SAFE & SOUND® STAR RATINGS™

Memorandum on findings

CUMBERLAND VALLEY NATIONAL BANK & TRUST COMPANY

1112 HIGHWAY 490
LONDON, Kentucky 40744

STAR RATING: 3 starstarstar
Predictive Indicator neutral
As of March 31, 2014
Federal Reserve System Identifier 647218


HOLDING COMPANY INFORMATION

(Based on data from the previous quarter.)

This bank is not owned by a holding company.

INTRODUCTION

U.S. commercial banks are chartered under either federal or state jurisdiction for the purposes of accepting funds for deposit and extending loans to either individual or business borrowers. Banks are subject to credit, interest rate, and operational risk, and, because of both their public purpose and their importance to the nation’s economy, banks become the object of intense regulatory scrutiny.

U.S. thrift institutions are chartered under either federal or state jurisdiction for the primary purpose of utilizing deposited funds to issue loans secured by real estate. Currently, real estate-backed loans account for approximately 43% of total thrift industry assets, and one-to-four family residential mortgages comprise nearly 63% of the industry’s real estate loan portfolio. Thrift institutions are subject to credit, interest rate, and operational risk, and, during the last twenty years, thrifts have made great strides toward reducing historic mismatches between asset and liability maturities.

The Bankrate proprietary commercial bank rating model analyzes capitalization, asset quality, earnings, and liquidity and produces composite and component "Star" ratings that can be used as a measure of the rated entity's financial safety and soundness. Additionally, early warning components of the model highlight operating characteristics of immediate concern and recommended follow-up actions. "The analyses are not adjusted for TARP funding and those institutions receiving funds may receive ratings that would differ were the TARP funds adjusted out of the analyses. You can check whether or not this institution has received TARP funding and whether or not they have paid it back at http://projects.propublica.org/bailout/list/index."

INSTITUTIONAL HIGHLIGHTS
Institution Name CUMBERLAND VALLEY NATIONAL BANK & TRUST COMPANY
Report Date March 31, 2014
Report Period 3 months
Star Composite Rating, Percentile Rank 3 /18.73
Predictive Indicator neutral
Earnings Rating, Percentile Rank 2 /18.34
Asset Quality Rating, Percentile Rank 3 /18.31
Capital Rating, Percentile Rank 4 /59.86
Liquidity Rating, Percentile Rank 4 /79.96
Institution Asset Size 400.6510 million
Deposits 341.2870 million
Loans 231.4530 million
Equity 43.7150 million
Net Profit/Loss 347.0000 thousand

COMPONENT HIGHLIGHTS

Component star rating: 2 starstar
Earnings Highlights

Bank profitability is critical to building capital, establishing adequate loss reserves, and providing dividends to shareholders.

Key Earnings information and ratios:Ratio (%)Assessment
Return on Equity3.50Approximately Average
Net Interest Margin3.44Mid-Range
Level of Non-interest Income (1)1.38Approximately Normal
Overhead (1)4.01Significantly Higher Than Average
(1) = As a percentage of average assets
Note: All ratios are based on the latest four quarters of income and expense

Component star rating: 3 starstarstar
Asset quality highlights

Asset quality is a major determinant of the viability of any banking institution. Poor asset quality will have a very direct impact upon the other components and bank regulators invest substantial amounts of time and resources in gauging the quality of a bank's loans and investments.

Key Asset Quality information and ratios:Ratio (%)Assessment
Nonperforming Asset Ratio (2)16.72Somewhat Higher Than Standard
Loss Reserve Coverage (3)97.31Approximately Normal
Loan Yield5.08Conservative
Asset Growth Rate-1.95Below Normal
(2) = Nonperforming Assets/Equity plus Loss Reserves
(3) = Loan Loss Reserves/Nonperforming Loans

Component star rating: 4 starstarstarstar
Capital highlights

Bank capitalization stands as a protection against loss for bank customers, creditors, shareholders, and the Federal Deposit Insurance Corporation (FDIC). Regulators place a high degree of importance upon assessments of capitalization and assign regulatory benchmarks as determinants of capital adequacy.

Key measures of Capital Adequacy:Ratio (%)Assessment
Net Worth to Total Assets10.91Approximates Peer Norm
Regulatory Capital Ratio18.79Substantially Exceeded Requirement

Component star rating: 4 starstarstarstar
Liquidity highlights

Liquidity provides funding for normal bank operations and represents a reserve for unanticipated disintermediation. Liquidity can be both an asset and a liability concept.

