UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the quarterly period ended September 30, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
Commission
File Number 0-18832
First
Financial Service Corporation
(Exact
Name of Registrant as specified in its charter)
Kentucky
|
|
61-1168311
|
(State
or other jurisdiction
|
|
(IRS
Employer Identification No.)
|
of
incorporation or organization)
|
|
|
2323
Ring Road
|
|
(270)
765-2131
|
Elizabethown,
Kentucky 42701
|
|
(Registrant's
telephone number,
|
(Address
of principal executive offices)
|
|
including
area code)
|
(Zip
Code)
|
|
|
(270)
765-2131
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large Accelerated
Filer
¨
|
Accelerated
Filer
x
|
Non-Accelerated
Filer
¨
|
Smaller
Reporting
Company
¨
|
|
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding as of October 31,
2009
|
|
|
|
Common
Stock
|
|
4,707,898
shares
|
FIRST
FINANCIAL SERVICE CORPORATION
FORM
10-Q
TABLE
OF CONTENTS
PART
I
–
FINANCIAL
INFORMATION
|
|
|
|
|
Preliminary
Note Regarding Forward-Looking Statements
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements and Notes to Consolidated Financial
Statements
|
4
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
27
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
43
|
|
|
|
Item
4.
|
Controls
and Procedures
|
45
|
|
|
|
PART
II
–
OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
45
|
|
|
|
Item
1A.
|
Risk
Factors
|
45
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
45
|
|
|
|
Item
3.
|
Defaults
upon Senior Securities
|
45
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
45
|
|
|
|
Item
5.
|
Other
Information
|
45
|
|
|
|
Item
6.
|
Exhibits
|
45
|
|
|
|
SIGNATURES
|
46
|
PRELIMINARY
NOTE REGARDING
FORWARD-LOOKING
STATEMENTS
Statements
in this report that are not statements of historical fact are forward-looking
statements. First Financial Service Corporation (the “Corporation”) may make
forward-looking statements in future filings with the Securities and Exchange
Commission (“SEC”), in press releases, and in oral and written statements made
by or with the approval of the Corporation. Forward-looking
statements include, but are not limited to: (1) projections of revenues, income
or loss, earnings or loss per share, capital structure and other financial
items; (2) plans and objectives of the Corporation or its management or Board of
Directors; (3) statements regarding future events, actions or economic
performance; and (4) statements of assumptions underlying such
statements. Words such as “estimate,” “strategy,” “believes,”
“anticipates,” “expects,” “intends,” “plans,” “targeted,” and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements.
Various
risks and uncertainties may cause actual results to differ materially from those
indicated by our forward-looking statements. In addition to those
risks described under “Item 1A Risk Factors,” of this report and our Annual
Report on Form 10-K, the following factors could cause such differences: changes
in general economic conditions and economic conditions in Kentucky and the
markets we serve, any of which may affect, among other things, our level of
non-performing assets, charge-offs, and provision for loan loss expense; changes
in interest rates that may reduce interest margins and impact funding sources;
changes in market rates and prices which may adversely impact the value of
financial products including securities, loans and deposits; changes in tax
laws, rules and regulations; various monetary and fiscal policies and
regulations, including those determined by the Federal Reserve Board, the
Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Office of
Financial Institutions (“KOFI”); competition with other local and regional
commercial banks, savings banks, credit unions and other non-bank financial
institutions; our ability to grow core businesses; our ability to develop and
introduce new banking-related products, services and enhancements and gain
market acceptance of such products; and management’s ability to manage these and
other risks.
Our
forward-looking statements speak only as of the date on which they are made, and
we undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date of the statement to reflect the
occurrence of unanticipated events.
Item 1.
|
FIRST
FINANCIAL SERVICE CORPORATION
|
|
|
Consolidated
Balance Sheets
|
|
|
(Unaudited)
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands, except share data)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
17,535
|
|
|
$
|
17,310
|
|
Interest
bearing deposits
|
|
|
2,566
|
|
|
|
3,595
|
|
Total
cash and cash equivalents
|
|
|
20,101
|
|
|
|
20,905
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
35,144
|
|
|
|
15,775
|
|
Securities
held-to-maturity, fair value of $1,359 Sept (2009) and $6,846 Dec
(2008)
|
|
|
1,346
|
|
|
|
7,022
|
|
Total
securities
|
|
|
36,490
|
|
|
|
22,797
|
|
Loans
held for sale
|
|
|
7,729
|
|
|
|
9,567
|
|
Loans,
net of unearned fees
|
|
|
980,121
|
|
|
|
903,434
|
|
Allowance
for loan losses
|
|
|
(16,173
|
)
|
|
|
(13,565
|
)
|
Net
loans
|
|
|
971,677
|
|
|
|
899,436
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
8,515
|
|
|
|
8,515
|
|
Cash
surrender value of life insurance
|
|
|
8,923
|
|
|
|
8,654
|
|
Premises
and equipment, net
|
|
|
32,345
|
|
|
|
30,068
|
|
Real
estate owned:
|
|
|
|
|
|
|
|
|
Acquired
through foreclosure
|
|
|
8,184
|
|
|
|
5,925
|
|
Held
for development
|
|
|
45
|
|
|
|
45
|
|
Other
repossessed assets
|
|
|
40
|
|
|
|
91
|
|
Goodwill
|
|
|
11,931
|
|
|
|
11,931
|
|
Core
deposit intangible
|
|
|
1,401
|
|
|
|
1,703
|
|
Accrued
interest receivable
|
|
|
5,064
|
|
|
|
4,379
|
|
Deferred
income taxes
|
|
|
468
|
|
|
|
1,147
|
|
Other
assets
|
|
|
2,382
|
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,107,566
|
|
|
$
|
1,017,047
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$
|
59,499
|
|
|
$
|
55,668
|
|
Interest
bearing
|
|
|
878,219
|
|
|
|
719,731
|
|
Total
deposits
|
|
|
937,718
|
|
|
|
775,399
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
2,200
|
|
|
|
94,869
|
|
Advances
from Federal Home Loan Bank
|
|
|
52,777
|
|
|
|
52,947
|
|
Subordinated
debentures
|
|
|
18,000
|
|
|
|
18,000
|
|
Accrued
interest payable
|
|
|
340
|
|
|
|
288
|
|
Accounts
payable and other liabilities
|
|
|
2,366
|
|
|
|
2,592
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
1,013,401
|
|
|
|
944,095
|
|
Commitments
and contingent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Serial
preferred stock, $1 par value per share; authorized 5,000,000 shares;
issued and outstanding, 20,000 shares with a liquidation preference of
$1,000/share Sept (2009)
|
|
|
19,768
|
|
|
|
-
|
|
Common
stock, $1 par value per share; authorized 10,000,000 shares; issued and
outstanding, 4,707,898 shares Sept (2009), and 4,668,030 shares Dec
(2008)
|
|
|
4,708
|
|
|
|
4,668
|
|
Additional
paid-in capital
|
|
|
34,965
|
|
|
|
34,145
|
|
Retained
earnings
|
|
|
35,744
|
|
|
|
36,476
|
|
Accumulated
other comprehensive loss
|
|
|
(1,020
|
)
|
|
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
94,165
|
|
|
|
72,952
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,107,566
|
|
|
$
|
1,017,047
|
|
See
notes to the unaudited consolidated financial statements.
FIRST
FINANCIAL SERVICE CORPORATION
Consolidated
Statements of Income
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Dollars in thousands, except per share data)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
and Dividend Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
14,410
|
|
|
$
|
14,337
|
|
|
$
|
42,509
|
|
|
$
|
41,718
|
|
Taxable
securities
|
|
|
312
|
|
|
|
403
|
|
|
|
925
|
|
|
|
1,095
|
|
Tax
exempt securities
|
|
|
137
|
|
|
|
90
|
|
|
|
361
|
|
|
|
297
|
|
Total
interest income
|
|
|
14,859
|
|
|
|
14,830
|
|
|
|
43,795
|
|
|
|
43,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,513
|
|
|
|
5,325
|
|
|
|
13,359
|
|
|
|
15,815
|
|
Short-term
borrowings
|
|
|
27
|
|
|
|
156
|
|
|
|
117
|
|
|
|
661
|
|
Federal
Home Loan Bank advances
|
|
|
601
|
|
|
|
610
|
|
|
|
1,798
|
|
|
|
1,808
|
|
Subordinated
debentures
|
|
|
331
|
|
|
|
315
|
|
|
|
989
|
|
|
|
649
|
|
Total
interest expense
|
|
|
5,472
|
|
|
|
6,406
|
|
|
|
16,263
|
|
|
|
18,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
9,387
|
|
|
|
8,424
|
|
|
|
27,532
|
|
|
|
24,177
|
|
Provision
for loan losses
|
|
|
2,482
|
|
|
|
1,720
|
|
|
|
6,441
|
|
|
|
2,819
|
|
Net
interest income after provision for loan losses
|
|
|
6,905
|
|
|
|
6,704
|
|
|
|
21,091
|
|
|
|
21,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
service fees on deposit accounts
|
|
|
1,750
|
|
|
|
1,817
|
|
|
|
4,872
|
|
|
|
4,865
|
|
Gain
on sale of mortgage loans
|
|
|
300
|
|
|
|
179
|
|
|
|
832
|
|
|
|
566
|
|
Gain
on sale of investments
|
|
|
-
|
|
|
|
52
|
|
|
|
-
|
|
|
|
52
|
|
Total
other-than-temporary impairment losses
|
|
|
(1,352
|
)
|
|
|
-
|
|
|
|
(2,915
|
)
|
|
|
(216
|
)
|
Portion
of loss recognized in other comprehensive income (before
taxes)
|
|
|
1,048
|
|
|
|
-
|
|
|
|
2,212
|
|
|
|
-
|
|
Net
impairment losses recognized in earnings
|
|
|
(304
|
)
|
|
|
-
|
|
|
|
(703
|
)
|
|
|
(216
|
)
|
Write
down on real estate acquired through foreclosure
|
|
|
(305
|
)
|
|
|
(151
|
)
|
|
|
(555
|
)
|
|
|
(160
|
)
|
Brokerage
commissions
|
|
|
89
|
|
|
|
109
|
|
|
|
281
|
|
|
|
352
|
|
Other
income
|
|
|
365
|
|
|
|
361
|
|
|
|
1,263
|
|
|
|
1,001
|
|
Total
non-interest income
|
|
|
1,895
|
|
|
|
2,367
|
|
|
|
5,990
|
|
|
|
6,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
4,042
|
|
|
|
3,867
|
|
|
|
12,193
|
|
|
|
10,765
|
|
Office
occupancy expense and equipment
|
|
|
832
|
|
|
|
779
|
|
|
|
2,488
|
|
|
|
2,112
|
|
Marketing
and advertising
|
|
|
225
|
|
|
|
215
|
|
|
|
735
|
|
|
|
638
|
|
Outside
services and data processing
|
|
|
793
|
|
|
|
882
|
|
|
|
2,381
|
|
|
|
2,365
|
|
Bank
franchise tax
|
|
|
257
|
|
|
|
258
|
|
|
|
778
|
|
|
|
761
|
|
FDIC
insurance premiums
|
|
|
414
|
|
|
|
102
|
|
|
|
1,381
|
|
|
|
286
|
|
Amortization
of core deposit intangible
|
|
|
100
|
|
|
|
56
|
|
|
|
302
|
|
|
|
59
|
|
Other
expense
|
|
|
1,365
|
|
|
|
1,478
|
|
|
|
3,998
|
|
|
|
3,505
|
|
Total
non-interest expense
|
|
|
8,028
|
|
|
|
7,637
|
|
|
|
24,256
|
|
|
|
20,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
772
|
|
|
|
1,434
|
|
|
|
2,825
|
|
|
|
7,327
|
|
Income
taxes
|
|
|
196
|
|
|
|
443
|
|
|
|
773
|
|
|
|
2,354
|
|
Net
Income
|
|
|
576
|
|
|
|
991
|
|
|
|
2,052
|
|
|
|
4,973
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
|
(250
|
)
|
|
|
-
|
|
|
|
(730
|
)
|
|
|
-
|
|
Accretion
on preferred stock
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
-
|
|
Net
income available to common shareholders
|
|
$
|
312
|
|
|
$
|
991
|
|
|
$
|
1,283
|
|
|
$
|
4,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
applicable to basic income per common share
|
|
|
4,704,289
|
|
|
|
4,667,081
|
|
|
|
4,689,917
|
|
|
|
4,665,058
|
|
Basic
income per common share
|
|
$
|
0.07
|
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
applicable to diluted income per common share
|
|
|
4,734,037
|
|
|
|
4,683,978
|
|
|
|
4,703,432
|
|
|
|
4,689,458
|
|
Diluted
income per common share
|
|
$
|
0.07
|
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
|
$
|
0.050
|
|
|
$
|
0.190
|
|
|
$
|
0.430
|
|
|
$
|
0.570
|
|
See
notes to the unaudited consolidated financial statements.
FIRST
FINANCIAL SERVICE CORPORATION
Consolidated
Statements of Comprehensive Income/(Loss)
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
576
|
|
|
$
|
991
|
|
|
$
|
2,052
|
|
|
$
|
4,973
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized gain (loss) on securities available-for-sale
|
|
|
915
|
|
|
|
(2,131
|
)
|
|
|
1,526
|
|
|
|
(2,518
|
)
|
Reclassification
of realized amount on securities available-for-sale
|
|
|
304
|
|
|
|
(52
|
)
|
|
|
679
|
|
|
|
164
|
|
Non-credit
component of other-than- temporary impairment on held-to-maturity
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(215
|
)
|
|
|
-
|
|
Accretion
of non-credit component of other- than-temporary impairment on
held-to-maturity securities
|
|
|
3
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Net
unrealized gain (loss) recognized in comprehensive income
|
|
|
1,222
|
|
|
|
(2,183
|
)
|
|
|
1,995
|
|
|
|
(2,354
|
)
|
Tax
effect
|
|
|
(415
|
)
|
|
|
742
|
|
|
|
(678
|
)
|
|
|
800
|
|
Total
other comphrehensive income (loss)
|
|
|
807
|
|
|
|
(1,441
|
)
|
|
|
1,317
|
|
|
|
(1,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income/(Loss)
|
|
$
|
1,383
|
|
|
$
|
(450
|
)
|
|
$
|
3,369
|
|
|
$
|
3,419
|
|
See
notes to the unaudited consolidated financial statements.
FIRST
FINANCIAL SERVICE CORPORATION
Consolidated
Statement of Changes in Stockholders' Equity
Nine
Months Ended September 30, 2009
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
|
|
Shares
|
|
|
Amount
|
|
|
Additional
|
|
|
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
(Loss),
Net of Tax
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2009
|
|
|
-
|
|
|
|
4,668
|
|
|
$
|
-
|
|
|
$
|
4,668
|
|
|
$
|
34,145
|
|
|
$
|
36,476
|
|
|
$
|
(2,337
|
)
|
|
$
|
72,952
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,052
|
|
|
|
|
|
|
|
2,052
|
|
Issuance
of preferred stock and a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock warrant
|
|
|
20,000
|
|
|
|
|
|
|
|
19,729
|
|
|
|
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Shares
issued under dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinvestment
program
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Stock
issued for stock options exercised
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Stock
issued for employee benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
27
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
407
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
Net
change in unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
securities available-for-sale,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,317
|
|
|
|
1,317
|
|
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(730
|
)
|
|
|
|
|
|
|
(730
|
)
|
Accretion
of preferred stock discount
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
-
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($.43
per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,015
|
)
|
|
|
-
|
|
|
|
(2,015
|
)
|
Balance,
September 30, 2009
|
|
|
20,000
|
|
|
|
4,708
|
|
|
$
|
19,768
|
|
|
$
|
4,708
|
|
|
$
|
34,965
|
|
|
$
|
35,744
|
|
|
$
|
(1,020
|
)
|
|
$
|
94,165
|
|
See
notes to the unaudited consolidated financial statements.
