additionally, an independent loan officer is responsible for performing periodic reviews of the loan-portfolio independent from the identification process employed by loan officers. Loans that fall into criticized categories are further evaluated for impairment and allowance allocations calculated. The portion of the allowance allocated to an impaired loan is based on the most appropriate of the following methods: discounted cash flows from the loan using the loan’s effective interest rate, the fair value of the collateral for collateral dependent loans, or the observable market price of the impaired loan.
| - 11 - |
| 1. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) |
| Provision and Allowance for Loan Losses (Continued) |
The second allocation or loss experience factor approach, which applies to homogenous pools of loans with similar characteristics. This allocation is made by applying an average loss experience factor plus a qualitative factor to the outstanding balance in each loan category. This approach gives recognition to the Corporation’s historical loss experience with such loans, as well as qualitative factors such as changes in lending policies, changes in economic conditions, changes in the nature and volume of the loan portfolio, changes in the experience, ability, and depth of lending management, changes in the volume and severity of past due loans, non-accruals, and classified loans, changes in the quality of the loan review system, changes in the value of collateral, concentrations of credit and competition, legal and regulatory requirements. These factors are reviewed on a quarterly basis to ensure that the factors are reflective of trends or changes in the business environment and our markets.
Other evidentiary matter used to evaluate the adequacy of the allowance for loan losses is the amount and trend of criticized loans, results of regulatory examinations, peer group comparisons and economic data associated with the relevant markets, specifically the local real estate market. This information may lead management to consider that the overall allowance level should be greater than the amount determined by the allocation process described above.
Land, Furniture, Fixtures and Equipment
Land, furniture, fixtures and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is recognized principally by the straight-line method applied over the estimated useful lives of the assets, which are 3 to 39 years for buildings and 3 to 10 years for fixtures and equipment. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
Other Real Estate Owned
Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of the Bank’s carrying amount or fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expenses. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell.
The Corporation recorded a loss on Other Real Estate in 2012 and 2011 made up of the following (in thousands):
| 2012 | 2011 | |||||||
| Fair Value Adjustments | $ | 191 | $ | 2,934 | ||||
| (Gain) Loss on Sale | (34 | ) | 132 | |||||
| $ | 157 | $ | 3,066 | |||||
Mortgage Banking Revenue
Mortgage banking revenue includes revenue derived from mortgages originated and subsequently sold, generally with servicing released. The primary components include: gains and losses on mortgage sales, servicing revenue, and changes in the fair value of mortgage servicing rights.
| - 12 - |
| 1. | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) |
Profit Sharing
The Corporation has established a profit sharing plan covering substantially all full-time employees. Contributions range from 0% to 15% of an employee’s base salary based upon net earnings. The Corporation accrued a profit sharing accrual of $81,400 and $0 for the years ended December 31, 2012 and 2011.
Advertising Costs
The Corporation expensed advertising and marketing costs as incurred totaling $141,416 and $165,060, for 2012 and 2011, respectively.
Income Taxes
The Corporation, with the consent of its shareholders, has elected under the Internal Revenue Code to be an S-Corporation, effective January 1, 1998. In lieu of federal corporation income taxes, the shareholders of an S-Corporation, are taxed on their proportionate share of the company’s taxable income. Accordingly, the company will not incur additional federal income tax obligations, and future financial statements will not include a provision for federal income taxes. State income taxes are still payable by the Subsidiaries.
The Corporation reports state income tax expense as the total of current income taxes payable and deferred tax expense provided for temporary differences. Temporary differences result from differences in the carrying values of various assets and liabilities for financial reporting and income tax purposes, and from differences in the timing of income or expense for financial statements purposes and when these items of income or expense are recognized for income tax purposes. Deferred tax expense is recorded at the statutory tax rate which is in effect at the time the temporary differences are expected to reverse.
The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Interest Rate Swap Agreements
The Corporation periodically enters into interest rate swap agreements in order to reduce the impact of changes in interest rates. The differential between interest paid or received in these agreements is recognized at the time paid over the life of the agreements. The interest rate swap agreements are recorded at fair value. There were no such agreements outstanding as of December 31, 2012 and 2011, respectively.
Interest Rate CAP Agreements
The Corporation has entered into interest rate cap agreements in order to reduce the impact of changes in interest rates. The fees related to the cap agreements are amortized over the life of the agreement. Interest income received is recognized at the time paid. The cap agreements are recorded at fair value as discussed further in Note 13.
| - 13 - |
| 2. | INVESTMENT SECURITIES |
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of available-for-sale securities were as follows at December 31 (in thousands):
| DECEMBER 31, 2012 | ||||||||||||||||
| GROSS | GROSS | |||||||||||||||
| AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
| COST | GAINS | LOSSES | VALUE | |||||||||||||
| Obligations of States and Political Subdivisions | $ | 8,711 | $ | 738 | $ | - | $ | 9,449 | ||||||||
| Obligations of U.S. Government Agencies and Corporations | 106,427 | 3,968 | (86 | ) | 110,309 | |||||||||||
| $ | 115,138 | $ | 4,706 | $ | (86 | ) | $ | 119,758 | ||||||||
| DECEMBER 31, 2011 | ||||||||||||||||
| GROSS | GROSS | |||||||||||||||
| AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
| COST | GAINS | LOSSES | VALUE | |||||||||||||
| Obligations of States and Political Subdivisions | $ | 8,182 | $ | 567 | $ | - | $ | 8,749 | ||||||||
| Obligations of U.S. Government Agencies and Corporations | 102,758 | 4,309 | (26 | ) | 107,041 | |||||||||||
| $ | 110,940 | $ | 4,876 | $ | (26 | ) | $ | 115,790 | ||||||||
Investment securities were pledged to secure public deposits, trust deposits, securities sold under agreements to repurchase and for other purposes required by law. Securities pledged consist of the following (in thousands):
| DECEMBER 31, | ||||||||
| 2012 | 2011 | |||||||
| SECURITIES PLEDGED: | ||||||||
| Amortized Cost | $ | 61,207 | $ | 70,873 | ||||
| Fair Value | 64,046 | 74,345 | ||||||
Investment in stocks of other banks are recorded at cost and include investments in stock of the Federal Reserve Bank, Bankers Bank of Kansas, and the Federal Home Loan Bank of Topeka, totaling $4,432,600 and $4,325,200, at December 31, 2012 and 2011.
The following is a summary of maturities of investment securities, as of December 31, 2012 (in thousands):
| SECURITIES AVAILABLE FOR SALE | ||||||||
| AMORTIZED | FAIR | |||||||
| AMOUNTS MATURING IN: | COST | VALUE | ||||||
| One Year or Less | $ | 13,463 | $ | 13,784 | ||||
| After 1 through 5 Years | 68,807 | 71,544 | ||||||
| After 5 through 10 Years | 29,816 | 31,284 | ||||||
| After 10 Years | 3,052 | 3,146 | ||||||
| $ | 115,138 | $ | 119,758 | |||||
| - 14 - |
| 2. | INVESTMENT SECURITIES (Continued) |
The summary is based on the earliest expected redemption dates inasmuch as the fair values are, as a whole, greater than cost. Contractual maturities differ from expected maturities because issuers may choose exercise calls or prepayments on these securities.