Key measures of Liquidity:Ratio (%)Assessment
Balance Sheet Liquidity26.24Much Better Than Normal
Purchased Liabilities8.68No Greater Than Average Dependence

Early warning highlights

Early warning indicators identify areas of potential concern, which may lead to financial deterioration and thus, require inquiry or in-depth investigation. For this bank we have noted:

  • Overhead
  • Commercial Real Estate and Construction Lending

Institution Commentary

OVERVIEW of Institution
Organized in 1904, CUMBERLAND VALLEY NATIONAL BANK & TRUST COMPANY is a nationally chartered banking institution, which, as of March 31, 2014, reported $400.6510 million in total assets. At that date, loans and deposits held by the bank amounted to $231.4530 million and $341.2870 million, respectively. The bank's March 31, 2014 equity base of $43.7150 million produced an Equity/Assets ratio of 10.91%, as of that date.

COMPOSITE SUMMARY
Bankrate believes that, as of March 31, 2014, this bank exhibited a generally satisfactory condition, characterized by lower than normal overall, sustainable profitability, satisfactory asset quality, strong capitalization and seemingly ample liquidity.

EARNINGS ANALYSIS
For the twelve months ended March 31, 2014, the bank recorded net income of $1.5210 million. The bank experienced a return on average assets (ROA) of 0.38% over the latest four quarters. Year earlier twelve month results amounted to a net income of $1.6660 million, or a 0.41% ROA over the most recent four quarters at that time. An ROA of at least 1.0% is deemed satisfactory in accordance with banking industry standards, and the industry's annualized ROA for the twelve months of 2014 was approximately 1.00% for commercial banks and 1.11% for thrift institutions.

We have concluded that for the four quarters ending March 31, 2014, the bank achieved an approximately average return on equity. We deem net interest margin to have been mid-range. Noninterest income was normal. We also observed overhead ratios that were significantly higher than average, and the composition of overhead should be thoroughly analyzed. Importantly, net interest margins, noninterest income components, and overhead expense levels represent operating factors that combine to impact overall operating results.

ASSET QUALITY ANALYSIS
The bank revealed, as previously stated, satisfactory asset quality. Our conclusion with respect to asset quality incorporates our analysis of data depicting regional economic conditions as well as our computations of a somewhat higher than standard March 31, 2014 nonperforming asset ratio, approximately normal reserve coverage for nonperforming loans; and much greater than average holdings of commercial real estate and construction loans, two categories that can intensify credit risk.

Commercial real estate and construction loans should be examined for:

  • Loan underwriting and appraisal standards that differ from normal bank guidelines.
  • Loan-to-value benchmarks deemed not in conformance with prudent underwriting requirements.
  • Speculative construction activity.
  • The deferral of interest payments during construction periods.
  • The funding of the entire amount of construction costs and land valuation.


Loan yield can measure financial reward versus credit risk. Excessive loan yield may be an indicator of existing or future problems. Our loan review indicates that the bank has assumed a seemingly prudent position between credit risk and financial reward.

CAPITAL ANALYSIS
For the one year period ended March 31, 2014, the bank reported an approximately normal rate of growth in equity capital. Balance sheet structural changes, through the one year period of time ended March 31, 2014, have improved the bank's capital position. Our analytical methodology does take into account the quantity, quality, and durability of net worth, and, as set forth above, we have determined, based upon our series of tests, that the bank demonstrates strong capitalization. We have calculated the bank's March 31, 2014 Total Risk-Based Capital position, a computation used by industry regulators, and have concluded that this bank substantially exceeded the requirement, set by regulation, for this test.

LIQUIDITY ANALYSIS
As of March 31, 2014, the bank displayed Much Better Than Normal balance sheet liquidity and a No Greater Than Average Dependence upon wholesale, or non-core liabilities, which include all borrowings, such as Federal Home Loan Bank Advances, and CD's greater than $250,000.

Accounting principles require some securities to be categorized as "Available-for-Sale." Changes in market value of these securities are reflected through the GAAP (Generally Accepted Accounting Principles) net worth of the institution. Based upon the bank's present balance sheet, changes in the value of the current level of securities reported as "Available-for-Sale" are very likely to have a substantial impact upon future net worth of the bank.

INSTITUTION SUMMARY
This bank has been rated generally satisfactory.

Negative factors that impacted that rating follow:

  • Earnings

As noted previously, early warning indicators, possibly requiring specific investigation include:

  • Overhead
  • Commercial Real Estate and Construction Lending

PREDICTIVE INDICATOR
As stated, we have determined a composite Star rating for this bank of 3 starstarstar , indicative of a generally satisfactory financial condition. At times, financial conditions of banks change rapidly and significantly. Hence, our Safe & Sound Star ratings should not be deemed predictive of likely future ratings. However, in view of early warning indicators set forth within this report, in combination with the institution's financial data, we believe that the Star rating for this institution is unlikely to change within the ensuing twelve month period.

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