FIRST
FINANCIAL SERVICE CORPORATION
Consolidated
Statements of Cash Flows
(Dollars
In Thousands)
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,052
|
|
|
$
|
4,973
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
6,441
|
|
|
|
2,819
|
|
Depreciation
on premises and equipment
|
|
|
1,264
|
|
|
|
1,178
|
|
Federal
Home Loan Bank stock dividends
|
|
|
-
|
|
|
|
(309
|
)
|
Core
deposit intangible amortization
|
|
|
302
|
|
|
|
59
|
|
Net
amortization (accretion) available-for-sale
|
|
|
131
|
|
|
|
(3
|
)
|
Net
amortization (accretion) held-to-maturity
|
|
|
8
|
|
|
|
18
|
|
Impairment
loss on securities available-for-sale
|
|
|
679
|
|
|
|
216
|
|
Impairment
loss on securities held-to-maturity
|
|
|
24
|
|
|
|
-
|
|
Gain
on sale of investments available-for-sale
|
|
|
-
|
|
|
|
(52
|
)
|
Gain
on sale of mortgage loans
|
|
|
(832
|
)
|
|
|
(566
|
)
|
Origination
of loans held for sale
|
|
|
(101,364
|
)
|
|
|
(47,277
|
)
|
Proceeds
on sale of loans held for sale
|
|
|
104,034
|
|
|
|
46,432
|
|
Stock-based
compensation expense
|
|
|
78
|
|
|
|
92
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Cash
surrender value of life insurance
|
|
|
(269
|
)
|
|
|
(271
|
)
|
Interest
receivable
|
|
|
(685
|
)
|
|
|
155
|
|
Other
assets
|
|
|
(931
|
)
|
|
|
(17
|
)
|
Interest
payable
|
|
|
52
|
|
|
|
(763
|
)
|
Accounts
payable and other liabilities
|
|
|
(226
|
)
|
|
|
(589
|
)
|
Net
cash from operating activities
|
|
|
10,758
|
|
|
|
6,095
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Cash
paid for acquisition of Farmers State Bank, net of cash
acquired
|
|
|
-
|
|
|
|
(1,466
|
)
|
Sales
of securities available-for-sale
|
|
|
-
|
|
|
|
679
|
|
Purchases
of securities available-for-sale
|
|
|
(19,565
|
)
|
|
|
(524
|
)
|
Maturities
of securities available-for-sale
|
|
|
1,592
|
|
|
|
2,208
|
|
Maturities
of securities held-to-maturity
|
|
|
5,434
|
|
|
|
12,517
|
|
Net
change in loans
|
|
|
(82,728
|
)
|
|
|
(58,518
|
)
|
Net
purchases of premises and equipment
|
|
|
(3,541
|
)
|
|
|
(4,070
|
)
|
Net
cash from investing activities
|
|
|
(98,808
|
)
|
|
|
(49,174
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Net
change in deposits
|
|
|
162,319
|
|
|
|
31,927
|
|
Change
in short-term borrowings
|
|
|
(92,669
|
)
|
|
|
22,500
|
|
Repayments
to Federal Home Loan Bank
|
|
|
(170
|
)
|
|
|
(102
|
)
|
Proceeds
from issuance of subordinated debentures
|
|
|
-
|
|
|
|
8,000
|
|
Issuance
of preferred stock, net
|
|
|
20,000
|
|
|
|
-
|
|
Issuance
of common stock
|
|
|
3
|
|
|
|
-
|
|
Issuance
of common stock for stock options exercised
|
|
|
101
|
|
|
|
-
|
|
Issuance
of common stock for employee benefit plans
|
|
|
407
|
|
|
|
144
|
|
Dividends
paid on common stock
|
|
|
(2,015
|
)
|
|
|
(2,659
|
)
|
Dividends
paid on preferred stock
|
|
|
(730
|
)
|
|
|
-
|
|
Net
cash from financing activities
|
|
|
87,246
|
|
|
|
59,810
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
Increase in cash and cash equivalents
|
|
|
(804
|
)
|
|
|
16,731
|
|
Cash
and cash equivalents, beginning of period
|
|
|
20,905
|
|
|
|
14,948
|
|
Cash
and cash equivalents, end of period
|
|
$
|
20,101
|
|
|
$
|
31,679
|
|
See
notes to the unaudited consolidated financial statements.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis of
Presentation
– The accompanying unaudited consolidated financial
statements include the accounts of First Financial Service Corporation and its
wholly owned subsidiary, First Federal Savings Bank. First Federal
Savings Bank has three wholly owned subsidiaries, First Service Corporation of
Elizabethtown, Heritage Properties, LLC and First Federal Office Park,
LLC. Unless the text clearly suggests otherwise, references to "us,"
"we," or "our" include First Financial Service Corporation and its wholly-owned
subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the nine-month period ending September 30, 2009 are not necessarily
indicative of the results that may occur for the year ending December 31,
2009. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Corporation’s annual report on
Form 10-K for the period ended December 31, 2008.
Adoption of New
Accounting Standards
–
In June
2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No.
168 – “The
FASB
Accounting Standards
Codification
and the Hierarchy of Generally Accepted AccountingPrinciples
– areplacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168
establishes the
FASB
Accounting Standards Codification
(“Codification”) as the source of
authoritative generally accepted accounting principles (“GAAP”) for
nongovernmental entities. The Codification does not change
GAAP. Instead, it takes the thousands of individual pronouncements
that currently comprise GAAP and reorganizes them into approximately 90
accounting Topics, and displays all Topics using a consistent
structure. Contents in each Topic are further organized first by
Subtopic, then Section and finally Paragraph. The Paragraph level is
the only level that contains substantive content. Citing particular
content in the Codification involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph
structure. FASB suggests that all citations begin with “FASB ASC,”
where ASC stands for
Accounting Standards
Codification
. SFAS 168, (FASB ASC 105-10-05, 10, 15, 65, 70)
is effective for interim and annual periods ending after September 15, 2009 and
will not have an impact on our financial position but will change the
referencing system for accounting standards. The following
pronouncements provide citations to the applicable Codification by Topic,
Subtopic and Section.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
FASB ASC
855-10,
Subsequent
Events
, was issued in May 2009 and establishes the period after
thebalance sheet date during which management shall evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements and the circumstances under which an entity shall recognize
events or transactions that occur after the balance sheet date. The standard
also requires disclosure of the date through which subsequent events have been
evaluated. The new standard becomes effective for interim and annual periods
ending after June 15, 2009. We adopted this standard for the interim
reporting period ending June 30, 2009. The adoption of this statement did
not have a material impact on our consolidated financial position or results of
operations. We evaluated subsequent events through November 9, 2009, the date
the financial statements were issued, and believe that no events have occurred
requiring further disclosure or adjustment to the consolidated financial
statements.
In early April 2009, the FASB issued
three staff positions related to fair value which are discussed
below:
|
§
|
FASB
ASC 825-10,
Interim
Disclosures about Fair Value of Financial Instruments,
requires
disclosures about the fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual
financial statements and also requires those disclosure in summarized
financial information at interim reporting periods. A publicly
traded company includes any company whose securities trade in a public
market on either a stock exchange or in the over-the-counter market, or
any company that is a conduit bond obligor. Additionally, when
a company makes a filing with a regulatory agency in preparation for sale
of its securities in a public market it is considered a publicly traded
company for this purpose. This guidance is effective for
interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15,
2009. Adoption of this standard did not have a material
impact.
|
|
§
|
FASB
ASC 820-10,
Determining
Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That
are Not Orderly
, provides additional guidance for estimating fair
value when the volume and level of activity for the asset or liability
have significantly decreased. This topic also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This
standard emphasizes that even if there has been a significant decrease in
the volume and level of activity for the asset or liability and regardless
of the valuation technique(s) used, the objective of a fair value
measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market
conditions. This standard requires a reporting entity: (1) disclose
in interim and annual periods the inputs and valuation technique(s) used
to measure fair value and a discussion of changes in valuation techniques
and related inputs, if any, during the period, and (2) define
major category
for
equity securities and debt securities to be
major security types.
This guidance is effective for interim reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. We early adopted this standard for
our first quarter ended March 31, 2009, but its adoption did not have a
material impact.
|
|
§
|
FASB
ASC 320-10-65,
Recognition and Presentation
of Other-Than-Temporary Impairments
,
categorizes losses on
debt securities available-for-sale or held-to-maturity determined by
management to be other-than-temporarily impaired into losses due to credit
issues and losses related to all other
factors. Other-than-temporary impairment (OTTI) exists when it
is more likely than not that the security will mature or be sold before
its amortized cost basis can be recovered. An OTTI related to
credit losses should be recognized through earnings. An OTTI
related to other factors should be recognized in other comprehensive
income. The standard does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. This guidance is effective for interim reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. We early adopted this standard
for our first quarter ended March 31, 2009. Previous
other-than-temporary impairment charges were recorded on equity securities
so there is no cumulative effect adjustment upon
adoption.
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
FASB ASC
805-20,
Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies,
was issued in April 2009. This standard addresses concerns
raised by constituents about assets and liabilities arising from contingencies
in a business combination. The standard requires an acquirer to
recognize at fair value “an asset acquired or liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period.” The
guidance is effective for business combinations whose acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. This standard is expected to have an impact on our
accounting for any business combinations closing on or after January 1,
2009.
FASB ASC
815-10,
Disclosures about
Derivative Instruments and Hedging Activities
, was issued in March 2008.
This statement requires enhanced disclosures about how and why an entity
uses derivative
instruments, how derivative instruments and related items are accounted for and
how derivative
instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. The new standard is
effective for us on
January 1, 2009. Adoption of this standard did not have a material
impact.
FASB ASC
350-30, 275-10,
Determination
of the Useful Life of Intangible Assets,
was issued in April 2008
.
This standard amends the
factors that should be considered in developing renewal or extensionassumptions
used to determine the useful life of a recognized intangible
asset. The guidance provides that in addition to considering the
entity specific factors in paragraph 11 of Statement No. 142, an entity must
consider its own historical experience in renewing or extending similar
arrangements. Alternatively, if an entity lacks historical
experience, it must consider the assumptions a market participant would use
consistent with the highest and best use of the asset, adjusted for the entity
specific factors in paragraph 11 of Statement No. 142. The standard is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption
is prohibited. Adoption of this standard did not have a material
impact.
FASB ASC
260-10,
Determining Whether
Instruments Granted in Share-Based Payment Transactions
are Participating Securities
,
was issued in June 2008. This guidance concluded that all outstanding
unvested share-based payment awards that contain rights to nonforfeitable
dividends participate in undistributed earnings with common shareholders and
therefore are considered participating securities for purposes of computing
earnings per share. Entities that have participating securities that are not
convertible into common stock are required to use the “two-class” method of
computing earnings per share. The two- class method is an earnings allocation
formula that dividends declared (or accumulated) and participation rights in
undistributed earnings. This standard is effective for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. This
standard became effective for us on January 1, 2009. Adoption of this
standard did not have a material impact.
FASB ASC
805,
Business
Combinations
, was issued in December 2007. This
statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. It also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. This standard is effective for
business combinations where the acquisition date is on or after fiscal years
beginning after December 15, 2008. This standard is expected to have an impact
on our accounting for any business combinations closing on or after January 1,
2009.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
FASB ASC
810-10-65-1,
Non-controlling
Interests in Consolidated Financial Statements,
was issued in December
2007. This statement establishes accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements and requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of this standard shall be
applied prospectively. This standard is effective for fiscal years beginning
after December 15, 2008. Adoption of this standard did not have a
material impact.
Effect of Newly Issued But Not Yet
Effective Accounting Standards
–
In August 2009,
the
Financial Accounting Standards Board(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2009-05,
Measuring Liabilities at
Fair
Value
, which
is codified as ASC 820,
Fair
Value Measurements and Disclosures
. This update provides amendments to
Topic 820-10,
Fair Value
Measurements and Disclosures.
This update provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using a valuation technique that uses the quoted price of the identical
liability when traded as an asset, quoted prices for similar liabilities or
similar liabilities when traded as assets, or that is consistent with the
principles of Topic 820. The amendments in this update also clarify that when
estimating the fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents transfer of the liability. The amendments in this
update also clarify that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. This update is effective for periods beginning after October 1,
2009 and we do not expect the adoption of this update will have a significant
impact to our financial condition, results of operations or cash flows.
FASB ASC
715-20-65-2,
Employers’
Disclosures about Postretirement Benefit Plan Assets,
was issued in
December 2008. This staff position provides guidance on an employer’s
disclosures about plan
assets of a defined benefit pension or other postretirement plan. This standard
requires disclosure of the fair
value of each major
category of plan assets for pension plans and other postretirement benefit
plans. This standard
becomes effective for
us on January 1, 2010. Adoption of this standard is not expected to
have a material impact.
SFAS 166,
Accounting for Transfers of
Financial Assets
(not yet integrated into the ASC), was issued in June
2009. This statement amends and removes the concept of a qualifying
special-purpose entity and limits the circumstances in which a financial asset,
or portion of a financial asset, should be derecognized when the transferor has
not transferred the entire financial asset to an entity that is not consolidated
with the transferor in the financial statements being presented and/or when the
transferor has continuing involvement with the transferred financial asset. The
new standard will become effective for us on January 1, 2010. We are
currently evaluating the impact of adopting this standard but do not expect the
impact of adoption to be material to our results of operation or financial
position.
SFAS
167,
Amendments to FASB
Interpretation No. 46(R)
(not yet integrated into the ASC), was also
issued in June 2009 and amends tests for variable interest entities to determine
whether a variable interest entity must be consolidated. This standard requires
an entity to perform an analysis to determine whether an entity’s variable
interest or interests give it a controlling financial interest in a variable
interest entity. This statement requires ongoing reassessments of whether an
entity is the primary beneficiary of a variable interest entity and enhanced
disclosures that provide more transparent information about an entity’s
involvement with a variable interest entity. The new standard will become
effective for us on January 1, 2010. We are currently evaluating the impact
of adopting the standard but do not expect the impact of adoption to be material
to our results of operation or financial position.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
amortized cost basis and fair values of securities are as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(Dollars
in thousands)
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agencies
|
|
$
|
15,000
|
|
|
$
|
122
|
|
|
$
|
-
|
|
|
$
|
15,122
|
|
Government-sponsored
mortgage-backed securities
|
|
|
4,834
|
|
|
|
180
|
|
|
|
-
|
|
|
|
5,014
|
|
Equity
|
|
|
933
|
|
|
|
43
|
|
|
|
-
|
|
|
|
976
|
|
State
and municipal
|
|
|
13,591
|
|
|
|
467
|
|
|
|
(78
|
)
|
|
|
13,980
|
|
Trust
preferred securities
|
|
|
2,108
|
|
|
|
-
|
|
|
|
(2,056
|
)
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,466
|
|
|
$
|
812
|
|
|
$
|
(2,134
|
)
|
|
$
|
35,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
mortgage-backed securities
|
|
$
|
6,079
|
|
|
$
|
70
|
|
|
$
|
(10
|
)
|
|
$
|
6,139
|
|
Equity
|
|
|
933
|
|
|
|
17
|
|
|
|
(2
|
)
|
|
|
948
|
|
State
and municipal
|
|
|
9,558
|
|
|
|
3
|
|
|
|
(946
|
)
|
|
|
8,615
|
|
Trust
preferred securities
|
|
|
2,732
|
|
|
|
-
|
|
|
|
(2,659
|
)
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,302
|
|
|
$
|
90
|
|
|
$
|
(3,617
|
)
|
|
$
|
15,775
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
mortgage-backed securities
|
|
$
|
1,077
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
1,085
|
|
State
and municipal
|
|
|
245
|
|
|
|
5
|
|
|
|
-
|
|
|
|
250
|
|
Trust
preferred securities
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,346
|
|
|
$
|
13
|
|
|
$
|
-
|
|
|
$
|
1,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agencies
|
|
$
|
4,503
|
|
|
$
|
54
|
|
|
$
|
-
|
|
|
$
|
4,557
|
|
Government-sponsored
mortgage-backed securities
|
|
|
1,780
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
1,773
|
|
State
and municipal
|
|
|
481
|
|
|
|
2
|
|
|
|
-
|
|
|
|
483
|
|
Trust
preferred securities
|
|
|
258
|
|
|
|
-
|
|
|
|
(225
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,022
|
|
|
$
|
56
|
|
|
$
|
(232
|
)
|
|
$
|
6,846
|
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SECURITIES
– (Continued)
|
The
amortized cost and fair value of securities at September 30, 2009, by
contractual maturity, are shown below. Securities not due at a single
maturity date, primarily mortgage-backed and equity securities, are shown
separately.
|
|
Amortized
|
|
|
Fair
|
|
(Dollars
in thousands)
|
|
Cost
|
|
|
Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
Due
after one year through five years
|
|
$
|
15,115
|
|
|
$
|
15,240
|
|
Due
after five years through ten years
|
|
|
373
|
|
|
|
371
|
|
Due
after ten years
|
|
|
15,211
|
|
|
|
13,543
|
|
Government-sponsored
mortgage-backed securities
|
|
|
4,834
|
|
|
|
5,014
|
|
Equity
|
|
|
933
|
|
|
|
976
|
|
Total
|
|
$
|
36,466
|
|
|
$
|
35,144
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
(Dollars
in thousands)
|
|
Cost
|
|
|
Value
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
245
|
|
|
$
|
250
|
|
Due
after ten years
|
|
|
24
|
|
|
|
24
|
|
Government-sponsored
mortgage-backed securities
|
|
|
1,077
|
|
|
|
1,085
|
|
Total
|
|
$
|
1,346
|
|
|
$
|
1,359
|
|
There
were not any sales of available-for-sale securities for the September 30, 2009
period. For the quarter and nine month periods ended September 30,
2008, proceeds from sales of available-for-sale securities were $679,000 and
gross realized gains recognized in income were $52,000.