Proceeds from the sale of securities available for sale totaled $20,152,409 and $25,126,446 in 2012 and 2011, resulting in a gain of $924,128 and $955,767, respectively.
| 3. | LOANS |
The composition of the loan portfolio at December 31 was as follows:
| (in 000’s) | 2012 | 2011 | ||||||
| Agriculture Loans | ||||||||
| Agriculture Operating & Equipment Loans | $ | 7,293 | $ | 6,048 | ||||
| Farmland Real Estate Loans | 20,162 | 19,668 | ||||||
| Total Agriculture Loans | 27,455 | 25,716 | ||||||
| Residential Mortgages | ||||||||
| Residential Mortgages, first liens | 31,279 | 27,231 | ||||||
| Residential Mortgages, second liens | 359 | 505 | ||||||
| Home Equity Lines of Credit | 3,181 | 3,428 | ||||||
| Construction and Development | 519 | 1,069 | ||||||
| Residential Mortgages Held for Sale | 6,424 | 2,770 | ||||||
| Total Residential Mortgages | 41,762 | 35,003 | ||||||
| Commercial Real Estate | ||||||||
| Commercial Mortgages | 35,500 | 45,408 | ||||||
| Construction and Development | 705 | 5,453 | ||||||
| Total Commercial Real Estate | 36,205 | 50,861 | ||||||
| Commercial & Industrial Loans | 13,691 | 17,270 | ||||||
| Retail | ||||||||
| Installment and Auto Loans | 2,518 | 2,184 | ||||||
| Overdraft Banking | 86 | 97 | ||||||
| Overdrafts | 63 | 45 | ||||||
| Total Retail | 2,667 | 2,326 | ||||||
| TOTAL LOANS | $ | 121,780 | $ | 131,176 | ||||
| - 15 - |
| 3. | LOANS (Continued) |
The Corporation’s loan portfolio is concentrated primarily in loans secured by real estate located in the East to Southeast area of Kansas. The segments of the real estate portfolio are diversified in terms of risk and repayment sources. The underlying collateral includes multi-family apartment buildings, 1-4 family residential homes, farmland, and owner occupied/non-owner occupied commercial properties. The majority of the Corporation’s commercial real estate portfolio is secured by real estate located in the Kansas City metropolitan area. The risks inherent in this portfolio are dependent on both regional and general economic stability, which affect property values and the financial well being and creditworthiness of the borrowers.
At December 31, 2012 and 2011, loans of approximately $64,981,000 and $62,806,000 respectively were pledged as collateral under borrowing arrangements with the Federal Home Loan Bank of Topeka.
The Corporation routinely extends loans to directors, executive officers, and enterprises in which said individuals had beneficial interests. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons. The following is a summary of activity for loans to directors and executive officers (in thousands):
| 2012 | 2011 | |||||||
| Balance - Beginning of Year | $ | 124 | $ | 57 | ||||
| Additions | 31 | 129 | ||||||
| Repayments | (4 | ) | (62 | ) | ||||
| Balance, End of Year | $ | 151 | $ | 124 | ||||
Allowance for Loan Losses
The allowance for loan losses reserves for probable and estimable losses incurred in the Corporation’s loan portfolio. The following summarizes the activity in the reserve for loan loss (in 000’s):
| 2012 | 2011 | |||||||
| Balance - Beginning of Year | $ | 2,958 | $ | 3,180 | ||||
| Loans charged off | (1,244 | ) | (3,497 | ) | ||||
| Recoveries on loans charged off | 413 | 27 | ||||||
| Provision charged to expense | 675 | 3,248 | ||||||
| Balance, End of Year | $ | 2,802 | $ | 2,958 | ||||
| - 16 - |
| 3. | LOANS (Continued) |
Additional detail of the reserve for loan losses and related loan balances, by loan type, for the year ended December 31, 2012 and 2011 was as follows:
| 2012 (in 000’s) | Agriculture | Residential | Commercial Real Estate | Commercial & Industrial | Retail | Total | ||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Balance at beginning of year | $ | 274 | $ | 623 | $ | 1,443 | $ | 592 | $ | 26 | $ | 2,958 | ||||||||||||
| Add: | ||||||||||||||||||||||||
| Provision for credit losses | (136 | ) | 477 | 452 | (111 | ) | (7 | ) | 675 | |||||||||||||||
| Deduct: | ||||||||||||||||||||||||
| Loans charged off | 9 | 555 | 637 | 43 | - | 1,244 | ||||||||||||||||||
| Less recoveries of loans charged off | 163 | 160 | 81 | 3 | 6 | 413 | ||||||||||||||||||
| Net Loans charged off | (154 | ) | 395 | 556 | 40 | (6 | ) | 831 | ||||||||||||||||
| Balance at end of year | $ | 292 | $ | 705 | $ | 1,339 | $ | 441 | $ | 25 | $ | 2,802 | ||||||||||||
| 2012 (in 000’s) | Agriculture | Residential | Commercial Real Estate | Commercial & Industrial | Retail | Total | ||||||||||||||||||
| Allowance Balance at end of year related to: | ||||||||||||||||||||||||
| Loans individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Loans collectively evaluated for impairment | 292 | 705 | 1,339 | 441 | 25 | 2,802 | ||||||||||||||||||
| Loans acquired with deteriorated credit quality | - | - | - | - | - | - | ||||||||||||||||||
| Total Allowance for loan losses | $ | 292 | $ | 705 | $ | 1,339 | $ | 441 | $ | 25 | $ | 2,802 | ||||||||||||
| 2011 (in 000’s) | Agriculture | Residential | Commercial Real Estate | Commercial & Industrial | Retail | Total | ||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Balance at beginning of year | $ | 299 | $ | 413 | $ | 1,697 | $ | 726 | $ | 45 | $ | 3,180 | ||||||||||||
| Add: | ||||||||||||||||||||||||
| Provision for credit losses | 11 | 615 | 2,427 | 211 | (16 | ) | 3,248 | |||||||||||||||||
| Deduct: | ||||||||||||||||||||||||
| Loans charged off | 36 | 420 | 2,685 | 348 | 8 | 3,497 | ||||||||||||||||||
| Less recoveries of loans charged off | - | 15 | 4 | 3 | 5 | 27 | ||||||||||||||||||
| Net Loans charged off | 36 | 405 | 2,681 | 345 | 3 | 3,470 | ||||||||||||||||||
| Balance at end of year | $ | 274 | $ | 623 | $ | 1,443 | $ | 592 | $ | 26 | $ | 2,958 | ||||||||||||
| 2011 (in 000’s) | Agriculture | Residential | Commercial Real Estate | Commercial & Industrial | Retail | Total | ||||||||||||||||||
| Allowance Balance at end of year related to: | ||||||||||||||||||||||||
| Loans individually evaluated for impairment | $ | - | $ | - | $ | 375 | $ | 42 | $ | - | $ | 417 | ||||||||||||
| Loans collectively evaluated for impairment | 274 | 623 | 1,068 | 550 | 26 | 2,541 | ||||||||||||||||||
| Loans acquired with deteriorated credit quality | - | - | - | - | - | - | ||||||||||||||||||
| Total Allowance for loan losses | $ | 274 | $ | 623 | $ | 1,443 | $ | 592 | $ | 26 | $ | 2,958 | ||||||||||||
| - 17 - |
| 3. | LOANS (Continued) |
Credit Quality
The quality of the Corporation’s loan portfolio is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Corporation. These credit quality ratings are an important part of the Corporation’s overall credit risk management process and evaluation of its allowance for loan losses. The following table provides a summary of loans by portfolio type, including the delinquency status of those loans that continue to accrue interest, and those loans that are nonperforming:
