Kentucky Farmers Bank has fallen from grace.
The Catlettsburg-based community bank, which rose to fame through highly profitable investments in securities, was slammed last year as rising interest rates reduced the value of its derivatives holdings.
The result: A $16.9 million loss.
"The market moved against us," said Charles M. Russell Jr., chairman of the $112 million-asset bank, who manages the securities portfolio from offices in Gulf Stream, Fla., and Catlettsburg.
The loss bounced Kentucky Farmers from its perch as the most profitable community bank in the country - a position it has held three times from 1993 to 1989.
In 1993, Kentucky Farmers grabbed the No. 1 position with a gaudy 12.16% ROA. Last year, the bank's return on assets plunged to negative 12.94%
"If we didn't have the capital we would have been in real trouble," said Elbert C. Bowe, president of the bank. At yearend, Kentucky Farmers had $28 million in equity capital, down 39% from the prior year, according to Sheshunoff Information Services Inc., Austin, Tex.
Kentucky Farmers lost big because it held mortgage-backed securities whose coupons tumbled when interest rates rose. The securities, known as "inverse floaters," were hammered by several interest rate hikes.
Kentucky Farmers' portfolio of inverse floaters currently has a face value of $54 million. It is carried on the books at $21.5 million, Mr. Russell said.
Mr. Russell said Kentucky Farmers' made a profit for 1994, but Federal Deposit Insurance Corp. examiners in January required the bank to place the securities in a trading account and recognize an immediate loss. The bank had to restate earnings for the year, and posted a loss.
But the drubbing hasn't frightened Kentucky Farmers into getting out of the securities investment business.
"We made a mistake when we decided to ride it all out, but we have the equity," Mr. Russell said.
Mr. Bowe said nobody got fired over the loss, but "Charlie and I didn't take a raise this year."
The bank's performance is already improving, Mr. Russell said. Kentucky Farmers earned $6.5 million in the first five months of the year, and the profits are mainly coming from securities investments.
He expects "huge profits" this year, barring a spike in interest rates, and he is optimistic the small institution on the banks of the Ohio River will once again be cranking out profits.
Said Mr. Russell, "We are going to be the top-performing bank in 1995."