Investment
securities pledged to secure public deposits and FHLB advances had an amortized
cost of $31.8 million and fair value of $32.5 million at September 30, 2009 and
a $19.6 million amortized cost and fair value of $18.8 million at December 31,
2008.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SECURITIES
– (Continued)
|
The
following table summarizes the investment securities with unrealized losses at
September 30, 2009 and December 31, 2008 by aggregated major security type and
length of time in a continuous unrealized loss position:
September 30, 2009
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description
of Securities
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
$
|
371
|
|
|
$
|
(1
|
)
|
|
$
|
2,517
|
|
|
$
|
(77
|
)
|
|
$
|
2,888
|
|
|
$
|
(78
|
)
|
Trust
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
|
|
(2,056
|
)
|
|
|
52
|
|
|
|
(2,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
$
|
371
|
|
|
$
|
(1
|
)
|
|
$
|
2,569
|
|
|
$
|
(2,133
|
)
|
|
$
|
2,940
|
|
|
$
|
(2,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Securities
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored mortgage-backed
securities
|
|
$
|
3,944
|
|
|
$
|
(15
|
)
|
|
$
|
526
|
|
|
$
|
(2
|
)
|
|
$
|
4,470
|
|
|
$
|
(17
|
)
|
Equity
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
(2
|
)
|
State
and municipal
|
|
|
938
|
|
|
|
(99
|
)
|
|
|
7,450
|
|
|
|
(847
|
)
|
|
|
8,388
|
|
|
|
(946
|
)
|
Trust
preferred securities
|
|
|
106
|
|
|
|
(2,884
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
106
|
|
|
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
$
|
4,994
|
|
|
$
|
(3,000
|
)
|
|
$
|
7,976
|
|
|
$
|
(849
|
)
|
|
$
|
12,970
|
|
|
$
|
(3,849
|
)
|
We
evaluate investment securities with significant declines in fair value on a
quarterly basis to determinewhether they should be considered
other-than-temporarily impaired under current accounting guidance,which
generally provides that if a security is in an unrealized loss position, whether
due to general market conditions or industry or issuer-specific factors, the
holder of the securities must assess whether the impairment is
other-than-temporary.
As
discussed in Note 1, in early April 2009, the FASB issued FASB ASC
320-10-65,
Recognition and
Presentation of
Other-Than-Temporary Impairments
. Among other provisions, the
guidance requires entities to split other than temporary impairment charges
between credit losses (i.e., the loss based on the entity’s estimate of the
decrease in cash flows, including those that result from expected voluntary
prepayments), which are charged to earnings, and the remainder of the impairment
charge (non-credit component) to accumulated other comprehensive income. This
requirement pertains to both securities held to maturity and securities
available for sale.
The
unrealized losses on the state and municipal securities were caused primarily by
interest rate decreases. The contractual terms of those investments
do not permit the issuer to settle the securities at a price less than the
amortized cost of the investment. Because we do not have the intent
to sell these securities and it is likely that we will not be required to sell
the securities before their anticipated recovery, we do not consider these
investments to be other-than-temporarily impaired at September 30,
2009. We also considered the financial condition and near term
prospects of the issuer and identified no matters that would indicate less than
full recovery.
As
discussed in Note 6 - Fair Value, the fair value of our portfolio of trust
preferred securities, has decreased significantly as a result of the current
credit crisis and lack of liquidity in the financial markets. There
are limited trades in trust preferred securities and the majority of holders of
such
instruments
have elected not to participate in the market unless they are required to sell
as a result of liquidation, bankruptcy, or other forced or distressed
conditions.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SECURITIES
– (Continued)
|
To
determine if the five trust preferred securities were other than temporarily
impaired as of September 30, 2009, we used a discounted cash flow
analysis. The cash flow models used were used to determine if the
current present value of the cash flows expected on each security were still
equivalent to the original cash flows projected on the security when
purchased. The cash flow analysis takes into consideration
assumptions for prepayments, defaults and deferrals for the underlying pool of
banks, insurance companies and REITs.
Management
works with independent third parties to identify its best estimate of the cash
flow estimatedto be collected. If this estimate results in a present value of
expected cash flows that is less than theamortized cost basis of a security
(that is, credit loss exists), an OTTI is considered to have occurred. If there
is no credit loss, any impairment is considered temporary. The cash flow
analysis we performed included the following general assumptions:
|
·
|
We
assume default rates on individual entities behind the pools based on
Fitch ratings for financial institutions and A.M. Best ratings for
insurance companies. These ratings are used to predict the
default rates for the next seven
quarters.
|
|
·
|
We
assume that annual defaults for the remaining life of each security will
be 37.5 basis points.
|
|
·
|
We
assume a recovery rate of 15% on deferrals after two
years.
|
|
·
|
We
assume 2% prepayments through the five year par call and then 2% per annum
for the remaining life of the
security.
|
|
·
|
Our
securities have been modeled using the above assumptions by FTN Financial
using the forward LIBOR curve plus original spread to discount projected
cash flows to present values.
|
Additionally,
in making our determination, we considered all available market information that
could be obtained without undue cost and effort, and considered the unique
characteristics of each trust preferred security individually by assessing the
available market information and the various risks associated with that security
including:
|
·
|
Valuation
estimates provided by our investment
broker;
|
|
·
|
The
amount of fair value decline;
|
|
·
|
How
long the decline in fair value has
existed;
|
|
·
|
Significant
rating agency changes on the
issuer;
|
|
·
|
Level
of interest rates and any movement in pricing for credit and other
risks;
|
|
·
|
Information
about the performance of the underlying institutions that issued the debt
instruments, such as net income, return on equity, capital adequacy,
non-performing assets, Texas ratios,
etc;
|
|
·
|
Our
intent to sell the security or whether it is more likely than not that we
will be required to sell the security before its anticipated recovery;
and
|
|
·
|
Other
relevant observable inputs.
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SECURITIES
– (Continued)
|
|
|
|
|
Moody's
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Current
|
|
|
|
|
|
Credit
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferrals
and
|
|
(Dollars in thousands)
|
|
|
|
Ratings
|
|
Moody's
|
|
|
|
|
|
|
|
Estimated
|
|
|
Deferrals
|
|
|
Defaults
|
|
|
|
|
|
When
|
|
Credit
|
|
Par
|
|
|
Book
|
|
|
Fair
|
|
|
and
|
|
|
to Current
|
|
Security
|
|
Tranche
|
|
Purchased
|
|
Ratings
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Defaults
|
|
|
Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Term Securities IV
|
|
Mezzanine
|
|
|
A3
|
|
Ca
|
|
$
|
244
|
|
|
$
|
200
|
|
|
$
|
24
|
|
|
$
|
18,000
|
|
|
|
27
|
%
|
Preferred
Term Securities VI
|
|
Mezzanine
|
|
|
A1
|
|
Caa1
|
|
|
259
|
|
|
|
24
|
|
|
|
24
|
|
|
|
25,000
|
|
|
|
61
|
%
|
Preferred
Term Securities XV B1
|
|
Mezzanine
|
|
|
A2
|
|
Ca
|
|
|
1,004
|
|
|
|
829
|
|
|
|
15
|
|
|
|
131,550
|
|
|
|
22
|
%
|
Preferred
Term Securities XXI C2
|
|
Mezzanine
|
|
|
A3
|
|
Ca
|
|
|
1,018
|
|
|
|
641
|
|
|
|
8
|
|
|
|
177,500
|
|
|
|
24
|
%
|
Preferred
Term Securities XXII C1
|
|
Mezzanine
|
|
|
A3
|
|
Ca
|
|
|
503
|
|
|
|
438
|
|
|
|
5
|
|
|
|
317,500
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
$
|
3,028
|
|
|
$
|
2,132
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
The
following table details the five debt securities with other-than-temporary
impairment at September 30, 2009 and the related credit losses recognized in
earnings:
(Dollars
in thousands)
|
|
PreTSL
XXI
|
|
|
PreTSL
XXII
|
|
|
PreTSL
VI
|
|
|
PreTSL
IV
|
|
|
PreTSL
XV
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of other-than-temporary impairment
related to credit loss at
January 1, 2009
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Addition
|
|
|
393
|
|
|
|
66
|
|
|
|
25
|
|
|
|
44
|
|
|
|
175
|
|
|
|
703
|
|
Amount
of other-than-temporary impairment
related to credit loss at
September 30, 2009
|
|
$
|
393
|
|
|
$
|
66
|
|
|
$
|
25
|
|
|
$
|
44
|
|
|
$
|
175
|
|
|
$
|
703
|
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Loans are
summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
56,546
|
|
|
$
|
56,863
|
|
Real
estate commercial
|
|
|
623,473
|
|
|
|
563,314
|
|
Real
estate construction
|
|
|
12,635
|
|
|
|
17,387
|
|
Residential
mortgage
|
|
|
177,898
|
|
|
|
165,337
|
|
Consumer
and home equity
|
|
|
73,249
|
|
|
|
69,649
|
|
Indirect
consumer
|
|
|
37,229
|
|
|
|
31,754
|
|
Loans
held for sale
|
|
|
7,729
|
|
|
|
9,567
|
|
|
|
|
988,759
|
|
|
|
913,871
|
|
Less:
|
|
|
|
|
|
|
|
|
Net
deferred loan origination fees
|
|
|
(909
|
)
|
|
|
(870
|
)
|
Allowance
for loan losses
|
|
|
(16,173
|
)
|
|
|
(13,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,082
|
)
|
|
|
(14,435
|
)
|
|
|
|
|
|
|
|
|
|
Loans
Receivable
|
|
$
|
971,677
|
|
|
$
|
899,436
|
|
The
allowance for loan loss is summarized as follows:
|
|
As of and For the
|
|
|
As of
and For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
14,236
|
|
|
$
|
8,917
|
|
|
$
|
13,565
|
|
|
$
|
7,922
|
|
Allowance
related to acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
327
|
|
Provision
for loan losses
|
|
|
2,482
|
|
|
|
1,720
|
|
|
|
6,441
|
|
|
|
2,819
|
|
Charge-offs
|
|
|
(656
|
)
|
|
|
(191
|
)
|
|
|
(4,063
|
)
|
|
|
(766
|
)
|
Recoveries
|
|
|
111
|
|
|
|
62
|
|
|
|
230
|
|
|
|
206
|
|
Balance,
end of period
|
|
$
|
16,173
|
|
|
$
|
10,508
|
|
|
$
|
16,173
|
|
|
$
|
10,508
|
|
Impaired
loans are summarized below. There were no impaired loans for the
periods presented without an allowance allocation.
|
|
As of and For the
|
|
|
As of and For the
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
End
of period impaired loans
|
|
$
|
34,789
|
|
|
$
|
16,769
|
|
Amount
of allowance for loan
|
|
|
|
|
|
|
|
|
loss
allocated
|
|
|
3,474
|
|
|
|
3,090
|
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We report
non-performing loans as impaired. Our non-performing loans were as
follows:
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Restructured
|
|
$
|
2,358
|
|
|
$
|
1,182
|
|
Loans
past due over 90 days still on accrual
|
|
|
-
|
|
|
|
-
|
|
Non
accrual loans
|
|
|
32,431
|
|
|
|
15,587
|
|
Total
|
|
$
|
34,789
|
|
|
$
|
16,769
|
|
The
reconciliation of the numerators and denominators of the basic and diluted EPS
is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Dollars in thousands,
|
|
September 30,
|
|
|
September 30,
|
|
except
per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
576
|
|
|
$
|
991
|
|
|
$
|
2,052
|
|
|
$
|
4,973
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(250
|
)
|
|
|
-
|
|
|
|
(730
|
)
|
|
|
-
|
|
Accretion
on preferred stock discount
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
-
|
|
Net
income available to common shareholders
|
|
$
|
312
|
|
|
$
|
991
|
|
|
$
|
1,283
|
|
|
$
|
4,973
|
|
Weighted
average common shares
|
|
|
4,704
|
|
|
|
4,667
|
|
|
|
4,690
|
|
|
|
4,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
4,704
|
|
|
|
4,667
|
|
|
|
4,690
|
|
|
|
4,665
|
|
Dilutive
effect of stock options and warrants
|
|
|
30
|
|
|
|
17
|
|
|
|
13
|
|
|
|
24
|
|
Weighted
average common and incremental shares
|
|
|
4,734
|
|
|
|
4,684
|
|
|
|
4,703
|
|
|
|
4,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
1.07
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
1.06
|
|
Stock
options for 127,590 and 154,505 shares of common stock were not included in the
September 30, 2009 computation of diluted earnings per share for the quarter and
year to date because their impact was anti-dilutive. Stock options
for 127,590 and 68,360 shares of common stock were not included in the 2008
computation of diluted earnings per share for the quarter and year to date
because their impact was anti-dilutive.
Our 2006
Stock Incentive Plan, which is shareholder approved, succeeded our 1998 Stock
Option and Incentive Plan. Under the 2006 Plan, we may grant either incentive or
non-qualified stock options to
key employees and directors
for a total of 647,350 shares
of our common stock at not less than fair value at the date such options are
granted.
Options
available for future grant under the 1998 Plan totaled 38,500 shares and were
rolled into the 2006 Plan.
We believe that the ability to award stock options and other forms of
stock-based incentive compensation can assist us in attracting and retaining key
employees. Stock-based incentive compensation is also a means to align the
interests of key employees with those of our shareholders by providing awards
intended to reward recipients for our long-term
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5.
|
STOCK
OPTION PLAN - (Continued)
|
growth.
The option to purchase
shares vest over periods of one to five years and expire ten years after the
date of grant.
We
issue new shares of common stock upon the exercise of stock options.
At September 30, 2009
options available for future grant under the 2006 Plan totaled 590,750.
Compensation cost
related to options granted under the 1998 and 2006 Plans that was charged
against earnings for the nine month periods ended September 30, 2009
and 2008 was $78,000 and
$92,000.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses various weighted-average
assumptions. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant. The expected
volatility is based on the fluctuation in the price of a share of stock over the
period for which the option is being valued and the expected life of the options
granted represents the period of time the options are expected to be
outstanding. There were no stock option grants for the September 30,
2009 period.
A summary
of option activity under the 1998 and 2006 Plans as of September 30, 2009 is
presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
208,517
|
|
|
$
|
19.19
|
|
|
|
|
|
|
|
Granted
during period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
during period
|
|
|
(1,464
|
)
|
|
|
16.74
|
|
|
|
|
|
|
|
Exercised
during period
|
|
|
(35,882
|
)
|
|
|
15.42
|
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
171,171
|
|
|
$
|
20.00
|
|
|
|
5.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eligible
for exercise at period end
|
|
|
121,991
|
|
|
$
|
18.67
|
|
|
|
4.0
|
|
|
$
|
-
|
|
The total
intrinsic value of options exercised during the period ended September 30, 2009
was $119,000. There were no options exercised, modified or settled in
cash for the period ended September 30, 2008. There was no tax
benefit recognized from the option exercises as they are considered incentive
stock options. Management expects all outstanding unvested options
will vest.
As of
September 30, 2009 there was $178,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
1998 and 2006 Plans. That cost is expected to be recognized over a
weighted-average period of 3.0 years. Cash received from option
exercises under all share-based payment arrangements for the periods ended
September 30, 2009 and 2008 was $101,000 and $0.
US GAAP
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date and establishes a fair value hierarchy that prioritizes the
use of inputs used in valuation methodologies into the following three
levels:
Level 1:
Quoted prices
(unadjusted) for identical assets or liabilities in active markets. A
quoted price in an active
market provides the most reliable evidence of fair value and shall be used to
measure fair value whenever available.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6.
|
FAIR
VALUE - (Continued)
|
Level 2:
Significant other
observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data.
Level 3:
Significant
unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.
We used
the following methods and significant assumptions to estimate the fair value of
available-for-sale-securities.
Available-for-sale
securities:
The fair values of equity securities are determined by
obtaining quoted prices on nationally recognized securities exchanges (Level 1
inputs). The fair values of debt securities are determined by a
matrix pricing, which is a mathematical technique widely used in the industry to
value debt securities without relying exclusively on quoted prices for the
specific securities but rather by relying on the securities’ relationship to
other benchmark quoted securities (Level 2 inputs). In certain cases
where there is limited activity or less transparency around inputs to the
valuation, securities are classified within (Level 3) of the valuation
hierarchy. Discounted cash flows are calculated using spread to swap
and LIBOR curves that are updated to incorporate loss severities, volatility,
credit spread and optionality. Rating agency and industry research
reports as well as defaults and deferrals on individual securities are reviewed
and incorporated into the calculations.