| Accruing | ||||||||||||||||||||
| 30-89 Days | 90 days or | |||||||||||||||||||
| December 31, 2012 (in 000’s) | Current | Past Due | More Past Due | Nonperforming | Total | |||||||||||||||
| Agriculture Loans | $ | 27,429 | $ | - | $ | - | $ | 26 | $ | 27,455 | ||||||||||
| Residential Mortgages | 40,409 | 355 | - | 998 | 41,762 | |||||||||||||||
| Commercial Real Estate | 27,154 | - | - | 9,051 | 36,205 | |||||||||||||||
| Commercial & Industrial Loans | 12,275 | - | - | 1,416 | 13,691 | |||||||||||||||
| Retail | 2,667 | - | - | - | 2,667 | |||||||||||||||
| Total Loans | $ | 109,934 | $ | 355 | $ | - | $ | 11,491 | $ | 121,780 | ||||||||||
| Special | Total | |||||||||||||||||||
| December 31, 2012 (in 000’s) | Pass | Mention | Classified | Criticized | Total | |||||||||||||||
| Agriculture Loans | $ | 27,429 | $ | - | $ | 26 | $ | 26 | $ | 27,455 | ||||||||||
| Residential Mortgages | 40,764 | - | 998 | 998 | 41,762 | |||||||||||||||
| Commercial Real Estate | 25,494 | 1,041 | 9,670 | 10,711 | 36,205 | |||||||||||||||
| Commercial & Industrial Loans | 11,693 | - | 1,998 | 1,998 | 13,691 | |||||||||||||||
| Retail | 2,652 | - | 15 | 15 | 2,667 | |||||||||||||||
| Total Loans | $ | 108,032 | $ | 1,041 | $ | 12,707 | $ | 13,748 | $ | 121,780 | ||||||||||
| Accruing | ||||||||||||||||||||
| 30-89 Days | 90 days or | |||||||||||||||||||
| December 31, 2011 (in 000’s) | Current | Past Due | More Past Due | Nonperforming | Total | |||||||||||||||
| Agriculture Loans | $ | 25,685 | $ | - | $ | - | $ | 31 | $ | 25,716 | ||||||||||
| Residential Mortgages | 34,591 | 67 | - | 345 | 35,003 | |||||||||||||||
| Commercial Real Estate | 39,990 | 2,164 | - | 8,707 | 50,861 | |||||||||||||||
| Commercial & Industrial Loans | 13,434 | 2,393 | - | 1,443 | 17,270 | |||||||||||||||
| Retail | 2,302 | 24 | - | - | 2,326 | |||||||||||||||
| Total Loans | $ | 116,002 | $ | 4,648 | $ | - | $ | 10,526 | $ | 131,176 | ||||||||||
| Special | Total | |||||||||||||||||||
| December 31, 2011 (in 000’s) | Pass | Mention | Classified | Criticized | Total | |||||||||||||||
| Agriculture Loans | $ | 25,685 | $ | - | $ | 31 | $ | 31 | $ | 25,716 | ||||||||||
| Residential Mortgages | 33,224 | 1,399 | 380 | 1,779 | 35,003 | |||||||||||||||
| Commercial Real Estate | 40,473 | 429 | 9,959 | 10,388 | 50,861 | |||||||||||||||
| Commercial & Industrial Loans | 11,639 | 2,287 | 3,344 | 5,631 | 17,270 | |||||||||||||||
| Retail | 2,318 | - | 8 | 8 | 2,326 | |||||||||||||||
| Total Loans | $ | 113,339 | $ | 4,115 | $ | 13,722 | $ | 17,837 | $ | 131,176 | ||||||||||
| - 18 - |
| 3. | LOANS (Continued) |
For all loan classes, a loan is considered to be impaired when, based on current events or information, it is probable the Corporation will be unable to collect all amounts due per the contractual terms of the loan agreement. A summary of impaired loans, which include all nonaccrual and TDR loans, by portfolio class was as follows:
| Period-end | Unpaid | Commitments | ||||||||||||||
| Recorded | Principal | Valuation | to Lend Additional | |||||||||||||
| December 31, 2012 | Invesment | Balance | Allowance | Funds | ||||||||||||
| Agriculture Loans | $ | 26 | $ | 58 | $ | - | $ | - | ||||||||
| Residential Mortgages | 998 | 1,052 | - | - | ||||||||||||
| Commercial Real Estate | 9,051 | 11,158 | - | - | ||||||||||||
| Commercial & Industrial Loans | 1,416 | 1,606 | - | - | ||||||||||||
| Retail | - | - | - | - | ||||||||||||
| Total | $ | 11,491 | $ | 13,874 | $ | - | $ | - | ||||||||
| Period-end | Unpaid | Commitments | ||||||||||||||
| Recorded | Principal | Valuation | to Lend Additional | |||||||||||||
| December 31, 2011 | Invesment | Balance | Allowance | Funds | ||||||||||||
| Agriculture Loans | $ | - | $ | - | $ | - | $ | - | ||||||||
| Residential Mortgages | 155 | 520 | - | - | ||||||||||||
| Commercial Real Estate | 9,959 | 15,284 | 375 | 6 | ||||||||||||
| Commercial & Industrial Loans | 1,444 | 1,482 | 42 | - | ||||||||||||
| Retail | - | - | - | - | ||||||||||||
| Total | $ | 11,558 | $ | 17,286 | $ | 417 | $ | 6 | ||||||||
Troubled Debt Restructurings
In certain circumstances, the Corporation may modify terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. The following table provides a summary of loans modified as TDR’s for the year ended December 31, 2012 and 2011 by loan class:
| (in 000’s) December 31, 2012 | Number of Loans | Pre-Modification Outstanding Balance | Post-Modification Outstanding Balance | |||||||||
| Agriculture Loans | - | $ | - | $ | - | |||||||
| Residential Mortgages | - | - | - | |||||||||
| Commercial Real Estate | 6 | 9,013 | 6,939 | |||||||||
| Commercial & Industrial Loans | - | - | - | |||||||||
| Retail | - | - | - | |||||||||
| Total | 6 | $ | 9,013 | $ | 6,939 | |||||||
| Pre-Modification | ||||||||||||
| (in 000’s) | Number of | Outstanding | Post-Modification | |||||||||
| December 31, 2011 | Loans | Balance | Outstanding Balance | |||||||||
| Agriculture Loans | - | $ | - | $ | - | |||||||
| Residential Mortgages | 1 | 520 | 155 | |||||||||
| Commercial Real Estate | 6 | 9,058 | 7,178 | |||||||||
| Commercial & Industrial Loans | - | - | - | |||||||||
| Retail | - | - | - | |||||||||
| Total | 7 | $ | 9,578 | $ | 7,333 | |||||||
| - 19 - |
| 4. | LAND, FURNITURE, FIXTURES AND EQUIPMENT |
Land, furniture, fixtures and equipment is summarized as follows (in thousands):
| 2012 | 2011 | |||||||
| Land | $ | 3,804 | $ | 3,804 | ||||
| Furniture and fixtures | 2,497 | 2,477 | ||||||
| Computer equipment | 1,913 | 1,836 | ||||||
| Bank buildings | 8,637 | 8,621 | ||||||
| Automobiles | 158 | 150 | ||||||
| Construction in process | - | - | ||||||
| Total | 17,009 | 16,888 | ||||||
| Less: accumulated depreciation | (7,545 | ) | (7,224 | ) | ||||
| Net land, furniture, fixtures & equipment | $ | 9,464 | $ | 9,664 | ||||
| 5. | INTEREST-BEARING DEPOSITS |
A summary of time deposits which includes individual retirement accounts by year of maturity at December 31, 2012 is as follows (in thousands):
| 2013 | $ | 35,949 | ||
| 2014 | 8,991 | |||
| 2015 | 1,099 | |||
| 2016 | 1,703 | |||
| 2017 | 1,112 | |||
| Total Time Deposits | $ | 48,854 |
The Corporation had approximately $16,746,000 and $16,516,000, in time deposits $100,000 and over at December 31, 2012 and 2011, respectively. Interest expense on these deposits was $108,308 and $195,156, respectively. The aggregate amounts of overdraft deposit accounts reclassified as loans was $62,733 and $45,472, at December 31, 2012 and 2011, respectively.