Assets and Liabilities
Measured at Fair Value on a Recurring Basis
Assets
measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
September 30,
|
|
|
Identical Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
(Dollars in thousands)
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agencies
|
|
$
|
15,122
|
|
|
$
|
-
|
|
|
$
|
15,122
|
|
|
$
|
-
|
|
Government-sponsored
mortgage-backed securities
|
|
|
5,014
|
|
|
|
-
|
|
|
|
5,014
|
|
|
|
-
|
|
Equity
|
|
|
976
|
|
|
|
685
|
|
|
|
-
|
|
|
|
291
|
|
State
and municipal
|
|
|
13,980
|
|
|
|
-
|
|
|
|
13,980
|
|
|
|
-
|
|
Trust
preferred securities
|
|
|
52
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,144
|
|
|
$
|
685
|
|
|
$
|
34,116
|
|
|
$
|
343
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
December
31,
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
mortgage-backed securities
|
|
$
|
6,139
|
|
|
$
|
-
|
|
|
$
|
6,139
|
|
|
$
|
-
|
|
Equity
|
|
|
948
|
|
|
|
657
|
|
|
|
-
|
|
|
|
291
|
|
State
and municipal
|
|
|
8,615
|
|
|
|
-
|
|
|
|
8,615
|
|
|
|
-
|
|
Trust
preferred securities
|
|
|
73
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,775
|
|
|
$
|
657
|
|
|
$
|
14,754
|
|
|
$
|
364
|
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6.
|
FAIR
VALUE - (Continued)
|
Between
June 2002 and July 2006, we invested in four AFS and one HTM investment grade
tranches of trust preferred collateralized debt obligation (“CDO”)
securities. The securities were issued and are referred to as
Preferred Term Securities Limited (“PreTSL”). The underlying
collateral for the PreTSL is unguaranteed pooled trust preferred securities
issued by banks, insurance companies and REITs geographically dispersed across
the United States. We hold five PreTSL securities, none of which are
currently investment grade. Prior to September 30, 2008, we
determined the fair value of the trust preferred securities using a valuation
technique based on Level 2 inputs. The Level 2 inputs included
estimates of the market value for each security provided through our investment
broker.
Since
late 2007, the markets for collateralized debt obligations and trust preferred
securities have become increasingly inactive. The inactivity was
first evidenced in late 2007 when new issues of similar securities were
discounted in order to complete the offering. Beginning in the second
quarter of 2008, the purchase and sale activity of these securities
substantially decreased as investors elected to hold the securities instead of
selling them at substantially depressed prices. Our brokers have
indicated that little if any activity is occurring in this sector and that the
PreTSL securities trades that are taking place are primarily distressed sales
where the seller must liquidate as a result of insolvency, redemptions or
closure of a fund holding the security, or other distressed
conditions. As a result, the bid-ask spreads have widened
significantly and the volume of trades decreased significantly compared to
historical volumes.
As of
September 30, 2009, we determined that the market for the trust preferred
securities that we hold and for similar CDO securities (such as higher-rated
tranches within the same CDO security) are also not active. That
determination was made considering that there are few observable transactions
for the trust preferred securities or similar CDO securities and the observable
prices for those transactions have varied substantially over
time. Consequently, we have considered those observable inputs and
determined that our trust preferred securities are classified within Level 3 of
the fair value hierarchy.
We have
determined that an income approach valuation technique (using cash flows and
present value techniques) that maximizes the use of relevant observable inputs
and minimizes the use of unobservable inputs is equally or more representative
of fair value than relying on the estimation of market value technique used at
prior measurement dates, which now has few observable inputs and relies on an
inactive market with distressed sales conditions that would require significant
adjustments.
We
received valuation estimates on our trust preferred securities for September 30,
2009. Those valuation estimates were based on proprietary pricing
models utilizing significant unobservable inputs in an inactive market with
distressed sales, Level 3 inputs, rather than actual transactions in an active
market.
In
accordance with current accounting guidance, we determined that a risk-adjusted
discount rate appropriately reflects the reporting entity’s estimate of the
assumptions that market participants would use in an active market to estimate
the selling price of the asset at the measurement date.
We
conduct a thorough review of fair value hierarchy classifications on a quarterly
basis. Reclassification of certain financial instruments may occur
when input observability changes.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6.
|
FAIR
VALUE - (Continued)
|
The table
below presents a reconciliation and income statement classification of gains and
losses for all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the three month and nine month
periods ended September 30, 2009:
|
|
Fair Value
|
|
|
|
Measurements
|
|
|
|
Using Significant
|
|
|
|
Unobservable Inputs
|
|
|
|
(Level 3)
|
|
|
|
Three months ended
|
|
|
|
September 30, 2009
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Asset/Liability
|
|
|
|
|
|
Beginning
balance, July 1, 2009
|
|
$
|
539
|
|
Total
gains or losses realized:
|
|
|
|
|
Included
in earnings
|
|
|
|
|
Impairment
charges on securities
|
|
|
(304
|
)
|
Increase
in fair value of securities
|
|
|
108
|
|
Transfers
in and/or out of Level 3
|
|
|
-
|
|
Ending
balance, September 30, 2009
|
|
$
|
343
|
|
|
|
Fair Value
|
|
|
|
Measurements
|
|
|
|
Using Significant
|
|
|
|
Unobservable Inputs
|
|
|
|
(Level 3)
|
|
|
|
NIne months ended
|
|
|
|
September 30, 2009
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Asset/Liability
|
|
|
|
|
|
Beginning
balance, January 1, 2009
|
|
$
|
364
|
|
Total
gains or losses realized:
|
|
|
|
|
Included
in earnings
|
|
|
|
|
Impairment
charges on securities
|
|
|
(703
|
)
|
Increase
in fair value of securities
|
|
|
682
|
|
Transfers
in and/or out of Level 3
|
|
|
-
|
|
Ending
balance, September 30, 2009
|
|
$
|
343
|
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6.
|
FAIR
VALUE - (Continued)
|
Assets and Liabilities
Measured at Fair Value on a Nonrecurring Basis
Assets
measured at fair value on a nonrecurring basis are summarized
below:
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
September
30,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable
Inputs
|
|
(Dollars in thousands)
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
$
|
31,315
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31,315
|
|
Real
estate acquired through foreclosure
|
|
|
8,184
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,184
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December
31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable
Inputs
|
|
(Dollars in thousands)
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
$
|
13,679
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,679
|
|
Real
estate acquired through foreclosure
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $34.8 million, with a
valuation allowance of $3.5 million, resulting in an additional provision for
loan losses of $34,000 and $384,000 for the three and nine month periods ended
September 30, 2009. Values for collateral dependent loans are
generally based on appraisals obtained from licensed real estate appraisals and
in certain circumstances consideration of offers obtained to purchase properties
prior to foreclosure. Appraisals for commercial real estate generally
use three methods to derive value: cost, sales or market comparison and income
approach. The cost method bases value on the estimated cost to
replace the current property after considering adjustments for
depreciation. Values of the market comparison approach evaluate the
sales price of similar properties in the same market area. The income
approach considers net operating income generated by the property and an
investors required return. The final value is a reconciliation of
these three approaches and takes into consideration any other factors management
deems relevant to arrive at a representative fair value.
Real
estate owned acquired through foreclosure is recorded at lower of cost or fair
value less estimatedselling costs at the date of foreclosure. Fair
value is based on the appraised market value of the propertybased on sales of
similar assets. The fair value may be subsequently reduced if the
estimated fair value declines below the original appraised value. Fair value
adjustments of $305,000 and $555,000 were made to real estate owned during the
three and nine month periods ended September 30, 2009.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6.
|
FAIR
VALUE - (Continued)
|
Fair Value of Financial
Instruments
The
estimated fair value of financial instruments not previously presented is as
follows:
(Dollars in thousands)
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
20,101
|
|
|
$
|
20,101
|
|
|
$
|
20,905
|
|
|
$
|
20,905
|
|
Securities
held-to-maturity
|
|
|
1,346
|
|
|
|
1,359
|
|
|
|
7,022
|
|
|
|
6,846
|
|
Loans
held for sale
|
|
|
7,729
|
|
|
|
7,791
|
|
|
|
9,567
|
|
|
|
9,702
|
|
Loans,
net
|
|
|
963,948
|
|
|
|
1,004,351
|
|
|
|
889,869
|
|
|
|
925,817
|
|
Accrued
interest receivable
|
|
|
5,064
|
|
|
|
5,064
|
|
|
|
4,379
|
|
|
|
4,379
|
|
FHLB
stock
|
|
|
8,515
|
|
|
|
N/A
|
|
|
|
8,515
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
937,718
|
|
|
|
938,542
|
|
|
|
775,399
|
|
|
|
777,743
|
|
Short-term
borrowings
|
|
|
2,200
|
|
|
|
2,200
|
|
|
|
94,869
|
|
|
|
94,869
|
|
Advances
from Federal Home Loan Bank
|
|
|
52,777
|
|
|
|
56,461
|
|
|
|
52,947
|
|
|
|
57,757
|
|
Subordinated
debentures
|
|
|
18,000
|
|
|
|
12,743
|
|
|
|
18,000
|
|
|
|
12,804
|
|
Accrued
interest payable
|
|
|
340
|
|
|
|
340
|
|
|
|
288
|
|
|
|
288
|
|
The
methods and assumptions used in estimating fair value disclosures for financial
instruments are presented below:
Carrying
amount is the estimated fair value for cash and cash equivalents, interest
bearing deposits, accrued interest receivable and payable, demand deposits,
short-term debt and variable rate loans or deposits that reprice frequently and
fully. Held-to-maturity securities fair values are based on market
prices or dealer quotes and if no such information is available, on the rate and
term of the security and information about the issuer. The value of
loans held for sale is based on the underlying sale commitments. For
fixed rate loans or deposits and for variable rate loans or deposits with
infrequent reprising or reprising limits, fair value is based on discounted cash
flows using current market rates applied to the estimated life and credit
risk. Fair values of advances from Federal Home Loan Bank and
subordinated debentures are based on current rates for similar
financing. The fair value of off-balance-sheet items is based on the
current fees or cost that would be charged to enter into or terminate such
arrangements and is not material. It is not practicable to determine
the fair value of FHLB stock due to restrictions placed on its
transferability.
7.
|
PREFERRED
STOCK AND REGULATORY CAPITAL
|
On
October 3, 2008, Congress passed the Emergency Economic Stabilization Act
of 2008 (EESA), which creates the Troubled Asset Relief Program (“TARP”) and
provides the U.S. Secretary of the Treasury with broad authority to implement
certain actions to help restore stability and liquidity to U.S. markets. The
Capital Purchase Program (the “CPP”) was announced by the U.S. Treasury on
October 14, 2008 as part of TARP. Pursuant to the CPP, the U.S. Treasury can
purchase up to $250 billion of senior preferred shares on standardized
terms from qualifying financial institutions. The purpose of the CPP is to
encourage U.S. financial institutions to build capital to increase the flow of
financing to U.S. businesses and consumers and to support the U.S.
economy.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7.
|
PREFERRED
STOCK AND REGULATORY CAPITAL -
(Continued)
|
The CPP
is voluntary and requires a participating institution to comply with a number of
restrictions and provisions, including standards for executive compensation and
corporate governance and limitations on share repurchases and the declaration
and payment of dividends on common shares. The standard terms of the CPP require
that a participating financial institution limit the payment of dividends to the
most recent quarterly amount prior to October 14, 2008, which is $0.19 per
share in our case. This dividend limitation will remain in effect until the
earlier of three years or such time that the preferred shares are
redeemed.
Eligible
financial institutions could generally apply to issue senior preferred shares to
the U.S. Treasury in aggregate amounts ranging from 1% to 3% of the
institution’s risk-weighted assets. We applied for an investment by the U.S.
Treasury of $20 million, which was approved by the U.S. Treasury on
December 8, 2008. On January 9, 2009, we issued $20 million
of cumulative perpetual preferred shares, with a liquidation preference of
$1,000 per share (the “Senior Preferred Shares”). The Senior Preferred Shares
constitute Tier 1 capital and rank senior to our common shares. The Senior
Preferred Shares pay cumulative dividends quarterly at a rate of 5% per annum
for the first five years and will reset to a rate of 9% per annum after five
years. The Senior Preferred Shares may be redeemed at any time, at our
option.
We also
issued a warrant to purchase 215,983 common shares to the U.S. Treasury at a
purchase price of $13.89 per share. The aggregate purchase price equals 15% of
the aggregate amount of the Senior Preferred Shares purchased by the U.S.
Treasury or $3 million. The initial purchase price per share for the warrant and
the number of common shares subject to the warrant were determined by reference
to the market price of the common shares (calculated on a 20-day trailing
average) on December 8, 2008, the date the U.S. Treasury approved our TARP
application. The warrant has a term of 10 years and is potentially dilutive
to earnings per share.
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”)
was enacted. As required by ARRA, the U.S. Treasury has issued
additional compensation standards on companies receiving financial
assistance from the U.S. government. In addition, ARRA imposes certain
new executive compensation and corporate expenditure limits on each
current and future CPP recipient, including First
Financial Service Corporation, until the recipient has repaid the
Treasury. ARRA also permits CPP participants to
redeem the preferred shares held by the Treasury Department without
penalty and without the need to raise new capital, subject to the
Treasury’s consultation with the recipient’s appropriate regulatory
agency.
We
currently have a regulatory agreement with the FDIC that requires us to obtain
the consent of the Regional Director of the FDIC and the Commissioner
of the KOFI to declare and pay cash dividends. We also have a
regulatory agreement with the FDIC that requires us to maintain a Tier 1 capital
ratio of 8%. We are currently in compliance with the Tier
1 capital requirement.
The
Corporation maintains two lines of credit totaling $18 million with a
correspondent bank. The Corporation borrowed $1.5 million
against one of these lines of credit to pay its second quarter
cash dividend and for general operating expenses. At
September 30, 2009, the Corporation was in technical default with two
financial covenants and one operating covenant in regards to the lines of
credit. We asked for and received a waiver for all three
covenants as of September 30, 2009.
Subsequent
to September 30, 2009, the Corporation's total borrowing capacity was reduced
from $18 million to $1.5 million. We also reduced the number of lines
from two to one. The new line will have a maturity date of
January 31, 2010.
Item 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
GENERAL
We
operate 22 full-service banking centers and a commercial private banking center
in eight contiguous counties in Central Kentucky along the Interstate 65
corridor and in the Louisville Metropolitan area, including southern
Indiana. Our markets range from Metro Louisville in Jefferson County,
Kentucky approximately 40 miles north of our headquarters in Elizabethtown,
Kentucky to Hart County, Kentucky, approximately 30 miles south of Elizabethtown
to Harrison County, Indiana approximately 60 miles northwest of our
headquarters. Our markets are supported by a diversified industry
base and have a regional population of over 1 million. Based on the
current economic slow-down, management anticipates that our markets may not
continue to grow at the rate experienced over the last few
years. However, we believe we will still be well positioned to
benefit from growth in our local markets when the economy rebounds in the
future.
We serve
the needs and cater to the economic strengths of the local communities in which
we operate, and we strive to provide a high level of personal and professional
customer service. We offer a variety of financial services to our retail and
commercial banking customers. These services include personal and corporate
banking services and personal investment financial counseling
services.
Through
our personal investment
financial counseling services, we offer a wide variety of mutual funds, equity
investments, and fixed and variable annuities. We invest in the
wholesale capital markets to manage a portfolio of securities and use various
forms of wholesale funding. The security portfolio contains a variety of
instruments, including callable debentures, taxable and non-taxable debentures,
fixed and adjustable rate mortgage backed securities, and collateralized
mortgage obligations.
Our
results of operations depend primarily on net interest income, which is the
difference between interest income from interest-earning assets and interest
expense on interest-bearing liabilities. Our operations are also affected by
non-interest income, such as service charges, insurance agency revenue, loan
fees, gains and losses from the sale of mortgage loans and gains from the sale
of real estate held for development. Our principal operating expenses, aside
from interest expense, consist of compensation and employee benefits, occupancy
costs, data processing expense and provisions for loan losses.
The
discussion and analysis in this report covers material changes in the financial
condition since December 31, 2008 and material changes in the results of
operations for the three and nine month periods ending September 30, 2009 as
compared to the same periods in 2008. It should be read in
conjunction with "Management’s Discussion and Analysis of Financial Condition
and Results of Operations" included in the Annual Report on Form 10-K for the
period ended December 31, 2008.
OVERVIEW
On June
25, 2008, we expanded our operations into southern Indiana with the acquisition
of FSB Bancshares, Inc., the bank holding company for The Farmers State
Bank. The Farmers State Bank had approximately $65.7 million in total
assets and $55.8 million in deposits. The Farmers State Bank had four
banking offices in Harrison and Floyd Counties in Indiana, which are adjacent to
four Kentucky counties where we currently operate and are part of the Louisville
MSA. Upon completion of the acquisition, these four offices became
branches of First Federal Savings Bank.
Over the
past several years we have focused on enhancing and expanding our retail and
commercial banking network in our core markets as well as establishing our
presence in the Louisville market. Our core markets, where we have a
combined 23% market share, have become increasingly competitive as several new
banks have entered those markets during the past few years. In order
to protect and grow our market share, we are replacing existing branches with
newer, enhanced facilities and anticipate constructing new facilities over the
next few years. In addition to the enhancement and expansion in our
core markets, we have been increasing our presence in the Louisville
market. Our acquisition of FSB Bancshares, Inc. has broadened our
retail branch network in the Louisville market, which now extends into Southern
Indiana. Approximately 73% of the deposit base in the Louisville
market is controlled by six out-of-state banks. While the market is
very competitive, we believe this creates an opportunity for smaller community
banks with more power to make decisions locally. We believe our
investment in these initiatives along with our continued commitment to a high
level of customer service will enhance our market share in our core markets and
our development in the Louisville market.
Our
retail branch network continues to generate encouraging results.
Total deposits have grown
46% over the past three years. Total deposits were $937.7 million at September
30, 2009, an increase of $162.3 million from December 31, 2008. After
our acquisition of Farmers State Bank in 2008, our retail branch network in the
Louisville market has broadened to sixteen offices. In May 2009, we
opened the Fort Knox banking center, our twenty-first banking center, which
expanded our current footprint in Hardin County, Kentucky. The Fort
Knox banking center complements our existing branch located in Radcliff,
Kentucky and is located just outside the main entrance to the Fort Knox military
base. We also completed the construction of our twenty-second
banking center which opened in July 2009. The branch is located in the
Middletown area of Louisville, Kentucky. Competition for deposits
continues to be challenging in all of the markets we serve. We believe this
intense competition combined with continued repricing of variable rate loans
could add to additional margin compression.
We have
developed a strong commercial real estate niche in our markets. We
have an experienced team of bankers who focus on providing service and
convenience to our customers. It is quite common for our bankers to
close loans at a customer’s place of business or even the customer’s personal
residence. This high level of service has been well received in
our Louisville market, which is dominated by regional banks.
To further develop our
commercial banking relationships in Louisville, we opened a private banking
office in April 2007. This upscale facility complements our full
service centers in Louisville by attracting commercial deposit relationships in
conjunction with our commercial lending relationships.
Our
emphasis on commercial lending generated 40% growth in the total loan portfolio
and 46% growth in commercial loans over the past three years.
Commercial loans were
$692.7 million at September 30, 2009, an increase of $55.1 million, or 8.6% from
December 31, 2008.
Although
we had growth in the loan portfolio during the first nine months, credit quality
remained challenging in 2009.
There was a significant
migration of loans into the Substandard loan categories during the period,
resulting in a higher provision for loan losses.
At September 30, 2009, the
allowance for loan losses was $16.2 million compared to $13.6 million at
December 31, 2008. The allowance for loan losses to non-performing
loans fell to 46% from 81% at September 30, 2009 compared to December 31,
2008.
Despite
the continued deterioration in economic conditions during the first nine months
of 2009, the Corporation’s capital position remained well-capitalized as defined
by regulatory standards. Our capital position was further bolstered
in the first quarter of 2009 by our participation in the U.S. Treasury
Department Capital Purchase Program. Under the Capital Purchase
Program, we sold $20 million of cumulative perpetual preferred shares to the
U.S. Treasury in a transaction that closed on January 9, 2009.
We
believe that the economy is in a very deep and long lasting
recession. During the last quarter of 2008, the continued economic
slowdown moved to sectors not previously impacted, including consumer,
commercial, industrial among others. Credit issues are broadening in
these sectors and economic recovery is most likely several quarters
away. We will continue to monitor credit quality very closely in 2009
as this recession persists. As the economy and the financial sector
continue to struggle, probable losses in the loan portfolio could increase,
resulting in higher provision for loan losses during 2009.
CRITICAL
ACCOUNTING POLICIES
Our
accounting and reporting policies comply with U.S. generally accepted accounting
principles and conform to general practices within the banking
industry. The accounting policies identified below are critical to
the understanding of our results of operations since the application of these
policies requires significant management assumptions and estimates that could
result in materially different amounts to be reported if conditions or
underlying circumstances were to change.
Allowance for
Loan Losses
–
We
maintain an allowance sufficient to absorb probable incurred credit losses
existing in the loan portfolio. Our Allowance for Loan Loss Review Committee,
which is comprised of senior officers, evaluates the allowance for loan losses
on a quarterly basis. We estimate the allowance using past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower’s ability to repay, estimated value of the underlying
collateral, and current economic conditions. While we estimate the
allowance for loan losses based in part on historical losses within each loan
category, estimates for losses within the commercial real estate portfolio are
more dependent upon credit analysis and recent payment performance. Allocations
of the allowance may be made for specific loans or loan categories, but the
entire allowance is available for any loan that, in management’s judgment,
should be charged off.
The
allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general
component covers non-classified loans and is based on historical loss experience
adjusted for current factors. Allowance estimates are developed with actual loss
experience adjusted for current economic conditions. Allowance
estimates are considered a prudent measurement of the risk in the loan portfolio
and are applied to individual loans based on loan type.
Based on
our calculation, an allowance of $16.2 million
or 1.65% of total loans
was our estimate of probable losses within the loan portfolio as of
September 30, 2009.
This estimate resulted
in a provision for loan losses on the income statement of
$6.4 million for the
2009 nine month period.
If the mix and amount of future charge off percentages differ
significantly from the assumptions used by management in making its
determination, the allowance for loan losses and provision for loan losses on
the income statement could materially increase.
Goodwill and
Other Intangible Assets
– We record costs in
excess of the estimated fair value of identified assets acquired through
purchase transactions as an asset. In accordance with current accounting
guidance we perform an annual impairment analysis to determine if the asset is
impaired and needs to be written down to its fair value. We may conduct this
assessment annually or more frequently if conditions warrant. No impairment was
identified as a result of our most recent impairment analysis at March 31, 2009.
In making these impairment analyses, management must make subjective assumptions
regarding the fair value of our assets and liabilities. These judgments may
change over time as market conditions or our strategies change, and these
changes may cause us to record impairment changes to adjust the goodwill to its
estimated fair value.
Impairment of
Investment Securities
–
We review
all unrealized losses to
determine whether the losses are other-than-temporary. We evaluate
our investment securities for other-than-temporary impairment on at least a
quarterly basis and more frequently when economic or market conditions warrant
to determine whether a decline in the value of the securities below amortized
cost is other-than-temporary. We evaluate a number of factors
including, but not limited to: a discounted cash flow analysis; valuation
estimates provided by investment brokers; how much fair value has declined below
amortized cost; how long the decline in fair value has existed; the financial
condition of the issuer; significant rating agency changes on the issuer; and
whether management has the intent to sell the debt security or whether it is
more likely than not that we will be required to sell the debt security before
its anticipated recovery.
The term
“other-than-temporary” is not intended to indicate that the decline is
permanent, but indicates that the possibility for a near-term recovery of value
is not necessarily favorable, or that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the
investment. Once a decline in value is determined to be
other-than-temporary, the cost basis of the security is written down to fair
value and a corresponding charge to earnings is recognized if the security is an
equity security. If other-than-temporary impairment exists for a debt
security, the security’s carrying value is reduced by the amount of the credit
loss and is charged to earnings while the remainder of the loss remains in other
comprehensive income.
RESULTS
OF OPERATIONS
Net
income for the quarter ended September 30, 2009 was $576,000 or $0.07 per common
share diluted compared to $991,000 or $0.21 per common share diluted for the
same period in 2008.
Net income for the nine
month period ended September 30, 2009 was $2.1 million or $.27 per common share
diluted compared to $5.0 million or $1.06 per common share diluted for the same
period a year ago. Earnings decreased for 2009 compared to 2008 due
to a decrease in our net interest margin, an increase in provision for loan loss
expense, write downs taken on real estate acquired through foreclosure, write
downs taken on investment securities that were other-than-temporary impaired,
and a higher level of non-interest expense related to our expansion efforts. Net
income available to common shareholders was also impacted by dividends paid on
preferred shares.
Our book value per
common share decreased from $15.95 at September 30, 2008 to $15.80 at September
30, 2009.
Annualized net income
for the first nine months of 2009 represented a return on average assets of .16%
and a return on average equity of 1.85%.
These compare with a
return on average assets of .72% and a return on average equity of 8.80% for the
first nine months of 2008 also annualized.
Net Interest
Income
–
The
principal source of our revenue is net interest income. Net interest
income is the difference between interest income on interest-earning assets,
such as loans and securities and the interest expense on liabilities used to
fund those assets, such as interest-bearing deposits and borrowings. Net
interest income is affected by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities as well as changes in
market interest rates.
The
growth in our commercial loan portfolio has increased net interest
income. The increase in the volume of interest earning assets
increased net interest income by $963,000 and $3.4 million for the three and
nine month 2009 periods compared to the same prior year
periods. Average interest earning assets increased $125.4 million for
the 2009 quarter and $151.5 million for the nine months compared to
2008. Despite the increase in interest earning assets, our net
interest margin realized a modest decline. The yield on earning
assets averaged 5.75% and 5.85% for the three and nine month 2009 periods
compared to an average yield on earning assets of 6.54% and 6.78% for the same
periods in 2008. This decrease was offset by a decrease in our cost
of funds. Net interest margin as a percent of average earning assets
decreased
8 basis
points to 3.64% for the quarter ended September 30, 2009 and 12 basis points to
3.69% for the nine months ended September 30, 2009 compared to 3.72% and 3.81%
for the same periods in 2008.
Our cost
of funds averaged 2.29% and 2.36% for the quarter and nine month periods of 2009
compared to an average cost of funds of 3.05% and 3.24% for the same period in
2008. Going forward, our cost of funds is expected to continue to decrease as
certificates of deposit re-price and roll off into new certificates of deposit
at lower interest rates.
Our net
interest margin is likely to compress in future quarters as a result of the FOMC
decreasing the Federal Funds rate by 500 basis points since September
2007. The current Federal Funds rate is a range of 0.00% to
0.25%. Correspondingly, variable rate loans that are tied to the
federal prime rate are immediately re-priced downward when the prime rate
decreases. However, interest rates paid on customer deposits, which
are priced off of the London Interbank Offering Rate (LIBOR), have not adjusted
downward proportionately with the declining interest yields on loans and
investments. LIBOR, which is a market driven rate, did not decline in
rate as much as the prime rate. Therefore, we do not expect our
deposit costs to decline as fast as our yield on loans. Sixty percent of
deposits are time deposits that re-price over a longer period of
time. This difference in the timing of the repricing of our assets
and deposits is expected to continue to lower our net interest
margin.
AVERAGE
BALANCE SHEET
The
following table provides information relating to our average balance sheet and
reflects the average yield on assets and average cost of liabilities for the
indicated periods. Yields and costs for the periods presented are
derived by dividing income or expense by the average monthly balance of assets
or liabilities, respectively.
|
|
Quarter Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Cost
(5)
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Cost
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agencies
|
|
$
|
15,024
|
|
|
$
|
75
|
|
|
|
1.98
|
%
|
|
$
|
5,332
|
|
|
$
|
49
|
|
|
|
3.66
|
%
|
Mortgage-backed
securities
|
|
|
6,373
|
|
|
|
65
|
|
|
|
4.05
|
|
|
|
8,501
|
|
|
|
91
|
|
|
|
4.26
|
|
Equity
securities
|
|
|
977
|
|
|
|
25
|
|
|
|
10.15
|
|
|
|
1,775
|
|
|
|
12
|
|
|
|
2.69
|
|
State
and political subdivision securities
(1)
|
|
|
12,580
|
|
|
|
207
|
|
|
|
6.53
|
|
|
|
9,416
|
|
|
|
136
|
|
|
|
5.75
|
|
Corporate
bonds
|
|
|
265
|
|
|
|
26
|
|
|
|
38.93
|
|
|
|
3,110
|
|
|
|
47
|
|
|
|
6.01
|
|
Loans
(2)
(3) (4)
|
|
|
984,468
|
|
|
|
14,410
|
|
|
|
5.81
|
|
|
|
861,230
|
|
|
|
14,337
|
|
|
|
6.62
|
|
FHLB
stock
|
|
|
8,515
|
|
|
|
103
|
|
|
|
4.80
|
|
|
|
8,410
|
|
|
|
113
|
|
|
|
5.35
|
|
Interest
bearing deposits
|
|
|
2,706
|
|
|
|
18
|
|
|
|
2.64
|
|
|
|
7,685
|
|
|
|
90
|
|
|
|
4.66
|
|
Total
interest earning assets
|
|
|
1,030,908
|
|
|
|
14,929
|
|
|
|
5.75
|
|
|
|
905,459
|
|
|
|
14,875
|
|
|
|
6.54
|
|
Less: Allowance
for loan losses
|
|
|
(14,753
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,029
|
)
|
|
|
|
|
|
|
|
|
Non-interest
earning assets
|
|
|
87,857
|
|
|
|
|
|
|
|
|
|
|
|
84,270
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,104,012
|
|
|
|
|
|
|
|
|
|
|
$
|
980,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$
|
115,882
|
|
|
$
|
236
|
|
|
|
0.81
|
%
|
|
$
|
114,518
|
|
|
$
|
442
|
|
|
|
1.54
|
%
|
NOW
and money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounts
|
|
|
179,348
|
|
|
|
352
|
|
|
|
0.78
|
|
|
|
142,036
|
|
|
|
322
|
|
|
|
0.90
|
|
Certificates
of deposit and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
time deposits
|
|
|
525,372
|
|
|
|
3,925
|
|
|
|
2.96
|
|
|
|
478,747
|
|
|
|
4,561
|
|
|
|
3.79
|
|
Short
term borrowings
|
|
|
57,235
|
|
|
|
27
|
|
|
|
0.19
|
|
|
|
29,392
|
|
|
|
156
|
|
|
|
2.11
|
|
FHLB
advances
|
|
|
52,788
|
|
|
|
601
|
|
|
|
4.52
|
|
|
|
52,993
|
|
|
|
610
|
|
|
|
4.58
|
|
Subordinated
debentures
|
|
|
18,000
|
|
|
|
331
|
|
|
|
7.30
|
|
|
|
18,000
|
|
|
|
315
|
|
|
|
6.96
|
|
Total
interest bearing liabilities
|
|
|
948,625
|
|
|
|
5,472
|
|
|
|
2.29
|
|
|
|
835,686
|
|
|
|
6,406
|
|
|
|
3.05
|
|
Non-interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
|
58,176
|
|
|
|
|
|
|
|
|
|
|
|
62,606
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
3,481
|
|
|
|
|
|
|
|
|
|
|
|
6,261
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,010,282
|
|
|
|
|
|
|
|
|
|
|
|
904,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
93,730
|
|
|
|
|
|
|
|
|
|
|
|
76,147
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
1,104,012
|
|
|
|
|
|
|
|
|
|
|
$
|
980,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
9,457
|
|
|
|
|
|
|
|
|
|
|
$
|
8,469
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
3.49
|
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
|
|
|
3.72
|
%
|
(1)
|
Taxable
equivalent yields are calculated assuming a 34% federal income tax
rate.
|
(2)
|
Includes
loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans.
|
(3)
|
Calculations
include non-accruing loans in the average loan amounts
outstanding.
|
(4)
|
Includes
loans held for sale.