| 6. | SECURITIES SOLD UNDER REPURCHASE AGREEMENTS |
The Corporation had securities sold under agreements to repurchase, consisting of several transactions with varying short-term maturities. The securities underlying these agreements are federal agency securities with maturities over 5 years and are included in available for sale investment securities. The Corporation maintains possession of the securities underlying these types of agreements. Pertinent information concerning these types of agreements are as follows (in thousands):
| 2012 | 2011 | |||||||
| As of December 31, | ||||||||
| Repurchase agreements | $ | 4,451 | $ | 5,276 | ||||
| Underlying securities, Book value | 8,766 | 8,900 | ||||||
| Underlying securities, Market value | 9,072 | 9,370 | ||||||
| Maximum amount of repurchase agreements at month end | 8,802 | 9,395 | ||||||
| Average amount of repurchase agreements for the year | 7,566 | 8,246 | ||||||
| - 20 - |
| 7. | LINE OF CREDIT AND FHLB ADVANCES |
The balance of a line of credit with the Federal Home Loan Bank (FHLB) of Topeka, Kansas, as of December 31, 2012 and 2011, was $11,529,000 and $3,331,000, respectively. The maximum additional amount that can be drawn is approximately $12,000,000. The line of credit matures on July 5, 2013.
The following is a summary (in thousands) of the line of credit borrowing as of and for the years ended December 31,
| 2012 | 2011 | |||||||
| Line of Credit Borrowing: | ||||||||
| Period End Balance | $ | 11,529 | $ | 3,331 | ||||
| Maximum Amount Outstanding at Any Month End | 11,529 | 15,198 | ||||||
| Average Outstanding Balance | 8,668 | 3,965 | ||||||
Advances from the Federal Home Loan Bank (FHLB) are comprised of the following (in thousands):
| Three advances originally ranging from $4,889 to $10,000 each with principal payable at maturities ranging from 2016 to 2025. Interest is payable monthly at variable interest rates ranging from .16% to 4.10%. | $ | 20,274 | ||
| Seven advances originally ranging from $2,000 to $5,000 with interest payable at fixed interest rates ranging from 4.43% to 5.35%. Maturities range from 2016 to 2017. | 22,000 | |||
| Total FHLB Advances | $ | 42,274 |
Under the terms of the blanket collateral agreement with the FHLB, advances are secured by investment securities and certain qualifying residential mortgage, multi-family mortgage loans, agricultural loans, and commercial real estate loans. At December 31, 2012, the carrying value of securities and loans pledged as collateral was $34,572,034 and $62,806,107, respectively.
Future maturities of the advances are as follows (in thousands):
| AVERAGE | ||||||||
| YEAR ENDED DECEMBER 31, | PRINCIPAL | RATE % | ||||||
| 2016 | $ | 20,000 | 4.523 | % | ||||
| 2017 | 12,000 | 4.868 | % | |||||
| 2023 | 4,889 | .180 | % | |||||
| 2025 | 5,385 | .160 | % | |||||
| TOTAL | $ | 42,274 | 3.563 | % | ||||
| - 21 - |
| 8. | NOTES PAYABLE |
The Corporation has floating rate junior subordinated deferrable interest debentures payable totaling $5,000,000 dated June 22, 2006 with a scheduled maturity date of September 23, 2036. Interest is payable quarterly at the three-month LIBOR rate plus 1.62% (currently approximately 1.9%). As long as an event of default has not occurred, the Corporation may defer interest payments for up to twenty consecutive quarterly periods. Principal is payable at maturity on September 23, 2036. The principal may be redeemed without a premium.
The debentures (or Trust Preferred Securities) are obligations of a wholly-owned statutory business trust subsidiary (the “Trust”). The Trust was formed with initial capitalizations in common stock and for the exclusive purpose of issuing the Capital Securities and using the proceeds to acquire Junior Subordinated Debt Securities (“Debt Securities”) issued by the Corporation. The debentures are non-callable at any time in whole or in part for five years from the date of issuance, except in certain circumstances. They may be redeemed annually thereafter, in whole or in part, at declining premiums to maturity.
The debentures qualify as Tier 1 capital for regulatory purposes and are subordinate in repayment to all obligations. Due to the issuance of FIN 46R, there can be no assurance that the Federal Reserve will continue to allow institutions to include these securities as a component of Tier 1 Capital. As of December 31, 2012, the Company would still exceed the threshold for capital adequacy assuming the exclusion of the securities.
The Corporation obtained a promissory note payable totaling $3,295,000 dated February 15, 2012, with a scheduled maturity date of February 2013. Interest is payable quarterly at the variable prime rate currently at 4.50%. Principal and interest are due at maturity. The loan is secured by stock of the bank and by the Corporation, as well as a personal guarantee by the primary owner of the corporation. The loan was renewed in February 2013 at a rate of 3.75%.