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Cost
(5)
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Cost
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agencies
|
|
$
|
10,306
|
|
|
$
|
177
|
|
|
|
2.30
|
%
|
|
$
|
7,126
|
|
|
$
|
216
|
|
|
|
4.05
|
%
|
Mortgage-backed
securities
|
|
|
7,058
|
|
|
|
221
|
|
|
|
4.19
|
|
|
|
9,311
|
|
|
|
297
|
|
|
|
4.26
|
|
Equity
securities
|
|
|
953
|
|
|
|
82
|
|
|
|
11.50
|
|
|
|
1,683
|
|
|
|
42
|
|
|
|
3.33
|
|
State
and political subdivision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
(1)
|
|
|
10,961
|
|
|
|
547
|
|
|
|
6.67
|
|
|
|
9,478
|
|
|
|
450
|
|
|
|
6.34
|
|
Corporate
bonds
|
|
|
222
|
|
|
|
86
|
|
|
|
51.79
|
|
|
|
3,092
|
|
|
|
123
|
|
|
|
5.31
|
|
Loans
(2)
(3) (4)
|
|
|
963,728
|
|
|
|
42,509
|
|
|
|
5.90
|
|
|
|
811,036
|
|
|
|
41,718
|
|
|
|
6.87
|
|
FHLB
stock
|
|
|
8,515
|
|
|
|
290
|
|
|
|
4.55
|
|
|
|
7,983
|
|
|
|
317
|
|
|
|
5.30
|
|
Interest
bearing deposits
|
|
|
2,749
|
|
|
|
69
|
|
|
|
3.36
|
|
|
|
3,257
|
|
|
|
100
|
|
|
|
4.10
|
|
Total
interest earning assets
|
|
|
1,004,492
|
|
|
|
43,981
|
|
|
|
5.85
|
|
|
|
852,966
|
|
|
|
43,263
|
|
|
|
6.78
|
|
Less: Allowance
for loan losses
|
|
|
(14,465
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,537
|
)
|
|
|
|
|
|
|
|
|
Non-interest
earning assets
|
|
|
84,899
|
|
|
|
|
|
|
|
|
|
|
|
75,195
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,074,926
|
|
|
|
|
|
|
|
|
|
|
$
|
919,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$
|
115,323
|
|
|
$
|
634
|
|
|
|
0.74
|
%
|
|
$
|
105,827
|
|
|
$
|
1,389
|
|
|
|
1.75
|
%
|
NOW
and money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounts
|
|
|
166,202
|
|
|
|
861
|
|
|
|
0.69
|
|
|
|
135,172
|
|
|
|
1,078
|
|
|
|
1.07
|
|
Certificates
of deposit and
other time deposits
|
|
|
502,542
|
|
|
|
11,864
|
|
|
|
3.16
|
|
|
|
437,792
|
|
|
|
13,348
|
|
|
|
4.07
|
|
Short
term borrowings
|
|
|
66,866
|
|
|
|
117
|
|
|
|
0.23
|
|
|
|
34,132
|
|
|
|
661
|
|
|
|
2.59
|
|
FHLB
advances
|
|
|
52,737
|
|
|
|
1,798
|
|
|
|
4.56
|
|
|
|
53,026
|
|
|
|
1,808
|
|
|
|
4.55
|
|
Subordinated
debentures
|
|
|
18,000
|
|
|
|
989
|
|
|
|
7.35
|
|
|
|
13,556
|
|
|
|
649
|
|
|
|
6.40
|
|
Total
interest bearing liabilities
|
|
|
921,670
|
|
|
|
16,263
|
|
|
|
2.36
|
|
|
|
779,505
|
|
|
|
18,933
|
|
|
|
3.24
|
|
Non-interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
|
57,230
|
|
|
|
|
|
|
|
|
|
|
|
58,847
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
3,093
|
|
|
|
|
|
|
|
|
|
|
|
5,762
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
981,993
|
|
|
|
|
|
|
|
|
|
|
|
844,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
92,933
|
|
|
|
|
|
|
|
|
|
|
|
75,510
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders'
equity
|
|
$
|
1,074,926
|
|
|
|
|
|
|
|
|
|
|
$
|
919,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
27,718
|
|
|
|
|
|
|
|
|
|
|
$
|
24,330
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
3.54
|
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.69
|
%
|
|
|
|
|
|
|
|
|
|
|
3.81
|
%
|
(1)
|
Taxable
equivalent yields are calculated assuming a 34% federal income tax
rate.
|
(2)
|
Includes
loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans.
|
(3)
|
Calculations
include non-accruing loans in the average loan amounts
outstanding.
|
(4)
|
Includes
loans held for sale.
|
RATE/VOLUME
ANALYSIS
The table
below shows changes in interest income and interest expense for the periods
indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate (changes in rate multiplied by old volume); (2) changes in
volume (change in volume multiplied by old rate); and (3) changes in rate-volume
(change in rate multiplied by change in volume). Changes in
rate-volume are proportionately allocated between rate and volume
variance.
|
|
Three Months Ended
September 30,
2009 vs. 2008
Increase (decrease)
Due to change in
|
|
|
Nine Months Ended
September 30,
2009 vs. 2008
Increase (decrease)
Due to change in
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agencies
|
|
$
|
(31
|
)
|
|
$
|
57
|
|
|
$
|
26
|
|
|
$
|
(115
|
)
|
|
$
|
76
|
|
|
$
|
(39
|
)
|
Mortgage-backed
securities
|
|
|
(4
|
)
|
|
|
(22
|
)
|
|
|
(26
|
)
|
|
|
(6
|
)
|
|
|
(70
|
)
|
|
|
(76
|
)
|
Equity
securities
|
|
|
21
|
|
|
|
(8
|
)
|
|
|
13
|
|
|
|
65
|
|
|
|
(25
|
)
|
|
|
40
|
|
State
and political subdivision
securities
|
|
|
20
|
|
|
|
50
|
|
|
|
70
|
|
|
|
24
|
|
|
|
73
|
|
|
|
97
|
|
Corporate
bonds
|
|
|
56
|
|
|
|
(77
|
)
|
|
|
(21
|
)
|
|
|
173
|
|
|
|
(210
|
)
|
|
|
(37
|
)
|
Loans
|
|
|
(1,845
|
)
|
|
|
1,917
|
|
|
|
72
|
|
|
|
(6,426
|
)
|
|
|
7,217
|
|
|
|
791
|
|
FHLB
stock
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
(9
|
)
|
|
|
(47
|
)
|
|
|
20
|
|
|
|
(27
|
)
|
Interest
bearing deposits
|
|
|
(28
|
)
|
|
|
(43
|
)
|
|
|
(71
|
)
|
|
|
(17
|
)
|
|
|
(14
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest earning assets
|
|
|
(1,822
|
)
|
|
|
1,876
|
|
|
|
54
|
|
|
|
6,349
|
)
|
|
|
7,067
|
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
|
(211
|
)
|
|
|
5
|
|
|
|
(206
|
)
|
|
|
(870
|
)
|
|
|
115
|
|
|
|
(755
|
)
|
NOW
and money market accounts
|
|
|
(47
|
)
|
|
|
77
|
|
|
|
30
|
|
|
|
(430
|
)
|
|
|
213
|
|
|
|
(217
|
)
|
Certificates
of deposit and other time deposits
|
|
|
(1,050
|
)
|
|
|
414
|
|
|
|
(636
|
)
|
|
|
(3,282
|
)
|
|
|
1,798
|
|
|
|
(1,484
|
)
|
Short
term borrowings
|
|
|
(208
|
)
|
|
|
79
|
|
|
|
(129
|
)
|
|
|
(882
|
)
|
|
|
338
|
|
|
|
(544
|
)
|
FHLB
advances
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Subordinated
debentures
|
|
|
16
|
|
|
|
-
|
|
|
|
16
|
|
|
|
106
|
|
|
|
234
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
|
(1,507
|
)
|
|
|
573
|
|
|
|
(934
|
)
|
|
|
(5,358
|
)
|
|
|
2,688
|
|
|
|
(2,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in net interest income
|
|
$
|
(315
|
)
|
|
$
|
1,303
|
|
|
$
|
988
|
|
|
$
|
(991
|
)
|
|
$
|
4,379
|
|
|
$
|
3,388
|
|
Non-Interest
Income and Non-Interest Expense
The
following tables compare the components of non-interest income and expenses for
the periods ended September 30, 2009 and 2008. The tables show the
dollar and percentage change from 2008 to 2009. Below each table is a
discussion of significant changes and trends.
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
%
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
service fees on deposit accounts
|
|
$
|
1,750
|
|
|
$
|
1,817
|
|
|
$
|
(67
|
)
|
|
|
-3.7
|
%
|
Gain
on sale of mortgage loans
|
|
|
300
|
|
|
|
179
|
|
|
|
121
|
|
|
|
67.6
|
%
|
Gain
on sale of investments
|
|
|
-
|
|
|
|
52
|
|
|
|
(52
|
)
|
|
|
-100.0
|
%
|
Net
impairment losses recognized in earnings
|
|
|
(304
|
)
|
|
|
-
|
|
|
|
(304
|
)
|
|
|
100.0
|
%
|
Write
down on real estate acquired through foreclosure
|
|
|
(305
|
)
|
|
|
(151
|
)
|
|
|
(154
|
)
|
|
|
102.0
|
%
|
Brokerage
commissions
|
|
|
89
|
|
|
|
109
|
|
|
|
(20
|
)
|
|
|
-18.3
|
%
|
Other
income
|
|
|
365
|
|
|
|
361
|
|
|
|
4
|
|
|
|
1.1
|
%
|
|
|
$
|
1,895
|
|
|
$
|
2,367
|
|
|
$
|
(472
|
)
|
|
|
-19.9
|
%
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
%
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
service fees on deposit accounts
|
|
$
|
4,872
|
|
|
$
|
4,865
|
|
|
$
|
7
|
|
|
|
0.1
|
%
|
Gain
on sale of mortgage loans
|
|
|
832
|
|
|
|
566
|
|
|
|
266
|
|
|
|
47.0
|
%
|
Gain
on sale of investments
|
|
|
-
|
|
|
|
52
|
|
|
|
(52
|
)
|
|
|
-100.0
|
%
|
Net
impairment losses recognized in earnings
|
|
|
(703
|
)
|
|
|
(216
|
)
|
|
|
(487
|
)
|
|
|
225.5
|
%
|
Write
down on real estate acquired through foreclosure
|
|
|
(555
|
)
|
|
|
(160
|
)
|
|
|
(395
|
)
|
|
|
246.9
|
%
|
Brokerage
commissions
|
|
|
281
|
|
|
|
352
|
|
|
|
(71
|
)
|
|
|
-20.2
|
%
|
Other
income
|
|
|
1,263
|
|
|
|
1,001
|
|
|
|
262
|
|
|
|
26.2
|
%
|
|
|
$
|
5,990
|
|
|
$
|
6,460
|
|
|
$
|
(470
|
)
|
|
|
-7.3
|
%
|
We
originate qualified VA, KHC, RHC and conventional secondary market loans and
sell them into the secondary market with servicing rights
released. For the quarter and year to date, gain on sale of mortgage
loans increased due to an increase in mortgage refinance activity.
We invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, obligations of states and political
subdivisions, corporate bonds, mutual funds, stocks and
others. During the third quarter of 2008 we recorded a gain on sale
of investments of $52,000. Gains on investment securities are
infrequent in nature and are not a consistent recurring source of
income.
We
recognized other-than-temporary impairment charges of $703,000 for the expected
credit loss during the 2009 nine month period on all five of our trust preferred
securities. Management believes this impairment was primarily attributable to
the current economic environment which caused the financial conditions of some
of the issuers to deteriorate. During 2008, we recognized other-than-temporary
impairment charges of $216,000 on certain equity securities with a cost basis of
$840,000.
Further
reducing non-interest income for the 2009 period was a 10% or $555,000
write-down of the carrying value of real estate owned properties that had been
held for twelve months.
Other
income increased year to date as a result of gains recorded on the sale of a
real estate acquired through foreclosure properties and loan underwriter fees
due to increased loan demand.
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
(Dollars in
thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
%
|
|
Non-interest
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
$
|
4,042
|
|
|
$
|
3,867
|
|
|
$
|
175
|
|
|
|
4.5
|
%
|
Office
occupancy expense and equipment
|
|
|
832
|
|
|
|
779
|
|
|
|
53
|
|
|
|
6.8
|
%
|
Marketing
and advertising
|
|
|
225
|
|
|
|
215
|
|
|
|
10
|
|
|
|
4.7
|
%
|
Outside
services and data processing
|
|
|
793
|
|
|
|
882
|
|
|
|
(89
|
)
|
|
|
-10.1
|
%
|
Bank
franchise tax
|
|
|
257
|
|
|
|
258
|
|
|
|
(1
|
)
|
|
|
-0.4
|
%
|
FDIC
insurance premiums
|
|
|
414
|
|
|
|
102
|
|
|
|
312
|
|
|
|
305.9
|
%
|
Amortization
of core deposit intangible
|
|
|
100
|
|
|
|
56
|
|
|
|
44
|
|
|
|
78.6
|
%
|
Other
expense
|
|
|
1,365
|
|
|
|
1,478
|
|
|
|
(113
|
)
|
|
|
-7.6
|
%
|
|
|
$
|
8,028
|
|
|
$
|
7,637
|
|
|
$
|
391
|
|
|
|
5.1
|
%
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
(Dollars in
thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
%
|
|
Non-interest
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
$
|
12,193
|
|
|
$
|
10,765
|
|
|
$
|
1,428
|
|
|
|
13.3
|
%
|
Office
occupancy expense and equipment
|
|
|
2,488
|
|
|
|
2,112
|
|
|
|
376
|
|
|
|
17.8
|
%
|
Marketing
and advertising
|
|
|
735
|
|
|
|
638
|
|
|
|
97
|
|
|
|
15.2
|
%
|
Outside
services and data processing
|
|
|
2,381
|
|
|
|
2,365
|
|
|
|
16
|
|
|
|
0.7
|
%
|
Bank
franchise tax
|
|
|
778
|
|
|
|
761
|
|
|
|
17
|
|
|
|
2.2
|
%
|
FDIC
insurance premiums
|
|
|
1,381
|
|
|
|
286
|
|
|
|
1,095
|
|
|
|
382.9
|
%
|
Amortization
of core deposit intangible
|
|
|
302
|
|
|
|
59
|
|
|
|
243
|
|
|
|
411.9
|
%
|
Other
expense
|
|
|
3,998
|
|
|
|
3,505
|
|
|
|
493
|
|
|
|
14.1
|
%
|
|
|
$
|
24,256
|
|
|
$
|
20,491
|
|
|
$
|
3,765
|
|
|
|
18.4
|
%
|
Employee
compensation and benefits is the largest component of non-interest
expense. Since early 2008, we have added sixteen associates with our
expansion efforts. These associates were hired for a new Bullitt
County retail branch facility that opened in August 2008, a new Hardin County
retail branch facility that opened in May 2009, a new Louisville retail branch
facility that opened in July 2009 and to fill other positions to support our
growth. We added twenty additional associates in the second quarter
of 2008 as a result of the recent acquisition in Southern Indiana. We
look for a continued increase in employee compensation and benefits expense in
line with recent years, as we progress with our retail expansion and market
protection efforts.
Office
occupancy expense and equipment and marketing and advertising increased due to
additional operating expenses related to our expansion efforts. We
anticipate the increased level of non-interest expense to continue in 2009 with
additional retail expansion.
We have opened
full-service banking centers at Fort Knox and in the Middletown area of
Jefferson County since March 31, 2009.
Other
expense increased due to increases in interchange expense, postage and courier,
REO expense, losses on NOW accounts and other operating
expenses. Interchange expense increased due to the switch to
real-time debit card processing, which is more expensive per item than the batch
processing method we used previously. REO expense relating to
repair, maintenance and taxes increased due to increases in real estate we
acquired through foreclosure.
The FDIC
charges insured financial institutions premiums to maintain the Deposit
Insurance Fund at a certain level. See Part I, Item 1, "Business –
Federal
Deposit
Insurance
Assessments
" in our 2008 Form
10-K for additional information. On October 16, 2008, the FDIC
published a restoration plan designed to replenish the Deposit Insurance Fund
over a period of five years and to increase the deposit insurance reserve
ratio. In order to implement the restoration plan, the FDIC
proposes to change both its risk-based assessment system and its base assessment
rates. Either an increase in the Risk Category of our bank
subsidiary, or adjustments to the base assessment rates, could materially
increase our deposit insurance premiums and assessments.
In
addition, under an interim rule, the FDIC imposed a five basis point emergency
special assessment on insured depository institutions as of June 30,
2009. The special assessment was paid on September 30,
2009. This assessment resulted in a cost of $477,000 and is reflected
in our income statement for the nine months ended September 30,
2009. The interim rule also authorizes the FDIC to impose an
additional emergency assessment of up to 10 basis points in respect to deposits
for quarters ended after June 30, 2009 if necessary to maintain public
confidence in federal deposit insurance. During the third quarter of
2009, the FDIC proposed an alternative to an additional special
assessment. The alternative is to have all banks prepay three and a
quarter years worth of FDIC assessments on December 31, 2009. The
proposed prepayment, which includes assumptions about deposit growth, would be
based on average third quarter deposits. The prepaid amount would be
amortized over the prepayment period. If approved, our estimated
prepayment would be approximately $7.8 million. Given the enacted
and proposed increases in
assessments for insured financial institutions in 2009, we
anticipate that FDIC assessments on
deposits will have a significantly greater impact upon operating expenses for
the next few years.
Our
efficiency ratio was 72% for the nine months ended September 30, 2009 compared
to 67% for the 2008 period. The increase principally reflects our
recent expansion efforts.
ANALYSIS
OF FINANCIAL CONDITION
Total
assets at September 30, 2009 increased by $90.5 million from December 31, 2008.
The increase was primarily driven by an increase in loans of $72.2 million and
an increase in investment securities of $13.7 million. The growth in
loans and investment securities was funded with deposits, which increased $162.3
million for the period. The increase in deposits was also used to pay
down our short-term borrowings.