A summary of annual principal reductions of long-term debt is as follows (in thousands):
| YEAR ENDED DECEMBER 31, | PRINCIPAL | |||
| 2014 | $ | 3,295 | ||
| 2036 | 5,000 | |||
| TOTAL | $ | 8,295 | ||
| 9. | PROVISION FOR INCOME TAXES |
The provision for income taxes is summarized as follows (in thousands):
| 2012 | 2011 | |||||||
| Current | $ | 82 | $ | 90 | ||||
| Deferred | 18 | 5 | ||||||
| $ | 100 | $ | 95 | |||||
As stated in Note 1, the Corporation’s shareholders elected to be an S-Corporation, effective January 1, 1998. Accordingly, no federal income taxes are recorded in the financial statements.
| - 22 - |
| 9. | PROVISION FOR INCOME TAXES (Continued) |
Deferred state income tax liabilities have been provided for taxable temporary differences related to unrealized gains on available-for-sale securities. Deferred tax assets have been provided for deductible temporary differences primarily related to the allowance for loan losses. The net deferred tax assets in the accompanying consolidated statements of financial condition include the following components (in thousands):
| 2012 | 2011 | |||||||
| Deferred: | ||||||||
| Tax liabilities | $ | (202 | ) | $ | (212 | ) | ||
| Tax assets | 145 | 163 | ||||||
| Tax asset valuation allowance | - | - | ||||||
| Net Deferred Tax Asset (Liability) | $ | (57 | ) | $ | (49 | ) | ||
| 10. | COMMON AND PREFERRED STOCK |
The Corporation has the following types of stock authorized at December 31, 2012 and 2011:
Common stock, class A, $1 par value, authorized 1,000,000 shares, outstanding 100,000 shares; Common stock, class B, non-voting, $1 par value, authorized and issued 1,765,000 shares, outstanding and 733,675; Preferred stock, 12% noncumulative class C, series A, $1 par value, authorized 1,000,000 shares, no shares outstanding. The stock is redeemable at the option of the Corporation at an amount equal to net equity per share of all common and preferred stock outstanding.
| 11. | RETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS |
The Corporation maintains a defined contribution 401 (k) plan whereby eligible employees may elect to contribute amounts pursuant to a salary reduction arrangement. Employees may contribute up to 15% of compensation. The employer may match 50% of the employees’ contribution not to exceed 4% of the employees’ compensation. Substantially all employees may participate in the employer match on an entry date after one year and 1,000 minimum hours of service. Matching contributions totaled $53,403 and $52,846, in 2012 and 2011 respectively. The employer may make a profit sharing contribution of up to 15% of an employee’s eligible compensation. Employees are fully vested in employer contributions after six years of service. Profit sharing contributions totaled $81,400 in 2012 and $0 in 2011 respectively.
The Corporation has purchased life insurance policies from four different insurance companies to help fund employee benefit agreements. The policies are single premium policies owned by the Bank, and are recorded at cost, plus the net increase in cash surrender value less insurance expense. The cash surrender value of the policies will be used to purchase life annuities, which will then pay the key employees a fixed monthly benefit upon reaching the retirement age of 65. The balances of the Bank owned life insurance totaled $6,946,576 and $6,728,953 at December 31, 2012 and 2011, respectively. The Bank has accrued a salary continuation plan liability of $760,659 and $652,835 for the years ended December 31, 2012 and 2011, respectively. Income from bank owned life insurance totaled $268,731 and $196,882 for the years ended December 31, 2012 and 2011 and is included with other miscellaneous income.
| - 23 - |
| 12. | OTHER COMMITMENTS AND CONTIGENT LIABILITIES |
The Corporation extends traditional off-balance sheet financial products to meet the financing needs of its customers. They include commitments to extend credit and letters of credit. Funded commitments are reflected in the consolidated balance sheet.
Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These commitments usually have fixed expiration dates or other termination clauses and may require the payment of a fee. Total commitments outstanding do not necessarily represent future cash flow requirements of the Corporation as many commitments expire without being funded.
Management evaluates each customer’s creditworthiness prior to issuing these commitments and may also require certain collateral upon extension of credit based on management’s credit evaluation. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing properties. Fixed rate commitments are subject to interest rate risk based on changes in prevailing rates during the commitment period. The Corporation is subject to credit risk in the event that the commitments are drawn upon and the customer is unable to repay the obligation.
Lines of credit are irrevocable commitments issued at the request of customers. They authorize the customer to draw drafts for payment in accordance with the stated terms and conditions. Letters of credit substitute a bank’s creditworthiness for that of the customer and are issued for a fee commensurate with the risk.
Standby letters of credit are conditional commitments issued by the Corporation 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 credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation's policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
As of December 31, 2012 and 2011, the Corporation had the following unused commitments (in thousands):
| 2012 | 2011 | |||||||
| Line of credit | $ | 19,109 | $ | 14,630 | ||||
| Ready reserve on checking | 152 | 143 | ||||||
| Letters of credit | 669 | 584 | ||||||
| Total Unused Commitments | $ | 19,930 | $ | 15,357 | ||||
The Corporation is 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 Corporation.
| - 24 - |
| 13. | DERIVATIVE FINANCIAL INSTRUMENTS |
The use of derivative financial instruments creates exposure to credit risk. This credit exposure relates to losses that would be recognized if the counterparties fail to perform their obligations under the contracts. To mitigate this exposure to non-performance, the Corporation deals only with counterparties of good credit standing and establish counterparty credit limits. In connection with the interest rate risk management process, the Corporation periodically enters into interest rate derivative contracts. These derivative interest rate contracts consist of interest rate caps and are used to modify the repricing characteristics of specific assets and liabilities.
Interest Rate CAP Agreements
The Corporation is a party to seven interest rate CAP agreements with the Federal Home Loan Bank in order to reduce its own exposure to fluctuations in interest rates. These transactions involve capping the Corporation’s liability cost in exchange for an upfront fee. The Corporation has paid an upfront fee of $1,301,970 in exchange for caps based on 90-day LIBOR ranging from 1.00% to 2.50%. The CAP agreement notional amount at December 31, 2012, was $33,000,000 and will mature from March 2013 to June 2015.
The interest rate swap and interest rate cap agreements are considered derivative instruments. Accordingly, the change in the fair value of the agreements have been recorded in current earnings as follows (in thousands):
| 2012 | 2011 | |||||||
| Fair Value, Beginning of year | $ | 70 | $ | 367 | ||||
| Fair Value adjustment - gain (loss) | (66 | ) | (297 | ) | ||||
| Fair Value, End of year | $ | 4 | $ | 70 | ||||
The Fair Value of the interest rate cap agreements are included with Other Assets in these financial statements.
| 14. | REGULATORY CAPITAL |
Citizens Bank, N.A. ("Bank") is subject to the risk based capital guidelines administered by its primary federal regulator, the Office of Comptroller of the Currency (OCC) agency. The guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk weighted assets and certain risk weighted off-balance sheet items. The guidelines require all banks to maintain a minimum ratio of total risk based capital to total risk weighted assets (“Total Risk Adjusted Capital”) of 8%, including Tier 1 capital to total risk weighted assets (“Tier 1 Capital”) of 4% and a Tier 1 capital to average total assets (“Leverage Ratio”) of at least 4%. Failure to meet minimum capital requirements may initiate certain mandatory, and possibly additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines involving quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
| - 25 - |
| 14. | REGULATORY CAPITAL (continued) |
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk- weighted assets (as defined in the regulations), and Tier 1 capital to adjusted total assets (as defined). Management believes, as of December 31, 2012, that the Bank meets all the capital adequacy requirements to which it is subject.
As of December 31, 2012, the most recent notification from the OCC, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category.
Citizens Bank, N.A. recorded the following actual and required capital amounts and ratios (dollars in thousands):
| TO BE WELL CAPITALIZED | ||||||||||||||||||||||||
| UNDER THE PROMPT | ||||||||||||||||||||||||
| FOR CAPITAL | CORRECTIVE ACTION | |||||||||||||||||||||||
| ACTUAL | ADEQUACY PURPOSES | PROVISIONS | ||||||||||||||||||||||
| AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | |||||||||||||||||||
| As of December 31, 2012: | ||||||||||||||||||||||||
| Total Risk-Based Capital | ||||||||||||||||||||||||
| (Ratio to Risk-Weighted Assets) | $ | 31,588 | 18.48 | % | $ | 13,660 | 8.0 | % | $ | 17,075 | >10.0 | % | ||||||||||||
| Tier 1 Capital | ||||||||||||||||||||||||
| (Ratio to Risk-Weighted Assets) | 29,414 | 17.23 | % | 6,830 | 4.0 | % | 10,245 | >6.0 | % | |||||||||||||||
| Tier 1 Capital | ||||||||||||||||||||||||
| (Ratio to Risk-Weighted Assets) | 29,414 | 10.98 | % | 10,711 | 4.0 | % | 13,389 | >5.0 | % | |||||||||||||||
| TO BE WELL CAPITALIZED | ||||||||||||||||||||||||
| UNDER THE PROMPT | ||||||||||||||||||||||||
| FOR CAPITAL | CORRECTIVE ACTION | |||||||||||||||||||||||
| ACTUAL | ADEQUACY PURPOSES | PROVISIONS | ||||||||||||||||||||||
| AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | |||||||||||||||||||
| As of December 31, 2011: | ||||||||||||||||||||||||
| Total Risk-Based Capital | ||||||||||||||||||||||||
| (Ratio to Risk-Weighted Assets) | $ | 29,601 | 17.97 | % | $ | 13,179 | 8.0 | % | $ | 16,474 | >10.0 | % | ||||||||||||
| Tier 1 Capital | ||||||||||||||||||||||||
| (Ratio to Risk-Weighted Assets) | 27,399 | 16.63 | % | 6,590 | 4.0 | % | 9,884 | >6.0 | % | |||||||||||||||
| Tier 1 Capital | ||||||||||||||||||||||||
| (Ratio to Risk-Weighted Assets) | 27,399 | 9.62 | % | 11,388 | 4.0 | % | 14,235 | >5.0 | % | |||||||||||||||
| - 26 - |
| 15. | PARENT COMPANY ONLY (IN THOUSANDS) |
Condensed Balance Sheets at December 31,
| 2012 | 2011 | |||||||
| Assets | ||||||||
| Deposit accounts at subsidiary | $ | 167 | $ | 213 | ||||
| Investment in subsidiaries | 33,987 | 32,191 | ||||||
| Loans | - | 1,253 | ||||||
| Other Real Estate Owned | 1,688 | - | ||||||
| Other Assets | 64 | 61 | ||||||
| Total | $ | 35,906 | $ | 33,718 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Other liabilities | $ | 59 | $ | 58 | ||||
| Subordinated debentures payable | 5,155 | 5,155 | ||||||
| Notes Payable | 3,295 | 3,033 | ||||||
| Stockholders' Equity | 27,397 | 25,472 | ||||||
| Total | $ | 35,906 | $ | 33,718 | ||||
Condensed Statement of Income for the years ended December 31,
| 2012 | 2011 | |||||||
| Income: | ||||||||
| Dividends from subsidiaries | $ | 1,054 | $ | 512 | ||||
| Undistributed earnings, subsidiaries | 2,015 | (476 | ) | |||||
| Other Income | 165 | - | ||||||
| Total Income | 3,234 | 36 | ||||||
| Expense: | ||||||||
| Interest expense | 255 | 238 | ||||||
| Depreciation and amortization | 3 | 3 | ||||||
| Loss on loans | 75 | 1,753 | ||||||
| Other expense | 172 | 29 | ||||||
| Total Expenses | 505 | 2,023 | ||||||
| Net Income (Loss) | $ | 2,729 | $ | (1,987 | ) | |||
| - 27 - |
| 15. | PARENT COMPANY ONLY (IN THOUSANDS) (Continued) |
Condensed Statement of Cash Flows
| 2012 | 2011 | |||||||
| Cash flows from operating activities | ||||||||
| Net Income (Loss) | $ | 2,729 | $ | (1,987 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||
| Loss on loans | - | 1,753 | ||||||
| Depreciation and amortization | 3 | 3 | ||||||
| Undistributed earnings, subsidiaries | (2,015 | ) | 476 | |||||
| Change in other assets and liabilities | (441 | ) | 47 | |||||
| Net Cash Provided by Operating Activities | 276 | 292 | ||||||
| Cash Flows from Investing Activities | ||||||||
| Net increase in loans | - | (60 | ) | |||||
| Net Cash Used by Investing Activities | - | (60 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds note payable | 467 | 33 | ||||||
| Payment on notes payable | (205 | ) | - | |||||
| Dividends paid | (584 | ) | - | |||||
| Stock purchased | - | (119 | ) | |||||
| Net Cash Used by Financing Activities | (322 | ) | (86 | ) | ||||
| Net Increase (Decrease) in Cash and Cash Equivalents | (46 | ) | 146 | |||||
| Cash and Cash Equivalents, Beginning of Year | 213 | 67 | ||||||
| Cash and Cash Equivalents, End of Year | $ | 167 | $ | 213 | ||||
| 16. | FAIR VALUES OF ASSETS AND LIABILITIES |
The Corporation uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures. Derivatives and investment securities are recorded at fair value on a recurring basis. Additionally from time to time, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as certain loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.
| - 28 - |
| 16. | FAIR VALUES OF ASSETS AND LIABILITIES (Continued) |
The Corporation groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure assets and liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:
| · | Level 1 - Quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 includes debt securities that are traded less frequently than exchange-traded instruments and which are valued using third party pricing services, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated market data. |
| · | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
The following section describes the valuation methodologies used by the Corporation to measure financial assets and liabilities at fair value and for estimating fair value for financial instruments not recorded at fair value as required under disclosure guidance related to the fair value of financial instruments. In addition, for financial assets and liabilities measured at fair value, the following section includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. Where appropriate, the description includes information about the valuation models and key inputs to those models.
Cash and Cash Equivalents
The carrying value of cash, amounts due from banks and federal funds sold.
Investments Securities
When available, quoted market prices are used to determine the fair value of investment securities and such items are classified within Level 1 of the fair value hierarchy.
For other securities, the Corporation determines fair value based on various sources and may apply matrix pricing with observable prices for similar securities where a price for the identical security is not observable. Prices are verified, where possible, to prices of observable market trades as obtained from independent sources. Securities measured at fair value by such methods are classified as Level 2.
The fair value of securities for which there are no market trades, or where trading is inactive as compared to normal market activity, are categorized as Level 3.
| - 29 - |
| 16. | FAIR VALUES OF ASSETS AND LIABILITIES (Continued) |
Cash flow methodologies and other market valuation techniques involving management judgment use assumptions regarding housing prices, interest rates and borrower performance. Inputs are refined and updated to reflect market developments. The primary valuation drivers of these securities are the prepayment rates, default rates and default severities associated with the underlying collateral, as well as the discount rate used to calculate the present value of the projected cash flows.