Loans
Net loans
increased $72.2 million to $971.7 million at September 30, 2009 compared to
$899.4 million at December 31, 2008. Our commercial real estate
portfolio increased $60.2 million to $623.5 million at September 30,
2009. Real estate construction loans decreased due to the economic
slow-down while our residential mortgage loan, consumer, home equity and
indirect consumer portfolios all increased for the 2009 period. For 2009, we
believe the growth in commercial real estate loans may not continue at the rate
experienced over the last few years due to the current economic
slow-down. However, we also believe we will be well positioned to
benefit from growth in our local markets when the economy rebounds.
|
|
September
30,
|
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
56,546
|
|
|
$
|
56,863
|
|
Real
estate commercial
|
|
|
623,473
|
|
|
|
563,314
|
|
Real
estate construction
|
|
|
12,635
|
|
|
|
17,387
|
|
Residential
mortgage
|
|
|
177,898
|
|
|
|
165,337
|
|
Consumer
and home equity
|
|
|
73,249
|
|
|
|
69,649
|
|
Indirect
consumer
|
|
|
37,229
|
|
|
|
31,754
|
|
Loans
held for sale
|
|
|
7,729
|
|
|
|
9,567
|
|
|
|
|
988,759
|
|
|
|
913,871
|
|
Less:
|
|
|
|
|
|
|
|
|
Net
deferred loan origination fees
|
|
|
(909
|
)
|
|
|
(870
|
)
|
Allowance
for loan losses
|
|
|
(16,173
|
)
|
|
|
(13,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,082
|
)
|
|
|
(14,435
|
)
|
|
|
|
|
|
|
|
|
|
Loans
Receivable
|
|
$
|
971,677
|
|
|
$
|
899,436
|
|
Allowance
and Provision for Loan Losses
Our
financial performance depends on the quality of the loans we originate and
management’s ability to assess the degree of risk in existing loans when it
determines the allowance for loan losses. An increase in loan
charge-offs or non-performing loans or an inadequate allowance for loan losses
could reduce net interest income, net income and capital and limit the range of
products and services we can offer.
The
Allowance for Loan Loss Review Committee evaluates the allowance for loan losses
quarterly to maintain a level sufficient to absorb probable incurred credit
losses existing in the loan portfolio. Periodic provisions to the
allowance are made as needed. The Committee determines the allowance
by applying loss estimates to graded loans by categories, as described
below. In addition, the Committee analyzes such factors as changes in
lending policies and procedures; underwriting standards; collection; charge-off
and recovery history; changes in national and local economic business conditions
and developments; changes in the characteristics of the portfolio; ability and
depth of lending management and staff; changes in the trend of the volume and
severity of past due, non-accrual and classified loans; troubled debt
restructuring and other loan modifications; and results of regulatory
examinations.
2008 was
a tumultuous year for the U.S. economy and the financial service industry.
Deteriorating property values led to declining valuations for loan
portfolios. The property value declines, which began in the second
half of 2007, have continued into 2009. The markets we serve have
generally avoided the severe property value declines experienced in other parts
of the country; nonetheless, the impact in our markets was still
significant. In response to these adverse economic conditions, we
took the opportunity to strengthen our allowance for loan losses substantially
during the second half of 2008 and the first half of 2009. 2009 will
continue to be a challenging time for our financial institution as we manage the
overall level of our credit quality.
The
following table analyzes our loan loss experience for the periods
indicated.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
14,236
|
|
|
$
|
8,917
|
|
|
$
|
13,565
|
|
|
$
|
7,922
|
|
Allowance
related to acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
327
|
|
Loans
charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate mortgage
|
|
|
573
|
|
|
|
-
|
|
|
|
614
|
|
|
|
15
|
|
Consumer
|
|
|
83
|
|
|
|
137
|
|
|
|
570
|
|
|
|
402
|
|
Commercial
|
|
|
-
|
|
|
|
54
|
|
|
|
2,879
|
|
|
|
349
|
|
Total
charge-offs
|
|
|
656
|
|
|
|
191
|
|
|
|
4,063
|
|
|
|
766
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate mortgage
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
Consumer
|
|
|
62
|
|
|
|
60
|
|
|
|
179
|
|
|
|
185
|
|
Commercial
|
|
|
49
|
|
|
|
-
|
|
|
|
49
|
|
|
|
18
|
|
Total
recoveries
|
|
|
111
|
|
|
|
62
|
|
|
|
230
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans charged-off
|
|
|
545
|
|
|
|
129
|
|
|
|
3,833
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
2,482
|
|
|
|
1,720
|
|
|
|
6,441
|
|
|
|
2,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
16,173
|
|
|
$
|
10,508
|
|
|
$
|
16,173
|
|
|
$
|
10,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to total loans (excluding loans held for
sale)
|
|
|
|
|
|
|
|
|
|
|
1.65
|
%
|
|
|
1.21
|
%
|
Annualized
net charge-offs to average loans outstanding
|
|
|
|
|
|
|
|
|
|
|
0.53
|
%
|
|
|
0.09
|
%
|
Allowance
for loan losses to total non-performing loans
|
|
|
|
|
|
|
|
|
|
|
46
|
%
|
|
|
85
|
%
|
The
provision for loan losses increased by $762,000 to $2.5 million for the quarter
ended September 30, 2009, and increased by $3.6 million to $6.4 million for the
nine months ended September 30, 2009 compared to the same periods in
2008. The increase was related to growth in the loan portfolio, but
primarily from the specific reserves set aside for loans classified during
2009. The higher provision was also due to our increasing the general
reserve factors for commercial real estate loans during the period as the level
of classified loans has increased sharply. The allowance for loan
losses increased $5.7 million to $16.2 million from September 30, 2008 to
September 30, 2009.
The increase was due to
an increase in net loans for 2009, as well as the provision recorded to reflect
a $35.4 million increase in classified loans for the 2009 period.
Federal
regulations require banks to classify their own assets on a regular
basis. The regulations provide for three categories of classified
loans — substandard, doubtful and loss.
The
following table provides information with respect to classified loans for the
periods indicated:
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
Classified
Loans
|
|
|
|
|
|
|
Substandard
|
|
$
|
66,264
|
|
|
$
|
32,070
|
|
Doubtful
|
|
|
1,182
|
|
|
|
-
|
|
Loss
|
|
|
93
|
|
|
|
55
|
|
Total
Classified
|
|
$
|
67,539
|
|
|
$
|
32,125
|
|
As we
focused on credit quality during 2008 and the first nine months of 2009, there
was a significant migration of loans into the Special Mention and Substandard
loan categories. If economic conditions continue to put stress on our
borrowers going forward, this may result in higher provisions for loan
losses. We expect that the economy will remain weak at least for the
next several quarters. Credit quality will continue to be a primary
focus in 2009 and going forward.
The $34.2
million increase in substandard assets for 2009 was primarily the result
of downgrading loans
with
fourteen
borrowers with balances ranging from $928,000 to $6.1 million.
Offsetting this increase
was the transfer of a classified loan having a balance of $4.1 million to real
estate acquired through foreclosure. Approximately $35.1 million of the total
classified loans were related to real estate development or real estate
construction loans in our market area. Classified consumer loans
totaled $1.2 million, classified mortgage loans totaled $3.9 million and
classified commercial
loans totaled $27.3 million. For more information on collection
efforts, evaluation of collateral and how loss amounts are estimated, see
“Non-Performing Assets,” below.
Although
we may allocate a portion of the allowance to specific loans or loan categories,
the entire allowance is available for active charge-offs. We develop
our allowance estimates based on actual loss experience adjusted for current
economic conditions. Allowance estimates represent a prudent
measurement of the risk in the loan portfolio, which we apply to individual
loans based on loan type.
Non-Performing
Assets
Non-performing
assets consist of certain restructured loans for which interest rate or other
terms have been renegotiated, loans on which interest is no longer accrued, real
estate acquired through foreclosure and repossessed assets. We
do not have any loans longer than 90 days past due still on
accrual. Loans, including impaired loans, are placed on non-accrual
status when they become past due 90 days or more as to principal or interest,
unless they are adequately secured and in the process of
collection. Loans are considered impaired when we no longer
anticipate full principal or interest payments in accordance with the
contractual loan terms. If a loan is impaired, we allocate a portion
of the allowance so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate, or at the fair value
of collateral if repayment is expected solely from collateral.
We review
our loans on a regular basis and implement normal collection procedures when a
borrower fails to make a required payment on a loan. If the
delinquency on a mortgage loan exceeds 90 days and is not cured through normal
collection procedures or an acceptable arrangement is not worked out with the
borrower, we institute measures to remedy the default, including commencing a
foreclosure action. We generally charge off consumer loans when
management deems a loan uncollectible and any available collateral has been
liquidated. We handle commercial business and real estate loan
delinquencies on an individual basis with the advice of legal
counsel.
We
recognize interest income on loans on the accrual basis except for those loans
in a non-accrual of income status. We discontinue accruing interest on impaired
loans when management believes, after consideration of economic and business
conditions and collection efforts that the borrowers’ financial condition is
such that collection of interest is doubtful, typically after the loan becomes
90 days delinquent. When we discontinue interest accrual, we reverse
existing accrued interest and subsequently recognize interest income only to the
extent we receive cash payments.
We
classify real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure as real estate owned until such time as it is sold. We classify new
and used automobile, motorcycle and all terrain vehicles acquired as a result of
foreclosure as repossessed assets until they are sold. When such property is
acquired we record it at the lower of the unpaid principal balance of the
related loan or its fair market value. We charge any write-down of
the property at the time of acquisition to the allowance for loan
losses. Subsequent gains and losses are included in non-interest
income and non-interest expense.
Real
estate owned acquired through foreclosure is recorded at lower of cost or fair
value less estimated selling costs at the date of foreclosure. Fair
value is based on the appraised market value of the propertybased on sales of
similar assets. The fair value may be subsequently reduced if the
estimated fair value declines below the original appraised value. Real estate
acquired through foreclosure increased $2.3 million to $8.2 million at September
30, 2009. The increase was primarily the result of a commercial
credit relationship totaling $2.2 million that was transferred during the second
quarter of 2009.
The
following table provides information with respect to non-performing assets for
the periods indicated.
|
|
September 30 ,
|
|
|
December 31,
|
|
(Dollar
in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Restructured
|
|
$
|
2,358
|
|
|
$
|
1,182
|
|
Past
due 90 days still on accrual
|
|
|
-
|
|
|
|
-
|
|
Loans
on non-accrual status
|
|
|
32,431
|
|
|
|
15,587
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing loans
|
|
|
34,789
|
|
|
|
16,769
|
|
Real
estate acquired through foreclosure
|
|
|
8,184
|
|
|
|
5,925
|
|
Other
repossessed assets
|
|
|
40
|
|
|
|
91
|
|
Total
non-performing assets
|
|
$
|
43,013
|
|
|
$
|
22,785
|
|
|
|
|
|
|
|
|
|
|
Interest
income that would have been earned on non-performing loans
|
|
$
|
2,053
|
|
|
$
|
825
|
|
Interest
income recognized on non-performing loans
|
|
|
105
|
|
|
|
75
|
|
Ratios:
Non-performing loans to total loans (excluding loans held for
sale)
|
|
|
3.55
|
%
|
|
|
1.86
|
%
|
Non-performing
assets to total loans (excluding loans held for sale)
|
|
|
4.39
|
%
|
|
|
2.52
|
%
|
Non-performing
loans increased $18.0 million to $34.8 million at September 30, 2009 compared to
$16.8 million at December 31, 2008. The increase in non-accrual loans
consist primarily of eight credit relationships with balances ranging from
$640,000 to $5.3 million. Offsetting this increase was the transfer of a
non-accrual loan having a balance of $4.1 million to real estate acquired
through foreclosure. These credit relationships are secured by real estate and
we have provided adequate allowance based on current information. All
non-performing loans are considered impaired.
Non-performing
assets for the 2009 period include $2.4 million in restructured commercial,
mortgage and consumer loans. Restructured loans primarily consist of
four credit relationships with balances ranging from $116,000 to $1.6
million. The terms of these loans have been renegotiated to reduce
the rate of interest and extend the term, thus reducing the amount of cash flow
required from the borrower to service the loans. The borrowers are currently
meeting the terms of the restructured loans.
Investment
Securities
Interest
on securities provides us our largest source of interest income after interest
on loans, constituting 3.0% of the total interest income for the nine months
ended September 30, 2009. The securities portfolio serves as a source
of liquidity and earnings and contributes to the management of interest rate
risk. We have the authority to invest in various types of liquid
assets, including short-term United States Treasury obligations and securities
of various federal agencies, obligations of states and political subdivisions,
corporate bonds, certificates of deposit at insured savings and loans and banks,
bankers' acceptances, and federal funds. We may also invest a portion
of our assets in certain commercial paper and corporate debt
securities. We are also authorized to invest in mutual funds and
stocks whose assets conform to the investments that we are authorized to make
directly. The available-for-sale investment portfolio increased by $19.4 million
due to the purchase of a U.S. Government agency security and five state and
municipal obligations. The held-to-maturity investment portfolio decreased by
$5.7 million as securities were called for redemption in accordance with their
terms due to decreasing rates.
We review
all unrealized losses at least on a quarterly basis to determine whether the
losses are other than temporary and more frequently when economic or market
concerns warrant. We consider the length of time and the extent to which the
fair value has been less than cost, the financial condition and near-term
prospects of the issuer, and whether management has the intent to sell the debt
security or whether it is more likely than not that we will be required to sell
the debt security before its anticipated recovery. In analyzing an
issuer’s financial condition, we may consider whether the securities are issued
by the federal government or its agencies, whether downgrades by bond rating
agencies have occurred, and the results of reviews of the issuer’s financial
condition. The unrealized losses on the state and municipal
securities were caused primarily by interest rate decreases. The
contractual terms of those investments do not permit the issuer to settle the
securities at a price less than the amortized cost of the
investment. Because we do not have the intent to sell these
securities and it is likely that we will not be required to sell the securities
before their anticipated recovery, we do not consider these investments to be
other-than-temporarily impaired at September 30, 2009. We also
considered the financial condition and near term prospects of the issuer and
identified no matters that would indicate less than full
recovery.
We have
evaluated the decline in the fair value of our trust preferred securities, which
are directly related to the credit and liquidity crisis being experienced in the
financial services industry over the past year. The trust
preferred securities market is currently inactive making the valuation of trust
preferred securities very difficult. The trust preferred securities
are valued by management using unobservable inputs through a discounted cash
flow analysis as permitted under current accounting guidance and using the
expected cash flows appropriately discounted using present value
techniques. Refer to Note 6 – Fair Value for more
information.
We
recognized other-than-temporary impairment charges of $703,000 for the expected
credit loss during the 2009 period on five of our trust preferred securities
with an original cost basis of $3.0 million. All of our trust
preferred securities are below investment grade but have continued to pay
interest as scheduled through September 30, 2009, and are expected to continue
paying interest as scheduled. See Note 2 – Securities for
more information. Management will continue to evaluate these
securities for impairment quarterly.
As
discussed in Note 1, in early April 2009, the FASB issued FASB ASC
320-10-65,
Recognition and
Presentation of Other-Than-Temporary Impairments
. Among other provisions,
the guidance requires entities to split other than temporarily impaired charges
between credit losses (i.e., the loss based on the entity’s estimate of the
decrease in cash flows, including those that result from expected voluntary
prepayments), which are charged to earnings, and the remainder of the impairment
charge (non-credit component) to accumulated other comprehensive income. This
requirement pertains to both securities held to maturity and securities
available for sale. The guidance is effective for interim and annual reporting
periods ending after June 15, 2009 with early adoption permitted for
periods ending after March 15, 2009. We incorporated this guidance in our
review of impairment as of March 31, 2009.
Deposits
We rely
primarily on providing excellent customer service and long-standing
relationships with customers to attract and retain deposits. Market interest
rates and rates on deposit products offered by competing financial institutions
can significantly affect our ability to attract and retain
deposits. In conjunction with our initiatives to expand and enhance
our retail branch network, we emphasize growing our customer checking account
base to better enhance profitability and franchise value. Total
deposits increased by $162.3 million year to date compared to December 31, 2008.
Retail and commercial deposits increased $62.9 million, public funds increased
$15.9 million and we added $83.5 in brokered
certificates. Brokered deposits were $98.9 million at September
30, 2009 compared to $15.4 million at December 31, 2008.
The
following table breaks down our deposits.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$
|
59,499
|
|
|
$
|
55,668
|
|
NOW
demand
|
|
|
110,456
|
|
|
|
99,890
|
|
Savings
|
|
|
133,987
|
|
|
|
111,310
|
|
Money
market
|
|
|
83,365
|
|
|
|
40,593
|
|
Certificates
of deposit
|
|
|
550,411
|
|
|
|
467,938
|
|
|
|
$
|
937,718
|
|
|
$
|
775,399
|
|
Short-Term
Borrowings
We have
the ability to obtain short-term borrowings, consisting of federal funds
purchased and securities sold under agreements to repurchase. We had
short-term borrowings of $2.2 million and $65.3 million from the FHLB of
Cincinnati at September 30, 2009 and 2008. These borrowings averaged
a rate of 0.23% and 2.59% for 2009 and 2008.
Advances
from Federal Home Loan Bank
Deposits
are the primary source of funds for our lending and investment activities and
for our general business purposes. We can also use advances
(borrowings) from the Federal Home Loan Bank (FHLB) of Cincinnati to compensate
for reductions in deposits or deposit inflows at less than projected
levels. Advances from the FHLB are secured by our stock in the FHLB,
certain securities, certain commercial real estate loans and substantially all
of our first mortgage, multi-family and open end home equity
loans. At September 30, 2009 we had $52.8 million in advances
outstanding from the FHLB, and the capacity to increase our borrowings an
additional $69.3 million.