Loans
The loan portfolio includes adjustable and fixed-rate loans, the fair value of which was estimated using discounted cash flow analyses and other valuation techniques. To calculate discounted cash flows, the loans were aggregated into pools of similar types and expected repayment terms. The expected cash flows of loans considered historical prepayment experiences and estimated credit losses for nonperforming loans and were discounted using current rates offered to borrowers of similar credit characteristics. Generally, loan fair values reflect Level 3 information.
Derivatives
The majority of derivatives held by the Corporation are executed over-the-counter and are valued using standard cash flow, Black-Scholes and Monte Carlo valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves and volatility. In addition, all derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Corporation’s evaluation of credit risk as well as external assessments of credit risk, where available. In its assessment of nonperformance risk, the Corporation considers its ability to net derivative positions under master netting agreements, as well as collateral received or provided under collateral support agreements. The majority of these derivatives are classified within Level 2 of the fair value hierarchy as the significant inputs to the models are observable. An exception to the Level 2 classification is certain derivative transactions for which the risk of nonperformance cannot be observed in the market. These derivatives would be classified within Level 3 of the fair value hierarchy.
Deposit Liabilities
The fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand. The fair value of fixed-rate certificates of deposit was estimated by discounting the contractual cash flow using current market rates.
Short-term Borrowing
Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term funds borrowed have floating rates or short-term maturities. The fair value of short-term borrowings was determined by discounting contractual cash flows using current market rates.
Long-term Debt
The fair value for most long-term debt was determined by discounting contractual cash flows using current market rates. Junior subordinated debt instruments were valued using market quotes.
| - 30 - |
| 16. | FAIR VALUES OF ASSETS AND LIABILITIES (Continued) |
Loan Commitments, Letter of Credit and Guarantees
The fair value of commitments, letters of credit and guarantees represents the estimated costs to terminate or otherwise settle the obligations with a third-party. The fair value of residential mortgage commitments is estimated based on observable inputs. Other loan commitments, letters of credit and guarantees are not actively traded, and the Corporation estimates their fair value based on the related amount of unamortized deferred commitment fees adjusted for the probable losses for these arrangements.
The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:
| (Dollars in Thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| December 31, 2012 | ||||||||||||||||
| Available-for-sale securities | ||||||||||||||||
| Obligations of States and Political subdivisions | $ | - | $ | 9,449 | $ | - | $ | 9,449 | ||||||||
| Obligations of U.S. Government Agencies and Corporations | - | 110,309 | - | 110,309 | ||||||||||||
| Total Available-for-sale securities | - | 119,758 | - | 119,758 | ||||||||||||
| Interest rate CAP agreements | - | 4 | - | 4 | ||||||||||||
| Total Assets | $ | - | $ | 119,762 | $ | - | $ | 119,762 | ||||||||
The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:
| (Dollars in Thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| December 31, 2011 | ||||||||||||||||
| Available-for-sale securities | ||||||||||||||||
| Obligations of States and Political subdivisions | $ | - | $ | 8,749 | $ | - | $ | 8,749 | ||||||||
| Obligations of U.S. Government Agencies and Corporations | 107,041 | 107,041 | ||||||||||||||
| Total Available-for-sale securities | - | 115,790 | - | 115,790 | ||||||||||||
| Interest rate CAP agreements | - | 70 | - | 70 | ||||||||||||
| Total Assets | $ | - | $ | 115,860 | $ | - | $ | 115,860 | ||||||||
The Corporation may also be required periodically to measure certain other financial assets at fair value on a nonrecurring basis. These measurements of fair value usually result from the application of lower-of-cost-or-fair-value accounting or writedowns of individual assets. The following table summarizes the adjusted carrying values and the level of valuation assumptions for assets measured at fair value on a nonrecurring basis at December 31 (in thousands):
| - 31 - |
| 16. | FAIR VALUES OF ASSETS AND LIABILITIES (Continued) |
| 2012 | ||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Loans | $ | - | $ | - | $ | 12,312 | $ | 12,312 | ||||||||||
| 2011 | ||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Loans | $ | - | $ | - | $ | 13,464 | $ | 13,464 | ||||||||||
The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios for the year ended December 31:
| (Dollars in Thousands) | 2012 | 2011 | ||||||
| Loans | $ | 1,169 | $ | 3,034 | ||||
| Other real estate owned | 191 | 2,934 | ||||||
Disclosures about Fair Value of Financial Instruments
The following table summarizes the estimated fair value for financial instruments as of December 31, 2012 and 2011, and includes financial instruments that are not accounted for at fair value. In accordance with disclosure guidance related to fair values of financial instruments, the Corporation did not include assets and liabilities that are not financial instruments, such as the value of goodwill, long-term relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities.
The estimated fair values of the Corporation’s financial instruments are shown in the table below (in thousands):
| 2012 | 2011 | |||||||||||||||
| December 31 | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
| Financial Assets | ||||||||||||||||
| Cash and due from banks | $ | 5,261 | $ | 5,261 | $ | 3,881 | $ | 3,881 | ||||||||
| Investment securities available for sale | 119,758 | 119,758 | 115,790 | 115,790 | ||||||||||||
| Loans | 121,780 | 120,326 | 131,176 | 128,773 | ||||||||||||
| Financial Liabilities | ||||||||||||||||
| Deposits | 175,898 | 175,766 | 181,379 | 181,185 | ||||||||||||
| Securities sold under repurchase agreements | 4,451 | 4,451 | 5,276 | 5,276 | ||||||||||||
| FHLB line of credit | 11,529 | 11,529 | 3,331 | 3,331 | ||||||||||||
| FHLB advances | 42,274 | 46,968 | 49,274 | 55,460 | ||||||||||||
| Notes payable | 8,295 | 8,295 | 8,033 | 8,033 | ||||||||||||
| - 32 - |
| 17. | SUBSEQUENT EVENTS |
Management has evaluated events and transactions occurring subsequent to December 31, 2012 through the date of the issuance of the financial statements as shown in the Independent Auditors’ Report on page one of these financial statements. During this period, there were no subsequent events requiring recognition in the financial statements or disclosure in the notes to the financial statements.