Subordinated
Debentures
In 2008,
First Federal Statutory Trust III, an unconsolidated trust subsidiary of First
Financial Service Corporation, issued $8.0 million in trust preferred
securities. The trust loaned the proceeds of the offering to us in
exchange for junior subordinated deferrable interest debentures which we used to
finance the purchase of FSB Bancshares, Inc. The subordinated debentures, which
mature on June 24, 2038, can be called at par in whole or in part on or after
June 24, 2018. The subordinated debentures pay a fixed rate of 8% for thirty
years. We have the option to defer interest payments on the
subordinated debt from time to time for a period not to exceed five consecutive
years. The subordinated debentures are considered as Tier I capital
for the Corporation under current regulatory guidelines.
A
different trust subsidiary issued 30 year cumulative trust preferred securities
at a 10 year fixed rate of 6.69% adjusting quarterly thereafter at LIBOR plus
160 basis points. The subordinated debentures, which mature March 22,
2037, can be called at par in whole or in part on or after March 15,
2017. We have the option to defer interest payments on the
subordinated debt from time to time for a period not to exceed five consecutive
years. The subordinated debentures are considered as Tier I capital for the
Corporation under current regulatory guidelines.
Our trust
subsidiaries loaned the proceeds of their offerings of trust preferred
securities to us in exchange for junior subordinated deferrable interest
debentures. In accordance with current accounting guidance, these trusts are not
consolidated with our financial statements but rather the subordinated
debentures are shown as a liability.
LIQUIDITY
Liquidity
risk arises from the possibility we may not be able to satisfy current or future
financial commitments, or may become unduly reliant on alternative funding
sources. The objective of liquidity risk management is to ensure that we can
meet the cash flow requirements of depositors and borrowers, as well as our
operating cash needs, at a reasonable cost, taking into account all on- and
off-balance sheet funding demands. We maintain an investment and funds
management policy, which identifies the primary sources of liquidity,
establishes procedures for monitoring and measuring liquidity, and establishes
minimum liquidity requirements in compliance with regulatory guidance. The Asset
Liability Committee continually monitors our liquidity position.
Our
sources of funds include the sale of securities in the available-for-sale
portion of the investment portfolio, the payment of principal on loans and
mortgage-backed securities, proceeds realized from loans held for sale, brokered
deposits and other wholesale funding. We also secured federal funds
borrowing lines from three of our correspondent banks. Two of the
lines are for $15 million each and the other one is for $5
million. Our banking centers also provide access to retail deposit
markets. If large certificate depositors shift to our competitors or
other markets in response to interest rate changes, we have the ability to
replenish those deposits through alternative funding
sources. Traditionally, we have also borrowed from the FHLB to
supplement our funding requirements. At September 30, 2009, we had
sufficient collateral available to borrow, approximately, an additional $69.3
million in advances from the FHLB.
We believe we have the
ability to raise deposits, when needed, by offering rates at or slightly above
market rates.
At the
holding company level, the Corporation uses cash to pay dividends to
stockholders, repurchase common stock, make selected investments and
acquisitions, and service debt. The main sources of funding for the Corporation
include dividends from the Bank, borrowings and access to the capital
markets. Also, the Corporation maintains two lines of credit totaling
$18 million with a correspondent bank. The Corporation borrowed $1.5
million against on of these lines of credit to pay its second quarter cash
dividend. Subsequent to September 30, 2009, the Corporation's total
borrowing capacity was reduced from $18 million to $1.5 million. We
also reduced the number of lines from two to one. The new line will
have a maturity date of January 31, 2010.
The
primary source of funding for the Corporation has been dividends and returns of
investment from the Bank. Kentucky banking laws limit the amount of dividends
that may be paid to the Corporation by the Bank without prior approval of the
KOFI. Under these laws, the amount of dividends that may be paid in
any calendar year is limited to current year’s net income, as defined in the
laws, combined with the retained net income of the preceding two years, less any
dividends declared during those periods.
As a result of a $6
million dividend in 2008 used to finance the purchase of FSB Bancshares, Inc.,
the Bank needed and obtained partial approval for its third quarter 2009
dividend. We currently have a regulatory agreement with the FDIC that requires
us to obtain the consent of the Regional Director of the FDIC and the
Commissioner of the KOFI to declare and pay cash dividends. Because
of these limitations, consolidated cash flows as presented in the consolidated
statements of cash flows may not represent cash immediately available to the
Corporation. During 2009, the Bank declared and paid dividends of
$2.5 million to the Corporation.
CAPITAL
Stockholders’
equity increased $21.2 million for the period ended September 30, 2009 compared
to December 31, 2008 primarily due to the sale of $20 million of preferred stock
to the U.S. Treasury Department under the Capital Purchase
Program. Average stockholders’ equity to average assets ratio
increased to 8.65% for the nine months ended September 30, 2009 compared to
8.21% for 2008.
On
January 9, 2009, we sold $20 million of cumulative perpetual preferred shares,
with a liquidation preference of $1,000 per share (the “Senior Preferred
Shares”) to the U.S. Treasury under the terms of its Capital Purchase
Plan. Under CPP, the U.S. Treasury may purchase up to $250 billion of
senior preferred shares on standardized terms from qualifying financial
institutions as part of the Troubled Asset Relief Program authorized by the
Emergency Economic Stabilization Act of 2008. The Senior Preferred
Shares constitute Tier 1 capital and rank senior to our common
shares. The Senior Preferred Shares pay cumulative dividends at a
rate of 5% per year for the first five years and will reset to a rate of 9% per
year after five years. The Senior Preferred Shares may be redeemed at any time,
at our option.
Under the
terms of our CPP stock purchase agreement, we also issued the U.S. Treasury a
warrant to purchase an amount of our common stock equal to 15% of the aggregate
amount of the Senior Preferred Shares, or $3 million. The warrant
entitles the U.S. Treasury to purchase 215,983 common shares at a purchase price
of $13.89 per share. The initial exercise price for the warrant and
the number of shares subject to the warrant were determined by reference to the
market price of our common stock calculated on a 20-day trailing average as of
December 8, 2008, the date the U.S. Treasury approved our
application. The warrant has a term of 10 years and is
potentially dilutive to earnings per share.
During
the first nine months of 2009, we did not purchase any shares of our own common
stock.
However, the
terms of our Senior Preferred Shares do not allow us to repurchase shares of our
common stock without the consent of the U.S. Treasury until the Senior Preferred
Shares are redeemed.
Each of
the federal bank regulatory agencies has established minimum leverage capital
requirements for banks. Banks must maintain a minimum ratio of Tier 1 capital to
adjusted average quarterly assets ranging from 3% to 5%, subject to federal bank
regulatory evaluation of an organization’s overall safety and
soundness. We intend to maintain a capital position that meets or
exceeds the “well capitalized” requirements established for banks by the
FDIC. We currently have a regulatory agreement with the FDIC that
requires us to maintain a Tier 1 capital ratio of 8%. We are
currently in compliance with the Tier 1 capital requirement. The
following table shows the ratios of Tier 1 capital and total capital to
risk-adjusted assets and the leverage ratios for the Corporation and the Bank as
of September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Considered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Prompt
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
For Capital
|
|
|
Correction
|
|
|
|
Actual
|
|
|
Adequacy
|
|
|
Purposes
|
|
|
Action
|
|
|
Provisions
|
|
As of September 30, 2009:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total
risk-based capital (to risk- weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
112,144
|
|
|
|
11.45
|
%
|
|
$
|
78,328
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
111,062
|
|
|
|
11.36
|
|
|
|
78,236
|
|
|
|
8.00
|
|
|
|
97,794
|
|
|
|
10.00
|
|
Tier
I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
99,853
|
|
|
|
10.20
|
|
|
|
39,164
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
98,785
|
|
|
|
10.10
|
%
|
|
|
39,118
|
|
|
|
4.00
|
|
|
|
58,677
|
|
|
|
6.00
|
|
Tier
I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
99,853
|
|
|
|
9.16
|
|
|
|
43,627
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
98,785
|
|
|
|
9.05
|
|
|
|
43,657
|
|
|
|
4.00
|
|
|
|
54,572
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Considered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Prompt
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
For Capital
|
|
|
Correction
|
|
|
|
Actual
|
|
|
Adequacy
|
|
|
Purposes
|
|
|
Action
|
|
|
Provisions
|
|
As of December 31, 2008:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total
risk-based capital (to risk- weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
90,890
|
|
|
|
10.14
|
%
|
|
$
|
71,717
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
89,224
|
|
|
|
9.97
|
|
|
|
71,625
|
|
|
|
8.00
|
|
|
|
89,531
|
|
|
|
10.00
|
|
Tier
I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
79,655
|
|
|
|
8.89
|
|
|
|
35,859
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
78,029
|
|
|
|
8.72
|
|
|
|
35,812
|
|
|
|
4.00
|
|
|
|
53,719
|
|
|
|
6.00
|
|
Tier
I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
79,655
|
|
|
|
8.09
|
|
|
|
39,367
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
78,029
|
|
|
|
8.10
|
|
|
|
38,546
|
|
|
|
4.00
|
|
|
|
48,182
|
|
|
|
5.00
|
|
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Asset/Liability
Management and Market Risk
To
minimize the volatility of net interest income and exposure to economic loss
that may result from fluctuating interest rates, we manage our exposure to
adverse changes in interest rates through asset and liability management
activities within guidelines established by our Asset Liability Committee
(“ALCO”). The ALCO, comprised of senior management representatives,
has the responsibility for approving and ensuring compliance with
asset/liability management policies. Interest rate risk is the
exposure to adverse changes in the net interest income as a result of market
fluctuations in interest rates. The ALCO, on an ongoing basis,
monitors interest rate and liquidity risk in order to implement appropriate
funding and balance sheet strategies. Management considers interest
rate risk to be our most significant market risk.
We
utilize an earnings simulation model to analyze net interest income
sensitivity. We then evaluate potential changes in market interest
rates and their subsequent effects on net interest income. The model
projects the effect of instantaneous movements in interest rates of both 100 and
200 basis points. We also incorporate assumptions based on the
historical behavior of our deposit rates and balances in relation to changes in
interest rates into the model. These assumptions are inherently
uncertain and, as a result, the model cannot precisely measure future net
interest income or precisely predict the impact of fluctuations in market
interest rates on net interest income. Actual results will differ
from the model’s simulated results due to timing, magnitude and frequency of
interest rate changes as well as changes in market conditions and the
application and timing of various management strategies.
Our
interest sensitivity profile was asset sensitive at September 30, 2009 and
December 31, 2008. Given a 100 basis point decrease in rates
sustained for one year, our base net interest income would decrease by an
estimated
1.54% at
September 30, 2009 compared to a decrease of 2.67% at December 31, 2008.
Given a 100 basis point
increase in interest rates sustained for one year, our base net interest income
would increase by an
estimated 5.83% at
September 30, 2009 compared to an increase of 1.49% at December 31,
2008.
Our
interest sensitivity at any point in time will be affected by a number of
factors. These factors include the mix of interest sensitive assets
and liabilities, their relative pricing schedules, market interest rates,
deposit growth, loan growth, decay rates and prepayment speed
assumptions.
We use
various asset/liability strategies to manage the re-pricing characteristics of
our assets and liabilities designed to ensure that exposure to interest rate
fluctuations is limited within our guidelines of acceptable levels of
risk-taking. As demonstrated by the September 30, 2009 and December
31, 2008 sensitivity tables, our balance sheet has an asset sensitive position.
This means that our earning assets, which consist of loans and investment
securities, will change in price at a faster rate than our deposits and
borrowings. Therefore, if short term interest rates increase, our net
interest income will increase. Likewise, if short term interest rates
decrease, our net interest income will decrease.
Our
sensitivity to interest rate changes is presented based on data as of September
30, 2009 and December 31, 2008 annualized to a one year period.
|
|
September 30, 2009
|
|
|
|
Decrease in Rates
|
|
|
|
|
|
Increase in Rates
|
|
|
|
200
|
|
|
100
|
|
|
|
|
|
100
|
|
|
200
|
|
(Dollars in thousands)
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Base
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
55,321
|
|
|
$
|
56,722
|
|
|
$
|
58,269
|
|
|
$
|
59,810
|
|
|
$
|
61,437
|
|
Investments
|
|
|
1,862
|
|
|
|
1,896
|
|
|
|
1,439
|
|
|
|
1,813
|
|
|
|
1,877
|
|
Total
interest income
|
|
|
57,183
|
|
|
|
58,618
|
|
|
|
59,708
|
|
|
|
61,623
|
|
|
|
63,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
16,701
|
|
|
|
16,737
|
|
|
|
17,244
|
|
|
|
16,797
|
|
|
|
18,722
|
|
Borrowed
funds
|
|
|
3,654
|
|
|
|
3,654
|
|
|
|
3,639
|
|
|
|
3,737
|
|
|
|
3,824
|
|
Total
interest expense
|
|
|
20,355
|
|
|
|
20,391
|
|
|
|
20,883
|
|
|
|
20,534
|
|
|
|
22,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
36,828
|
|
|
$
|
38,228
|
|
|
$
|
38,825
|
|
|
$
|
41,089
|
|
|
$
|
40,768
|
|
Change
from base
|
|
$
|
(1,997
|
)
|
|
$
|
(597
|
)
|
|
|
|
|
|
$
|
2,264
|
|
|
$
|
1,943
|
|
%
Change from base
|
|
|
(5.14
|
)%
|
|
|
(1.54
|
)%
|
|
|
|
|
|
|
5.83
|
%
|
|
|
5.00
|
%
|
|
|
December 31, 2008
|
|
|
|
Decrease in Rates
|
|
|
|
|
|
Increase in Rates
|
|
|
|
200
|
|
|
100
|
|
|
|
|
|
100
|
|
|
200
|
|
(Dollars in thousands)
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Base
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
50,663
|
|
|
$
|
52,195
|
|
|
$
|
53,664
|
|
|
$
|
55,105
|
|
|
$
|
56,577
|
|
Investments
|
|
|
966
|
|
|
|
985
|
|
|
|
1,002
|
|
|
|
1,033
|
|
|
|
1,063
|
|
Total
interest income
|
|
|
51,629
|
|
|
|
53,180
|
|
|
|
54,666
|
|
|
|
56,138
|
|
|
|
57,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
15,815
|
|
|
|
16,026
|
|
|
|
16,419
|
|
|
|
16,984
|
|
|
|
17,523
|
|
Borrowed
funds
|
|
|
3,559
|
|
|
|
3,570
|
|
|
|
3,743
|
|
|
|
4,135
|
|
|
|
4,525
|
|
Total
interest expense
|
|
|
19,374
|
|
|
|
19,596
|
|
|
|
20,162
|
|
|
|
21,119
|
|
|
|
22,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
32,255
|
|
|
$
|
33,584
|
|
|
$
|
34,504
|
|
|
$
|
35,019
|
|
|
$
|
35,592
|
|
Change
from base
|
|
$
|
(2,249
|
)
|
|
$
|
(920
|
)
|
|
|
|
|
|
$
|
515
|
|
|
$
|
1,088
|
|
%
Change from base
|
|
|
(6.52
|
)%
|
|
|
(2.67
|
)%
|
|
|
|
|
|
|
1.49
|
%
|
|
|
3.15
|
%
|
Item
4. CONTROLS AND PROCEDURES
Management
is responsible for establishing and maintaining effective disclosure controls
and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. As of September 30, 2009, an evaluation was performed
under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on that
evaluation, management concluded that disclosure controls and procedures as of
September 30, 2009 were effective in ensuring material information required to
be disclosed in this Form 10-Q was recorded, processed, summarized, and reported
in a timely manner as specified in SEC rules and forms.
There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls after the date of the Chief Executive
Officer and Chief Financial Officers evaluation, nor were there any significant
deficiencies or material weaknesses in the controls which required corrective
action.
Part
II - OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings
|
Although,
from time to time, we are involved in various legal proceedings in the normal
course of business, there are no material pending legal proceedings to which we
are a party, or to which any of our property is subject.
We did
not have any changes to our risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008.
|
Item
2.
|
Unregistered
Sales of Securities and Use of
Proceeds
|
We did
not repurchase any shares of our common stock during the quarter ended September
30, 2009.
|
Item
3.
|
Defaults
Upon Senior Securities
|
Not
Applicable
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holder
|
Not
Applicable
|
Item
5.
|
Other
Information
|
None
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of
Sarbanes- Oxley
Act
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of
Sarbanes- Oxley
Act
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Section
18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002)
|
FIRST
FINANCIAL SERVICE CORPORATION
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: November
9, 2009
|
By:
|
/s/ B. Keith Johnson
|
|
|
|
B. Keith Johnson
|
|
|
Chief Executive Officer
|
|
|
|
|
Date: November
9, 2009
|
By:
|
/s/ Steven M. Zagar
|
|
|
|
Steven M. Zagar
|
|
|
Chief Financial Officer &
|
|
|
Principal Accounting
Officer
|
INDEX
TO EXHIBITS
Exhibit No.
|
|
Description
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
Act
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
Act
|
|
|
|
32
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002)
|
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