| - 33 - |
SUPPLEMENTAL INFORMATION
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidating Balance Sheet
December 31, 2012
First Capital Corporation | Citizens Bank, NA | Consolidation Adjustments | Consolidated Totals 2012 | |||||||||||||
| ASSETS | ||||||||||||||||
| Cash and due from banks | $ | 167 | $ | 5,261 | $ | (167) | (a) | $ | 5,261 | |||||||
| Federal funds sold | - | - | - | - | ||||||||||||
| Cash and Cash Equivalents | 167 | 5,261 | (167 | ) | 5,261 | |||||||||||
| Investment securities - Available for sale | - | 119,758 | 119,758 | |||||||||||||
| Investment in stock of other banks | - | 4,433 | 4,433 | |||||||||||||
| Investment in subsidiaries | 33,987 | - | (33,987 | )(1) | - | |||||||||||
| Loans less allowance for loan losses | - | 118,978 | 118,978 | |||||||||||||
| Land, furniture, fixtures & equipment, net | - | 9,464 | 9,464 | |||||||||||||
| Accrued interest receivable | - | 1,222 | 1,222 | |||||||||||||
| Other real estate owned | 1,688 | 3,235 | 4,923 | |||||||||||||
| Bank owned life insurance | - | 6,947 | 6,947 | |||||||||||||
| Other assets | 64 | 854 | 918 | |||||||||||||
| TOTAL ASSETS | $ | 35,906 | $ | 270,152 | $ | (34,154 | ) | $ | 271,904 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
| Deposits | ||||||||||||||||
| Demand | - | $ | 44,533 | $ | 44,533 | |||||||||||
| NOW Accounts | - | 55,582 | (167 | )(a) | 55,415 | |||||||||||
| Money market deposit accounts | - | 10,741 | 10,741 | |||||||||||||
| Savings | - | 16,355 | 16,355 | |||||||||||||
| Time deposits | - | 32,108 | 32,108 | |||||||||||||
| Time deposits over $100,000 | - | 16,746 | 16,746 | |||||||||||||
| Total Deposits | - | 176,065 | (167 | ) | 175,898 | |||||||||||
| Securities sold under repurch agreements | - | 4,451 | 4,451 | |||||||||||||
| Federal Home Line of Credit | - | 11,529 | 11,529 | |||||||||||||
| Federal Home Loan Bank Advances | - | 42,274 | 42,274 | |||||||||||||
| Other liabilities | 59 | 1,967 | 2,026 | |||||||||||||
| Accrued interest payable | - | 34 | 34 | |||||||||||||
| Notes payable | 8,450 | - | (155 | )(b) | 8,295 | |||||||||||
| Total Liabilities | 8,509 | 236,320 | (322 | ) | 244,507 | |||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||||||
| Common stock, Class A | 100 | 2,000 | (2,000 | )(c) | 100 | |||||||||||
| Common stock, Class B | 1,765 | - | 1,765 | |||||||||||||
| Treasury stock | (1,799 | ) | - | (1,799 | ) | |||||||||||
| Paid in capital | 1,278 | 7,839 | (7,839 | )(c) | 1,278 | |||||||||||
| Retained earnings | 21,635 | 19,575 | (19,575 | )(c) | 21,635 | |||||||||||
| Accumulated other comprehensive income | 4,418 | 4,418 | (4,418 | )(c) | 4,418 | |||||||||||
| Total Stockholders' Equity | 27,397 | 33,832 | (33,832 | )(c) | 27,397 | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 35,906 | $ | 270,152 | $ | (34,154 | ) | $ | 271,904 | |||||||
| To net investment in First Kansas Statutory Trust against note payable | 155 | (b) | ||||||||||||||
| To net investment accounts in subsidiaries against equity of the subsidiaries | (33,987 | )(1) | ||||||||||||||
| (33,832 | )(c) | |||||||||||||||
| - 34 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidating Statement of Income
For the Year Ended December 31, 2012
| First Capital | Citizens | Consolidation | Consolidated Totals | |||||||||||||
| Corporation | Bank, NA | Adjustments | 2012 | |||||||||||||
| INTEREST AND DIVIDEND INCOME | ||||||||||||||||
| Interest and fees on loans | - | $ | 6,765 | - | $ | 6,765 | ||||||||||
| Interest and dividends on investment securities | ||||||||||||||||
| Obligations of U.S. Treasury securities | - | - | - | - | ||||||||||||
| Obligations of U.S. government agencies | - | 3,856 | - | 3,856 | ||||||||||||
| Obligations of state and political subdivisions | - | 389 | - | 389 | ||||||||||||
| Other securities | 1,054 | 126 | (1,051 | )(c) | 129 | |||||||||||
| Interest on Federal funds sold | - | 7 | - | 7 | ||||||||||||
| Interest on deposits in banks | - | - | - | - | ||||||||||||
| Total Interest Income | 1,054 | 11,143 | (1,051 | ) | 11,146 | |||||||||||
| INTEREST EXPENSE | ||||||||||||||||
| Interest on deposits | - | 747 | - | 747 | ||||||||||||
| Interest on other borrowings | 255 | 2,065 | - | 2,320 | ||||||||||||
| Total Interest Expense | 255 | 2,812 | - | 3,067 | ||||||||||||
| Net Interest Income | 799 | 8,331 | (1,051 | ) | 8,079 | |||||||||||
| Provision for loan losses | 75 | 600 | - | 675 | ||||||||||||
| Net Interest Income after Provision for Loan Losses | 724 | 7,731 | (1,051 | ) | 7,404 | |||||||||||
| OTHER INCOME | ||||||||||||||||
| Fees on deposit accounts and other services | - | 1,607 | - | 1,607 | ||||||||||||
| Fair value adj - gain (loss) on interest rate cap agreements | - | 245 | - | 245 | ||||||||||||
| Investment security gains (losses) | - | 924 | - | 924 | ||||||||||||
| Loss on other real estate owned sold | - | (157 | ) | - | (157 | ) | ||||||||||
| Rent | - | 630 | - | 630 | ||||||||||||
| Mortgage banking revenue | - | 2,339 | 2,339 | |||||||||||||
| Other miscellaneous | 2,180 | 452 | (2,021 | )(a) | 611 | |||||||||||
| Total Other Income | 2,180 | 6,040 | (2,021 | ) | 6,199 | |||||||||||
| - 35 - |
FIRST CAPITAL CORPORATION AND SUBSIDIARIES
Consolidating Statement of Income
For the Year Ended December 31, 2012
| First Capital | Citizens | Consolidation | Consolidated Totals | |||||||||||||
| Corporation | Bank, NA | Adjustments | 2012 | |||||||||||||
| OTHER EXPENSES | ||||||||||||||||
| Salaries | $ | 4,453 | $ | 4,453 | ||||||||||||
| Employee benefits | - | 874 | 874 | |||||||||||||
| Occupancy expenses, net | 3 | 1,429 | 1,432 | |||||||||||||
| FHLB prepayment penalty | - | 1,049 | 1,049 | |||||||||||||
| Other operating expenses | 172 | 2,800 | (6 | )(b) | 2,966 | |||||||||||
| Total Other Expenses | 175 | 10,605 | (6 | ) | 10,774 | |||||||||||
| INCOME BEFORE PROVISION | ||||||||||||||||
| FOR INCOME TAX EXPENSE | 2,729 | 3,166 | (3,066) | (d) | 2,829 | |||||||||||
| Provision for Income Tax Expense (Benefit) | - | 100 | - | 100 | ||||||||||||
| NET INCOME | 2,729 | 3,066 | (3,066 | ) | 2,729 | |||||||||||
| OTHER COMPREHENSIVE INCOME | ||||||||||||||||
| Unrealized gain (loss) on securities available for sale, net of deferred income taxes | - | (219 | ) | - | (219 | ) | ||||||||||
| COMPREHENSIVE INCOME | $ | 2,729 | $ | 2,847 | $ | (3,066 | ) | $ | 2,510 | |||||||
| To remove management fee received by Citizens from First Capital Corp | $ | (6 | )(b) | |||||||||||||
| To remove increase in undistributed earnings from subsidiaries | (2,015 | ) | ||||||||||||||
| Subtotal | (2,021 | )(a) | ||||||||||||||
| To remove management fee paid by First Capital Corp to Citizens | (6 | )(b) | ||||||||||||||
| To remove dividend from Citizens Bank to First Capital Corp. | (1,051 | )(c) | ||||||||||||||
| $ | (3,078 | )(d) | ||||||||||||||
| - 36 - |